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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549
 Form 10-Q (Mark One) [X]
Quarterly Report pursuant to Section 13 or15(d)of the Securities Exchange Act of 1934 For the quarter ended September 30, 2004 or [   ] Transition Report pursuant to Section 13 or15(d)of the
Securities Exchange Act of 1934 For the transition period from  to Commission File number 0-27646 Matrixx Initiatives, Inc.  Delaware
    
    87-0482806(State or other jurisdiction
    
    (I.R.S. Employerof incorporation or organization)
    
    Identification Number)
 4742 N. 24th Street, Suite 455
Phoenix, AZ 85016
(Address of principal executive offices) (602) 385-8888
(Issuers telephone number) 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 [x]      NO [   ] Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). YES [   ]     NO [x] There were 9,476,701 shares of the registrants common stock, $.001 par value,
outstanding as of November 1, 2004.




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MATRIXX INITIATIVES, INC.
FORM 10-Q
INDEX PagePART I FINANCIAL INFORMATIONItem 1.
    
    Condensed
Consolidated Balance Sheet as of September 30, 2004 and December 31, 2003
    
    
    1Condensed
Consolidated Statements of Operations for the three months ended
September 30, 2004 and 2003
    
    
    3Condensed
Consolidated Statements of Operations for the nine months ended
September 30, 2004 and 2003
    
    
    4Condensed
Consolidated Statements of Cash Flows for the nine months ended
September 30, 2004 and 2003
    
    
    5Notes to Condensed
Consolidated Financial Statements
    
    
    6Item 2.
    
    Managements
Discussion and Analysis of Financial Condition and Results of Operations
    
    
    10Item 3.
    
    Quantitative and
Qualitative Disclosures About Market Risk
    
    
    27Item 4.
    
    Controls and Procedures
    
    
    27PART II OTHER INFORMATIONItem 1
    
    Legal Proceedings
    
    
    28Item 2
    
    Unregistered Sales
of Equity Securities and Use of Proceeds
    
    
    29Item 4
    
    Submission of
Matters to a Vote of Security Holders
    
    
    29Item 6.
    
    Exhibits
    
    
    29SIGNATURES
    
    
    31Exhibit 10.2Exhibit 31.1Exhibit 31.2Exhibit 32.1Exhibit 32.2
  Unless otherwise indicated in this quarterly report, Matrixx, us, we,
our, the Company and similar terms refer to Matrixx Initiatives, Inc. and
its subsidiaries. Zicam is a registered trademark of our subsidiary, Zicam,
LLC, and the Matrixx name and logo are trademarks of the Company.




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MATRIXX INITIATIVES,
INC. AND SUBSIDIARY 
 CONDENSED CONSOLIDATED BALANCE SHEETS
 ASSETS September 30, 2004
    
    December 31, 2003Current Assets:Cash and cash equivalents
    
    $
    4,668,300
    
    
    $
    10,682,614Accounts receivable:Trade, net allowance for doubtful
accounts of $535,320 and $601,357
    
    
    12,272,625
    
    
    
    11,471,511Inventories
    
    
    8,894,595
    
    
    
    3,267,604Prepaid expenses and other
    
    
    1,297,850
    
    
    
    615,790Deferred tax asset
    
    
    2,239,659
    
    
    
    2,829,556Total Current Assets
    
    
    29,373,029
    
    
    
    28,867,075Property and Equipment, at cost:Office furniture and equipment
    
    
    777,007
    
    
    
    681,528Machine tooling
    
    
    150,000
    
    
    
    150,000Leasehold improvements
    
    
    179,644
    
    
    
    37,2021,106,650
    
    
    
    868,730Less accumulated depreciation
    
    
    (393,040
    )
    
    
    (247,728
    )Net Property and Equipment
    
    
    713,610
    
    
    
    621,002Other Assets:Restricted cash
    
    
    5,035,589
    
    
    
    Deposits
    
    
    105,217
    
    
    
    212,697Debt issuance costs, net of accumulated amortization
of $12,500 and $0
    
    
    12,500
    
    
    
    Deferred tax asset
    
    
    2,828,424
    
    
    
    4,351,810Patents, net of accumulated amortization of $189,091
and $138,780
    
    
    934,509
    
    
    
    984,820Goodwill
    
    
    15,039,836
    
    
    
    15,039,836Total Other Assets
    
    
    23,956,075
    
    
    
    20,589,163Total Assets
    
    $
    54,042,714
    
    
    $
    50,077,240
 The accompanying notes are an integral part of these condensed consolidated financial statements. 1




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MATRIXX INITIATIVES, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
(Continued)
(Unaudited) LIABILITIES AND STOCKHOLDERS EQUITY September 30, 2004
    
    December 31, 2003Current Liabilities:Accounts payable and accrued expenses
    
    $
    7,676,525
    
    
    $
    9,552,218Sales returns and allowances
    
    
    2,079,441
    
    
    
    1,734,568Short term debt
    
    
    2,000,000
    
    
    
    Total Current Liabilities
    
    
    11,755,966
    
    
    
    11,286,786Total 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, 9,507,864 and 9,474,601 shares
issued and outstanding
    
    
    9,508
    
    
    
    9,475Additional paid in capital
    
    
    42,362,305
    
    
    
    41,993,189Accumulated earnings (deficit)
    
    
    311,239
    
    
    
    (2,972,987
    )42,683,052
    
    
    
    39,029,677Less common stock held in treasury, at cost
(53,800 and 35,900 shares)
    
    
    (396,304
    )
    
    
    (239,223
    )Total Stockholders Equity
    
    
    42,286,748
    
    
    
    38,790,454Total Liabilities and
Stockholders Equity
    
    $
    54,042,714
    
    
    $
    50,077,240
 The accompanying notes are an integral part of these condensed consolidated financial statements. 2




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MATRIXX INITIATIVES,
INC. AND SUBSIDIARY 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 Three months ended September 30,2004
    
    2003Net sales
    
    $
    16,904,856
    
    
    $
    13,374,004Cost of sales
    
    
    5,234,606
    
    
    
    4,215,034Gross Profit
    
    
    11,670,250
    
    
    
    9,158,970Operating expenses
    
    
    5,428,992
    
    
    
    3,755,539Research and development
    
    
    353,509
    
    
    
    795,429Income From Operations
    
    
    5,887,749
    
    
    
    4,608,002Other Income (Expense):Interest and other income
    
    
    271,444
    
    
    
    44,944Interest and other expense
    
    
    (22,937
    )
    
    
    (43,732
    )Total Other Income (Expense)
    
    
    248,507
    
    
    
    1,212Income Before Provision For Income Taxes
    
    
    6,136,256
    
    
    
    4,609,214Provision for income taxes
    
    
    2,459,272
    
    
    
    1,846,216Net Income
    
    $
    3,676,984
    
    
    $
    2,762,998Net Income Per Share of Common Stock:Basic:Weighted Average Number of Common Shares
Outstanding
    
    
    9,491,191
    
    
    
    9,410,965Net Income Per Share of Common Stock
    
    $
    0.39
    
    
    $
    0.29Diluted:Weighted Average Number of Common Shares
Outstanding
    
    
    9,536,399
    
    
    
    9,439,376Net Income Per Share of Common Stock
    
    $
    0.39
    
    
    $
    0.29
 The accompanying notes are an integral part of these condensed consolidated financial statements. 3




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MATRIXX INITIATIVES, INC. AND SUBSIDIARY 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 Nine months ended September 30,2004
    
    2003Net sales
    
    $
    33,229,143
    
    
    $
    25,270,098Cost of sales
    
    
    10,405,376
    
    
    
    8,009,663Gross Profit
    
    
    22,823,767
    
    
    
    17,260,435Operating expenses
    
    
    16,317,473
    
    
    
    11,619,979Research and development
    
    
    1,345,543
    
    
    
    1,702,246Income From Operations
    
    
    5,160,751
    
    
    
    3,938,210Other Income (Expense):Interest and other income
    
    
    345,794
    
    
    
    140,282Interest and other expense
    
    
    (22,937
    )
    
    
    (216,926
    )Total Other Income (Expense)
    
    
    322,857
    
    
    
    (76,644
    )Income Before Provision For Income Taxes
    
    
    5,483,608
    
    
    
    3,861,566Provision for income taxes
    
    
    2,199,382
    
    
    
    1,548,213Net Income
    
    $
    3,284,226
    
    
    $
    2,313,353Net Income Per Share of Common Stock:Basic:Weighted Average Number of Common Shares
Outstanding
    
    
    9,493,115
    
    
    
    9,420,213Net Income Per Share of Common Stock
    
    $
    0.35
    
    
    $
    0.25Diluted:Weighted Average Number of Common Shares
Outstanding
    
    
    9,574,215
    
    
    
    9,426,689Net Income Per Share of Common Stock
    
    $
    0.34
    
    
    $
    0.25
 The accompanying notes are an integral part of these condensed consolidated financial statements. 4




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MATRIXX INITIATIVES,
INC. AND SUBSIDIARY 
 CONDENSED STATEMENTS OF CASH FLOWS
 Nine months ended September 30,2004
    
    2003Cash Flows From Operating Activities:Net income
    
    $
    3,284,226
    
    
    $
    2,313,353Adjustments to reconcile net income to net cash
provided (used) by operating activities:Depreciation
    
    
    145,312
    
    
    
    117,143Amortization
    
    
    50,311
    
    
    
    50,310Amortization of imputed interest on notes payable
    
    
    
    
    
    
    216,805Amortization of debt issuance costs
    
    
    12,500
    
    
    
    14,583Deferred income taxes
    
    
    2,113,283
    
    
    
    1,547,216Other
    
    
    
    
    
    
    2,401Changes in assets and liabilities:Accounts receivable
    
    
    (801,114
    )
    
    
    (2,556,840
    )Inventories
    
    
    (5,626,991
    )
    
    
    (2,203,164
    )Prepaid expenses and other
    
    
    (682,060
    )
    
    
    43,001Interest receivable
    
    
    (35,589
    )
    
    
    Accounts payable and accrued expenses
    
    
    (1,875,693
    )
    
    
    (2,270,269
    )Sales returns and allowances
    
    
    344,873
    
    
    
    224,047Net Cash (Used) By Operating Activities
    
    
    (3,070,942
    )
    
    
    (2,501,414
    )Cash Flows From Investing Activities:Capital expenditures
    
    
    (237,920
    )
    
    
    (116,186
    )Deposits and other
    
    
    107,480
    
    
    
    (90,000
    )Restricted cash
    
    
    (5,000,000
    )
    
    
    Net Cash (Used) By Investing Activities
    
    
    (5,130,440
    )
    
    
    (206,186
    )Cash Flows From Financing Activities:Purchase of treasury stock
    
    
    (157,081
    )
    
    
    (177,367
    )Debt issuance costs
    
    
    (25,000
    )
    
    
    Proceeds from borrowing
    
    
    2,000,000
    
    
    
    Principal payments on notes payable
    
    
    
    
    
    
    (2,548,624
    )Issuance of common stock
    
    
    369,149
    
    
    
    36,000Net Cash Provided (Used) By Financing Activities
    
    
    2,187,068
    
    
    
    (2,689,991
    )Net Increase (Decrease) in Cash and Cash Equivalents
    
    
    (6,014,314
    )
    
    
    (5,397,591
    )Cash and Cash Equivalents at Beginning of Period
    
    
    10,682,614
    
    
    
    12,010,091Cash and Cash Equivalents at End of Period
    
    $
    4,668,300
    
    
    $
    6,612,500Supplemental Disclosure of Cash Flow Information:Cash paid during the period for:Interest
    
    $
    14,194
    
    
    $
    201,498Income taxes
    
    
    327,739
    
    
    
    997
 The accompanying notes are an integral part of these condensed consolidated financial statements. 5




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MATRIXX INITIATIVES,
INC. 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
  1.
    
    The accompanying financial information of Matrixx Initiatives, Inc. is
prepared in accordance with the rules prescribed for filing condensed
interim financial statements and, accordingly, does not include all
disclosures that may be necessary for complete financial statements
prepared in accordance with US generally accepted accounting principles.
The disclosures presented are sufficient, in managements opinion, to make
the interim information presented not misleading. All adjustments,
consisting of normal recurring adjustments, which are necessary so as to
make the interim information not misleading, have been made. Results of
operations for the nine months ended September 30, 2004 are not
necessarily indicative of results of operations that may be expected for
the year ending December 31, 2004. It is recommended that this financial
information be read with the complete financial statements included in
Matrixxs Annual Report on Form 10-K for the year ended December 31, 2003
previously filed with the Securities and Exchange Commission.2.
    
    Stock-Based Compensation The Company adopted the disclosure provisions of Statement of Financial
Accounting Standard (SFAS) No. 123, Accounting for Stock-Based
Compensation, as amended by SFAS No. 148, Accounting for Stock-Based
Compensation  Transition and Disclosure  an Amendment to SFAS 123. The
Company will continue to measure compensation expense for its stock-based
employee compensation plans using the intrinsic value method prescribed by
Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock
Issued to Employees and related interpretations in accounting for its stock
based compensation 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 net income per share would be reduced to
the following pro forma amounts: 6




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MATRIXX INITIATIVES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) Three Months Ended
    
    Nine Months EndedSeptember 30
    
    September 302004
    
    2003
    
    2004
    
    2003Net income applicable to
common shareholders, as reported
    
    $
    3,676,984
    
    
    $
    2,762,998
    
    
    $
    3,284,226
    
    
    $
    2,313,352Less stock based employee compensation
expense determined under fair value
based methods for all awards, net of
related tax effects
    
    
    234,036
    
    
    
    88,776
    
    
    
    807,967
    
    
    
    331,697Pro forma Net Income
    
    $
    3,442,948
    
    
    $
    2,674,222
    
    
    $
    2,476,259
    
    
    $
    1,981,656Net income per share of Common StockBasic:As reported
    
    $
    0.39
    
    
    $
    0.29
    
    
    $
    0.35
    
    
    $
    0.25Pro forma
    
    $
    0.36
    
    
    $
    0.28
    
    
    $
    0.26
    
    
    $
    0.21Diluted:As reported
    
    $
    0.39
    
    
    $
    0.29
    
    
    $
    0.34
    
    
    $
    0.25Pro forma
    
    $
    0.36
    
    
    $
    0.28
    
    
    $
    0.26
    
    
    $
    0.21
 During the quarter ended September 30, 2004, no options were exercised. For
the nine months ended September 30, 2004, 35,000 options were exercised for
total proceeds to the Company of $392,500.  3.
    
    The Company follows the provisions of Statement of Financial Accounting
Standards (SFAS) No. 128, Earnings Per Share, which specifies the method
of computation, presentation and disclosure of earnings per share. SFAS
No. 128 requires the presentation of two earnings per share amounts, basic
and diluted. 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 effect of dilutive securities. The Companys stock options are
included using the treasury stock method. 7




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MATRIXX INITIATIVES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) The table below summarizes the elements included in the calculation of
basic and diluted net income per common share for the three and nine months
ended September 30, 2004 and 2003. Options, warrants and other
incremental shares to purchase 391,893 and 215,000 shares of common stock for the three
months ended September 30, 2004 and 2003, and 357,963 and 376,300 shares of
common stock for the nine months ended September 30, 2004 and 2003,
respectively, were not included in the computation of diluted net income per
share because their effect would be anti-dilutive. Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003Net income
    
    $
    3,676,984
    
    
    $
    2,762,998
    
    
    $
    3,284,226
    
    
    $
    2,313,353Weighted average common
shares outstanding:Basic
    
    
    9,491,191
    
    
    
    9,410,965
    
    
    
    9,493,115
    
    
    
    9,420,213Dilutive securities
    
    
    45,208
    
    
    
    28,411
    
    
    
    81,100
    
    
    
    6,476Diluted
    
    
    9,536,399
    
    
    
    9,439,376
    
    
    
    9,574,215
    
    
    
    9,426,689Net income
per common share:Basic
    
    $
    0.39
    
    
    $
    0.29
    
    
    $
    0.35
    
    
    $
    0.25Diluted
    
    $
    0.39
    
    
    $
    0.29
    
    
    $
    0.34
    
    
    $
    0.25
  4.
    
    Inventories consisted of the following at September 30, 2004, and
December 31, 2003: September 30, 2004
    
    December 31, 2003Raw materials and packaging
    
    $
    2,572,745
    
    
    $
    1,137,584Finished goods
    
    
    6,563,824
    
    
    
    2,296,486Less reserve for obsolescence
    
    
    (241,974
    )
    
    
    (166,465
    )Total
    
    $
    8,894,595
    
    
    $
    3,267,605
 The increase in inventory is due to the addition of six new Zicam Cough
Mist products and the seasonal increase of inventory to meet expected
increases in sales during the cough and cold season.  5.
    
    Recently Issued Accounting Standards In January 2003, the Financial Accounting Standards Board (FASB) issued
FIN 46, Consolidation of Variable Interest Entities, which was amended in
December 2003, as FIN 46R. 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 8




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equity investors that do not provide sufficient financial resources for
the entity to support its activities. FIN 46R 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 46R 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 Company does not have any
variable interest entities and therefore, the adoption of the interpretation
did not have any impact on our financial statements.  6.
    
    New Insurance Program In April 2004, we established a fully-funded deductible insurance program
through a product liability insurance carrier. Under the program, we have
agreed to reimburse our insurer for its claims administration expenses and for
amounts paid out by it in settlement of product liability claims filed after
the initial date of the program and which are not covered by insurance programs
from prior years. The terms of the program require us to maintain an
irrevocable, evergreen letter of credit issued by a bank or other financial
institution to secure our reimbursement obligations to our insurer. We have a
$5.0 million letter of credit with Comerica Bank and have reserved an equal
amount of cash, presented as restricted cash in the accompanying balance sheet,
to secure repayments of amounts that become due under the letter of credit.  7.
    
    Legal Proceedings We are subject, from time to time, to legal proceedings and claims
regarding adverse reactions to our products. From late 2003 through October
2004, we have been sued by approximately 284 individuals in 19 different
lawsuits generally alleging that our Zicam Cold Remedy product caused damage to
the sense of smell and/or taste. Two of these lawsuits have been filed as
class action lawsuits covering named and unnamed plaintiffs. The lawsuits have
been previously disclosed in our Annual Report on Form 10-K for our fiscal year
ended December 31, 2003; our Quarterly Reports on Form 10-Q for our first
quarter ended March 31, 2004 and our second quarter ended June 30, 2004; and on
our Report on Form 8-K filed August 20, 2004. Various defendants in the
lawsuits, including manufacturers and retailers, have sought indemnification or
other recovery from us for damages related to the lawsuits. All of the existing lawsuits have been submitted to our insurance
carriers. We cannot predict the outcome of the litigation, but we will defend
ourselves vigorously. If any liability were to result from one or more of
these or future lawsuits, we believe our financial results could be materially
impacted. Our future financial results could also be materially impacted by
the adverse publicity that may result from the lawsuits. Additionally, there have been two class action lawsuits filed against the
Company, our President and Chief Executive Officer, Carl J. Johnson, and our
Executive Vice President and Chief Financial Officer, William J. Hemelt,
alleging violations of federal securities laws. The 9




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cases were previously disclosed on our Quarterly Report on Form 10-Q for
our second quarter ended June 30, 2004. Among other things, the lawsuits
allege that between October 2003 and February 2004, we made materially false
and misleading statements regarding our Zicam Cold Remedy product, including
failing to adequately disclose to the public the details of certain of the
product liability lawsuits described above. We believe the claims made in
these lawsuits are without merit and represent the actions of opportunistic
plaintiffs law firms seeking to take advantage of existing Zicam Cold Remedy
litigation. We intend to vigorously defend ourselves in these matters. In
accordance with and subject to the provisions of the Companys Certificate of
Incorporation, Messrs. Johnson and Hemelt will be indemnified by the Company
for their expenses incurred in defending these lawsuits and for any other
losses which they may suffer as a result of these lawsuits. If any liability
were to result from these lawsuits, we believe our financial results could be
materially impacted. 
 Item 2. Managements Discussion and Analysis of Financial Condition and Results
of Operations Overview Through our 100%-owned subsidiary, Zicam LLC, we are engaged in the
development, production and sale of over-the-counter pharmaceutical products.
In 2002, we introduced five new Zicam nasal gel products, improved package
graphics for our entire Zicam product line and engaged a new sales team to
represent our products to retailers. In 2003, we began shipping three new
Zicam Cold Remedy products (Oral Mist, Chewables and RapidMelts). In the third
quarter of fiscal 2004, we began shipping our six new Zicam Cough Mist products
(Cough Mist Adult Cherry, Cough Mist Adult Honey Lemon, Cough Mist Adult Plus
Decongestant, Cough Mist Adult Night Time, Cough Mist Kids Cherry, Cough Mist
Kids Plus Decongestant). Executive Summary Net sales for the third quarter of fiscal 2004 increased 26% to
approximately $16.9 million compared to approximately $13.4 million for the
third quarter of 2003. The increased sales in the third quarter of 2004 were
due to sales of the new Zicam Cough Mist products. Net income for the third
quarter of 2004 increased 33% to approximately $3.7 million compared to $2.8
million in the third quarter of 2003. The increase in net income is primarily
related to the increased sales for the quarter. Net sales for the first nine months of fiscal 2004 increased 31% to
approximately $33.2 million compared to approximately $25.3 million for the
first nine months of fiscal 2003. Approximately half of the increase was
attributable to sales of our new Zicam Cough Mist products, while sales of our
allergy and sinus products increased approximately 37%. The remaining increase
in sales is attributable to increased sales of Zicam Cold Remedy oral products
that were introduced in the third quarter of 2003. Net income for the first
nine months of fiscal 2004 increased 42% to approximately $3.3 million,
compared to approximately $2.3 million for the first nine months of 2003. We expect net income in future periods will be significantly affected by
the level of sales, the timing and amount of our advertising and research and
development expenses, and the timing 10




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and amount of expenses incurred in the defense of product liability and
securities litigation matters. Since the introduction of our new Zicam Cough Mist products, we now market
products in the cold (3 nasal delivery products and 3 oral delivery products),
allergy/sinus (4 nasal delivery products), and cough (6 oral delivery products)
market categories of the overall cough and cold category. We expect that our
mix of products sold will change due to seasonality and varying growth rates
within the market categories. For the nine months ending September 30, 2004
our mix of products sold was cold  56%, allergy/sinus  27%, and cough  17%,
compared to the nine months ending September 30, 2003 of cold  72%, and
allergy/sinus  28%. Our expected growth in annual sales will depend on our success in securing
additional retail distribution of our products, including the six new Zicam
Cough Mist products, expanding consumer awareness and acceptance of our entire
line of Zicam products, and avoiding additional adverse publicity.
Expenditures for advertising, research and development and legal expenses will
vary by quarter throughout the year and could be significantly different from
amounts incurred in the same periods in prior years. We expect advertising
expenses to be heaviest in our first and fourth fiscal quarters in conjunction
with the cough and cold season. Management reviews several key performance indicators. First, we compare
our year to date sales and net income performance against our stated annual
goal for each. In fiscal 2004, our goal was to grow sales and net income 30%
above the level realized in 2003. For the nine months ended September 30, 2004
net sales have increased 31% and net income is up 42% over the same period in
2003. Second, we monitor our overall share of the cough and cold market. For
the 12-week period ended September 5, 2004, retail sales of our products (as
measured by three outlet syndicated scanner data, not including our customer
Wal-Mart) increased approximately 29% over the comparable period a year ago
while the entire cough and cold category experienced a 2% increase over the
same period. Third, we measure our ability to maintain strong gross margins on
our products. During the nine months ended September 30, 2004, our products
averaged a gross margin of 69%, which was slightly below our target of 70% for
the full year, but better than the 68% recorded for the first nine months of
2003. Fourth, we evaluate our operating performance by reviewing, over time,
our ability to decrease administrative and general costs as a percentage of net
sales. For the third quarter of fiscal 2004, our operating expenses were 32%
of our net sales compared to 28% for the third quarter of fiscal 2003.
Operating expenses have been negatively impacted by an increase in legal
expense primarily related to the product liability lawsuits which have been
filed against the Company (see Part II, Item 1- Legal Proceedings, in this
Report on Form 10-Q). Fifth, we review the distribution of our products by key
national customers. We expect to expand the distribution of our existing
products and add distribution of our new products among our top 10 retailers
and anticipate them carrying, on average, 12 of our 16 products for the
2004-2005 cough and cold season compared to carrying, on average, seven of our
products during the prior years cough and cold season. The legal challenges facing the Company have, as previously reported,
slowed new product development activity. We expect that slowness, coupled with
the high level of legal expenses, may slow the rate of net income growth in
2005 compared to that achieved in recent years. 11




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Critical Accounting Policies and Estimates Our consolidated financial statements and accompanying notes have been
prepared in accordance with U.S. generally accepted accounting principles
applied on a consistent basis. The preparation of financial statements in
conformity with U.S. generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported amounts
of assets and liabilities, the disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts of revenues
and expenses during the reporting periods. We regularly evaluate the accounting policies and estimates that we use to
prepare our consolidated financial statements. In general, managements
estimates are based on historical experience, on information from third party
professionals and on various other assumptions that are believed to be
reasonable under the facts and circumstances. Actual results could differ from
those estimates made by management. We believe that our critical accounting policies and estimates include the
accounting for intangible assets and goodwill, accounting for income taxes,
accounting for returns and allowances associated with our products, and
accounting for legal contingencies. Intangible Assets and Goodwill:We recorded approximately $15.0 million
in goodwill in connection with the 40% Zicam, LLC interest that we acquired
from Zensano, Inc. in December 2001. Under SFAS No. 142, goodwill must be
tested when a triggering event occurs or at least annually to identify a
potential impairment and the amount of any impairment loss. Factors that could
affect this analysis would be significant loss of market share, a general
decline in Zicam product sales, higher than expected increases in expenses and
various other matters. Any change in key assumptions about the business or
prospects of Zicam, LLC, or any change in market conditions or other
externalities affecting Zicam, LLC, could result in an impairment charge, and
such a charge could have a material adverse effect on our financial condition
and results of operations. Our annual evaluation of goodwill was completed in
the third quarter of 2004 by an independent valuation firm and no impairment
was found. Income Taxes:Due to our significant operating losses prior to 2001, we
possess a sizeable tax loss carry-forward which can be used to reduce our
taxable income in future periods. Due to our history of operating losses, we
recorded a deferred tax valuation allowance in 2001 and prior years to offset
the entire deferred tax asset arising from our tax loss carry-forward.
However, due to the significant improvement in our net income in 2002, together
with our expectation of continuing profitability in future years, we determined
that we are more likely than not to realize the tax benefit associated with our
tax loss carry-forward. Consequently, we reduced the deferred tax valuation
allowance and recorded a large portion of the deferred tax asset in 2002. The
effect of this change was a decrease in our income tax expense of approximately
$3.4 million in 2002. In 2003 and the first nine months of 2004, we recorded income tax expense
based on our estimated effective income tax rate for the year and will continue
to do so in future periods. In addition, we will continue to evaluate the
deferred tax valuation allowance regularly and adjust the amount to reflect our
expectation of our ability to realize the tax benefit arising from our tax 12




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##### Table of Contents



loss carry-forward on a quarterly basis. Should there be a significant
change in our expectations of future income, the impact of increasing the
deferred tax valuation allowance could be significant which would negatively
impact our earnings. Customer Returns and Allowances:We recognize revenues on the sale of our
products when they are shipped from our warehouse facilities, and at that time
record a provision for estimated product returns. The estimate for product
returns is based on our historical experience of sales to retailers and is
reviewed regularly to ensure that it reflects 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 cough and cold season, which resulted in out-of-date product two
years later. In July 2004, we reviewed the return provision for the three oral
delivery Cold Remedy products that were introduced in the third quarter of
2003. Based on our product return experience we reduced the return provision
from 7% to 3% on sales of these three products in mid 2004. Currently, we are
recording a provision of 3% of gross sales for the 10 Zicam products introduced
in 2003 or earlier for potential returns and allowances. In establishing the
appropriate reserve level for the six new Zicam Cough Mist products, that began
shipping in July 2004, we reviewed the similarities and differences of the six
products relative to the 10 Zicam products for which we now have several years
of product return experience. Based on that review, we are recording a
provision of 7% of gross sales for these products. We will review the return
provision at least quarterly and adjust these reserve amounts as actual product
return experience continues to develop. Should the actual level of product
returns vary significantly from our estimates, our operating and financial
results would be materially affected. In addition, we expect that a higher
sales returns allowance will be recorded for any other new products that we
introduce until such products achieve market acceptance. Legal Contingencies:We are subject to lawsuits, investigations and
claims arising out of the normal conduct of our business. We are being sued by
approximately 284 individuals in 19 different lawsuits generally alleging that
our Zicam Cold Remedy product caused damage to their sense of smell and/or
taste. Two of these lawsuits have been filed as class action lawsuits. Various
defendants in the lawsuits, including manufacturers and retailers, have sought
indemnification or other recovery from us for damages related to the lawsuits.
In addition, two class action lawsuits have been filed against Matrixx, our
President and Chief Executive Officer, Carl J. Johnson, and our Executive Vice
President and Chief Financial Officer, William J. Hemelt, alleging violation of
federal securities laws (see Part II, Item 1- Legal Proceedings, in this
Report on Form 10-Q). While we intend to defend ourselves vigorously in each
of these proceedings, the outcome of these and any other proceedings that may
arise cannot be predicted with certainty. Therefore, loss provisions arising
from such matters will be recorded when a loss outcome is probable and can be
reasonably estimated, to the extent not provided for through insurance or
otherwise. At present, we have not been able to determine the probability of a
loss outcome in any of the litigation to which we are currently subject.
Accordingly, we have not recorded any loss provisions related to such
litigation. 13




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##### Table of Contents



Results of Operations for the Three Months Ended September 30, 2004 Compared to
the Three Months Ended September 30, 2003 Certain information is set forth below for our Zicam operations expressed
in dollars and as a percentage of net sales for the periods indicated: Three Months Ended September 30,2004
    
    2003Net sales
    
    $
    16,904,856
    
    
    
    100
    %
    
    $
    13,374,004
    
    
    
    100
    %Cost of sales
    
    
    5,234,606
    
    
    
    31
    
    
    
    4,215,034
    
    
    
    32Gross profit
    
    
    11,670,250
    
    
    
    69
    
    
    
    9,158,970
    
    
    
    68Operating expenses
    
    
    5,428,992
    
    
    
    32
    
    
    
    3,755,539
    
    
    
    28Research and development
    
    
    353,509
    
    
    
    2
    
    
    
    795,429
    
    
    
    6Income from operations
    
    
    5,887,749
    
    
    
    35
    
    
    
    4,608,002
    
    
    
    34Interest and other income
    
    
    271,444
    
    
    
    2
    
    
    
    44,944
    
    
    
    Interest expense
    
    
    (22,937
    )
    
    
    
    
    
    
    (43,732
    )
    
    
    Income before income taxes
    
    
    6,136,256
    
    
    
    36
    
    
    
    4,609,214
    
    
    
    34Provision for income taxes
    
    
    2,459,272
    
    
    
    15
    
    
    
    1,846,216
    
    
    
    14Net Income
    
    $
    3,676,984
    
    
    
    22
    %
    
    $
    2,762,998
    
    
    
    21
    %
 Net Sales.Net sales for the three months ended September 30, 2004
increased approximately $3.5 million to $16.9 million, or almost 26% above net
sales in the third quarter of the prior year. For the quarter ended September
30, 2004, the increase in net sales was due to sales of the new Zicam Cough
Mist products which began shipping in July 2004. Generally, sales in the third quarter are significantly higher than the
prior quarter due to retailers purchasing products for the cough and cold
season which usually begins at the end of the third quarter. We expect further
increases in sales of our cough and cold products in the fourth quarter of 2004
as the incidence of illness increases during the cough and cold season. We
continue to expect sales growth of 30% above our 2003 sales level for the full
2004 fiscal year, subject to a number of assumptions including the intensity
and timing of the 2004-2005 cough and cold season and no additional adverse
publicity. Cost of Sales.For the third quarter of fiscal 2004, our cost of sales
increased approximately $1 million to approximately $5.2 million, or 24% above
the third quarter 2003 cost of sales. The increase in cost of sales is due to
the higher sales volume that we experienced during the 2004 third quarter
compared to the prior years third quarter. Gross Profit.Gross profit for the third quarter of 2004 increased to
approximately $11.7 million, or 27% greater than the third quarter of 2003, due
to the increase in sales. The gross margin increased from 68% in the third
quarter 2003, to 69% in the third quarter 2004, due to the phase-out of an
older, more expensive swab design and the relative mix of products sold. The
gross margin on our current products varies between 65% and 80%. Gross margin
will continue to be affected by the relative mix of products sold. 14




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##### Table of Contents



Operating Expenses.Operating expenses for the third quarter of 2004
increased to approximately $5.4 million, approximately $1.7 million above the
third quarter of 2003. The increase is primarily due to a $1.6 million
increase in legal expense ($1.8 million for the quarter ended September 30,
2004 versus $208,000 for the quarter ended September 30, 2003). Also
contributing to increased expenses were increases in insurance ($165,000),
sales expense ($101,000), and non-advertising marketing expense ($674,000),
which offset a $510,000 decrease in advertising expense ($338,000 in the third
quarter of 2004 compared to $848,000 in the third quarter 2003), and labor
expense ($494,000). The decrease in labor expense reflects the accrual of a
portion of year end incentive compensation ($675,000) in the third quarter of
2003, which was not accrued in the third quarter of 2004. Expenses in future periods will vary largely in relation to the level of
our advertising expenditures, which are heaviest in the first and fourth
quarters. We anticipate that we will continue to incur approximately $1.0 to
$1.5 million in higher legal expense each quarter as a result of the Zicam Cold
Remedy product liability and securities litigation in which we are engaged (see
Part II, Item 1  Legal Proceedings, in this Report on Form 10-Q). Research and Development.Research and development expenses decreased
from approximately $795,000 in the third quarter of 2003 to approximately
$353,000 in the third quarter of 2004. We had previously announced our
intention to spend 6% of net sales annually on research and development
efforts; however, due to research and development efforts being diverted as a
result of product liability litigation matters, we do not anticipate spending at that
level in 2004. We continue to maintain research and development efforts and
remain focused on developing new products. Interest & Other Income. Other income increased to $271,000 in the third
quarter 2004, approximately $227,000 higher than the third quarter of 2003.
The increase is attributable to royalty income associated with a gum product
marketed by the Wm. Wrigley Jr. Company. We do not anticipate any future
royalty income under this agreement. Interest Expense.Interest expense for the third quarter of 2004 was
approximately $23,000, $21,000 below the level of the third quarter of 2003.
The decrease is attributable to the repayment of the debt that we incurred in
connection with the acquisition of the 40% interest in Zicam, LLC in December
2001. This debt was fully repaid in November 2003. In July 2004, we borrowed
$2 million against our credit facility with Comerica Bank. We anticipate
repaying the borrowing in the fourth quarter of 2004 and ending the year with
no debt outstanding. Income (Loss) Before Income Tax.Income before income tax in the third
quarter of 2004 increased to approximately $6.1 million, or 33%, from $4.6
million in the third quarter of 2003, as a result of higher sales which were
partially offset by higher operating expenses. We expect that earnings in
future periods will continue to 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. Based on our expectation of
increased sales in the fourth quarter of fiscal 2004, we expect to be
profitable in the fourth quarter of fiscal 2004 and for the full 2004 fiscal
year. 15




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##### Table of Contents



Provision for Income Tax Expense.In 2004, we are recording a provision
for income tax expense based on an estimate of our effective income tax rate
for the full year. Due to operating income recorded in the third quarter of
2004, we recognized income tax expense of approximately $2.5 million. Net Income.Net income increased $914,000, or 33%, to approximately $3.7
million for the quarter ended September 30, 2004, compared to net income for
the third quarter of 2003 of approximately $2.8 million. Based on our
expectation of seasonally increased sales in the fourth quarter of fiscal 2004,
we continue to expect 30% net income growth for the full 2004 fiscal year
compared to fiscal 2003, subject to a number of assumptions including the
intensity and timing of this years cough and cold season and no additional
adverse publicity. Results of Operations for the Nine Months Ended September 30, 2004 Compared to
the Nine Months Ended September 30, 2003 Certain information is set forth below for our Zicam operations expressed
in dollars and as a percentage of net sales for the periods indicated: Nine Months Ended September 30,2004
    
    2003Net sales
    
    $
    33,229,143
    
    
    
    100
    %
    
    $
    25,270,098
    
    
    
    100
    %Cost of sales
    
    
    10,405,376
    
    
    
    31
    
    
    
    8,009,663
    
    
    
    32Gross profit
    
    
    22,823,767
    
    
    
    69
    
    
    
    17,260,435
    
    
    
    68Operating expenses
    
    
    16,317,473
    
    
    
    49
    
    
    
    11,619,979
    
    
    
    46Research and development
    
    
    1,345,543
    
    
    
    4
    
    
    
    1,702,246
    
    
    
    7Income from operations
    
    
    5,160,751
    
    
    
    16
    
    
    
    3,938,210
    
    
    
    16Interest and other income
    
    
    345,794
    
    
    
    1
    
    
    
    140,282
    
    
    
    1Interest expense
    
    
    (22,937
    )
    
    
    
    
    
    
    (216,926
    )
    
    
    (1
    )Income before income taxes
    
    
    5,483,608
    
    
    
    17
    
    
    
    3,861,566
    
    
    
    15Provision for income taxes
    
    
    2,199,382
    
    
    
    7
    
    
    
    1,548,213
    
    
    
    6Net Income
    
    $
    3,284,226
    
    
    
    10
    %
    
    $
    2,313,353
    
    
    
    9
    %
 Net Sales.Net sales for the nine months ended September 30, 2004
increased to approximately $33.2 million, or 31% above net sales in the first
nine months of the prior year. Approximately half of the increase in net sales
was attributable to sales of our new Zicam Cough Mist products. Sales of Zicam
products within the allergy & sinus segment of our business increased almost
42% in the first nine months of 2004 compared to the same period in the prior
year, and accounted for approximately 37% of the increase in net sales for the
nine months ended September 30, 2004 compared to the same period in 2003. The
remaining increase in sales stemmed from sales growth within our cold remedy
line of products. We continue to expect sales growth for the full 2004 fiscal
year to be 30% above our 2003 sales, subject to a number of assumptions
including the intensity and timing of the 2004-2005 cough and cold season and
no additional adverse publicity. 16




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##### Table of Contents



Cost of Sales.Our cost of sales increased to approximately $10.4
million, or 30% above the cost of sales for the first nine months of 2003 of
approximately $8.0 million. The increase is due to the higher product sales
that have occurred year to date. Gross Profit.Gross profit for the first nine months of 2004 increased to
approximately $22.8 million, or 32% greater than the first nine months of 2003,
due to the substantial increase in sales. The gross margin increased 1%, to
69% for the first nine months of 2004 compared to 68% for the same period in
2003. We experienced higher margins in the first nine months of 2004 due to
the phase-out of an older, more expensive swab design and the relative mix of
products sold. The gross margin on our current products varies between 65% and
80%. Gross margin will continue to be affected by the relative mix of products
sold. We anticipate achieving a 70% gross margin for the full year due to the
relative mix of products we anticipate selling. Operating Expenses.Operating expenses for the nine months ended September
30, 2004 increased to approximately $16.3 million, or approximately $4.7
million above the first nine months of 2003. The increase is due to
approximately $2.8 million in increased legal expense compared to the first
nine months of 2003 ($3.3 million for the nine months ended September 30, 2004
versus $564,000 for the nine months ended September 30, 2003). Also
contributing to increased expenses were increases in non-advertising marketing
expense ($1.3 million), insurance expense ($265,000), advertising expense of
$169,000 ($5.2 million for the first nine months in 2004 versus $5.0 million in
2003), quality control expense ($271,000), and sales expense ($95,000), which
offset a decrease in labor expense ($211,000). The decrease in labor expense
reflects the accrual of a portion of year end incentive compensation ($675,000)
in the third quarter of 2003, which was not accrued in the third quarter of
2004. Expenses in future periods will vary largely in relation to the level of
our advertising expenditures, which are heaviest in the first and fourth
quarters. We anticipate that we will continue to incur approximately $1.0 to
$1.5 million in higher legal expense each quarter as a result of the Zicam Cold
Remedy product liability and securities litigation in which we are engaged (see
Part II, Item 1  Legal Proceedings, in this Report on Form 10-Q). Research and Development.Research and development expenses decreased
from approximately $1.7 million in the first nine months of 2003 to
approximately $1.3 million in the first nine months of 2004. We had previously
announced our intention to spend 6% of net sales annually on research and
development efforts; however, due to research and development efforts being
diverted as a result of product liability matters, we do not anticipate
spending at that level in 2004. We continue to maintain research and
development efforts and remain focused on developing new products. Interest & Other Income. Interest and other income increased to $346,000
in the first nine months of 2004, approximately $206,000 higher than the same
period of 2003. The increase is attributable to royalty income associated with
a gum product marketed by the Wm. Wrigley Jr. Company. We do not anticipate
any future royalty income under this agreement. Interest Expense.Interest expense for the nine months ended September
30, 2004 decreased to $23,000, which is $194,000 below the amount incurred for
the first nine months of 2003. The decrease is attributable to the repayment
of the debt that we incurred in connection 17




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with the acquisition of the 40% interest in Zicam, LLC in December 2001.
This debt was fully repaid in November 2003. In July 2004, we borrowed $2
million against our credit facility with Comerica Bank. We anticipate repaying
the borrowing in the fourth quarter of 2004 and ending the year with no debt. Income Before Income Tax.Income before income tax in the first nine
months of 2004 increased to approximately $5.5 million, or 42%, from
approximately $3.9 million in the first nine months of 2003, due to higher
sales which were partially offset by higher operating expenses. We expect that
earnings in future periods will continue to 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. Based on our
expectation of increased sales in the fourth quarter, we expect to be
profitable in the fourth quarter of fiscal 2004 and for the full 2004 fiscal
year. Provision for Income Tax Expense.In 2004, we are recording a provision
for income tax expense based on an estimate of our effective income tax rate
for the full year. We recognized tax expense of almost $2.2 million for the
first nine months of 2004. Net Income.Net income increased $971,000 to approximately $3.3 million
for the nine months ended September 30, 2004, compared to net income for the
first nine months in 2003 of $2.3 million. Based on our expectation of
seasonally higher sales in the fourth fiscal quarter, we continue to expect 30%
net income growth for the full 2004 fiscal year compared to fiscal 2003,
subject to a number of assumptions including the intensity and timing of the
2004-2005 cough and cold season and no additional adverse publicity. Liquidity and Capital Resources Our working capital remained unchanged from the $17.6 million level
recorded on December 31, 2003. During the nine-month period ended September 30,
2004, we experienced a decrease in cash from operating activities of
approximately $3.1 million. The decrease in cash from operations is due to
increases in cash of $3.3 million from net income and $2.6 million for non-cash
items being offset by decreases in cash of approximately $5.6 million due to
increases in inventory levels (the increase in inventory is due to the addition
of six new Zicam Cough Mist products and the seasonal increase in inventory to
meet expected increases in sales during the cough and cold season). Also
contributing to the decrease in cash from operations was a decrease in accounts
payable ($1.9 million), an increase in accounts receivable ($801,000), and an
increase in prepaid expenses ($682,000). Investing activities used cash of approximately $5.1 million. The
decrease in cash was primarily due to $5 million of cash being restricted to
secure a $5 million letter of credit related to the new insurance program, as
discussed below. Cash flow from financing activities provided approximately
$2.2 million which includes $2 million borrowed under our credit facility with
Comerica Bank in July 2004. In April 2004, we established a fully-funded deductible insurance program
through a product liability insurance carrier. Under the program, we have
agreed to reimburse our insurer for its claims administration expenses and for
amounts paid out by it in settlement of product 18




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##### Table of Contents



liability claims filed after the initial date of the program and which are
not covered by insurance programs from prior years. The terms of the program
require us to maintain an irrevocable, evergreen letter of credit issued by a
bank or other financial institution to secure our reimbursement obligations to
our insurer. We have a $5.0 million letter of credit with Comerica Bank and
have reserved an equal amount of cash to secure repayments of amounts that
become due under the letter of credit. The $5 million reserve is noted as
Restricted Cash on the balance sheet and has been placed in an interest earning
certificate of deposit. We have a $2.5 million credit facility with Comerica Bank which was
renewed for a two-year term in May 2003. In July 2004, we borrowed $2 million
under the facility to meet our working capital needs in the third quarter. We
anticipate repaying the debt in the fourth quarter of 2004 and ending fiscal
2004 with no debt. We are in compliance with the earnings and financial
covenants contained in our credit agreement. We believe that our existing
capital resources and our credit line will be sufficient to fund our operations
and capital requirements for the next 12 months. 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 September 30, 2004Less 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
    
    
    276
    
    
    
    81
    
    
    
    195
    
    
    
    0
    
    
    
    0Purchase Obligations
    
    
    6,400
    
    
    
    6,400
    
    
    
    0
    
    
    
    0
    
    
    
    0Other Long-Term Liabilities Reflected on the
Companys Balance Sheet under GAAP
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0Total
    
    $
    6,676
    
    
    $
    6,481
    
    
    $
    195
    
    
    $
    0
    
    
    $
    0
 CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS AND RISK FACTORS Forward Looking Statements This Report on Form 10-Q, 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: 19




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##### Table of Contents




    
    our belief that expected growth in sales will depend on our success
in securing additional retail distribution of our products, including
the six new Cough Mist products that we began shipping in the third
quarter of 2004;
    
    our belief that growth in sales in future periods will be affected
by expanding consumer awareness and acceptance of our entire Zicam
brand line of products and upon avoiding additional adverse publicity;
    
    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 expectation that our mix of products sold will change due to
seasonality and varying growth rates within our three market
categories;
    
    our expectation of expanding distribution of our products among our
largest 10 retailers such that they will carry, on average, 12 of our
16 products for the 2004-2005 cough and cold season;
    
    our expectation that slower product development activity coupled
with high legal expenses may slow the rate of net income growth in
2005;
    
    our expectation of continuing profitability in future years, and
profitability in the fourth quarter of fiscal 2004 and the full 2004
fiscal year;
    
    our intention to review our product return reserve provision
regularly and adjust the reserve amounts as actual product return
experience continues to develop, and our expectation that a higher
sales returns allowance will be recorded in the future for new products
that we introduce until such products achieve market acceptance;
    
    our intention to evaluate and adjust as appropriate the deferred
tax valuation allowance;
    
    our expectation that sales growth and net income for the full 2004
fiscal year will be 30% above our 2003 sales and net income levels
subject to a number of assumptions;
    
    our anticipation that we will not receive any future royalty income
under our agreement with the Wm. Wrigley Jr. Company.
    
    our expectation that our Cough Mist product manufacturer will have
inventory available for sales of the Cough Mist products through the
2004-2005 cough and cold season;
    
    our expectation that the average unit cost of goods sold and gross
margin will continue to be affected by the relative mix of products
sold;
    
    our expectation of achieving a 70% gross margin for the year; 20




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
    
    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 expenditures;
    
    our belief that research and development spending will be below 6%
of net sales for 2004;
    
    our expectation regarding increases in sales in the fourth quarter
of 2004;
    
    our expectation that earnings in future periods will be
significantly impacted by the seasonality of our sales, the severity of
the cold season, the revenues and expenses associated with new
products, and the timing and amount of advertising, research and
development, and legal expenses;
    
    our intention to vigorously defend the Zicam Cold Remedy product
liability and securities violation claims that have been filed against
us, our expectation that additional product liability lawsuits will be
filed against us, and our belief that any liability resulting from
these or other lawsuits, including any adverse publicity, could
materially impact our financial results;
    
    our anticipation that we will continue to incur approximately $1.0
to $1.5 million in higher legal expense each quarter as a result of the
Zicam Cold Remedy product liability and securities litigation in which
we are engaged;
    
    our Scientific Advisory Boards plan to do further testing of the
zinc gluconate nasal gel on human volunteers and animal models, and our
expectation that members of the Scientific Advisory Board will
reconvene in approximately six months to review the findings of such
research;
    
    our expectation that we will repay the $2 million borrowed from our
credit facility by the end of 2004 and have no debt at the end of
fiscal 2004;
    
    our belief that our existing capital resources and our credit line
will be sufficient to fund our operations and capital requirements for
the next 12 months;
    
    our having no plans to directly manufacture and store our products;
and
    
    our belief that moderate interest rate increases will not have a
material adverse impact on our results of operations or financial
position in the foreseeable future. We may make additional written or oral forward-looking statements from
time to time in filings with the Securities and Exchange Commission or in
public news releases. Such additional statements may include, but not be
limited to, projections of revenues, income or loss, capital expenditures,
acquisitions, plans for future operations, financing needs or plans, the impact
of inflation and plans relating to our products or services, as well as
assumptions relating to the foregoing. Forward-looking statements are
inherently subject to risks and uncertainties, some of which cannot be
predicted or quantified. Future events and actual results could differ 21




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materially from those set forth in, contemplated by, or underlying our
forward-looking statements. Statements in this Report on Form 10-Q, including those set forth in the
section entitled 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) a weak cough
and cold season, (iii) lack of market acceptance for or uncertainties
concerning the efficacy or safety of our current and future products or
regulatory actions involving our products, (iv) difficulties in increasing
production or maintaining sufficient inventories to meet unexpectedly high
demand in the short term, (v) financial difficulties encountered by one or more
of our principal customers, (vi) difficulties in obtaining additional capital
for marketing, research and development, and other expenses, (vii) material
litigation involving patent and contractual claims, product liability claims,
consumer issues and securities violation claims, and (viii) adverse publicity
regarding our products or advertising restrictions. Forward-looking statements contained in this Report on Form 10-Q speak
only as of the date of this Report on Form 10-Q or, in the case of any document
incorporated by reference, the date of that document. We do not undertake, and
we specifically disclaim any obligation, to publicly update or revise any
forward-looking statement contained in this Report on Form 10-Q 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 and delays frequently encountered in
connection with the development and operation of a new business, and the
development and marketing of relatively new products such as the Zicam
products. If our Zicam products do not gain widespread market acceptance or receive
additional adverse publicity, our anticipated sales and results of operations
will suffer Although we believe that each of our products, and in particular our Zicam
Cold Remedy nasal products, offer unique benefits to consumers, we cannot be
certain that any of these products will achieve widespread acceptance by the
market. In addition, given their recent introduction in late 2003, our three
new oral Zicam products have not yet reached the level of market recognition
achieved by the original Zicam Cold Remedy nasal gel pump or swab products.
While we are working to increase the market presence of all of our products,
including our new Cough Mist products, we cannot be certain that demand for
these products will grow. If 22




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problems arise concerning the efficacy or safety of any of our products,
or if any of our products receives additional adverse publicity, or if any of
our products fails to achieve widespread market acceptance for any other
reason, our operating results and prospects would be materially adversely
affected. Our results could also be affected by fluctuations in buying patterns
and inventory levels of major customers. Unanticipated problems associated with product development and
commercialization could adversely affect our operating results Our successful development of existing and new products is subject to the
risks of failure and delay inherent in the development and commercialization of
products based on innovative technologies. These risks include the
possibilities that:  
    
    we may experience unanticipated or otherwise negative research and
development results;
    
    existing or proposed products may be found to be ineffective or
unsafe, or may otherwise fail to receive required regulatory clearances
or approvals;
    
    we may find that existing or proposed products, while effective,
are uneconomical to commercialize or market;
    
    we may be unable to produce sufficient product inventories to meet customer demand;
    
    existing or proposed products do not achieve broad market acceptance; or
    
    proprietary rights held by third parties preclude us from
developing or marketing existing or proposed products. Our inability to develop and commercialize our existing products or any
new products on a timely basis and within our financial budgets could have a
material adverse effect on our operating results and future prospects. Our inability to provide scientific proof for product claims may adversely
affect our sales The marketing of our Zicam products involves claims that these products
assist in reducing the duration and severity of the common cold (in the case of
Zicam Cold Remedy products) and controlling allergy symptoms (in the case of
Zicam Allergy Relief). Under Food and Drug Administration (FDA) and Federal
Trade Commission (FTC) rules, we are required to obtain scientific data to
support any health claims we make concerning our products. We have obtained
scientific data for our product claims, however, we cannot be certain that the
scientific data we have obtained in support of our claims will be deemed
acceptable to the FDA, FTC or other regulatory bodies. If any regulatory body
requests supporting information and we are unable to provide support that is
acceptable, either the FDA or FTC could force us to stop making the claims in
question or restrict us from selling the affected products. FDA and other government regulation may restrict our ability to sell our
products We are subject to various federal, state and local laws and regulations
affecting our business. Our Zicam products are subject to regulation by the
FDA, including regulations with respect to labeling of products, approval of
ingredients in products, claims made regarding the 23




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products, and disclosure of product ingredients. If we do not comply with
these regulations or if these regulations change in the future, the FDA could
force us to stop selling the affected products or require us to incur
substantial costs in adopting measures to maintain compliance with these
regulations. If the FDA came to believe that any of our products caused harm to
consumers, we could be required to stop selling that product or subject the
product to a recall. Our advertising claims regarding our products are subject
to the jurisdiction of the FTC as well as the FDA. In both cases we are
required to obtain scientific data to support any advertising or labeling
health claims we make concerning our products, although no pre-clearance or
filing is required to be made with either agency. If we are unable to provide
the required support for such claims, the FTC may stop us from making such
claims or require us to stop selling the affected products. We may fail to compete effectively, particularly against larger, more
established pharmaceutical and health products companies, causing our business
and operating results to suffer The consumer health products industry is highly competitive. We compete
with companies with sales in the United States that are engaged in the
development of both traditional and innovative healthcare products. Many of
these companies have much greater financial and technical resources and
production and marketing capabilities than we do. As well, many of these
companies have already achieved significant product acceptance and brand
recognition with respect to products that compete directly with our Zicam
products. Our competitors may successfully develop and market superior or less
expensive products which could render our Zicam and other future products less
valuable or unmarketable. If we are unable to protect our intellectual property or if we infringe the
intellectual property of others, our financial condition and future prospects
could be materially harmed We rely significantly on the protections afforded by patent and trademark
registrations that we routinely seek from the U.S. Patent and Trademark Office
(USPTO) and from similar agencies in foreign countries. We cannot be certain
that any patent or trademark application that we file will be approved by the
USPTO or other foreign agencies. In addition, we cannot be certain that we
will be able to successfully defend any trademark, trade name or patent that we
hold against claims from, or use by, competitors or other third parties. No
consistent policy has emerged from the USPTO or the courts regarding the
breadth of claims allowed or the degree of protection afforded under
biotechnology and similar patents. Our future success will depend on our
ability to prevent others from infringing on our proprietary rights, as well as
our ability to operate without infringing upon the proprietary rights of
others. We may be required at times to take legal action to protect our
proprietary rights and, despite our best efforts, we may be sued for infringing
on the patent rights of others. Patent litigation is costly and, even if we
prevail, the cost of such litigation could adversely affect our financial
condition. If we do not prevail, in addition to any damages we might have to
pay, we could be required to stop the infringing activity or obtain a license.
We cannot be certain that any required license would be available to us on
acceptable terms, or at all. If we fail to obtain a license, our business
might be materially adversely affected. In addition to seeking patent
protection, we rely upon a combination of non-disclosure agreements, other
contractual restrictions and trade secrecy laws to protect proprietary
information. There can be no assurance that these steps will be adequate to
prevent misappropriation of our proprietary information or that our competitors
will not independently develop technology or trade secrets that compete with
our proprietary information. 24




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We may incur significant costs resulting from product liability claims or
securities litigation We are subject to significant liability should use or consumption of our
products cause injury, illness or death. Presently, we are being sued by
approximately 284 individuals in 19 different product liability lawsuits (two
of which have been filed as class action lawsuits) relating to our Zicam Cold
Remedy product. Various defendants in the lawsuits, including manufacturers
and retailers, have sought indemnification or other recovery from us for
damages related to the lawsuits. Although we carry product liability
insurance, we cannot be sure that our insurance will be adequate to protect us
against product liability claims or that insurance coverage will continue to be
available. Product liability claims, such as those described in our Report on
Form 10-K for our 2003 fiscal year and in our subsequent Reports on
Form 10-Q and 8-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 claims, whether or not proven to be valid, could
have a material adverse effect on our product branding and goodwill, resulting
in reduced market acceptance of our products. In addition, any adverse
decision in such litigation could require significant damages to be paid or
result in adverse publicity, either of which could materially adversely affect
our results of operations and financial condition. The Company and its Chief
Executive and Chief Financial Officers are also subject to two class action
lawsuits alleging violations of securities laws. Any adverse decision in such
litigation 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 2003, we had approximately $0.4 million in backlog of
swab orders. This backlog continued into the first half of the first quarter
of fiscal 2004. We have undertaken significant measures to remedy the
manufacturing problems that led to this backlog, including replacing our swab
manufacturer and redesigning our swab product to permit higher volume
production. We have built a substantial inventory of swab products to reduce
the likelihood of any backlog occurring in the 2004-2005 cough and cold season.
We have increased the inventory of our other products in preparation of
anticipated sell-in during the third quarter of 2004, and we have established
inventory plans to support sales through the 2004-2005 cough and cold season.
We introduced six new Zicam Cough Mist products which began shipping to
customers in July 2004. Our Cough Mist manufacturer is producing according to
our forecast and we expect to have inventory available for sales of the new
products through the 2004-2005 25




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cough and cold season. However, we cannot be certain that these measures
will be sufficient to prevent future backlog of these products or that other
product backlogs will not occur in the future. Any such future backlogs will
potentially result in higher production costs, higher freight costs to expedite
shipment of raw materials and finished goods, fines from certain retailers,
cancelled orders and lost opportunity costs. These in turn could materially
affect our results of operations and financial condition. Our board of directors is authorized to issue shares of preferred stock that
could have rights superior to our outstanding shares of common stock, and, if
issued, could adversely impact the value of our common stock Our certificate of incorporation permits our board of directors, in its
sole discretion, to issue up to 2,000,000 shares of authorized but unissued
preferred stock. These shares may be issued by our board without further
action by our shareholders, and may include any of the following rights (among
others) as our board may determine, which rights may be superior to the rights
of our outstanding common stock:  
    
    voting rights, including the right to vote as a class on particular matters;
    
    preferences as to dividends and liquidation rights;
    
    conversion rights;
    
    anti-dilution protections; and
    
    redemption rights Since our board of directors has the authority to determine, from time to
time, the terms of our authorized preferred stock, there is no limit on the
amount of common stock that could be issuable upon conversion of any future
series of preferred stock that may be issued. The rights of holders of our
common stock will be subject to, and may be adversely affected by, the rights
of the holders of any series of preferred stock that may be issued in the
future. In addition, the market price of our common stock may be adversely
affected by the issuance of any series of preferred stock with voting or other
rights superior to those of our common stock. The issuance of any series of
preferred stock could also have the effect of making it more difficult for a
third party to acquire a majority of our outstanding common stock. The price of our stock may continue to be volatile The market price of our common stock, which is quoted for trading on the
Nasdaq National Market, has been highly volatile and may continue to be
volatile in the future. Any or a combination of the following factors could
cause the market value of our common stock to decline quickly: operating
results that differ from market expectations, negative or other unanticipated
results of clinical trials or other testing, delays in product development,
technological innovations or commercial product introductions by our
competitors, changes in government regulations or advertising
restrictions, developments concerning
proprietary rights, including pending or threatened patent
litigation, adverse publicity or public
concerns regarding the safety of any of our products, litigation against the
Company, and general economic and stock market conditions. Since the Spring of
2000, the stock market has experienced, and it may continue to experience,
significant price and volume fluctuations. These fluctuations have
particularly affected the market prices of equity 26




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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 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 holding short positions in our
stock. 
 Item 3. Quantitative and Qualitative Disclosures About Market Risk Our primary market risk exposure relates to our variable rate revolving
line of credit with Comerica Bank. At no time during fiscal 2003 or the first
six months of fiscal 2004 did we have any outstanding balance against this line
of credit. In July 2004, we borrowed $2 million against our credit facility
with Comerica Bank. The primary purpose for the borrowing was to provide
additional liquidity as we built inventory for expected increases in sales
during the second half of 2004. We generally extend payment terms for
customers during the third quarter as customers purchase new products and build
inventory for the upcoming cough and cold season. We anticipate repaying the
debt in the fourth quarter of 2004 and ending fiscal 2004 with no debt.
Consequently, we believe that moderate interest rate increases will not have a
material adverse impact on our results of operations or financial position in
the foreseeable future. As of September 30, 2004 and December 31, 2003, we did not participate in
any market risk-sensitive commodity instruments for which fair value disclosure
would be required under Statement of Financial Accounting Standards No. 107.
We believe that we are not subject in any material way to other forms of market
risk, such as foreign currency exchange risk or foreign customer purchases (of
which there were none in the first nine months of fiscal 2004 or in any of
2003) or commodity price risk. 
 Item 4. Controls and Procedures We carried out an evaluation, under the supervision and with the
participation of our Chief Executive Officer and Chief Financial Officer, of
the effectiveness of the design and operation of our disclosure controls and
procedures pursuant to Rules 13a-15 and 15d-15 of the Securities Exchange Act
of 1934. Based upon that evaluation, our Chief Executive Officer and Chief
Financial Officer concluded that, as of the end of the period covered by this
report, our disclosure controls and procedures are effective in timely alerting
them to material information relating to the Company and required to be
included in our periodic SEC filings. There were no significant changes in our
internal controls over financial reporting during our most recently completed
quarter that have materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting, or other factors that
could significantly affect these controls subsequent to the date of their
evaluation, and there were no corrective actions taken with regard to
significant deficiencies or material weaknesses in our controls. 27




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PART II
OTHER INFORMATION 
 Item 1. Legal Proceedings We are subject, from time to time, to legal proceedings and claims
regarding adverse reactions to our products. From late 2003 through October
2004, we have been sued by approximately 284 individuals in 19 different
lawsuits generally alleging that our Zicam Cold Remedy product caused damage to
the sense of smell and/or taste. Two of these lawsuits have been filed as
class action lawsuits covering named and unnamed plaintiffs. The lawsuits have
been previously disclosed in our Annual Report on Form 10-K for our fiscal year
ended December 31, 2003, our Quarterly Reports on Form 10-Q for our first
quarter ended March 31, 2004 and our second quarter ended June 30, 2004, and on
our Report on Form 8-K filed August 20, 2004. Various defendants in the
lawsuits, including manufacturers and retailers, have sought indemnification or
other recovery from us for damages related to the lawsuits. 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 appears to be related to the filing of the
lawsuits. Also, we are aware that plaintiffs law firms are actively
soliciting potential claimants through the Internet and other media. As a
result, we expect additional lawsuits to be filed against us. It is very early
in the discovery phase of the lawsuits. It appears that the lawsuits, as well
as the above-noted news media reports, are 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 was no indication in either group of impairment to the sense
of smell. Further, the incidence of smell disorders is reported at 1-2% of the
population on average, and is very common in those over age 50. Upper
respiratory infections are among the most common causes of impairment to sense
of smell. Therefore, any product such as Zicam Cold Remedy designed to treat
upper respiratory illnesses may be mistakenly associated with distortion of
sense of smell. The rate of reported complaints of distortion of sense of
smell associated with Zicam Cold Remedy is well below these national incidence
levels. In September 2004, we convened a two-day meeting of our Scientific
Advisory Board to review the findings of studies initiated in the first quarter
of fiscal 2004. Members of the Scientific Advisory Board presented the results
of their studies on the epidemiology, anatomy, and physiology of smell
disorders. It was the unanimous opinion of the Scientific Advisory Board that
the cumulative scientific evidence does not support the contention that Zicam®
Cold Remedy zinc gluconate nasal gel is associated with disorders of smell.
The Scientific Advisory Board plans to do further testing of the zinc gluconate
nasal gel on human volunteers and animal models. Panel members are expected to
reconvene in approximately six months to review the findings of the additional
research. 28




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We have submitted all of the existing lawsuits to our insurance carriers.
We cannot predict the outcome of the litigation, but we will defend ourselves
vigorously. If any liability were to result from one or more of these or
future lawsuits, we believe our financial results could be materially impacted.
Our financial results could also be materially impacted by the adverse
publicity that may result from the lawsuits. Additionally, there have been two class action lawsuits filed against the
Company, our President and Chief Executive Officer, Carl J. Johnson, and our
Executive Vice President and Chief Financial Officer, William J. Hemelt,
alleging violations of federal securities laws. These cases were previously
disclosed in our Quarterly Report on Form 10-Q for our second quarter ended
June 30, 2004. Among other things, the lawsuits allege that between October
2003 and February 2004, we made materially false and misleading statements
regarding our Zicam Cold Remedy product, including failing to adequately
disclose to the public the details of certain of the product liability lawsuits
described above. We believe the claims made in these lawsuits are without
merit and represent the actions of opportunistic plaintiffs law firms seeking
to take advantage of existing Zicam Cold Remedy litigation. We intend to
vigorously defend ourselves in these matters. In accordance with and subject
to the provisions of the Companys Certificate of Incorporation, Messrs.
Johnson and Hemelt will be indemnified by the Company for their expenses
incurred in defending these lawsuits and for any other losses which they may
suffer as a result of these lawsuits. If any liability were to result from
these lawsuits, we believe our financial results could be materially impacted. 
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds During the quarter ended September 30, 2004, there were no sales of equity
securities by the Company that were not registered under the Securities Act and
no purchases by the Company (and its affiliated purchasers) of the Companys
equity securities. The board of directors previously approved the repurchase by the Company
of up to one million shares of the Companys common stock through a stock
repurchase program that we publicly announced on April 1, 2004 (the Program).
Unless terminated earlier by resolution of our board of directors, the Program
will expire when we have repurchased all shares authorized for repurchase
through the Program. There are 982,100 shares remaining for repurchase under
the Program. 
 Item 4. Submission of Matters to a Vote of Security Holders There were no matters subject to a vote of security holders during the
third quarter of 2004. 
 Item 6. Exhibits Exhibit No.
    
    Title3.01
    
    Articles of Incorporation and Amendments thereto of the registrant (1)3.02
    
    Bylaws of the registrant (1)
 29




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Exhibit No.
    
    Title4.01
    
    Rights Agreement dated as of July 22, 2002 by and between the
registrant and Corporate Stock Transfer, Inc. (2)10.1
    
    Manufacturing Agreement dated October 22, 2004, by and
between Matrixx Initiatives, Inc. and Biozone Laboratories (3)10.2*
    
    Manufacturing Agreement dated July 9, 2004, by and between
Matrixx Initiatives, Inc. and Applied Laboratories, Inc.31.1*
    
    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 135032.2*
    
    Certification of CFO pursuant to 18 U.S.C. Section 1350
    *
    
    Filed with this Report on Form 10-Q.  (1)
    
    Incorporated by reference to the registrants Amendment No. 1
to Form 8-A, filed June 18, 2002, file number 000-27646.(2)
    
    Incorporated by reference to the registrants registration
statement on Form 8-A, filed July 23, 2002, file number 000-27646.(3)
    
    Incorporated by reference to the registrants Report on Form
8-K filed October 28, 2004; file number 001-31404. 30




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SIGNATURES In accordance with the requirements of the Securities Exchange Act of
1934, the registrant has caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized. Matrixx Initiatives, Inc./s/ Carl J. JohnsonCarl J. JohnsonPresident andChief Executive Officer/s/ William J. HemeltWilliam J. HemeltExecutive Vice President,Chief Financial Officer,Treasurer and SecretaryNovember 10, 2004
 31




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EXHIBIT INDEX 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. (2)10.1
    
    Manufacturing Agreement dated October 22, 2004, by and
between Matrixx Initiatives, Inc. and Biozone Laboratories (3)10.2*
    
    Manufacturing Agreement dated July 9, 2004, by and between
Matrixx Initiatives, Inc. and Applied Laboratories, Inc.31.1*
    
    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 135032.2*
    
    Certification of CFO pursuant to 18 U.S.C. Section 1350
    *
    
    Filed with this Report on Form 10-Q.  (1)
    
    Incorporated by reference to the registrants Amendment No. 1
to Form 8-A, filed June 18, 2002, file number 000-27646.(2)
    
    Incorporated by reference to the registrants registration
statement on Form 8-A, filed July 23, 2002, file number 000-27646.(3)
    
    Incorporated by reference to the registrants Report on Form
8-K filed October 28, 2004; file number 001-31404.