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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 or 15(d) of the Securities
Exchange Act of 1934
 For the quarter ended June 30, 2004 or [  ] Transition Report pursuant to Section 13 or 15(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   
þ     NO o Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). YES   
o     NO    þ There were 9,476,701 shares of the registrants common stock, $.001 par value,
outstanding as of August 1, 2004.




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MATRIXX INITIATIVES, INC.
FORM 10-Q
INDEX PagePART I FINANCIAL INFORMATIONItem 1.
Condensed Consolidated Balance Sheet as of June 30, 2004 and
December 31, 2003
    
    
    1Condensed
Consolidated Statements of Operations for the three months ended
June 30, 2004 and 2003
    
    
    3Condensed
Consolidated Statements of Operations for the six months ended
June 30, 2004 and 2003
    
    
    4Condensed
Consolidated Statements of Cash Flows for the six months ended
June 30, 2004 and 2003
    
    
    5Notes to Condensed Consolidated Financial Statements
    
    
    6Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    11Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    27Item 4. Controls and Procedures
    
    
    28PART II OTHER INFORMATIONItem 1 Legal Proceedings
    
    
    28Item 2 Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities
    
    
    30Item 4 Submission of Matters to a Vote of Security Holders
    
    
    30Item 6. Exhibits and Reports on Form 8-K
    
    
    31SIGNATURES
    
    
    32EXHIBIT 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
(Unaudited) ASSETS June 30, 2004
    
    December 31, 2003Current Assets:Cash and cash equivalents
    
    $
    4,502,301
    
    
    $
    10,682,614Accounts receivable:Trade, net allowance for doubtful
accounts of $516,418 and $601,357
    
    
    1,840,515
    
    
    
    11,471,511Inventories
    
    
    7,710,114
    
    
    
    3,267,604Prepaid expenses and other
    
    
    1,302,988
    
    
    
    615,790Deferred tax asset
    
    
    3,488,801
    
    
    
    2,829,556Total Current Assets
    
    
    18,844,719
    
    
    
    28,867,075Property and Equipment, at cost:Office furniture and equipment
    
    
    771,012
    
    
    
    681,528Machine tooling
    
    
    150,000
    
    
    
    150,000Leasehold improvements
    
    
    166,613
    
    
    
    37,2021,087,625
    
    
    
    868,730Less accumulated depreciation
    
    
    (326,507
    )
    
    
    (247,728
    )Net Property and Equipment
    
    
    761,118
    
    
    
    621,002Other Assets:Restricted cash
    
    
    5,014,072
    
    
    
    Deposits
    
    
    358,045
    
    
    
    212,697Debt issuance costs, net of accumulated amortization
of $6,250 and $0
    
    
    18,750
    
    
    
    Deferred tax asset
    
    
    4,006,567
    
    
    
    4,351,810Patents, net of accumulated amortization of $172,321
and $138,780
    
    
    951,279
    
    
    
    984,820Goodwill
    
    
    15,039,836
    
    
    
    15,039,836Total Other Assets
    
    
    25,388,549
    
    
    
    20,589,163Total Assets
    
    $
    44,994,386
    
    
    $
    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 June 30, 2004
    
    December 31, 2003Current Liabilities:Accounts payable and accrued expenses
    
    $
    4,603,203
    
    
    $
    9,552,218Sales returns and allowances
    
    
    1,758,069
    
    
    
    1,734,568Total Current Liabilities
    
    
    6,361,272
    
    
    
    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, 9,509,601 and 9,474,601 shares
issued and outstanding
    
    
    9,509
    
    
    
    9,475Additional paid in capital
    
    
    42,385,654
    
    
    
    41,993,189Accumulated deficit
    
    
    (3,365,745
    )
    
    
    (2,972,987
    )39,029,418
    
    
    
    39,029,677Less common stock held in treasury, at cost
(53,800 and 35,900 shares)
    
    
    (396,304
    )
    
    
    (239,223
    )Total Stockholders Equity
    
    
    38,633,114
    
    
    
    38,790,454Total Liabilities and
Stockholders Equity
    
    $
    44,994,386
    
    
    $
    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
(Unaudited) Three months ended June 30,2004
    
    2003Net sales
    
    $
    3,391,721
    
    
    $
    2,994,419Cost of sales
    
    
    1,071,545
    
    
    
    1,145,584Gross Profit
    
    
    2,320,176
    
    
    
    1,848,835Operating expenses
    
    
    3,471,905
    
    
    
    2,171,909Research and development
    
    
    521,565
    
    
    
    596,055Income (Loss) From
Operations
    
    
    (1,673,294
    )
    
    
    (919,129
    )Other Income (Expense):Interest and other income
    
    
    28,518
    
    
    
    58,379Interest and other expense
    
    
    
    
    
    
    (87,359
    )Total Other Income (Expense)
    
    
    28,518
    
    
    
    (28,980
    )Income (Loss) Before Provision (Benefit) For Income Taxes
    
    
    (1,644,776
    )
    
    
    (948,109
    )Provision (benefit) for income taxes
    
    
    (655,380
    )
    
    
    (381,110
    )Net Income (Loss)
    
    $
    (989,396
    )
    
    $
    (566,999
    )Net Income (Loss) Per Share of Common Stock:Basic:Weighted Average Number of Common Shares Outstanding
    
    
    9,499,156
    
    
    
    9,420,478Net Income (Loss) Per Share of Common Stock
    
    $
    (0.10
    )
    
    $
    (0.06
    )Diluted:Weighted Average Number of Common Shares Outstanding
    
    
    9,499,156
    
    
    
    9,420,478Net Income (Loss) Per Share of Common Stock
    
    $
    (0.10
    )
    
    $
    (0.06
    )
 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
(Unaudited) Six months ended June 30,2004
    
    2003Net sales
    
    $
    16,324,287
    
    
    $
    11,896,094Cost of sales
    
    
    5,170,770
    
    
    
    3,794,629Gross Profit
    
    
    11,153,517
    
    
    
    8,101,465Operating expenses
    
    
    10,888,481
    
    
    
    7,864,440Research and development
    
    
    992,034
    
    
    
    906,817Income (Loss) From Operations
    
    
    (726,998
    )
    
    
    (669,792
    )Other Income (Expense):Interest and other income
    
    
    74,350
    
    
    
    95,338Interest and other expense
    
    
    
    
    
    
    (173,194
    )Total Other Income (Expense)
    
    
    74,350
    
    
    
    (77,856
    )Income (Loss) Before Provision (Benefit) For Income Taxes
    
    
    (652,648
    )
    
    
    (747,648
    )Provision (benefit) for income taxes
    
    
    (259,890
    )
    
    
    (298,003
    )Net Income (Loss)
    
    $
    (392,758
    )
    
    $
    (449,645
    )Net Income (Loss) Per Share of Common Stock:Basic:Weighted Average Number of Common Shares Outstanding
    
    
    9,494,087
    
    
    
    9,424,913Net Income (Loss) Per Share of Common Stock
    
    $
    (0.04
    )
    
    $
    (0.05
    )Diluted:Weighted Average Number of Common Shares Outstanding
    
    
    9,494,087
    
    
    
    9,424,913Net Income (Loss) Per Share of Common Stock
    
    $
    (0.04
    )
    
    $
    (0.05
    )
 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
(Unaudited) Six months ended June 30,2004
    
    2003Cash Flows From Operating Activities:Net income (loss)
    
    $
    (392,758
    )
    
    $
    (449,645
    )Adjustments to reconcile net income (loss) to net cash
provided (used) by operating activities:Depreciation
    
    
    78,779
    
    
    
    75,897Amortization
    
    
    33,541
    
    
    
    33,540Amortization of imputed interest on notes payable
    
    
    
    
    
    
    173,072Amortization of debt issuance costs
    
    
    6,250
    
    
    
    14,583Deferred income taxes
    
    
    (314,002
    )
    
    
    (298,955
    )Other
    
    
    
    
    
    
    2,401Changes in assets and liabilities:Accounts receivable
    
    
    9,630,996
    
    
    
    6,171,731Inventories
    
    
    (4,442,510
    )
    
    
    (1,643,298
    )Prepaid expenses and other
    
    
    (687,198
    )
    
    
    (173,404
    )Interest receivable
    
    
    (14,072
    )
    
    
    Accounts payable and accrued expenses
    
    
    (4,949,015
    )
    
    
    (4,304,762
    )Sales returns and allowances
    
    
    23,501
    
    
    
    (49,837
    )Net Cash (Used) By Operating Activities
    
    
    (1,026,488
    )
    
    
    (448,677
    )Cash Flows From Investing Activities:Capital expenditures
    
    
    (218,895
    )
    
    
    (49,566
    )Deposits and other
    
    
    (145,348
    )
    
    
    (90,000
    )Restricted cash
    
    
    (5,000,000
    )
    
    
    Net Cash (Used) By Investing Activities
    
    
    (5,364,243
    )
    
    
    (139,566
    )Cash Flows From Financing Activities:Purchase of treasury stock
    
    
    (157,081
    )
    
    
    (154,050
    )Debt issuance costs
    
    
    (25,000
    )
    
    
    Principal payments on notes payable
    
    
    
    
    
    
    (2,548,624
    )Issuance of common stock
    
    
    392,499
    
    
    
    36,000Net Cash Provided (Used) By Financing Activities
    
    
    210,418
    
    
    
    (2,666,674
    )Net Increase (Decrease) in Cash and Cash Equivalents
    
    
    (6,180,313
    )
    
    
    (3,254,917
    )Cash and Cash Equivalents at Beginning of Period
    
    
    10,682,614
    
    
    
    12,010,091Cash and Cash Equivalents at End of Period
    
    $
    4,502,301
    
    
    $
    8,755,174Supplemental Disclosure of Cash Flow Information:Cash paid during the period for:Interest
    
    $
    
    
    
    $
    201,498Income taxes
    
    
    280,751
    
    
    
    950
 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 six months ended June 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 CompensationThe 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 loss and loss 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
    
    Six Months EndedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003Net income (loss) applicable to
common shareholders, as reported
    
    $
    (989,396
    )
    
    $
    (566,999
    )
    
    $
    (392,758
    )
    
    $
    (449,645
    )Less stock based employee compensation
expense determined under fair value
based methods for all awards, net of
related tax effects
    
    
    270,511
    
    
    
    84,906
    
    
    
    670,491
    
    
    
    242,921Pro forma net income (loss)
    
    $
    (1,259,907
    )
    
    $
    (651,905
    )
    
    $
    (1,063,249
    )
    
    $
    (692,566
    )Net income (loss) per share
of common stock:Basic:As reported
    
    $
    (.10
    )
    
    $
    (.06
    )
    
    $
    (.04
    )
    
    $
    (.05
    )Pro forma
    
    $
    (.13
    )
    
    $
    (.07
    )
    
    $
    (.11
    )
    
    $
    (.07
    )Diluted:As reported
    
    $
    (.10
    )
    
    $
    (.06
    )
    
    $
    (.04
    )
    
    $
    (.05
    )Pro forma
    
    $
    (.13
    )
    
    $
    (.07
    )
    
    $
    (.11
    )
    
    $
    (.07
    )
  During the quarter ended June 30, 2004, 10,000 options were exercised for
total proceeds to the Company of $90,000.  3.
    
    As of December 31, 1997, Matrixx adopted 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 (loss) per common share for the three and six months
ended June 30, 2004 and 2003. Options, warrants and other incremental
shares to purchase 750,400 and 511,300 shares of common stock for the three
and six months ended June 30, 2004 and 2003, respectively, were not included
in the computation of diluted loss per share because their effect would be
anti-dilutive. Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003Net income (loss)
    
    $
    (989,396
    )
    
    $
    (566,999
    )
    
    $
    (392,758
    )
    
    $
    (449,645
    )Weighted average common
shares outstanding:Basic
    
    
    9,499,156
    
    
    
    9,420,478
    
    
    
    9,494,087
    
    
    
    9,424,913Dilutive securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Diluted
    
    
    9,499,156
    
    
    
    9,420,478
    
    
    
    9,494,087
    
    
    
    9,424,913Net income (loss)
per common share:Basic
    
    $
    (.10
    )
    
    $
    (.06
    )
    
    $
    (.04
    )
    
    $
    (.05
    )Diluted
    
    $
    (.10
    )
    
    $
    (.06
    )
    
    $
    (.04
    )
    
    $
    (.05
    )
  4.
    
    Inventories consisted of the following at June 30, 2004, and December 31,
2003: June 30, 2004
    
    December 31, 2003Raw materials and packaging
    
    $
    2,455,932
    
    
    $
    1,137,584Finished goods
    
    
    5,414,919
    
    
    
    2,296,486Less reserve for obsolescence
    
    
    (160,737
    )
    
    
    (166,465
    )Total
    
    $
    7,710,114
    
    
    $
    3,267,605
  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 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 8




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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 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 July 2004,
we have been sued by approximately 175 individuals in 18 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. In addition to the
lawsuits previously disclosed in our Annual Report on Form 10-K for our fiscal
year ended December 31, 2003 and our Quarterly Report on Form 10-Q for our
first quarter ended March 31, 2004, the new cases are Benkwith vs. Matrixx
Initiatives, Inc. et al., filed May 3, 2004 in the Circuit Court for Montgomery
County, Alabama, Case No. CV04-1180 CNP; Bryant vs. Matrixx Initiatives, Inc.
et al., filed June 14, 2004 in District Court, Boulder County, Colorado, Case
No. 2004 CV808; Wyatt vs. Matrixx Initiatives, Inc. et al., filed June 17, 2004
in the US District Court, Northern District of Alabama, Case No. CV04-1230-S;
Hilton vs. Matrixx Initiatives, Inc. et al., filed June 27, 2004 in the
District Court, Tarrant County, Texas, Case No. 0482061620 (removed to the
United States District Court for the Northern District of Texas, Fort Worth
Division, Case No. 4-04CV-519-Y); Hunter vs. Matrixx Initiatives, Inc. et al,
filed June 4, 2004 in the Superior Court of the State of Arizona (Maricopa
County), Case No. CV2004-010830; and Mayo vs. Matrixx Initiatives, Inc. et al.,
filed June 24, 2004 in the Superior Court of New Jersey (Essex County), Case
No. ESX-L-3551-04. The case Christensen et al. vs. Matrixx Initiatives, Inc.
et al. filed October 13, 2003, previously disclosed on Form 10-K for our fiscal
year ended December 31, 2003, has been dismissed without prejudice. Various
defendants in the lawsuits, including manufacturers and retailers, have sought
indemnification or other recovery from us for damages related to the lawsuits. 9




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All 17 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 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 Johnson, and our
Executive Vice President and Chief Financial Officer, William J. Hemelt,
alleging violations of federal securities laws. The cases are Sved vs. Matrixx
Initiatives, Inc., Carl J. Johnson and William J. Hemelt, filed April 27, 2004
in the United States District Court for the District of Arizona, Case No.
CV04-0886PHX and Siracusano vs. Matrixx Initiatives, Inc, Carl J. Johnson and
William J. Hemelt, filed May 19, 2004 in the United States District Court for
the District of Arizona, Case No. CV041012PHX. 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. 10




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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 the third quarter of 2003, we began
shipping three new Zicam Cold Remedy products  Oral Mist, Chewables and
RapidMelts. At our annual meeting of shareholders held on April 28, 2004, we
announced 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. We began
shipping the new Cough Mist products to retailers in mid-July 2004, after the
end of our second quarter. Executive Summary Net sales for the second quarter of fiscal 2004 increased 13% to
approximately $3.4 million compared to almost $3.0 million for the second
quarter of 2003. The majority of the increased sales in the second quarter
were due to increased sales of the allergy and congestion products. Net loss
for the second quarter increased to approximately $(989,000) compared to
$(567,000) in the second quarter of 2003.The increased net loss is primarily
related to increased legal expense. Net sales for the first six months of fiscal 2004 increased 37% to
approximately $16.3 million compared to almost $11.9 million for the first six
months of fiscal 2003. Approximately half of the increase was attributable to
increased sales of our allergy and congestion products while the other half of
the increase stemmed from sales of our Zicam Cold Remedy oral products
introduced in the third quarter of 2003. Net loss for the first six months of
fiscal 2004 decreased 13% to approximately $(393,000) compared to almost
$(450,000) for the first six months of last year. We expect net income in future periods will be significantly affected by
the level of sales, the timing and amount of our advertising and research and
development expenses, and the timing and amount of expenses incurred in the
defense of product liability and securities litigation matters. 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
that we began shipping in July 2004, upon expanding consumer awareness and
acceptance of our entire line of Zicam products, and upon 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. 11




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Management reviews several key performance indicators. First, we compare
our annual sales and net income performance against our stated goal of 30%
annual growth for each. For the six month year to date period net sales have
increased 37% and net loss is down 13%. Second, we monitor our share of the
cough and cold market. For the 12 week period ended June 13, 2004, sales of
our products (as measured by three outlet syndicated scanner data, excluding
Wal-Mart) increased approximately 7% over the comparable period a year ago
while the entire cough and cold market industry experienced a 3% decline over
the same period. Third, we measure our ability to maintain strong gross
margins on our products. During the second quarter of fiscal 2004, our
products averaged a gross margin of 68%, which was slightly below our target of
70% for the full year but better than the 62% recorded in the second quarter of
fiscal 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 second quarter of fiscal 2004, our operating expenses
were 102% of our net sales compared to 73% for the second 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). Finally, we review the distribution of our products by
key national customers. In 2003, our 15 largest customers carried, on average,
6 of our 10 Zicam products. 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, 11 of our 16 products for
the 2004-2005 cough and cold season. 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 12




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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 evaluation of goodwill was completed in the
third quarter of 2003 by an independent valuation firm and no impairment was
found and no triggering events have occurred since that date. 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 half of 2004, we recorded income tax expense
(benefit) based on our estimated effective income tax rate for the year and
will continue to do so in future periods. In addition, we will continue to
evaluate the deferred tax valuation allowance regularly and adjust the amount
to reflect our expectation of our ability to realize the tax benefit arising
from our tax loss carry-forward on a quarterly basis. Should there be a
significant change in our expectations of future income, the impact of
adjusting the deferred tax valuation allowance could be significant which would
negatively impact our earnings. 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 going forward. 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. 13




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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 175 individuals in 17 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. While we intend to defend ourselves vigorously in
each of these proceedings, the outcome of these and any other proceedings that
may arise cannot be predicted with certainty. Therefore, loss provisions
arising from such matters will be recorded when a loss outcome is probable and
can be reasonably estimated, to the extent not provided for through insurance
or otherwise. At present, we have not been able to determine the probability
of a loss outcome in any of the litigation to which we are currently subject.
Accordingly, we have not recorded any loss provisions related to such
litigation. Results of Operations for the Three Months Ended June 30, 2004 Compared to the
Three Months Ended June 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 June 30,2004
    
    2003Net sales
    
    $
    3,391,721
    
    
    
    100
    %
    
    $
    2,994,419
    
    
    
    100
    %Cost of sales
    
    
    1,071,545
    
    
    
    32
    
    
    
    1,145,584
    
    
    
    38Gross profit
    
    
    2,320,176
    
    
    
    68
    
    
    
    1,848,835
    
    
    
    62Operating expenses
    
    
    3,471,905
    
    
    
    102
    
    
    
    2,171,909
    
    
    
    73Research and development
    
    
    521,565
    
    
    
    15
    
    
    
    596,055
    
    
    
    20Income from operations
    
    
    (1,673,294
    )
    
    
    (49
    )
    
    
    (919,129
    )
    
    
    (31
    )Interest and other income
    
    
    28,518
    
    
    
    1
    
    
    
    58,379
    
    
    
    2Interest expense
    
    
    0
    
    
    
    
    
    
    
    (87,359
    )
    
    
    (3
    )Income before income taxes
    
    
    (1,644,776
    )
    
    
    (48
    )
    
    
    (948,109
    )
    
    
    (32
    )Provision (Benefit) for income taxes
    
    
    (655,380
    )
    
    
    (19
    )
    
    
    (381,110
    )
    
    
    (13
    )Net Income (Loss)
    
    $
    (989,396
    )
    
    
    (29
    )%
    
    $
    (566,999
    )
    
    
    (19
    )%
 Net Sales.Net sales for the three months ended June 30, 2004 increased
approximately $397,000 to $3.4 million, or almost 13% above net sales in the
second quarter of the prior year. For the quarter ending June 30, 2004 the
increase in net sales was primarily due to increased sales of the Zicam Allergy
Relief and Zicam Extreme Congestion products. 14




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Generally, sales in the second quarter are significantly weaker than in
other quarters of the year. We expect increases in sales in the second half of
2004 from the six new Cough Mist products, that we began shipping in July 2004,
as well as continued growth in the sales of our existing Zicam products. 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.Our cost of sales decreased almost $74,000 to
approximately $1.1 million, or 6% below the second quarter 2003 cost of sales.
The decreased cost is primarily related to the lower cost to produce the
re-designed swab product; (in the second quarter of 2003 we recorded a
settlement with IST, our previous swab manufacturer, which resulted in higher
swab costs during that quarter). In addition, during the second quarter of
2004, a higher percentage of our net sales came from our allergy and congestion
relief products, which have a lower cost compared to the swab products. This
resulted in a lower average unit cost in the second quarter of 2004. We expect
the average unit cost of goods sold will continue to be affected by the
relative mix of products sold. Gross Profit.Gross profit for the second quarter of 2004 increased to
approximately $2.3 million, or 25% greater than the second quarter of 2003, due
to the increase in units sold and the lower cost of goods sold. The gross
margin increased from 62% in 2003 to 68% due to the lower per-unit cost of the
swab products and the relative mix of products sold in 2004. With the
introduction of the redesigned swab product, we expect to continue to
experience improved gross margin on the swabs. Gross margin will continue to be
affected by the relative mix of products sold. Operating Expenses.Operating expenses for the second quarter of 2004
increased to approximately $3.5 million, or more than $1.3 million above the
second quarter of 2003. The increase is primarily due to an $883,000 increase
in legal expense ($1.1 million for the quarter ended June 30, 2004 versus
$214,000 for the quarter ended June 30, 2003), a $272,000 increase in
non-advertising marketing expense, and a $158,000 increase in advertising
expense ($663,000 in the second quarter 2004 compared to $505,000 in 2003). We
expect that legal expenses will increase throughout the balance of fiscal 2004
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). We expect that operating expenses in future
periods will vary largely in connection with the level of our advertising and legal expenditures. Research and Development.Research and development expenses decreased
from approximately $596,000 in the second quarter of 2003 to approximately
$522,000 in the second quarter of 2004. We had previously announced our
intention to spend 6% of net sales annually on research and development
efforts; however we do not anticipate spending at that level to occur in 2004.
We continue to maintain research and development efforts and remain focused on
developing new products. Interest Expense.Interest expense for the second quarter of 2004
decreased to zero, $87,000 below the level of the second quarter of 2003. The
decrease is entirely attributable to the repayment of the debt that we incurred
in connection with the acquisition of the 40% interest 15




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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 expect to incur a small amount of interest expense over the
next two quarters. We anticipate repaying the borrowing in the fourth quarter
of 2004 and ending the year with no debt. Income (Loss) Before Income Tax.The loss before income tax in the second
quarter of 2004 increased to approximately $(1,645,000), or (73)%, from
$(948,000) in 2003, primarily as a result of higher legal expense offsetting
the increase in sales. We expect that earnings in future periods will continue
to be significantly impacted by the seasonality of our sales, 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 third and fourth quarters and beginning shipments of our
new Cough Mist products, we expect to be profitable in the third and fourth
quarters 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. This reflects the determination that we made at the end of
fiscal 2002 that we would more likely than not be able to realize the benefit
of tax losses accumulated in prior years to offset taxable income in 2003 and
future years. Due to the operating loss recorded in the second quarter of 2004,
we recognized a benefit in income tax expense of approximately $655,000. Net Income (Loss).Net loss increased $422,000 to approximately
$(989,000) for the quarter ended June 30, 2004 compared to the net loss for the
second quarter 2003 of approximately $(567,000). Based on our expectation of
seasonally increased sales in the third and fourth quarters 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. 16




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Results of Operations for the Six Months Ended June 30, 2004 Compared to the
Six Months Ended June 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: Six Months Ended June 30,2004
    
    2003Net sales
    
    $
    16,324,287
    
    
    
    100
    %
    
    $
    11,896,094
    
    
    
    100
    %Cost of sales
    
    
    5,170,770
    
    
    
    32
    
    
    
    3,794,629
    
    
    
    32Gross profit
    
    
    11,153,517
    
    
    
    68
    
    
    
    8,101,465
    
    
    
    68Operating expenses
    
    
    10,888,481
    
    
    
    67
    
    
    
    7,864,440
    
    
    
    66Research and development
    
    
    992,034
    
    
    
    6
    
    
    
    906,817
    
    
    
    8Income from operations
    
    
    (726,998
    )
    
    
    (4
    )
    
    
    (669,792
    )
    
    
    (6
    )Interest and other income
    
    
    74,350
    
    
    
    
    
    
    
    95,338
    
    
    
    1Interest expense
    
    
    0
    
    
    
    
    
    
    
    (173,194
    )
    
    
    (1
    )Income before income taxes
    
    
    (652,648
    )
    
    
    (4
    )
    
    
    (747,648
    )
    
    
    (6
    )Provision (Benefit) for income taxes
    
    
    (259,890
    )
    
    
    (2
    )
    
    
    (298,003
    )
    
    
    (3
    )Net Income (Loss)
    
    $
    (392,758
    )
    
    
    (2
    )%
    
    $
    (449,645
    )
    
    
    (4
    )%
 Net Sales.Net sales for the six months ended June 30, 2004 increased to
approximately $16.3 million, or 37% above net sales in the first six months of
the prior year. Approximately half of the increase in net sales was
attributable to increased sales of the Cold Remedy products, in particular,
Zicam Cold Remedy Oral Mist, Zicam Cold Remedy Chewables, and Zicam Cold Remedy
Rapid Melts, which were introduced in the third quarter of 2003. The remaining
balance of the increase was attributable to increased sales of our Zicam
Allergy Relief and congestion relief 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. Demand for our products is highly seasonal which results in significant
fluctuations in our quarterly sales throughout the year. Generally, sales in
the second quarter are significantly weaker than in other quarters of the year.
We expect increases in sales beginning in the second half of 2004 from the six
new Cough Mist products that we began shipping in July 2004, as well as
continued growth in the sales of our existing Zicam products. Cost of Sales.Our cost of sales increased to approximately $5.2 million,
or 36% above the cost of sales for the first six months of 2003 of
approximately $3.8 million. Most of the increase is due to the higher sales
volume and, to a lesser degree, the mix of products sold. Our swabs and oral
delivery Cold Remedy products cost more per unit to manufacture than the nasal
gel pump products. Consequently, an increasing percentage of sales from swabs
and oral delivery Cold Remedy products results in a higher total unit cost.
Sales of the oral delivery Cold Remedy products (which were introduced in the
second half of 2003) accounted for 24% of the Cold Remedy units sold and 15% of
the overall units sold for the six months ended June 30, 17




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2004. We expect the average unit cost of goods sold will continue to be
affected by the relative mix of products sold. Gross Profit.Gross profit for the first six months of 2004 increased to
approximately $11.2 million, or 38% greater than the first six months of 2003,
due to the substantial increase in sales. The gross margin on products was 68%
for both periods. We experienced lower margins than expected in the first six
months of 2004 due to the higher per-unit cost of the swab products and the
relative mix of products sold. With the introduction of the redesigned swab
product, we expect to improve the gross margin on the swabs in the upcoming
cough and cold season. We anticipate achieving a 70% gross margin for the year
due to increased sales in the second half of the year and the relative mix of
products we anticipate selling. Operating Expenses.Operating expenses for the six months ending June 30,
2004 increased to $10.9 million, or more than $3.0 million above the first six
months of 2003. The increase is due to approximately $1.2 million in increased
legal expense compared to the first six months of 2003 ($1.5 million for the
six months ending June 30, 2004 versus $355,000 for the six months ended June
30, 2003.) The increase in legal expense is primarily related to the product
liability lawsuits that have been filed against the Company. Additionally,
there was an increase of approximately $679,000 in advertising expense
(approximately $5.0 million in 2004 versus $4.3 million in 2003), and an
increase of $636,000 for non-advertising marketing expense for the six months
ending June 30, 2004 compared to the same period in 2003. Also contributing to
the increase in operating expense was an increase in labor expense of $283,000
and an increase of $128,000 in operations, the latter being related to higher
quality control costs. We expect legal expenses will continue to be significantly above the
levels incurred in fiscal 2003 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). We expect that
operating expenses in future periods will vary largely in connection with the
level of our advertising and legal expenditures. Research and Development.Research and development expenses increased
from approximately $907,000 in the first six months of 2003 to approximately
$992,000 in the first six months of 2004. We had previously announced our
intention to spend 6% of net sales annually on research and development
efforts; however we do not anticipate spending at that level to occur in 2004.
We continue to maintain research and development efforts and remain focused on
developing new products. Interest Expense.Interest expense for the six months ended June 30, 2004
decreased to zero, $173,000 below the level of the first half of 2003. The
decrease is entirely 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 expect
to incur a small amount of interest expense over the next two quarters. We
anticipate repaying the borrowing in the fourth quarter of 2004 and ending the
year with no debt. Income (Loss) Before Income Tax.The loss before income tax in the first
six months of 2004 decreased to approximately $(653,000), or 13%, from almost
$(748,000) in the first six 18




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months of 2003, primarily as a result of the higher level of sales
offsetting increases in operating expenses. We expect that earnings in future
periods will continue to be significantly impacted by the seasonality of our
sales, revenues and expenses associated with new products, and the timing and
amount of advertising, research and development, and legal expenses. 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. This reflects the determination that we made at the end of
fiscal 2002 that we would more likely than not be able to realize the benefit
of tax losses accumulated in prior years to offset taxable income in 2003 and
future years. Due to the loss in the second quarter we recorded a tax benefit
of almost $260,000 for the first six months of 2004. Net Income (Loss). Net loss decreased $57,000 to approximately $(393,000)
for the six months ended June 30, 2004 compared to net loss for the first six
months in 2003 of $(449,000). Based on our expectation of seasonally higher
sales in the third and fourth fiscal quarters and the introduction of six new
cough products, 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 decreased from approximately $17.6 million at December
31, 2003 to approximately $12.5 million at June 30, 2004. During the six-month
period ended June 30, 2004, we experienced a decrease in cash from operating
activities of approximately $1.0 million. Approximately $588,000 of the
decrease is attributable to the operating loss for the first half of the year
of $(393,000) and non-cash items of $(195,000). The remaining decrease in cash
from operations is related to the timing of cash receipts and disbursements and
higher inventories. Investing
activities used cash of approximately $5,364,000. 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. The additional decrease of $364,000 was used for capital expenditures
and deposits. Cash flows from financing activities provided approximately
$210,000 which includes $392,000 from the issuance of common stock related to
the exercise of stock options less $157,000 used to purchase 17,900 shares of
Matrixx common stock on the open market. 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 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. 19




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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. 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 March 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
    
    
    295
    
    
    
    80
    
    
    
    215
    
    
    
    0
    
    
    
    0Purchase Obligations
    
    
    3,256
    
    
    
    3,256
    
    
    
    0
    
    
    
    0
    
    
    
    0Other Long-Term Liabilities Reflected on the
Companys Balance Sheet under GAAP
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0Total
    
    $
    3,551
    
    
    $
    3,336
    
    
    $
    215
    
    
    $
    0
    
    
    $
    0
 CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS AND RISK FACTORS Forward Looking Statements This 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:  
    
    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 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; 20




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
    
    our expectation of expanding distribution of our products among our
largest 10 retailers such that they will carry, on average, 11 of our
16 products for the 2004-2005 cough and cold season;
    
    our expectation of continuing profitability in future years, and
profitability in the third and fourth quarters 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 our six new
Zicam Cough Mist products and any other 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;
    
    our belief that our new contract manufacturer of our redesigned
swab product will be able to meet our requirements for 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 that the introduction of the redesigned swab
product, will improve the gross margin on the swab products;
    
    our expectation of achieving a 70% gross margin for the year;
    
    our expectation that legal expenses will increase throughout the
second half of fiscal 2004 as a result of the Zicam Cold Remedy product
liability litigation and the securities litigation in which we are
engaged;
    
    our expectation that operating expenses in future periods will vary
largely in connection with the level of our advertising and legal expenses expenditures;
    
    our expectation that legal expenses will continue to be
significantly above levels incurred in fiscal 2003;
    
    our belief that research and development spending will be below 6%
of net sales for 2004;
    
    our expectation regarding increases in sales in the second half of
2004 from the six new Cough Mist products, as well as continued growth
in the sales of our existing Zicam products; 21




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
    
    our expectation that net income in future periods will be
significantly affected by the level of our sales, 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 expectation that we will incur a small amount of interest over
the next two quarters, and that we will be able to 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
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) lack of
market acceptance for or uncertainties concerning the efficacy or safety of our
current and future products or regulatory actions involving our products, (iii)
difficulties in increasing production or maintaining sufficient inventories to
meet unexpectedly high demand in the short term, (iv) financial difficulties
encountered by one or more of our principal customers, (v) difficulties in
obtaining additional capital for marketing, research and development, and other
expenses, (vii) material litigation involving patent and contractual claims,
product liability, consumer issues and securities violation claims, and (viii)
adverse publicity regarding our products. 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 22




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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 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; 23




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##### Table of Contents




    
    we may be unable to produce sufficient product inventories to meet customer demand;
    
    existing or proposed products do not achieve broad market acceptance; or
    
    proprietary rights held by third parties preclude us from
developing or marketing existing or proposed products. Our inability to develop and commercialize our existing products or any
new products on a timely basis and within our financial budgets could have a
material adverse effect on our operating results and future prospects. Our inability to provide scientific proof for product claims may adversely
affect our sales The marketing of our Zicam products involves claims that these products
assist in reducing the duration and severity of the common cold (in the case of
Zicam Cold Remedy products) and controlling allergy symptoms (in the case of
Zicam Allergy Relief). Under FDA and FTC rules, we are required to obtain
scientific data to support any health claims we make concerning our products.
Although we have neither provided nor been requested to provide any scientific
data to the FDA or FTC in support of claims regarding our Zicam products, we
have obtained scientific data for our products. We cannot be certain, however,
that the scientific data we have obtained in support of our claims will be
deemed acceptable to the FDA or FTC, should either agency request any such data
in the future. If the FDA or the FTC requests any supporting information, and
we are unable to provide support that is acceptable to the FDA or the FTC,
either agency could force us to stop making the claims in question or restrict
us from selling the affected products. FDA and other government regulation may restrict our ability to sell our
products We are subject to various federal, state and local laws and regulations
affecting our business. Our Zicam products are subject to regulation by the
FDA, including regulations with respect to labeling of products, approval of
ingredients in products, claims made regarding the products, and disclosure of
product ingredients. If we do not comply with these regulations 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 24




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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. 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 175 individuals in 17 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,
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 25




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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 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; 26




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##### Table of Contents




    
    preferences as to dividends and liquidation rights;
    
    conversion rights;
    
    anti-dilution protections; and
    
    redemption rights Since our board of directors has the authority to determine, from time to
time, the terms of our authorized preferred stock, there is no limit on the
amount of common stock that could be issuable upon conversion of any future
series of preferred stock that may be issued. The rights of holders of our
common stock will be subject to, and may be adversely affected by, the rights
of the holders of any series of preferred stock that may be issued in the
future. In addition, the market price of our common stock may be adversely
affected by the issuance of any series of preferred stock with voting or other
rights superior to those of our common stock. The issuance of any series of
preferred stock could also have the effect of making it more difficult for a
third party to acquire a majority of our outstanding common stock. The price of our stock may continue to be volatile The market price of our common stock, which is quoted for trading on the
Nasdaq National Market, has been highly volatile and may continue to be
volatile in the future. Any or a combination of the following factors could
cause the market value of our common stock to decline quickly: operating
results that differ from market expectations, negative or other unanticipated
results of clinical trials or other testing, delays in product development,
technological innovations or commercial product introductions by our
competitors, changes in government regulations, developments concerning
proprietary rights, including pending or threatened patent litigation, public
concerns regarding the safety of any of our products, litigation against the
Company, and general economic and stock market conditions. Since the Spring of
2000, the stock market has experienced, and it may continue to experience,
significant price and volume fluctuations. These fluctuations have
particularly affected the market prices of equity securities of small
capitalization companies, like Matrixx. Often, the effect on the price of 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 is to provide
additional liquidity as we build 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. 27




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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 June 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 six 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. 
 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 July 2004,
we have been sued by approximately 175 individuals in 18 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. In addition to the
lawsuits previously disclosed in our Annual Report on Form 10-K for our fiscal
year ended December 31, 2003 and our Quarterly Report on Form 10-Q for our
first quarter ended March 31, 2004, the new cases are Benkwith vs. Matrixx
Initiatives, Inc. et al., filed May 3, 2004 in the Circuit Court for Montgomery
County, Alabama, Case No. CV04-1180 CNP; Bryant vs. Matrixx Initiatives, Inc.
et al., filed June 14, 2004 in District Court, Boulder County, Colorado, Case
No. 2004 CV808; Wyatt vs. Matrixx Initiatives, Inc. et al., filed June 17, 2004
in the US District Court, Northern District of Alabama, Case No. CV04-1230-S;
Hilton vs. Matrixx Initiatives, Inc. et al., filed June 27, 2004 in the
District Court, Tarrant County, Texas, Case No. 0482061620 (removed to the
United States District Court for the Northern District of Texas, Fort Worth
Division, Case No. 4-04CV-519-Y); Hunter vs. Matrixx Initiatives, Inc. et al,
filed June 4, 2004 in the Superior Court of the State of Arizona (Maricopa
County), Case No. CV2004-010830; and Mayo vs. Matrixx Initiatives, Inc. et al.,
filed June 24, 2004 in the Superior Court of New Jersey 28




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##### Table of Contents



(Essex County), Case No. ESX-L-3551-04. The case Christensen et al. vs.
Matrixx Initiatives, Inc. et al. filed October 13, 2003, previously disclosed
on Form 10-K for our fiscal year ended December 31, 2003, has been dismissed
without prejudice. 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 an impairment to the
sense of smell. Further, the incidence of smell disorders is reported at 1-2%
of the population on average, and is very common in those over age 50. Upper
respiratory infections are among the most common causes of impairment to sense
of smell. Therefore, any product such as Zicam Cold Remedy designed to treat
upper respiratory illnesses may be mistakenly associated with distortion of
sense of smell. The rate of reported complaints of distortion of sense of
smell associated with Zicam Cold Remedy is well below these national incidence
levels. We have submitted all 17 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 was 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 cases are Sved vs. Matrixx
Initiatives, Inc., Carl J. Johnson and William J. Hemelt, filed April 27, 2004
in the United States District Court for the District of Arizona, Case No.
CV04-0886PHX and Siracusano vs. Matrixx Initiatives, Inc, Carl J. Johnson and
William J. Hemelt, filed May 19, 2004 in the United States District Court for
the District of Arizona, Case No. CV041012PHX. 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 29




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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. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities The following table provides information about purchases by the Company
(and its affiliated purchasers) during the quarter ended June 30, 2004 of
equity securities that are registered by the Company pursuant to Section 12 of
the Exchange Act. Issuer Purchases of Equity Securities (c)Total Number of
    
    (d)(a)
    
    
    
    
    
    Shares Purchased
    
    Maximum NumberTotal
    
    (b)
    
    as Part of
    
    of Shares that MayNumber of
    
    Average
    
    Publicly
    
    Yet be PurchasedShares
    
    Price Paid
    
    Announced Plans
    
    Under the Plans orPeriod
    
    Purchased
    
    per Share
    
    or Programs
    
    Programs4/01/04-4/30/04
    
    
    4,500
    
    
    $
    8.74
    
    
    
    4,500
    
    
    
    995,5005/01/04-5/31/04
    
    
    10,500
    
    
    $
    8.76
    
    
    
    10,500
    
    
    
    985,0006/1/04-6/30/04
    
    
    2,900
    
    
    $
    8.90
    
    
    
    2,900
    
    
    
    982,100Total
    
    
    17,900
    
    
    $
    8.78
    
    
    
    17,900
    
    
    
    982,100
 We repurchased an aggregate of 17,900 shares of our common stock pursuant
to the stock repurchase program that we publicly announced on April 1, 2004
(the Program) in open market transactions. Commissions paid for repurchased
common stock during the second quarter of 2004 totaled $537. The board of directors approved the repurchase by the Company of up to 1
million shares of the Companys common stock. 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. 
 Item 4. Submission of Matters to a Vote of Security Holders At our 2004 annual meeting of stockholders held on April 28, 2004, our
stockholders elected Edward J. Walsh and Michael A. Zeher to our Board of
Directors for terms of three years each. Of the 9,463,801 shares entitled to
vote in such election, the votes cast were as follows: Director
    
    Votes For
    
    Votes Withheld
    
    Abstentions
    
    Broker Non-VotesEdward J. Walsh
    
    
    8,457,334
    
    
    
    464,305
    
    
    
    0
    
    
    
    0Michael A. Zeher
    
    
    8,476,934
    
    
    
    444,705
    
    
    
    0
    
    
    
    0
 30




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The Companys four other directors Edward Faber, L. White Matthews, William
Egan, and Carl Johnson were not scheduled for election this year and will
continue as members of the board. 
 Item 6. Exhibits and Reports on Form 8-K  A.
    
    Exhibits Exhibit No.
    
    Title3.01
    
    Articles of Incorporation and Amendments thereto of the registrant (1)3.02
    
    Bylaws of the registrant (1)4.01
    
    Rights Agreement dated as of July 22, 2002 by and between the
registrant and Corporate Stock Transfer, Inc. (2)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.B.
    
    Reports on Form 8-K  On April 28, 2004, the registrant filed a Report on Form 8-K announcing
its preliminary earnings results for the first quarter of fiscal 2004.On April 30, 2004, the registrant filed a Report on Form 8-K announcing
the election of two directors at the registrants 2004 annual meeting of
shareholders and the introduction at such annual meeting of six new Zicam
products.On July 27, 2004, the registrant filed a Report on Form 8-K announcing
its preliminary earnings results for the second quarter of fiscal 2004. 31




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##### Table of Contents



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 Secretary
 August 13, 2004 32




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##### Table of Contents



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)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.