Filed with the SEC from Oct 2 to Oct 8 :
Matrixx Initiatives (MTXX)
A group of funds managed by Mario Gabelli's Gamco Investors (GBL) reported ownership of 498,222 shares (5.17%) after purchasing 40,000 from Aug. 11 to Sept. 22 at $17.09 to $18.08 per share.
We develop, produce, market and sell innovative, over-the-counter (OTC) healthcare products with an emphasis on those that utilize unique, novel and/or proprietary delivery systems that provide consumers with â€śBetter Ways to Get BetterÂ®.â€ť Through our subsidiaries, we produce, market and sell products under the ZicamÂ®, Nasal Comfortâ„˘, and Xcidâ„˘ brands. As discussed in more detail below, our current Zicam and Nasal Comfort product offerings compete in the following four product classes within the cough and cold category: Cold Remedy; Allergy/Sinus; Cough; and Multi-Symptom Cold/Flu relief. Our Xcid brand antacid competes within the over-the-counter antacid category.
We were incorporated in Utah in 1991 as Gum Tech International, Inc. On June 18, 2002, we reincorporated in Delaware and changed our name from Gum Tech International, Inc. to Matrixx Initiatives, Inc. We generally conduct our business through our wholly owned subsidiaries. We develop and market our Zicam, Xcid, and Nasal Comfort products through Zicam, LLC. We are developing our oral care product concepts through Zicare, LLC, which we formed in 2006. In May 2008, we formed Zicam Canada, Inc. to commercialize sales of Zicam products in Canada.
We have sales in one business segment, over-the-counter pharmaceuticals. Currently, all of our revenues are attributed to sales within the United States; however, we anticipate entering international markets in the future and expect initial sales to occur in Canada in fiscal 2009. Our net sales were approximately $101.0 million for the fiscal year ended March 31, 2008, compared to net sales for the twelve months ended March 31, 2007 of approximately $97.6 million. Our net income was $10.4 million for the fiscal year ended March 31, 2008, and $6.5 million for the twelve months ended March 31, 2007.
As used herein, except as otherwise indicated, references to â€śwe,â€ť â€śus,â€ť â€śour,â€ť or the â€śCompanyâ€ť refer to Matrixx Initiatives, Inc. and its subsidiaries.
Access to Our Filings with the Securities and Exchange Commission
Our website is www.matrixxinc.com. Through a link on the Investor Relations section of our website, we make available the following filings as soon as reasonably practicable after they are electronically filed with or furnished to the SEC: our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and any amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934. All such filings are available free of charge. Information contained on the Companyâ€™s website is not part of this report.
Our principal executive offices are at 8515 E. Anderson Drive, Scottsdale, AZ 85255 and our telephone number is (602) 385-8888.
Markets and Company Products
Our current Zicam products are marketed in the cough and cold market category. That market, which is estimated at more than $4.0 billion annually in retail sales in the United States, includes a wide variety of tablets, liquids, gels, sprays, and syrups that remedy and/or provide relief to cold, allergy and sinus congestion sufferers. The largest sub-segment of the cough and cold category includes products formulated to relieve symptoms associated with the common cold. It is estimated that more than one billion common colds occur in the United States each year, with over 100 million of these colds resulting in lost days of school or work, or some level of restricted activity. Colds are estimated to occur at a rate of two to five per person (six to eight per child) each year. The market for allergy relief products covers a much smaller segment of the population, estimated at 35 million people in the United States. However, allergy sufferers, compared to cold sufferers, are more likely to require medication for a much longer period of time to relieve allergy symptoms.
In February 2007, the Company changed its fiscal year-end from December 31 st to March 31 st .
Zicam Cold Remedy was formulated to reduce the duration and severity of the common cold. In a study published in the October 2000 issue of the ENT- Ear, Nose & Throat Journal, Zicam Cold Remedy was shown to reduce the duration of the common cold when taken at the onset of symptoms. In a separate study published in the January 2003 issue of QJM: An International Journal of Medicine, zinc gluconate nasal gel (Zicam Cold Remedy) was shown to reduce the duration and symptoms of the common cold when treatment was started as late as the second day of illness. We believe Zicam Cold Remedy is unique in the cough and cold market category due to the productâ€™s ability to reduce the duration of the common cold. Customer awareness of the products has increased as a result of our marketing and public relations efforts and word-of-mouth experience by consumers.
Our original product, Zicam Cold Remedy nasal pump, is a homeopathic nasal gel product based on our patented zinc gluconate delivery system and was introduced in 1999. We introduced Zicam Cold Remedy Swabs in late 2002 to appeal to consumers who dislike nasal sprays. In November 2005, we acquired substantially all of the assets of Viridian a manufacturer of dry handle swab products. The principal assets acquired included a patent related to dry handle swab technology and other associated intellectual property. Additional assets included equipment, machinery and tooling. The Companyâ€™s ownership of this intellectual property facilitated partnering with a contract manufacturer to build and operate a new automated manufacturing line to meet increased demand for the swab products. The Company invested approximately $4.2 million in a new manufacturing line to produce the Companyâ€™s improved swab product, which includes a recessed score in the swab container that users can snap to open. The new equipment began production and we began shipping the improved swab product during the fourth calendar quarter of 2006.
In order to meet the needs of customers who dislike any form of nasal applications, we introduced three oral delivery forms of Zicam Cold Remedy products in late 2003 (Zicam Cold Remedy Chewables, Zicam Cold Remedy RapidMelts, and Zicam Cold Remedy Oral Mist). The oral Cold Remedy products are designed to rapidly deliver a dose of ionic zinc to the oral mucosa. We believe that this feature allows the consumer to avoid much or all of the stomach upset that has been associated with zinc lozenges on the market. During 2006, the Company introduced two additional oral delivery forms of Zicam Cold Remedy: Zicam Cold Remedy RapidMelts + Vitamin C and Zicam Cold Remedy ChewCaps.
Zicam Allergy Relief, a homeopathic nasal gel formula, was introduced in 2000. Zicam Allergy Relief is designed to control allergy symptoms for sufferers of hay fever and other upper respiratory allergies. We believe Zicam Allergy Relief is distinctive from most allergy products available on the market due to the absence of side effects such as drowsiness. We introduced two allopathic Zicam nasal gel products in late 2002: Extreme Congestion Relief and Sinus Relief. Zicam Extreme Congestion Relief is a nasal gel that combines the active ingredient oxymetazoline hydrochloride into our gel matrix and soothing aloe vera to provide fast-acting, long- lasting relief of nasal congestion and sinus pressure. Zicam Sinus Relief provides all of the benefits of the Extreme product with the aromatic strength of a cooling menthol/eucalyptus blend.
The Company began shipping Nasal Comfort, a new brand and product for nasal health, during the third quarter of 2005. Nasal Comfort is a unique product designed to help maintain the critical functions of the nasal cavity and its role in the respiratory process. The product is a preservative-free, sterile, hypertonic aqueous solution with essential salts and oils that cleanses and moisturizes the nose. This brand was initially targeted to the drug trade and has not achieved widespread distribution or consumer acceptance. Beginning in 2006, the Company has experienced a large amount of returns for this product. During fiscal 2008, the Company reduced the price for Nasal Comfort in an effort to increase consumer acceptance of the product..
In 2004, we introduced several Zicam Cough Spray products designed to deliver fast, effective cough relief and soothe throat irritation. We increased our cough product offerings in the third quarter of 2005 with the addition of Zicam Cough Mist Max, a more powerful liquid spray formulation that provides eight hours of relief. Several of the cough spray stock keeping units, or SKUs, did not realize the growth rates we anticipated, and as a result, during fiscal 2008, we consolidated the number of cough spray products to the Cough Max spray product. Our Zicam Cough Max spray product utilizes a unique spray delivery system that is convenient and portable, with no messy measuring or sticky syrups, to deliver the active ingredient most recommended by doctors to quiet a cough. Additionally, we introduced a Zicam Cough Melt product in the third calendar quarter of 2006, which utilizes quick dissolve technology and delivers eight hours of cough relief via a rapid dissolve tablet. The Company is currently marketing the Cough Max spray and the Cough Melts.
Multi-Symptom Cold & Flu Relief
In the third calendar quarter of 2005, we began shipping our line of Zicam Multi-Symptom Cold & Flu Relief products. The initial products utilized a spoon dosing delivery. Each spoon is individually packaged and dosed with medicine to provide powerful relief of cold and flu symptoms. The spoon delivery is designed to be mixed with any beverage, hot or cold. During fiscal 2008, we introduced two new multi-symptom products for the 2007/2008 cold season. The new products expanded upon our existing flavor-neutral product by providing consumers a liquid that can be poured into any beverage (hot or cold) for relief of cold and flu symptoms. The two new multi-symptom products replaced two of the original multi-symptom flu relief products previously available in the spoon dosage form and are being sold at a lower price per unit.
Xcid, a smooth creamy antacid, was introduced in the fourth quarter of fiscal 2008, with one large national retailer. The antacid category generally consists of large well known brands that have products to either neutralize acid or block acid production. Xcid antacid competes with other acid neutralizing products. Introducing a new brand is challenging and it takes time to build awareness and trial. We anticipate sampling and marketing activities to begin in fiscal 2009 to build trial and awareness for the product.
We continue to believe there are opportunities to expand the Zicam brand within the cough and cold category. In the past we have introduced Zicam line extensions and new delivery forms, and we anticipate that to continue. We are also investigating product opportunities in other categories, including oral care and cold sore.
Our business objective is to be a growth oriented over-the-counter (OTC) healthcare company marketing products that utilize novel, unique and proprietary delivery systems that provide consumers with â€śBetter Ways to Get BetterÂ®.â€ť To achieve our objective, the key elements of our business strategy include the following:
Expanding Marketing Efforts for Existing and New Products : We intend to continue to develop and refine our sales and marketing efforts to increase market penetration of our products in U.S. households. Such efforts include improving the timing and consistency of marketing activities, executing effective trial generating programs, implementing programs with retailers to enhance consumer awareness of our products, and seeking to increase recommendations from healthcare professionals. We are continuing to implement new creative advertising approaches and public relations efforts. We believe these efforts will continue to build brand awareness, trial, and sales of our products. Additionally, we anticipate introducing several Zicam products in the Canadian marketplace during the 2008/2009 cold season. We will engage a Canadian distributor to perform retail sales there.
Pursuing Additional Delivery Systems and Expansion into New OTC Categories : Our success in expanding consumer acceptance of our Zicam products confirms our belief that opportunities exist to pursue development of other healthcare products that deliver consumer benefits utilizing unique, novel and/or proprietary delivery systems. We are seeking to identify, through internal research and development efforts and through consideration of external acquisition opportunities, other growth opportunities for Matrixx and are specifically targeting product concepts in the oral care, antacid, and cold sore markets as well as in the cough and cold market category in which we currently compete.
We sell our products directly to major food, drug, mass market (e.g., Wal-Mart, Target) and wholesale warehouse retailers throughout the United States, and to distributors that sell to smaller retail establishments. Zicam Cold Remedy Nasal Pump, Zicam Cold Remedy Swabs, Zicam Cold Remedy Rapid Melts, Zicam Allergy Relief, and Zicam Extreme Congestion Relief are sold in virtually every major food, drug, and mass merchant retail outlet in the country. Our other Zicam and Nasal Comfort products have not achieved the same level of distribution. We are highly dependent on a small group of large national retailers for our product distribution, such that our top 15 customers accounted for more than 80% of our net sales in fiscal 2008, and three customers each accounted for more than 10% of our net sales in fiscal 2008 (Wal-Mart, 23%; Walgreens, 13%; and CVS, 12%). During the prior twelve months ended March 31, 2007, our top 15 customers accounted for approximately 80% of our net sales, and three customers accounted for more than 10% of the yearâ€™s net sales (Wal-Mart, 23%; Walgreens, 13%; CVS, 13%). Our agreements with our customers generally permit them to return unsold merchandise, limited to damaged, out-of-date, or discontinued products. We provide in our financial results, as an offset against sales, an estimate for expected returns (see Note 4 to the Consolidated Financial Statements). During fiscal 2008, we experienced a high amount of product returns related to several discontinued products. In fiscal 2008, we recorded an increase to our returns allowance of approximately $3.1 million, in excess of our customary reserve, to account for this increase in returns. To the extent that any of our largest customers were to stop carrying our products for any reason, or were to fail to pay us for our products, our sales and financial results could be negatively impacted in a material way.
Prior to fiscal 2008, we contracted with a third party organization to provide sales management and broker oversight. During fiscal 2008, we hired and trained our dedicated sales force to call on national and regional retail accounts, wholesale distribution companies, and to oversee brokers. We rely on brokers to provide retail support to our more fragmented and smaller customers. Our new sales force is focused on increasing distribution, improving shelf placement of our products, and developing trade promotional programs.
Manufacturing and Distribution
Our products are manufactured and packaged by third-party manufacturers. Each of our manufacturers is registered with the federal Food and Drug Administration (FDA) as a drug facility, which requires each manufacturer to adhere to current Good Manufacturing Practices in its production processes and procedures. Each manufacturer is responsible for sourcing raw materials used in its production of our products from third party suppliers. We rely on individual production orders to meet our needs from these suppliers. We are in the process of negotiating contracts with certain manufacturers at this time. We have some flexibility in securing other manufacturers to produce our products; however, in some circumstances we may be limited in our alternatives due to proprietary technologies that are utilized in some of the products.
Our manufacturers are subject to reporting, facility inspection, and governmental review. In general, subsequent discovery of previously unrecognized problems or failure to comply with applicable regulatory requirements could result in restrictions on manufacturing or marketing of the products, product recalls or withdrawal, fines, seizure of product, as well as withdrawal or suspension of regulatory approvals. The manufacturer of several of our products is in the process of responding to observations made by the FDA during a routine facility inspection. We do not know how the conclusions of this review process might impact our products or business, but the review could result, with regard to those products manufactured at the facility, in any or all of the above consequences, including the possibility of a product recall.
We generally source packaging materials, including bottles and sprayers, from third parties. We use third-party manufactures and packagers for production processes including compounding and producing product mixtures, filling bottles, assembling finished product and packing finished product in master cases. In several instances our drug manufacturers ship bulk formula to our packaging contractors to fill product into primary and secondary packaging and assemble finished product in master cases. Finished products are shipped to an independent warehouse in Indiana for storage prior to shipment to our customers. We recently consolidated to one warehouse to reduce costs.
Research and Development
Research and development of new products is an important part of our business. Expenditures during fiscal 2008 reflect costs associated with the multi-symptom and antacid products introduced in fiscal 2008, as well as expenses associated with line extensions we anticipate introducing in fiscal 2009 and in future years. During 2008, research and development expenses were $4.1 million, or 4% of 2008 net sales. We expect to commit approximately 3% to 4% of net sales on research and development in subsequent years in order to develop a pipeline of new products to be introduced in the future to meet our sales growth targets. Research and development expense was approximately $4.7 million for the twelve months ended March 31, 2007, and $4.7 million and $4.1 million during the fiscal years ended December 31, 2006, and 2005, respectively.
FDA, FTC and Other Government Regulation
We are subject to various federal, state and local laws and regulations that affect our business. All of our products are subject to regulation by the FDA, including regulations with respect to manufacturing processes and procedures, ingredients in the products, labeling and claims made. Our drug products are commercially distributed by following the Homeopathic Pharmacopeia or FDAâ€™s OTC monographs. The OTC monographs classify certain drug ingredients as safe and effective for specified uses and establish categorical requirements for the marketing of drugs containing such ingredients without pre-approval. All of our Zicam Cold Remedy products and Zicam Allergy Relief are subject to the requirements of the Homeopathic Pharmacopeia of the United States. Zicam Extreme Congestion Relief, Zicam Sinus Relief, the Zicam cough products, and the Zicam multi-symptom relief products are subject to the requirements of the FDA as allopathic drugs. All of our claims and advertising are subject to the rules of the Federal Trade Commission (FTC). Although we believe that our products and claims comply in all material respects with the regulatory requirements, if the FDA or FTC were to determine that we are in violation of any such requirement, either agency could restrict our ability to market the products, require us to change the claims that we make or cause us to remove the products from the market.
On March 5, 2007, the FTCâ€™s East Central Region (Cleveland, Ohio office), notified the Company that it is no longer pursuing an inquiry into the Companyâ€™s advertising and promotional activities for several of the Companyâ€™s Zicam products, including, Zicam Â® Cold Remedy Nasal Gel and Zicam Cold Remedy Swabs. The inquiry was initiated pursuant to a letter from the FTCâ€™s staff that management received on March 21, 2006, as supplemented by a letter dated October 16, 2006, to determine whether the Company engaged in unfair or deceptive acts or practices in violation of the Federal Trade Commission Act.
On March 10, 2005, the National Advertising Division (NAD) of the Council of Better Business Bureaus, an investigative arm of the advertising industryâ€™s voluntary self-regulation program, issued a press release announcing the results of a review of Matrixxâ€™s advertising claims. The NAD determined, among other things, that Matrixxâ€™s claims that its product, ZicamÂ® Cold Remedy Nasal Gel, resolves colds three times faster when taken at the first sign of a cold, that using the product results in a less severe cold, and the promise that these benefits are clinically proven, were substantiated by competent and reliable scientific evidence.
Lori H. Bush was elected to the Board of Directors in October 2004. Ms. Bush currently serves as the President and General Manager of Rodan + Fields Dermatologists, the clinical skincare brand launched in 2002 by Stanford University-trained dermatologists Katie Rodan, M.D. and Kathy Fields, M.D. Prior to joining Rodan + Fields, Ms. Bush served as Chief Operating Officer of Helix BioMedix, Inc., a biopharmaceutical discovery and development company from October 2006 to October 2007, and was the Managing Director of the Gremlin Group, a health and consumer product consulting company from March 2006 to October 2007. From May 2001 to May 2006, Ms. Bush served as President of Nu Skin, a division of Nu Skin Enterprises, a NYSE-listed direct selling company that markets premium quality personal care and nutrition products through a global network of sales representatives. Ms. Bush served as Vice President of Marketing of Nu Skin from February 2000 to May 2001. Prior to joining Nu Skin, she worked at Johnson & Johnson Consumer Products Companies as the worldwide executive director over skin care ventures from May 1998 to February 2000. She also served as Vice President of Professional Marketing at Neutrogena Corporation. Ms. Bush earned a Masters of Business Administration from Temple University and a Bachelors of Science from Ohio State University.
Carl J. Johnson joined Matrixx Initiatives, Inc. in July 2001 as President and Chief Executive Officer and as a member of the Board of Directors. Mr. Johnson has over thirty-five years of professional experience in the product development, marketing, and sales arenas with several large pharmaceutical and consumer goods companies. From 1993 to 2001, Mr. Johnson was Vice President, Commercial Development with Perrigo Company, a public company and leading manufacturer of OTC pharmaceutical and nutritional products for the store brand market. In that capacity he was responsible for the procurement of new products and technologies and contract manufacturing services with emphasis on Abbreviated New Drug Applications (ANDA) products. Mr. Johnson worked at Johnson & Johnson from 1973 to 1989, where he held a number of high-level marketing and sales positions, including responsibility for the national launch of the Acuvue Â® disposable contact lens product. Mr. Johnson provided marketing leadership for a special team tasked to re-engineer Johnson & Johnsonâ€™s Consumer Sector sales, administrative and operational functions. He also held the position of Director of Marketing for Johnson & Johnson Baby Products Company. Prior to joining Johnson & Johnson, he was an Account Executive at Compton Advertising servicing Procter & Gamble business. Mr. Johnson earned a Masters of Business Administration â€” Marketing from the Fairleigh Dickinson University and a Bachelors of Science in Economics from Wagner College.
Samuel C. Cowley was elected to the Board of Directors in July 2005. In May 2008, Mr. Cowley joined the Company as Executive Vice President, Business Development, General Counsel and Secretary. Previously, Mr. Cowley served until May 2007, as Executive Vice President and General Counsel for Swift Transportation Co., Inc. and was a member of Swiftâ€™s board of directors. Prior to joining Swift in March 2005, Mr. Cowley was a practicing attorney with the law firm of Snell & Wilmer L.L.P., Phoenix, Arizona since March 1990. Mr. Cowleyâ€™s practice was concentrated in mergers and acquisitions, securities regulation, including Sarbanes-Oxley Act compliance, and corporate finance. Previously, he was associated with Reid & Priest, New York, New York. Mr. Cowley is a graduate of Cornell Law School, Ithaca, New York and of Brigham Young University, Provo, Utah with a B.A. in Economics. Mr. Cowley is admitted to practice law in the States of Arizona and New York.
L. White Matthews, III was elected to the Board of Directors in March 2003. Retired from active management, Mr. Matthews currently serves as a director and audit committee member of Imation Corp., an NYSE-listed data storage provider, a director of PNC Funds, Inc., a family of mutual funds, and was recently a director and non-executive chairman of Ceridian Corp., a NYSE-listed human resources services company. Mr. Matthews brings extensive experience in the accounting, financial and audit fields of corporate management from having served as Chief Financial Officer of two large public corporations. From 1999 until 2001, Mr. Matthews served as Executive Vice President, Chief Financial Officer and member of the board of directors for Ecolab, Inc., an NYSE-listed developer and marketer of cleaning and sanitizing products and services. From 1977 to 1998, he served in various capacities with Union Pacific Corporation, including Executive Vice President-Finance and Chief Financial Officer from 1988 to 1998 and as a member of the board of directors from 1994 to 1998. Mr. Matthews earned a Masters of Business Administration in Finance and General Business from the University of Virginiaâ€™s Darden School of Business Administration and a Bachelors of Science in Economics from Hampden-Sydney College.
John M. Clayton, Ph.D. was elected to the Board of Directors in October 2005. Retired from active management, Mr. Clayton recently served as the Senior Vice President of Scientific and Regulatory Affairs for Schering-Plough HealthCare Products, a position he was appointed to in September 1984. In that position, Mr. Clayton was responsible for research and development of drugs and devices as well as regulatory affairs, clinical research, and prescription-to-over-the- counter drug switch programs. Prior to joining Schering-Plough in April 1974, Mr. Clayton held several research and teaching positions, which included serving as Associate Professor at the University of Tennessee as well as a Research Biologist at the Food and Drug Administrationâ€™s National Center for Toxicological Research. Mr. Clayton received a Ph.D. in Pharmaceutical Sciences from the University of Tennessee Health Sciences Center and a Bachelors of Science in Science-Pharmacy from Tennessee Technological University.
William C. Egan was elected to the Board of Directors in August 2001. Since October 2005, he has served as the Managing Partner of Huckleberry Partners, LLC, a real estate investment firm. From 1999 to 2001, Mr. Egan served as Chairman of the board of directors of the Cosmetic, Toiletry and Fragrance Association. In 2001, Mr. Egan retired from Johnson & Johnson after 25 years of active management. From 1995 to 2001, Mr. Egan was a member of Johnson & Johnsonâ€™s Consumer Products Operating Committee, where he held a number of important global positions, including Group Franchise Chairman, Worldwide Consumer and Personal Care Products. Additional positions with Johnson & Johnson included President of Baby Products, Chairman of Windsor Minerals, Inc. and Group Product Director, Tylenol Products. Mr. Egan also served as President of Arm & Hammer Consumer Products, a division of Church & Dwight Co., Inc. Mr. Egan graduated from Trinity College and received a Masters of Business Administration from the Northwestern University, J. L. Kellogg Graduate School of Management.
Michael A. Zeher was elected to the Board of Directors in September 2000. From February 2006 through November 2007, Mr. Zeher served as the President and CEO of Nutritional Laboratories, International, a privately-held contract manufacturer servicing the dietary supplement industry. From July 2003 until March 2005, Mr. Zeher was President and Chief Operating Officer of Pharmaceutical Formulations, Inc., a manufacturer of over 100 different types of solid-dose over-the-counter pharmaceutical products. From 1994 through February 2002, Mr. Zeher served as President and Chief Executive Officer of Lander Company, Inc., a manufacturer and marketer of health and beauty care products. In that capacity, he was responsible for the companyâ€™s worldwide operations and custom health care and international divisions. Mr. Zeher previously served as Vice President, Business Development for Johnson & Johnson, where he was responsible for the North American Consumer Sector business. Prior to taking that office, he held various sales and marketing positions with Johnson & Johnson. Mr. Zeher holds a Bachelors of Science in Business Administration from Old Dominion University.
MANAGEMENT DISCUSSION FROM LATEST 10K
The Company develops, produces, markets and sells innovative, over-the-counter (OTC) healthcare products with an emphasis on those that utilize unique, novel and/or proprietary delivery systems that provide consumers with â€śBetter Ways to Get BetterÂ®â€ť. The Company currently markets its products within the $4.0 billion overall cough and cold category at retail. Our Zicam products are sold in the cold (2 nasal delivery products and 5 oral delivery products), allergy/sinus (3 Zicam nasal delivery), cough (cough spray and RapidMelt tablets), and multi-symptom relief (4 oral delivery products) market groups of the overall cough and cold category. Our Nasal Comfort products are generally sold within the space allocated for allergy and sinus products at retail. We expect that our mix of products sold will change due to seasonality and varying growth rates within the market groups. Our products are currently available at all of the major food, drug, and mass merchant retailers.
Because of the extreme seasonality of our business, our Board of Directors approved a change in our fiscal year in order to better align our operations and financial results with the entire cold season (our previous fiscal years ended in the middle of the cold season). Due to the change in our fiscal year, the three months ended March 31, 2007, are reported as a transition period. Our new fiscal year began April 1, 2007 and ended March 31, 2008. As in prior years, we believe the quarter ending June 30th (our new fiscal first quarter) will result in a net loss.
Net sales for the fiscal year ended March 31, 2008 increased to approximately $101.0 million, or 3% above net sales of $97.6 million for the twelve months ended March 31, 2007. The increase in net sales is primarily attributable to sales of our new multi-symptom relief products, which began shipping during our fiscal second quarter (ended September 30, 2007). Sales of allergy/sinus products grew $1.2 million, or 8%, during the year, while sales of our cough products declined $1.7 million, or 27%, compared to the comparable period in the prior year. The decrease in sales of cough products relates to the discontinuation of several of the original cough spray products. During fiscal 2008, we experienced a change in inventory management practices with certain of our large national retailers. This change reduced the amount of inventory these retailers carried, as well as the size of pre-season inventory purchases, compared to prior years. We anticipate retailers will continue to improve their inventory management practices and we expect our sales to retailers will more closely mirror retail sales of our products to consumers. We expect the Zicam brand will continue to grow as we grow consumer awareness of our products, increase distribution of our products, and introduce new items.
Net income for the fiscal year ended March 31, 2008 was approximately $10.4 million compared to approximately $6.5 million for the twelve months ended March 31, 2007. The increase in net income is primarily attributable to a decrease in selling, general and administrative (SG&A) expense and, to a lesser degree, higher net sales. The decreased SG&A expense was related to reductions in legal expense related to product liability litigation (see Item 3 â€” Legal Proceedings). Product liability defense costs decreased to $2.5 million (net of $560,000 for insurance reimbursements) for the fiscal year ended March 31, 2008, compared to $4.2 million for the twelve months ended March 31, 2007 (net of $1.6 million for insurance reimbursements). We anticipate legal defense costs will be $500,000 to $750,000 per quarter during fiscal 2009.
We expect net income (loss) in future periods to be significantly affected by the level of sales, the timing and amount of our advertising, research and development expenses, and the timing and amount of expenses incurred in defense of product liability litigation matters. Expenditures for advertising and research and development will vary by quarter throughout the year and could be significantly different in future periods than the amounts incurred in the same period in earlier years. We expect that advertising expenses will be highest during the cold season (third and fourth fiscal quarters). We anticipate quarterly earnings will continue to vary along with the seasonality of sales and the level of marketing and research and development expense. As in prior years, we expect to report a loss in the quarter ending June 30.
The Companyâ€™s management reviews several key indicators in evaluating overall performance:
1) We compare our year-to-date sales and net income performance against our stated annual goal for each. For fiscal 2008, our goal was to grow sales 5% to 15% above the $97.6 million recorded for the trailing twelve months ended March 31, 2007 ($102.5 million â€” $112.25 million), and to increase net income to the range of $9.3 million to $10.8 million, compared to $6.5 million for the twelve months ended March 31, 2007. However, the 2007/2008 cold season had an unusually slow start and the incidence of colds and flu in the general population was tracking at the lowest levels since Zicam was introduced in 1999. We believe the change in inventory management practices by certain customers, the slow start to the cold season, and the low level of illness is reflected in the lower level of sales growth (3%) realized during the year. Due to decreased SG&A expense, we realized net income of $10.4 million in fiscal 2008, which was in line with our original goal.
2) We monitor our share of the cough and cold market. For the 52 weeks ended March 23, 2008, retail sales of our products (as measured by three outlet syndicated scanner data, not including our largest customer, Wal-Mart) increased approximately 9% over the comparable period in the previous year, while the entire cough and cold category increased approximately 4% over the same period. The increased sales of our products for the 52 weeks ended March 23, 2008 resulted in Zicam products achieving a 2.9% dollar share of the category versus 2.8% in the prior year period.
3) We measure our ability to maintain strong gross margins on our products. During fiscal 2008, we realized an average gross margin of 66%, comparable to the 66% average gross margin achieved in the twelve months ended March 31, 2007, but below our goal of 69% to 70% (gross margins on our existing products vary between 55% and 80%). Average gross margins were negatively impacted by returns of discontinued items and the mix of products sold, primarily related to sales of our new multi-symptom products that are sold at prices below our cold remedy and allergy/sinus products. We are attempting to identify ways to improve gross margin on the new multi-symptom products in the future. Additionally, average gross margins were negatively impacted by a $1.1 million increase to our inventory reserve in excess of our customary amount, to account for expiring products and obsolete components.
4) We evaluate our operating performance by reviewing, over time, our ability to decrease selling, general and administrative expenses as a percentage of net sales. For the fiscal year ended March 31, 2008, our operating expenses (excluding R&D and product liability litigation related charges) were approximately 44% of our net sales compared to 47% in the twelve months ended March 31, 2007.
5) We review the distribution and mix of our products by key national retailers. Our ten largest retail customers account for a substantial majority of our annual sales, and we encourage our largest customers to carry a mix of our highest-selling products. Retailers generally reset their cough and cold sections during the third calendar quarter of each year, at which time they add new products. We encourage retailers to replace discontinued items with new Zicam products.
Seasonality and Quarterly Results
The products we currently market are seasonal in nature, and sales at retail generally increase as the level of population suffering from colds rises. The Company records sales when we ship products from our warehouse facilities. During the second fiscal quarter, the Company usually realizes increased sales volume as retailers stock
our products and order displays to prepare for the upcoming cough and cold season. Additional sales (reorders) to retailers are highly dependent upon the incidence of illness within the population. Retail consumption of our products is highest during the cough and cold season, which usually runs from October through March. The Company begins extensive advertising campaigns to coincide with the cough and cold season and generally realizes higher advertising expense in the October through March timeframe. The fiscal first quarter (ending June 30th) of each year generally accounts for 7% to 8% of annual sales and, historically, we have incurred a loss in that quarter. Further, the Company records the expense for annual bonus awards when goal attainment for the bonus is reached, which is generally reflected in the fiscal fourth quarter results. Because of the seasonality of our business, results for any single quarter are not necessarily indicative of the results that may be achieved for the full fiscal year.
Certain information is set forth below for fiscal operations (expressed in $000â€™s and as a percentage of net sales) on a quarterly basis for the twelve months ended March 31, for the periods indicated. The quarters indicated below have been reordered to reflect our new fiscal year, which ends March 31.
Results Of Operations For The Year Ended March 31, 2008 Compared To The Twelve Months Ended March 31, 2007
Net sales for fiscal 2008 were approximately $101.0 million, or 3% above net sales of $97.6 million for the twelve months ended March 31, 2007. We believe the increase in sales compared to the prior year is related to the introduction of our new multi-symptom products, the increased level of retail sales of our products to consumers, offset by retailers reduced inventory levels and reductions in sales of our cough products. Sales have been affected by retailersâ€™ maintaining a lower level of inventory and more closely aligning their repurchases with retail consumption during the cold season. During the quarter ended September 30, 2007, we initiated a 3% price increase for our Cold Remedy products. This is the first price increase since Zicam products were introduced in 1999. Our new multi-symptom products (which began shipping during the second fiscal quarter) have a selling price that is below the selling price of all of our other products. We are evaluating our current pricing structure and anticipate raising prices on certain of our products during fiscal 2009. The average net selling price per unit, for the year ended March 31, 2008, was comparable to the average net selling price per unit in the twelve months ended March 31, 2007.
Cost of Sales
For the year ended March 31, 2008, our cost of sales increased approximately $900,000 to approximately $34.5 million, compared to the cost of sales for the year ended March 31, 2007 of approximately $33.6 million. The increase was due to the higher number of units sold. Our cost of goods sold varies by product and is affected by the mix of products sold.
Gross profit for the year ended March 31, 2008 was approximately $66.4 million, compared to gross profit of approximately $64.0 million for year ended March 31, 2007. The increased gross profit is due to the higher level of sales during the period (compared to the prior year). Gross margins for fiscal 2008 were 66%, equivalent to the 66% gross margins recorded for the twelve months ended March 31, 2007. The price increase on Cold Remedy products, initiated in the quarter ended September 30, 2007, was somewhat offset by the lower average net sales price per unit for the new multi-symptom products, which began shipping during the three months ended September 30, 2007. In addition, gross margin was negatively impacted by approximately $3.1 million in product returns, in excess of our customary returns allowance, associated with discontinued products. The recording of an additional $1.1 million to the inventory reserve to account for expiring products and obsolete components also negatively impacted gross margin. Gross margins on our existing products vary between 55% and 80%. Gross margin will continue to be affected by the relative mix of products sold and changes in product sales price and costs.
Selling, General & Administrative (SG&A)
SG&A expense for 2008 decreased to $46.5 million from approximately $50.0 million in the twelve months ended March 31, 2007. Litigation expense related to the product liability lawsuits was approximately $2.5 million (net of approximately $560,000 for insurance reimbursements), compared to approximately $4.2 million in the twelve months ended March 31, 2007 (net of $1.6 million for insurance reimbursements). We anticipate legal defense costs will be $500,000 to $750,000 per quarter during fiscal 2009.
The lower SG&A expense in the year ended March 31, 2008 compared to 2007, is primarily due to the lower product liability litigation expense as well as a decrease of approximately $1.1 million in general legal expenses that were primarily associated with the Federal Trade Commission (FTC) inquiry initiated in early 2006, which has since been closed with no adverse findings. Additionally, there was approximately $1.3 million of additional expense incurred in the twelve months ended March 31, 2007 associated with a charitable donation of short-dated products. Charitable donations of products during fiscal 2008 were approximately $100,000. Also, during fiscal 2008, we determined that our allowance for bad debt exceeded the amount of loss that would likely be incurred and we reduced the allowance amount by approximately $250,000, which reduced SG&A expenses by an equal amount.
Lower SG&A expense was also due to a $730,000 decrease in marketing expenses, primarily related to significant decreases in marketing expense associated with Nasal Comfort, offset by increased marketing associated with the Xcid antacid introduction. Due to the change in the Companyâ€™s fiscal year, we believe advertising expenses can be better managed across the entire cold season to increase consumer awareness of our products and we expect to spread our advertising across the entire cold season during fiscal 2009. Offsetting those SG&A decreases was a $520,000 increase in sales expense associated with hiring and training our new trade sales force to call on national and regional retail accounts, wholesale distribution companies, and to oversee brokers. In addition, labor expense increased approximately $340,000 due to increased headcount.
We expect SG&A expenses in future periods will vary largely in relation to the level of our advertising and legal expenditures. Advertising expense is heaviest during the cold season, which occurs October through March. We anticipate that we will continue to incur approximately $500,000 to $750,000 in legal expense each quarter as a result of the Zicam Cold Remedy product liability litigation matters in which we are engaged (see Part 1, Item 3 â€” â€śLegal Proceedingsâ€ť).
Research and Development
Research and development expense was approximately $4.1 million in fiscal 2008, approximately $600,000 less than the level incurred in the twelve months ended March 31, 2007. The research and development spending reflects scale-up costs related to new products, including our new multi-symptom and antacid products, and our goal of continuing to expand the business by developing products in the oral care, cold sore, and other categories. The timing of research and development spending can vary throughout the year and is not generally associated with our seasonal sales patterns. We expect to invest approximately 3% to 4% of fiscal 2009 annual net sales in research and development efforts.
Interest & Other Income
Interest and other income was approximately $653,000 in the year ended March 31, 2008, versus approximately $531,000 in the comparable twelve months of the prior year. The increase in interest income is associated with our increased cash balances offset by lower interest rates. For the year ended March 31, 2007, interest income of $531,000 was offset by interest expense of $117,000 related to borrowings outstanding under our credit facility. There was no interest expense in fiscal 2008. Interest income in future periods will vary based on our level of cash and interest rate levels.
Income Before Income Taxes
Income before income tax for fiscal 2008 was approximately $16.5 million, compared to approximately $9.7 million for the year ended March 31, 2007. The increased income level is due to the higher net sales achieved and lower SG&A expenses during the year ended March 31, 2008. We expect that income in future periods will be significantly impacted by the sales levels of our products including: new Zicam products to be introduced in fiscal 2009; product introductions in new categories, and annual changes in our advertising; research and development; and legal expenses. We anticipate quarterly earnings will continue to vary along with the seasonality of sales.
Provision for Income Tax Expense
We recorded income tax expense at our combined estimated annual effective tax rate of approximately 39% and adjusted for the tax effects of certain transactions including research and development tax credits and charitable donations . We recognized income tax expense of approximately $6.0 million during fiscal 2008, versus approximately $3.2 million for the twelve months ended March 31, 2007. The lower effective tax rate in the year ended March 31, 2007 period was associated with the charitable donation of products.
Net income was approximately $10.4 million in fiscal 2008, compared to $6.5 million for the year ended March 31, 2007.
MANAGEMENT DISCUSSION FOR LATEST QUARTER
Results of Operations for the Three Months Ended June 30, 2008 Compared to the Three Months Ended June 30, 2007
Net sales for the three months ended June 30, 2008 were $8.5 million, versus net sales of $8.6 million for the quarter ended June 30, 2007. The decrease in net sales during the quarter ended June 30, 2008 is associated with a $1.0 million increase to our returns reserve, in excess of the customary 3.5% of gross sales, for anticipated returns of discontinued products by certain retailers. During the quarter ended June 30, 2008, our unit sales increased approximately 9% compared to the prior year, however, the increase to the returns reserve reduced our recorded net sales. We anticipate increasing the list sales price for some of our cold remedy and allergy/sinus products in the quarter ending September 30, 2008.
Cost of Sales
For the quarter ended June 30, 2008, our cost of sales increased to $3.2 million, compared to $2.8 million for the quarter ended June 30, 2007. The increase was primarily due to the higher number of units sold. Our cost of goods sold was also affected by the mix of products sold and higher packaging costs associated with some of the products sold.
Gross profit for the three months ended June 30, 2008 was approximately $5.3 million, compared to gross profit of approximately $5.7 million for the quarter ended June 30, 2007. The lower gross profit is primarily attributable to
the decreased net sales recorded during the quarter due to the increased returns reserve and, to a lesser degree, the higher cost of goods sold, compared to the prior year. Gross margin for the quarter ended June 30, 2008 was 62%, which is below the 67% gross margin achieved in the comparable quarter ended June 30, 2007. Gross margins for the three months ended June 30, 2008 were affected by the $1.0 million adjustment to the returns reserve, which reduced net sales, and the higher cost of goods sold. Gross margins on our existing products vary between 55% and 80%. Gross margin will continue to be affected by the relative mix of products sold and changes in product sales price and costs that may occur.
Selling, General & Administrative (SG&A)
SG&A expense for the quarter ended June 30, 2008 increased to approximately $8.5 million from approximately $6.3 million in the quarter ended June 30, 2007. The higher SG&A expense is due to a $1.0 million charge recorded in the quarter ended June 30, 2008, to account for estimated costs and charges related to the recall of certain oral cold remedy product lots discussed previously. In addition, marketing expense increased approximately $779,000, which was primarily related to the testing of antacid marketing in several test markets as well as in-store sampling. There was also an increase in labor expense of approximately $534,000. Approximately $370,000 of the increase was related to a one-time expense associated with new employee compensation which was primarily stock-based. We expect SG&A expenses in future periods will vary largely in relation to the level of our advertising and legal expenditures. Advertising expense is heaviest during the cold season, which occurs October through March.
Litigation expense related to the product liability lawsuits was approximately $743,000 for the quarter ended June 30, 2008, compared to approximately $829,000 (net of approximately $100,000 for insurance reimbursement) for product liability litigation expense in the quarter ended June 30, 2007. We anticipate that we will continue to incur between $500,000 and $750,000 in legal expense each quarter as a result of the Zicam Cold Remedy product liability litigation matters in which we are engaged (see Note 7 to the Condensed Consolidated Financial Statements).
Research and Development
Research and development expense was approximately $610,000 in the quarter ended June 30, 2008, approximately $843,000 less than the level incurred in the quarter ended June 30, 2007. The higher research and development expense in the prior year was related to ongoing research associated with our oral care product. We expect to invest approximately 3% to 4% of fiscal 2009 annual net sales on research and development efforts. The timing of research and development spending can vary throughout the year and is not generally associated with our seasonal sales patterns.
Interest & Other Income
Interest and other income was approximately $107,000 in the quarter ended June 30, 2008 versus approximately $247,000 in the quarter ended June 30, 2007. The decreased interest income is due to lower interest rates compared to the prior year. Interest income in future periods will vary based on our level of cash and changes in interest rates.
Loss Before Income Taxes
Loss before income tax for the three months ended June 30, 2008 was approximately ($3.7) million, compared to the loss of approximately ($1.7) million for the quarter ended June 30, 2007. The loss is primarily due to the decreased gross profit and the increased SG&A expenses discussed above. We expect that income (loss) in future periods will be significantly impacted by the sales levels of our products (including our new products to be introduced in the second quarter of fiscal 2009), product introductions in new categories, and annual changes in our advertising, research and development, and legal expenses. We anticipate quarterly earnings will continue to vary along with the seasonality of sales.
Benefit From Income Taxes
We recorded an income tax benefit at our combined estimated annual effective tax rate of approximately 38%. Due to the loss from operations incurred in the quarter ended June 30, 2008, we recognized a benefit for income tax expense of approximately $1.4 million, compared to a benefit of $663,000 in the quarter ended June 30, 2007.
Net loss was approximately ($2.3) million in the quarter ended June 30, 2008, compared to net loss of approximately ($1.1) million in the quarter ended June 30, 2007.
Off-Balance Sheet Arrangements
As of June 30, 2008, we did not have any off-balance sheet arrangements.
Liquidity and Capital Resources
Our working capital was $41.4 million as of June 30, 2008, compared to $44.6 million at March 31, 2008. During the quarter ended June 30, 2008, we experienced a decrease in available cash of approximately $3.7 million. The decrease is primarily due to the Company repurchasing 161,500 shares of our common stock for approximately $2.5 million.
During the quarter ended June 30, 2008, trade receivables decreased to $8.1 million from $12.1 million at March 31, 2008. We converted substantially all of the March 31, 2008 receivables to cash during the quarter ended June 30, 2008. The Companyâ€™s principal source of liquidity is cash generated from sales of our products to retailers and distributors. The majority of sales are given 30 day credit terms; however, payment terms are occasionally extended, as retailers begin to increase inventory of our products prior to the onset of the cough and cold season. The Company records an estimated allowance for potentially uncollectible accounts, which is reviewed on a monthly basis. During our review in the quarter ended June 30, 2007, we determined that our allowance for bad debt exceeded the amount of loss that would likely be incurred and we reduced the allowance amount by approximately $250,000. This reduction was reflected in selling, general and administrative expenses during that quarter. We believe our allowance as of June 30, 2008 is adequate.
The change in accounts receivable, inventory, accounts payable and accrued expenses largely reflects the seasonal nature of the Companyâ€™s business. Our working capital requirements fluctuate with the seasonality of our sales and are generally highest in the July through September quarter. The Company records the bulk of its sales, which is reflected in higher accounts receivable, in the second, third, and fourth fiscal quarters; generally builds inventory during the first through third fiscal quarter periods; and advertises its products, which is the largest component of accrued expenses, primarily in the third and fourth fiscal quarters. Although affected by the build-up of inventory, accounts payable and accrued expenses are more significantly affected by advertising spending, which occurs primarily in the third and fourth fiscal quarters.
Generally, to the extent our operations are profitable, our business is cash flow positive. We do have working capital requirements arising from the increase of inventory and accounts receivable in excess of the increase in accounts payable, but these vary throughout the year reflecting the seasonal nature of our business.
Historically, the Company has had very low capital expenditures since we rely on contract manufacturers to produce our products. Typical capital expenditures include investments in technology, office furniture, leasehold improvements, and small tooling requirements. The Company occasionally provides deposits and prepayments to our manufacturers to improve and increase manufacturing capabilities for our products. Additionally, the Companyâ€™s facility lease for its corporate offices expired during fiscal 2008 and we leased new corporate office and R&D space in March 2008. The relocation required capital expenditures and tenant improvements of approximately $650,000, which we will amortize over the term of the new lease (approximately five years).
We have an $8.0 million credit facility with Comerica Bank that was renewed in July 2007, until July 2009. The interest rate under the renewed credit facility is prime minus 0.25% (or 4.75% at June 30, 2008). There have been no borrowings under the facility since the quarter ended December 31, 2006. We do not anticipate any borrowings from the credit facility for working capital needs during the next quarter. We are in compliance with the earnings and financial covenants contained in the credit facility. 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.