| Some of the risks associated with our operations are described in the “Competition,”“Government Regulation,”“Environmental,” and “Manufacturing and Quality Control” portions of this Form 10-K In addition to the other information contained in this Form 10-K, the following risk factors should be carefully considered |
| We may face additional lawsuits alleging injury from the use of Dexatrim products containing ephedrine, which we discontinued manufacturing and shipping in September 2002, or from other products that we currently produce or may produce in the future |
| We are currently named as a defendant in two lawsuits alleging that the plaintiffs were injured as a result of the ingestion of Dexatrim containing ephedrine |
| On December 30, 2003, the FDA issued a consumer alert on the safety of dietary supplements containing ephedrine alkaloids and on February 6, 2004 published a final rule with respect to these products |
| The final rule prohibits the sale of dietary supplements containing ephedrine alkaloids because such supplements present an unreasonable risk of illness or injury |
| The final rule became effective on April 11, 2004 |
| Although we discontinued the manufacturing and shipment of Dexatrim containing ephedrine in September 2002, the FDA’s final rule may result in additional lawsuits being filed against us alleging damages related to the use or purchase of Dexatrim containing ephedrine |
| Our available product liability coverage for the defense of lawsuits alleging injury from the use of Dexatrim products containing ephedrine, or from other products that we currently produce or may produce in the future, consists of dlra20dtta0 million of coverage through our captive insurance subsidiary, of which approximately dlra5dtta5 million is funded as of February 17, 2006, and an additional dlra30dtta0 million of excess coverage through third party insurers |
| In the future, if we face significant liabilities relating to the Dexatrim products which included ephedrine, our product liability insurance may be insufficient, and we may not have sufficient resources to satisfy these liabilities in excess of our insurance coverage |
| An inherent risk of our business is exposure to product liability claims by users of our products |
| We may also experience significant product liability exposure related to our other products in the future |
| Our product liability insurance coverage may be insufficient to cover existing or future product liability claims |
| Our business inherently makes us the potential target of product liability claims |
| We have product liability insurance through our captive insurance subsidiary and third party insurers that provides coverage for product liability claims |
| Our product liability insurance coverage for all of our products, including Dexatrim products containing ephedrine, consists of dlra20dtta0 million of coverage through our captive insurance subsidiary, of which approximately dlra5dtta5 million is funded as of February 17, 2006, and an additional dlra30dtta0 million of excess coverage through third party insurers |
| All of our insurance policies are subject to certain limitations that are generally customary for policies of this type such as deductibles and exclusions for exemplary and punitive damages |
| Since plaintiffs in product liability claims may seek exemplary and punitive damages, if these damages were awarded, some of our insurance coverage would not cover these amounts, and we may not have sufficient resources to pay these damages |
| Any amounts paid by our insurance to satisfy product liabilities would decrease product liability insurance coverage available for any other claims |
| If our liability for product liability claims is significant, our existing insurance is likely to be insufficient to cover these claims, and we may not have sufficient resources to pay the liabilities in excess of our insurance coverage |
| Furthermore, our product liability insurance provided by third parties will expire at the end of each annual policy period, currently in May of each year |
| We may incur significant additional costs to obtain insurance coverage upon the expiration of our current policies and may not be able to obtain coverage in the future in amounts equal to that which we currently have or in amounts sufficient to satisfy future claims |
| Our acquisition strategy is subject to risk and may not be successful |
| A component of our growth strategy depends on our ability to successfully execute acquisitions, which involves numerous risks including: • not accurately identifying suitable products or brands for acquisition; • difficulties in integrating the operations, technologies and manufacturing processes of the acquired products; • the diversion of management’s attention from other business concerns; and • incurring substantial additional indebtedness |
| 20 _________________________________________________________________ Any future acquisitions, or potential acquisitions, may result in substantial costs, disrupt our operations or materially adversely affect our operating results |
| We face significant competition in the OTC health care, toiletries and dietary supplements markets |
| The OTC health care, toiletries and dietary supplements markets are highly competitive and are characterized by the frequent introduction of new products, including the migration of prescription drugs to the OTC market, often accompanied by major advertising and promotional support |
| These introductions may adversely affect our business especially because we compete in categories in which product sales are highly influenced by advertising and promotions |
| Our competitors include large pharmaceutical companies such as Pfizer, Inc |
| and Johnson & Johnson, consumer products companies such as Procter & Gamble Co |
| and dietary supplements companies such as Nature’s Bounty, Inc |
| and Pharmaton Natural Health Products, many of which have considerably greater financial and other resources than we do and are not as highly leveraged as we are |
| These competitors are thus better positioned to spend more on research and development, employ more aggressive pricing strategies, utilize greater purchasing power, build stronger vendor relationships and develop broader distribution channels than us |
| In addition, our competitors have often been willing to use aggressive spending on trade promotions and advertising as a strategy for building market share at the expense of their competitors including us |
| The private label or generic category has also become increasingly more competitive in certain of our product markets |
| If we are unable to continue to introduce new and innovative products that are attractive to consumers or are unable to allocate sufficient resources to effectively advertise and promote our products so that they achieve wide spread market acceptance, we may not be able to compete effectively, and our operating results and financial condition may be adversely affected |
| Our business is regulated by numerous federal, state and foreign governmental authorities, which subjects us to elevated compliance costs and risks of non-compliance |
| The manufacturing, distributing, processing, formulating, packaging and advertising of our products are subject to numerous and complicated federal, state and foreign governmental regulations |
| Compliance with these regulations is difficult and expensive |
| In particular, the FDA regulates the safety, manufacturing, labeling and distributing of our OTC products, medical devices, and dietary supplements |
| In addition, the FTC may regulate the promotion and advertising of our drug products, particularly OTC versions and dietary supplements |
| The EPA regulates our Bullfrog Mosquito Coast insect repellent products |
| We are also regulated by various state statutes, including the California Safe Drinking Water and Toxic Enforcement Act of 1986 |
| If we fail to adhere to the standards required by these federal and state regulations, or are alleged to have failed to adhere such regulations, our operating results and financial condition may be adversely affected |
| Our success depends on our ability to anticipate and respond in a timely manner to changing consumer demands |
| Our success depends on our products’ appeal to a broad range of consumers whose preferences cannot be predicted with certainty and are subject to change |
| If our current products do not meet consumer demands, our sales may decline |
| In addition, our growth depends upon our ability to develop new products through product line extensions and product modifications, which involve numerous risks |
| We may not be able to accurately identify consumer preferences and translate our knowledge into customer-accepted products or successfully integrate these products with our existing product platform or operations |
| We may also experience increased expenses incurred in connection with product development, marketing and advertising that are not subsequently supported by a sufficient level of sales, which would negatively affect our margins |
| Furthermore, product development may divert management’s attention from other business concerns, which could cause sales of our existing products to suffer |
| We cannot assure you that newly developed products will contribute favorably to our operating results |
| We rely on a few large customers, particularly Wal-Mart Stores, Inc, for a significant portion of our sales |
| In fiscal 2005, Wal-Mart Stores, Inc |
| represented approximately 36prca of our total revenues, our ten largest customers represented approximately 70prca of our total revenues and our 20 largest customers represented approximately 81prca of our total revenues |
| Consistent with industry practice, we do not operate under a long-term written supply contract with Wal-Mart Stores, Inc |
| Our business would materially suffer if we lost Wal-Mart Stores, Inc |
| as a continuing major customer or if our business with Wal-Mart Stores, Inc |
| significantly decreases |
| The loss of sales to any other large customer could also materially and adversely affect our financial results |
| We may be adversely affected by fluctuations in buying decisions of mass merchandiser, drug and food trade buyers and the trend toward retail trade consolidation |
| 21 _________________________________________________________________ We sell our products to mass merchandiser and food and drug retailers in the United States |
| Consequently, our total revenues are affected by fluctuations in the buying patterns of these customers |
| These fluctuations may result from wholesale buying decisions, economic conditions and other factors |
| In addition, with the growing trend towards retail consolidation, we are increasingly dependent upon a few leading retailers, such as Wal-Mart Stores, Inc, whose bargaining strength continues to grow due to their size |
| Such retailers have demanded, and may continue to demand, increased service and order accommodations as well as price and incremental promotional investment concessions |
| We also may be negatively affected by changes in the policies of our retail trade customers such as inventory destocking, limitations on access to shelf space and other conditions |
| We rely on third party manufacturers for a portion of our product portfolio including products under our Gold Bond, Icy Hot, Selsun and Dexatrim brands |
| We use third party manufacturers to make products representing approximately 40prca of our fiscal 2005 sales volume, including our Gold Bond medicated powders and foot spray, the Icy Hot patches and sleeves, Herpecin-L, and our line of dietary supplements including Dexatrim Max and, internationally, our line of Selsun medicated dandruff shampoos |
| We will also rely on third party manufacturers to manufacture our Icy Hot Pro-Therapy line of products |
| In many cases, third party manufacturers are not obligated under contracts that fix the term of their commitments, and they may discontinue production upon little or no advance notice |
| Manufacturers also may experience problems with product quality or timeliness of product delivery |
| We rely on these manufacturers to comply with applicable current GMPs |
| The loss of a contract manufacturer may force us to shift production to in-house facilities and possibly cause manufacturing delays, disrupt our ability to fill orders or require us to suspend production until we find another third party manufacturer |
| We are not able to control the manufacturing efforts of these third party manufacturers as closely as we control our business |
| Should any of these manufacturers fail to meet our standards, we may face regulatory sanctions, additional product liability claims or customer complaints, any of which could harm our reputation and our business |
| Our dietary supplement business could suffer as a result of injuries caused by dietary supplements in general, unfavorable scientific studies or negative press |
| Our dietary supplements consist of Dexatrim and our Sunsource product line |
| We are highly dependent upon consumers’ perceptions of the benefit and integrity of the dietary supplements business as well as the safety and quality of products in that industry |
| Injuries caused by dietary supplements or unfavorable scientific studies or news relating to products in this category, such as the December 30, 2003 consumer alert on the safety of dietary supplements containing ephedrine alkaloids issued by the FDA and the subsequent FDA rule banning the sale of supplements containing ephedrine alkaloids that became effective on April 11, 2004, may negatively affect consumers’ overall perceptions of products in this category, including our products, which could harm the goodwill of these brands and cause our sales to decline |
| Our business could be adversely affected if we are unable to successfully protect our intellectual property |
| Our trademarks are of material importance to our business and are among our most important assets |
| In fiscal 2005, substantially all of our total revenues were from products bearing proprietary or licensed brand names |
| Accordingly, our future success may depend in part upon the goodwill associated with our brand names, particularly Gold Bond, Selsun Blue, Icy Hot and Aspercreme |
| Although our principal brand names are registered trademarks in the United States and certain foreign countries, we cannot assure you that the steps we take to protect our proprietary rights in our brand names will be adequate to prevent the misappropriation of these registered brand names in the United States or abroad |
| In addition, the laws of some foreign countries do not protect proprietary rights in brand names to the same extent as do the laws of the United States |
| We cannot assure you that we will be able to successfully protect our trademarks from infringement or otherwise |
| The loss or infringement of our trademarks could impair the goodwill associated with our brands, harm our reputation and materially adversely affect our financial results |
| We license additional intellectual property from third parties that is used in certain of our products, and we cannot assure you that these third parties can successfully maintain their intellectual property rights |
| In addition, the sale of these products relies on our ability to maintain and extend our licensing agreements with third parties, and we cannot assure you that we will be successful in maintaining these licensing agreements |
| Any significant impairment of the intellectual property covered by these licenses, or in our rights to use this intellectual property, may cause our sales to decline |
| In addition, our product line extensions are often based on new or unique delivery methods for those products like our Icy Hot patches and sleeves |
| These delivery methods may not be protected by intellectual property rights that we own or license on 22 _________________________________________________________________ an exclusive basis or by exclusive manufacturing agreements |
| As a result, we may be unable to prevent any competitor or customer from duplicating our delivery methods to compete directly with these product line extensions, which could cause sales to suffer |
| We may face litigation in the future, either to protect our intellectual property rights or to defend against claims that we have infringed the intellectual property rights of others |
| Intellectual property litigation can be extremely expensive, and such expense could materially adversely affect our business |
| Because most of our operations are located in Chattanooga, Tennessee, we are subject to regional and local risks |
| Approximately 60prca of our sales volume in fiscal 2005 was from products manufactured in two plants located in Chattanooga, Tennessee |
| We store the raw materials used in our manufacturing activities in two warehouses that are also located in Chattanooga |
| Additionally, our corporate headquarters are also located in Chattanooga, and most of our employees live in the area |
| Because of this, we are subject to regional and local risks, such as: • changes in state and local government regulations; • severe weather conditions, such as floods, ice storms and tornadoes; • natural disasters, such as fires and earthquakes; • power outages; • nuclear facility incidents; • spread of infectious diseases; • hazardous material incidents; or • any other catastrophic events in our area |
| If our region, city or facilities were to suffer a significant disaster, our operations are likely to be disrupted and our business would suffer |
| We depend on sole source suppliers for three active ingredients used in our Pamprin and Prēmsyn PMS products and a limited source of supply for selenium sulfide, the active ingredient in Selsun Blue, and if we are unable to buy these ingredients, we will not be able to manufacture these products |
| Pamabrom, pyrilamine maleate and compap, active ingredients used in our Pamprin and Prēmsyn PMS products, are purchased from single sources of supply |
| Pamabrom is sold only by Chattem Chemicals, Inc |
| (an unrelated company), pyrilamine maleate is produced only in India and sold only by Lonza, Inc |
| and compap is sold only by Mallinckrodt, Inc |
| In addition, we have a limited source of supply for selenium sulfide, the active ingredient in Selsun Blue |
| Financial, regulatory or other difficulties faced by these source suppliers or significant changes in demand for these active ingredients could limit the availability and increase the price of these active ingredients |
| We may not be able to obtain necessary supplies in a timely manner, and we may be required to pay higher than expected prices for these active ingredients, which could adversely affect our gross margin from these products |
| Any interruption or significant delay in the supply of these active ingredients would impede our ability to manufacture these products, which would cause our sales to decline |
| We would not be able to find an alternative supplier and would either need to reformulate these products or discontinue their production |
| While we do not currently know of any facts or circumstances that would adversely affect the supply of pamabrom, pyrilamine maleate, compap, or selenium sulfide, we cannot assure you that we will be able to continue to purchase adequate quantities of these active ingredients at acceptable prices in the future |
| We are subject to the risk of doing business internationally |
| 23 _________________________________________________________________ In fiscal 2005, approximately 10prca of our total revenues were attributable to our international business |
| Our acquisition of Selsun Blue in 2002 has greatly expanded our international business |
| We operate in regions and countries where we have little or no experience, and we may not be able to market our products in, or develop new products successfully for, these markets |
| We may also encounter other risks of doing business internationally including: • unexpected changes in, or impositions of, legislative or regulatory requirements; • fluctuations in foreign exchange rates, which could cause fluctuations in the price of our products in foreign markets or cause fluctuations in the cost of certain raw materials purchased by us; • delays resulting from difficulty in obtaining export licenses, tariffs and other barriers and restrictions, potentially longer payment cycles, greater difficulty in accounts receivable collection and potentially adverse tax treatment; • potential trade restrictions and exchange controls; • differences in protection of our intellectual property rights; and • the burden of complying with a variety of foreign laws |
| In addition, we will be increasingly subject to general geopolitical risks in foreign countries where we operate such as political and economic instability and changes in diplomatic and trade relationships, which could affect, among other things, customers’ inventory levels and consumer purchasing, which could cause our results to fluctuate and our sales to decline |
| It has not been our practice to engage in foreign exchange hedging transactions to manage the risk of fluctuations in foreign exchange rates because of the limited nature of our past international operations |
| Due to the significant expansion of our international operations as a result of the Selsun Blue acquisition, our exposure to fluctuations in foreign exchange rates has increased |
| We have a significant amount of debt that could adversely affect our business and growth prospects |
| As of November 30, 2005, our total long-term debt was dlra182dtta5 million |
| In the future we may incur significant additional debt |
| Our debt could have significant adverse effects on our business including: • requiring us to dedicate a substantial portion of our available cash for interest payments and the repayment of principal; • limiting our ability to capitalize on significant business opportunities; • making us more vulnerable to economic downturns; • limiting our ability to withstand competitive pressures; and • making it more difficult for us to obtain additional financing on favorable terms |
| If we are unable to generate sufficient cash flow from operations in the future, we may not be able to service our debt and may have to refinance all or a portion of our debt, obtain additional financing or sell assets to repay such debt |
| We cannot assure you that we will be able to obtain such refinancing, additional financing or asset sale on favorable terms or at all |
| The terms of our outstanding debt obligations limit certain of our activities |
| The terms of the indenture under which our 7dtta0prca Subordinated Notes are issued and our Amended Revolving Credit Facility impose operating and financial restrictions on us including restrictions on: • incurrence of additional indebtedness; • dividends and restricted payments; • investments; • loans and guarantees; 24 _________________________________________________________________ • creation of liens; • transactions with affiliates; • use of proceeds from sales of assets and subsidiary stock; and • certain mergers, consolidations and transfers of assets |
| The terms of our Amended Revolving Credit Facility also require us to comply with financial maintenance covenants |
| In the future, we may have other indebtedness with similar or even more restrictive covenants |
| These restrictions may impair our ability to respond to changing business and economic conditions or to grow our business |
| In the event that we fail to comply with these covenants, there could be an event of default under the applicable debt instrument, which in turn could cause a cross default to other debt instruments |
| As a result, all amounts outstanding under our various debt instruments may become immediately due and payable |
| Our operations are subject to significant environmental laws and regulations |
| Our manufacturing sites use chemicals and other potentially hazardous materials and generate both hazardous and non-hazardous waste, the transportation, treatment, storage and disposal of which are regulated by various governmental agencies and federal, state and local laws |
| Under these laws, we are exposed to liability primarily as an owner or operator of real property, and as such, we may be responsible for the clean-up or other remediation of contaminated property |
| Environmental laws and regulations can change rapidly, and we may become subject to more stringent environmental laws and regulations in the future, which may be retroactively applied to earlier events |
| Product line extensions, such as Bullfrog Mosquito Coast, or acquisitions of new products may also subject our business to new or additional environmental laws and regulations |
| In addition, compliance with new or more stringent environmental laws and regulations could involve significant costs |
| We are dependent on certain key executives, the loss of whom could have a material adverse effect on our business |
| Our future performance depends significantly upon the efforts and abilities of certain members of senior management, in particular those of Zan Guerry, our chairman and chief executive officer, and Robert E Bosworth, our president and chief operating officer |
| If we were to lose any key senior executive, our business could be materially adversely affected |
| Our shareholder rights plan and restated charter contain provisions that may delay or prevent a merger, tender offer or other change of control of us |
| Provisions of our shareholder rights plan and our restated charter, as well as certain provisions of Tennessee corporation law, may deter unfriendly offers or other efforts to obtain control over us and could deprive shareholders of their ability to receive a premium on their common stock |
| Generally, if any person attempts to acquire 15prca or more of our common stock then outstanding without the approval of our independent directors, pursuant to our shareholder rights plan, our shareholders may purchase a significant amount of additional shares of our common stock at 50prca of the then applicable market price |
| This threat of substantial dilution will discourage takeover attempts not approved by our board despite significant potential benefits to our shareholders |
| Our restated charter contains the following additional provisions, which may have the effect of discouraging takeover attempts: • our directors are divided into three classes, with only one class of directors elected at each annual meeting for a term of three years, making it difficult for new shareholders to quickly gain control of our board of directors; • directors may be removed only for cause prior to the expiration of their terms; and • we are prohibited from engaging in certain business combination transactions with any interested shareholder unless such transaction is approved by the affirmative vote of at least 80prca of the outstanding shares of our common stock held by disinterested shareholders, unless disinterested members of our board of directors approve the transaction or certain fairness conditions are satisfied, in which case such transaction may be approved by either the affirmative vote of the holders of not less than 75prca of our outstanding shares of common stock and the affirmative vote of the 25 _________________________________________________________________ holders of not less than 66prca of the outstanding shares of our common stock which are not owned by the interested shareholder, or by a majority of disinterested members of our board of directors, provided that certain quorum requirements are met |
| The Tennessee Business Combination Act prevents an interested shareholder, which is defined generally as a person owning 10prca or more of our voting stock, from engaging in a business combination with us for five years following the date such person became an interested shareholder unless before such person became an interested shareholder, our board of directors approved the transaction in which the interested shareholder became an interested shareholder or approved the business combination, and the proposed business combination satisfied any additional applicable requirements imposed by law and by our restated charter or bylaws |
| If the requisite approval for the business combination or share acquisition has not been obtained, any business combination is prohibited until the expiration of five years following the date such person became an interested shareholder |
| The trading price of our common stock may be volatile |
| The trading price of our common stock could be subject to significant fluctuations in response to several factors, some of which are beyond our control, including variations in our quarterly operating results, our leveraged financial position, potential sales of additional shares of our common stock, general trends in the consumer products industry, changes by securities analysts in their estimates or investment ratings, the relative illiquidity of our common stock, news regarding PPA-related product liability litigation and other potential product liability litigation and stock market conditions generally |
| We have no current intention of paying dividends to holders of our common stock |
| We presently intend to retain our earnings, if any, for use in our operations, to repurchase our common stock and to repay our outstanding indebtedness and have no current intention of paying dividends to holders of our common stock |
| Market Data We use market and industry data throughout this Annual Report on Form 10-K and the documents incorporated by reference herein, which we have obtained from market research, publicly available information and industry publications |
| These sources generally state that the information that they provide has been obtained from sources believed to be reliable, but that the accuracy and completeness of such information are not guaranteed |
| The market and industry data is often based on industry surveys and the preparers’ experience in the industry |
| Similarly, although we believe that the surveys and market research that others have performed are reliable, we have not independently verified this information |
| In particular, market share information has been coordinated and prepared for us by AC Nielsen at our request based on market segments that we defined and for which we have paid customary fees |
| Therefore, such data, including the market category delineations that form the basis for such data, are not necessarily representative of results that would have been obtained from an independent source |