2008 ANNUAL REPORT CE AT TEM PROCESSED WAR 06 roa “ROMSONRGGIERS BETTER PRODUCTS FOR BETTER LIVING en) ‘SEC Mail Processing Sect F ion COIN te 2 ie 09002455 H ‘Washington, oc 110Financial Highlights TOTAL REVENUES masons) 3 a & 3 » 3 all gil 3 8) 2] 2 gi} sii S| 8) Sit S| || = SEAS ‘ieee cS TEVERAGE ong ar dab nef cah acc quer dey ‘cuted TOR snr GAN? raed ease Musee trons oncieatanetncone pred cere ined Sats GAAP on page ho seer. EPs ra sudo nce cera ta Se te cen ‘om ncone reports wh Und Sates (gee espn eure pcp ANP oO omGhAP names on pagel separ rage $1372 Dae Sie ‘sr sera WARKET CAPITALIZATION “caleuated sof 1720 or exch ys- . ».Chairman’s Letter To our Shareholders and the Chattem Team: Fa 2008 was another exceptional year for Chattem. Net sales of $455 million increased 7% over fiscal 2007 while adjusted earnings per share! jumped 26% to $4.25 compared to $3.36 last year. Chatter focuses on the consistent achievement of results and we are very proud of our 5-year compouind growth rate in adjusted earnings per share! of 29%, ‘These strong results in fiscal 2008 are due to the continued growth of our largest brands Gold Bond®, ACTS, Icy Hot® and Cortizone-108, Each of these brands showed strong consumer sales growth and each increased market share in their respective categories during fiscal 2008, ‘The two significant drivers of growth for our key brands have been product innovation combined with our strong ‘commitment to advertising, Over the last several years our brands have had a numberof very successful new product introductions that have driven growth. Gold Bond hasbeen led by the dramatic success of the Gold Bond Unimate® Lotion line of products as we further expanded our shelf presence in fiscal 2008 with the new Gold Bond Ukimate Softening and Gold Bond Uhimate Restoring lotions. ley Hot growth has been largely fueled by the continued success of our line of patch products. Cortizone-10 growth has continued behind the new Cortizone-10 Intensive Healing formula, ACT has grown due to the major success of ACT Restoring Mouthwash, 2009 Outlook. Desieiecitestnnicenvionan crating emits hb 299. Hepes year of excellent growth in sales and earnings. We initiated adjusted earnings per share’ guidance at $4.80-$5.00 per share, representing an increase of 13% and 18%, respectively, over adjusted earnings per share? of $4.25 in fiscal 2008. ‘Chatter entered the year with positive consumer sales momentum for its largest brands and a strong lincup of newe product launches planned for fiscal 2008. Each of our four largest brands will have major new products in fiscal 2009. New ACT Total Care™ is expected to have the largest seles impact, but Icy Hat and Gold Bond also have two new products that have received extremely strong consumer test scores. Cortizone-10 also has two new product launches planned for fiscal 2009 that we believe wil strengthen its number one market share psition in the anti-ich category Certain of our other brands are also well positioned for success in fiscal 2009. Bullfrog® is coming offa solid year and has gained some important new distribution for 2009, We are excited about the new Selsun Blue® Itchy Dry Scalp product and believe Selsun Blue in total should show overall growth in fiscal 2009. Finally, Unisom® and Pamprin® are expected to deliver solid performances, As always, we are grateful for our outstanding employees, directors and business partners. Our record results are a tribute to their loyalty, talents and efforts. y~ Zan Guerry ‘Chairman & CEO 1 see thereconaaton cf agusenet income to netincame pared naccoranee Mah GARP on poe (DAE por. 2 Geran siatements ins secon conta loaacing tenet wiinthe mesg fhe Prva Seces tgaton elo Act 95 andre madeln‘Reconciliation of Non-GAAP Financial Measures INCOME FROM OPERATIONS (EXCLUDING SFAS 1Z3R EXPENSE, IMPAIRMENT, {LOSS ON PRODUCT DIVESTURES, UTIGATION SETTLEMENT, PRODUCT RECALL EXPENSE AND EXECUTIVE. SEVERANCE CHARGES): ream fom apa SFAS TR pores apart ol rntodved ange assets Las on posit estes Ligation settenent Producreal expense Enecve severance charges Inco fom operators (excucng SFAS 123 exons, ingen oss on roduc ‘vestses, gan selenent pratt eal expense an exacie severance chaps) ETINCONE PER COMMON SHARE (OLUTED) NETINGOME (EXCLUDING DEBT EXTAVGUISHVENT.SFAS 1238 EXPENSE, IMPARMENT, LOSS ON PRODUCT OVESTURES,LITGATION SETTLEMENT, ‘PRODUCT RECALL EXPENSE AND EXECUTIVE SEVERANCE CHARGES) PER (CONMOW SHARE (OLUTED|: Net ine ‘i (sta: Losson gay exhgushmert fest SFAS TR exyense Impatnert cf nde red angle assets oss on protic dvesues (Presion) bnel incre aes atin (exuding cet existent SFAS 122 expense, inser loss on (roti dvesties, gator seer, roduc recal expense ard exe feveronce ges) ‘tinue (ecg eb expiant SEAS TZ axpenes,enpsioon oss on ‘oduc vesrs,iegatansetloner pect ral expense an exealve Severance charges) pe common share ue). EBTDA RECONCILIATION (EXCLLDING IMPAIRMENT, LOSS ON PRODUCT DIVESTURES, LIGATION SETTLEMENT, PRODUCT RECALL EXPENSE AND EXECUTIVE SEVERANCE CHARGES) Netoame a Provisions incon tes leet ogo, a inca ss on ery exngushmert odo) Dagresion rd amoriaton ss amounts noted nines EBTDA ed (seat Inparment indented tango sts Lass on prod estes Ligation stent Proucreal exoense rare severance ches EBITDA exudrginpsiren bs on pret vests, gain setae, pout ‘aca expense and eroute severance capes) FREE OASH FLOW RECONCILATION Net ish proved ycpraig aves lass Prhass of propery, lan and equa Frescash ow w ¥ 125006 sa70 nan 6268 EE 2 3 $02 5822 saz, Saat $s sa600 260 562 re. 1349 3.103 19746 Ta s me aus (9m EE 205 $7563 $m rae ‘2454 Bat (92 $ sour 16.958 1348 Ti 8 az Dan. . UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF ‘THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended November 30, 2008 Commission fle number 0-5905 CHATTEM, INC. A TENNESSEE CORPORATION IRS EMPLOYER IDENTIFICATION NO. 62-0156300 1715 WEST 38TH STREET CHATTANOOGA, TENNESSEE 37409 ‘TELEPHONE: 423-821-4571 ‘Securities registered pursuant to Section 12(b) of the Act ‘Name Tillcof Each Class Which Reisered ‘None Securities registered pursuant to Section 12(g) of the Act: ‘Common Stock, without par value [Indicate by check mark ifthe registrant isa well-known seasoned issuer, as defined in Rule 405 of the Securities Act, Yes@ NOO Indieate by check mark i the registrant is nat required to fle reports pursuant to Section 13 or Section 15(4) of the Act. YES NO Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 oF 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) hs been subject to such filing requirements forthe past 90 days. YES NOO dicate by check mark if disclosure of delinguent filers pursuant to Item 40S of Regulation S-K is not contained herein und will not be contained, o the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part IIL ofthis Form 10-K or any amendment to this Form 10-K. 0 Indicate by check mark whether the registrant i a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 ofthe Exchange Act. (Check one) Large accelerated filer Accelerated filer © Non-accelerated filer 0 (Do not check ifa smaller reporting company) Smaller reporting company 5) dicate hy check mark whether the registrants shell company (as defined in rule 125-2 of the Act). YES. NOG ‘As of May 31, 2008, the aggregate market value of voting and non-voting shares held by non-affliates was SI,129,498,322. For the sole purpose ofthis computation, all executive officers and directors ofthe registrant have been deemed tobe affiliates ofthe registrant. ‘As of January 22, 2009, 19,468,434 shares of common stock were outstanding. DOCUMENTS INCORPORATED BY REFERENCE: Portions of the registrant's Proxy Statement for the egistrant’s 2009 Annual Meeting of Shareholders (he “2009 Proxy Statement) are incorporated by reference in Purt II ofthis Form 10-K to the extent deseribed herein.A 1B. 8A, 98. 10. 1" 12 13. 14 16 (CHATTEM, INC. TABLE OF CONTENTS PART Business Risk Factors Unresoved Staff Comments Properties Legal Proceedings ‘Submission of Matters toa Vote of Secures Holders PARTI “Market forthe Registrants Common Equity, Retated Shareholder Matters and issuer Purchases of Equity Seourties Selected Financial Dala Management's Discussion an Analysis of Financial Condon and Results of Operations (Quanttatve and Quabtatve Disclosures about Market Risk Financial Slatements and Supplementary Data (Changes in and Disagreements with Accountants on Accounting ané Financial Disclosure Controls and Procedures ‘Other information PART I Directors, Executve Ofices and Corporate Govemance Executive Compensation ‘Security Ovmersip of Certain Banefiel Owners and Management and Related Shareholder Mators Certain Relationships and Related Transactions, and Director independence Principal Accounting Fees and Services PARTIV Eshibts and Financial Statement Schedules Page 16 2% % % a 43 45 B 92 2 2PART! tem 4, Business Except as otherwise inated, al references inthis Form 10-K to "we", us", “our of “Chatto” refer to Chattem, ine. ‘and our subsiciaries. In addition, in this Form 10-K, our fiscal years ended Noveriber 30, 2008, November 30, 2007 and November 30, 2008 are reterreé to as fiscal 2006, fiscal 2007 and fiscal 2008, respectively. Our fiscal year ending on [November 30, 2009 s refered io as fiscal 2008. Brand names thal ae italicized in this Form 10-K rele to trademarks thal we own. General Founded in 1879, we are a leading marketer and manulacturer of @ broad pono of branded over-the-counter (COTC’)heatihcare products, toletres and cetery supplements in such categories as mecicated skin cae, topical pain care, ‘ra care, intemal OTC, medicated dancrulf shampoos, etary supplements and ther OTC and tly products. Our porto ‘of products includes wel-ecognized brends suchas: + Gol Bond, Cortizone-10 and Belmex - medicated skin care; . ley Hal, Asperereme and Capzasn- topical pain care; + ACT and Herpecin-oral care: + Unisam, Pampnin and Kaopectate- internal OTC; + Salsa Blue - mecicated candrut shampoos, + Dexatrin, Gariquo and New Phase - dietary supplements; and ‘Buitog, UtraSwin and Sunn - other OTC and tlt product. ‘Our products tage niche markets that are on outside the focus of larger companies where we believe we can achieve and sustain significant markel share through produc innovation and strong adverising and promotion support, Many of our products are among the U.S. marke! leaders in their respective categores. For example, our prtolo of iopical analgesic brands, cut Cortzone-10 anlich ointment and our Gold Bond medicated body powders have the leading US. ‘market share in thelr respective categories, We support cur brands through extensive and costtfectve advertising and ‘romaton, We sel our products natonaly through mass merchandiser, drug and food channels, principally ulzng our own sales force. Our experienced management team has grown our business by acquiring brands, developing product fine extensions and increasing market penetration of our exising products. We will coninue to seek opportunites to acquire attractive brands in niche markets. Competitive Strengths Wie believe that he folowing key compettve strengths ar ctical to our continuing success: Diverse and broad portfolio of welbrecognized branded products. We curenty market a diverse and broad pototo of 26 brands in a variety of diferent product categories. Cur products are markeled under wellrecognized brand ‘ames, which inclide ky Hot, Gold Bond, Selsun Blue, ACT, Cottzone-10 and Unisom. Our presence in diverse product ‘categories reduces our exposure to changing consumer demand or weakness in any singe category Significant presence in niche markets. We acquire and develop brands that compete in smal to madium sized riche markels where we believe we can achieve significant market presence and buld brand equity. Our products often faceless competive pressures because we focus on markols thal are frequenly oulside the core product areas of lager consumer products and pharmaceutical companies. This focus provides us with the opportunity to develop strong brand equity, identty and respond to consumer trends and leverage our strong seling and distibuton capabilies in these markets. ‘High margins and efficient operating structure. We are able to achieve high gross margins as a result of our abiy to buld and maintain brand equity, our significant market presence in niche markets and effcencies in purchasing, ‘manufacturing and cistrbution. In addtion, we seek to tighily contro our expenses, which stengtens our operating margins. (Our high margins and resuitng strong cash low allow us to withstand temporary fuctuaions in our product markets that could hhave adverse effects on our business. Proven advertising and promotion strategy. We aggressively buld awareness and consumer loyalty of our brands through extensive and cost-effective advertising strategies that emphasize the compeltve strengths of our produ. \We rely principally on television advertising and, toa lesser extent, ratio and print advertising and promotional programs, We stv to achieve cost efficiencies in our advertising by being opportunistic in our purchase of media and though contol of our production cass. We also maintain the febilly to allocate purchased media time among ou key brends to respond quickly to changing consumer trends and to support our growing brands. We believe our welldeveloped advertising and promotion platform allows us to quicly and efcienty launch and support newly acquired brands and product line extensions as well 2s increase market penetration of existing brands. Advertsing and promotion expenditures represented approximately 26% of our total revenues in fiscal 2008. Given the impertance of our products’ brand equity we expect to maintain a significant level of spencing on acvertising and promaton. Established national sales and distribution network. We have an established national sales and distribution network that sels to mass merchandiser, dug and fod tars such as WalMart Stores, Inc, Walgreens Co. and The Kroger Co. In fiscal 2008, sales to our tp fen customers coasituted approximately 74% of our total domestic gross sales, ich atows us to target our seling fos to our key customers and tar specic programs to meet their needs. Our fiscal 2008 sales to WalMart Stores, inc. accounted for approximately 33% of our ‘lal domestic goss sales. Through targeted 2s and uflization of ou esabished cstrbution network, inluing our approximately 55 person sales force, we bebeve we can effectively sll and cstibue our products, incuding newy acquired brands and produc ine extensions, while maintaining fight contos over cu selng expenses Focused new product development. We stive to increase the valve of our brands while obtaining an increased market presence through product ne extensions. In fscal 2008, our product development expenditures were $5.7 milion, During the past several years, we have expanded our product development staff and increased research and development spending, We rely on intemal marke research as well s constants to identify new produc formulations and ine extensions that we believe appeal tothe needs of consumers. In scal 2008, we inteduced 11 new product ne extensions: Unisom Sleep Metts, Cotizone-10 inensive Healing, Gold Bond Ulimte Restoring Lotion, Gold Bond Utimate Foot Cream, Gold Bond Ultimate Soothing Lion, ley Hot PM Lotion, ky Hot PM Patch, Aspercreme Heat Pain Reliving Gel, Asperceme Nightime Lotion, Dexatrim Max Daytime Control and Dexatrim Max Complex 7. We have 13 new product launches scheduled for fiscal 2008, Business Strategy Our strategy to achieve future growth isto generate new sales through strong marketing and promotional programs, new product development and the acquisition of new brands. Brand management and growth. We seck to increase market share for our major brands through focused ‘marketing of our existing products and product tne extensions while maintaining market share for our smaller brands. Our marketing strategy isto postion our products to meet consumer preferences idenified through extensive use of market and consumer research. We intend to channel advertising and promotion resources to thase brands that we feel exhibit the most Potential for growth. We also seek continued growth throush our new product line extension actives as evidenced by our imreased research and development spending and the expansion of ur product development stafl, In addition, we continually evaluate the prot potential of and markets for our brands and, in instances where our objctves are not realized, wil spose of under-performing brands and redeploy the resulting cash asses,Strategic acquisitions. We intend to iently and acquire brands in niche markets where we believe we can achieve a significant market presence through our estabished advertising and promotion platform, sales and aistibuton network and research and development capabities. We target brands wih sales that are responsive to increased adverising ‘suppor, provide an opportunity for product line extensions through our research and development efforts and have the potental fo meet cur high gross margin goals. On January 2, 2007, we aoqued the U.S. ight othe follwing five consumer ‘and OTC brands from Johnson & Johnson ('J & J Acnusiton’): ACT, Unisom, Cotzane-10, Kaopectate and Baimex. Aso in fiscal 2007, we acquired the wordwide trademark and rights to sell and market ACT in Westem Europe from Johason & Johnson (‘ACT Aaquision’). We wil continue to seek oppo fo acquie tractive brands in sce markets Developments During Fiscal 2008 Products In fscal 2008, we introduced the following product ine extensions: Unsom Sleep Mets, Coizone-10Iniensive Healing, Gold Bord Ulimate Restoring Loon, Gold Bond Uitmate Foot Cream, Gold Bond Utimate Soothing Lotion, ley Hot PM Lotion, ley Hot PM Patch, Aspercreme Heat Pain Relieving Gel, Asperveme Nahitie Loon, Dexatnim Max Dayime ‘Control and Dexatrm Max Complex 7. Product Recall ‘On February 8, 2008, we iiated a voluntary nationwide recall of out ley Hot Heat Therapy product. ley Hot Heat Therapy is en a-acivated, self-heating disposable device for temporary reef of muscular and joint pain. We recaled these products because we ecelved some consumer repos of fist, second and third degree bums an skin ition resuting fom the use o possible misuse ofthe product. Based in parton consideration of on-hand factory inventory and etl pont of sales data, during the fist quarter of fiscal 2008 we recorded an esimate of approximately $60 milion of recal expenses related to product retums, inventory obsolescence, destruction costs, consumer refunds, laal fees and otter estimated expenses. ‘Subsequent to ou rst fscal quater, we increased our estimate of recall expenses by $03 mon, to @ total of $63 millon, Brimarly as a resuft of atonal egal fees and settement payments. The remaining accrved lability for product recall expenses was $0.8 milion as of November 30, 2008, ‘Loss on Early Extinguishment of Debt ‘During the frst quarter of fiscal 2008, we uiized borrowings under the revolving credit facil portion of cur Credit Facility to repay $35.0 milion of te tem loan under the Credit Facility. n connection withthe tem loan repayment, we retired «a proportonal share of the term loan debt issuance costs and recorded the resulting loss on extinguishment of debt of $0.5 milion. ‘Stock Repurchase ‘During fiscal 2008, we repurchased 418,281 shares of our common stock under our stock repurchase program for $26.3 milion at an average price per share of $62.94, Litigation Settement During the tid quarter of fiscal 2008, we reached a setement on al 26 known claims aging pulmonary arterial hypertension 3s a sul of the ingestion of Dexarim products in 1998 though 2003, Included a Figaton setement in the consoidated statements of income isthe setement ofthe 25 claims iotaing $133 mlfion and $0.6 milion of egal expenses, ich were paral offset by $26 milion of proceeds fom the Dextrin ligation setlement tus. ‘Subsequent Event On December 4, 2008, we issued an aggregate of 487,123 shares of our common stock in exchange for $28.7 milion in aggregate principal amount of our oustanding 2.0% Convertibe Serior Notes cue 2013 (2.0% Convertible Notes) ‘Asa resultofthis transaction, te blanc of the remaining 2.0% Convertible Notes was reduced to $96.3 milbon oustandingProducts ‘We curenty market @ diverse and broad portfolio of branded OTC healthcare products, totes and dietary supplements in such catagories as medicaled skn care, topical pain care, oral care, intemal OTC, medicated dandrutt shampoos. citary supplements and other OTC and tletry products. Gur branded producs by catagory consist of: Category and Brands Product Description Medicated Skin Care Gold Bond Medicated powder, cream, lotion, fst aid and foot care products Corkzone-10 Hydrocarisone anttch Baimex Diaper rash Topical Pain Care toy Hot Dual acon muscular and ais pain refever Asporcreme doe artis pain reever Flxal ‘loewera based pain elver CCapzasin Deep ponetating, adore atts pain reever Sporisreme ‘or ree muscular pan reliever ‘Artis Hot Value-prced arthritis pain reever Oral Care ACT ‘nt-cavily mouhwashimout nse Herpecint. ‘Cod sore fp treatment Benzodent Denture pain elif cream Internal OTC Papin Menstrual pain lever Prémsyn PMS Premenstrual pan relever Unisom OTC seepaid Keopectate Antdiarneal remedy Medicated Dandrut Shampoos Selsun vo Mediated dandrut shampoos Dietary Supplements Dexatin Cit pits Garfgue Cholesterol heath supplement Meltonex Natural sleep aid New Phase enopausa suplement Omnigest EZ Digestive ad Other OTC and Toiletry Products Buttog Sunscreens Sunn Spray-on har igitener Utraswin Chlorine removing shampoo and conditioner Musa Facil mesque Medicated Shin Care ‘The Gold Bond brand competes in numerous product catagories with special formulated products for both adults and babies, including body powder, therapeutic hand and bady lotions, foot care and fist sid. ‘Gold Bond has long been the number one seling brand of medicated body powder domesticaly, and its stong brand equity among consumers has allowed Us fo successfuly launch new tine extensions, most recently under the Gold Bord Utimate ine. Initially launched in fscal 2003, Gold Bond Utimate Healing Skin Therapy Lotion helps to heal and nurture extremely dry, cracked and imitated skin with seven intensive moisturizers plus vitamins A, C and €, The Gold Bond Ultimate ineexpanded into the everyday bath powder catagory with the introduction of Gold Bond Utimate Comfort Body Powder in fiscal 2008. Gold Bond Ultimate Comfort Body Powder is a tac-ree powder that provides freshness, odor protection and meistre contol and features the signature Utimate fragrance. In fiscal 2006, we introduoed Gold Bond Utimate Softening Loon, The ew Usimate Softening lation i specaly formulated to soften rough, dy skin. In fiscal 2008 we leunched three addons to the Gold Bond timate line: Restoring Lotion, Soothing Lotion and Foot Cream, As part of the JBJ Acquisition in 2007, Cortzone-10 and Bales joined the Gold Bond brand in the medicated skin care category. Cottizone-10 is the leading band inthe antic category and helps to reve itching associated with various skin iniaions incuing rashes, diy skin, eczema, poison inj and insect bites. All Cortzone-f0 products conlain 1% hydrocortisone end are avaible in mug forms. The Cortizone-10 Créme wih aloe and Créme Plus with 10 moisturizers are designed to reve itch fst and moisturize the skin, Cortzone-10 Intensive Healing Formula launched in January 2008, contains moisturizers, ant-oxdent vitamins, and chamomile designed to moisturize fr 24 hours and to help relieve itchy skin, ‘Balmexis a ine of diaper rash products availble in two formulas. The primary formula contains zinc oxide to treat ‘and prevent diaper rash. The second formula is a peroltum based produc for reatment and prevention of diaper rash and other skin iritations. Topical Pain Care ‘Our topical pain care portato features sx cistinctly postioned brands. Our flagship brand, Icy Hot, isa leader in the extemal analgesic category ar receives heavy mecia support and stong advertising featuring NBA superstar Shaquile ONNeal. In fscal 2008, we extended the ley Hot brand with two new products — ley Hot PM Lotion and fey Hot PM Patch — specifically designed to help relieve arthritis sufferers’ nightime pain. ‘Aspercreme provides odor‘ree pain rele for sufferer of arts and other joint and muse pain. In fiscal 2008, tis brand was extended with two new product invoductons: Aspercreme Nightime Lotion offers maximum nighttime pain reef, ‘and Aspercreme Heat Pain Relieving Gel deve fast-acting pain rel wih a heat sensation ina no-mess gel. Capzasinis ‘an aftits pain reliever that contains capsaicin. Spotscreme is targeted at serious athletes as well a5 “weekend waar’, Flexalis marketed toward those who seek a menthol and aloe vera based pain reliever for condtons such as back pain or ‘muscle sain. Arthritis Ht rounds ou the portfolio and competes agains! private label products ata value price. Oral Care ‘Our oral care brands include Herpecin, a tip care product thet teats cold sores and protects tps fom the haraful ‘ays ofthe sun, and Benzoden, a dental analgesic cream for pain related to dentures. With the J8J Acqusiton, we ated ACT, alin ofant-cavity mouthwash and mouth rinses, ACTis avaible in tree favors ofant-cavy Nuonide rinse and in the ‘ACT Restoring ine wit four favors and mulicle package sizes. The ACT Resting ine of producs seeks to restore minerals to soft spos; strengthen enamel to prevent tooth decay; and kil bad breath germs. In 2008, we wil launch the ACT Total Care ine of mouthwashes which combines the consume benefits of strong teeth, healthy gums end iesh breath in two Favors = ley ean min and aleohol fee Fresh mint Internat OTC's ‘We compete in the menstrual analgesic category with two brends, Pamprin and Prémsyn PS. Pamprin, featuring four distinct formulas, seeks to provide complete relief of a woman's menstrual symptoms, while Prémsyn PIMS has one formula designed to address specific symploms of premensinal syndrome. Pamprin is avalable in four formulas: Muli- ‘Symptom, Cramp, All Day, and Max In connection withthe J Acquistion, the Unisom and Kagpectat brands joined the internal OTC category in 2007. Unisom is the leading single ingredient brand in the OTC sleep ald catagory. Unisom is avalaiein three product forms: ‘SleopTabs, withthe active ingredient diphenhydramine; SleepGels, which contains the active ingredient doxylamine: and ‘Sleep Metts, launched in fiscal 2008, which mets in your mouth. Keopectae is @ wel establshed ant-ciarheal remedy. KKeopectate is avaiable in Regular and Extra Strength and three favors: reguar, Peppermint and Chery In adlton, Keopectate offers a stoo softener under is brand banner.Medicated Dandruff Shampoos ‘The Setsun Blu ine of products consists of three distinct prduct offerings, each using diferent actve medication and ingredients to provide unique formulas forthe various consumer segments in he marketplace The Selsun Blue base formula contains the active ingredient selenium sulfide and is comprised of four shampoos: Medicated, wth a cooling clean fee; Moisturizing, wih aloe and meistuizers; 2n-1, with a patented conditioning system, and Dail for more sensitive scalp treatment, Selsun Salon, launched in 2005, contains the active ingredient, pyrthione zinc, plus moisturizers and nutients for ‘enhanced hair care. All Selsun Salon products are formulated with a blend of salon qualiy moisturizers, vitamins and ‘utentstoprovde great looking hai Selsun Natural, launched in fiscal 2007, contains the active ingredient saicyic acid. The two shampoos (Ac Energy and Island Breeze) have a clearlooking formula with moisturizers, botanicals and Vitamins to provide gener care of the hair and scalp and help restore hair tots natural, heathy sate Dietary Supplements, Dexatrim isa leading brand in the dit pill category tha includes such products as Dexatim Max, Dexatrim Max20, Dexatrim Max Evening Appeite Contol, Dexatrin Natural and, launched in fiscal 2008, Dexatrim Max Daytime Control and Daxatrim Max Complex 7. We also compete inthe cetery supplements category wit cur Sunsource line of products. Al Sunsource products ‘are specially formulated to provide consumers with an al-natural, drugfree way to suppot ther specifc heath care goals. Known fr its support of cardiovascular heath, Gafigue leads the garc supplement category and is postioned as an odor- ‘hee, one-per-day supplement that helps maintain cholesterol levels already within a healthy range. Other OTC and Toiletry Products The majorty of sales of our seasonal brands, Buitrog, Sun-n and UtraSwim,typcaly occur during the frst tes ‘quarters of our fiscal yea. Bulag is alne of high qualty, high SPF waterproof sunblocks. Included inthe Bulg ine is Butfiog Moszuito Coast which combines an SPF 30 sunblock with a DEET Free insoct repallent, QuickGel Sporspray, ‘Supertlock, Guk Stk, and Marathon Mist, @ convenient continuous spray sunblock procuctn chdren and adult versions. In 2008 and 2009, the Bulfog line is being enhanced with "UV Extender which provides broader UVB and UVA protection for the Quick Gel, Sportspray and Marathon Mist products. in adcton in 2009 Bultrog Superlock wil be reformulated to ‘rovide SPF 50 protection for those seeking sun protection. Sumin, ai ightener, is avaiable in to vais of spray-an and ahiglighing gel. UteSwimis ou riche ine of ‘swimmers’ shampoos and condones. Our oer brands include Mudd, alin of specialty masque produ, and a varity of ‘other smaller brands. {International Business ur international business, which represented approximately 7%, 7% and 8% of our total revenues in fiscal 2008, ‘2007 and 2006, respectively, as been concentrated in Canada, an export market driven ftom our operations in Ireland, the ‘United Kingdom ('U.K-), Greeoe and in Lath American counties in which Selsun, ACT and cetain of our other products are sold. Canada Chattem Canada, 2 wholly-owned subsidiary based in Mississauga, Ontario, Canada, markets and distributes certain of our consumer products throughout Canada. The manufacturing ofthese products is pincipaly done in our faites in Chattanooga, Tennessee, while some packaging is dane in Mississauga. Chattem Canada uiizes a national broker for its ‘sales efforts. Brands marketed and sold in Canada include fey Hot, Sesun, Gold Bond, Pamprin, Sun-in, UtraSwim and Aspercreme,Europe Our European business is conducted through Chattem Global Consumer Products Limited (‘Chatter Globe’), our lish subsiciry, located in Limerick, Iretand, Chatter (UK) Limited (‘Chatem (U.K,)), a wholly-owned subsiiary lceted in Basingstoke, Hampshire, England; and Chaltem Greece, a wholly-owned subsidiary located in Alimos Atica, Greece Packaging and astibuton operations are conducted pricipaly in Ireland with certain products sourced from our US. ‘operations. Chattem uses a national broker in the U.K. while distribtors are used to market and sell our products on the European continent an elsewriere, Our products sold in Europe include Seisun, ACT. Sun-n, and Mud. Comsik® is sld by CChattem (U.K) under a lensing arangement withthe owner ofits registered trademark, Coy, Inc. Spray Blond Spray-In Hait lightenes is marketed only onthe European continent. Certain of cur OTC heath care products ae sold by Chattem Giobal to customers in pats of Central Europe andthe Middle East Peru Inthe fourth quater of fiscal 2008, we estabised Chattem Peru SRL (‘Chae Per’), a wholly-owned subsidiary located in Lima, Peru, Chattem Peru sels certain of our Selsun products throughout Pen using third party cistb.tors United States Export (Our United States export dvsion sences various distbutor primary located in the Caribbean and Latin Americ. We cistibuteSelsun, ACT, Gold Bond, Dexatin, ly Hot, Aspercreme, Capzasin and Sportsreme into these markets. Selsun International ‘We plan to focus our efforts on expanding Selsun's interational presence in existing key markets, such as Canada, Mexico, Brazil, the UK. and Australia. In cetain inemational markets, we sell Selsun through distributors and receive a royally based on a percentage of dsiibutor sales. We have entered into dstibutor agreements wit third party disibtors for ‘Seisun in vaous interatonal markets oer than Canada and the U.K, where we engege natal broker. ‘Marketing, Sales and Distribution ‘Advertising and Promotion We aggressively seek to build brand awareness and product usage tough extensive and cos effecve advertising strategies tat emphasize the competive strengths of ou products. We allocate 2 Sqnifcantporton of our revenues (othe ‘adverising and promotion of our products. Expenditures for these puposes were approximately 26%, 27% and 22% of ‘otal revenues in fiscal 2008, 007 and 2006, respectively ‘We seek to increase market share for our major brands tough focused marketing of our existing products and product line extensions while maintaining market share for our smaller brands. Our marketing stretegy is to positon our products to meet consumer preferences identified through extenswve use of market and consumer research. We intend to channel advertising and promotion resources to thase brands that we feel exhibit the most potental for growth. We rely frincipalyon television advertising and toa lesser extent, radio and print advertising and promotional programs. We stive to achieve cost efciences in cur advertising by being opportunistic in our purchase of media and controling ou production costs. We also maintain the ext o allocate purchased media time among our Key brands to respond quickly to changing consume trends and to suppor our groning brands. We believe our welldeveloped advertising and promation platform allows us qui and efcent to launch and support newy acquired brands ané produc ne extensions as wel as increase market penetration of ening brands. ‘Wie work drecy with retailers to develop promotional calender and campaigns for each brand, cusomizng the promation tothe particular requremenis of the individual retaier. These programs, which include cooperative advertising, temporary orive reductions in-store csplas and special events, are designed to abain or enhance cstrbution a the rela level and to reach the uate consumers ofthe product. We als lize consumer promation such as coupons, samples and tal sizes to inzease the tl and consumption ofthe productsCustomers (Our customers consis of mass merchandisers such as Wal-Mart Stores Inc, drug etalers such as Walgreens Co. ‘and food retalers such as The Kroger Co. In fiscal 2008, our ten lagest customers represented approximately 74% of toil ‘domestic oross sales, and our 20 largest customers represented approximately 84% of total domestic gross sales, which allows us o target our seling efforts to our key customers and customize programs to meet their needs. Our fiscal 2008 sales to Wat-Mart Stores, Inc. accounted for approximately 33% o total domestic gross sales. No cer customer accounts for more ‘than 10% of ou toll domestic gross sales. No international relalers aocounted for more than 10% of our total intemational {10ss sales in fiscal 2008. Consistent with industry precce, we do not operate under a long-term writen supply contract wih any of our customers, Sales and Distribution We have an estabished national sales and cstrbution organization tat sels to mass merchandiser, drug and food Falailers, We utiiz our national sales network, consisting prmariy of our ovm sales fare, to sell and distribute ou products, including newty acquires brands and product line extensions, while maintaining tight contots over our seling expenses. Our ‘experienced sales force of approximately 55 people serves all direct buying aocounts on an indvidul basis. For the more fragmented food channel and forthe smaller individual slores, we rely on a national network of regional brokers to provide fetal suppor. In excess of 85% of our domestic orders are received electronicaly through our electronic data interchange, or EDI, system, and accuracy for cur order fulfilment has been consistently high, Our sales department performs significant analysis heping both our sales personnel and customers understand sales pattems and create appropiate promotions and merchandising ads for our products. Although not contractually obigated 10 do so, in certain circumstances, we allow out ‘customers to return unsold merchandise, and for seasonal products we provide extended payment terms to cur customers. Intemational, our products are sold by national brokers in Canada and the U.K. and by dstbutors in Europe and Latin America. We have entered ino aistibution agreements with tid paty dstrbutors for Selsun in various intemational markets except Canada and the UK. Most of our products, incuding those manulactured by third party manutactuers, are shipped fom leased ‘warehouses located in Chattanooga, Tennessee. We aso use a third paty logistics service located in Caifomia to warehouse and distribute our products tothe wes! coast area ofthe United States. We use third party common carriers to transport our products. We do not generally experience wide variances in the amount of inventory we mainiain. At present, we fave no backlog of customer orders and are promptly meeting customer requirements. ‘Manufacturing and Quality Control ‘During fiscal 2008, we manufactured products representing approximately 67% of our domestic sales volume at our {wo Chattanooga, Tennessee, facies. The balance of our products are manufactured by tid party contract manufacturers induding our Gold Bond medicated powders, Icy Hot patches and sleeves, ACT. Herpecin, and our dietary supplements, including Dexatim products. We coniect with third party manufacturers to manuiacture products that are not compatbe with ‘ur existing manufacturing factes or which can be more cost-effectively manufactured by others. In certain cases, third party manufactures are not obigated under contracts that fix the term oftheir commitment, We believe we have adequate capacity to meet anicipated demand for our products through our own manufacturing facies and third party manufacturers To monitor the qualiy of our producis, we maintain an internal quality contol system supported by onsite microbiology and analytical laboratories, We have trained quality convo technicians who test our products and processes and ‘uid the products through the manufacturing cycle. Consultants also are employed from time to time to test our quality contro! Procedures and the compliance of our manufacturing operations with the United States Food and Orog Administration (‘FDA") feguiations. We audit our thd party manufacturers to monitor compliance with applicable current good manufacturing practices "GMPs') as defined by FDA regulations, We purchase raw materials and packaging materials from a number of third party suppliers primarily on a purchase ‘order basis. Except fora select few active ingrediens used in our Pamprin and Prémsyn PAS products, we ae not ited to & single source of supply forthe ingredients used in the manufacture of our products. Sales of our Pamprin and Prémsyn PMS products represented approximately 3% of cur consolidated total revenues in fscal 2008. In ation, we have a fimited 10souroe of supply for selenium sulfide, the active ingredient in Selsun Biue, As a result ofthe limited supply and increase in ‘worldwide demand for selenium metal, a major component in the manufacture of selenium sufide, our cost of selenium sulfide has been and is expected fo be voaile. We believe that our current and potential altemative sources of supply will be adequate to meet future product demands. Sales of our Selsun Ble products represented appronimatey 11% of our consolidated total venues in fsca! 2008, Research and Development We sive to increase the value of our base brends and obtain an increased market presence though produc ine catensions. We rely on inomal market research as well as consutans to identity new product formulations and tine eotensions thal we beleve appeal othe needs of consumers. Our growth strategy intudes an emphasis on new product development 25 evdenoed by our increased research and development spending and the expansion of our product evelopment staff. We currently employ approximately 34 people in our research and development department and also engage consultants from time to tne to provide expetse or research in apaticular produc area. Our product development expenditures were $5.7 milion in ical 2008 and $55 milion in cal 2007 Competition We compete in the OT heath care, toleties and dietary supplements markets. These markets are highly competitive and are characterized by te frequent intoducton of new products, inludng the migration of prescription drugs to the OTC market, often accompanied by mejor advertising and promotional suppor Our competitors include large ‘Phamaceutcal companies such as Johnson & Jonson, consumer products comparies such as Procer & Gamble Co, and Gietary supplements companies such as GlaxoSmithkine and Nature's Bounty, Inc, many of which have considerably eater financial and other resources and are not as highly leveraged as we are. Our competitors may be bette pastioned to spend ‘more on research and development, employ more aggressive pricing strategies, ublze greater purchasing power, buld stronger vendor relationships and develop broader distribution channels than us. In adton, our compettors nave oten been wiling o use aggressive spending on trade promotions and advertising a a strategy for building marketshare atthe expense of ther competitors, ncucing us. The private label or generic category has also become increasingly more compete in certain of our product markets. Our products continue to compete for shelf space among retailers who are increasingly ‘consolidating Trademarks and Patents (ur trademarks are of material importance to our business and among our most important assets. We own all of our ‘trademarks associated with brands that we currently market In fiscal 2008, substantaly all of ou total revenues were from Products bearing proprietary or licensed brand names, Accordingly, our future success may depend in part upon the good associated with our brand names, particulary Gold Bond, Saisun Be, ley Hot, ACT, Unisom and Cortizone-19, ‘Our principal brand names are registered trademarks in the United States and certain foreign courtries, We malnain or have applied for patent and copyright protection in the United States relating fo certain of our existing and proposed products and ‘processes. We also license from third parties other intelectual property that is used in certain of our products. The sale ofthese ‘products retes on our abity to maintain and extend cur supply and icensing agreements wih these third pares. Government Regulation ‘The U.S. manufacturing, distribution, processing, formulation, packaging, labeling and advertising of our products ‘are subject to regulation by federal agencies, including, but nat iid to; + the Food & Drug Adminstration (he FDA"): + the Federal Trade Commission the ‘FTC’ + the Drug Enforcement Administration (the ‘DEA + the Consumer Product Safety Commission (the “CPSC"); the United States Postal Service; the Enviconmental Protection Agency (‘EPA’); and the Occupational Safety and Heath Administration (OSHA). "‘These actives are also regulated by various agencies ofthe states, localities and foreign countries in which our products are sod. n partcular, the FDA regulates the safety, manufacturing, labeling and distribution of OTC drugs, medical devices, dietary supplements, funcional follies, and skin care products. In addition, the FC has primary jurisdiction to regulate the advertising of OTC drugs, medical devices, dietary supplements, functional totes and skin care products. in foreign counties these same acvlies may be regulated by ministries of heath, or other local regulatory agencies. The ‘manner in which products sod in foreign counties are registered, how they ae formulated, or what clas may be permited ‘may fer rom similar procucts and pracces inthe US. Under the Federal Food, Drug, and Cosmetic Act (‘FOC Act) all ‘new drugs’, including OTC products are subject to pre-market approval by the FDA under the new drug application ("NDA") process. The FDC Act defines a “new drug” asa drug thatis not generally recognized among scientficaly quafied experts as safe and efectve for use under the condibons slated in ts labeling. A drug might also be considered new if it hes not been used, outside of cinical investigation, toa material extent o for @ material ime under condiions desorbed fora product. A crug that is generally regarded as safe and eflecve is nota “new drug" and therefore does not require pre-market approval ‘The FDA has adopted an aiirstativ process, the OTC Drug Review, to determine which active ingredients and indications are safe and elective for use in OTC products. Wit the aid of ndapendent expert advisory review panels, the FDA develops rls, refered to as “monographs”, whith define cetegores of safe and effective OTC drugs. These monographs you dug ingredients into theapeutc classes such as OTC eternal analgesics. Products that comply wih monograph Condos donot require pre-market approval from the FOA. ‘The FDA has finalized monographs for certain categories of OTC drugs such as drug products for the con! of dandeut. I @ product is marketed boyond the scope ofa particular final monograph and without an approved NOA, such as if the manufacturer makes a label claim not covered by the monograph, the FDA will consider the product to be unapproved and mmisbranded and can take enforcement acon against the drug company and produc including, but not imited to, issuing a warning letter or initiating @ product seizure. In order to market a product whose active ingredients are not permitted by a fnal ‘monograph, @ company must submit an NDA to the FOA. ‘There are several categories of OTC drugs, such as extemal analgesics, for which the FDA has not completed its review. In such cases, the FDA has estabshed tentative final monographs. These tentative final monographs are similar to final monographs in thal they establish condiions under which OTC drugs can be marketed for certain uses without FDA pre- ‘marketing approval. The FDA generaly does not take enforcement action against an OTC drug subject to a tentative final ‘monograph unless there isa safely problem ora substantial effectiveness question. Te majority of our OTC drug produets are regulated pursuant tothe FDA monograph system. Many of our products are sold according to tentative final monogrephs. Therefore, we face the risk thatthe FDA could take acton if there is a Perceived safety oF effcacy issue wih respec to one of aur product ‘categories or nai these monographs with condons, ato which of our products do not comply. If any of our products were found not o be in compliance with a final monograph, we may be forced to reformulate or rlabel such products, if possible, or submit an NDA or an abbreviated NDA to continu to ‘market our existing fommulaton, The submission of an NDA would require the preparation and submission of circa test, wich would be time consuming and expensive, We may nol receive FDA approval of any NDA ina timely manner ora al. If we were notable to reformulate or relabel cur product or oblan FDA approval ofan ND, we would be required to discontinue seling th affected produc. Changes in monographs could also require us to change our product formulation o dosage form, revise our labeling, modify our producton process or provide addtional scientific Gata, any of which would involve addtional costs and may be prohibitive. For our OTC drug products that are sold according to final monographs, we cannot deviate from the conditons deserbed inthe fai monograph, such as changes in approved acive ingredient levels or labelng claims, unless we obtain pre-maketing approval om the FDA We have responded to certain questions received from the FDA wit respect to efficacy af pytilamine maleate, one Of the active ingredients used in certain ofthe Pamprin Menstual Pain Rete and Prémsyn PMS products. While we addressed all ofthe FO question in deta, the final monograph for menstrual drug products, which has not yet been issued, wil determine if the FDA considers pylamine maleate safe and effective for menstrual eit products. If pyrlaine maleate is ‘ot inched inthe final monograph, we would be requiced to reformulate the products fo continue to provide tre consumer with rmull-symptom rele! benefits. We believe tat any adverse fincing by the FOA would likewise affect our principal competitors in the menstrual product category and that finalization of the mensival products monograph isnot imminent 2Moreover, we have formulated altemative Pamorin products that fully comply with toth the intemal analgesic and menstrual product monographs. Sales of cur Pamprin Menstrual Pain Relief and Prémsyn PMS products represented approximately 3% ‘of cur consolidated total revenues in fiscal 2008, ‘We were noted in October, 2000 thatthe FOA denied @ ctizenpetton submited by Thompson Medical Company, Inc, the previous onner of Spatsoreme and Asparcreme. The peiton sought a determination that 10% tole sala, the active ingredient in Sporscreme and Asperreme, was cincaly proven to be an effective acve ingredient in extemal analgesic OTC drug products and should be included inthe FDA'S yetto-b finalized monograph for extemal anaigesis. We are working to develop altematefermulaons for Spertsoreme and Aspercreme inthe event thatthe FDA does not consider the avaiable cinical data to conclusively demonstrate the efcacy of tolaine salyate when the OTC extemal analgesic monograph is fnalized. I 10% trolaine sate isnot included in the final monograph, we woud tkely be required to ciscontnue these products as curently fomrulete afer expzalon of an antcipated grace per. tis occured, we beleve we could matte elated products as homeopathic products and could also reformulate them using oer ingredients included inthe FDA manograph. We boive thatthe monograph is unkely to become final and take effect before mi-2009, Sales of cur Sportscreme and Aspercreme produc represented approximately 5% of our consolidated total revenues in cal 2008. Certain of cur topical analgesic products are curenty marketed under an FDA tentative final monograph. In 2003, the FDA proposed thatthe final monogreph exclude extemal analgesic products in patch, plastr or pout fom, unless the FOA receives addtional data Supporting the safety and effcacy of these products. On October 14, 2003, we submited tothe FDA information regering the safety of our icy Hot patches and arguments to support the inclusion of patch products inthe final monograph. We also paricpated in an industy-wide effort coordinated by Consumer Healthcare Products Assocation (CCHPA' requesting that patches be inclued in the final monograph and seeking to estabish with the FDA a protool of ‘additonal research that would alow the patches to be marketed under the fnal monograph even fhe ii monogreph does ‘rot explcily alow them, The CHPA submission to the FDA was made on October 15, 003. The FDA has not responded to ‘ou or CHPA's submission, The most recent Unified Agenda of Federat Reguatory and Dereguatory Actions published inthe Federal Register provided a target ral monograph publication date of May 2009, the nal monograph excludes products in path, plaster or poutice form, we would have to fle and obtain approval fan NDA in oder to continue to marke the fey Hot, CCapzasin and Aspercrome patch products, the fey Hot Sleeve andlor similar davery systems under out other topical analgesic brands. In such case, we would have to cease marketing the existing products likely within one year from the elective date of the final monograch, or pending FDA review and approval of an NDA..The preparation of an NDA would key take us six to 24 months and would be expensive typically takes the FDA atleast 12 months to rule on an NDA once tis submited and there is no assurance that an NDA would be approved. Sales of cur fy Hot, Capzasin, and Aspercrome patches and cy Hot Sleeve products represented approximately 8% of our consolidated total revenues in sca! 2008 During the fraization of the monograph on sunscreen products, the FDA chose to hold in abeyance soectic requirements relating to the characterization of a product's ability to reduce UVA radiation. n September 2007, the FOR published a new proposed rule amending the prevousYy stayed final monograph on sunscreens to incude new formulation ‘options, labeling requirements and testing standards for measuring UVA protection and revised testing for UVB protection ‘When implemented, the final rue wil require all sunscreen manufacturers to conduct new testing and revise the labeling of their products within elghteen months ater issuance ofthe final rie. We vil be required fo take such actions foc our Buliog prot in, The Dietary Supplement Heath and Education Act of 1994 CDSHEA') was enacted on October 25, 1984. DSHEA ‘amends the FOC Act by defining dietary supplements, which include lain, minerals, amino acids, nurtonal supplements, herbs and botanicals, asa new category of food separa from conventional food. DSHEA provides a regulatory framework to ensute sal, qually citar supplements and to foster the dissemination of accurate infomation ebout such products. Under SHEA, the FDA is generaly probited fom requaing detary suplemenls as food addves or as drugs unless product dais, such as claims that a product may ciagnose, mga, cue or prevent an Ines, csease or malay, peril the FDA fo ‘tach drug statu o a product In such cas, the FDA could require prematkel approval to sell the produc. Manufacturers ‘ate not requied to obtain ror FDA approval before producing or seling a cietary supplement unless the ingredient is ‘considered new” or was not onthe market as of October 15,1994, The FDA has promulgated regulations relating to the manulacturing process for drugs, which are known as curent ‘GMP’. In June 2007, the FDA pubished the final rule on GMP’s for dietary supplements, with an effecive date of June 25, 2008. We source all of our dietary supplement products from outside suppliers, including Dexatrim, New Phase, Garque, 3‘Moiatonex, and Omnigest. As part ofits reguatory author, the FDA may periodically conduct audi ofthe physical facies, ‘machinery, processes and procedures that wo, or our suppliers, use to manufacture products, The FOA may perform these ‘audits at any ime without advanced notice. AS a resul of these audits, the FDA may order us, or cur suppliers, to make ‘certain changes in manutacturing facilities and processes, We may be required to make adcional expenditures to comply with these orders or the new GMP requirements, or possibly discontinue seling certain products until we, of our suppkers, comply wit these orders and requirements. As a result, our business could be adversely affected. In 1997, the EDA published a proposed rule on the use of dietary supplements contairing ephectine alkaloids. In June 2002, the United States Department of Heath and Human Services (HHS') proposed an expanded scenic evaluation ‘of Ephedra which led to the issuance of a report ty the RAND-based Southem Calfomia Evidence-Based Pracice Center (he “RAND Report), The RAND Report concluded that ephedrine, ephedrine plus caffeine and Ephedra-contaning dletary supplements wih or without herbs containing caffeine al promote modest amounts of weight lss over the short term and use ‘of Ephedra, or ephedrine plus caffeine, is associated with an increased risk of gastrontestna, psychiatric and autonomic symptoms, The adverse event reports contained a smaller number of more serious adverse events. Given the small number of such everts, the RAND Report conciuded thet further study would be necessary fo determine wheter consumption of Ephedra, or enhedtne, may be causally related to these serous adverse events. In connection with the RAND Report, HS sought public comment on whether additonal measures are required conceming the sale and distribution of dietary supplements containing ephedrine axaods (on December 30, 2003, the FDA issued a consumer alert onthe safety of tary supplements conning ephedine atkalods and on February 6, 2004 pubished a final rule with respect to these produts. The final rule profits the sae of dietary supplements contzning ephodsne alkaloids because such supplements present an unreasonable risk of iness or injury. The final rie became etfectve on Apri 1, 2004. We dscomtinued the manufacturing and shipment of Dexatrim containing ephedrine in September 2002. ‘The FDA also regulates some of cur products as cosmetics or drugcosmetics. There are fewer regulatory ‘exuiremens for cosmetics than for drugs or dietary supplements. Cosmetics marketed inthe United States must comply with the FOC Act the Fair Packaging and Labeling Act and the FDA's implementing regulations. Cosmetics must also comely with quality and labeling requirements proscribed by the FDA In alton, several of cur products are subject o product packaging regulation by the CPSC and the FOA. Combination products can be reguated via a memorandum of understanding between federal agencies, in February 2006, we launched Buitfog Mosquito Coast, a combination of sunscreen and insect repellent. The sunscreen labotng is regulated by the FDA in ts sunsereen monograph, butte insect repellent, IR-3535, and Its labeling, require pre-market safety ‘and effcacy testing and approval by the EPA and all $0 states (and US. Terris). Bulfog Mosquito Coast received approval from all states and the EPA prior to launch. Further, the FDA announced its intention in its November, 2005 United ‘Agenda fo regulate, under the monograph system, the combination of sunscreens and insect repelens in a notice of proposed rulemaking yet to be published. Any fra rule making is yeas in the future end the FDA might grandfather existing products or otherwise allow time for their compliance. (Our business is also regulated by the Caitoia Sale Drinking Water and Toxic Enforcement Act of 1986, known as Proposition 65. Proposition 65 prohibits businesses from exposing consumers to chenicals thatthe site has determined cause cancer or reproduction toxicity without fst giving far and reasonable warning unless the level of exposure to the carcinogen o reproductive loxcan falls below prescribed levels From time to ime, one or more ingredients in our products could become subject to an inquiry under Proposition 65. fan ingredient ison the state's list 2s a carcinogen, it is possible that claim could be brought, n which case we would be required to demonstrate that exposure is below a “ro significant risk” level for consumers. Any such claims may cause us to incur significant expense, and we may face monetary penalies or injunctive reli, oF both, or be required to reformulate our product to acceptable levels. The State of Calfornia under Propostion 65 i also considering the inclusion of titanium doxide on the state's Kst of suspected cerinagens. Titanium cloxide has 2 long history of widespread use as an excipient in prescription and OTC pharmaceuteas, cosmetics, dietary supplements and skin care products and isan active ingredient in our Buttog Superblock products. We have parcpated in ‘an industy-wide submission to the State of Calioria,faitated through CHPA, presenting evidence that titanium dioxide presents ‘no significant is” to consumers. 6Finally, the FA regulate the qualty ofl irished drug, medical device, and food products under GMP’. As par of its regulatory authority, the FDA may periodtally conduct audits of the physical feces, machinery, processes. and ‘procedures that we, or our suppers, use fo manufacture products. The FDA may perform these audits at anytime without advanced notice. In February 2006, we registered as a medical device manufacturer withthe FDA in connecion with our sale of cy Hot Pro Therapy products. It might be expected that we could be aucied as @ new device manufacturer under medical device GMP's, Working with consutans we have insttuted medical device GMPs pursuant to applicable porions of the medical device Cualty System Reguaton, or QSR, As a rest of any audits, the FDA may order us. o our supplier, to make certain changes in manufacturing facies and prooesses, We may be required to make adctional expenditures to comply wih these orders, or possibly dscontinue seling certain products uni we. or our supple, compy wth these orders. Asa result, ‘ur business could be adversely affected. In December 2006, the Dietary Supplement and Nonprescription Drug Consumer Protection Act was signed info law wih an effective date of December 22, 2007. This new law requires the mandatory reporting of serious adverse events and speci recor keeping requirements for dietary supplements and non-prescription crags marketed without an approved application. The FOA has broad regulatory and enforcement powers. If the FDA determines that we have failed to comply with applicable regulatory requirements, it can impose a variety of enforcement actions from public waming letters, fines, injunctions, consent decrees and cil penalies fo suspension or delayed issuance of approvals, seizure or recall of our products, total or partial shutdown of production, withdrawal of approvals or clearances already granted, and criminal prosecution. The FDA can also require us to repair, replace or refund the cost of devices that we manufactured or distributed. {any ofthese events were to occur, it could materaly adversely affect us. Environmental Matters ‘We continually assess the compliance of our operations with applicable federal, state and local environmental laws. ‘and regulations. Our policy isto record fables for environmental matters when loss amounts are probable and reascnably determinable. Our manufacturing site utlizes chemicals and other potentially hazardous materials and generates both hazardous and non-hazardous waste, the transportation, treatment, storage and disposal of which are regulated by various {governmental agencies We have engaged environmental consultants on a reguar bass to assist wih our compance efforts. We believe we are curenty in compiance with all applicable environmental permits and are aware of our responsibilities under appiceble environmental laws. Any expenditure necessitated by changes in law and pemmiting requirements cannot be predicted at this time, athough such costs are not expected to be material to our financial poston, results of operations or cash fows. In late 2005, we began the manufacture of Bulrog Mosquito Coast at our Chattanooga, Tennessee plant. Bulliog Mosquito Coast is a combination of sunscreen and insect repellent, The EPA has primary jurstiction over Insect repellant and combination insect repellant products containing sunscreens, such as Buliog Mosquito Coast. Both products and manutactuing establishments must be registered with the EPA, ‘The handling, disposal, and environmental exposure ofthe insect repellent, IR-3535, is strictly reguated by the EPA under the Clean Waters Act. Any falure to comply with appicable regulations with respect to the use of 1R-2535 might result in EPA action against us, ntuding fines or injunctive action, Employees ‘As of November 30, 2008, we employed approximately 488 people on a ful-time bass and 10 people ona part-time basis in the United States. in addition, at the end of fiscal 2008, we employed approximately 24 people at our foreign ‘subsidiaries offices. Our employees are not represented by any organized labor union, and we consider our labor relations to bbe good. Market Data ‘We use market and industry data throughout this Annual Report on Form 10-K and the documents incorporated by Teference herein, which we have obtained ffom market research, publiey avaiable information and industry publications. ‘These sources generaly state thatthe information that they provide has been oblained from sources beleved to be reliable, but thatthe accuracy and completeness of such information are not queranteed. The market and industy data is ofen based 6‘on industry surveys andthe preparers’ experence inthe industry. Similar, athough we believe thatthe surveys and market research tha! thers have performed are reliable, we have not independently verfed ths information. In particule, market share information has been coordinated and prepared for us by AC. Nielsen al our request based on market segments that we defined and for which we nave paid customary fees, Therefore, such data, incuding the market category delineatons that form the bass for such daa, are not necessarily representative of results that would have been oblaned from an independent source. Furthermore, the market share information prepared by AC. Nielsen does not incude data from certain of our customers, most notably Wal-Mart Stores, In. Financial information on Products and Geographical Areas For nancial informaton on our product categories and geographical areas, see note 11 to our consolidated financial statements. ‘Additional information ‘Our intemet website addcess is www.chattemcom, We make avaliable free of charge on or through our website our ‘annual reports on Form 10+, quarterly reports on For 10-Q, curent reports on For &K, reports fled pursuant to Section 16, the proxy statement to our annual shareholders meeting and all amendments to those reports @s soon as reasonably praccabe ater such materials electronical fled with or fuished tothe Secures and Exchange Commission, We aso ‘make available on our website cur Code of Business Conduct and Ethics, our Audit Commitee Charter and our Compensation Committee Charter. The information found on cur website shal not bo deemed incorporated by reference into tis annual report on Form 10-K o fled withthe Secures anc Exchange Commission and does not constitute a part of his annual report on Form 10K, tem 1A, Factors ‘Our business is subjct to a number of risks. Some of the risks associated with our operations are described in the "Competition * Government Reguation,* “Environmental,” and "Manufacturing and Quality Control" portions ofthis Form 10.K. {mn adition to the other information contained in this Form 40-K, the folowing risk factors shouldbe carefully considered, We face significant competition in the OTC health care, toiletries and dietary supplements markets. ‘The OTC heath care, eres and etary supplements markets are highly competitive and are characterized by the ‘tequent inroducton of new products, meucing the migron of prescription drugs to the OTC marke, often accompanied by ‘mejor advertsing and promotional suppor. These introductions may adversely affect our business especialy because we compete in catagories in which product sales are highly infuenced by advertising and promotions. Our compottrsincude large pharmaceutical companies such a Johnson & Johnson, consumer products companies such 2s Procter & Gamble Co, ‘and etary supplements companies such 2s GlaxoSmithKIine and Nature's Bounty, Inc, many of wich have considerably steatr financial and other resources than we do and are no as highly leveraged as we ae. These compeltors are thus better Positioned to spend more on research and development, employ more aggressive pcg stategies, ule greater purchasing Power, bid stronger vendor relationships and develop broader distribution channels than us. In adn, cur competitors have ofen been wing to use aggressive spending on trade promations and advertising as a stategy for buling market share at te expense of their competirs including us. The private lebel cr ganic catagory 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 ae atracve tc consumer or ar unable to allocate suficient resources to effectively adverse and promote our products £0 that they achieve wide spread market acceptance, we may nat be able fo compete effectnely, and our operating resuls and fnancal condition may be adversely affected. ‘Our business could be adversely affected by a prolonged downtum or recession in the United States andlor the other ‘countries in which we conduct significant business, | prolonged economic downtum or recession in the United States or any ofthe other counties in which we do signicant business could materialy and adversely affect our business, financial condition and resis of operations, In 6