CHATTEM INC - FORM 10-K - January 28, 2010

Attached files

file	filename
EX-32 - 906 CERTIFICATION - CHATTEM INC	exh32_16678.htm
EX-21 - SUBSIDIARIES LIST - CHATTEM INC	exh-21_16678.htm
EX-99.1 - SCHEDULE II - CHATTEM INC	exh99-1_16678.htm
EX-23.1 - CONSENT - CHATTEM INC	exh23-1_16678.htm
EX-31.2 - 302 CERTIFICATION - CFO - CHATTEM INC	exh31-2_16678.htm
EX-31.1 - 302 CERTIFICATION - CEO - CHATTEM INC	exh31-1_16678.htm
EX-10.1 - SECOND AMENDMENT LICENSE AGREEMENT - CHATTEM INC	exh10-1_16678.htm
EX-10.3 - MASTER TRADEMARK LICENSE AGREEMENT - CHATTEM INC	exh10-3_16678.htm

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, 2009

Commission file 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:

Title of Each Class	Name of Each Exchange on Which Registered
None	None

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, without par value

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

YES þ NO ¨

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.

YES ¨ NO þ

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days.

YES þ NO ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files)

YES ¨ NO ¨

Indicate by check mark whether the registrant is 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 of the Exchange Act. (Check one):

Large accelerated filer þ

Non-accelerated filer  (Do not check if a smaller reporting company)

Accelerated filer 

Smaller reporting company 

Indicate by check mark whether the registrant is a shell company (as defined in rule 12b-2 of the Act). YES  NO þ

As of May 31, 2009, the aggregate market value of voting and non-voting shares held by non-affiliates was $1,096,840,387. For the sole purpose of this computation, all executive officers and directors of the registrant have been deemed to be affiliates of the registrant.

As of January 20, 2010, 18,979,170 shares of common stock were outstanding.

DOCUMENTS INCORPORATED BY REFERENCE:

Portions of the registrant’s Proxy Statement for the registrant’s 2010 Annual Meeting of Shareholders (the “2010 Proxy Statement”) are incorporated by reference in Part III of this Form 10-K to the extent described herein.

CHATTEM, INC. TABLE OF CONTENTS PART I
Item		Page

1.	Business	3
1A.	Risk Factors	18
1B.	Unresolved Staff Comments	28
2.	Properties	29
3.	Legal Proceedings	29
4.	Submission of Matters to a Vote of Securities Holders	29

	PART II
5.	Market for the Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities	30
6.	Selected Financial Data	31

7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	31
7A.	Quantitative and Qualitative Disclosures about Market Risk	47
8.	Financial Statements and Supplementary Data	48
9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	94
9A.	Controls and Procedures	94
9B.	Other Information	95

	PART III
10.	Directors, Executive Officers and Corporate Governance	95
11.	Executive Compensation	98
12.	Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters	98
13.	Certain Relationships and Related Transactions, and Director Independence	98
14.	Principal Accounting Fees and Services	98

	PART IV
15.	Exhibits and Financial Statement Schedules	99

PART I

Item 1. Business

Except as otherwise indicated, all references in this Form 10-K to “we”, “us”, “our” or “Chattem” refer to Chattem, Inc. and our subsidiaries. In addition, in this Form 10-K, our fiscal years ended November 30, 2007, November 30, 2008 and November 30, 2009 are referred to as fiscal 2007, fiscal 2008 and fiscal 2009, respectively. Our fiscal year ending on November 30, 2010 is referred to as fiscal 2010. Brand names that are italicized in this Form 10-K refer to trademarks that we own.

General

Founded in 1879, we are a leading marketer and manufacturer of a broad portfolio of branded over-the-counter (“OTC”) healthcare products, toiletries and dietary supplements in such categories as medicated skin care, topical pain care, oral care, internal OTC, medicated dandruff shampoos, dietary supplements and other OTC and toiletry products. Our portfolio of products includes well-recognized brands such as:

•

Gold Bond, Cortizone-10 and Balmex - medicated skin care;

•

Icy Hot, Aspercreme and Capzasin - topical pain care;

•

ACT and Herpecin-L - oral care;

•

Unisom, Pamprin and Kaopectate - internal OTC;

•

Selsun Blue - medicated dandruff shampoos;

•

Dexatrim, Garlique and New Phase - dietary supplements; and

•

Bullfrog, UltraSwim and Sun-In - other OTC and toiletry products.

Our products target niche markets that are often outside the focus of larger companies where we believe we can achieve and sustain significant market share through product innovation and strong advertising and promotion support. Many of our products are among the U.S. market leaders in their respective categories. For example, our portfolio of topical pain care brands, our Cortizone-10 anti-itch ointment and our Gold Bond medicated body powders have the leading U.S. market share in these categories. We support our brands through extensive and cost-effective advertising and promotion. We sell our products nationally through mass merchandiser, drug and food channels, principally utilizing our own sales force.

Our experienced management team has grown our business by acquiring brands, developing product line extensions and increasing market penetration of our existing products. We will continue to seek opportunities to acquire attractive brands in niche markets.

Competitive Strengths

We believe that the following key competitive strengths are critical to our continuing success:

Diverse and broad portfolio of well-recognized branded products. We currently market a diverse and broad portfolio of 26 brands in a variety of different product categories. Our products are marketed under well-recognized brand names, which include lcy Hot, Gold Bond, Selsun Blue, ACT, Cortizone-10 and Unisom. Our presence in diverse product categories reduces our exposure to changing consumer demand or weakness in any single category.

Significant presence in niche markets. We acquire and develop brands that compete in small to medium sized niche markets where we believe we can achieve significant market presence and build brand equity. Our products often face less competitive pressures because we focus on markets that are frequently outside the core product areas of larger consumer products and pharmaceutical companies. This focus provides us with the opportunity to develop strong brand equity, identify and respond to consumer trends and leverage our strong selling and distribution capabilities in these markets.

High margins and efficient operating structure. We are able to achieve high gross margins as a result of our ability to build and maintain brand equity, our significant market presence in niche markets and efficiencies in purchasing, manufacturing and distribution. In addition, we seek to tightly control our expenses, which strengthens our operating margins. Our high margins and resulting strong cash flow allow us to withstand temporary fluctuations in our product markets that could have adverse effects on our business.

Proven advertising and promotion strategy. We aggressively build awareness and consumer loyalty of our brands through extensive and cost-effective advertising strategies that emphasize the competitive strengths of our products. We rely principally on television advertising and, to a lesser extent, radio and print advertising and promotional programs. We strive to achieve cost efficiencies in our advertising by being opportunistic in our purchase of media and through control of our production costs. We also maintain the flexibility to allocate purchased media time among our key brands to respond quickly to changing consumer trends and to support our growing brands. We believe our well-developed advertising and promotion platform allows us to quickly and efficiently launch and support newly acquired brands and product line extensions as well as increase market penetration of existing brands. Advertising and promotion expenditures represented approximately 23% of our total revenues in fiscal 2009. Given the importance of our products’ brand equity we expect to maintain a significant level of spending on advertising and promotion.

Established national sales and distribution network. We have an established national sales and distribution network that sells to mass merchandiser, drug and food retailers such as Wal-Mart Stores, Inc., Walgreens Co. and The Kroger Co. In fiscal 2009, sales to our top ten customers constituted approximately 74% of our total domestic gross sales, which allows us to target our selling efforts to our key customers and tailor specific programs to meet their needs. Our fiscal 2009 sales to Wal-Mart Stores, Inc. accounted for approximately 33% of our total domestic gross sales. Through targeted sales and utilization of our established distribution network, including our 56 person sales force, we believe we can effectively sell and distribute our products, including newly acquired brands and product line extensions, while maintaining tight controls over our selling expenses.

Focused new product development. We strive to increase the value of our brands while obtaining an increased market presence through product line extensions. In fiscal 2009, our product development expenditures were $6.7 million. We rely on internal market research as well as consultants to identify new product formulations and line extensions that we believe appeal to the needs of consumers. In fiscal 2009, we introduced 13 new product line extensions: ACT Total Care, Gold Bond Sanitizing Moisturizer, Gold Bond Ultimate Protecting Lotion, Gold Bond Anti-Itch Lotion, Gold Bond Foot Pain Cream, Gold Bond Ultimate Concentrated Therapy, Cortizone-10 Cooling Gel, Cortizone-10 Easy Relief Applicator, Icy Hot No-Mess Applicator, Icy Hot Medicated Roll, Capzasin Quick Relief, Selsun Blue Itchy Dry Scalp and Dexatrim Max Slim Packs.

Business Strategy

Our strategy to achieve future growth is to generate new sales through strong marketing and promotional programs, new product development and the acquisition of new brands.

Brand management and growth. We seek to increase market share for our major brands through focused marketing of our existing products and product line extensions while maintaining market share for our smaller brands. Our marketing strategy is to position our products to meet consumer preferences identified through extensive use of market and consumer research. We intend to channel advertising and promotion resources to those brands that we feel exhibit the most potential for growth. We also seek continued growth through our new product line extension activities as evidenced by our increased research and development spending and the expansion of our product development staff. In addition, we continually evaluate the profit potential of and markets for our brands and, in instances where our objectives are not realized, will dispose of under-performing brands and redeploy the resulting cash assets.

Strategic acquisitions. We intend to identify and acquire brands in niche markets where we believe we can achieve a significant market presence through our established advertising and promotion platform, sales and distribution network and research and development capabilities. We target brands with sales that are responsive to increased advertising support, provide an opportunity for product line extensions through our research and development efforts and have the potential to meet our high gross margin goals. On January 2, 2007, we acquired the U.S. rights to the following five consumer and OTC brands from Johnson & Johnson (“J & J Acquisition”): ACT, Unisom, Cortizone-10, Kaopectate and Balmex. Also in fiscal 2007, we acquired

the worldwide trademark and rights to sell and market ACT in Western Europe from Johnson & Johnson (“ACT Acquisition”). We will continue to seek opportunities to acquire attractive brands in niche markets.

Developments During Fiscal 2009

Products

In fiscal 2009, we introduced the following 13 product line extensions: ACT Total Care, Gold Bond Sanitizing Moisturizer, Gold Bond Ultimate Protecting Lotion, Gold Bond Anti-Itch Lotion, Gold Bond Foot Pain Cream, Gold Bond Ultimate Concentrated Therapy, Cortizone-10 Cooling Gel, Cortizone-10 Easy Relief Applicator, Icy Hot No-Mess Applicator, Icy Hot Medicated Roll, Capzasin Quick Relief, Selsun Blue Itchy Dry Scalp and Dexatrim Max Slim Packs.

2.0% Convertible Notes

In December 2008 we issued an aggregate of 487,123 shares of our common stock in exchange for $28.7 million in aggregate principal amount of our outstanding 2.0% Convertible Senior Notes due 2013 (“2.0% Convertible Notes”). Upon completion of the transaction, the balance of the remaining 2.0% Convertible Notes was reduced to $96.3 million outstanding. In connection with this transaction, we retired a proportional share of the 2.0% Convertible Notes debt issuance costs and recorded the resulting loss on early extinguishment of debt of $0.7 million in the first quarter of fiscal 2009.

Stock Repurchase

During fiscal 2009, we repurchased 625,642 shares of our common stock under our stock repurchase program for $34.6 million at an average price per share of $55.36. Effective September 30, 2009, our board of directors increased the authorization for us to repurchase shares of our common stock to $100.0 million under the terms of our existing stock repurchase program.

7.0% Senior Subordinated Notes Repurchase

During fiscal 2009, we repurchased $17.3 million of our 7.0% Senior Subordinated Notes (“7.0% Subordinated Notes”) in open market transactions at an average premium of 0.9% above the principal amount of the 7.0% Subordinated Notes. In connection with the repurchase of the $17.3 million of 7.0% Subordinated Notes, we retired a proportional share of the related debt issuance costs. The premium paid for the $17.3 million of 7.0% Subordinated Notes combined with the early extinguishment of the proportional debt issuance costs resulted in a loss on extinguishment of debt of $0.9 million.

Credit Facility Amendment

Effective September 30, 2009, we entered into an amendment to our Credit Facility (see note 5 in Notes to Consolidated Financial Statements) that, among other things, extended the maturity date of the revolving credit facility portion of our Credit Facility to January 2013, increased the applicable interest rates on the revolving credit facility portion of our Credit Facility and increased our flexibility to repurchase shares of our common stock and our 7.0% Subordinated Notes.

Manufacturing Expansion

During the third quarter of fiscal 2009, we began construction on a manufacturing facility in Chattanooga, Tennessee that is expected to be completed during the fourth quarter of fiscal 2010. The purpose of the facility is to allow for the internal manufacturing of ACT and certain products marketed under our other brands.

Brand Impairment

distribution with certain of our retail customers as a result of declining sales. The fair value used to determine the impairment charge was calculated using the discounted cash flow valuation methodology and was compared to the respective book value carrying amount of those brands to determine the impairment charge. The aggregate remaining book value carrying amount for those brands, after giving consideration to the impairment write-down, is $11.3 million.

Subsequent Event

Agreement and Plan of Merger

On December 20, 2009, we entered into an agreement and plan of merger (the “Merger Agreement”), with sanofi-aventis, a French société anonyme (“sanofi”), and River Acquisition Corp., a Tennessee corporation and an indirect wholly-owned subsidiary of sanofi (“Merger Sub”), pursuant to which, among other things, Merger Sub agreed to commence a cash tender offer (the “Tender Offer”) to acquire all outstanding shares of our common stock, together with the associated rights to purchase our Series A Junior Participating Preferred Stock issued under the Rights Agreement, dated as of January 27, 2000, between us and SunTrust Bank, Atlanta, as rights agent, as amended (the “Rights Agreement”), for $93.50 per share of common stock, net to the sellers in cash without interest, less any required withholding taxes (the “Offer Price”). The Merger Agreement also provides that following consummation of the Tender Offer, Merger Sub will be merged with and into us (the “Merger”), with our company surviving the Merger as an indirect wholly-owned subsidiary of sanofi. At the effective time of the Merger, all remaining outstanding shares of common stock not tendered in the Tender Offer (other than shares of common stock owned by us, sanofi or any of sanofi’s subsidiaries) will be cancelled and converted into the right to receive the same Offer Price paid in the Tender Offer. All unvested stock options representing the right to purchase our common stock will vest and become exercisable on the date the Tender Offer is consummated. At the effective time of the Merger, each then outstanding option will be cancelled and will represent the right to receive an amount in cash equal to the excess, if any, of the Offer Price over the exercise price of such option.

The Tender Offer commenced on January 11, 2010 and is scheduled to expire at 12:00 midnight, New York City time, on February 8, 2010, unless extended. In the Tender Offer, each share of common stock accepted by Merger Sub in accordance with the terms and conditions of the Tender Offer will be exchanged for the right to receive the Offer Price. Sanofi shall cause Merger Sub to accept for payment, and Merger Sub shall accept for payment, all shares of common stock validly tendered and not validly withdrawn, pursuant to the terms and conditions of the Tender Offer, promptly following the Tender Offer’s expiration date.

Merger Sub’s obligation to accept for payment and pay for all shares of common stock validly tendered and not validly withdrawn pursuant to the Tender Offer is subject to the condition that the number of shares of common stock validly tendered and not validly withdrawn together with any shares of common stock already owned by sanofi and its subsidiaries, represents at least that number of shares of common stock required to approve the Merger Agreement, Merger and the other transactions contemplated by the Merger Agreement pursuant to our organizational documents and the Tennessee Business Corporation Act, on a fully-diluted basis (as defined in the Merger Agreement) (the “Minimum Condition”) and certain other customary conditions as set forth in the Merger Agreement.

We have also granted to sanofi an irrevocable option (the “Top-Up Option”), which sanofi may exercise immediately following consummation of the Tender Offer, to purchase from us the number of shares of common stock that, when added to the shares of common stock already owned by sanofi or any of its subsidiaries following consummation of the Tender Offer, constitutes one share of common stock more than 90% of the shares of common stock then outstanding on a fully-diluted basis (as defined in the Merger Agreement). If sanofi, Merger Sub and any of their respective affiliates acquire more than 90% of the outstanding shares of common stock, including through exercise of the Top-Up Option, the Merger will be effected through the “short form” procedures available under Tennessee law.

The Merger Agreement contains certain termination rights for sanofi and us including, with respect to our company, in the event that we receive a superior proposal (as defined in the Merger Agreement). In connection with the termination of the Merger Agreement under specified circumstances, including with respect to our entry into an agreement with respect to a superior proposal, we may be required to pay to sanofi a termination fee equal to approximately $64.6 million.

following consummation of the Tender Offer, with the funds required to (i) make payments with respect to the Convertible Notes, (ii) redeem the 7% Subordinated Notes, (iii) pay all outstanding amounts under the Credit Facility and (iv) pay amounts owed in connection with the unwinding of the warrants sold in connection with the issuance of the Convertible Notes, if any.

The foregoing description of the Merger Agreement has been provided solely to inform investors of its terms. The representations, warranties and covenants contained in the Merger Agreement were made only for the purposes of such agreement and as of specific dates, were made solely for the benefit of the parties to the Merger Agreement and may be intended not as statements of fact, but rather as a way of allocating risk to one of the parties if those statements prove to be inaccurate. In addition, such representations, warranties and covenants may have been qualified by certain disclosures not reflected in the text of the Merger Agreement, and may apply standards of materiality in a way that is different from what may be viewed as material by shareholders of, or other investors in, Chattem. Our shareholders and other investors are not third-party beneficiaries under the Merger Agreement and should not rely on the representations, warranties and covenants or any descriptions thereof as characterizations of the actual state of facts or conditions of Chattem, sanofi, Merger Sub or any of their respective subsidiaries or affiliates. We acknowledge that, notwithstanding the inclusion of the foregoing cautionary statements, we are responsible for considering whether additional specific disclosures of material information regarding material contractual provisions are required to make the statements in this Form 10-K not misleading.

Amendment to Rights Agreement

In connection with the Merger Agreement and the transactions contemplated thereby, we have amended the Rights Agreement (the “Rights Agreement” and such amendment; the “Amendment”) to provide that (i) none of sanofi, Merger Sub or their subsidiaries, affiliates or associates (each as defined in the Rights Agreement) shall be an Acquiring Person (as defined in the Rights Agreement) under the Rights Agreement by reason of the adoption, approval, execution, delivery, announcement or consummation of the transactions contemplated by the Merger Agreement (an “Exempt Event”), (ii) neither a “Stock Acquisition Date” nor a “Distribution Date” (each as described in the Rights Agreement) shall occur by reason of an Exempt Event, (iii) neither a “Section 11(a)(ii) Event” nor a “Section 13 Event” (each as described in the Rights Agreement) shall occur by reason of an Exempt Event, and (iv) the “Final Expiration Date” shall be extended to the earlier of (1) 5:00 P.M. Chattanooga, Tennessee time on May 30, 2010 or (2) immediately prior to the effective time of the Merger.

The Amendment also provides that if for any reason the Merger Agreement is terminated in accordance with its terms, the Amendment will be of no further force and effect and the Rights Agreement shall remain exactly the same as it existed immediately prior to the execution of the Amendment.

Agreements with Named Executive Officers

In connection with the Merger Agreement and the transactions contemplated thereby, on December 20, 2009, we and each of our named executive officers (Zan Guerry, Robert E. Bosworth, Theodore K. Whitfield, Jr. and Robert B. Long) signed an amendment to the respective officer’s existing severance agreement with us. On December 20, 2009, we entered into a conforming amendment with Mr. Guerry to Mr. Guerry’s existing employment agreement with us (collectively with the severance agreement amendments noted above, the “Severance Amendments”). The Severance Amendments will become effective on the date on which shares of common stock are purchased in accordance with the terms of the Tender Offer, subject to the completion of the Merger. The Severance Amendments to Messrs. Guerry, Bosworth, and Whitfield’s respective agreements limit the circumstances under which severance may be paid to (i) involuntary termination of the executive’s employment without cause by us or (ii) termination by the executive due to specified material adverse changes in the executive’s employment relationship with us. By entering into these Severance Amendments, Messrs. Guerry, Bosworth and Whitfield have waived their previously existing right to resign and receive severance between the 180th day and the 240th day following the “Change in Control” of our company, which would include the purchase of shares of common stock in the Tender Offer. The amendment to Mr. Long’s severance agreement changed the circumstances in which severance may be paid to him, with the result that these circumstances are consistent with those in Messrs. Guerry’s, Bosworth’s, and Whitfield’s amended severance agreements. The Severance Amendments to Mr. Guerry’s and Mr. Long’s severance agreements specify that their respective severance payments will be reduced to the extent necessary to avoid the triggering of excise tax under Section 4999 of the Internal Revenue Code.

Amendments to Bylaws

In connection with the Merger Agreement, we have agreed to amend our Amended and Restated Bylaws, as amended (the “Bylaws”), effective upon sanofi’s request but no sooner than the consummation of the Tender Offer. Pursuant to the Merger Agreement, upon consummation of the Tender Offer, sanofi will be entitled to designate 50% of the members of our board of directors. The amendment to the Bylaws will (i) fix the size of the board of directors at eight directors, (ii) change the voting requirements such that any act of the board of directors requires the affirmative vote of at least a majority of the directors constituting the entire board of directors and (iii) change the quorum requirements such that at least 50% of the directors present for the purposes of determining a quorum at any meeting of the board of directors or any committee thereof must be sanofi’s designees.

Products

We currently market a diverse and broad portfolio of branded OTC healthcare products, toiletries and dietary supplements in such categories as medicated skin care, topical pain care, oral care, internal OTC, medicated dandruff shampoos, dietary supplements and other OTC and toiletry products. Our branded products by category consist of:

Category and Brands

Product Description

Medicated Skin Care

Gold Bond

Medicated powder, cream, lotion, sanitizer, first aid and foot care products

Cortizone-10

Hydrocortisone anti-itch

Balmex

Diaper rash

Topical Pain Care

Icy Hot

Dual action muscular and arthritis pain reliever

Aspercreme

Odor-free arthritis pain reliever

Flexall

Aloe-vera based pain reliever

Capzasin

Deep penetrating, odor-free arthritis pain reliever

Sportscreme

Odor-free muscular pain reliever

Arthritis Hot

Value-priced arthritis pain reliever

Oral Care

ACT	Anti-cavity mouthwash/mouth rinse

Herpecin-L

Cold sore lip treatment

Benzodent

Denture pain relief cream

Internal OTC

Unisom

OTC sleep-aid

Pamprin

Menstrual pain reliever

Prēmsyn PMS

Premenstrual pain reliever

Kaopectate

Anti-diarrheal remedy

Medicated Dandruff Shampoos

Selsun Blue

Medicated dandruff shampoos

Dietary Supplements

Dexatrim

Diet pills

Garlique

Cholesterol health supplement

New Phase

Menopausal supplement

Melatonex

Natural sleep aid

Omnigest EZ

Digestive aid

Other OTC and Toiletry Products

Bullfrog

Sunscreens

UltraSwim

Chlorine-removing shampoo and conditioner

Sun-In

Spray-on hair lightener

Mudd	Facial masque

Medicated Skin Care

The Gold Bond brand competes in numerous product categories with specially formulated products for both adults and babies, including body powder, therapeutic hand and body lotions, sanitizing moisturizer, foot care and first aid. Gold Bond has long been the number one selling brand of medicated body powder domestically, and its strong brand equity among consumers has allowed us to successfully launch new line extensions, including the Gold Bond Ultimate line and most recently Gold Bond Sanitizing Moisturizer.

Initially launched in fiscal 2003, Gold Bond Ultimate Healing Skin Therapy Lotion helps to heal and nurture extremely dry, cracked and irritated skin with seven intensive moisturizers plus vitamins A, C and E. The Gold Bond Ultimate line expanded into the everyday bath powder category with the introduction of Gold Bond Ultimate Comfort Body Powder in fiscal 2005. Gold Bond Ultimate Comfort Body Powder is a talc-free powder that provides freshness, odor protection and moisture control and features the signature Ultimate fragrance. In fiscal 2006, we introduced Gold Bond Ultimate Softening Lotion. The new Ultimate Softening Lotion is specially formulated to soften rough, dry skin. In fiscal 2008, we launched three additions to the Gold Bond Ultimate line: Restoring Lotion, Soothing Lotion and Foot Cream. In fiscal 2009, we added Protecting Lotion and Concentrated Therapy to the Gold Bond Ultimate line. Also in fiscal 2009, we launched Gold Bond Sanitizing Moisturizer.

As part of the J&J Acquisition in 2007, Cortizone-10 and Balmex joined the Gold Bond brand in the medicated skin care category. Cortizone-10 is the leading brand in the anti-itch category and helps to relieve itching associated with various skin irritations including rashes, dry skin, eczema, poison ivy and insect bites. All Cortizone-10 products contain 1% hydrocortisone and are available in multiple forms. The Cortizone-10 Crème with aloe and Crème Plus with 10 moisturizers are designed to relieve itch fast and moisturize the skin. Cortizone-10 Intensive Healing Formula, launched in January 2008, contains moisturizers, anti-oxidant vitamins, and chamomile designed to moisturize for 24 hours and to help relieve itchy skin. In fiscal 2009, we launched Cortizone-10 Cooling Gel and Cortizone-10 Easy Relief Applicator.

Balmex is a line of diaper rash products available in two formulas. The primary formula contains zinc oxide to treat and prevent diaper rash. The second formula is a petrolatum based product for treatment and prevention of diaper rash and other skin irritations.

Topical Pain Care

Our topical pain care portfolio features six distinctly positioned brands. Our flagship topical pain care brand, Icy Hot, is a leader in the external analgesic category and receives heavy media support and strong advertising featuring NBA super-star Shaquille O’Neal. In fiscal 2009, we extended the Icy Hot brand with two new products – Icy Hot Medicated Roll and Icy Hot No-Mess Applicator – specifically designed to help relieve arthritis sufferers’ nighttime pain.

Aspercreme provides odor-free pain relief for sufferers of arthritis and other joint and muscle pain. Capzasin is an arthritis pain reliever that contains capsaicin. In fiscal 2009, this brand was extended with the introduction of Capzasin Quick Relief. Sportscreme is targeted at serious athletes as well as “weekend warriors”. Flexall is marketed toward those who seek a menthol and aloe vera based pain reliever for conditions such as back pain or muscle strain. Arthritis Hot rounds out the portfolio and competes against private label products at a value price.

Oral Care

ACT is a line of anti-cavity mouthwash and mouth rinses. ACT is available in three flavors of anti-cavity fluoride rinse and in the ACT Restoring line with four flavors and multiple package sizes. The ACT Restoring line of products seeks to restore minerals to soft spots; strengthen enamel to prevent tooth decay; and kill bad breath germs. In 2009, we launched the ACT Total Care line of mouthwashes which promotes strong teeth, cavity prevention and fresh breath in two flavors – icy clean mint and alcohol-free fresh mint.

Our oral care brands also include Herpecin-L, a lip care product that treats cold sores and protects lips from the harmful rays of the sun, and Benzodent, a dental analgesic cream for pain related to dentures.

Internal OTC’s

We compete in the menstrual analgesic category with two brands, Pamprin and Prēmsyn PMS. Pamprin, featuring four distinct formulas, seeks to provide complete relief of a woman’s menstrual symptoms, while Prēmsyn PMS has one formula designed to address specific symptoms of premenstrual syndrome. Pamprin is available in four formulas: Multi-Symptom, Cramp, All Day, and Max.

Unisom is the leading single ingredient brand in the OTC sleep aid category. Unisom is available in three product forms: SleepTabs, with the active ingredient doxylamine succinate; SleepGels, which contains the active ingredient diphenhydramine HCI; and Sleep Melts, which also contains diphenhydramine HCI and is designed to melt in your mouth. Kaopectate is a well established anti-diarrheal remedy. Kaopectate is available in Regular and Extra Strength and three flavors: Vanilla, Peppermint and Cherry. In addition, Kaopectate offers a stool softener under its brand banner.

Medicated Dandruff Shampoos

The Selsun Blue line of products consists of three distinct product offerings, each using different active medication and ingredients to provide unique formulas for the various consumer segments in the marketplace.

The Selsun Blue base formula contains the active ingredient selenium sulfide and is comprised of four shampoos: Medicated, with a cooling clean feel; Moisturizing, with aloe and moisturizers; 2-in-1, with a patented conditioning system; and Daily, for more sensitive scalp treatment.

Selsun Natural, contains the active ingredient salicylic acid. The two shampoos (Artic Energy and Island Breeze) have a clear-looking formula with moisturizers, botanicals and vitamins to provide gentler care of the hair and scalp and help restore hair to its natural, healthy state.

Selsun Blue Itchy Dry Scalp, launched in fiscal 2009, has a salicylic acid formula and a pyrithione zinc formula.

Dietary Supplements

Dexatrim is a leading brand in the diet pill category that includes such products as Dexatrim Max, Dexatrim Natural, Dexatrim Max Daytime Control, Dexatrim Max Complex 7 and Dexatrim Max Slim Packs which was launched in fiscal 2009.

We also compete in the dietary supplements category with our Sunsource line of products. All Sunsource products are specially formulated to provide consumers with an all-natural, drug-free way to support their specific health care goals. Known for its support of cardiovascular health, Garlique leads the garlic supplement category and is positioned as an odor-free, one-per-day supplement that helps maintain cholesterol levels already within a healthy range.

Other OTC and Toiletry Products

The majority of sales of our seasonal brands, Bullfrog, Sun-In and UltraSwim, typically occur during the first three quarters of our fiscal year. Bullfrog is a line of high quality, high SPF waterproof sunblocks. Included in the Bullfrog line are Mosquito Coast which combines a SPF 30 sunblock with a DEET Free insect repellent, QuickGel Sportspray, Superblock, Quik Stick, and Marathon Mist, a convenient continuous spray sunblock product in children and adult versions. In 2009, the Bullfrog line was enhanced with “UV Extender” which provides broader UVB and UVA protection for the Quick Gel, Sportspray and Marathon Mist products. In addition, in 2009 Bullfrog Superblock was reformulated to provide SPF 50 protection for those seeking sun protection.

Sun-In, a hair lightener, is available in two varieties of spray-on and a highlighting gel. UltraSwim is our niche line of swimmers’ shampoos and conditioner. Our other brands include Mudd, a line of specialty masque products, and a variety of other smaller brands.

International Business

Our international business, which represented approximately 5%, 7% and 7% of our total revenues in fiscal 2009, 2008 and 2007, respectively, has been concentrated in Canada, an export market driven from our operations in Ireland, the United Kingdom (“U.K.”), Greece and in Latin American countries in which Selsun, ACT and certain of our other products are sold.

Canada

Chattem Canada, a wholly-owned subsidiary based in Mississauga, Ontario, Canada, markets and distributes certain of our consumer products throughout Canada. The manufacturing of these products is principally done in our facilities in Chattanooga, Tennessee, while some packaging is done in Mississauga. Chattem Canada utilizes a national broker for its sales efforts. Brands marketed and sold in Canada include Icy Hot, Selsun, Gold Bond, Pamprin, Sun-In, UltraSwim and Aspercreme.

Europe

Our European business is conducted through Chattem Global Consumer Products Limited (“Chattem Global”), our Irish subsidiary, located in Limerick, Ireland; Chattem (U.K.) Limited (“Chattem (U.K.)”), a wholly-owned subsidiary located in Basingstoke, Hampshire, England; and Chattem Greece, a wholly-owned subsidiary located in Alimos Attica, Greece. Packaging and distribution operations are conducted principally in Ireland with certain products sourced from our U.S. operations. Chattem uses a national broker in the U.K., while distributors are used to market and sell our products on the European continent and elsewhere. Our products sold in Europe include Selsun, ACT, Sun-In, and Mudd. Cornsilk® is sold by Chattem (U.K.) under a licensing arrangement with the owner of its registered trademark, Coty, Inc. Spray Blond Spray-In Hair lightener is marketed only on the European continent. Certain of our OTC health care products are sold by Chattem Global to customers in parts of Central Europe and the Middle East.

Peru

In the fourth quarter of fiscal 2008, we established Chattem Peru SRL (“Chattem Peru”), a wholly-owned subsidiary located in Lima, Peru. Chattem Peru sells certain of our Selsun products throughout Peru using third party distributors.

United States Export

Our United States export division services various distributors primarily located in the Caribbean and Latin America. We distribute Selsun, ACT, Gold Bond, Dexatrim, Icy Hot, Aspercreme, Capzasin and Sportscreme into these markets.

Selsun International

We plan to focus our efforts on expanding Selsun’s international presence in existing key markets, such as Canada, Mexico, Brazil, the U.K. and Australia. In certain international markets, we sell Selsun through distributors and receive a royalty based on a percentage of distributor sales. We have entered into distributor agreements with third party distributors for Selsun in various international markets other than Canada and the U.K., where we engage national brokers.

Marketing, Sales and Distribution

Advertising and Promotion

We aggressively seek to build brand awareness and product usage through extensive and cost effective advertising strategies that emphasize the competitive strengths of our products. We allocate a significant portion of our revenues to the advertising and promotion of our products. Expenditures for these purposes were approximately 23%, 26% and 27% of total revenues in fiscal 2009, 2008 and 2007, respectively. During 2009, as a result of alterations in the strategy for trade promotions by our retail customers, we were required to spend more of our advertising and promotion dollars on price promotion programs, which are recorded as a reduction of revenue rather than as advertising or promotion programs that would be reflected as advertising and promotion expense in our consolidated financial statements.

We seek to increase market share for our major brands through focused marketing of our existing products and product line extensions while maintaining market share for our smaller brands. Our marketing strategy is to position our products to meet consumer preferences identified through extensive use of market and consumer research. We intend to channel advertising and promotion resources to those brands that we feel exhibit the most potential for growth. We rely principally on television advertising and to a lesser extent, radio and print advertising and promotional programs. We strive to achieve cost efficiencies in our advertising by being opportunistic in our purchase of media and controlling our production costs. We also maintain the flexibility to allocate purchased media time among our key brands to respond quickly to changing consumer trends and to support our growing brands. We believe our well-developed advertising and promotion platform allows us quickly and efficiently to launch and support newly acquired brands and product line extensions as well as increase market penetration of existing brands.

We work directly with retailers to develop promotional calendars and campaigns for each brand, customizing the promotion to the particular requirements of the individual retailer. These programs, which include cooperative advertising, temporary price reductions, in-store displays and special events, are designed to obtain or enhance distribution at the retail level and to reach the ultimate consumers of the product. We also utilize consumer promotions such as coupons, samples and trial sizes to increase the trial and consumption of the products.

Customers

Our customers consist of mass merchandisers such as Wal-Mart Stores, Inc., drug retailers such as Walgreens Co. and food retailers such as The Kroger Co. In fiscal 2009, our ten largest customers represented approximately 74% of total domestic gross sales, and our 20 largest customers represented approximately 85% of total domestic gross sales, which allows us to target our selling efforts to our key customers and customize programs to meet their needs. Our fiscal 2009 sales to Wal-Mart Stores, Inc. accounted for approximately 33% of total domestic gross sales. No other customer accounts for more than 10% of our total domestic gross sales. Shoppers Drug Mart, a Canadian retailer, accounted for more than 10% of our total international gross sales in fiscal 2009. Consistent with industry practice, we do not operate under a long-term written supply contract with any of our customers.

Sales and Distribution

We have an established national sales and distribution organization that sells to mass merchandiser, drug and food retailers. We utilize our national sales network, consisting primarily of our own sales force, to sell and distribute our products, including newly acquired brands and product line extensions, while maintaining tight controls over our selling expenses. Our experienced sales force of 56 people serves all direct buying accounts on an individual basis. For the more fragmented food channel and for the smaller individual stores, we rely on a national network of regional brokers to provide retail support. In excess of 96% of our domestic orders are received electronically through our electronic data interchange, or EDI, system, and accuracy for our order fulfillment has been consistently high. Our sales department performs significant analysis helping both our sales personnel and customers understand sales patterns and create appropriate promotions and merchandising aids for our products. Although not contractually obligated to do so, in certain circumstances, we allow our customers to return unsold merchandise, and for seasonal products we provide extended payment terms to our customers.

Internationally, our products are sold by national brokers in Canada and the U.K. and by distributors in Europe and Latin America. We have entered into distribution agreements with third party distributors for Selsun in various international markets except Canada and the U.K.

Most of our products, including those manufactured by third party manufacturers, are shipped from leased warehouses located in Chattanooga, Tennessee. We also use a third party logistics service located in California to warehouse and distribute our products to the west coast area of the 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 maintain. At present, we have no backlog of customer orders and are promptly meeting customer requirements.

Manufacturing and Quality Control

During fiscal 2009, we manufactured products representing approximately 55% of our domestic sales volume at our two Chattanooga, Tennessee, facilities. The balance of our products are manufactured by third party contract manufacturers including our Gold Bond medicated powders, Icy Hot patches and sleeves, ACT, Herpecin-L, and our dietary supplements,

including Dexatrim products. We contract with third party manufacturers to manufacture products that are not compatible with our existing manufacturing facilities or which can be more cost-effectively manufactured by others. In certain cases, third party manufacturers are not obligated under contracts that fix the term of their commitment. We believe we have adequate capacity to meet anticipated demand for our products through our own manufacturing facilities and third party manufacturers.

During fiscal 2009, we began construction on a new manufacturing facility in Chattanooga, Tennessee that is expected to be completed during the fourth quarter of fiscal 2010. The purpose of the facility is to allow for the internal manufacturing of ACT and other brands.

To monitor the quality of our products, we maintain an internal quality control system supported by onsite microbiology and analytical laboratories. We have trained quality control technicians who test our products and processes and guide the products through the manufacturing cycle. Consultants also are employed from time to time to test our quality control procedures and the compliance of our manufacturing operations with the United States Food and Drug Administration (“FDA”) regulations. We audit our third 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 for a select few active ingredients used in our Pamprin and Prēmsyn PMS products, we are not limited to a single source of supply for the ingredients used in the manufacture of our products. Sales of our Pamprin and Prēmsyn PMS products represented approximately 3% of our consolidated total revenues in fiscal 2009. In addition, we have a limited source of supply for selenium sulfide, the active ingredient in certain of our Selsun Blue products. As a result of the limited supply and increase in worldwide demand for selenium metal, a major component in the manufacture of selenium sulfide, our cost of selenium sulfide has been and is expected to be volatile. We believe that our current and potential alternative sources of supply will be adequate to meet future product demands. Sales of our Selsun Blue products containing selenium sulfide represented approximately 8% of our consolidated total revenues in fiscal 2009.

Research and Development

We strive to increase the value of our base brands and obtain an increased market presence through product line extensions. We rely on internal market research as well as consultants to identify new product formulations and line extensions that we believe appeal to the needs of consumers. Our growth strategy includes an emphasis on new product development. We currently employ 35 people in our research and development department and also engage consultants from time to time to provide expertise or research in a particular product area. Our product development expenditures were $6.7 million in fiscal 2009 and $5.7 million in fiscal 2008.

Competition

We compete in the OTC health care, toiletries and dietary supplements markets. These 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. Our competitors include large pharmaceutical companies such as Johnson & Johnson, consumer products companies such as Procter & Gamble Co., and dietary supplements companies such as GlaxoSmithKline and Nature’s Bounty, Inc., many of which have considerably greater financial and other resources and are not as highly leveraged as we are. Our competitors may be 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. Our products continue to compete for shelf space among retailers who are increasingly consolidating.

Trademarks and Patents

Our 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 2009, 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, ACT, Unisom and Cortizone-10.

Our principal brand names are registered trademarks in the United States and certain foreign countries. We maintain or have applied for patent and copyright protection in the United States relating to certain of our existing and proposed products and processes. We also license from third parties other intellectual property that is used in certain of our products. The sale of these products relies on our ability to maintain and extend our supply and licensing agreements with these third parties.

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 not limited to:

• the Food & Drug Administration (the “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 Environmental Protection Agency (“EPA”); and

• the Occupational Safety and Health Administration (“OSHA”).

These activities are also regulated by various agencies of the states, localities and foreign countries in which our products are sold. In particular, the FDA regulates the safety, manufacturing, labeling and distribution of OTC drugs, medical devices, dietary supplements, functional toiletries, and skin care products. In addition, the FTC has primary jurisdiction to regulate the advertising of OTC drugs, medical devices, dietary supplements, functional toiletries and skin care products. In foreign countries these same activities may be regulated by ministries of health, or other local regulatory agencies. The manner in which products sold in foreign countries are registered, how they are formulated, or what claims may be permitted may differ from similar products and practices in the U.S.

Under the Federal Food, Drug, and Cosmetic Act (“FDC 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” as a drug that is not generally recognized among scientifically qualified experts as safe and effective for use under the conditions stated in its labeling. A drug might also be considered new if it has not been used, outside of clinical investigations, to a material extent or for a material time under conditions described for a product. A drug that is generally regarded as safe and effective is not a “new drug” and therefore does not require pre-market approval.

The FDA has adopted an administrative process, the OTC Drug Review, to determine which active ingredients and indications are safe and effective for use in OTC products. With the aid of independent expert advisory review panels, the FDA develops rules, referred to as “monographs”, which define categories of safe and effective OTC drugs. These monographs group drug ingredients into therapeutic classes such as OTC external analgesics. Products that comply with monograph conditions do not require pre-market approval from the FDA.

The FDA has finalized monographs for certain categories of OTC drugs such as drug products for the control of dandruff. If a product is marketed beyond the scope of a particular final monograph and without an approved NDA, such as if the manufacturer makes a label claim not covered by the monograph, the FDA will consider the product to be unapproved and misbranded and can take enforcement action against the drug company and product including, but not limited to, issuing a warning letter or initiating a product seizure. In order to market a product whose active ingredients are not permitted by a final monograph, a company must submit an NDA to the FDA.

There are several categories of OTC drugs, such as external analgesics, for which the FDA has not completed its review. In such cases, the FDA has established tentative final monographs. These tentative final monographs are similar to final monographs in that they establish conditions under which OTC drugs can be marketed for certain uses without FDA pre-marketing approval. The FDA generally does not take enforcement action against an OTC drug subject to a tentative final monograph unless there is a safety problem or a substantial effectiveness question.

Our OTC drug products are regulated pursuant to the FDA monograph system. Many of our products are sold according to tentative final monographs. Therefore, we face the risk that the FDA could take action if there is a perceived safety or efficacy issue with respect to one of our product categories or finalize these monographs with conditions as to which some of our products do not comply. If any of our products were found not to be in compliance with a final monograph, we may be forced

to reformulate or relabel such products, if possible, or submit an NDA or an abbreviated NDA to continue to market our existing formulation. The submission of an NDA would require the preparation and submission of clinical tests, which would be time consuming and expensive. We may not receive FDA approval of any NDA in a timely manner or at all. If we were not able to reformulate or relabel our product or obtain FDA approval of an NDA, we would be required to discontinue selling the affected product. Changes in monographs could also require us to change our product formulation or dosage form, revise our labeling, modify our production process or provide additional scientific data, any of which would involve additional costs and may be prohibitive. For our OTC drug products that are sold according to final monographs, we cannot deviate from the conditions described in the final monograph, such as changes in approved active ingredient levels or labeling claims, unless we obtain pre-marketing approval from the FDA.

We were notified in October, 2000 that the FDA denied a citizen petition submitted by Thompson Medical Company, Inc., the previous owner of Sportscreme and Aspercreme. The petition sought a determination that 10% trolamine salicylate, the active ingredient in Sportscreme and Aspercreme, was clinically proven to be an effective active ingredient in external analgesic OTC drug products and should be included in the FDA’s yet-to-be finalized monograph for external analgesics. We are working to develop alternate formulations for Sportscreme and Aspercreme in the event that the FDA does not consider the available clinical data to conclusively demonstrate the efficacy of trolamine salicylate when the OTC external analgesic monograph is finalized. If 10% trolamine salicylate is not included in the final monograph, we would likely be required to discontinue these products as currently formulated after expiration of an anticipated grace period. If this occurred, we believe we could market related products as homeopathic products and could also reformulate them using other ingredients included in the final FDA monograph. We believe that the monograph is unlikely to become final and take effect before September 2010. Sales of our Sportscreme and Aspercreme products represented approximately 5% of our consolidated total revenues in fiscal 2009.

Certain of our topical analgesic products are currently marketed under an FDA tentative final monograph. In 2003, the FDA proposed that the final monograph exclude external analgesic products in patch, plaster or poultice form, unless the FDA receives additional data supporting the safety and efficacy of these products. On October 14, 2003, we submitted to the FDA information regarding the safety of our Icy Hot patches and arguments to support the inclusion of patch products in the final monograph. We also participated in an industry-wide effort coordinated by Consumer Healthcare Products Association (“CHPA”) requesting that patches be included in the final monograph and seeking to establish with the FDA a protocol of additional research that would allow the patches to be marketed under the final monograph even if the final monograph does not explicitly allow them. The CHPA submission to the FDA was made on October 15, 2003. The FDA has not responded to our or CHPA’s submission. The most recent Unified Agenda of Federal Regulatory and Deregulatory Actions published in the Federal Register provided a target final monograph publication date of September 2010. If the final monograph excludes products in patch, plaster or poultice form, we would have to file and obtain approval of an NDA in order to continue to market the Icy Hot, Capzasin and Aspercreme patch products, the Icy Hot Sleeve and/or similar delivery systems under our other topical analgesic brands. In such case, we would have to cease marketing the existing products likely within one year from the effective date of the final monograph, or pending FDA review and approval of an NDA. The preparation of an NDA would likely take us a minimum of 24 months and would be expensive. It typically takes the FDA at least 12 months to rule on an NDA once it is submitted and there is no assurance that an NDA would be approved. Sales of our Icy Hot, Capzasin, and Aspercreme patches and Icy Hot Sleeve products represented approximately 8% of our consolidated total revenues in fiscal 2009.

We have responded to certain questions received from the FDA with respect to efficacy of pyrilamine maleate, one of the active ingredients used in certain of the Pamprin Menstrual Pain Relief and Prēmsyn PMS products. While we addressed all of the FDA questions in detail, the final monograph for menstrual drug products, which has not yet been issued, will determine if the FDA considers pyrilamine maleate safe and effective for menstrual relief products. If pyrilamine maleate is not included in the final monograph, we would be required to reformulate the products to continue to provide the consumer with multi-symptom relief benefits without use of pyrilamine maleate. We believe that any adverse finding by the FDA would likewise affect our principal competitors in the menstrual product category and that finalization of the menstrual products monograph is not imminent. Moreover, we have formulated alternative Pamprin products that fully comply with both the internal analgesic and menstrual product monographs.

We are aware of the FDA’s concern about the potential toxicity due to taking more than the recommended amount of the analgesic ingredient acetaminophen, an ingredient found in Pamprin and Prēmsyn PMS and Unisom PM. We are participating in an industry-wide effort to reassure the FDA that the current recommended dosing regimens are safe and effective and that proper labeling and public education by both OTC and prescription drug companies are the best policies to abate the FDA’s concern.

On April 29, 2009, FDA finalized one part of the internal analgesic monograph on internal analgesic products that directly affects Pamprin and Prēmsyn PMS and Unisom PM. The final rule requires that acetaminophen-containing OTC products include on their labeling new liver warnings and directions for use. In addition, the ingredient name “acetaminophen” must be made more prominent on the products’ labeling. The final rule’s compliance date for all affected products is April 29, 2010. We are revising our product labels to comply with this FDA final rule. FDA has not yet determined a final action date for the remaining parts of the monograph on internal analgesics.

More recently, on June 29-30, 2009, FDA convened a meeting of the appropriate FDA Advisory Committees to discuss potential steps to reduce acetaminophen-related liver injury. The joint Advisory Committee generally agreed that clearer labeling and better public education are necessary but recommended that FDA take certain administrative actions to further protect the public, such as changing the directions for use of OTC products to reduce the maximum milligrams per dose and the maximum total daily dosage. If FDA agrees with the Advisory Committee and implements these changes, it could affect the labeling and formulation of certain maximum-strength (500 mg) versions of Pamprin and Prēmsyn PMS. After citing a lack of data and urging FDA to conduct further research, a majority of the joint Advisory Committee voted against removing OTC combination acetaminophen products from the market or limiting package sizes. We believe that FDA will address these issues in its future efforts to finalize the monograph on internal analgesic products and, prior to monograph closure, may issue revised labeling requirements within the next year that will cause the OTC industry to relabel its analgesic products.

During the finalization of the monograph on sunscreen products, the FDA chose to hold in abeyance specific requirements relating to the characterization of a product’s ability to reduce UVA radiation. In September 2007, the FDA published a new proposed rule amending the previously stayed final monograph on sunscreens to include new formulation options, labeling requirements and testing standards for measuring UVA protection and revised testing for UVB protection. When implemented, the final rule will require all sunscreen manufacturers to conduct new testing and revise the labeling of their products within eighteen months after issuance of the final rule. We will be required to take such actions for our Bullfrog product line.

The Dietary Supplement Health and Education Act of 1994 (“DSHEA”) was enacted on October 25, 1994. DSHEA amends the FDC Act by defining dietary supplements, which include vitamins, minerals, amino acids, nutritional supplements, herbs and botanicals, as a new category of food separate from conventional food. DSHEA provides a regulatory framework to ensure safe, quality dietary supplements and to foster the dissemination of accurate information about such products. Under DSHEA, the FDA is generally prohibited from regulating dietary supplements as food additives or as drugs unless product claims, such as claims that a product may diagnose, mitigate, cure or prevent an illness, disease or malady, permit the FDA to attach drug status to a product. In such case, the FDA could require pre-market approval to sell the product. Manufacturers are not required to obtain prior FDA approval before producing or selling a dietary supplement unless the ingredient is considered “new” or was not on the market as of October 15, 1994. In December 2006, the Dietary Supplement and Nonprescription Drug Consumer Protection Act was signed into law with an effective date of December 22, 2007. This new law requires the mandatory reporting of serious adverse events and specific record keeping requirements for dietary supplements and non-prescription drugs marketed without an approved application.

The FDA has promulgated regulations relating to the manufacturing process for drugs, which are known as current GMP’s. In June 2007, the FDA published the final rule on GMP’s for dietary supplements, with an effective date of June 25, 2008. We source all of our dietary supplement products from outside suppliers, including Dexatrim, New Phase, Garlique, Melatonex, and Omnigest. As part of its regulatory authority, the FDA may periodically conduct audits of the physical facilities, machinery, processes and procedures that we, or our suppliers, use to manufacture products. The FDA may perform these audits at any time without advanced notice. As a result of these audits, the FDA may order us, or our suppliers, to make certain changes in manufacturing facilities and processes. We may be required to make additional expenditures to comply with these orders or the June 2008 GMP requirements, or possibly discontinue selling certain products until we, or our suppliers, comply with these orders and requirements. As a result, our business could be adversely affected.

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. We discontinued the manufacturing and shipment of Dexatrim containing ephedrine in September 2002.

The FDA also regulates some of our products as cosmetics or drug-cosmetics. There are fewer regulatory requirements for cosmetics than for drugs or dietary supplements. Cosmetics marketed in the United States must comply with the FDC Act, the Fair Packaging and Labeling Act and the FDA’s implementing regulations. Cosmetics must also comply with quality and labeling requirements proscribed by the FDA. In addition, several of our products are subject to product packaging regulation by the CPSC and the FDA.

Combination products can be regulated via a memorandum of understanding between federal agencies. In February 2006, we launched Bullfrog Mosquito Coast, a combination of sunscreen and insect repellent. The sunscreen labeling is regulated by the FDA in its sunscreen monograph, but the insect repellent, IR-3535, and its labeling, require pre-market safety and efficacy testing and approval by the EPA and all 50 states (and U.S. Territories). Bullfrog Mosquito Coast received approval from all states and the EPA prior to launch. Further, the FDA announced its intention in its November, 2005 Unified Agenda to regulate, under the monograph system, the combination of sunscreens and insect repellents in a notice of proposed rulemaking yet to be published. Any final rule making is years in the future and the FDA might grandfather existing products or otherwise allow time for their compliance.

Our business is also regulated by the California Safe Drinking Water and Toxic Enforcement Act of 1986, known as Proposition 65. Proposition 65 prohibits businesses from exposing consumers to chemicals that the state has determined cause cancer or reproduction toxicity without first giving fair and reasonable warning unless the level of exposure to the carcinogen or reproductive toxicant falls below prescribed levels. From time to time, one or more ingredients in our products could become subject to an inquiry under Proposition 65. If an ingredient is on the state’s list as a carcinogen, it is possible that a claim could be brought, in which case we would be required to demonstrate that exposure is below a “no significant risk” level for consumers. Any such claims may cause us to incur significant expense, and we may face monetary penalties or injunctive relief, or both, or be required to reformulate our product to acceptable levels. The State of California under Proposition 65 is also considering the inclusion of titanium dioxide on the state’s list of suspected carcinogens. Titanium dioxide has a long history of widespread use as an excipient in prescription and OTC pharmaceuticals, cosmetics, dietary supplements and skin care products and is an active ingredient in our Bullfrog Superblock products. We have participated in an industry-wide submission to the State of California, facilitated through CHPA, presenting evidence that titanium dioxide presents “no significant risk” to consumers.

The FDA regulates the quality of all finished drug, medical device, and food products under GMP’s. As part of its regulatory authority, the FDA may periodically conduct audits of the physical facilities, machinery, processes and procedures that we, or our suppliers, use to manufacture products. The FDA may perform these audits at any time without advanced notice. As a result of any audits, the FDA may order us, or our suppliers, to make certain changes in manufacturing facilities and processes. We may be required to make additional expenditures to comply with these orders, or possibly discontinue selling certain products until we, or our suppliers, comply with these orders. As a result, our business could be adversely affected.

The FDA 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 warning letters, fines, injunctions, consent decrees and civil penalties to 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. If any of these events were to occur, it could materially 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 is to record liabilities for environmental matters when loss amounts are probable and reasonably determinable. Our manufacturing site utilizes 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 regular basis to assist with our compliance efforts. We believe we are currently in compliance with all applicable environmental permits and are aware of our responsibilities under applicable environmental laws. Any expenditure necessitated by changes in law and permitting requirements cannot be predicted at this time, although such costs are not expected to be material to our financial position, results of operations or cash flows.

In late 2005, we began the manufacture of Bullfrog Mosquito Coast at our Chattanooga, Tennessee plant. Bullfrog Mosquito Coast is a combination of sunscreen and insect repellent. The EPA has primary jurisdiction over insect repellants and

combination insect repellant products containing sunscreens, such as Bullfrog Mosquito Coast. Both products and manufacturing establishments must be registered with the EPA.

The handling, disposal, and environmental exposure of the insect repellent, IR-3535, is strictly regulated by the EPA under the Clean Waters Act. Any failure to comply with applicable regulations with respect to the use of IR-3535 might result in EPA action against us, including fines or injunctive action.

Employees

As of November 30, 2009, we employed 524 people on a full-time basis and 9 people on a part-time basis in the United States. In addition, at the end of fiscal 2009, we employed 23 people at our foreign subsidiaries’ offices. Our employees are not represented by any organized labor union, and we consider our labor relations to be good.

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 A.C. 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. Furthermore, the market share information prepared by A.C. Nielsen does not include data from certain of our customers, most notably Wal-Mart Stores, Inc.

Financial Information on Products and Geographical Areas

For financial information on our product categories and geographical areas, see note 11 to our consolidated financial statements.

Additional Information

Our internet website address is www.chattem.com. We make available free of charge on or through our website our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, reports filed pursuant to Section 16, the proxy statement to our annual shareholders meeting and all amendments to those reports as soon as reasonably practicable after such material is electronically filed with or furnished to the Securities and Exchange Commission. We also make available on our website our Code of Business Conduct and Ethics, our Audit Committee Charter and our Compensation Committee Charter. The information found on our website shall not be deemed incorporated by reference into this annual report on Form 10-K or filed with the Securities and Exchange Commission and does not constitute a part of this annual report on Form 10-K.

Item 1A. Risk Factors

If the Merger contemplated by the Merger Agreement with sanofi and Merger Sub does not occur, it could have a material adverse effect on our business, results of operations and financial condition.

On December 20, 2009, we entered into a Merger Agreement with sanofi and Merger Sub. Under the terms of the Merger Agreement, on January 11, 2010, Merger Sub commenced a Tender Offer to purchase all outstanding shares of our common stock for the Offer Price. The Tender Offer is scheduled to expire at 12:00 midnight, New York City time, on February 8, 2010, unless the Tender Offer is extended. The Tender Offer is conditioned on the tender of a majority of our common stock calculated on a fully-diluted basis (as defined in the Merger Agreement) and other customary closing conditions. Following the successful completion of the Tender Offer, Merger Sub will merge with and into us and any shares of our common stock not tendered in the Tender Offer (except for shares of common stock owned by us, sanofi or any of sanofi’s subsidiaries) will be cancelled and converted into the right to receive the same Offer Price paid in the Tender Offer.

We cannot predict whether the closing conditions for the Tender Offer and the Merger set forth in the Merger Agreement will be satisfied, and the transactions contemplated by the Merger Agreement may be delayed or even abandoned before completion if certain events occur. The Merger Agreement may be terminated by us, on the one hand, or sanofi, on the other hand, under certain circumstances, and termination of the Merger Agreement may require us to pay a termination fee of approximately $64.6 million to sanofi. If the conditions to the Tender Offer set forth in the Merger Agreement are not satisfied or waived pursuant to the Merger Agreement, or if the transactions are not completed for any other reason, (i) the market price of our common stock could significantly decline, (ii) we will remain liable for the significant expenses that we have incurred related to the transaction, including legal and financial advisor fees, and may be required to pay the approximately $64.6 million termination fee, (iii) we may experience substantial disruption in our sales, research and development, and operating activities, and the loss of key personnel, customers, suppliers and other third-party relationships, any of which could materially and adversely affect us and our business, operating results and financial condition and (iv) we may have difficulty attracting and retaining key personnel.

On December 22 and December 23, 2009, two purported shareholder class action lawsuits were filed against us and members of our board of directors in the Chancery Court for Hamilton County, Tennessee. The actions, which are described in greater detail in note 12 of the Notes to Consolidated Financial Statements included in Item 8 “Financial Statements and Supplementary Data” of this Annual Report on Form 10−K, allege, among other things, breaches of fiduciary duty by the members of our board of directors and seek, among other things, to enjoin the acquisition of us by sanofi. The parties to the purported class actions have, following arm’s-length negotiations, agreed in principle upon a proposed settlement of such actions, which will be subject to court approval. Pursuant to this proposed settlement, we will be making certain supplemental disclosures to our shareholders in connection with the Tender Offer. We and the members of our board of directors have denied and continue to deny any wrongdoing or liability with respect to all claims, events and transactions complained of in the aforementioned actions or that we or the members of our board of directors engaged in any wrongdoing. We are settling the actions in order to eliminate the uncertainty, burden, risk, expense and distraction of further litigation.

Until the closing of the Tender Offer and the Merger, it is possible that the focus of our management team and employees may be diverted, and that there may be a negative reaction to the Tender Offer and the Merger on the part of our customers, employees, suppliers, or other third-party relationships. The Merger Agreement also contains certain limitations regarding our business operations prior to completion of the Merger.

Our business could be adversely affected by a prolonged downturn or recession in the United States and/or the other countries in which we conduct significant business.

A prolonged economic downturn or recession in the United States or any of the other countries in which we do significant business could materially and adversely affect our business, financial condition and results of operations. In particular, such a downturn or recession could adversely impact (i) the level of spending by our ultimate consumers, (ii) our ability to collect accounts receivable on a timely basis from certain customers, (iii) the ability of certain suppliers to fill our orders for raw materials, packaging or co-packed finished goods on a timely basis and (iv) the mix of our products sales.

We may be adversely affected by factors affecting our customers’ businesses.

Factors that adversely impact our customers’ businesses may also have an adverse effect on our business, prospects, results of operations, financial condition or cash flows. These factors may include:

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any credit risks associated with the financial condition of our customers;

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the effect of consolidation or weakness in the retail industry, including the closure of our customer’s retail stores and the uncertainty resulting therefrom; and

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inventory reduction initiatives and other factors affecting customer buying patterns, including any reduction in retail space commitment and practices used to control inventory shrinkage.

We rely on a few large customers, particularly Wal-Mart Stores, Inc., for a significant portion of our sales.

In fiscal 2009, Wal-Mart Stores, Inc. represented approximately 33% of our total domestic gross sales, our ten largest customers represented approximately 74% of our total domestic gross sales and our 20 largest customers represented approximately 85% of our total domestic gross sales. Consistent with industry practice, we do not operate under a long-term written supply contract with Wal-Mart Stores, Inc. or any of our other customers. 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 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 Johnson & Johnson, consumer products companies such as Procter & Gamble Co., and dietary supplements companies such as GlaxoSmithKline and Nature’s Bounty, Inc., 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.

Litigation may adversely affect our business, financial condition and results of operations.

Our business is subject to the risk of litigation by consumers, employees, suppliers or others through private actions, class actions, administrative proceedings, regulatory actions or other litigation. The outcome of litigation, particularly class action lawsuits and regulatory actions, is difficult to assess or quantify. Plaintiffs in these types of lawsuits may seek recovery of very large or indeterminate amounts, and the magnitude of the potential loss relating to such lawsuits may remain unknown for substantial periods of time. The cost to defend current and future litigation may be significant. There may also be adverse publicity associated with litigation that could decrease customer acceptance of our products, regardless of whether the allegations are valid or whether we are ultimately found liable. As a result, litigation may adversely affect our business, financial condition and results of operations.

We may receive additional claims that allege personal injury from ingestion of Dexatrim.

During the third quarter of fiscal 2008, we reached a settlement on 26 claims alleging pulmonary arterial hypertension as a result of the ingestion of Dexatrim products in 1998 through 2003. However, we may receive additional claims and some or all of these potential claimants may file lawsuits against us. If the lawsuits are filed, we plan to vigorously defend these claims. If notwithstanding our defenses these or other product liability claims are resolved in favor of the claimants, it could have a material adverse effect on our results of operation and financial condition.

Our initiation of a voluntary recall of our Icy Hot Heat Therapy products could expose us to additional product liability claims.

On February 8, 2008, we initiated a voluntary nationwide recall of our Icy Hot Heat Therapy products. The recall was conducted to the consumer level. We recalled these products because we received some consumer reports of first, second and third degree burns, as well as skin irritation resulting from consumer use or possible misuse of the products. As of January 20, 2010, there were approximately 89 consumers with pending claims against us and four product liability lawsuits pending against us alleging burns and skin irritation from the use of Icy Hot Heat Therapy products. We may receive additional lawsuits and/or claims in the future alleging skin irritation and/or burns from use of our Heat Therapy products. The outcome of any such potential litigation cannot be predicted.

We are subject to the risk of doing business internationally.

In fiscal 2009, approximately 5% of our total consolidated revenues were attributable to 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:

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unexpected changes in, or impositions of, legislative or regulatory requirements;

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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;

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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;

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potential trade restrictions and exchange controls;

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differences in protection of our intellectual property rights; and

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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, our exposure to fluctuations in foreign exchange rates has increased.

Our product liability insurance coverage may be insufficient to cover existing or future product liability claims.

An inherent risk of our business is exposure to product liability claims by users of our products. We maintain product liability insurance through our captive insurance subsidiary and a third party reinsurance policy that provides coverage for product liability claims. Our product liability insurance coverage for all of our products consists of $10.0 million of coverage through our captive insurance subsidiary, of which approximately $2.6 million has been funded as of January 20, 2010. We also have $50.0 million of excess coverage through our captive insurance subsidiary, which is reinsured on a 50% quota share basis by a third party insurance carrier.

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 August 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.

We have a significant amount of debt that could adversely affect our business and growth prospects.

As of November 30, 2009, our total long-term debt was $391.0 million. In the future, we may incur significant additional debt. Our debt could have significant adverse effects on our business including:

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requiring us to dedicate a substantial portion of our available cash for interest payments and the repayment of principal;

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limiting our ability to capitalize on significant business opportunities;

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making us more vulnerable to economic downturns;

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limiting our ability to withstand competitive pressures; and

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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.

We may discontinue products or product lines, which could result in returns and asset write-offs, and/or engage in product recalls, any of which would reduce our cash flow and earnings.

In the past, we have discontinued certain products and product lines which resulted in returns from customers and asset write-offs. We may suffer similar adverse consequences in the future to the extent we discontinue products that do not meet expectations or no longer satisfy consumer demand. Product returns or write-offs would reduce cash flow and earnings. Product efficacy or safety concerns could result in product recalls or declining sales, which also would reduce our cash flow and earnings.

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.

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. As a result, we may face downward pressure on our prices and increased promotional expenses to meet these demands, which would reduce our margins. 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.

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 to 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 preferences.

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 conform to consumer preferences, 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.

Our projections of earnings are highly subjective and our future earnings could vary in a material amount from our projections.

From time to time, we provide projections to our shareholders and the investment community of our future earnings. Since we do not require long-term purchase commitments from our major customers and the customer order and ship process is very short, it is difficult for us to accurately predict the amount of our future sales and related earnings. Our projections are based on management’s best estimate of sales using historical sales data and other information deemed relevant. These projections are highly subjective since sales to our customers can fluctuate substantially based on the demands of their retail customers and due to other risks described in this report. Additionally, changes in retailer inventory management strategies could make inventory management more difficult. Because our ability to forecast sales is highly subjective, there is a risk that our future earnings could vary materially from our projections.

We rely on third party manufacturers for a portion of our product portfolio, including products under our Gold Bond, Icy Hot, Selsun, Dexatrim, ACT and Unisom brands.

We use third party manufacturers to make products representing approximately 45% of our fiscal 2009 domestic sales volume, including our Gold Bond medicated powders and foot spray, the Icy Hot patches and sleeves, Herpecin-L, ACT mouthwash and mouthrinse, Unisom products and our line of dietary supplements including Dexatrim Max and, internationally, our line of Selsun medicated dandruff shampoos. In certain cases, third party manufacturers are not bound by fixed term commitments in our contracts with them, and they may discontinue production with 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 or defend claims of infringement by others.

Our trademarks are of material importance to our business and are among our most important assets. In fiscal 2009, substantially all of our total revenues were from products bearing proprietary 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, ACT, Cortizone-10 and Unisom. 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 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 are defending and may have to defend in the future litigation and/or claims alleging that we have infringed the intellectual property rights of others. Intellectual property litigation can be extremely expensive. If we were unable to successfully defend against any claims that our products infringe the intellectual property rights of others, we may be forced to pay significant damages and on-going royalties or reformulate, redesign or remove our affected product from the market. As a result, intellectual property litigation 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 55% of our domestic sales volume in fiscal 2009 was from products manufactured in our 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. We package and ship most of our products from 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:

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changes in state and local government regulations;

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severe weather conditions, such as floods, ice storms and tornadoes;

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natural disasters, such as fires and earthquakes;

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power outages;

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nuclear facility incidents;

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spread of infectious diseases;

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hazardous material incidents; or

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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. 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.

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:

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not accurately identifying suitable products or brands for acquisition;

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difficulties in integrating the operations, technologies and manufacturing processes of the acquired products;

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the diversion of management’s attention from other business concerns; and

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incurring substantial additional indebtedness.

Any future acquisitions, or potential acquisitions, may result in substantial costs, disrupt our operations or materially adversely affect our operating results.

The terms of our outstanding debt obligations limit certain of our activities.

The terms of the indenture under which our 7.0% Subordinated Notes are issued and our Credit Facility impose operating and financial restrictions on us including restrictions on:

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incurrence of additional indebtedness;

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dividends and restricted payments;

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investments;

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loans and guarantees;

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creation of liens;

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transactions with affiliates;

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use of proceeds from sales of assets and subsidiary stock; and

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certain mergers, consolidations and transfers of assets.

The terms of our 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.

To service our indebtedness, we will require a significant amount of cash.

Our ability to make payments on our indebtedness will depend on our ability to generate cash in the future. This, to a certain extent, is subject to general economic, financial, competitive, regulatory and other factors that are beyond our control. We cannot assure you that our business will generate sufficient cash flow from operations or that future borrowings will be available to us under our secured Credit Facility in an amount sufficient to enable us to pay our indebtedness or to fund our other

liquidity needs. We may need to refinance all or a portion of our indebtedness on or before maturity, sell assets, reduce or delay capital expenditures or seek additional financing. We may not be able to refinance any of our indebtedness on commercially reasonable terms or at all.

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 and regulations. Under these laws and regulations, 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, such as those acquired in the J&J Acquisition, 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 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 (including holders of the Convertible Notes which may convert into common stock) of their ability to receive a premium on their common stock.

Generally, if any person attempts to acquire 15% 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 50% 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 charter contains the following additional provisions, which may have the effect of discouraging takeover attempts:

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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;

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directors may be removed only for cause prior to the expiration of their terms; and

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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 80% 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 75% of our outstanding shares of common stock and the affirmative vote of the holders of not less than 66% 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 10% 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. Among the factors that could affect our stock price are:

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our operating and financial performance and prospects;

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quarterly variations in key financial performance measures, such as earnings per share, net income and revenue;

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changes in revenue or earnings estimates or publication of research reports by financial analysts;

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announcements of new products by us or our competitors;

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speculation in the press or investment community;

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strategic actions by us or our competitors, such as acquisitions or restructurings;

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product liability claims;

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further issuance of convertible securities or common stock by us or sales of our common stock or other actions by investors with significant shareholdings;

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general market conditions for companies in our industry; and

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domestic and international economic, legal, political and regulatory factors unrelated to our performance.

The stock markets in general have experienced substantial volatility that has often been unrelated to the operating performance of particular companies. These broad market fluctuations may adversely affect the trading price of our common stock.

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 repay our outstanding indebtedness and to repurchase our common stock and have no current intention of paying dividends to holders of our common stock.

We can be affected adversely and unexpectedly by the implementation of new, or changes in the interpretation of existing, accounting principles generally accepted in the United States of America (“GAAP”).

Our financial reporting complies with GAAP, and GAAP is subject to change over time. If new rules or interpretations of existing rules require us to change our financial reporting, our financial condition and results from operations could be adversely affected.

Identification of a material weakness in our internal controls over financial reporting may adversely affect our financial results.

We are subject to ongoing obligations under the internal control provisions of the Sarbanes-Oxley Act of 2002. Those provisions require us to identify and report material weaknesses in our system of internal controls over financial reporting. If such a material weakness is identified, it could indicate a lack of controls adequate to generate accurate financial statements.

We routinely assess our internal controls over financial reporting, but we cannot assure you that we will be able to timely remediate any material weaknesses that may be identified in future periods, or maintain all of the controls necessary for continued compliance. Likewise, we cannot assure you that we will be able to retain sufficient skilled finance and accounting personnel, especially in light of the increased demand for such personnel among publicly-traded companies.

The convertible note hedge and warrant transactions may affect the value of our common stock and our convertible notes.

In connection with the sale of our convertible notes in November 2006 and April 2007, we entered into separate convertible note hedge transactions. These transactions are expected, but are not guaranteed, to eliminate the potential dilution upon conversion of the convertible notes. We also entered into warrant transactions. In connection with hedging these transactions, the counterparty:

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will enter into various over-the-counter derivative transactions with respect to our common stock, and may have purchased our common stock concurrently with and shortly after the pricing of the notes; and

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may have entered into, or may unwind, various over-the-counter derivatives and/or purchased or sold our common stock in secondary market transactions following the pricing of the notes (including during any conversion reference period related to a conversion of our convertible notes).

Such activities could have the effect of increasing, or preventing a decline in, the price of our common stock. Such effect is expected to be greater in the event we elect to settle converted convertible notes entirely in cash. The counterparty to these transactions is likely to modify its hedge positions from time to time prior to conversion or maturity of the convertible notes or termination of the transactions by purchasing and selling shares of our common stock, other of our securities, or other instruments it may wish to use in connection with such hedging. In particular, such hedging modification may occur during any conversion reference period for a conversion of convertible notes, which may have a negative effect on the value of the consideration received in relation to the conversion of those convertible notes. In addition, we intend to exercise options we hold under the convertible note hedge transaction whenever convertible notes are converted. In order to unwind its hedge position with respect to those exercised options, the counterparty to these transactions expects to sell shares of our common stock in secondary market transactions or unwind various over-the-counter derivative transactions with respect to our common stock during the conversion reference period for the converted convertible notes.

Conversion of our convertible notes may dilute the ownership interest of existing shareholders, including holders who had previously converted their convertible notes.

The conversion of some or all of the convertible notes may dilute the ownership interests of existing shareholders. All or a portion of the amounts payable upon conversion of the convertible notes may, at our election, be paid in cash rather than in the form of shares of common stock. Any sales in the public market of the common stock issued upon such conversion could adversely affect prevailing market prices of our common stock. In addition, the existence of the convertible notes may encourage short selling by market participants because the conversion of the convertible notes could depress the price of our common stock.

Virtually all of our assets consist of intangibles.

As our financial statements indicate, a substantial portion of our assets consist of intangibles, principally the trademarks, trade names and patents that we have acquired. In the event that the value of those assets became impaired or our business is materially adversely affected in any way, we would not have sufficient tangible assets that could be sold to repay our liabilities. As a result, our creditors and investors may not be able to recoup the amount of the indebtedness that they have extended to us or the amount they have invested in us.

Item 1B. Unresolved Staff Comments

None

Item 2. Properties

Our headquarters and administrative offices are located at 1715 West 38th Street, Chattanooga, Tennessee. Our primary production facilities are in close proximity to our headquarters on land owned by us. We lease our primary warehouse and distribution centers in Chattanooga, Tennessee for our domestic consumer products. The following table describes in detail the principal properties owned and leased by us:

	Total Area (Acres)	Total Buildings (Square Feet)	Use	Square Feet
Owned Properties:
Chattanooga, Tennessee	12.0	120,500	Manufacturing & Support Group	63,600
			Office & Administration	56,900
Chattanooga, Tennessee *	8.3	78,300	Manufacturing	58,300
			Office	10,000
			Product Development Center	10,000
Leased Properties:
Chattanooga, Tennessee	5.1	139,000	Warehousing	139,000
Chattanooga, Tennessee	10.0	200,000	Warehousing	200,000
Chattanooga, Tennessee	–	43,000	Manufacturing	43,000
Chattanooga, Tennessee	–	50,350	Warehousing	50,350
Coral Gables, Florida	–	755	Office & Administration	755
Mississauga, Ontario, Canada	0.3	15,100	Warehousing	10,600
			Office & Administration	3,000
			Packaging	1,500
Basingstoke, Hampshire, England		2,143	Office & Administration	2,143
Limerick, Ireland	–	2,100	Office & Administration	2,100
Alimos Attica, Greece	–	194	Office & Administration	194

We are currently operating our manufacturing facilities at approximately 75% of total capacity. These manufacturing facilities are FDA registered and are capable of further utilization through the use of a full-time second shift and the addition of a third shift.

* We have caused legal title to this property to be transferred to the Industrial Development Board of The City of Chattanooga in connection with a property tax abatement program. We can terminate our participation in the program at any time, in which event we would reacquire title to this property for $1.00.

Item 3. Legal Proceedings

See note 12 of Notes to Consolidated Financial Statements included in Item 8 “Financial Statements and Supplementary Data”.

Item 4. Submission of Matters to a Vote of Security Holders

None

Part II

Item 5. Market for the Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities

Market Information

Our common stock is traded on the Nasdaq Global Select Market under the symbol “CHTT”. The table below sets forth the high and low closing sales prices of our common stock as reported on the Nasdaq Global Select Market for the periods indicated.


Fiscal 2009	High		Low
First Quarter	$	71.53	$	61.20
Second Quarter		60.52		52.00
Third Quarter		69.44		60.27
Fourth Quarter		67.62		62.12

Fiscal 2008	High		Low
First Quarter	$	81.45	$	65.15
Second Quarter		79.58		62.21
Third Quarter		70.12		57.52
Fourth Quarter		79.84		63.05

Holders

As of January 20, 2010, there were approximately 188 holders of record of our common stock. The number of record holders does not include beneficial owners whose shares are held in the names of banks, brokers, nominees or other fiduciaries.

Dividends

We have not paid dividends on our common stock during the past two fiscal years. We are restricted from paying dividends by the terms of the indenture under which our 7.0% Subordinated Notes were issued and by the terms of our Credit Facility.

Purchases of Equity Securities by the Issuer and Affiliated Purchasers

Period	Total Number of Shares Purchased		Average Price Paid Per Share (1)		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (2)		Maximum Dollar Value of Shares that may yet be Purchased under the Plans or Programs (2)
9/1/09-9/30/09		–	$	–		–	$	100,000,000
10/1/09-10/31/09		68,432		63.47		68,432		95,656,530
11/1/09-11/30/09		65,818		63.54		65,818		91,474,459
Total Fourth Quarter		134,250	$	63.50		134,250	$	91,474,459

(1) Average price paid per share includes broker commissions

(2) On September 30, 2009, our board of directors increased the stock repurchase authorization to a total of $100.0 million of our common stock under the terms of our existing stock repurchase program.

Item 6. Selected Financial Data

This selected financial data should be read in conjunction with Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and notes thereto included elsewhere in this Annual Report on Form 10-K.

	Year Ended November 30,
	2009			2008			2007			2006			2005
	(dollars in thousand, except per share amount)
INCOME STATEMENT DATA:
Total revenues	$	463,342		$	454,879		$	423,378		$	300,548		$	279,318
Operating costs and expenses		344,010			329,843			301,196			217,804			212,830
Income from operations		119,332			125,036			122,182			82,744			66,488
Other expense, net		(22,028	)		(25,121	)		(31,103	)		(13,454	)		(13,478	)
Income before income taxes		97,304			99,915			91,079			69,290			53,010
Provision for income taxes		34,133			33,629			31,389			24,178			16,963
Net income	$	63,171		$	66,286		$	59,690		$	45,112		$	36,047
PER SHARE DATA:
Income per diluted share	$	3.28		$	3.42		$	3.08		$	2.34		$	1.77
BALANCE SHEET DATA: (At end of year)
Total assets	$	801,160		$	792,972		$	780,560		$	415,313		$	367,214
Long-term debt, less current maturities	$	388,040		$	456,500		$	505,000		$	232,500		$	145,500

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of our financial condition and results of operations should be read together with Item 6, “Selected Financial Data”, and our consolidated financial statements and notes therein included elsewhere in this annual report on Form 10-K.

This discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. The actual results may differ materially from those anticipated in these forward-looking statements as a result of a number of factors, including, but not limited to, those described in our filings with the Securities and Exchange Commission.

Overview

care, oral care, internal OTC, medicated dandruff shampoos, dietary supplements and other OTC and toiletry products. Our portfolio of products includes well-recognized brands such as:

•

Gold Bond, Cortizone-10 and Balmex - medicated skin care;

•

Icy Hot, Aspercreme and Capzasin - topical pain care;

•

ACT and Herpecin-L - oral care;

•

Unisom, Pamprin and Kaopectate - internal OTC;

•

Selsun Blue - medicated dandruff shampoos;

•

Dexatrim, Garlique and New Phase - dietary supplements; and

•

Bullfrog, UltraSwim and Sun-In - other OTC and toiletry products.

Our products target niche markets that are often outside the focus of larger companies where we believe we can achieve and sustain significant market share through innovation and strong advertising and promotion support. Many of our products are among the U.S. market leaders in their respective categories. For example, our portfolio of topical pain care brands, our Cortizone-10 anti-itch ointment and our Gold Bond medicated body powders have the leading U.S. market share in these categories. We support our brands through extensive and cost-effective advertising and promotion, the expenditures for which represented approximately 23% of our total revenues in fiscal 2009. We sell our products nationally through mass merchandiser, drug and food channels, principally utilizing our own sales force.

Developments During Fiscal 2009

Products

2.0% Convertible Notes

In December 2008 we issued an aggregate of 487,123 shares of our common stock in exchange for $28.7 million in aggregate principal amount of our outstanding 2.0% Convertible Notes. Upon completion of the transaction, the balance of the remaining 2.0% Convertible Notes was reduced to $96.3 million outstanding. In connection with this transaction, we retired a proportional share of the 2.0% Convertible Notes debt issuance costs and recorded the resulting loss on early extinguishment of debt of $0.7 million in the first quarter of fiscal 2009.

Stock Repurchase

7.0% Senior Subordinated Notes Repurchase

During fiscal 2009, we repurchased $17.3 million of our 7.0% Subordinated Notes in open market transactions at an average premium of 0.9% above the principal amount of the 7.0% Subordinated Notes. In connection with the repurchase of the $17.3 million of 7.0% Subordinated Notes, we retired a proportional share of the related debt issuance costs. The premium paid for the $17.3 million of 7.0% Subordinated Notes combined with the early extinguishment of the proportional debt issuance costs resulted in a loss on extinguishment of debt of $0.9 million.

Credit Facility Amendment

Manufacturing Expansion

Brand Impairment

During the fourth quarter of fiscal 2009, we performed the annual impairment testing of our intangible assets with indefinite lives as required by U.S. GAAP. As a result of this analysis, we recognized a non-cash impairment charge of $38.3 million. The impairment charge related to certain brands within the dietary supplement category that represented approximately 4% of fiscal 2009 consolidated total revenues. The impairment charge was a result of the consideration of adverse circumstances in connection with our annual financial budget process including, but not limited to, the current and expected competitive environment and market conditions in which these respective brands are marketed and expectations of lost distribution with certain of our retail customers as a result of declining sales. The fair value used to determine the impairment charge was calculated using the discounted cash flow valuation methodology and was compared to the respective book value carrying amount of those brands to determine the impairment charge. The aggregate remaining book value carrying amount for those brands, after giving consideration to the impairment write-down, is $11.3 million.

Subsequent Event

Merger Agreement

As more fully discussed above in Item 1 under the heading “Subsequent Event,” on December 20, 2009, we entered into a Merger Agreement with sanofi and Merger Sub. Under the terms of the Merger Agreement, on January 11, 2010, Merger Sub commenced a Tender Offer to purchase all outstanding shares of our common stock for the Offer Price. The Tender Offer is scheduled to expire at 12:00 midnight, New York City time, on February 8, 2010, unless the Tender Offer is extended. The Tender Offer is conditioned on the tender of a majority of our common stock calculated on a fully-diluted basis (as defined in the Merger Agreement) and other customary closing conditions. Following the consumation of the Tender Offer, Merger Sub will merge with and into us and any shares of our common stock not tendered in the Tender Offer (except for shares of common stock owned by us, sanofi or any of sanofi’s subsidiaries) will be cancelled and converted into the right to receive the same Offer Price paid in the Tender Offer.

Results of Operations

The following table sets forth for the periods indicated, certain items from our consolidated statements of income expressed as a percentage of total revenues:

	Year Ended November 30,
	2009			2008			2007
TOTAL REVENUES		100.0	%		100.0	%		100.0	%
COSTS AND EXPENSES:
Cost of sales		30.2			28.9			30.5
Advertising and promotion		22.8			26.0			26.5
Selling, general and administrative		13.0			13.7			13.6
Impairment of indefinite-lived intangible assets		8.3			–			–
Product recall expenses		–			1.4			–
Litigation settlement		–			2.5			–
Acquisition expenses		–			–			0.5
Total costs and expenses		74.3			72.5			71.1
INCOME FROM OPERATIONS		25.7			27.5			28.9
OTHER INCOME (EXPENSE):
Interest expense		(4.5	)		(5.6	)		(7.1	)
Investment and other income, net		0.1			0.2			0.3
Loss on early extinguishment of debt		(0.3	)		(0.1	)		(0.6	)
Total other income (expense)		(4.7	)		(5.5	)		(7.4	)
INCOME BEFORE INCOME TAXES		21.0			22.0			21.5
PROVISION FOR INCOME TAXES		7.4			7.4			7.4
NET INCOME		13.6	%		14.6	%		14.1	%

Critical Accounting Estimates

The preparation of financial statements in accordance with U.S. generally accepted accounting principles requires management to use estimates. Several different estimates or methods can be used by management that might yield different results. The following are the significant estimates used by management in the preparation of the November 30, 2009 consolidated financial statements:

Allowance for Doubtful Accounts

As of November 30, 2009, an estimate was made of the collectibility of the outstanding accounts receivable balances. This estimate requires the utilization of outside credit services, knowledge about the customer and the customer’s industry, new developments in the customer’s industry and operating results of the customer as well as general economic conditions and historical trends. When all these facts are compiled, a judgment as to the collectibility of the individual account is made. Many factors can impact this estimate, including those noted in this paragraph. The adequacy of the estimated allowance may be impacted by the deterioration in the financial condition of a large customer, weakness in the economic environment resulting in a higher level of customer bankruptcy filings or delinquencies and the competitive environment in which the customer operates. During the year ended November 30, 2009, we performed an assessment of the collectibility of trade accounts receivable and did not make any significant adjustments to our estimate of allowance for doubtful accounts. The balance of allowance for doubtful accounts was $0.5 million and $0.4 million at November 30, 2009 and 2008, respectively.

Revenue Recognition

Revenue is recognized when our products are shipped and title transfers to our customers. It is generally our policy across all classes of customers that all sales are final. As is common in the consumer products industry, customers return products for a variety of reasons including products damaged in transit, discontinuance of a particular size or form of product and shipping errors. As sales are recorded, we accrue an estimated amount for product returns, as a reduction of these sales, based upon our historical experience and consideration of discontinued products, product divestitures, estimated inventory levels held by our customers and retail point of sale data on existing and newly introduced products. The level of returns may fluctuate from our estimates due to several factors including weather conditions, customer inventory levels and competitive conditions. We charge the allowance account for product returns when the customer provides appropriate supporting documentation that the product is properly destroyed or upon receipt of the product.

We separate returns into the two categories of seasonal and non-seasonal products. We use the historical return detail of seasonal and non-seasonal products for at least the most recent three fiscal years on generally all products, which is normalized for any specific occurrence that is not reasonably likely to recur, to determine the amount of product returned as a percentage of sales, and estimate an allowance for potential returns based on product sold in the current period. To consider product sold in current and prior periods, an estimate of inventory held by our retail customers is calculated based on customer inventory detail. This estimate of inventory held by our customers, along with historical returns as a percentage of sales, is used to determine an estimate of potential product returns. This estimate of the allowance for seasonal and non-seasonal returns is further analyzed by considering retail customer point of sale data. We also consider specific events, such as discontinued product or product divestitures, when determining the adequacy of the allowance.

Our estimate of product returns for seasonal and non-seasonal products was $1.5 million and $1.3 million as of November 30, 2009, and $1.4 million and $1.3 million as of November 30, 2008, and $1.2 million and $1.3 million as of November 30, 2007. Due to higher sales volume during fiscal 2009 and 2008, we increased our estimate of seasonal returns by approximately $0.1 million and $0.2 million, respectively, which resulted in a decrease to net sales in our consolidated financial

statements. During fiscal 2009 and 2008, our estimate of non-seasonal returns remained consistent as compared to fiscal 2008 and 2007, respectively. Each percentage point change in the seasonal return rate would impact net sales by approximately $0.2 million. Each percentage point change in the non-seasonal return rate would impact net sales by approximately $0.6 million.

We routinely enter into agreements with customers to participate in promotional programs. The cost of these programs are recorded as either advertising and promotion expense or as a reduction of sales. A significant portion of the programs are recorded as a reduction of sales and generally take the form of coupons and vendor allowances, which are normally taken via temporary price reductions, scan downs, display activity and participations in in-store programs provided uniquely by the customer. We also enter into cooperative advertising programs with certain customers, the cost of which is recorded as advertising and promotion expense. In order for retailers to receive reimbursement under such programs, the retailer must meet specified advertising guidelines and provide appropriate documentation of the advertisement being run.

We analyze promotional programs in two primary categories -- coupons and vendor allowances. Customers normally utilize vendor allowances in the form of temporary price reductions, scan downs, display activity and participations in in-store programs provided uniquely by the customer. We estimate the accrual for outstanding coupons by utilizing a third-party clearinghouse to track coupons issued, coupon value, distribution and expiration dates, quantity distributed and estimated redemption rates that are provided by us. We estimate the redemption rates of issued coupons based on internal analysis of historical coupon redemption rates and expected future retail sales by considering recent point of sale data. The estimate for vendor allowances is based on estimated unit sales of a product under a program and amounts committed for such programs in each fiscal year. Estimated unit sales are determined by considering customer forecasted sales, point of sale data and the nature of the program being offered. The three most recent years of expected program payments versus actual payments made and current year retail point of sale trends are analyzed to determine future expected payments. Customer delays in requesting promotional program payments due to their audit of program participation and resulting request for reimbursement is also considered to evaluate the accrual for vendor allowances. The costs of these programs are often variable based on the number of units actually sold. As of November 30, 2009, the coupon accrual and reserve for vendor allowances were $2.1 million and $6.0 million, respectively, and $1.8 million and $4.9 million, respectively, as of November 30, 2008. Each percentage point change in promotional program participation would impact net sales by $0.3 million and advertising and promotion expense by an insignificant amount.

Income Taxes

We account for income taxes using the asset and liability approach as prescribed by Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 740, “Income Taxes” (“ASC 740”). This approach requires recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in our consolidated financial statements or tax returns. Using the enacted tax rates in effect for the year in which the differences are expected to reverse, deferred tax assets and liabilities are determined based on the differences between the financial reporting and the tax basis of an asset or liability. Our effective tax rate was 35.1% for fiscal 2009, as compared to 33.7% in fiscal 2008 and 34.5% in fiscal 2007.

Accounting for Acquisitions and Intangible Assets

We account for our acquisitions under the purchase method of accounting for business combinations as prescribed by FASB ASC Topic 805, “Business Combinations” (“ASC 805”). Under ASC 805, the cost, including transaction costs, are allocated to the underlying net assets, based on their respective estimated fair values. Business combinations consummated beginning in the first quarter of our fiscal 2010 will be accounted for under certain provisions of ASC 805 (previously reported as SFAS No. 141R, “Business Combinations”).

We account for our intangible assets in accordance with FASB ASC Topic 350, “Intangibles-Goodwill and Other” (“ASC 350”). Under ASC 350, intangible assets with indefinite useful lives are not amortized but are reviewed for impairment at least annually. Intangible assets with finite lives are amortized over their estimated useful lives using the straight-line method.

The judgments made in determining the estimated fair value and expected useful lives assigned to each class of assets and liabilities acquired can significantly affect net income. For example, the useful life of property, plant, and equipment acquired will differ substantially from the useful life of brand licenses and trademarks. Consequently, to the extent a longer-lived asset is ascribed greater value under the purchase method than a shorter-lived asset or a value is assigned to an indefinite-lived asset, net income in a given period may be higher.

Determining the fair value of certain assets and liabilities acquired is judgmental in nature and often involves the use of significant estimates and assumptions. An area that requires significant judgment is the fair value and useful lives of intangible assets. In this process, we often obtain the assistance of a third party valuation firm for certain intangible assets.

Our intangible assets consist of exclusive brand licenses, trademarks and other intellectual property, customer relationships and non-compete agreements. We have determined that our trademarks have indefinite useful lives, as cash flows from the use of the trademarks are expected to be generated indefinitely. The useful lives of our intangible assets are reviewed as circumstances dictate in accordance with the provisions of ASC 350.

The value of our intangible assets are subject to future adverse changes if we experience declines in operating results or experience significant negative industry or economic trends. We review our indefinite-lived intangible assets for impairment at least annually by comparing the carrying value of the indefinite-lived intangible assets to their estimated fair value. The estimate of fair value is determined by discounting the estimate of future cash flows of the indefinite-lived intangible assets. Consistent with our policy, we perform the annual impairment testing of our indefinite-lived intangible assets during the quarter ended November 30, with the most recent test performed in the quarter ended November 30, 2009. As a result of that testing, we calculated and recorded an impairment charge of $38.3 million.

In January 2007, we completed the acquisition of the U.S. rights to five consumer and OTC brands from Johnson & Johnson (“J&J Acquisition”). The acquired brands were: ACT, Unisom, Cortizone-10, Kaopectate, and Balmex. In May 2007, we acquired the worldwide trademark and rights to sell and market ACT in Western Europe from Johnson & Johnson (“ACT Acquisition”).

Fair Value Measurements

On December 1, 2007, we adopted certain provisions of FASB ASC Topic 820, “Fair Value Measurements and Disclosures” (“ASC 820”), as it pertains to financial assets and liabilities, which provides guidance for using fair value to measure assets and liabilities. ASC 820 applies both to items recognized and reported at fair value in the financial statements and to items disclosed at fair value in the notes to the financial statements. ASC 820 does not change existing accounting rules governing what can or must be recognized and reported at fair value and clarifies that fair value is defined as the price received to sell an asset, or paid to transfer a liability, in an orderly transaction between market participants at the measurement date. Additionally, ASC 820 does not eliminate practicability exceptions that exist in accounting pronouncements amended by ASC 820 when measuring fair value. As a result, we are not required to recognize any new assets or liabilities at fair value.

ASC 820 also establishes a framework for measuring fair value. Fair value is generally determined based on quoted market prices in active markets for identical assets or liabilities. If quoted market prices are not available, ASC 820 provides guidance on alternative valuation techniques that place greater reliance on observable inputs and less reliance on unobservable inputs.

Stock-Based Compensation

We account for stock-based compensation under the provisions of FASB ASC Topic 718, “Compensation-Stock Compensation” (“ASC 718”), which requires the recognition of the cost of employee services received in exchange for an award of equity instruments in the financial statements and is measured based on the grant date fair value of the award. The fair value of each stock option grant is estimated using a Flex Lattice Model. The input assumptions used in determining fair value are the expected life of the stock options, the expected volatility of our common stock, the risk-free interest rate over the expected life of the option and the expected forfeiture rate of the options granted. We recognize stock option compensation expense over the period during which an employee provides service in exchange for the award (the vesting period).

For additional information regarding our significant accounting policies, see note 2 of Notes to Consolidated Financial Statements.

Fiscal 2009 Compared to Fiscal 2008

To facilitate discussion of our operating results for the years ended November 30, 2009 and 2008, we have included the following selected data from our consolidated statements of income:

	For the Year Ended November 30,
					Increase (Decrease)
	2009		2008		Amount			Percentage
	(dollars in thousands)
Domestic net sales	$	438,846	$	423,088	$	15,758			3.7	%
International revenues (including royalties)		24,496		31,791		(7,295	)		(22.9	)
Total revenues		463,342		454,879		8,463			1.9
Cost of sales		139,768		131,620		8,148			6.2
Advertising and promotion expense		105,684		118,093		(12,409	)		(10.5	)
Selling, general and administrative expense		60,300		62,590		(2,290	)		(3.7	)
Impairment of indefinite-lived intangible assets		38,258		–		38,258			100.0
Product recall expenses		–		6,269		(6,269	)		(100.0	)
Litigation settlement		–		11,271		(11,271	)		(100.0	)
Interest expense		20,784		25,310		(4,526	)		(17.9	)
Loss on early extinguishment of debt		1,571		526		1,045			198.7
Net income		63,171		66,286		(3,115	)		(4.7	)

Domestic Net Sales

Domestic net sales for fiscal 2009 increased $15.8 million, or 3.7%, as compared to fiscal 2008. A comparison of domestic net sales for the categories of products included in our portfolio of OTC healthcare products is as follows:

	For the Year Ended November 30,
					Increase (Decrease)
	2009		2008		Amount			Percentage
	(dollars in thousands)
Medicated skin care	$	158,013	$	141,942	$	16,071			11.3	%
Topical pain care		95,407		96,779		(1,372	)		(1.4	)
Oral care		70,353		62,872		7,481			11.9
Internal OTC		44,096		48,006		(3,910	)		(8.1	)
Medicated dandruff shampoos		36,488		35,737		751			2.1
Dietary supplements		18,296		19,491		(1,195	)		(6.1	)
Other OTC and toiletry products		16,193		18,261		(2,068	)		(11.3	)
Total	$	438,846	$	423,088	$	15,758			3.7

Net sales in the medicated skin care category increased $16.1 million, or 11.3%, in fiscal 2009 compared to fiscal 2008, primarily as a result of the launch of Gold Bond Sanitizing Moisturizer in the fourth quarter of fiscal 2009, the launch of Gold Bond Ultimate Concentrated Therapy in the third quarter of fiscal 2009, the launches of Gold Bond Anti-Itch Lotion, Gold Bond Foot Pain Cream, Gold Bond Ultimate Protecting Lotion, Cortizone-10 Cooling Gel and Cortizone-10 Easy Relief during the first quarter of fiscal 2009 and the continued growth of our existing Gold Bond lotion and Cortizone-10 businesses.

Net sales in the topical pain care category decreased $1.4 million, or 1.4%, in fiscal 2009 compared to fiscal 2008, primarily as a result of the discontinuance of shipments of Icy Hot Heat Therapy following the voluntary recall of the product announced on February 8, 2008, lower sales of Aspercreme and certain other smaller brands in the category, reduced product distribution at certain retail customers and the increase in revenues during the third quarter of fiscal 2008 as a result of the reduction of our estimate of Icy Hot Pro Therapy returns. The decrease in category net sales was partially offset by the first quarter launch of Icy Hot No-Mess Applicator and the second quarter launch of Icy Hot Medicated Roll in fiscal 2009. Excluding sales of Icy Hot Heat Therapy and the reduction of the Icy Hot Pro Therapy returns estimate, sales in the category increased $2.9 million, or 3.2% compared to the prior year period.

Net sales in the oral care category increased $7.5 million, or 11.9%, in fiscal 2009 compared to fiscal 2008 as a result of the launch of ACT Total Care in the first quarter of fiscal 2009 and the continued performance of ACT Restoring and ACT Rinse.

Net sales in the internal OTC category decreased $3.9 million, or 8.1%, in fiscal 2009 compared to fiscal 2008 primarily as a result of increased competitive pressure from private label brands within the category and decreased distribution at certain retail customers of certain products within this category.

Net sales in the medicated dandruff shampoos category increased $0.8 million, or 2.1%, in fiscal 2009 compared to fiscal 2008 primarily resulting from the initial sell-in of Selsun Blue Itchy Dry Scalp in the first quarter of 2009, offset by a decline in sales of certain other Selsun Blue products as a result of distribution changes to accommodate the launch of Selsun Blue Itchy Dry Scalp.

Net sales in the dietary supplements category decreased $1.2 million, or 6.1%, in fiscal 2009 compared to fiscal 2008, primarily as a result of a decline in sales of Garlique and Sunsource, partially offset by an increase in sales of Dexatrim Max Complex 7, which was initially launched in the third quarter of fiscal 2008.

Net sales in the other OTC and toiletry products category decreased $2.1 million, or 11.3%, in fiscal 2009 compared to fiscal 2008, primarily as a result of certain retailers reducing the inventory levels of seasonal products and reduced store count distribution for certain products at certain retailers.

Domestic sales variances were principally the result of changes in unit sales volume with the exception of certain selected products for which we implemented a unit sales price increase effective April 2008 and December 2008 and a $9.3 million increase in utilization of promotion programs considered a vendor allowance, which are accounted for as a reduction of total revenues and not as a component of advertising and promotion expense in fiscal 2009 as compared to fiscal 2008.

International Revenues

For fiscal 2009, international revenues decreased $7.3 million, or 22.9%, compared to fiscal 2008, primarily as a result of terminating shipments to certain distributors serving Latin American markets to reduce the potential for diversion of English language packaging back to the United States market, unfavorable exchange rates that decreased revenues by approximately $1.9 million and unfavorable macro-economic conditions in the markets where our products are sold. We are in the process of identifying new distributors for the affected Latin American markets and are also converting the packaging for the major products sold in these markets to local Spanish language.

Cost of Sales

Cost of sales for fiscal 2009 was 30.2% as a percentage of total revenues compared to 28.9% in fiscal 2008 and gross margin for fiscal 2009 was 69.8% compared to 71.1% in the prior year period. The decrease in gross margin was primarily attributable to the increased cost of certain raw material input components and an increased utilization of promotional programs by retailers to reduce product prices to consumers, the costs of which are recorded as a reduction of total revenues rather than advertising and promotion expense.

Advertising and Promotion Expense

Advertising and promotion expenses for fiscal 2009 decreased $12.4 million, or 10.5%, compared to fiscal 2008 and were 22.8% of total revenues for fiscal 2009 as compared to 26.0% for fiscal 2008. The decrease in advertising and promotion expense was a result of greater utilization of promotional programs by retailers to reduce product prices to consumers, the costs of which are recorded as a reduction of total revenues rather than advertising and promotion expense, and reduced product sampling programs, partially offset by an increase in marketing research expenses.

Selling, General and Administrative Expense

Selling, general and administrative expenses for fiscal 2009 decreased $2.3 million, or 3.7%, compared to fiscal 2008 and were 13.0% and 13.7% of total revenues for fiscal 2009 and 2008, respectively. The decrease in selling, general and administrative expenses as a percentage of total revenues was attributable to favorable foreign currency translation adjustments resulting from intercompany transactions and reduced transportation costs related to outbound product shipments.

Impairment of Indefinite-Lived Intangible Assets

Product Recall Expenses

The $6.3 million of product recall expenses in fiscal 2008 related to the voluntary recall of our Icy Hot Heat Therapy product initiated in February 2008. The product recall expenses included product returns, inventory obsolescence, destruction costs, consumer refunds, legal fees, settlement payments and other estimated expenses. The estimate was made by management based on consideration of on-hand inventory and retail point of sales data. There was no corresponding charge in fiscal 2009.

Litigation Settlement

During the third quarter of fiscal 2008, we reached a settlement on 26 claims alleging pulmonary arterial hypertension as a result of the ingestion of Dexatrim products in 1998 through 2003. Included as litigation settlement in the consolidated statements of income is the settlement of the 26 claims totaling $13.3 million and $0.6 million of legal expenses, which was partially offset by $2.6 million funded with proceeds from the Dexatrim litigation settlement trust. There was no corresponding charge in fiscal 2009.

Interest Expense

Interest expense decreased $4.5 million, or 17.9%, for fiscal 2009 compared to fiscal 2008 reflecting the decreasing notional amounts under our interest rate swap (“swap”), a three-year, amortizing notional 4.98% interest rate swap that expired on January 15, 2010 (“interest rate swap”), the repayment of $22.5 million in principal outstanding under our Credit Facility since November 30, 2008, the exchange of 487,123 shares of our common stock for $28.7 million of the 2.0% Convertible Notes in December 2008 and the repurchase of $17.3 million of our 7.0% Subordinated Notes in fiscal 2009. Until our indebtedness is reduced substantially, interest expense will continue to represent a significant percentage of our total revenues.

Loss on Early Extinguishment of Debt

On December 4, 2008, we issued an aggregate of 487,123 shares of our common stock in exchange for $28.7 million in aggregate principal of our outstanding 2.0% Convertible Notes. In connection with this transaction, we retired a proportional share of the 2.0% Convertible Notes debt issuance costs and recorded the resulting amount as loss on early extinguishment of debt of $0.7 million in the first quarter of fiscal 2009. During fiscal 2009, we repurchased $17.3 million of our 7.0% Subordinated Notes in open market transactions at an average premium of 0.9% above the face amount of the 7.0% Subordinated Notes. In connection with the repurchase of the 7.0% Subordinated Notes, we retired a proportional share of the related debt issuance

costs. The premium paid for the $17.3 million of 7.0% Subordinated Notes combined with the early extinguishment of the proportional debt issuance costs resulted in a loss on extinguishment of debt of $0.9 million recorded in fiscal 2009.

Income Taxes

The effective tax rate increased to 35.1% in fiscal 2009 from 33.7% in fiscal 2008 primarily as a result of reduced inventory contributions and an increase in income subject to state taxes.

Fiscal 2008 Compared to Fiscal 2007

To facilitate discussion of our operating results for the years ended November 30, 2008 and 2007, we have included the following selected data from our consolidated statements of income:

	For the Year Ended November 30,
					Increase ( Decrease)
	2008		2007		Amount			Percentage
	(dollars in thousands)
Domestic net sales	$	423,088	$	393,493	$	29,595			7.5	%
International revenues (including royalties)		31,791		29,885		1,906			6.4
Total revenues		454,879		423,378		31,501			7.4
Cost of sales		131,620		129,055		2,565			2.0
Advertising and promotion expense		118,093		112,206		5,887			5.2
Selling, general and administrative expense		62,590		57,878		4,712			8.1
Product recall expenses		6,269		–		6,269			100.0
Litigation settlement		11,271		–		11,271			100.0
Acquisition expenses		–		2,057		(2,057	)		(100.0	)
Interest expense		25,310		29,930		(4,620	)		(15.4	)
Loss on early extinguishment of debt		526		2,633		(2,107	)		(80.0	)
Net income		66,286		59,690		6,596			11.1

Domestic Net Sales

Domestic net sales for fiscal 2008 increased $29.6 million, or 7.5%, to $423.1 million from $393.5 million in fiscal 2007. A comparison of domestic net sales for the categories of products included in our portfolio of OTC healthcare products is as follows:

	For the Year Ended November 30,
					Increase ( Decrease)
	2008		2007		Amount			Percentage
	(dollars in thousands)
Medicated skin care	$	141,942	$	123,456	$	18,486			15.0	%
Topical pain care		96,779		95,858		921			1.0
Oral care		62,872		48,863		14,009			28.7
Internal OTC		48,006		45,043		2,963			6.6
Medicated dandruff shampoos		35,737		36,934		(1,197	)		(3.2	)
Dietary supplements		19,491		26,121		(6,630	)		(25.4	)
Other OTC and toiletry products		18,261		17,218		1,043			6.1
Total	$	423,088	$	393,493	$	29,595			7.5

Net sales growth in the medicated skin care category increased $18.5 million, or 15.0%, in fiscal 2008 compared to fiscal 2007 as a result of the launch of Gold Bond Ultimate Restoring Lotion and Cortizone-10 Intensive Healing in the first quarter of fiscal 2008, the continued success of Gold Bond Ultimate Softening Lotion and our ownership of the Cortizone-10 and Balmex brands for the entire twelve month period of fiscal 2008 compared to only eleven months of ownership in fiscal 2007.

Net sales in the topical pain care category increased $0.9 million, or 1.0%, in fiscal 2008 compared to fiscal 2007, principally due to increases in Icy Hot and Aspercreme, led by the new products introduced in the first quarter of fiscal 2008, Icy Hot PM Lotion, Icy Hot PM Patch, Aspercreme Heat Pain Gel and Aspercreme Nighttime Lotion, offset by declines in Capzasin and the discontinuance of shipments of Icy Hot Heat Therapy following our February 8, 2008 voluntary recall of the product. Excluding sales of Icy Hot Heat Therapy and Icy Hot Pro Therapy, sales in the category increased 6.9% compared to the prior year period.

Net sales in the oral care category increased $14.0 million, or 28.7%, in fiscal 2008 compared to fiscal 2007. The increase primarily results from our ownership of the ACT brand for the entire twelve month period of fiscal 2008 compared to only eleven months of ownership in fiscal 2007 and an expanded distribution base.

Net sales in the internal OTC category increased $3.0 million, or 6.6%, in fiscal 2008 compared to fiscal 2007 as a result of our ownership of the Unisom and Kaopectate brands for the entire twelve month period of fiscal 2008 compared to only eleven months of ownership in fiscal 2007 and the introduction of Unisom SleepMelts in the second quarter of fiscal 2008.

Net sales in the medicated dandruff shampoos category decreased $1.2 million, or 3.2%, in fiscal 2008 compared to fiscal 2007 primarily due to declining sales of Selsun Salon, which were partially offset by a full year of sales of Selsun Blue Naturals, which began shipping in the second quarter of fiscal 2007.

Net sales in the dietary supplements category decreased $6.6 million, or 25.4%, in fiscal 2008 compared to fiscal 2007. Net sales of Dexatrim decreased 36.9% primarily resulting from increased competitive pressures in the diet-aid category, a

decline in sales of Dexatrim Max2O and increased returns of Dexatrim mainly from several retailers discontinuing Dexatrim Max2O, partially offset by the launch of Dexatrim Max Daytime Control in the first quarter of fiscal 2008 and Dexatrim Max Complex 7, which began shipping in the third quarter of fiscal 2008.

Net sales in the other OTC and toiletry products category increased $1.0 million, or 6.1%, in fiscal 2008 compared to fiscal 2007 driven primarily by an increase in fourth quarter shipments of Bullfrog as a result of expanded distribution in key retailers and the early season shipments of upgraded product formulas for the 2009 suncare season.

Domestic sales variances were principally the result of changes in unit sales volume with the exception of certain products for which we implemented a unit sales price increase effective April 2008.

International Revenues

For fiscal 2008, international revenues increased $1.9 million, or 6.4%, to $31.8 million from $29.9 million in fiscal 2007. The increase was primarily due to favorable exchange rates that increased net sales approximately $1.5 million in fiscal 2008 and a full twelve months of ownership of ACT internationally in fiscal 2008 compared to seven months of ownership in fiscal 2007.

Cost of Sales

Cost of sales in fiscal 2008 increased $2.6 million, or 2.0%, to $131.6 million from $129.1 million in fiscal 2007. Cost of sales as a percentage of total revenues was 28.9% for fiscal 2008 as compared to 30.5% for fiscal 2007. The decrease in cost of sales as a percentage of total revenues was primarily due to the integration of manufacturing of certain of the acquired brands from the J&J Acquisition in the fourth quarter of fiscal 2007, partially offset by an increase in fuel costs in 2008 resulting in higher inbound freight expense.

Advertising and Promotion Expense

Advertising and promotion expenses in fiscal 2008 increased $5.9 million, or 5.2%, to $118.1 million from $112.2 million in fiscal 2007 and were 26.0% of total revenues for fiscal 2008 compared to 26.5% for fiscal 2007. The increase in advertising and promotion expenses results from higher expenditures for advertising and promotion in fiscal 2008 in connection with the ownership of the brands acquired in the J&J Acquisition for the entire twelve month period of fiscal 2008 as compared to eleven months of ownership in fiscal 2007.

Selling, General and Administrative Expense

Selling, general and administrative expenses increased $4.7 million, or 8.1%, to $62.6 million from $57.9 million in fiscal 2007. Selling, general and administrative expenses were 13.7% and 13.6% of total revenues for fiscal 2008 and fiscal 2007, respectively. The increase in selling, general and administrative expenses as a percentage of total revenues was largely attributable to the absorption of transition service costs similar to those paid to Johnson & Johnson related to freight and administrative costs that were recorded as acquisition expenses in fiscal 2007 and an increase in fuel costs in 2008 resulting in higher outbound freight expense.

Product Recall Expenses

On February 8, 2008, we initiated a voluntary nationwide recall of our Icy Hot Heat Therapy product. Icy Hot Heat Therapy is an air-activated, self-heating disposable device for temporary relief of muscular and joint pain. We recalled these products because we received some consumer reports of first, second and third degree burns and skin irritation resulting from the use or possible misuse of the product. Based in part on consideration of on-hand factory inventory and retail point of sales data, during the first quarter of fiscal 2008 we recorded an estimate of approximately $6.0 million of recall expenses related to product returns, inventory obsolescence, destruction costs, consumer refunds, legal fees and other estimated expenses. Subsequent to our first fiscal quarter, we increased our estimate of recall expenses by $0.3 million, to a total of $6.3 million,

primarily as a result of additional legal fees and settlement payments. The remaining accrued liability for product recall expenses was $0.8 million as of November 30, 2008.

Litigation Settlement

During the third quarter of fiscal 2008, we reached a settlement on 26 claims alleging pulmonary arterial hypertension as a result of the ingestion of Dexatrim products in 1998 through 2003. Included as litigation settlement in the consolidated statements of income is the settlement of the 26 claims totaling $13.3 million and $0.6 million of legal expenses, which were partially offset by $2.6 million of proceeds from the Dexatrim litigation settlement trust.

Acquisition Expenses

Acquisition expenses for fiscal 2007 reflect the costs incurred for transition services, including consumer affairs, distribution and collection services, related to the J&J Acquisition. The distribution and collection services were terminated in April 2007 and the consumer affairs services were terminated in June 2007.

Interest Expense

Interest expense decreased $4.6 million, or 15.4%, in fiscal 2008 compared to fiscal 2007 reflecting the decreasing notional amounts under our swap and a reduction in the principal portion of debt since August 31, 2007. Until our indebtedness is reduced substantially, interest expense will continue to represent a significant percentage of our income from operations.

Loss on Early Extinguishment of Debt

During the first quarter of fiscal 2008, we utilized borrowings under the revolving credit facility portion of our Credit Facility to repay $35.0 million of the term loan under the Credit Facility. In connection with the term loan repayment, we retired a proportional share of the term loan debt issuance costs and recorded the resulting loss on extinguishment of debt of $0.5 million. In April 2007, we utilized the net proceeds from the 1.625% Convertible Notes and borrowings under the revolving credit facility portion of our Credit Facility to repay $128.0 million of the term loan under the Credit Facility. In July 2007, we utilized borrowings under the revolving credit facility portion of our Credit Facility to repay an additional $25.0 million of the term loan under the Credit Facility. In connection with the term loan repayments, we retired a proportional share of the term loan debt issuance costs and recorded the resulting loss on early extinguishment of debt of $2.6 million during fiscal 2007.

Income Taxes

The effective tax rate decreased from 34.5% in fiscal 2007 to 33.7% in fiscal 2008 primarily as a result of higher inventory contributions and an increase in the statutory percentage used to determine the tax deduction related to domestic production activities.

Liquidity and Capital Resources

We have historically funded our operations with a combination of internally generated funds and borrowings. Our principal uses of cash are for operating expenses, servicing long-term debt, acquisitions, working capital, repurchases of our common stock, payment of income taxes and capital expenditures.

Net cash provided by operations in fiscal 2009 increased $17.9 million to $110.1 million as compared to $92.2 million in fiscal 2008. The increase was primarily the result of net income after considering the $38.3 million non-cash impairment of indefinite-lived assets, offset by a reduction in our deferred tax liability as a result of the impairment and an increased inventory balance in connection with our launch of Gold Bond Sanitizing Moisturizer in the fourth quarter of fiscal 2009 and inventory balances for other products in preparation for our fiscal 2010 new product launches.

Investing activities used cash of $4.3 million and $6.2 million in fiscal 2009 and 2008, respectively. The decrease in cash used in investing activities was a result of decreases in our interest rate swap liability and other assets and by an increase

in purchases of property, plant and equipment as we funded the construction of a new manufacturing facility that is expected to be completed in late fiscal 2010.

Financing activities used cash of $73.5 million and $69.1 million in fiscal 2009 and 2008, respectively. In fiscal 2009, we reduced borrowings outstanding on the 7.0% Subordinated Notes and our Credit Facility and repurchased shares of our common stock. In fiscal 2008, we reduced borrowings outstanding under our Credit Facility and repurchased shares of our common stock.

As of November 30, 2009, our total debt was $391.0 million, consisting of $90.2 million of our 7.0% Subordinated Notes, $96.3 million of our 2.0% Convertible Notes, $100.0 million of our 1.625% Convertible Notes and $104.5 million outstanding under the term loan portion of our Credit Facility. In November 2006, we entered into an interest rate swap that expired on January 15, 2010. As of November 30, 2009, we were in compliance with all covenants in our Credit Facility and 7.0% Subordinated Notes.

During fiscal 2009, we repurchased 625,642 shares of our common stock for $34.6 million. Effective September 30, 2009, our board of directors increased the authorization for us to repurchase shares of our common stock to $100.0 million under the terms of our existing stock repurchase program. As of November 30, 2009, $91.5 million remained available under such authorization to repurchase shares of our common stock.

We believe that cash provided by operating activities, our cash and cash equivalents balance and funds available under the revolving credit facility portion of our Credit Facility will be sufficient to fund our capital expenditures, debt service and working capital requirements for the foreseeable future as our business is currently conducted. It is likely that any acquisitions we make in the future will require us to obtain additional financing. If additional financing is required, there are no assurances that it will be available, or, if available, that it can be obtained on terms favorable to us or not dilutive to our future earnings.

Contractual Obligations

The following data summarizes our contractual obligations as of November 30, 2009. We had no commercial obligations as of November 30, 2009.

	Payments due by
Contractual Obligations:	Total		Within 1 year		2-3 years		4-5 years		After 5 years
	(dollars in thousands)
Long-term debt	$	391,040	$	3,000	$	6,000	$	382,040	$	–
Interest payments		50,580		13,441		24,677		12,462		–
Operating leases		1,410		739		618		48		5
Purchase commitments		10,671		5,759		3,806		1,106		–
Endorsements		2,300		1,400		900		–		–
Total	$	456,001	$	24,339	$	36,001	$	395,656	$	5

Purchase orders or contracts for the purchase of inventory and other goods and services are not included in the table above. We are not able to determine the aggregate amount of such purchase orders that represent contractual obligations, as purchase orders may represent authorizations to purchase rather than binding agreements. Our purchase orders are based on our current distribution needs and are fulfilled by our vendors within short time horizons. Other than as presented in the table above, we do not have significant agreements for the purchase of inventory or other goods specifying minimum quantities or fixed prices that exceed our expected requirements for three months. We have also excluded from the table above the liability for unrecognized tax benefits due to the uncertainty of payment and amount of payment per period. As of November 30, 2009, we have a gross liability for unrecognized tax benefits, including interest, of $1.6 million (see note 7 to the consolidated financial statements).

Interest payments consist of interest at the November 30, 2009 effective rate of 5.62% per annum on the $104.5 million term loan portion of our Credit Facility due 2013, the 7.0% Subordinated Notes due 2014, the 2.0% Convertible Notes due 2013 and the 1.625% Convertible Notes due 2014.

We have no existing off-balance sheet financing arrangements.

Foreign Operations

Historically, our primary foreign operations have been conducted through our Canadian and United Kingdom (“U.K.”) subsidiaries. Our European business is conducted through Chattem Global Consumer Products Limited, a wholly-owned subsidiary located in Limerick, Ireland. In connection with the ACT Acquisition, we have been conducting business in Greece through Chattem Greece, a wholly-owned subsidiary located in Alimos Attica, Greece. In fiscal 2008, we established Chattem Peru SRL (“Chattem Peru”) a wholly-owned subsidiary located in Lima, Peru. Chattem Peru utilizes third party distributors to sell certain of our Selsun Blue products throughout Peru. The functional currencies of these subsidiaries are Canadian dollars, British pounds, Euros and Peruvian Sols, respectively. Fluctuations in exchange rates can impact operating results, including total revenues and expenses, when translations of the subsidiary financial statements are made in accordance with FASB ASC Topic 830, “Foreign Currency Matters”. For fiscal 2009 and 2008, these subsidiaries accounted for 5% and 7% of total consolidated revenues, respectively, and 3% and 2% of total consolidated assets, respectively. It has not been our practice to hedge our assets and liabilities in Canada, the U.K., Ireland, Greece, and Peru or our intercompany transactions due to the inherent risks associated with foreign currency hedging transactions and the timing of payments between us and our foreign subsidiaries. Historically, gains or losses from foreign currency transactions have not had a material impact on our operating results. Gains of $0.7 million and losses of $1.0 million from foreign currency transactions for the years ended November 30, 2009 and 2008, respectively, are included in selling, general and administrative expenses in the consolidated statements of income.

Recent Accounting Pronouncements

See note 2 of Notes to Consolidated Financial Statements included in Item 8 “Financial Statements and Supplementary Data.”

Forward Looking Statements

We may from time to time make written and oral forward-looking statements. Written forward-looking statements may appear in documents filed with the Securities and Exchange Commission, in press releases and in reports to shareholders or be made orally in publicly accessible conferences or conference calls. The Private Securities Litigation Reform Act of 1995 contains a safe harbor for forward-looking statements. We rely on this safe harbor in making such disclosures. These forward-looking statements generally can be identified by use of phrases such as “believe,” “plan,” “expect,” “anticipate,” “intend,” “forecast” or other similar words or phrases. These forward-looking statements relate to, among other things, our strategic and business initiatives and plans for growth or operating changes; our financial condition and results of operation; future events, developments or performance; and management’s expectations, beliefs, plans, estimates and projections. The forward-looking statements are based on management’s current beliefs and assumptions about expectations, estimates, strategies and projections. These statements are not guarantees of future performance and involve risks, uncertainties and assumptions that are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed or forecasted in such forward-looking statements. We undertake no obligation to update publicly any forward-looking statements whether as a result of new information, future events or otherwise. Factors that could cause our actual results to differ materially from those anticipated in the forward-looking statements in this Form 10-K and the documents incorporated herein by reference include the following:

•

if the Merger contemplated by the Merger Agreement with sanofi and Merger Sub does not occur, it could have a material adverse effect on our business, results of operations and financial condition;

•

our business could be adversely affected by a prolonged downturn or recession in the United States and/or the other countries in which we conduct significant business;

•

we may be adversely affected by factors affecting our customer’s businesses;

•

we rely on a few large customers, particularly Wal-Mart Stores, Inc., for a significant portion of our sales;

•

we face significant competition in the OTC healthcare, toiletries and dietary supplements markets;

•

litigation may adversely affect our business, financial condition and results of operations;

•

we may receive additional claims that allege personal injury from ingestion of Dexatrim;

•

our initiation of a voluntary recall of our Icy Hot Heat Therapy products could expose us to additional product liability claims;

•

we are subject to the risk of doing business internationally;

•

our product liability insurance coverage may be insufficient to cover existing or future liability claims;

•

we have a significant amount of debt that could adversely affect our business and growth prospects;

•

we may discontinue products or product lines, which could result in returns and asset write-offs, and/or engage in product recalls, any of which would reduce our cash flow and earnings;

•

we may be adversely affected by fluctuations in buying decisions of mass merchandise, drug and food trade buyers and the trend toward retail trade consolidation;

•

our business is regulated by numerous federal, state and foreign governmental authorities, which subjects us to elevated compliance costs and risks of non-compliance;

•

our success depends on our ability to anticipate and respond in a timely manner to changing consumer preferences;

•

our projections of earnings are highly subjective and our future earnings could vary in a material amount from our projections;

•

we rely on third party manufacturers for a portion of our product portfolio, including products under our Gold Bond, Icy Hot, Selsun, Dexatrim, ACT, Unisom and Cortizone-10 brands;

•

our dietary supplement business could suffer as a result of injuries caused by dietary supplements in general, unfavorable scientific studies or negative press;

•

our business could be adversely affected if we are unable to successfully protect our intellectual property or defend claims of infringement by others;

•

because most of our operations are located in Chattanooga, Tennessee, we are subject to regional and local risks;

•

we depend on sole or limited source suppliers for ingredients in certain of our products, and our inability to buy these ingredients would prevent us from manufacturing these products;

•

our acquisition strategy is subject to risk and may not be successful;

•

the terms of our outstanding debt obligations limit certain of our activities;

•

to service our indebtedness, we will require a significant amount of cash;

•

our operations are subject to significant environmental laws and regulations;

•

we are dependent on certain key executives, the loss of whom could have a material adverse effect on our business;

•

our shareholder rights plan and charter contain provisions that may delay or prevent a merger, tender offer or other change of control of us;

•

the trading price of our common stock may be volatile;

•

we have no current intentions of paying dividends to holders of our common stock;

•

we can be affected adversely and unexpectedly by the implementation of new, or changes in the interpretation of existing, accounting principles generally accepted in the United States of America (“GAAP”);

•

identification of a material weakness in our internal controls over financial reporting may adversely affect our financial results;

•

the convertible note hedge and warrant transactions may affect the value of our common stock and our convertible notes;

•

conversion of our convertible notes may dilute the ownership interest of existing shareholders, including holders who had previously converted their convertible notes;

•

virtually all of our assets consists of intangibles; and

•

other risks described in our Securities and Exchange Commission filings.

Item 7A. Quantitative and Qualitative Disclosures About Market Risks

We are exposed to market risk from changes in interest rates and foreign currency exchange rates, which may adversely affect our results of operations and financial condition. We seek to minimize the risks from these interest rates and foreign currency exchange rate fluctuations through our regular operating and financing activities.

Our exposure to interest rate risk currently relates to amounts outstanding under our Credit Facility. Borrowings under the revolving credit facility portion of our Credit Facility bear interest at LIBOR plus applicable percentages of 2.25% to 2.75% or the highest of the federal funds rate plus 0.50%, the prime rate, or the Eurodollar base rate plus 1.00% (the “Base Rate”), plus applicable percentages of 1.25% to 1.75%. The applicable percentages are calculated based on our leverage ratio. The term loan under our Credit Facility bears interest at either LIBOR plus 1.75% or the Base Rate plus 0.75%. As of November 30, 2009, we had no borrowings outstanding under the revolving credit facility portion of our Credit Facility and $104.5 million was outstanding under the term loan portion of our Credit Facility, which was bearing interest at LIBOR plus 1.75% or 5.62%. The 7.0% Subordinated Notes, the 1.625% Convertible Notes and the 2.0% Convertible Notes are fixed interest rate obligations.

In November 2006, we entered into an interest rate swap agreement effective January 2007. As of November 30, 2009, the decrease in fair value of $1.5 million, net of tax, was recorded to other comprehensive income and the swap was deemed to be an effective cash flow hedge as of November 30, 2009 and expired on January 15, 2010.

The impact on our results of operations of a one-point rate change on the January 20, 2010 outstanding $103.8 million term loan balance of our Credit Facility for the next twelve months would be approximately $0.6 million, net of tax.

We are subject to risk from changes in the foreign exchange rates relating to our Canadian, U.K., Irish, Grecian and Peruvian subsidiaries. Assets and liabilities of these subsidiaries are translated to U.S. dollars at quarter-end exchange rates. Income and expense items are translated at average rates of exchange prevailing during the year. Translation adjustments are accumulated as a separate component of shareholders’ equity. Gains and losses, which result from transactions denominated in foreign currencies, are included in selling, general and administrative expenses in our consolidated statements of income. The potential loss resulting from a hypothetical 10.0% adverse change in the quoted foreign currency exchange rate amounts to approximately $1.5 million as of November 30, 2009.

This market risk discussion contains forward-looking statements. Actual results may differ materially from this discussion based upon general market conditions and changes in financial markets.

Item 8. Financial Statements and Supplementary Data

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of

Chattem, Inc.:

We have audited the accompanying consolidated balance sheets of Chattem, Inc. (a Tennessee corporation) and subsidiaries (“the Company”) as of November 30, 2009 and 2008, and the related consolidated statements of income, shareholders’ equity and cash flows for each of the three years in the period ended November 30, 2009. Our audits of the basic financial statements included the financial statement schedule listed in the index appearing under Item 15 (a)(2). These consolidated financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Chattem, Inc. and subsidiaries as of November 30, 2009 and 2008, and the results of its operations and its cash flows for each of the three years in the period ended November 30, 2009, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

The Company has adopted certain provisions of ASC Topic 740, “Income Taxes” (previously reported as Interpretation No. 48, “Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109”, as amended by FSP FIN-48-1, “Definition of Settlement in FASB Interpretation No. 48,” issued by the Financial Accounting Standards Board) in fiscal 2008.

The Company has adopted certain provisions of ASC Topic 715 “Compensation – Retirement Benefits” (previously reported as Financial Accounting Standards No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans”) in fiscal 2007.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Chattem, Inc. and subsidiaries’ internal control over financial reporting as of November 30, 2009, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and our report dated January 28, 2010 expressed an unqualified opinion on the effectiveness of internal control over financial reporting.

/s/ GRANT THORNTON LLP

Charlotte, North Carolina

January 28, 2010

Consolidated Balance Sheets

November 30, 2009 and 2008

(In thousands)

ASSETS	2009		2008

CURRENT ASSETS: Cash and cash equivalents	$	64,766	$	32,310
Accounts receivable, less allowances of $10,401 in 2009 and $9,718 in 2008		54,607		49,417
Inventories, net		48,775		40,933
Deferred income taxes		5,585		3,968
Prepaid expenses and other current assets		2,494		2,451
Total current assets		176,227		129,079

PROPERTY, PLANT AND EQUIPMENT, NET		35,065		32,243

OTHER NONCURRENT ASSETS:
Patents, trademarks and other purchased product rights, net		577,466		616,670
Debt issuance costs, net		9,860		12,253
Other		2,542		2,727
Total other noncurrent assets		589,868		631,650

TOTAL ASSETS	$	801,160	$	792,972

The accompanying notes are an integral part of these consolidated financial statements.

Consolidated Balance Sheets

November 30, 2009 and 2008

(In thousands)

LIABILITIES AND SHAREHOLDERS’ EQUITY	2009			2008

CURRENT LIABILITIES:
Current maturities of long-term debt	$	3,000		$	3,000
Accounts payable		22,216			18,116
Bank overdrafts		461			1,184
Accrued liabilities		21,345			21,293
Total current liabilities		47,022			43,593

LONG-TERM DEBT, less current maturities		388,040			456,500

DEFERRED INCOME TAXES		41,001			35,412

OTHER NONCURRENT LIABILITIES		935			1,609

COMMITMENTS AND CONTINGENCIES (Note 12)

SHAREHOLDERS’ EQUITY:
Preferred shares, without par value, authorized 1,000, none issued		—			—
Common shares, without par value, authorized 100,000, issued and outstanding 18,916 in 2009 and 18,978 in 2008		30,640			28,926
Retained earnings		294,401			231,230
		325,041			260,156
Cumulative other comprehensive income (loss), net of taxes
Interest rate hedge adjustment		(274	)		(1,787	)
Foreign currency translation adjustment		664			(968	)
Unrealized actuarial gains and losses		(1,269	)		(1,543	)
Total shareholders’ equity		324,162			255,858

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	801,160		$	792,972

The accompanying notes are an integral part of these consolidated financial statements.

Consolidated Statements of Income

For the Years Ended November 30, 2009, 2008 and 2007

(In thousands, except per share amounts)

	2009			2008			2007

TOTAL REVENUES	$	463,342		$	454,879		$	423,378

COSTS AND EXPENSES:
Cost of sales		139,768			131,620			129,055
Advertising and promotion		105,684			118,093			112,206
Selling, general and administrative		60,300			62,590			57,878
Impairment of indefinite-lived intangible assets		38,258			—			—
Product recall expenses		—			6,269			—
Litigation settlement		—			11,271			—
Acquisition expenses		—			—			2,057
Total costs and expenses		344,010			329,843			301,196

INCOME FROM OPERATIONS		119,332			125,036			122,182

OTHER INCOME (EXPENSE):
Interest expense		(20,784	)		(25,310	)		(29,930	)
Investment and other income, net		327			715			1,460
Loss on early extinguishment of debt		(1,571	)		(526	)		(2,633	)
Total other income (expense)		(22,028	)		(25,121	)		(31,103	)

INCOME BEFORE INCOME TAXES		97,304			99,915			91,079

PROVISION FOR INCOME TAXES		34,133			33,629			31,389

NET INCOME	$	63,171		$	66,286		$	59,690

NUMBER OF COMMON SHARES:
Weighted average outstanding, basic		19,178			18,980			18,927
Weighted average and potential dilutive outstanding		19,281			19,364			19,350

NET INCOME PER COMMON SHARE:

Basic	$	3.29		$	3.49		$	3.15

Diluted	$	3.28		$	3.42		$	3.08

The accompanying notes are an integral part of these consolidated financial statements.

Consolidated Statements of Shareholders’ Equity

For the Years Ended November 30, 2009, 2008 and 2007

(In thousands)

	Common Shares			Retained Earnings			Cumulative Other Comprehensive Income (Loss)			Total
Balance, November 30, 2006	$	30,452		$	105,965		$	(836	)	$	135,581
Comprehensive income (loss):
Net income		—			59,690			—			59,690
Interest rate hedge adjustment, net of taxes of $671		—			—			(1,150	)		(1,150	)
Foreign currency translation adjustment		—			—			1,247			1,247
Total comprehensive income		—			—			—			59,787
Adjustment to initially apply certain provisions of FASB ASC Topic 715 and recognize postretirement loss, net of taxes of $9		—			—			(8	)		(8	)
Stock option expense		6,208			—			—			6,208
Stock options exercised		16,661			—			—			16,661
Tax benefit realized from stock option plans		7,938			—			—			7,938
Stock repurchases		(23,601	)		—			—			(23,601	)
Payment for purchase of note hedge, net of tax benefit		(18,408	)		—			—			(18,408	)
Proceeds from issuance of warrant		17,430			—			—			17,430
Issuance of 2 common shares for non-employee directors’ compensation		120			—			—			120
Balance, November 30, 2007	$	36,800		$	165,655		$	(747	)	$	201,708
Comprehensive income (loss):
Net income		—			66,286			—			66,286
Interest rate hedge adjustment, net of taxes of $69		—			—			(40	)		(40	)
Foreign currency translation adjustment		—			—			(1,976	)		(1,976	)
Unrealized actuarial gains and losses, net of taxes of $945		—			—			(1,535	)		(1,535	)
Total comprehensive income		—			—			—			62,735
Stock option expense		6,255			—			—			6,255
Stock options exercised		8,372			—			—			8,372
Tax benefit realized from stock option plans		3,709			—			—			3,709
Stock repurchases		(26,327	)		—			—			(26,327	)
Issuance of 2 common shares for non-employee directors’ compensation		117			—			—			117
Net cumulative effect of adoption of certain provisions of FASB ASC Topic 740		—			(711	)		—			(711	)
Balance, November 30, 2008	$	28,926		$	231,230		$	(4,298	)	$	255,858

	Common Shares			Retained Earnings		Cumulative Other Comprehensive Income (Loss)			Total
Balance, November 30, 2008	$	28,926		$	231,230	$	(4,298	)	$	255,858
Comprehensive income (loss):
Net income		—			63,171		—			63,171
Interest rate hedge adjustment, net of taxes of $931		—			—		1,513			1,513
Foreign currency translation adjustment		—			—		1,632			1,632
Unrealized actuarial gains and losses, net of taxes of $168		—			—		274			274
Total comprehensive income		—			—		—			66,590
Stock option expense		7,851			—		—			7,851
Stock options exercised		2,914			—		—			2,914
Tax benefit realized from stock option plans		311			—		—			311
Stock repurchases		(34,633	)		—		—			(34,633	)
Issuance of 2 common shares for non-employee directors’ compensation		119			—		—			119
Issuance of 487 common shares		28,700			—		—			28,700
Tax impact of convertible debt settlement		(3,548	)		—		—			(3,548	)
Balance, November 30, 2009	$	30,640		$	294,401	$	(879	)	$	324,162

The accompanying notes are an integral part of these consolidated financial statements.

Consolidated Statements of Cash Flows

For the Years Ended November 30, 2009, 2008 and 2007

(In thousands)

	2009			2008			2007
OPERATING ACTIVITIES:
Net income	$	63,171		$	66,286		$	59,690
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		7,667			8,386			8,843
Deferred income taxes		1,854			18,139			12,718
Tax benefit realized from stock options exercised		(311	)		(3,709	)		(8,291	)
Stock option expense		7,770			5,970			5,622
Loss on early extinguishment of debt		1,571			526			2,633
Other, net		117			(1,463	)		(189	)
Impairment of indefinite-lived intangible assets		38,258			—			—
Changes in operating assets and liabilities, net of acquisitions:
Accounts receivable		(5,190	)		(5,664	)		(13,901	)
Inventories		(7,804	)		2,331			(5,820	)
Prepaid expenses and other current assets		(43	)		(391	)		1,249
Accounts payable and accrued liabilities		2,990			1,747			24,180
Net cash provided by operating activities		110,050			92,158			86,734

INVESTING ACTIVITIES:
Purchases of property, plant and equipment		(6,937	)		(4,621	)		(6,295	)
Acquisitions of brands		—			—			(415,765	)
(Increase) decrease in other assets, net		2,653			(1,534	)		1,910
Net cash used in investing activities		(4,284	)		(6,155	)		(420,150	)

FINANCING ACTIVITIES:
Repayment of long-term debt		(20,260	)		(38,000	)		(154,500	)
Proceeds from long-term debt		—			—			400,000
Proceeds from borrowings under revolving credit facility		1,000			151,500			159,000
Repayments of revolving credit facility		(20,500	)		(162,000	)		(129,000	)
Change in bank overdraft		(723	)		(6,400	)		1,760
Repurchase of common shares		(34,633	)		(26,327	)		(23,601	)
Proceeds from exercise of stock options		2,914			8,372			16,661
Purchase of note hedge		—			—			(29,500	)
Proceeds from issuance of warrants		—			—			17,430
Increase in debt issuance costs		(1,490	)		—			(9,383	)
Debt retirement costs		(151	)		—			—
Premium paid on interest rate cap agreement		—			—			(114	)
Proceeds from sale of interest rate cap		—			—			909
Tax benefit realized from stock options exercised		311			3,709			8,291
Net cash (used in) provided by financing activities		(73,532	)		(69,146	)		257,953

EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS		222			46			343

CASH AND CASH EQUIVALENTS:
Increase (decrease) for the year		32,456			16,903			(75,120	)
At beginning of year		32,310			15,407			90,527
At end of year	$	64,766		$	32,310		$	15,407

The accompanying notes are an integral part of these consolidated financial statements.

Notes to Consolidated Financial Statements

All monetary and share, other than per share, amounts are expressed in thousands. Our fiscal years ended November 30, 2007, November 30, 2008 and November 30, 2009 are referred to herein as fiscal 2007, fiscal 2008 and fiscal 2009, respectively.

(1) NATURE OF OPERATIONS

Chattem, Inc. and its wholly-owned subsidiaries (“we”, “us”, “our” or “Chattem”) market and manufacture branded over-the-counter (“OTC”) health care products. The products are sold primarily through mass merchandisers, independent and chain drug stores, drug wholesalers and food stores in the United States (“U.S.”) and in various markets in approximately 80 countries throughout the world.

(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

BASIS OF CONSOLIDATION

The accompanying consolidated financial statements include the accounts of Chattem and its wholly-owned subsidiaries. All significant intercompany transactions and balances have been eliminated.

CASH AND CASH EQUIVALENTS

We consider all short-term deposits and investments with original maturities of three months or less to be cash equivalents. Short-term cash investments are placed with high credit quality financial institutions or in low risk, liquid instruments. These cash and cash equivalents balances periodically exceed the Federal Deposit Insurance Corporation’s insurance limit. Cash denominated in foreign currency was $8,635 and $6,302 as of November 30, 2009 and 2008, respectively.

INVENTORIES

Inventory costs include materials, labor and factory overhead. Inventories are valued at the lower of cost using the first-in, first-out (“FIFO”) method or market. We estimate reserves for inventory obsolescence based on our judgment of future realization.

PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment are recorded at cost. Depreciation is computed using the straight-line method over the estimated useful lives of 7 to 40 years for buildings and improvements and 3 to 15 years for machinery and equipment. Expenditures for maintenance and repairs are charged to expense as incurred. Depreciation expense for fiscal 2009, fiscal 2008 and fiscal 2007 was $4,172, $4,560 and $4,735, respectively.

PATENTS, TRADEMARKS AND OTHER PURCHASED PRODUCT RIGHTS

The costs of acquired patents and other purchased product rights are capitalized and amortized over their respective useful lives, generally 5 years.

The provisions of Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 350, “Intangibles-Goodwill and Other” (“ASC 350”), require certain fair-value-based tests of the carrying value of indefinite-lived intangible assets at least annually.

See note 4 for a discussion of our annual impairment testing for fiscal 2009, in which we recorded a non-cash impairment charge of $38,258 related to certain of our indefinite-lived intangible assets.

Under FASB ASC Topic 360, “Property, Plant and Equipment” (“ASC 360”) we evaluate whether events and circumstances have occurred that indicate the remaining useful life of finite-lived assets might warrant revision or that the remaining balance may not be recoverable. When factors indicate that finite-lived assets should have been evaluated for possible impairment, we use an estimate of the future undiscounted net cash flows of the related assets over the remaining lives of the assets in measuring whether the carrying values of finite-lived assets were recoverable.

LIFE INSURANCE

We own 20 life insurance policies on certain current and former members of our board of directors and management that have a cash surrender value of $2,328 and $2,567 as of November 30, 2009 and 2008, respectively. We anticipate premium costs on these policies to approximate $23 for each of the five succeeding fiscal years.

DEBT ISSUANCE COSTS

We have incurred debt issuance costs in connection with our long-term debt. These costs are capitalized and amortized over the term of the related debt. Amortization expense related to debt issuance costs was $2,505, $2,651 and $2,719 in fiscal 2009, fiscal 2008 and fiscal 2007, respectively. Accumulated amortization of these costs was $8,059 and $6,434 at November 30, 2009 and 2008, respectively. In November 2006, we completed a private offering of $125,000 of 2.0% Convertible Senior Notes due 2013 (“2.0% Convertible Notes”) resulting in the capitalization of debt issuance costs of $517 in fiscal 2007, which is being amortized as additional interest expense through 2013. In January 2007, we completed an amendment to the Amended Revolving Credit Facility resulting in the capitalization of debt issuance costs of $5,507, which is being amortized as additional interest expense through 2013. In April 2007, we completed an amendment to our Credit Facility resulting in additional debt issuance costs of $625, which is being amortized as additional interest expense through 2013. In April 2007, we completed a private offering of $100,000 of 1.625% Convertible Senior Notes due 2014 (“1.625% Convertible Notes”) resulting in the capitalization of debt issuance costs of $2,734, which is being amortized as additional interest expense through 2014. In September 2009, we completed an amendment to our Credit Facility resulting in additional debt issuance costs of $1,490, which is being amortized as additional interest expense through 2013.

During 2007, we repaid $153,000 of the term loan under the Credit Facility, retiring a proportional share of the related debt issuance costs and recording a loss on extinguishment of debt of $2,633. During 2008, we repaid an additional $35,000 of the term loan under the Credit Facility. In connection with the term loan repayment, we retired a proportional share of the term loan debt issuance costs and recorded the resulting loss on early extinguishment of debt of $526 in fiscal 2008. In December 2008, we issued 487 shares of our common stock in exchange for $28,700 of our outstanding 2.0% Convertible Notes, retiring a proportional share of the related debt issuance costs and recording a loss on early extinguishment of debt of $696 in fiscal 2009. Also during fiscal 2009, we repurchased $17,260 of our 7.0% Senior Subordinated Notes due 2014 (“7.0% Subordinated Notes”) in open market transactions at an average premium of 0.9% above the face amount of the 7.0% Subordinated Notes, retiring a proportional share of the related debt issuance costs. The premium paid for the 7.0% Subordinated Notes combined with the early extinguishment of the proportional debt issuance costs resulted in a loss on early extinguishment of debt of $875 in fiscal 2009.

BANK OVERDRAFT

Bank overdraft represents outstanding checks in excess of current cash levels. We fund bank overdrafts from our short-term investments and our operating cash flows.

PRODUCT DEVELOPMENT

Product development costs relate primarily to the development of new products and are expensed as incurred. Such expenses were $6,739, $5,672 and $5,525 in fiscal 2009, 2008 and 2007, respectively, and are included in selling, general and administrative expenses on our consolidated statements of income.

ADVERTISING EXPENSES

The cost of advertising is expensed in the fiscal year in which the related advertising takes place. Production and communication costs are expensed in the period in which the related advertising begins running. Advertising expense for fiscal 2009, 2008 and 2007 was $66,984, $76,405, and $74,510, respectively. At November 30, 2009 and 2008, we reported $953 and $1,251, respectively, of advertising paid for in fiscal 2009 and fiscal 2008, which will run or did run in the next fiscal year. These amounts are included in prepaid expenses and other current assets in the consolidated balance sheets.

FOREIGN CURRENCY TRANSLATION

Assets and liabilities of our Canadian, United Kingdom (“U.K.”), Irish, Grecian and Peruvian subsidiaries are translated to U.S. dollars at year-end exchange rates. Income and expense items are translated at average rates of exchange prevailing during the year. Translation adjustments are accumulated as a separate component of shareholders’ equity. Gains (losses) which result from foreign currency transactions amounted to $693, $(982) and $295 in fiscal 2009, 2008 and 2007, respectively, and are included in selling, general and administrative expenses on our consolidated statements of income.

USE OF ESTIMATES

The preparation of financial statements in accordance with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Several different estimates or methods can be used by management that might yield different results. The following are the significant estimates used by management in the preparation of the consolidated financial statements for fiscal 2009, 2008 and 2007:

Allowance For Doubtful Accounts

As of November 30, 2009, an estimate was made of the collectibility of the outstanding accounts receivable balances. This estimate requires the utilization of outside credit services, knowledge about the customer and the customer’s industry, new developments in the customer’s industry and operating results of the customer as well as general economic conditions and historical trends. When all these facts are compiled, a judgment as to the collectibility of the individual account is made. Many factors can impact this estimate, including those noted in this paragraph. The adequacy of the estimated allowance may be impacted by the deterioration in the financial condition of a large customer, weakness in the economic environment resulting in a higher level of customer bankruptcy filings or delinquencies and the competitive environment in which the customer operates. During the year ended November 30, 2009, we performed an assessment of the collectibility of trade accounts receivable and did not make any significant adjustments to our estimate of allowance for doubtful accounts. The balance of allowance for doubtful accounts was $483 and $419 at November 30, 2009 and 2008, respectively.

Revenue Recognition

Revenue is recognized when our products are shipped and title transfers to our customers. It is generally our policy across all classes of customers that all sales are final. As is common in the consumer products industry, customers return products for a variety of reasons including products damaged in transit, discontinuance of a particular size or form of product and shipping errors. As sales are recorded, we accrue an estimated amount for product returns, as a reduction of these sales, based upon our historical experience and consideration of discontinued products, product divestitures, estimated inventory levels held by our customers and retail point-of-sale data on existing and newly introduced products. The level of returns may fluctuate from our estimates due to several factors including weather conditions, customer inventory levels and competitive conditions. We charge the allowance account for product returns when the customer provides appropriate supporting documentation that the product is properly destroyed or upon receipt of the product.

We separate returns into the two categories of seasonal and non-seasonal products. We use the historical return detail of seasonal and non-seasonal products for at least the most recent three fiscal years on generally all products, which is normalized for any specific occurrence that is not reasonably likely to recur, to determine the amount of product returned as a percentage of sales, and estimate an allowance for potential returns based on product sold in the current period. To consider product sold in current and prior periods, an estimate of inventory held by our retail customers is calculated based on customer inventory detail. This estimate of inventory held by our customers, along with historical returns as a percentage of sales, is used to determine an estimate of potential product returns. This estimate of the allowance for seasonal and non-seasonal returns is further analyzed by considering retail customer point-of-sale data. We also consider specific events, such as discontinued product or product divestitures, when determining the adequacy of the allowance.

Our estimate of product returns for seasonal and non-seasonal products was $1,503 and $1,276 as of November 30, 2009, $1,376 and $1,270 as of November 30, 2008 and $1,174 and $1,254 as of November 30, 2007. Due to higher sales volume during fiscal 2009 and 2008, we increased our estimate of seasonal returns by $127 and $202, respectively, which resulted in a decrease to net sales in our consolidated financial statements. During fiscal 2009 and 2008, our estimate of non-

seasonal returns remained consistent as compared to fiscal 2008 and 2007, respectively. Each percentage point change in the seasonal return rate would impact net sales by approximately $207. Each percentage point change in the non-seasonal return rate would impact net sales by approximately $638.

We routinely enter into agreements with customers to participate in promotional programs. The cost of these programs is recorded as either advertising and promotion expense or as a reduction of sales. A significant portion of the programs are recorded as a reduction of sales and generally take the form of coupons and vendor allowances, which are normally taken via temporary price reductions, scan downs, display activity and participations in in-store programs provided uniquely by the customer. We also enter into cooperative advertising programs with certain customers, the cost of which is recorded as advertising and promotion expense. In order for retailers to receive reimbursement under such programs, the retailer must meet specified advertising guidelines and provide appropriate documentation of the advertisement being run.

We analyze promotional programs in two primary categories -- coupons and vendor allowances. Customers normally utilize vendor allowances in the form of temporary price reductions, scan downs, display activity and participations in in-store programs provided uniquely by the customer. We estimate the accrual for outstanding coupons by utilizing a third-party clearinghouse to track coupons issued, coupon value, distribution and expiration dates, quantity distributed and estimated redemption rates that are provided by us. We estimate the redemption rates based on internal analysis of historical coupon redemption rates and expected future retail sales by considering recent point of sale data. The estimate for vendor allowances is based on estimated unit sales of a product under a program and amounts committed for such programs in each fiscal year. Estimated unit sales are determined by considering customer forecasted sales, point of sale data and the nature of the program being offered. The three most recent years of expected program payments versus actual payments made and current year retail point of sale trends are analyzed to determine future expected payments. Customer delays in requesting promotional program payments due to their audit of program participation and resulting request for reimbursement is also considered to evaluate the accrual for vendor allowances. The cost of these programs is often variable based on the number of units actually sold. As of November 30, 2009, the coupon accrual and reserve for vendor allowances were $2,064 and $5,970, respectively, and $1,756 and $4,907, respectively, as of November 30, 2008. Each percentage point change in promotional program participation would impact net sales by approximately $272 and advertising and promotion expense by an insignificant amount.

Income Taxes

We account for income taxes using the asset and liability approach as prescribed by FASB ASC Topic 740, “Income Taxes” (“ASC 740”). This approach requires recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the consolidated financial statements or tax returns. Using the enacted tax rates in effect for the year in which the differences are expected to reverse, deferred tax assets and liabilities are determined based on the differences between the financial reporting and the tax basis of an asset or liability. We adopted certain provisions of ASC 740 on December 1, 2007, which clarified the accounting for uncertainty in income taxes recognized in the financial statements. Our estimated annual effective income tax rate during fiscal 2009 was 35.1%, as compared to 33.7% in fiscal 2008 and 34.5% in fiscal 2007.

DERIVATIVE FINANCIAL INSTRUMENTS

We entered into an interest rate cap agreement effective June 2004 as a means of managing our interest rate exposure and not for trading purposes. During fiscal 2007, the interest rate cap was sold for $353. As a result, $49 was recorded as additional interest expense in the accompanying consolidated statement of income.

In November 2006, we entered into an interest rate cap agreement effective January 2007 as a means of managing our interest rate exposure and not for trading purposes. During fiscal 2007, the interest rate cap was sold for $555. As a result, $50 was recorded as additional interest expense in the accompanying consolidated statement of income.

In November 2006, we entered into an interest rate swap agreement effective January 2007 as a means of managing our interest rate exposure and not for trading purposes. As of November 30, 2009, the interest rate swap was deemed to be an effective cash flow hedge and the change in fair value of $1,513, net of tax, was recorded to other comprehensive income. The swap expired on January 15, 2010.

CONCENTRATIONS OF CREDIT RISK

Financial instruments, which subject us to concentrations of credit risk, consist primarily of accounts receivable and short-term cash investments. Our exposure to credit risk associated with nonpayment of accounts receivable is affected by conditions or occurrences within the retail industry. As a result, we perform ongoing credit evaluations of our customers’ financial position but generally require no collateral from our customers. Our largest customer accounted for 33% of domestic sales in fiscal 2009, 2008 and 2007. That same customer accounted for 33% of domestic accounts receivable as of November 30, 2009 and 2008 and 28% of domestic accounts receivable as of November 30, 2007. No other customer exceeded 10% of our domestic sales as of November 30, 2009, 2008 and 2007. One other customer exceeded 10% of our domestic accounts receivable as of November 30, 2009. No other customer exceeded 10% of our domestic accounts receivable as of November 30, 2008 and 2007. Shoppers Drug Mart, a Canadian retailer, accounted for more than 10% of our international revenues. Our ten largest customers represented approximately 74% of total revenues during fiscal 2009, and approximately 74% of our total domestic accounts receivable at November 30, 2009.

OTHER CONCENTRATIONS

We purchase raw materials and packaging materials from a number of third party suppliers primarily on a purchase order basis. Except for pamabrom, pyrilamine maleate and compap, active ingredients used in our Pamprin and Prēmsyn PMS products, we are not limited to a single source of supply for the ingredients used in the manufacture of our products. Net sales of Pamprin and Prēmsyn PMS products in fiscal 2009 represented $11,619 of our consolidated total revenues in that year. In addition, we have a limited source of supply for selenium sulfide, the active ingredient in Selsun Blue. As a result of the limited supply and increase in worldwide demand, prices have been and are expected to be volatile. We believe that our current sources of supply and potential alternative sources will be adequate to meet future product demands.

SHIPPING AND HANDLING COSTS

Shipping and handling costs of $14,247, $15,479 and $12,105 for fiscal 2009, 2008 and 2007, respectively, are included in selling, general and administrative expenses on our consolidated statements of income.

STOCK-BASED COMPENSATION

We currently provide stock-based compensation under five stock incentive plans that have been approved by our shareholders. Our 1999 Non-Statutory Stock Option Plan for Non-Employee Directors allows for the issuance of up to 200 shares of common stock. The 2000 Non-Statutory Stock Option Plan provides for the issuance of up to 1,500 shares of common stock. The 2003 and 2005 Stock Incentive Plans both provide for the issuance of up to 1,500 shares of common stock. The 2009 Equity Incentive Plan, which was adopted by our board of directors on January 28, 2009 and approved by our shareholders at the April 8, 2009 annual shareholders’ meeting, provides for the issuance of up to 1,750 shares of common stock. Stock options granted under all of these plans generally vest over four years from the date of grant as specified in the plans or by the compensation committee of our board of directors and are exercisable for a period of up to ten years from the date of grant.

The following table represents the impact of stock-based compensation expense on our consolidated statements of income during fiscal 2009, 2008 and 2007 respectively:

	For the Year Ended November 30,
	2009		2008		2007
Income from operations	$	7,770	$	5,970	$	5,622
Provision for income taxes		2,727		2,012		1,940
Net income	$	5,043	$	3,958	$	3,682

Basic net income per share	$	0.26	$	0.21	$	0.19
Diluted net income per share	$	0.26	$	0.20	$	0.19

The fair value of each option award is estimated on the date of grant using the Flex Lattice Model that uses the assumptions noted in the following table. The risk-free interest rate is based on the yield of an applicable term Treasury instrument, the dividend yield is a result of our expectation that we will not pay a dividend in the foreseeable future, the expected life of the option is based on historical exercise behavior and the option’s expected volatility is based on the historical volatility of our common stock price. The following assumptions were used to determine the fair value of stock options grants:

	For the Year Ended November 30,
	2009		2008		2007
Risk-free interest rate		2.61%		3.84%		4.47%
Expected dividend yield		0%		0%		0%
Expected volatility		37%		36%		34%
Expected life (years)		6		6		6

RECENT ACCOUNTING PRONOUNCEMENTS

In December 2007, the FASB amended certain provisions of ASC Topic 805, “Business Combinations” (previously reported as Statement of Financial Accounting Standards (“SFAS”) No. 141R, “Business Combinations”). This amendment establishes principles and requirements for how the acquirer in a business combination recognizes and measures the identifiable assets acquired, liabilities assumed and intangible assets acquired and determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. The provisions of this amendment are effective for acquisitions closing after the first annual reporting period beginning after December 15, 2008. Accordingly, we will apply the provisions of this amendment prospectively to business combinations consummated beginning in the first quarter of our fiscal 2010. We do not expect this amendment to have an effect on our previous acquisitions.

In March 2008, the FASB amended certain provisions of ASC Topic 815, “Derivatives and Hedging” (“ASC 815”) (previously reported as SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities—an amendment of FASB Statement No. 133”). This amendment requires enhanced disclosures about an entity’s derivative and hedging activities. This amendment expands the disclosure requirement, with the intent to provide users of financial statements adequate information about how derivative and hedging activities affect an entity’s financial position, financial performance and cash flows. This amendment is effective for quarterly interim periods beginning after November 15, 2008 and fiscal years that include those quarterly interim periods. We have included all disclosures as required by this amendment, none of which have a material impact on our financial statements.

In April 2008, the FASB amended certain provisions of ASC 350 (previously reported as FASB Staff Position (“FSP”) No. FAS 142-3, “Determination of the Useful Life of Intangible Assets”). In determining the useful life of intangible assets, this amendment removes the requirement to consider whether an intangible asset can be renewed without substantial cost of material modifications to the existing terms and conditions and, instead, requires an entity to consider its own historical experience in renewing similar arrangements. This amendment also requires expanded disclosure related to the determination of intangible asset useful lives and is effective for financial statements issued for fiscal years beginning after December 15, 2008, or our fiscal 2010. We do not expect this amendment to have a material impact on our financial statements.

In May 2008, the FASB amended certain provisions of ASC Topic 740, “Debt” (previously reported as FSP Accounting Principles Board (“APB”) Opinion No. 14-1, “Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement)”). This amendment specifies that issuers of convertible debt instruments should separately account for the liability and equity components of the instrument in a manner that will reflect the entity’s non-convertible debt borrowing rate on the instrument’s issuance date when interest is recognized in subsequent periods. Upon adoption of this amendment, the proceeds received from the issuance of the 2.0% Convertible Notes and the 1.625% Convertible Notes (collectively, the “Convertible Notes”) will be allocated between the liability and equity component by determining the fair value of the liability component using our non-convertible debt borrowing rate at the time the Convertible Notes were issued. The difference between the proceeds of the Convertible Notes and the calculated fair value of the liability component will be recorded as a debt discount with a corresponding increase to common shares in our consolidated balance sheet. The debt discount will be amortized as additional non-cash interest expense over the remaining life of the Convertible Notes using the effective interest rate method. Although this amendment will have no impact on our cash flows, it will result in additional non-cash interest expense until maturity or early extinguishment of the Convertible Notes. The provisions of this amendment are to be applied retrospectively to all periods presented upon adoption and are effective for fiscal years beginning after December 15, 2008, or our fiscal 2010, and interim periods within those fiscal years. Upon adoption of this amendment, we estimate non-cash interest expense will increase for the fiscal years ended November 30, 2009 and 2008 by approximately $6,600 and $7,200 (or $0.21 and $0.23 per share), respectively. The additional non-cash interest expense is expected to increase each fiscal year as the Convertible Notes approach their respective maturity dates and accrete to their face values.

In December 2008, the FASB amended certain provisions of ASC Topic 715, “Compensation – Retirement Benefits” (previously reported as FSP No. FAS 132(R)-1, “Employers’ Disclosures about Postretirement Benefit Plan Assets”). This amendment enhances the required disclosures about plan assets in an employer’s defined benefit pension or other postretirement plan, including investment allocations decisions, inputs and valuations techniques used to measure the fair value of plan assets and significant concentrations of risks within plan assets. This amendment is effective for financial statements issued for fiscal years ending after December 15, 2009, or our fiscal 2010 and we do not expect it to have a material impact on our financial statements.

In April 2009, the FASB amended certain provisions of ASC Topic 825, “Financial Instruments” (previously reported as FSP No. 107-1 and Accounting Principles Board (“APB”) 28-1, “Interim Disclosures about Fair Value of Financial Instruments”). This amendment, which requires disclosures about the fair value of financial instruments in interim financial statements as well as in annual financial statements, was effective for us for the quarter ended August 31, 2009. The adoption of this amendment did not have a material impact on our financial statements.

In May 2009, the FASB amended certain provisions of ASC Topic 855, “Subsequent Events” (previously reported as SFAS No. 165, “Subsequent Events”). This amendment provides general standards of accounting for and disclosure of subsequent events and clarifies that management must evaluate, as of each reporting period (i.e. interim and annual), events or transactions that occur after the balance sheet date through the date the financial statements for such reporting period are issued. It also requires management to disclose the date through which subsequent events have been evaluated and whether that is the date on which the financial statements were issued. This amendment is effective prospectively for interim or annual financial periods ending after June 15, 2009 and was adopted in the third quarter of fiscal 2009 (see note 13).

In June 2009, the FASB issued Accounting Standards Update (ASU) No. 2009-01, the FASB Accounting Standards Codification™ (“Codification”) and the Hierarchy of Generally Accepted Accounting Principles (“ASU 2009-01”). This update eliminates the previous levels of U.S. GAAP. It does not include any guidance or interpretations of GAAP beyond what is already reflected in the FASB literature. It merely takes previously issued FASB standards and other authoritative pronouncements, changes the nomenclature previously used to refer to FASB standards, and includes them in specific topic areas. We have adopted ASU 2009-01, which was effective for financial statements issued for interim and annual reporting periods ending after September 15, 2009.

(3) SHAREHOLDERS’ EQUITY

COMPUTATION OF EARNINGS PER SHARE

The following table presents the computation of per share earnings for the years ended November 30, 2009, 2008 and 2007, respectively:

	For the Year Ended November 30,
	2009		2008		2007

NET INCOME:	$	63,171	$	66,286	$	59,690

NUMBER OF COMMON SHARES:
Weighted average outstanding		19,178		18,980		18,927
Issued upon assumed exercise of outstanding stock options		—		53		345
Issued upon assumed exercise of convertible notes		103		328		69
Effect of issuance of restricted common shares		—		3		9
Weighted average and potential dilutive outstanding (1)		19,281		19,364		19,350

NET INCOME PER COMMON SHARE:

Basic	$	3.29	$	3.49	$	3.15

Diluted	$	3.28	$	3.42	$	3.08

(1) Because their effects are anti-dilutive, excludes shares issuable under stock option plans whose grant price was greater than the average market price of common shares outstanding as follows: 974 shares in fiscal 2009, 609 shares in fiscal 2008 and 249 shares in fiscal 2007.

STOCK OPTIONS

We have granted stock options to key employees and non-employee directors under the plans described in note 2. A summary of the activity of stock options during fiscal 2009, 2008 and 2007 is presented below:

	2009					2008					2007
	Shares Under Option			Weighted Average Exercise Price		Shares Under Option			Weighted Average Exercise Price		Shares Under Option			Weighted Average Exercise Price
Outstanding at beginning of year		1,510		$	50.23		1,458		$	40.43		1,936		$	27.63
Granted		387			55.55		368			70.85		427			60.05
Exercised		(75	)		39.06		(303	)		27.69		(824	)		20.23
Cancelled		(12	)		61.26		(13	)		58.82		(81	)		43.36

Outstanding at end of year		1,810		$	51.75		1,510		$	50.23		1,458		$	40.43

Options exercisable at year-end		877		$	43.94		607		$	37.74		571		$	29.56

Weighted average fair value of options granted				$	21.00				$	27.97				$	24.63
Fair value of options granted				$	8,122				$	10,277				$	10,505
Fair value of options vested				$	7,808				$	5,970				$	5,665
Intrinsic value of options exercised				$	1,844				$	13,994				$	33,574

As of November 30, 2009, the aggregate intrinsic value of stock options outstanding was $28,039 and the weighted average remaining contractual life was four years. The aggregate intrinsic value of stock options exercisable was $20,072 and the weighted average remaining contractual life was three years.

As of November 30, 2009, we had $15,921 of unrecognized compensation cost related to stock options that will be recorded over a weighted average period of approximately three years. The stock option compensation expense is included partly in cost of sales, advertising and promotion expenses and selling, general and administrative expenses in the consolidated statements of income. We capitalized $221 and $183 of stock option compensation cost as a component of the carrying cost of inventory as of November 30, 2009 and 2008, respectively.

A summary of the exercise prices for options outstanding under our stock-based compensation plans at November 30, 2009 is presented below:

Range of Exercise Prices	Shares Under Option	Weighted Average Exercise Price	Weighted Average Remaining Life in Years	Shares Exercisable	Weighted Average Exercise Price of Shares Exercisable
$ 4.66 - $37.96	241	$ 26.25	3.45	232	$ 25.88
$38.07 - $52.37	464	40.36	2.51	367	40.38
$55.53 - $59.73	386	55.75	5.39	11	59.19
$59.77 - $65.31	354	59.91	3.45	171	59.86
$67.73 - $71.83	365	70.90	5.12	96	70.91
Total	1,810	51.75	3.96	877	43.94

PREFERRED SHARES

We are authorized to issue up to 1,000 preferred shares in series and with rights established by the board of directors. At November 30, 2009 and 2008, no shares of any series of preferred stock were issued and outstanding.

STOCK REPURCHASE

On September 30, 2009, our board of directors increased the repurchase authorization to a total of $100,000 of our common stock under the terms of our existing stock repurchase program.

In fiscal 2009, 626 shares at a cost of $34,633 were repurchased, in fiscal 2008, 418 shares were repurchased at a cost of $26,327 and in fiscal 2007, 400 shares at a cost of $23,601 were repurchased. The repurchased shares were retired and returned to unissued. As of January 20, 2010, the amount available under the authorization from the board of directors was $91,474.

SHAREHOLDER RIGHTS AGREEMENT

On January 27, 2000, we entered into the Rights Agreement. Under the Rights Agreement, rights were constructively distributed as a dividend at the rate of one right for each share of our common stock, without par value, held by shareholders of record as of the close of business on February 11, 2000. As a result of the two-for-one split of our common stock on November 29, 2002, there is now one-half (1/2) right associated with each share of common stock outstanding. Each right initially will entitle shareholders to buy one one-hundredth of a share of a new Series A Junior Participating Preferred Stock at an exercise price of $90.00 per right, subject to adjustment. The rights generally will be exercisable only if a person or group acquires beneficial ownership of 15% or more of our common stock. If the rights are triggered, the resulting issued shares would be included in the calculation of diluted earnings per share. As of November 30, 2009, no person or group has acquired beneficial ownership of 15% of our common stock, therefore, no rights have been exercised. In December 2009, the Rights Agreement was amended to, among other things, exempt actions taken by sanofi, Merger Sub or their subsidiaries, affiliates or associates in connection with the Merger and the other transactions contemplated by the Merger Agreement from the operative provisions of the Rights Agreement and extend the expiration of the Rights Agreement to the earlier of (1) 5:00 P.M. Chattanooga, Tennessee time on May 30, 2010 or (2) immediately prior to the effective time of the Merger. If the Merger Agreement is terminated, the amendment to the Rights Agreement will be of no more force and effect and the Rights Agreement will remain as it existed prior to the execution of the amendment.

RESTRICTED STOCK ISSUANCE

We have previously issued restricted shares of common stock to certain employees under our 2003 Stock Incentive Plan. These amounts were amortized using the straight-line method over respective four year periods from the date of issuance as additional compensation expense. Amortization expense for restricted stock issued was $43, $286 and $565 in fiscal 2009, 2008 and 2007, respectively. No restricted shares of common stock were issued in fiscal 2009, 2008 and 2007. As of November 30, 2009, the restrictions on all previously granted restricted shares of our common stock had expired.

(4) PATENT, TRADEMARKS AND OTHER PURCHASED PRODUCT RIGHTS

During fiscal 2009, 2008 and 2007, we performed impairment testing of our intangible assets as prescribed by ASC 350. As a result of this analysis, we recognized a non-cash impairment charge of $38,258 in the fourth quarter of fiscal 2009. The impairment charge related to certain brands within the dietary supplement category that represented approximately 4% of fiscal 2009 consolidated total revenues. The impairment charge was a result of the consideration of adverse circumstances in connection with our annual financial budget process including, but not limited to, the current and expected competitive environment and market conditions in which these respective brands are marketed and expectations of lost distribution with certain of our retail customers as a result of declining sales. The fair value used to determine the impairment charge was calculated using the discounted cash flow valuation methodology and was compared to the respective book value carrying amount of those brands to determine the impairment charge. The aggregate remaining book value carrying amount for those brands, after giving consideration to the impairment write-down, is $11,349.

Although the estimates made in assessing the fair value of our indefinite-lived intangible assets represent management’s best estimate, the estimates and assumptions made are subject to significant uncertainties. Consequently, changing rates of interest and inflation, declining sales, increases in competition, changing consumer preferences, technical advances or reductions in advertising and promotion may require additional impairments in the future. The valuations indicated no impairment in 2008 and 2007.

The carrying value of indefinite-lived intangible assets, which are not subject to amortization under the provisions of ASC 350, was $575,070 and $613,328 as of November 30, 2009 and 2008, respectively.

The gross carrying amount of intangible assets subject to amortization at November 30, 2009 and 2008, which consist primarily of non-compete agreements and shelf presence, was $7,028. The related accumulated amortization of these intangible assets at November 30, 2009 and 2008 was $4,632 and $3,687, respectively. Amortization of our intangible assets subject to amortization under the provisions of SFAS 142 was $945, $890 and $824 for fiscal 2009, 2008 and 2007, respectively. Estimated annual amortization expense for these assets for fiscal 2010, 2011, 2012, 2013 and 2014 is $925, $925, $208, $75 and $53, respectively. Royalty expense related to other purchased product rights for fiscal 2009, 2008 and 2007 was $19, $53 and $62, respectively. Amortization and royalty expense are included in advertising and promotion expense in the accompanying consolidated statements of income.

(5) LONG-TERM DEBT

Long-term debt consisted of the following as of November 30, 2009 and 2008:

	2009		2008
Revolving Credit Facility due 2013 at a variable rate of 6.07% as of November 30, 2008	$	—	$	19,500
2.0% Convertible Senior Notes due 2013		96,300		125,000
1.625% Convertible Senior Notes due 2014		100,000		100,000
Term Loan due 2013 at a variable rate of 5.62% and 6.57% as of November 30, 2009 and 2008, respectively		104,500		107,500
7.0% Senior Subordinated Notes due 2014		90,240		107,500
Total long-term debt		391,040		459,500
Less: current maturities		3,000		3,000
Total long-term debt, net of current maturities	$	388,040	$	456,500

In February 2004, we entered into a Senior Secured Revolving Credit Facility with a maturity date of February 2009 (the “Revolving Credit Facility”) with Bank of America, N.A. that provided an initial borrowing capacity of $25,000 and an additional $25,000, subject to successful syndication. In March 2004, we entered into a commitment agreement with a syndicate of commercial banks led by Bank of America, N.A., as agent, that enabled us to borrow up to a total of $50,000 under the Revolving Credit Facility and an additional $50,000, subject to successful syndication. In November 2005, we entered into an amendment to our Revolving Credit Facility (the “Amended Revolving Credit Facility”) that, among other things, increased our borrowing capacity under the facility from $50,000 to $100,000, increased our flexibility to repurchase shares of our stock, improved our borrowing rate under the facility and extended the maturity date to November 2010. Upon successful syndication, we were able to increase the borrowing capacity under the Amended Revolving Credit Facility by $50,000 to an aggregate of $150,000. In November 2006, we entered into an amendment to our Amended Revolving Credit Facility that, among other things, permitted the sale of the 2.0% Convertible Notes. In January 2007, we completed an amendment to the Amended Revolving Credit Facility providing for up to a $100,000 revolving credit facility and a $300,000 term loan (the “Credit Facility”). The proceeds from the term loan under the Credit Facility were used to finance in part the acquisition of the five consumer and OTC brands from Johnson & Johnson. The Credit Facility includes “accordion” features that permit us under certain circumstances to increase our borrowings under the revolving credit facility by $50,000 and to borrow an additional $50,000 as a term loan, subject to successful syndication. In April 2007, we entered into an amendment to our Credit Facility that, among other things, permitted the sale of the 1.625% Convertible Notes and reduced the applicable interest rates on the revolving credit facility portion of our Credit Facility. In September 2009, we entered into an amendment to our Credit Facility that, among other things, extended the maturity date of the revolving credit facility portion of our Credit Facility to January 2013, increased the applicable interest rates in the revolving credit facility portion of our Credit Facility and increased our flexibility to repurchase shares of our common stock and 7.0% Subordinated Notes.

Borrowings under the revolving credit facility portion of our Credit Facility bear interest at LIBOR plus applicable percentages of 2.25% to 2.75% or the highest of the federal funds rate plus 0.50%, the prime rate or the Eurodollar base rate plus 1.00% (the “Base Rate”), plus applicable percentages of 1.25% to 1.75%. The applicable percentages are calculated based on our leverage ratio. As of November 30, 2009 and 2008, respectively we had $0 and $19,500 of borrowings outstanding under the revolving credit facility portion of our Credit Facility. As of January 20, 2010, we had no borrowings outstanding under the revolving credit facility portion of our Credit Facility and our borrowing capacity was $100,000.

The term loan under the Credit Facility bears interest at either LIBOR plus 1.75% or the Base Rate plus 0.75%. The term loan borrowings are to be repaid in increments of $750 each calendar quarter, with the first principal payment paid June 2007. The principal outstanding after scheduled repayment and any unscheduled prepayments matures and is payable January 2013. In April 2007, we utilized the net proceeds from the 1.625% Convertible Notes and borrowings under the revolving credit facility portion of our Credit Facility to repay $128,000 of the term loan under the Credit Facility. In July 2007, we utilized borrowings under the revolving credit facility portion of our Credit Facility to repay an additional $25,000 of the term loan under the Credit Facility. In connection with the term loan repayments during April 2007 and July 2007, we retired a proportional share of the term loan debt issuance costs and recorded the resulting loss on early extinguishment of debt of $2,633 in fiscal 2007. In January 2008, we utilized borrowings under the revolving credit facility portion of our Credit Facility to repay an additional $35,000 of the term loan under the Credit Facility. In connection with the term loan repayment in January 2008, we retired a proportional share of the term loan debt issuance costs and recorded the resulting loss on early extinguishment of debt of $526 in the first quarter of fiscal 2008.

Borrowings under the Credit Facility are secured by substantially all of our assets, except real property, and shares of capital stock of our domestic subsidiaries held by us and by the assets of the guarantors (our domestic subsidiaries). The Credit Facility contains covenants, representations, warranties and other agreements by us that are customary in credit agreements and security instruments relating to financings of this type. The significant financial covenants include fixed charge coverage ratio, leverage ratio, senior secured leverage ratio and brand value calculations. As of November 30, 2009, we were in compliance with all covenants in our Credit Facility.

In February 2004, we issued and sold $125,000 of 7.0% Subordinated Notes. During fiscal 2005, we repurchased $17,500 of our 7.0% Subordinated Notes in the open market at an average premium of 1.6% over the principal amount of the notes. During fiscal 2009, we repurchased an additional $17,260 of our 7.0% Subordinated Notes in open market transactions at an average premium of 0.9% above the face amount of the 7.0% Subordinated Notes. In connection with the repurchase, we retired a proportional share of the related debt issuance costs. The premium paid off the 7.0% Subordinated Notes, combined with early extinguishment of the proportional debt issuance costs, resulted in a loss on extinguishment of debt of $875. The outstanding balance of the remaining 7.0% Subordinated Notes was reduced to $90,240.

Interest payments on the 7.0% Subordinated Notes are due semi-annually in arrears in March and September. Our domestic subsidiaries are guarantors of the 7.0% Subordinated Notes. The guarantees of the 7.0% Subordinated Notes are unsecured senior subordinated obligations of the guarantors. At any time after March 1, 2009, we may redeem any of the 7.0% Subordinated Notes upon not less than 30 nor more than 60 days’ notice at redemption prices (expressed in percentages of principal amount), plus accrued and unpaid interest, if any, and liquidation damages, if any, to the applicable redemption rate, if redeemed during the twelve-month periods beginning March 2009 at 103.500%, March 2010 at 102.333%, March 2011 at 101.167% and March 2012 and thereafter at 100.000%. As of January 20, 2010, no such redemption has occurred.

The indenture governing the 7.0% Subordinated Notes, among other things, limits our ability and the ability of our restricted subsidiaries to: (i) borrow money or sell preferred stock, (ii) create liens, (iii) pay dividends on or redeem or repurchase stock, (iv) make certain types of investments, (v) sell stock in our restricted subsidiaries, (vi) restrict dividends or other payments from restricted subsidiaries, (vii) enter into transactions with affiliates, (viii) issue guarantees of debt and (ix) sell assets or merge with other companies. In addition, if we experience specific kinds of changes in control, we must offer to purchase the 7.0% Subordinated Notes at 101.0% of their principal amount plus accrued and unpaid interest.

In July 2006, we successfully completed a consent solicitation from the holders of the 7.0% Subordinated Notes to an amendment to the indenture to increase our capacity to make restricted payments by an additional $85,000, including payments for the repurchase of our common stock, and adjust the fixed charge coverage ratio (as defined in the indenture).

In November 2006, we entered into an interest rate swap (“swap”) agreement effective January 2007. The swap has decreasing notional principal amounts beginning October 2007 and a swap rate of 4.98% over the life of the agreement. During the second and fourth quarters of fiscal 2008, we retired a portion of the swap for $270 and $26, respectively, and during the first quarter of fiscal 2009, we retired a portion of the swap for $195, which was recorded as additional interest expense in the accompanying consolidated statement of income. As of November 30, 2009, we had $75,500 of LIBOR based borrowings hedged under the provisions of the swap. During fiscal 2009, the decrease in fair value of the swap of $1,513, net of tax, was recorded to other comprehensive income. The current portion of the fair value of the swap of $906 is included in accrued liabilities. As of November 30, 2009, the swap was deemed to be an effective cash flow hedge. The fair value of the swap agreement is valued by a third party. The swap agreement expired on January 15, 2010.

In November 2006, we completed a private offering of $125,000 of the 2.0% Convertible Notes to qualified institutional purchasers pursuant to Section 4(2) of the Securities Act of 1933. The 2.0% Convertible Notes bear interest at an annual rate of 2.0%, payable semi-annually in May and November of each year. The 2.0% Convertible Notes are convertible into our common stock at an initial conversion price of $58.92 per share, upon the occurrence of certain events, including the closing price of our common stock exceeding 130% of the initial conversion price per share, or $76.59 per share, for 20 of the last 30 consecutive trading days of the fiscal quarter (the “prescribed measurement period”). The evaluation of the classification of the 2.0% Convertible Notes occurs each fiscal quarter.

Upon conversion, a holder will receive, in lieu of common stock, an amount of cash equal to the lesser of (i) the principal amount of the 2.0% Convertible Notes, or (ii) the conversion value, determined in the manner set forth in the indenture governing the 2.0% Convertible Notes, of a number of shares equal to the conversion rate. If the conversion value exceeds the principal amount of the 2.0% Convertible Notes on the conversion date, we will also deliver, at our election, cash or common stock or a combination of cash and common stock with respect to the conversion value upon conversion. If conversion occurs in connection with a change of control, we may be required to deliver additional shares of our common stock by increasing the conversion rate with respect to such notes. The maximum aggregate number of shares that we would be obligated to issue upon conversion of the 2.0% Convertible Notes is 2,059.

Concurrently with the sale of the 2.0% Convertible Notes, we purchased a note hedge from an affiliate of Merrill Lynch (the “Counterparty”), which is designed to mitigate potential dilution from the conversion of the 2.0% Convertible Notes. Under the note hedge, the Counterparty is required to deliver to us the number of shares of our common stock that we are obligated to deliver to the holders of the 2.0% Convertible Notes with respect to the conversion, calculated exclusive of shares deliverable by us by reason of any additional premium relating to the 2.0% Convertible Notes or by reason of any election by us to unilaterally increase the conversion rate pursuant to the indenture governing the 2.0% Convertible Notes. The note hedge expires at the close of trading on November 15, 2013, which is the maturity date of the 2.0% Convertible Notes, although the Counterparty will have ongoing obligations with respect to 2.0% Convertible Notes properly converted on or prior to that date of which the Counterparty has been timely notified.

In addition, we issued warrants to the Counterparty that could require us to issue up to approximately 1,634 shares of our common stock on November 15, 2013 upon notice of exercise by the Counterparty. The exercise price is $74.82 per share, which represented a 60.0% premium over the closing price of our shares of common stock on November 16, 2006. If the Counterparty exercises the warrant, we will have the option to settle in cash or shares the excess of the price of our shares on that date over the initially established exercise price.

The note hedge and warrant are separate and legally distinct instruments that bind us and the Counterparty and have no binding effect on the holders of the 2.0% Convertible Notes.

In December 2008, we issued an aggregate of 487 shares of our common stock in exchange for $28,700 in aggregate principal amount of our outstanding 2.0% Convertible Notes. Upon completion of the transaction, the balance of the remaining 2.0% Convertible Notes was reduced to $96,300 outstanding. In connection with this transaction, we retired a proportional share of the 2.0% Convertible Notes debt issuance costs and recorded the resulting loss on early extinguishment of debt of $696 in the first quarter of fiscal 2009.

In April 2007, we completed a private offering of $100,000 of the 1.625% Convertible Notes to qualified institutional investors pursuant to Rule 144A under the Securities Act of 1933. The 1.625% Convertible Notes bear interest at an annual rate of 1.625%, payable semi-annually in May and November of each year. The 1.625% Convertible Notes are convertible into our common stock at an initial conversion price of $73.20 per share, upon the occurrence of certain events, including the closing price of our common stock exceeding 130% of the initial conversion price per share, or $95.16 per share, for the prescribed measurement period. The evaluation of the classification of the 1.625% Convertible Notes occurs each fiscal quarter.

Upon conversion, a holder will receive, in lieu of common stock, an amount of cash equal to the lesser of (i) the principal amount of the 1.625% Convertible Notes, or (ii) the conversion value, determined in the manner set forth in the indenture governing the 1.625% Convertible Notes, of a number of shares equal to the conversion rate. If the conversion value exceeds the principal amount of the 1.625% Convertible Note on the conversion date, we will also deliver, at our election, cash or common stock or a combination of cash and common stock with respect to the conversion value upon conversion. If conversion occurs in connection with a change of control, we may be required to deliver additional shares of our common stock by increasing the conversion rate with respect to such notes. The maximum aggregate number of shares that we would be obligated to issue upon conversion of the 1.625% Convertible Notes is 1,694.

Concurrently with the sale of the 1.625% Convertible Notes, we purchased a note hedge from the Counterparty, which is designed to mitigate potential dilution from the conversion of the 1.625% Convertible Notes. Under the note hedge, the Counterparty is required to deliver to us the number of shares of our common stock that we are obligated to deliver to the holders of the 1.625% Convertible Notes with respect to the conversion, calculated exclusive of shares deliverable by us by reason of any additional premium relating to the 1.625% Convertible Notes or by reason of any election by us to unilaterally increase the conversion rate pursuant to the indenture governing the 1.625% Convertible Notes. The note hedge expires at the close of trading on May 1, 2014, which is the maturity date of the 1.625% Convertible Notes, although the Counterparty will have ongoing obligations with respect to 1.625% Convertible Notes properly converted on or prior to that date of which the Counterparty has been timely notified.

In addition, we issued warrants to the Counterparty that could require us to issue up to approximately 1,366 shares of our common stock on May 1, 2014 upon notice of exercise by the Counterparty. The exercise price is $94.45 per share, which represented a 60% premium over the closing price of our shares of common stock on April 4, 2007. If the Counterparty exercises the warrant, we will have the option to settle in cash or shares the excess of the price of our shares on that date over the initially established exercise price.

Pursuant to certain provisions of ASC 815 (previously reported as EITF 90-19, “Convertible Bonds with Issuer Option to Settle for Cash upon Conversion”, EITF 00-19, “Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock” and EITF 01-6, “The Meaning of Indexed to a Company’s Own Stock”), the 2.0% Convertible Notes and the 1.625% Convertible Notes are accounted for as convertible debt in the accompanying consolidated balance sheet and the embedded conversion option in the 2.0% Convertible Notes and the 1.625% Convertible Notes have not been accounted for as separate derivatives. Additionally, the note hedges and warrants are accounted for as equity transactions, and therefore, the payments associated with the issuance of the note hedges and the proceeds received from the issuance of the warrants were recorded as a charge and an increase, respectively, in common shares in shareholders’ equity as separate equity transactions.

For income tax reporting purposes, we have elected to integrate the 2.0% Convertible Notes and the 1.625% Convertible Notes and the respective note hedge transaction. Integration of the respective note hedge with the 2.0% Convertible Notes and the 1.625% Convertible Notes creates an in-substance original issue debt discount for income tax reporting purposes and therefore, the cost of the note hedge transactions will be accounted for as interest expense over the term of the 2.0% Convertible Notes and the 1.625% Convertible Notes, respectively, for income tax reporting purposes. The income tax benefit related to each respective convertible note issuance was recognized as a deferred tax asset.

The future maturities of long-term debt outstanding as of November 30, 2009 are as follows:

2010	$	3,000
2011		3,000
2012		3,000
2013		191,800
2014		190,240
	$	391,040

Cash interest payments during fiscal 2009, 2008 and 2007 were $18,864, $22,247 and $26,671, respectively.

(6) FAIR VALUE OF FINANCIAL INSTRUMENT

We currently measure and record in the accompanying consolidated financial statements an interest rate swap at fair value. FASB ASC Topic 820, “Fair Value Measurements and Disclosures” (“ASC 820”), establishes a fair value hierarchy for those instruments measured at fair value that distinguishes between assumptions based on market data (observable inputs) and our own assumptions (unobservable inputs). The hierarchy consists of three levels:

Level 1 -

Quoted market prices in active markets for identical assets or liabilities;

Level 2 -

Inputs other than Level 1 inputs that are either directly or indirectly observable; and

Level 3 -

Unobservable inputs developed using estimates and assumptions developed by us, which reflect those that a market participant would use.

Determining which category an asset or liability falls within the hierarchy requires significant judgment. We evaluate our hierarchy disclosures each quarter.

The following table summarizes the interest rate swap measured at fair value in the accompanying consolidated balance sheet:

	Fair Value Measurements as of November 30, 2009
	Level 1		Level 2		Level 3		Total

Liabilities
Interest rate swap (1)	$	—	$	906	$	—	$	906

(1)

The total fair value of the interest rate swap is classified as a current liability as of November 30, 2009 and expired on January 15, 2010. We value this financial instrument using the “Income Approach” valuation technique. This method uses valuation techniques to convert future amounts to a single present value amount. The measurement is based on the value indicated by current market expectations about those future amounts.

ASC 820 requires separate disclosure of assets and liabilities measured at fair value on a recurring basis, as documented above, from those measured at fair value on a nonrecurring basis. As of November 30, 2009, no assets or liabilities are measured at fair value on a nonrecurring basis.

At November 30, 2009 and 2008, the carrying value of the 7.0% Subordinated Notes and the term loan portion of our Credit Facility approximated fair value based on market prices and market volume for same or similar issues. At November 30, 2009 and 2008, the fair value of the 2.0% Convertible Notes was determined to be $107,615 and $153,965, respectively, based upon consideration of our closing stock price of $65.84 and $72.57, respectively, compared to the carrying value of $96,300 and $125,000, respectively, and determination of conversion value as defined in the indenture under which the 2.0% Convertible Notes were issued. At November 30, 2009 and 2008, the fair value of the 1.625% Convertible Notes was determined to be $89,949 and $99,143, respectively, based upon consideration of our closing stock price compared to the carrying value of $100,000 and determination of conversion value as defined in the indenture under which the 1.625% Convertible Notes were issued. At November 30, 2009 and 2008, the carrying value of cash and cash equivalents, accounts receivable and accounts payable approximated their respective fair value based on the short term nature of the instruments.

(7) INCOME TAXES

The provision for income taxes includes the following components for fiscal 2009, 2008 and 2007:

	2009		2008		2007
Current:
Federal	$	29,193	$	13,428	$	16,850
State		4,186		1,191		1,674
Deferred		754		19,010		12,865
	$	34,133	$	33,629	$	31,389

As of November 30, 2009, we had a foreign tax credit of $1,943 which will expire over nine years beginning in fiscal 2011 through 2019. In fiscal 2009, 2008 and 2007 income tax benefits of $311, $3,709 and $8,291, respectively, attributable to employee stock option transactions were allocated to shareholders’ equity.

Deferred income tax assets and liabilities reflect the impact of temporary differences between the amounts of assets and liabilities for financial reporting and income tax reporting purposes. Temporary differences and carryforwards, which give rise to deferred tax assets and liabilities at November 30, 2009 and 2008, are as follows:

	2009		2008
Deferred tax assets:
Allowances and accruals	$	1,816	$	1,511
Inventory reserve		661		484
Stock-based compensation expense		6,390		3,822
Allowance for product returns		932		1,194
Net operating loss carryforwards		2,621		1,844
Accrued postretirement health care benefits		356		491
Note hedge call option		13,509		18,315
Foreign tax credit		1,943		1,988
Other		3,628		3,641
Gross deferred tax assets		31,856		33,290
Valuation allowance		—		—
Net deferred tax assets		31,856		33,290
Deferred tax liabilities:
Depreciation and amortization		66,805		63,976
Prepaid advertising		363		637
Other		104		121
Gross deferred tax liabilities		67,272		64,734
Net deferred tax liability	$	35,416	$	31,444

The deferred provision for income taxes excludes the tax effect of the portion of the note hedge call option that was retired in 2009 of $2,118, the interest rate hedge adjustment of $931 and $69, and unrealized actuarial gains and losses related to the pension and post retirement health benefit plans of $168 and $945 for fiscal 2009 and 2008, respectively, which are included in the consolidated statements of shareholders’ equity. The deferred provision for income taxes also excludes the impact of adopting FIN 48 in fiscal 2008 of $711.

The difference between the provision for income taxes and the amount computed by multiplying income before income taxes by the United States statutory rate for fiscal 2009, 2008 and 2007 is summarized as follows:

	2009			2008			2007
Expected federal tax provision	$	34,056		$	34,970		$	31,878
State income taxes, net of federal income tax benefit		2,867			2,077			1,922
Permanent Items		(1,619	)		(2,928	)		(1,083	)
Other, net		(1,171	)		(490	)		(1,328	)
Provision for income taxes	$	34,133		$	33,629		$	31,389

Income taxes paid in fiscal 2009, 2008 and 2007 were $31,484, $11,181, and $7,977, respectively. We received income tax refunds of $375, $135 and $34 during fiscal 2009, 2008 and 2007, respectively.

We have undistributed earnings of Chattem Canada, our Canadian subsidiary, of approximately $5,380 at November 30, 2009, for which deferred taxes have not been provided. Such earnings are considered indefinitely invested in the foreign subsidiaries. If such earnings were repatriated, additional tax expense may result, although the calculation of such additional taxes is not practicable.

The difference between the tax benefit recognized in the financial statements for a tax position and the tax benefit claimed in the tax return is referred to as an unrecognized tax benefit. A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:

Unrecognized tax benefit at November 30, 2008	$	7,673
Increase for current year positions		1,211
Increase for prior period positions		227
Decrease due to settlements and payments		(216	)
Unrecognized tax benefit at November 30, 2009	$	8,895

The total amount of net unrecognized tax benefit that, if recognized, would affect the effective tax rate is $1,013 and $890 for the years ended November 30, 2009 and 2008, respectively. We recognize interest and penalties related to income tax matters as a component of the provision for income taxes. The total amount of interest and penalties included in the provision for income taxes is $102 and $30 for fiscal 2009 and 2008, respectively. Included in the liability for unrecognized tax benefits we have $254 and $191 for the years ended November 30, 2009 and 2008, respectively, accrued for penalties and interest, net of tax benefits.

We file income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions. We are no longer subject to examinations by tax authorities related to U.S. federal income taxes for fiscal years before 2000, state income taxes for fiscal years before 1997 or non-U.S. income taxes for fiscal years before 2000.

(8) SUPPLEMENTAL FINANCIAL INFORMATION

Inventories consisted of the following at November 30, 2009 and 2008:

	2009		2008

Raw materials and work in process	$	22,741	$	16,753
Finished goods		26,034		24,180
Total inventories	$	48,775	$	40,933

International inventories included above were $3,694 and $3,328 at November 30, 2009 and 2008, respectively.

Property, plant and equipment consisted of the following at November 30, 2009 and 2008:

	2009			2008
Land	$	1,123		$	1,123
Buildings and improvements		11,794			11,228
Machinery and equipment		65,503			60,269
Package design and tooling		8,956			8,241
Construction in progress		4,196			4,824
Total property, plant and equipment		91,572			85,685
Less – accumulated depreciation		(56,507	)		(53,442	)
Property, plant and equipment, net	$	35,065		$	32,243

Accrued liabilities consisted of the following at November 30, 2009 and 2008:

	2009		2008
Interest	$	2,096	$	3,216
Salaries, wages and commissions		4,561		5,333
Product advertising and promotion		3,455		2,611
Litigation settlements and legal fees		1,305		799
Income taxes payable		7,666		4,636
Interest rate swap		906		2,602
Other		1,356		2,096
Total accrued liabilities	$	21,345	$	21,293

(9) ACQUISITION OF BRANDS

In January 2007, we acquired the U.S. rights to five leading consumer and OTC brands from Johnson & Johnson (“J&J Acquisition”). The acquired brands were: ACT, an anti-cavity mouthwash/mouth rinse; Unisom, an OTC sleep-aid; Cortizone-10, a hydrocortisone anti-itch product; Kaopectate, an anti-diarrhea product; and Balmex, a diaper rash product. The J&J Acquisition was funded with the proceeds from a $300,000 term loan provided under our Credit Facility, borrowings under the revolving credit facility portion of our Credit Facility and through the use of a portion of the proceeds derived from the issuance of the 2.0% Convertible Notes. The purchase price of the J&J Acquisition was $410,000 plus $1,573 of costs directly related to the acquisition. The purchase price included $5,916 of inventory, $1,781 of assumed liabilities, $463 of equipment, $403,061 of trademarks, which were assigned an indefinite life, and $3,914 of distribution rights, which was assigned a useful life of five years. The value assigned each of the acquired brands was as follows: ACT, $163,167; Unisom, $95,181; Cortizone-10, $124,318; Kaopectate, $11,653; and Balmex, $8,742. Certain of the products are manufactured and supplied under assumed agreements with third party manufacturers. During fiscal 2007 and 2008, the manufacturing of certain products was transferred to our facilities. For a period of up to six months from the close of the acquisition, Johnson & Johnson was to provide transition services consisting of consumer affairs, distribution and collection services (including related financial, accounting and reporting services). We terminated the distribution and collections services effective April 2, 2007 and the consumer affairs services effective June 21, 2007. The costs charged for these transition services approximated the actual costs incurred by Johnson & Johnson. During fiscal 2007, we incurred $2,057, of expenses related to these transition services, which are recorded as acquisition expenses in the accompanying consolidated statements of income.

The following unaudited consolidated pro forma information assumes the J&J Acquisition had occurred at the beginning of the period presented:

PRO FORMA CONSOLIDATED RESULTS OF OPERATIONS (Unaudited)

	Year Ended
	November 30, 2007

Total revenue	$	432,559
Net income		60,472
Earnings per share – basic:		3.20
Earnings per share – diluted:		3.13

The pro forma consolidated results of operations include adjustments to give effect to interest expense on debt to finance the J&J Acquisition, increased advertising expense to raise brand awareness, incremental selling, general and administrative expenses, amortization of certain intangible assets and decreased interest income on cash used in the J&J Acquisition, together with related income tax effects. The pro forma information is for comparative purposes only and does not purport to be indicative of the results that would have occurred had the J&J Acquisition and borrowings occurred at the beginning of the periods presented, or indicative of the results that may occur in the future.

On May 25, 2007, we acquired the worldwide trademark and rights to sell and market ACT in Western Europe from Johnson & Johnson (“ACT Acquisition”) for $4,100 in cash plus certain assumed liabilities. The ACT Acquisition was funded with existing cash.

(10) POSTRETIREMENT BENEFIT PLANS

We maintain two defined benefit postretirement plans that cover certain employees who have met specific age and service requirements. The plans include a noncontributory defined benefit pension plan (the “Pension Plan”) and a postretirement health care benefits plan (the “Retiree Health Plan”). The Pension Plan provides benefits based upon years of service and employee compensation to employees who had completed one year of service prior to December 31, 2000. On December 31, 2000, Pension Plan benefits and participation were frozen. The Retiree Health Plan provides benefits to certain eligible employees over the age of 65. On May 31, 2006, Retiree Health Plan eligibility was restricted to current retirees and those active employees that were retirement eligible as of that date (age 55 and 10 years of service or age 65). Contributions to the Pension Plan are calculated by an independent actuary and have been sufficient to provide benefits to participants and meet the funding requirements of the Employee Retirement Income Security Act (“ERISA”). Contributions to the Retiree Health Plan are limited to $2 per participant per year and are paid monthly on a fully insured basis. Retiree Health Plan participants are required to pay any insurance premium amount in excess of the employer contribution. Plan assets and benefit obligations are measured as of November 30 for both plans.

In addition to the previously described plans, we also sponsor a defined contribution plan that covers substantially all employees. Eligible employees are allowed to contribute their eligible compensation up to the applicable annual elective deferral and salary reduction limits as set forth by the IRS. We make matching contributions of 25% on the first 6% of contributed compensation. Our expense for the matching contribution totaled $309 in fiscal 2009, $293 in fiscal 2008 and $286 in fiscal 2007. In addition to matching contributions, safeharbor contributions equaling 3% of eligible annual compensation are made on behalf of eligible participants. Safeharbor contributions totaled $921 in fiscal 2009, $879 in fiscal 2008 and $775 in fiscal 2007. Our contributions to this plan are expensed as incurred.

The frozen status of the Pension Plan prevents any future salary increase of participants from affecting the plan’s accumulated benefit obligation. Therefore, the Pension Plan’s projected benefit obligation continually equals the accumulated benefit obligation. In fiscal 2009, the Pension Plan recognized previously unrecognized actuarial losses in the amount of $184 as a component of net periodic cost. Amortization of the cumulative net loss in the amount of $120 is expected to be recognized as a component of net periodic pension cost in fiscal 2010.

The Retiree Health Plan recognized a previously unrecognized actuarial gain in the amount of $142 in fiscal 2009 as a result of a decrease in plan participants. An actuarial gain in the amount of $142 is expected in fiscal 2010.

Net periodic (benefit) cost for fiscal 2009, 2008 and 2007 was comprised of the following components:

	Pension Plan									Retiree Health Plan
	2009			2008			2007			2009			2008			2007
Service cost	$	—		$	—		$	—		$	6		$	7		$	21
Interest cost		605			576			609			59			55			56
Expected return on plan assets		(700	)		(921	)		(937	)		—			—			—
Recognized net actuarial (gain)/loss		184			—			—			(142	)		(136	)		(96	)
Settlement/Curtailment loss		—			—			89			—			—			—
Net periodic (benefit) cost	$	89		$	(345	)	$	(239	)	$	(77	)	$	(74	)	$	(19	)

For each plan the changes in plan assets are as follows for fiscal 2009 and 2008:

	Pension Plan						Retiree Health Plan
	2009			2008			2009			2008
Plan assets at fair value, beginning of year	$	8,873		$	11,883		$	—		$	—
Actual return on plan assets		1,294			(2,320	)		—			—
Employer contribution		—			—			59			58
Benefits paid		(234	)		(690	)		(59	)		(58	)
Plan assets at fair value, end of year	$	9,933		$	8,873		$	—		$	—

For each plan, the changes in the benefit obligations are as follows for fiscal 2009 and 2008:

	Pension Plan						Retiree Health Plan
	2009			2008			2009			2008
Benefit obligation, beginning of year	$	9,226		$	10,165		$	936		$	1,003
Service cost		—			—			6			7
Interest cost		605			576			59			55
Actuarial (gain)/loss		200			(825	)		(7	)		(71	)
Benefits paid		(234	)		(690	)		(59	)		(58	)
Benefit obligation, end of year	$	9,797		$	9,226		$	935		$	936

The following table sets forth the funded status of each plan as of November 30, 2009 and 2008:

	Pension Plan					Retiree Health Plan
	2009		2008			2009			2008
Plan assets at fair value	$	9,933	$	8,873		$	—		$	—
Benefit obligation		9,797		9,226			935			936
Funded status prepaid (deficiency)		136		(353	)		(935	)		(936	)
Unrecognized actuarial net (gain)/loss		2,193		2,771			(142	)		(277	)
Total recognized in the consolidated balance sheet	$	2,329	$	2,418		$	(1,077	)	$	(1,213	)

Amounts recognized in our consolidated balance sheets as of November 30, 2009 and 2008 consist of the following:

	Pension Plan					Retiree Health Plan
	2009		2008			2009			2008
Deferred income tax assets (liabilities)	$	836	$	1,057		$	(54	)	$	(106	)
Other noncurrent assets (liabilities)		136		(353	)		(935	)		(936	)
Shareholder equity:
Accumulated other comprehensive income		1,357		1,714			(88	)		(171	)
Net asset (liability) recognized in the consolidated balance sheet	$	2,329	$	2,418		$	(1,077	)	$	(1,213	)

The discount rate used in determining the actuarial present value of the projected benefit obligation for the Pension Plan and the Retiree Health Plan was 6.5% in fiscal 2009 and 2008, respectively. The expected long-term rate of return on the Pension Plan assets was 8% in fiscal 2009 and 2008, respectively. The long-term return percentage on assets is based on the weighted-average of the Pension Plan’s invested allocation as of the measurement date and the available historical returns for those asset categories as published by Ibbotson Associates, a leading provider of historical financial market data.

Our existing investment policy of the Pension Plan recognizes that the most significant decision to affect the ability to meet the investment objectives is the asset allocation decision. Therefore, based on the investment objectives and our risk tolerances, the investment policy defines the following asset mix range:

Asset Class		Range
Corporate & Government Bonds		30.0 – 70.0%
Equities		30.0 – 70.0%

In addition, the existing investment policy requires a performance review annually. The weighted-average asset allocations at November 30, 2009 and 2008 by asset class are as follows:

	Pension Plan Assets at November 30,
Asset Class	2009			2008
Mutual funds		87	%		84	%
Equity securities		13			16
Total		100	%		100	%

As of November 30, 2009, we had 20 shares of our common stock in the Pension Plan with a fair value of $1,317.

The following benefit payments are expected to be paid:

Year Ending November 30,	Estimated Benefit Payments
	Pension Plan		Retiree Health Plan
2010	$	695	$	60
2011		700		62
2012		705		63
2013		710		64
2014		715		66
2015-2019		2,000		330

In fiscal 2010, no employer contributions are expected for the Pension Plan. Employer contributions for the Retiree Health Plan are expected to be paid upon receipt of the monthly insurance premium.

(11) PRODUCT AND GEOGRAPHICAL SEGMENT INFORMATION

We currently operate in only one primary segment – OTC health care. This segment includes medicated skin care, topical pain care, oral care, internal OTC, medicated dandruff shampoo, dietary supplement and other OTC and toiletry products.

Geographical segment information is as follows for fiscal 2009, 2008 and 2007:

	2009		2008		2007
Revenues:
Domestic	$	438,846	$	423,088	$	393,493
International (1)		24,496		31,791		29,885
Total	$	463,342	$	454,879	$	423,378

Long-Lived Assets (2)
Domestic	$	610,344	$	646,676	$	646,926
International		2,187		2,237		2,233
Total	$	612,531	$	648,913	$	649,159

(1) International sales include export sales from United States operations and royalties from international sales of Selsun. These royalties were $97, $90 and $93 for fiscal 2009, 2008 and 2007, respectively.

(2) Consists of book value of property, plant, equipment, patents, trademarks and other purchased product rights.

Net sales of our domestic product categories within our single healthcare business segment are as follows for fiscal 2009, 2008 and 2007:

	2009		2008		2007
Medicated skin care	$	158,013	$	141,942	$	123,456
Topical pain care		95,407		96,779		95,858
Oral care		70,353		62,872		48,863
Internal OTC		44,096		48,006		45,043
Medicated dandruff shampoos		36,488		35,737		36,934
Dietary supplements		18,296		19,491		26,121
Other OTC and toiletry products		16,193		18,261		17,218
Total	$	438,846	$	423,088	$	393,493

(12) COMMITMENTS AND CONTINGENCIES

GENERAL LITIGATION

We were named as a defendant in a number of lawsuits alleging that the plaintiffs were injured as a result of ingestion of products containing Phenylpropanolamine (“PPA”), which was an active ingredient in most of our Dexatrim products until November 2000. The lawsuits filed in federal court were transferred to the United States District Court for the Western District of Washington before United States District Judge Barbara J. Rothstein (In Re Phenylpropanolamine (“PPA”) Products Liability Litigation, MDL No. 1407). The remaining lawsuits were filed in state court in a number of different states.

On April 13, 2004, we entered into a class action settlement agreement with representatives of the plaintiffs’ settlement class, which provided for a national class action settlement of all Dexatrim PPA claims. On November 12, 2004, Judge Barbara J. Rothstein of the United States District Court for the Western District of Washington entered a final order and judgment certifying the class and granting approval of the Dexatrim PPA settlement. The Dexatrim PPA settlement included claims against us involving alleged injuries by Dexatrim products containing PPA in which the alleged injury occurred after December 21, 1998, the date we acquired the Dexatrim brand. A total of 14 claimants with alleged injuries that occurred after December 21, 1998 elected to opt-out of the class settlement. Subsequently, we have settled twelve of the opt-out claims. The other two opt-outs have not filed lawsuits against us, and we believe the applicable statutes of limitation have run against their claims.

In accordance with the terms of the class action settlement, approximately $70,885 was initially funded into a settlement trust. We have resolved all claims in the settlement and paid all trust expenses. On June 14, 2006, we filed a motion to dissolve the settlement trust. The court granted this motion on July 14, 2006. We dissolved the settlement trust pursuant to a letter to the trustee dated September 24, 2008.

We were also named as a defendant in approximately 206 lawsuits relating to Dexatrim containing PPA which involved alleged injuries by Dexatrim products containing PPA manufactured and sold prior to our acquisition of Dexatrim on December 21, 1998. The DELACO Company (“DELACO”), successor by merger to the Thompson Medical Company, Inc., which owned the brand prior to December 21, 1998, owed us an indemnity obligation for any liabilities arising from these lawsuits. On February 12, 2004, DELACO filed a Chapter 11 bankruptcy petition in the United States Bankruptcy Court for the Southern District of New York. We filed a claim for indemnification in DELACO’s bankruptcy. We entered into a settlement agreement with DELACO dated June 30, 2005 that resolved DELACO’s indemnity obligations to us (“the DELACO Agreement”). The DELACO Agreement was approved by the DELACO bankruptcy court on July 28, 2005. In accordance with the DELACO bankruptcy plan, a settlement trust established under the plan paid us $8,750 on March 17, 2006, which was included in our consolidated statements of income, net of legal expenses, as litigation settlement for 2006. The payment to us by the DELACO settlement trust of $8,750 has conclusively compromised and settled our indemnity claim filed in the DELACO bankruptcy. The confirmation of the DELACO bankruptcy plan effectively released us from liability for all PPA products liability cases with injury dates prior to December 21, 1998.

On December 30, 2003, the United States Food and Drug Administration (“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. We discontinued the manufacturing and shipment of Dexatrim containing ephedrine in September 2002. During April to June 2008, we received notification from an attorney of 26 individual claims alleging the development of pulmonary arterial hypertension as a result of ingesting Dexatrim containing ephedrine and/or PPA in 1998 through 2003. In September 2008, we resolved all of these claims for $13,250, of which approximately $2,545 was funded from the proceeds of the Dexatrim settlement trust. We are not currently aware of any additional product liability claims relating to Dexatrim.

We have been named as a defendant in a putative class action lawsuit filed by Florida consumer James A. Wilson in the United States District Court for the Southern District of Florida relating to the labeling, advertising, promotion and sale of our Garlique product. We were served with this lawsuit on May 27, 2009. The plaintiff seeks injunctive relief, compensatory and punitive damages, and attorney fees. The plaintiff alleges that we mislabeled our product and made false advertising claims. The plaintiff seeks certification of a national class. We are vigorously defending the case.

On February 8, 2008, we initiated a voluntary nationwide recall of our Icy Hot Heat Therapy products, including consumer “samples” that were included on a limited promotional basis in cartons of our 3 oz. Aspercreme product, and are no longer marketing these products. We conducted the recall to the consumer level. We recalled these products because we received some consumer reports of first, second and third degree burns, as well as skin irritation resulting from consumer use or possible misuse of the products. As of January 20, 2010, there were approximately 89 consumers with pending claims against us and four products liability lawsuits pending against us alleging burns and skin irritation from the use of the Icy Hot Heat Therapy products. We may receive additional claims and/or lawsuits in the future alleging burns and/or skin irritation from use of our Heat Therapy products. The outcome of any such potential litigation cannot be predicted.

On July 25, 2008, LecTec Corporation filed a complaint against us in the U.S. District Court for the Eastern District of Texas, which alleges that our Icy Hot and Capzasin patch products infringe LecTec’s patents. In the same lawsuit, LecTec has asserted patent infringement claims against Endo Pharmaceuticals, Inc. (“Endo”); Johnson & Johnson Consumer Products Company, Inc. (“J&J”); The Mentholatum Company, Inc. (“Mentholatum”); and Prince of Peace Enterprises, Inc. LecTec seeks injunctive relief, and compensatory and enhanced damages for the alleged infringement, and attorneys’ fees and expenses. LecTec filed a motion for preliminary injunction against us and the other defendants in February 2009 seeking an order preventing us and the other defendants from selling the specified patch products while the litigation is pending. The motion was dismissed on November 13, 2009. Defendants Endo, J&J, and Mentholatum have entered into settlement agreements with the plaintiff. We are vigorously defending this lawsuit.

On July 31, 2009, Colgate-Palmolive Company filed a complaint in the U.S. District Court for the Southern District of New York alleging that our Act Total Care product infringes Colgate-Palmolive’s Total trademark. The complaint seeks injunctive relief and damages. We filed an answer on September 24, 2009 that denies all material allegations made in the complaint. The case is not yet set for trial.

On January 11, 2010 W.F. Young, Inc. filed a lawsuit against us in the United States District Court for the District of Massachusetts (Springfield Division) as Civil Action No. 3:10-CV-30012 captioned W.F. Young, Inc. v. Chattem, Inc. asserting claims against our product Icy Hot Power Gel for trademark infringement, unfair competition, and false designation of origin under the Lanham Act and for unfair competition under Chapter XV, Section 93 (a) of Massachusetts General Laws. As of January 20, 2010, we have not been served with process. We will assert that the infringement claim asserted by W.F. Young, Inc. is without merit and that any rights of W.F. Young in the POWER GEL trademark have been abandoned. We intend to defend our position vigorously.

Two purported class action complaints have been filed in connection with the Merger Agreement and the transactions contemplated thereby in the Chancery Court for Hamilton County, Tennessee. The first complaint, captioned Pirelli Armstrong Tire Corporation Retiree Medical Benefits Trust, Individually and On Behalf of All Others Similarly Situated v. Chattem, Inc., et al. was filed on December 22, 2009. The second complaint, captioned Schipper v. Guerry, et al., was filed on December 23, 2009. The complaints allege generally, among other things, that the members of our board breached their fiduciary duties to our shareholders by advancing their personal interests ahead of those of the shareholders and by engaging in self-dealing and failing to properly value or disclose our true value. The Pirelli complaint also alleges that we aided and abetted the breaches of duty by our board and the Schipper complaint brings a similar aiding and abetting charge against sanofi.

The complaints seek generally an injunction preventing the transactions contemplated by the Merger Agreement from being consummated or, to the extent any such transactions are consummated, that such transactions be rescinded and set aside. Plaintiffs in each action seek costs and disbursements in conjunction with the actions, including attorneys’ fees, and Schipper seeks compensatory damages against defendants, both individually and severally.

On January 6, 2010, plaintiff in the Pirelli action moved to consolidate the actions and appoint its counsel as lead counsel in the consolidated action. On January 8, 2010, we moved to dismiss the Pirelli action for failure to state a claim and to stay discovery pending the resolution of the motion to dismiss. The parties to the purported class actions have, following arm’s-length negotiations, agreed in principle upon a proposed settlement of such actions, which will be subject to court approval. Pursuant to this proposed settlement, we will be making certain supplemental disclosures to our shareholders in connection with the Tender Offer. We and the members of our board of directors have denied and continue to deny any wrongdoing or liability with respect to all claims, events and transactions complained of in the aforementioned actions or that we or the members of our board of directors engaged in any wrongdoing. We are settling the actions in order to eliminate the uncertainty, burden, risk, expense and distraction of further litigation.

Other claims, suits and complaints arise in the ordinary course of our business involving such matters as patents and trademarks, product liability, environmental matters, employment law issues and other alleged injuries or damage. The outcome of such litigation cannot be predicted, but, in the opinion of management, based in part upon assessments from counsel, all such other pending matters are without merit or are of such kind or involve such other amounts that are not reasonably estimable or would not have a material adverse effect on our financial position, results of operations or cash flows if disposed of unfavorably.

We maintain insurance coverage for product liability claims relating to our products under claims-made policies which are subject to annual renewal. For the current annual policy period beginning September 1, 2009, we maintain product liability insurance coverage in the amount of $10,000 through our captive insurance subsidiary, of which approximately $2,570 has been funded as of January 20, 2010. We also have $50,000 of excess coverage through our captive insurance subsidiary which is reinsured on a 50% quota share basis by a third party insurance carrier.

REGULATORY

We were notified in October 2000 that the FDA denied a citizen petition submitted by Thompson Medical Company, Inc., the previous owner of Sportscreme and Aspercreme. The petition sought a determination that 10% trolamine salicylate, the active ingredient in Sportscreme and Aspercreme, was clinically proven to be an effective active ingredient in external analgesic OTC drug products and should be included in the FDA’s yet-to-be finalized monograph for external analgesics. We are working to develop alternate formulations for Sportscreme and Aspercreme in the event that the FDA does not consider the available clinical data to conclusively demonstrate the efficacy of trolamine salicylate when the OTC external analgesic monograph is

finalized. If 10% trolamine salicylate is not included in the final monograph, we would likely be required to discontinue these products as currently formulated after expiration of an anticipated grace period. If this occurred, we believe we could still market these products as homeopathic products or reformulate them using other ingredients included in the final FDA monograph. We believe that the monograph is unlikely to become final and take effect before September 2010.

Certain of our topical analgesic products are currently marketed under an FDA tentative final monograph for external analgesics. In 2003, the FDA proposed that the final monograph exclude external analgesic products in patch, plaster or poultice form, unless the FDA received additional data supporting the safety and efficacy of these products. On October 14, 2003, we submitted to the FDA information regarding the safety of our Icy Hot patches and arguments to support the inclusion of patch products in the final monograph. We also participated in an industry-wide effort coordinated by Consumer Healthcare Products Association (“CHPA”) requesting that patches be included in the final monograph and seeking to establish with the FDA a protocol of additional research that would allow the patches to be marketed under the final monograph even if the final monograph does not explicitly allow them. The CHPA submission to the FDA was made on October 15, 2003. The FDA has not responded to our or CHPA’s submission. The most recent Unified Agenda of Federal Regulatory and Deregulatory Actions published in the Federal Register provided a target final monograph publication date of September 2010. If the final monograph excludes products in patch, plaster or poultice form, we would have to file and obtain approval of a new drug application (“NDA”) in order to continue to market the Icy Hot patch products, the Icy Hot Sleeve and/or similar delivery systems under our other topical analgesic brands. In such case, we would have to cease marketing the existing products likely within one year from the effective date of the final monograph, or pending FDA review and approval of an NDA. The preparation of an NDA would likely take us a minimum of 24 months and would be expensive. It typically takes the FDA at least 12 months to rule on an NDA once it is submitted and there is no assurance that an NDA would be approved. Sales of our Icy Hot patches and Icy Hot Sleeve products represented approximately 8% of our consolidated total revenues in fiscal 2009.

We have responded to certain questions with respect to efficacy received from the FDA in connection with clinical studies for pyrilamine maleate, one of the active ingredients used in certain of the Pamprin and Prēmsyn PMS products. While we addressed all of the FDA questions in detail, the final monograph for menstrual drug products, which has not yet been issued, will determine if the FDA considers pyrilamine maleate safe and effective for menstrual relief products. If pyrilamine maleate were not included in the final monograph, we would be required to reformulate the products to continue to provide the consumer with multi-symptom relief benefits. We believe that any adverse finding by the FDA would likewise affect our principal competitors in the menstrual product category and that finalization of the menstrual products monograph is not imminent. Moreover, we have formulated alternative Pamprin products that fully comply with both the internal analgesic and menstrual product monographs.

We are aware of the FDA’s concern about the potential toxicity due to taking more than the recommended amount of the analgesic ingredient acetaminophen, an ingredient found in Pamprin and Prēmsyn PMS. We are participating in an industry-wide effort to reassure the FDA that the current recommended dosing regimens are safe and effective and that proper labeling and public education by both OTC and prescription drug companies are the best policies to abate the FDA’s concern.

On April 29, 2009, FDA finalized one part of the monograph on internal analgesic products that directly affects Pamprin and Prēmsyn PMS. The final rule requires that acetaminophen-containing OTC products include on their labeling new liver warnings and directions for use. In addition, the ingredient name “acetaminophen” must be made more prominent on the products’ labeling. The final rule’s compliance date for all affected products is April 29, 2010. We will be revising our product labels to comply with this FDA final rule. FDA has not yet determined a final action date for the remaining parts of the monograph on internal analgesics.

Our business is also regulated by the California Safe Drinking Water and Toxic Enforcement Act of 1986, known as Proposition 65. Proposition 65 prohibits businesses from exposing consumers to chemicals that the state has determined cause cancer or reproduction toxicity without first giving fair and reasonable warning unless the level of exposure to the carcinogen or reproductive toxicant falls below prescribed levels. From time to time, one or more ingredients in our products could become subject to an inquiry under Proposition 65. If an ingredient is on the state’s list as a carcinogen, it is possible that a claim could be brought in which case we would be required to demonstrate that exposure is below a “no significant risk” level for consumers. Any such claims may cause us to incur significant expense, and we may face monetary penalties or injunctive relief, or both, or be required to reformulate our product to acceptable levels. The State of California under Proposition 65 is also considering the inclusion of titanium dioxide on the state’s list of suspected carcinogens. Titanium dioxide has a long history of widespread use as an excipient in prescription and OTC pharmaceuticals, cosmetics, dietary supplements and skin care products and is an active ingredient in our Bullfrog Superblock products. We have participated in an industry-wide submission to the State of California, facilitated through the CHPA, presenting evidence that titanium dioxide presents “no significant risk” to consumers. In 2009, the State of California Carcinogen Identification Board is reviewing fluoride for further scientific review as a potential listing under Proposition 65.

On February 8, 2008, we initiated a voluntary nationwide recall of all lots of the medical device, Icy Hot Heat Therapy Air Activated Heat patch (Back and Arm, Neck and Leg), including consumer “samples” that were included on a limited promotional basis in cartons of our 3 oz. Aspercreme product. The recall was due to adverse events reports which associated the use of the products with temporary or medically reversible health consequences, skin irritation and burns. The recall was voluntary and conducted with the full knowledge of the FDA. On February 5-8, 2008, the FDA conducted a medical device inspection of our manufacturing plant, manufacturing records, and consumer complaint handling system related to the manufacture and distribution of the Heat Therapy device. On February 8, 2008, the FDA issued a Form FDA-483 noting three inspectional observations pertaining to medical device reporting, device correction reports, and corrective and preventive action procedures. We responded to the Form FDA-483 on February 14 and February 20, 2008 committing to correct the cited observations. On June 10, 2008, we received a warning letter from the FDA asserting the Heat Therapy devices are misbranded and adulterated based on the inspectional observations and requesting additional information to correct the observations. On June 24, 2008, we responded to the warning letter addressing the noted violations and providing the requested documentation. On September 22, 2008, the FDA responded stating that our response to the warning letter was thorough and appeared to adequately address the FDA’s concerns. We are no longer marketing the Icy Hot Heat Therapy products. On October 19, 2009, the FDA officially closed and terminated the recall.

COMMITMENTS

The minimum rental commitments under all noncancelable operating leases, primarily real estate, as of November 30, 2009 are as follows:

2010	$	739
2011		474
2012		144
2013		29
2014		19
Thereafter		5
	$	1,410

Rental expense was $2,448, $2,648 and $2,395 for fiscal 2009, 2008 and 2007, respectively.

The minimum commitments under noncancelable endorsement contracts related to our advertising as of November 30, 2009 are as follows:

2010	$	1,400
2011		900
	$	2,300

The minimum noncancelable purchase commitments related to inventory and equipment as of November 30, 2009 are as follows:

2010	$	5,759
2011		3,253
2012		553
2013		553
2014		553
	$	10,671

(13) SUBSEQUENT EVENTS

AGREEMENT AND PLAN OF MERGER

On December 20, 2009, we entered into an agreement and plan of merger (the “Merger Agreement”), with sanofi-aventis, a French société anonyme (“sanofi”), and River Acquisition Corp., a Tennessee corporation and an indirect wholly-owned subsidiary of sanofi (“Merger Sub”), pursuant to which, among other things, Merger Sub agreed to commence a cash tender offer (the “Tender Offer”) to acquire all outstanding shares of our common stock, together with the associated rights to purchase our Series A Junior Participating Preferred Stock issued under the Rights Agreement, dated as of January 27, 2000, between us and SunTrust Bank, Atlanta, as rights agent, as amended (the “Rights Agreement”), for $93.50 per share of common stock, net to the sellers in cash without interest, less any required withholding taxes (the “Offer Price”). The Merger Agreement also provides that following consummation of the Tender Offer, Merger Sub will be merged with and into us (the “Merger”), with our company surviving the Merger as an indirect wholly-owned subsidiary of sanofi. At the effective time of the Merger, all remaining outstanding shares of common stock not tendered in the Tender Offer (other than shares of common stock owned by us, sanofi or any of sanofi’s subsidiaries), will be cancelled and converted into the right to receive the same Offer Price paid in the Tender Offer and on the terms and conditions set forth in the Merger Agreement. All unvested stock options representing the right to purchase our common stock will vest and become exercisable on the date the Tender Offer is consummated. At the effective time of the Merger, each then outstanding option will be cancelled and will represent the right to receive an amount in cash equal to the excess, if any, of the Offer Price over the exercise price of such option.

when added to the shares of common stock already owned by sanofi or any of its subsidiaries following consummation of the Tender Offer, constitutes one share of common stock more than 90% of the shares of common stock then outstanding on a fully-diluted basis (as defined in the Merger Agreement). If sanofi, Merger Sub and any of their respective affiliates acquire more than 90% of the outstanding shares of common stock, including through exercise of the Top-Up Option, the Merger will be effected through the “short form” procedures available under Tennessee law.

Our 2% Convertible Notes and 1.625% Convertible Notes (together, the “Convertible Notes”) will be treated in accordance with the terms of their respective indentures and our 7% Subordinated Notes will be redeemed in connection with the Merger Agreement. The Merger Agreement contemplates that we will repay all outstanding amounts under our Credit Facility and will seek to unwind certain warrants sold in connection with the issuance of the Convertible Notes. Sanofi will provide us, following consummation of the Tender Offer, with the funds required to (i) make payments with respect to the Convertible Notes, (ii) redeem the 7% Subordinated Notes, (iii) pay all outstanding amounts under the Credit Facility and (iv) pay amounts owed in connection with the unwinding of the warrants sold in connection with the issuance of the Convertible Notes, if any.

AMENDMENT TO RIGHTS AGREEMENT

AGREEMENTS WITH NAMED EXECUTIVE OFFICERS

the date on which shares of common stock are purchased in accordance with the terms of the Tender Offer, subject to the completion of the Merger. The Severance Amendments to Messrs. Guerry, Bosworth, and Whitfield’s respective agreements limit the circumstances under which severance may be paid to (i) involuntary termination of the executive’s employment without cause by us or (ii) termination by the executive due to specified material adverse changes in the executive’s employment relationship with us. By entering into these Severance Amendments, Messrs. Guerry, Bosworth and Whitfield have waived their previously existing right to resign and receive severance between the 180th day and the 240th day following the “Change in Control” of our company, which would include the purchase of shares of common stock in the Tender Offer. The amendment to Mr. Long’s severance agreement changed the circumstances in which severance may be paid to him, with the result that these circumstances are consistent with those in Messrs. Guerry’s, Bosworth’s, and Whitfield’s amended severance agreements. The Severance Amendments to Mr. Guerry’s and Mr. Long’s severance agreements specify that their respective severance payments will be reduced to the extent necessary to avoid the triggering of excise tax under Section 4999 of the Internal Revenue Code.

AMENDMENTS TO BYLAWS

We evaluated events that occurred after the balance sheet date through January 28, 2010, the date these financial statements were issued, and no other subsequent events that met recognition or disclosure criteria were identified.

(14) CONSOLIDATING FINANCIAL STATEMENTS

The consolidating financial statements, for the dates or periods indicated, of Chattem, Inc. (“Chattem”), Signal Investment & Management Co. (“Signal”), SunDex, LLC (“SunDex”) and Chattem (Canada) Holdings, Inc. (“Canada”), the guarantors of the long-term debt of Chattem, and the non-guarantor direct and indirect wholly-owned subsidiaries of Chattem are presented below. Signal is 89% owned by Chattem and 11% owned by Canada. SunDex and Canada are wholly-owned subsidiaries of Chattem. The guarantees of Signal, SunDex and Canada are full and unconditional and joint and several. The guarantees of Signal, SunDex and Canada as of November 30, 2009 arose in conjunction with Chattem’s Credit Facility and Chattem’s issuance of the 7.0% Subordinated Notes (see note 5). The maximum amount of future payments the guarantors would be required to make under the guarantees as of November 30, 2009 is $194,740.

Note 14

CHATTEM, INC. AND SUBSIDIARIES

CONSOLIDATING BALANCE SHEETS

NOVEMBER 30, 2009

(In thousands)

	CHATTEM			GUARANTOR SUBSIDIARY COMPANIES			NON-GUARANTOR SUBSIDIARY COMPANIES			ELIMINATIONS			CONSOLIDATED
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	52,521		$	421		$	11,824		$	—		$	64,766
Accounts receivable, less allowances of $10,041		48,624			16,953			7,933			(18,903	)		54,607
Interest receivable		17			38			—			(55	)		—
Inventories, net		43,611			1,470			3,694			—			48,775
Deferred income taxes		5,544			—			41			—			5,585
Prepaid expenses and other current assets		2,030			—			494			(30	)		2,494
Total current assets		152,347			18,882			23,986			(18,988	)		176,227

PROPERTY, PLANT AND EQUIPMENT, NET		33,664			775			626			—			35,065

OTHER NONCURRENT ASSETS:
Patents, trademarks and other purchased product rights, net		2,396			635,799			1,561			(62,290	)		577,466
Debt issuance costs, net		9,860			—			—			—			9,860
Investment in subsidiaries		573,520			64,682			97,690			(735,892	)		—
Note receivable		—			34,694			—			(34,694	)		—
Other		2,542			—			—			—			2,542
Total other noncurrent assets		588,318			735,175			99,251			(832,876	)		589,868

TOTAL ASSETS	$	774,329		$	754,832		$	123,863		$	(851,864	)	$	801,160

LIABILITIES AND SHAREHOLDERS’ EQUITY

CURRENT LIABILITIES:
Current maturities of long-term debt	$	3,000		$	—		$	—		$	—		$	3,000
Accounts payable		20,165			—			2,051			—			22,216
Bank overdrafts		461			—			—			—			461
Accrued liabilities		33,368			1,791			5,176			(18,990	)		21,345
Total current liabilities		56,994			1,791			7,227			(18,990	)		47,022

LONG-TERM DEBT, less current maturities		393,977			(7,737	)		36,494			(34,694	)		388,040

DEFERRED INCOME TAXES		(19,688	)		62,823			(2,134	)		—			41,001

OTHER NONCURRENT LIABILITIES		935			—			—			—			935

INTERCOMPANY ACCOUNTS		18,200			(24,605	)		6,405			—			—

SHAREHOLDERS’ EQUITY
Preferred shares, without par value, authorized 1,000, none issued		—			—			—			—			—
Common shares, without par value, authorized 100,000, issued and outstanding 19,004		30,640			—			—			—			30,640
Share capital of subsidiaries		—			641,659			78,999			(720,658	)		—
Dividends		—			(56,462	)		—			56,462			—
Retained earnings		294,401			135,669			(2,568	)		(133,101	)		294,401
		325,041			720,866			76,431			(797,297	)		325,041
Accumulated other comprehensive income (loss), net of taxes:
Interest rate hedge adjustment		(274	)		—			—			—			(274	)
Foreign currency translation adjustment		413			1,694			(560	)		(883	)		664
Unrealized actuarial gains and losses		(1,269	)		—			—			—			(1,269	)
Total shareholders’ equity		323,911			722,560			75,871			(798,180	)		324,162

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	774,329		$	754,832		$	123,863		$	(851,864	)	$	801,160

Note 14

CHATTEM, INC. AND SUBSIDIARIES

CONSOLIDATING BALANCE SHEETS

NOVEMBER 30, 2008

(In thousands)

	CHATTEM			GUARANTOR SUBSIDIARY COMPANIES			NON-GUARANTOR SUBSIDIARY COMPANIES			ELIMINATIONS			CONSOLIDATED
ASSETS

CURRENT ASSETS:
Cash and cash equivalents	$	22,055		$	1,570		$	8,685		$	—		$	32,310
Accounts receivable, less allowances of $9,718		44,175			16,226			5,242			(16,226	)		49,417
Interest receivable		108			641			(91	)		(658	)		—
Inventories, net		35,795			1,811			3,327			—			40,933
Deferred income taxes		3,932			—			36			—			3,968
Prepaid expenses and other current assets		4,024			—			332			(1,905	)		2,451
Total current assets		110,089			20,248			17,531			(18,789	)		129,079

PROPERTY, PLANT AND EQUIPMENT, NET		30,792			775			676			—			32,243

OTHER NONCURRENT ASSETS:
Patents, trademarks and other purchased product rights, net		3,341			674,057			1,561			(62,289	)		616,670
Debt issuance costs, net		12,253			—			—			—			12,253
Investment in subsidiaries		597,821			64,682			97,690			(760,193	)		—
Note receivable		—			34,694			—			(34,694	)		—
Other		2,727			—			—			—			2,727
Total other noncurrent assets		616,142			773,433			99,251			(857,176	)		631,650

TOTAL ASSETS	$	757,023		$	794,456		$	117,458		$	(875,965	)	$	792,972

LIABILITIES AND SHAREHOLDERS’ EQUITY

CURRENT LIABILITIES:
Current maturities of long-term debt	$	3,000		$	—		$	—		$	—		$	3,000
Accounts payable		16,463			—			1,736			(83	)		18,116
Bank overdrafts		1,184			—			—			—			1,184
Accrued liabilities		34,594			699			4,708			(18,708	)		21,293
Total current liabilities		55,241			699			6,444			(18,791	)		43,593

LONG-TERM DEBT, less current maturities		455,900			(1,200	)		36,494			(34,694	)		456,500

DEFERRED INCOME TAXES		(24,111	)		60,766			(1,243	)		—			35,412

OTHER NONCURRENT LIABILITIES		1,609			—			—			—			1,609

INTERCOMPANY ACCOUNTS		12,526			(18,962	)		6,436			—			—

SHAREHOLDERS’ EQUITY
Preferred shares, without par value, authorized 1,000, none issued		—			—			—			—			—
Common shares, without par value, authorized 100,000, issued and outstanding 18,978		28,926			—			—			—			28,926
Share capital of subsidiaries		—			641,659			77,935			(719,594	)		—
Dividends		—			(69,628	)		—			69,628			—
Retained earnings		231,230			179,428			(6,416	)		(173,012	)		231,230
		260,156			751,459			71,519			(822,978	)		260,156
Accumulated other comprehensive income (loss), net of taxes:
Interest rate hedge adjustment		(1,787	)		—			—			—			(1,787	)
Foreign currency translation adjustment		(968	)		1,694			(2,192	)		498			(968	)
Unrealized actuarial gains and losses		(1,543	)		—			—			—			(1,543	)
Total shareholders’ equity		255,858			753,153			69,327			(822,480	)		255,858

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	757,023		$	794,456		$	117,458		$	(875,965	)	$	792,972

Note 14

CHATTEM, INC. AND SUBSIDIARIES

CONSOLIDATING STATEMENTS OF INCOME

FOR THE YEAR ENDED NOVEMBER 30, 2009

(In thousands)

	CHATTEM			GUARANTOR SUBSIDIARY COMPANIES			NON-GUARANTOR SUBSIDIARY COMPANIES			ELIMINATIONS			CONSOLIDATED

TOTAL REVENUES	$	427,217		$	90,952		$	21,346		$	(76,173	)	$	463,342

COSTS AND EXPENSES:
Cost of sales		127,511			4,998			10,867			(3,608	)		139,768
Advertising and promotion		96,681			4,321			4,682			—			105,684
Selling, general and administrative		56,388			1,042			2,870			—			60,300
Impairment of indefinite-lived intangible assets		—			38,258			—			—			38,258
Equity in subsidiary income		(24,981	)		—			—			24,981			—
Total costs and expenses		255,599			48,619			18,419			21,373			344,010

INCOME FROM OPERATIONS		171,618			42,333			2,927			(97,546	)		119,332

OTHER INCOME (EXPENSE):
Interest expense		(20,828	)		—			(4,034	)		4,078			(20,784	)
Investment and other income, net		288			4,078			4,775			(8,814	)		327
Loss on early extinguishment of debt		(1,571	)		—			—			—			(1,571	)
Royalties		(69,632	)		(2,924	)		(9	)		72,565			—
Corporate allocations		1,951			(1,744	)		(207	)		—			—
Intercompany R&D expense		4,176			(4,176	)		—			—			—

Total other income (expense)		(85,616	)		(4,766	)		525			67,829			(22,028	)

INCOME (LOSS) BEFORE INCOME TAXES		86,002			37,567			3,452			(29,717	)		97,304

PROVISION FOR INCOME TAXES		22,831			11,698			(396	)		—			34,133

NET INCOME (LOSS)	$	63,171		$	25,869		$	3,848		$	(29,717	)	$	63,171

Note 14

CHATTEM, INC. AND SUBSIDIARIES

CONSOLIDATING STATEMENTS OF INCOME

FOR THE YEAR ENDED NOVEMBER 30, 2008

(In thousands)

	CHATTEM			GUARANTOR SUBSIDIARY COMPANIES			NON-GUARANTOR SUBSIDIARY COMPANIES			ELIMINATIONS			CONSOLIDATED

TOTAL REVENUES	$	413,450		$	89,033		$	24,624		$	(72,228	)	$	454,879

COSTS AND EXPENSES:
Cost of sales		118,000			5,370			11,194			(2,944	)		131,620
Advertising and promotion		105,873			6,193			6,027			—			118,093
Selling, general and administrative		58,185			697			3,708			—			62,590
Product recall expenses		5,479			—			790			—			6,269
Litigation settlement		567			—			10,704			—			11,271
Equity in subsidiary income		(42,411	)		—			—			42,411			—
Total costs and expenses		245,693			12,260			32,423			39,467			329,843

INCOME FROM OPERATIONS		167,757			76,773			(7,799	)		(111,695	)		125,036

OTHER INCOME (EXPENSE):
Interest expense		(25,134	)		—			(4,236	)		4,060			(25,310	)
Investment and other income, net		189			4,074			3,012			(6,560	)		715
Loss on early extinguishment of debt		(526	)		—			—			—			(526	)
Royalties		(66,145	)		(3,141	)		—			69,286			—
Corporate allocations		1,973			(1,812	)		(161	)		—			—
Total other income (expense)		(89,643	)		(879	)		(1,385	)		66,786			(25,121	)

INCOME (LOSS) BEFORE INCOME TAXES		78,114			75,894			(9,184	)		(44,909	)		99,915

PROVISION FOR INCOME TAXES		11,828			25,139			(3,338	)		—			33,629

NET INCOME (LOSS)	$	66,286		$	50,755		$	(5,846	)	$	(44,909	)	$	66,286

Note 14

CHATTEM, INC. AND SUBSIDIARIES

CONSOLIDATING STATEMENTS OF INCOME

FOR THE YEAR ENDED NOVEMBER 30, 2007

(In thousands)

	CHATTEM			GUARANTOR SUBSIDIARY COMPANIES			NON-GUARANTOR SUBSIDIARY COMPANIES			ELIMINATIONS			CONSOLIDATED

TOTAL REVENUES	$	378,225		$	92,089		$	22,875		$	(69,811	)	$	423,378

COSTS AND EXPENSES:
Cost of sales		115,001			7,125			10,932			(4,003	)		129,055
Advertising and promotion		96,471			9,844			6,004			(113	)		112,206
Selling, general and administrative		55,120			320			2,438			—			57,878
Acquisition expenses		2,057			—			—			—			2,057
Equity in subsidiary income		(46,302	)		—			—			46,302			—
Total costs and expenses		222,347			17,289			19,374			42,186			301,196

INCOME FROM OPERATIONS		155,878			74,800			3,501			(111,997	)		122,182

OTHER INCOME (EXPENSE):
Interest expense		(30,142	)		—			(2,645	)		2,857			(29,930	)
Investment and other income, net		801			2,589			3,428			(5,358	)		1,460
Loss on early extinguishment of debt		(2,633	)		—			—			—			(2,633	)
Royalties		(61,517	)		(4,178	)		—			65,695			—
Corporate allocations		2,424			(2,362	)		(62	)		—			—
Total other income (expense)		(91,067	)		(3,951	)		721			63,194			(31,103	)

INCOME (LOSS) BEFORE INCOME TAXES		64,811			70,849			4,222			(48,803	)		91,079

PROVISION FOR INCOME TAXES		5,121			24,797			1,471			—			31,389

NET INCOME (LOSS)	$	59,690		$	46,052		$	2,751		$	(48,803	)	$	59,690

Note 14

CHATTEM, INC. AND SUBSIDIARIES

CONSOLIDATING STATEMENTS OF CASH FLOWS

FOR THE YEAR ENDED NOVEMBER 30, 2009

(In thousands)

	CHATTEM			GUARANTOR SUBSIDIARY COMPANIES			NON-GUARANTOR SUBSIDIARY COMPANIES			ELIMINATIONS			CONSOLIDATED

OPERATING ACTIVITIES:
Net income (loss)	$	63,171		$	25,869		$	3,848		$	(29,717	)	$	63,171
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation and amortization		7,513			—			154			—			7,667
Deferred income taxes		694			2,057			(897	)		—			1,854
Tax benefit realized from stock options exercised		(311	)		—			—			—			(311	)
Stock option expense		7,770			—			—			—			7,770
Loss on early extinguishment of debt		1,571			—			—			—			1,571
Other, net		339			—			(222	)		—			117
Impairment of long-lived assets		—			38,258			—			—			38,258
Equity in Subsidiary (earnings) loss		(29,717	)		—			—			29,717			—
Changes in operating assets and liabilities:
Accounts receivable and other		(4,447	)		(728	)		(2,693	)		2,678			(5,190	)
Interest receivable		91			601			(90	)		(602	)		—
Inventories		(7,780	)		342			(366	)		—			(7,804	)
Prepaid expenses and other current assets		1,994			—			(162	)		(1,875	)		(43	)
Accounts payable and accrued liabilities		1,315			1,094			782			(201	)		2,990
Net cash provided by (used in) operating activities		42,203			67,493			354			—			110,050

INVESTING ACTIVITIES:
Purchase of property, plant and equipment		(6,945	)		—			8			—			(6,937	)
Increase in other assets, net		1,025			—			1,628			—			2,653
Net cash (used in) provided by investing activities		(5,920	)		—			1,636			—			(4,284	)

FINANCING ACTIVITIES:
Repayment of long-term debt		(20,260	)		—			—			—			(20,260	)
Proceeds from borrowings under revolving credit facility		1,000			—			—			—			1,000
Repayments of revolving credit facility		(20,500	)		—			—			—			(20,500	)
Bank overdraft		(723	)		—			—			—			(723	)
Repurchase of common shares		(34,633	)		—			—			—			(34,633	)
Proceeds from exercise of stock options		2,914			—			—			—			2,914
Tax benefit realized from stock options exercised		311			—			—			—			311
Increase in debt issuance costs		(1,490	)		—			—			—			(1,490	)
Debt retirement costs		(151	)		—			—			—			(151	)
Intercompany debt proceeds (payments)		6,537			(6,537	)		—			—			—
Changes in intercompany accounts		9,452			(5,643	)		(3,809	)		—			—
Dividends paid		51,726			(56,462	)		4,736			—			—
Net cash provided by (used in) financing activities		(5,817	)		(68,642	)		927			—			(73,532	)

EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS		—			—			222			—			222

CASH AND CASH EQUIVALENTS
Increase (decrease) for the year		30,466			(1,149	)		3,139			—			32,456
At beginning of year		22,055			1,570			8,685			—			32,310
At end of year	$	52,521		$	421		$	11,824		$	—		$	64,766

Note 14

CHATTEM, INC. AND SUBSIDIARIES

CONSOLIDATING STATEMENTS OF CASH FLOWS

FOR THE YEAR ENDED NOVEMBER 30, 2008

(In thousands)

	CHATTEM			GUARANTOR SUBSIDIARY COMPANIES			NON-GUARANTOR SUBSIDIARY COMPANIES			ELIMINATIONS			CONSOLIDATED

OPERATING ACTIVITIES:
Net income (loss)	$	66,286		$	50,755		$	(5,846	)	$	(44,909	)	$	66,286
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation and amortization		8,134			—			252			—			8,386
Deferred income taxes		3,643			15,734			(1,238	)		—			18,139
Stock option expense		5,970			—			—			—			5,970
Loss on early extinguishment of debt		526			—			—			—			526
Tax benefit realized from stock options exercised		(3,709	)		—			—			—			(3,709	)
Other, net		(1,417	)		—			(46	)		—			(1,463	)
Equity in subsidiary income		(44,909	)		—			—			44,909			—
Changes in operating assets and liabilities:
Accounts receivable		(6,683	)		467			1,019			(467	)		(5,664	)
Interest receivable		(8	)		(15	)		8			15			—
Inventories		425			1,431			475			—			2,331
Prepaid expenses and other current assets		(2,115	)		—			(31	)		1,755			(391	)
Accounts payable and accrued liabilities		3,171			5			(126	)		(1,303	)		1,747
Net cash provided by (used in) operating activities		29,314			68,377			(5,533	)		—			92,158

INVESTING ACTIVITIES:
Purchase of property, plant and equipment		(4,251	)		—			(370	)		—			(4,621	)
(Increase) decrease in other assets, net		(237	)		1,694			(2,991	)		—			(1,534	)
Net cash (used in) provided by investing activities		(4,488	)		1,694			(3,361	)		—			(6,155	)

FINANCING ACTIVITIES:
Repayment of long-term debt		(38,000	)		—			—			—			(38,000	)
Proceeds from borrowings under revolving credit facility		151,500			—			—			—			151,500
Repayments of revolving credit facility		(162,000	)		—			—			—			(162,000	)
Bank overdraft		(6,400	)		—			—			—			(6,400	)
Repurchase of common shares		(26,327	)		—			—			—			(26,327	)
Proceeds from exercise of stock options		8,372			—			—			—			8,372
Tax benefit realized from stock options exercised		3,709			—			—			—			3,709
Changes in intercompany accounts		(5,438	)		537			4,901			—			—
Dividends paid		67,128			(69,628	)		2,500			—			—
Net cash provided by (used in) financing activities		(7,456	)		(69,091	)		7,401			—			(69,146	)

EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS		—			—			46			—			46

CASH AND CASH EQUIVALENTS
Increase (decrease) for the year		17,370			980			(1,447	)		—			16,903
At beginning of year		4,685			590			10,132			—			15,407
At end of year	$	22,055		$	1,570		$	8,685		$	—		$	32,310

Note 14

CHATTEM, INC. AND SUBSIDIARIES

CONSOLIDATING STATEMENTS OF CASH FLOWS

FOR THE YEAR ENDED NOVEMBER 30, 2007

(In thousands)

	CHATTEM			GUARANTOR SUBSIDIARY COMPANIES			NON-GUARANTOR SUBSIDIARY COMPANIES			ELIMINATIONS			CONSOLIDATED

OPERATING ACTIVITIES:
Net income (loss)	$	59,690		$	46,052		$	2,751		$	(48,803	)	$	59,690
Adjustments to reconcile net income (loss)to net cash provided by operating activities:
Depreciation and amortization		8,480			—			363			—			8,843
Deferred income taxes		1,875			10,847			(4	)		—			12,718
Stock option expense		5,622			—			—			—			5,622
Loss on early extinguishment of debt		2,633			—			—			—			2,633
Tax benefit realized from stock options exercised		(8,291	)		—			—			—			(8,291	)
Other, net		154			—			(343	)		—			(189	)
Equity in subsidiary income		(48,803	)		—			—			48,803			—
Changes in operating assets and liabilities, net of acquisitions:
Accounts receivable		(12,289	)		(7,286	)		(1,612	)		7,286			(13,901	)
Interest receivable		(83	)		—			83			—			—
Inventories		(5,721	)		918			(1,017	)		—			(5,820	)
Prepaid expenses and other current assets		1,243			—			(144	)		150			1,249
Accounts payable and accrued liabilities		27,814			(441	)		4,243			(7,436	)		24,180
Net cash provided by operating activities		32,324			50,090			4,320			—			86,734

INVESTING ACTIVITIES:
Purchase of property, plant and equipment		(5,854	)		—			(441	)		—			(6,295	)
Acquisition of brands		(8,420	)		(405,784	)		(1,561	)		—			(415,765	)
Decrease in other assets, net		(1,342	)		468			2,784			—			1,910
Net cash (used in) provided by investing activities		(15,616	)		(405,316	)		782			—			(420,150	)

FINANCING ACTIVITIES:
Repayment of long-term debt		(154,500	)		—			—			—			(154,500	)
Proceeds from long-term debt		400,000			—			—			—			400,000
Proceeds from borrowings under revolving credit facility		159,000			—			—			—			159,000
Repayments of revolving credit facility		(129,000	)		—			—			—			(129,000	)
Bank overdraft		1,760			—			—			—			1,760
Repurchase of common shares		(23,601	)		—			—			—			(23,601	)
Proceeds from exercise of stock options		16,661			—			—			—			16,661
Purchase of note hedge		(29,500	)		—			—			—			(29,500	)
Proceeds from issuance of warrant		17,430			—			—			—			17,430
Increase in debt issuance costs		(9,383	)		—			—			—			(9,383	)
Premium paid on interest rate cap agreement		(114	)		—			—			—			(114	)
Proceeds from sale of interest rate cap		909			—			—			—			909
Tax benefit realized from stock options exercised		8,291			—			—			—			8,291
Changes in intercompany accounts		(374,120	)		373,095			1,025			—			—
Dividends paid		17,546			(18,046	)		500			—			—
Intercompany debt proceeds (payments)		6,400			(1,200	)		(5,200	)		—			—
Net cash provided by (used in) financing activities		(92,221	)		353,849			(3,675	)		—			257,953

EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS		—			—			343			—			343

CASH AND CASH EQUIVALENTS
Increase for the year		(75,513	)		(1,377	)		1,770			—			(75,120	)
At beginning of year		80,198			1,967			8,362			—			90,527
At end of year	$	4,685		$	590		$	10,132		$	—		$	15,407

(15) QUARTERLY INFORMATION (Unaudited and in thousands, except per share amounts)

			Quarter Ended
	Total		February 28		May 31		August 31		November 30
FISCAL 2009:
Total revenues	$	463,342		116,092		121,830		115,171		110,249
Gross profit	$	323,574		80,835		84,699		80,406		77,634
Net income (loss)	$	63,171		19,566		24,230		23,428		(4,053	)
Net income (loss) per share:
Basic (1)	$	3.29		1.01		1.26		1.23		(.21	)
Diluted (1)	$	3.28		.99		1.26		1.22		(.21	)

FISCAL 2008:
Total revenues	$	454,879		120,773		116,716		111,929		105,461
Gross profit	$	323,259		86,040		84,075		80,176		72,968
Net income	$	66,286		14,873		20,732		13,966		16,715
Net income per share:
Basic (1)	$	3.49		.78		1.08		.74		.88
Diluted (1)	$	3.42		.75		1.06		.73		.86

(1) The sum of the quarterly earnings per share amounts may differ from annual earnings per share because of the differences in the weighted average number of common shares and dilutive potential shares used in the quarterly and annual computations.

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of

Chattem, Inc.:

We have audited Chattem, Inc. (a Tennessee corporation) and subsidiaries’ (“the Company”) internal control over financial reporting as of November 30, 2009, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on Chattem, Inc. and subsidiaries’ internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, Chattem, Inc. and subsidiaries maintained, in all material respects, effective internal control over financial reporting as of November 30, 2009, based on criteria established in Internal Control—Integrated Framework issued by COSO.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Chattem, Inc. and subsidiaries as of November 30, 2009 and 2008, and the related consolidated statements of income, shareholders’ equity, and cash flows for each of the three years in the period ended November 30, 2009, and our report dated January 28, 2010, expressed an unqualified opinion on those consolidated financial statements.

/s/ GRANT THORNTON LLP

Charlotte, North Carolina

January 28, 2010

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

None.

Item 9A. Controls and Procedures

Disclosure Controls and Procedures

Under the supervision and with the participation of our management, including our chief executive officer and chief financial officer, we have evaluated the effectiveness of our disclosure controls and procedures (as such terms are defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of November 30, 2009 (the “Evaluation Date”). Based on such evaluation, such officers have concluded that, as of the Evaluation Date, our disclosure controls and procedures were effective in alerting them on a timely basis to material information relating to us (including our consolidated subsidiaries) required to be included in our filings under the Exchange Act.

Management’s Report on Internal Control Over Financial Reporting

Management of our company is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is defined in Rule 13a-15(f) or 15d-15(f) promulgated under the Exchange Act as a process designed by, or under the supervision of, a company’s principal executive and principal financial officers and effected by the Company’s board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:

•

Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the company;

•

Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and

•

Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Our management assessed the effectiveness of our internal control over financial reporting as of November 30, 2009 using the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework. Management’s assessment included an evaluation of the design of our internal control over financial reporting and testing the operational effectiveness of our internal control over financial reporting. Management reviewed the results of the assessment with the Audit Committee of the board of directors. Based on our assessment, management determined that, at November 30, 2009, we maintained effective internal control over financial reporting.

Our independent registered public accounting firm has issued an attestation report on our internal control over financial reporting, which is included herein.

Changes in Internal Control Over Financial Reporting

There have been no changes during the quarter ended November 30, 2009 in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Item 9B. Other Information

None

PART III

Item 10. Directors, Executive Officers and Corporate Governance

(a) Directors

The information found in our 2010 Proxy Statement under the heading “Information about Nominees and Continuing Directors” is hereby incorporated by reference.

(b) Executive Officers

The following table lists the names of the executive officers and other key employees of the Company as of January 20, 2010, their ages and their positions and offices with us:

NAME	AGE	POSITION WITH REGISTRANT

Zan Guerry*	61	Chairman of the Board and Chief Executive Officer; Director

Robert E. Bosworth*	62	President and Chief Operating Officer; Director

Andrea M. Crouch	51	Vice President – Brand Management

Ron Galante	66	Vice President – New Business Development

Robert B. Long*	38	Vice President and Chief Financial Officer

B. Derrill Pitts	67	Vice President – Operations

J. Blair Ramey	43	Vice President – Marketing

John L. Stroud	49	Senior Vice President – Marketing

Charles M. Stafford	59	Vice President – Sales

Joseph J. Czerwinski	60	Vice President – Product Development

Theodore K. Whitfield, Jr.*	44	Vice President, General Counsel and Secretary

*Executive Officer

Zan Guerry. Mr. Guerry became our chairman of the board and chief executive officer in June 1990. Previously, he served as our vice president and chief financial officer from 1980 until 1983, as executive vice president from 1983 to 1990, as president of Chattem Consumer Products from 1989 to 1994, as chief operating officer from 1989 to 1990 and as president from 1990 to 1998. Mr. Guerry became one of our directors in 1981. He is also a director of SunTrust Bank, Chattanooga, N.A.

Robert E. Bosworth. Mr. Bosworth became our president and chief operating officer in September 2005. From 2001 to September 2005, Mr. Bosworth served as Vice President-Corporate Finance of Livingston Company, a merchant banking firm.

Andrea M. Crouch. Ms. Crouch became our vice president-brand management in 1995. Ms. Crouch joined us in 1985 as an assistant brand manager. Prior to joining us, she served as product planner for Hayes Microcomputer Products, a manufacturer of modems and communication equipment, and previously was a systems consultant with Arthur Andersen LLP, an accounting firm.

Ron Galante. Mr. Galante became our vice president-new business development in June 1996. Previously, he was director - new business development. Prior to that, Mr. Galante served as general manager of Chattem Canada, our Canadian subsidiary, from June 1990 to May 1993 and as director of marketing for many of our domestic brands from 1980 until 1990.

Robert B. Long. Mr. Long became our vice president and chief financial officer in July 2008. Previously, he served as our vice president-finance since July 2007 and as our chief accounting officer from April 2006 to July 2007. Prior to joining us, Mr. Long was Chief Financial Officer of Charleston Hosiery, Inc. and served as a senior audit manager with Ernst & Young LLP from 2003 to 2005.

B. Derrill Pitts. Mr. Pitts joined us in 1961 and since that time has served us in all manufacturing operation disciplines. He was promoted to vice president-operations in 1984.

J. Blair Ramey. Mr. Ramey became our vice president-marketing in November 2007. Mr. Ramey joined us in 1998 and previously served as a marketing manager, a marketing director, and since April 2006 as our vice president-brand management and media. Prior to joining our company, he held marketing positions at Nabisco, Inc. and Bryan Foods.

John L. Stroud. Mr. Stroud became our senior vice president-marketing in January 2010. Previously, he served as our vice president-marketing, vice president-brand management and category manager since joining our company in August 2005. Prior to joining us, he served in various capacities, including Vice President, Marketing, R&D and Quality, at Brach’s Confections, Inc., a manufacturer of confections and fruit snacks.

Charles M. Stafford. Mr. Stafford became our vice president-sales in June 1994. Previously, he served as our director of field sales and zone sales manager. Prior to joining us in 1983, Mr. Stafford held sales management positions with Johnson & Johnson, a pharmaceutical company, and Schering Corporation (now Schering–Plough Corporation), a research-based pharmaceutical company.

Joseph J. Czerwinski. Mr. Czerwinski became our vice president-product development in July 2007. Since joining us in 2002, he has served as our Director of Product Development.

Theodore K. Whitfield, Jr. Mr. Whitfield became our vice president, general counsel and secretary in June 2004. Prior to joining us, Mr. Whitfield was a member with the law firm of Miller & Martin PLLC from 1999 to 2004.

The information found in our 2010 Proxy Statement under the heading “Section 16(a) Beneficial Ownership Reporting Compliance” is hereby incorporated by reference.

(d) Audit Committee; Audit Committee Financial Expert

The information found in our 2010 Proxy Statement regarding the identity of the audit committee members and the audit committee financial expert under the heading “Audit Committee Report – Identification of Members and Functions of Committee” is hereby incorporated by reference.

(e) Code of Ethics

We have adopted a code of business conduct and ethics that applies to our directors, officers and employees, including our principal executive officer, principal financial officer, principal accounting officer, controller or persons performing similar functions. A copy of this code of business conduct and ethics is posted on the Company’s website at www.chattem.com. In the event waivers are granted under the code of business conduct and ethics, such waivers will be posted on our website for one year from the date the waiver is granted.

Item 11. Executive Compensation

The information found in our 2010 Proxy Statement under the headings “Corporate Governance – Compensation Committee – Compensation Committee Interlocks and Insider Participation” and “Executive Compensation and Other Information” is hereby incorporated by reference.

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters

The information found in our 2010 Proxy Statement under the headings “Executive Compensation and Other Information – Equity Compensation Plan Information” and “Ownership of Common Stock” is hereby incorporated by reference.

Item 13. Certain Relationships, Related Transactions and Director Independence

The information found in our 2010 Proxy Statement under the headings “Corporate Governance – Policies and Procedures for the Approval of Related Person Transactions” and “Executive Compensation and Other Information – Certain Relationships, Related Transactions and Director Independence” is hereby incorporated by reference.

Item 14. Principal Accountant Fees and Services

The information found in our 2010 Proxy Statement under the headings “Corporate Governance - Audit Committee Pre-Approval of Services by the Independent Auditor” and “Corporate Governance - Audit and Non-Audit Fees” is hereby incorporated by reference.

PART IV

Item 15. Exhibits and Financial Statement Schedules

(a) 1. Consolidated Financial Statements

The following consolidated financial statements of Chattem, Inc. and Subsidiaries are set forth in Item 8 hereof:

Report of Independent Registered Public Accounting Firm

Consolidated Balance Sheets as of November 30, 2009 and 2008

Consolidated Statements of Income for the Years Ended November 30, 2009, 2008 and 2007

Consolidated Statements of Shareholders’ Equity for the Years Ended November 30, 2009, 2008 and 2007

Consolidated Statements of Cash Flows for the Years Ended November 30, 2009, 2008 and 2007

Notes to Consolidated Financial Statements

Report of Independent Registered Public Accounting Firm on Internal Control over Financial Reporting

2. The following financial statement schedule is filed as Exhibit 99.1 to this report:

Schedule II - Valuation and Qualifying Accounts

All other schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instructions or are inapplicable and therefore have been omitted.

3. The following documents are filed or incorporated by reference as exhibits to this report:

Exhibit Number	Description of Exhibit	References

2.1	Agreement and Plan of Merger, dated as of December 20, 2009, among sanofi-aventis, River Acquisition Corp. and Chattem, Inc.	(34)

3.1	Restated Charter of Chattem, Inc., as amended	(4), (5), (8), and (14)

3.2	Amended and Restated By-Laws of Chattem, Inc.	(1), (6), (18), (28) and (34)

4.1	Rights Agreement dated January 27, 2000 between Chattem, Inc. and SunTrust Bank, Atlanta, N.A.	(2)

4.2	First Amendment to the Rights Agreement, dated as of December 21, 2009, between Chattem, Inc. and SunTrust Bank, Atlanta, as rights agent	(33)

4.3	Indenture dated as of February 26, 2004 among Chattem, Inc., its domestic subsidiaries and SouthTrust Bank, as trustee, relating to the 7% Senior Subordinated Notes due 2014	(3)

4.4	First Amendment to and Supplemental Indenture dated July 25, 2006 among Chattem, Inc., its domestic subsidiaries and U.S. Bank, National Association, as successor trustee, relating to the 7% Senior Subordinated Notes due 2014	(20)

4.5	Indenture dated as of November 22, 2006 between Chattem, Inc. and U.S. Bank, National Association, as trustee, relating to 2% Convertible Senior Notes due 2013	(23)

Exhibit

Number

Description of Exhibit

References


4.6	Registration Rights Agreement dated November 22, 2006 among Chattem, Inc. and the purchasers of the 2% Convertible Senior Notes due 2013	(23)

4.7	Indenture dated as of April 11, 2007 between Chattem, Inc., and U.S. Bank, National Association, as trustee, relating to 1.625% Convertible Senior Notes due 2014	(27)

4.8	Registration Rights Agreement dated April 11, 2007 between Chattem, Inc., and Merrill Lynch, Pierce, Fenner & Smith Incorporated	(27)

10.1	Second Amended and Restated Master Trademark License Agreement between Signal Investment & Management Co. and Chattem, Inc., effective March 22, 2002

10.2	First Amendment to the Second Amended and Restated Master Trademark License Agreement between Signal Investment & Management Co. and Chattem, Inc. effective May 31, 2003	(11)

10.3	Master Trademark License Agreement by and between SunDex, Inc. and Signal Investment & Management Co., effective March 22, 2002

10.4	First Amendment to Master Trademark License Agreement between Signal Investment & Management Co. and SunDex, LLC, effective May 31, 2003	(11)

10.5*	Chattem, Inc. Non-Statutory Stock Option Plan – 1998	(7)

10.6*	1999 Stock Plan for Non-Employee Directors	(19)

10.7*	Chattem, Inc. Non-Statutory Stock Option Plan – 2000	(8)

10.8*	Chattem, Inc. Stock Incentive Plan – 2003	(10)

10.9*	Chattem, Inc. Stock Incentive Plan – 2005	(15)

10.10*	Form of Stock Option Grant Agreement under Chattem, Inc. Stock Incentive Plan – 2005	(15)

10.11*	Form of Restricted Stock Agreement under Chattem, Inc. Stock Incentive Plan – 2005	(15)

10.12*	Form of Amendment to Grant Agreement under 2005 Stock Incentive Plan pertaining only to officers	(17)

10.13*	Form of Amendment to Grant Agreement under 2005 Stock Incentive Plan pertaining to all optionees other than officers	(17)

10.14*	Chattem, Inc. 2009 Equity Incentive Plan	(31)

10.15*	Chattem, Inc. Annual Cash Incentive Compensation Plan	(30)

10.16*	Amended and Restated Employment Agreement dated July 8, 2008 by and between Chattem, Inc. and Zan Guerry	(29)

100

Exhibit

Number

Description of Exhibit

References


10.17*	Second Amended and Restated Severance Agreement dated July 8, 2008 by and between Chattem, Inc. and Zan Guerry	(29)

10.18*	Form of Second Amended and Restated Non-Competition and Severance Agreement - Robert E. Bosworth, Andrea M. Crouch, Ron Galante, B. Derrill Pitts, Charles M. Stafford, Theodore K. Whitfield, Jr.	(29)

10.19*	Form of Non-Competition and Severance Agreement - Joseph J. Czwerwinski, Robert B. Long and John L. Stroud	(29)

10.20	Amendment, dated December 20, 2009, to Amended and Restated Employment Agreement, dated July 8, 2008, by and between the Company and Zan Guerry.	(35)

10.21	Amendment, dated December 20, 2009, to Second Amended and Restated Severance Agreement, dated July 8, 2008, by and between the Company and Zan Guerry.	(35)

10.22	Amendment, dated December 20, 2009, to Second Amended and Restated Non-Competition and Severance Agreement, dated July 8, 2008, by and between the Company and Robert E. Bosworth.	(35)

10.23	Amendment, dated December 20, 2009, to Second Amended and Restated Non-Competition and Severance Agreement, dated July 8, 2008, by and between the Company and Theodore K. Whitfield, Jr.	(35)

10.24	Amendment, dated December 20, 2009, to Non-Competition and Severance Agreement, dated July 8, 2008, by and between the Company and Robert B. Long.	(35)

10.25*	Form of Restricted Stock Agreements – Zan Guerry	(9)

10.26	Asset Purchase Agreement dated as of October 5, 2006, among Johnson & Johnson, Pfizer, Inc. and Chattem, Inc.	(21)

10.27	Letter Agreement dated November 16, 2006 among Chattem, Inc., Merrill Lynch International and Merrill Lynch, Pierce, Ferner & Smith Incorporated regarding confirmation of OTC Convertible Note Hedge	(23)

10.28	Letter Agreement dated November 16, 2006 among Chattem, Inc., Merrill Lynch International and Merrill Lynch, Pierce, Ferner & Smith Incorporated regarding confirmation of OTC Warrant Transaction	(23)

10.29	Securities Purchase Agreement dated November 16, 2006 among Chattem, Inc. and the purchasers of the 2% Convertible Senior Notes due 2013	(22)

10.30	Purchase Agreement dated April 4, 2007 among Chattem, Inc., and the initial purchasers of the 1.625% Convertible Senior Notes due 2014	(26)

10.31	Letter Agreement dated April 10, 2007 among Chattem, Inc., Merrill Lynch International and Merrill Lynch, Pierce, Fenner & Smith Incorporated regarding confirmation of OTC Convertible Note Hedge	(27)

101

Exhibit

Number

Description of Exhibit

References


10.32	Letter Agreement dated April 10, 2007 among Chattem, Inc., Merrill Lynch Incorporated and Merrill Lynch, Pierce, Fenner & Smith Incorporated regarding confirmation of the OTC Warrant Transactions	(27)

10.33	Credit Agreement dated as of February 26, 2004 among Chattem, Inc., its domestic subsidiaries, identified lenders and Bank of America, N.A., as agent	(3)

10.34	New Commitment Agreement dated March 9, 2004 between Chattem, Inc. and Bank of America, N.A., as administrative agent	(12)

10.35	First Amendment to Credit Agreement dated as of December 22, 2004 among Chattem, Inc., its domestic subsidiaries, identified lenders and Bank of America, N.A., as agent	(16)

10.36	Waiver and Second Amendment to Credit Agreement dated as of February 25, 2005 among Chattem, Inc., its domestic subsidiaries, identified lenders and Bank of America, N.A., as agent	(16)

10.37	Third Amendment to Credit Agreement dated as of November 29, 2005 among Chattem, Inc., its domestic subsidiaries, identified lenders and Bank of America, N.A., as agent	(17)

10.38	Fourth Amendment to Credit Agreement dated as of November 16, 2006 among Chattem, Inc., its domestic subsidiaries, identified lenders and Bank of America, N.A., as agent	(22)

10.39	Fifth Amendment to Credit Agreement dated December 22, 2006 among Chattem, Inc., its domestic subsidiaries, identified lenders and Bank of America, N.A., as agent	(24)

10.40	Sixth Amendment to Credit Agreement dated April 3, 2007 among Chattem, Inc., its domestic subsidiaries, identified lenders and Bank of America, N.A., as agent	(25)

10.41	Seventh Amendment to Credit Agreement, dated as of September 30, 2009, among Chattem, Inc., its domestic subsidiaries, identified lenders and Bank of America, N.A., as agent	(32)

10.42	Rate Cap Transaction Agreement dated March 8, 2004 between Chattem, Inc. and JP Morgan Chase Bank	(12)

10.43	Memorandum of Understanding dated December 19, 2003 with Plaintiffs’ Steering Committee in In re: Phenylpropanalomine (PPA) Products Liability Litigation, MDL 1407, pending before the United States District Court for the Western District of Washington	(10)

10.44	Class Action Settlement Agreement dated as of April 13, 2004 between Chattem, Inc. and Class Counsel on behalf of Class Representatives In re: Phenylpropanolamine (PPA) Products Liability Litigation	(12)

10.45	Initial Settlement Trust Agreement dated April 12, 2004 between Chattem, Inc. and Amsouth Bank	(12)

10.46	Final Settlement Trust Agreement between Chattem, Inc. and AmSouth Bank dated March 16, 2005	(16)

102

Exhibit

Number

Description of Exhibit

References


10.47	Settlement Agreement dated April 26, 2004 between Chattem, Inc. and General Star Indemnity Company	(12)

10.48	Memorandum of Understanding dated December 13, 2003 between and among Chattem, Inc. and Kemper Indemnity Insurance Company	(12)

10.49	Settlement Agreement dated December 30, 2003 between Chattem, Inc. and Admiral Insurance Company	(12)

10.50	Settlement Agreement dated July 14, 2004 between Chattem, Inc. and Sidmak Laboratories	(13)

10.51	Dexatrim Case Scoring System and Matrix for the Chattem Dexatrim Class Action Settlement	(13)

10.52	Settlement and Coverage-In-Place Agreement between Interstate Fire & Casualty Company and Chattem, Inc. effective March 18, 2005	(16)

10.53	Settlement Agreement dated as of June 30, 2005 by and between Chattem, Inc. and The DELACO Company	(15)

21	Subsidiaries of the Company

23.1	Consent of Independent Registered Public Accounting Firm

31.1	Certification required by Rule 13a-14(a) under the Securities Exchange Act

31.2	Certification required by Rule 13a-14(a) under the Securities Exchange Act

32	Certification required by Rule 13a-14(b) under the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350

99.1	Schedule II – Valuation and Qualifying Accounts

*This item is a management contract or compensatory plan or arrangement required to be filed as an exhibit to this Form 10-K pursuant to Item 15(b) of this report.

References:

Previously filed as an exhibit to and incorporated by reference from the indicated report filed with the Securities and Exchange Commission:

(1)	Form 8-K filed February 1, 2000.

(2)	Form 8-A filed February 1, 2000.

(3)	Form S-4 filed March 22, 2004.

(4)	Form S-8 filed June 2, 1999.

(5)	Form 10-K filed for the year ended November 30, 1992.

(6)	Form 10-K filed for the year ended November 30, 1995.

103

(7)	Form 10-K filed for the year ended November 30, 1997.

(8)	Form 10-K filed for the year ended November 30, 1999.

(9)	Form 10-K filed for the year ended November 30, 2001.

(10)	Form 10-K filed for the year ended November 30, 2003.

(11)	Form 10-Q filed for the quarter ended May 31, 2003.

(12)	Form 10-Q filed for the quarter ended May 31, 2004.

(13)	Form 10-Q filed for the quarter ended August 31, 2004.

(14)	Schedule 14A filed March 4, 2005.

(15)	Form 10-Q filed for the quarter ended May 31, 2005.

(16)	Form 10-Q filed for the quarter ended February 28, 2005.

(17)	Form 8-K filed December 2, 2005.

(18)	Form 8-K/A filed August 31, 2005.

(19)	Schedule 14A filed March 8, 1999.

(20)	Form 8-K filed July 19, 2006, as supplemented by Form 8-K filed July 26, 2006.

(21)	Form 8-K filed November 15, 2006.

(22)	Form 8-K filed November 22, 2006.

(23)	Form 8-K filed November 29, 2006.

(24)	Form 8-K filed December 28, 2006.

(25)	Form 8-K filed April 4, 2007.

(26)	Form 8-K filed April 11, 2007.

(27)	Form 8-K filed April 17, 2007.

(28)	Form 8-K filed November 13, 2007.

(29)	Form 10-Q filed for the quarter ended May 31, 2008.

(30)	Form 10-K filed for the year ended November 30, 2009.

(31)	Schedule 14A filed February 27, 2009.

(32)	Form 10-Q filed for the quarter ended August 31, 2009.

(33)	Form 8-A/A filed December 22, 2009.

(34)	Form 8-K filed December 23, 2009.

(35)	Schedule 14D-9 filed January 11, 2010

104

SIGNATURES

Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Dated: January 28, 2010

	CHATTEM, INC.

	By:	/s/ Zan Guerry Zan Guerry Chairman and Chief Executive Officer

	By:	/s/ Robert B. Long Robert B. Long Vice President and Chief Financial Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant in the capacities and on the dates indicated:

Signature	Title	Date

/s/ Zan Guerry Zan Guerry	Chairman of the Board and Director (Chief Executive Officer)	1-28-10

/s/ Robert E. Bosworth Robert E. Bosworth	President and Director (Chief Operating Officer)	1-28-10

/s/ Robert B. Long Robert B. Long	Vice President and Chief Financial Officer	1-28-10

/s/ Samuel E. Allen Samuel E. Allen	Director	1-28-10

/s/ Ruth W. Brinkley Ruth W. Brinkley	Director	1-28-10

/s/ Gary D. Chazen Gary D. Chazen	Director	1-28-10
/s/ Joey B. Hogan Joey B. Hogan	Director	1-28-10
/s/ Bill W. Stacy Bill W. Stacy	Director	1-28-10

/s/ Philip H. Sanford Philip H. Sanford	Director	1-28-10

105

CHATTEM INC - FORM 10-K - January 28, 2010

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