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 RegisteredNone
            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
      filerþ
              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
      IItem
            
            Page1.
            Business
            31A.
            Risk
      Factors
            181B.
            Unresolved
      Staff Comments
            282.
            Properties
            293.
            Legal
      Proceedings
            294.
            Submission
      of Matters to a Vote of Securities Holders
            29PART
      II5.
            Market
      for the Registrant’s Common Equity, Related Shareholder Matters and Issuer
      Purchases of   Equity Securities
            306.
            Selected
      Financial Data
            317.
            Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
            317A.
            Quantitative
      and Qualitative Disclosures about Market Risk
            478.
            Financial
      Statements and Supplementary Data
            489.
            Changes
      in and Disagreements with Accountants on Accounting and Financial
      Disclosure
            949A.
            Controls
      and Procedures
            949B.
            Other
      Information
            95PART
      III10.
            Directors,
      Executive Officers and Corporate Governance
            9511.
            Executive
      Compensation
            9812.
            Security
      Ownership of Certain Beneficial Owners and Management and Related
      Shareholder Matters
            9813.
            Certain
      Relationships and Related Transactions, and Director
      Independence
            9814.
            Principal
      Accounting Fees and Services
            98PART
      IV15.
            Exhibits
      and Financial Statement Schedules
            99





2


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, UltraSwimand 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.


3


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, GoldBond
Ultimate Protecting Lotion, Gold Bond Anti-Itch Lotion,
Gold Bond Foot Pain
Cream, Gold BondUltimate 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


4


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 BondSanitizing
Moisturizer, Gold Bond
Ultimate Protecting Lotion, Gold Bond Anti-Itch Lotion,
Gold Bond Foot Pain
Cream, Gold BondUltimate 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




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


5


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.




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,


6


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.


7


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




8


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 Balmexjoined theGold Bondbrand in themedicated 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.




Balmexis 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




ACTis 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 includeHerpecin-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.


9


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 PrēmsynPMS 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




TheSelsun 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,
DexatrimMax 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, theBullfrog 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.


10


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.


11


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,


12


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 Blueproducts.  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.


13


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


14


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
PrēmsynPMS 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.


15


On April 29, 2009, FDA finalized one
part of the internal analgesic monograph on internal analgesic products that
directly affects Pamprin and Prēmsyn
PMSandUnisom 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.


16


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


17


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.


18


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:




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




•
            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




•
            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


19


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


20


develop
new products successfully for, these markets. We may also encounter other risks
of doing business internationally including:




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




•
            fluctuations
      in foreign exchange rates, which could cause fluctuations in the price of
      our products in foreign markets or cause fluctuations in the cost of
      certain raw materials purchased by
us;




•
            delays
      resulting from difficulty in obtaining export licenses, tariffs and other
      barriers and restrictions, potentially longer payment cycles, greater
      difficulty in accounts receivable collection and potentially adverse tax
      treatment;




•
            potential
      trade restrictions and exchange
controls;




•
            differences
      in protection of our intellectual property rights;
  and




•
            the
      burden of complying with a variety of foreign
  laws.




In
addition, we will be increasingly subject to general geopolitical risks in
foreign countries where we operate such as political and economic instability
and changes in diplomatic and trade relationships, which could affect, among
other things, customers’ inventory levels and consumer purchasing, which could
cause our results to fluctuate and our sales to decline. It has not been our
practice to engage in foreign exchange hedging transactions to manage the risk
of fluctuations in foreign exchange rates because of the limited nature of our
past international operations. Due to the significant expansion of our
international operations, 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:




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




•
            limiting
      our ability to capitalize on significant business
      opportunities;




21


•
            making
      us more vulnerable to economic
downturns;




•
            limiting
      our ability to withstand competitive pressures;
  and




•
            making
      it more difficult for us to obtain additional financing on favorable
      terms.




If we are
unable to generate sufficient cash flow from operations in the future, we may
not be able to service our debt and may have to refinance all or a portion of
our debt, obtain additional financing or sell assets to repay such debt. We
cannot assure you that we will be able to obtain such refinancing, additional
financing or asset sale on favorable terms or at all.







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


22


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-10andUnisom.  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.


23


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:




•
            changes
      in state and local government
regulations;




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




•
            natural
      disasters, such as fires and
earthquakes;




•
            power
      outages;




•
            nuclear
      facility incidents;




•
            spread
      of infectious diseases;




•
            hazardous
      material incidents; or




•
            any
      other catastrophic events in our
area.




If our
region, city or facilities were to suffer a significant disaster, our operations
are likely to be disrupted and our business would suffer.




We
depend on sole source suppliers for three active ingredients used in our Pamprin and Prēmsyn
PMS products and a limited source of supply for selenium sulfide, the
active ingredient in Selsun
Blue, and if we are unable to buy these ingredients, we will not be able
to manufacture these products.




Pamabrom,
pyrilamine maleate and compap, active ingredients used in our Pamprin and Prēmsyn
PMS products, are purchased from single sources of supply. Pamabrom is
sold only by Chattem Chemicals, Inc. (an unrelated company), pyrilamine maleate
is produced only in India and sold only by Lonza, Inc. and compap is sold only
by Mallinckrodt, Inc.  In addition, we have a limited source of supply
for selenium sulfide, the active ingredient in Selsun
Blue.  Financial, regulatory or other difficulties faced by
these source suppliers or significant changes in demand for these active
ingredients could limit the availability and increase the price of these active
ingredients. We may not be able to obtain necessary supplies in a timely manner,
and we may


24


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:




•
            not
      accurately identifying suitable products or brands for
      acquisition;




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




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




•
            incurring
      substantial additional
indebtedness.




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:




•
            incurrence
      of additional indebtedness;




•
            dividends
      and restricted payments;




•
            investments;




•
            loans
      and guarantees;




•
            creation
      of liens;




•
            transactions
      with affiliates;




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




•
            certain
      mergers, consolidations and transfers of
assets.




The terms
of our 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


25


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:




•
            our
      directors are divided into three classes, with only one class of directors
      elected at each annual meeting for a term of three years, making it
      difficult for new shareholders to quickly gain control of our board of
      directors;




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




•
            we
      are prohibited from engaging in certain business combination transactions
      with any interested shareholder unless such transaction is approved by the
      affirmative vote of at least 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


26


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:




•
            our
      operating and financial performance and
  prospects;




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




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




•
            announcements
      of new products by us or our
competitors;




•
            speculation
      in the press or investment
community;




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




•
            product
      liability claims;




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




•
            general
      market conditions for companies in our industry;
  and




•
            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.


27


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:




•
            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




•
            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


28


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


29


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
            
            
            LowFirst
      Quarter
            
            $
            71.53
            
            
            $
            61.20Second
      Quarter
            
            
            60.52
            
            
            
            52.00Third
      Quarter
            
            
            69.44
            
            
            
            60.27Fourth
      Quarter
            
            
            67.62
            
            
            
            62.12Fiscal
      2008
            
            High
            
            
            LowFirst
      Quarter
            
            $
            81.45
            
            
            $
            65.15Second
      Quarter
            
            
            79.58
            
            
            
            62.21Third
      Quarter
            
            
            70.12
            
            
            
            57.52Fourth
      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.


30


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
            
            
            –
            
            
            $
            –
            
            
            
            –
            
            
            $
            100,000,00010/1/09-10/31/09
            
            
            68,432
            
            
            
            63.47
            
            
            
            68,432
            
            
            
            95,656,53011/1/09-11/30/09
            
            
            65,818
            
            
            
            63.54
            
            
            
            65,818
            
            
            
            91,474,459Total
      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
            
            
            $
            279,318Operating
      costs and expenses
            
            
            344,010
            
            
            
            329,843
            
            
            
            301,196
            
            
            
            217,804
            
            
            
            212,830Income
      from operations
            
            
            119,332
            
            
            
            125,036
            
            
            
            122,182
            
            
            
            82,744
            
            
            
            66,488Other
      expense, net
            
            
            (22,028
            )
            
            
            (25,121
            )
            
            
            (31,103
            )
            
            
            (13,454
            )
            
            
            (13,478
            )Income
      before income taxes
            
            
            97,304
            
            
            
            99,915
            
            
            
            91,079
            
            
            
            69,290
            
            
            
            53,010Provision
      for income taxes
            
            
            34,133
            
            
            
            33,629
            
            
            
            31,389
            
            
            
            24,178
            
            
            
            16,963Net
      income
            
            $
            63,171
            
            
            $
            66,286
            
            
            $
            59,690
            
            
            $
            45,112
            
            
            $
            36,047PER
      SHARE DATA:Income
      per diluted share
            
            $
            3.28
            
            
            $
            3.42
            
            
            $
            3.08
            
            
            $
            2.34
            
            
            $
            1.77BALANCE
      SHEET DATA:
              (At
      end of year)Total
      assets
            
            $
            801,160
            
            
            $
            792,972
            
            
            $
            780,560
            
            
            $
            415,313
            
            
            $
            367,214Long-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




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 including such categories as medicated skin care, topical pain


31


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, UltraSwimand 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





In fiscal
2009, we introduced the following 13 product line extensions: ACT Total Care, Gold BondSanitizing
Moisturizer, Gold Bond
Ultimate Protecting Lotion, Gold Bond Anti-Itch Lotion,
Gold Bond Foot Pain
Cream, Gold BondUltimate 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 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% 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.


32


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




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




33


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


34


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.


35


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.


36


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
            
            
            
            1.9Cost
      of sales
            
            
            139,768
            
            
            
            131,620
            
            
            
            8,148
            
            
            
            6.2Advertising
      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
            
            
            
            100.0Product
      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
            
            
            
            198.7Net
      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
            
            
            
            11.9Internal
      OTC
            
            
            44,096
            
            
            
            48,006
            
            
            
            (3,910
            )
            
            
            (8.1
            )Medicated
      dandruff shampoos
            
            
            36,488
            
            
            
            35,737
            
            
            
            751
            
            
            
            2.1Dietary
      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 Therapyreturns.
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 ofIcy 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.


37


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.


38


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





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.  There was no corresponding charge in fiscal
2008.





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


39


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.





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 amount as loss on extinguishment of debt of $0.5
million.





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
            
            
            
            6.4Total
      revenues
            
            
            454,879
            
            
            
            423,378
            
            
            
            31,501
            
            
            
            7.4Cost
      of sales
            
            
            131,620
            
            
            
            129,055
            
            
            
            2,565
            
            
            
            2.0Advertising
      and promotion expense
            
            
            118,093
            
            
            
            112,206
            
            
            
            5,887
            
            
            
            5.2Selling,
      general and administrative expense
            
            
            62,590
            
            
            
            57,878
            
            
            
            4,712
            
            
            
            8.1Product
      recall expenses
            
            
            6,269
            
            
            
            –
            
            
            
            6,269
            
            
            
            100.0Litigation
      settlement
            
            
            11,271
            
            
            
            –
            
            
            
            11,271
            
            
            
            100.0Acquisition
      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




40


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
            
            
            
            1.0Oral
      care
            
            
            62,872
            
            
            
            48,863
            
            
            
            14,009
            
            
            
            28.7Internal
      OTC
            
            
            48,006
            
            
            
            45,043
            
            
            
            2,963
            
            
            
            6.6Medicated
      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
            
            
            
            6.1Total
            
            $
            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 HotHeat Therapy
following our February 8, 2008 voluntary recall of the
product.  Excluding sales of Icy Hot Heat Therapy andIcy 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 UnisomSleepMelts 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 SelsunSalon, 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


41


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 HotHeat 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,


42


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


43


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.


44


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 byContractual 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
            
            
            
            5Purchase
      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.”


45


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-10brands;


•
            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;




46


•
            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.




47


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.


48


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




49


Consolidated
Balance Sheets
 November
30, 2009 and 2008
 (In
thousands)
   ASSETS
              
              2009
              
              
              2008CURRENT
      ASSETS:
                Cash
      and cash equivalents
              
              $
              64,766
              
              
              $
              32,310Accounts
      receivable, less allowances of $10,401 in 2009 and $9,718 in
      2008
              
              
              54,607
              
              
              
              49,417Inventories,
      net
              
              
              48,775
              
              
              
              40,933Deferred
      income taxes
              
              
              5,585
              
              
              
              3,968Prepaid
      expenses and other current assets
              
              
              2,494
              
              
              
              2,451Total
      current assets
              
              
              176,227
              
              
              
              129,079PROPERTY,
      PLANT AND EQUIPMENT, NET
              
              
              35,065
              
              
              
              32,243OTHER
      NONCURRENT ASSETS:Patents,
      trademarks and other purchased
                product
      rights, net
              
              
              577,466
              
              
              
              616,670Debt
      issuance costs, net
              
              
              9,860
              
              
              
              12,253Other
              
              
              2,542
              
              
              
              2,727Total
      other noncurrent assets
              
              
              589,868
              
              
              
              631,650TOTAL
      ASSETS
              
              $
              801,160
              
              
              $
              792,972
  
 The
accompanying notes are an integral part of these consolidated financial
statements.
  
 
 50
 Consolidated
Balance Sheets
 November
30, 2009 and 2008
 (In
thousands)
   LIABILITIES
      AND SHAREHOLDERS’ EQUITY
              
              2009
              
              
              2008CURRENT
      LIABILITIES:Current
      maturities of long-term debt
              
              $
              3,000
              
              
              $
              3,000Accounts
      payable
              
              
              22,216
              
              
              
              18,116Bank
      overdrafts
              
              
              461
              
              
              
              1,184Accrued
      liabilities
              
              
              21,345
              
              
              
              21,293Total
      current liabilities
              
              
              47,022
              
              
              
              43,593LONG-TERM
      DEBT, less current maturities
              
              
              388,040
              
              
              
              456,500DEFERRED
      INCOME TAXES
              
              
              41,001
              
              
              
              35,412OTHER
      NONCURRENT LIABILITIES
              
              
              935
              
              
              
              1,609COMMITMENTS
      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
              
              
              
              28,926Retained
      earnings
              
              
              294,401
              
              
              
              231,230325,041
              
              
              
              260,156Cumulative
      other comprehensive income (loss), net of taxesInterest
      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
              
              
              
              255,858TOTAL
      LIABILITIES AND SHAREHOLDERS’ EQUITY
              
              $
              801,160
              
              
              $
              792,972
  
 The
accompanying notes are an integral part of these consolidated financial
statements.
  
 51
 Consolidated
Statements of Income
 For
the Years Ended November 30, 2009, 2008 and 2007
 (In
thousands, except per share amounts)
  2009
              
              
              2008
              
              
              2007TOTAL
      REVENUES
              
              $
              463,342
              
              
              $
              454,879
              
              
              $
              423,378COSTS
      AND EXPENSES:Cost
      of sales
              
              
              139,768
              
              
              
              131,620
              
              
              
              129,055Advertising
      and promotion
              
              
              105,684
              
              
              
              118,093
              
              
              
              112,206Selling,
      general and administrative
              
              
              60,300
              
              
              
              62,590
              
              
              
              57,878Impairment
      of indefinite-lived intangible assets
              
              
              38,258
              
              
              
              —
              
              
              
              —Product
      recall expenses
              
              
              —
              
              
              
              6,269
              
              
              
              —Litigation
      settlement
              
              
              —
              
              
              
              11,271
              
              
              
              —Acquisition
      expenses
              
              
              —
              
              
              
              —
              
              
              
              2,057Total
      costs and expenses
              
              
              344,010
              
              
              
              329,843
              
              
              
              301,196INCOME
      FROM OPERATIONS
              
              
              119,332
              
              
              
              125,036
              
              
              
              122,182OTHER
      INCOME (EXPENSE):Interest
      expense
              
              
              (20,784
              )
              
              
              (25,310
              )
              
              
              (29,930
              )Investment
      and other income, net
              
              
              327
              
              
              
              715
              
              
              
              1,460Loss
      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
              
              
              
              91,079PROVISION
      FOR INCOME TAXES
              
              
              34,133
              
              
              
              33,629
              
              
              
              31,389NET
      INCOME
              
              $
              63,171
              
              
              $
              66,286
              
              
              $
              59,690NUMBER
      OF COMMON SHARES:Weighted
      average outstanding, basic
              
              
              19,178
              
              
              
              18,980
              
              
              
              18,927Weighted
      average and potential dilutive outstanding
              
              
              19,281
              
              
              
              19,364
              
              
              
              19,350NET
      INCOME PER COMMON SHARE:Basic
              
              $
              3.29
              
              
              $
              3.49
              
              
              $
              3.15Diluted
              
              $
              3.28
              
              
              $
              3.42
              
              
              $
              3.08
  
 The
accompanying notes are an integral part of these consolidated financial
statements.
   52
 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)
              
              
              TotalBalance,
      November 30, 2006
              
              $
              30,452
              
              
              $
              105,965
              
              
              $
              (836
              )
              
              $
              135,581Comprehensive
      income (loss):Net
      income
              
              
              —
              
              
              
              59,690
              
              
              
              —
              
              
              
              59,690Interest
      rate hedge adjustment, net of taxes of $671
              
              
              —
              
              
              
              —
              
              
              
              (1,150
              )
              
              
              (1,150
              )Foreign
      currency translation adjustment
              
              
              —
              
              
              
              —
              
              
              
              1,247
              
              
              
              1,247Total
      comprehensive income
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              59,787Adjustment
      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
              
              
              
              —
              
              
              
              —
              
              
              
              6,208Stock
      options exercised
              
              
              16,661
              
              
              
              —
              
              
              
              —
              
              
              
              16,661Tax
      benefit realized from stock option plans
              
              
              7,938
              
              
              
              —
              
              
              
              —
              
              
              
              7,938Stock
      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
              
              
              
              —
              
              
              
              —
              
              
              
              17,430Issuance
      of 2 common shares for non-employee directors’
compensation
              
              
              120
              
              
              
              —
              
              
              
              —
              
              
              
              120Balance,
      November 30, 2007
              
              $
              36,800
              
              
              $
              165,655
              
              
              $
              (747
              )
              
              $
              201,708Comprehensive
      income (loss):Net
      income
              
              
              —
              
              
              
              66,286
              
              
              
              —
              
              
              
              66,286Interest
      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
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              62,735Stock
      option expense
              
              
              6,255
              
              
              
              —
              
              
              
              —
              
              
              
              6,255Stock
      options exercised
              
              
              8,372
              
              
              
              —
              
              
              
              —
              
              
              
              8,372Tax
      benefit realized from stock option plans
              
              
              3,709
              
              
              
              —
              
              
              
              —
              
              
              
              3,709Stock
      repurchases
              
              
              (26,327
              )
              
              
              —
              
              
              
              —
              
              
              
              (26,327
              )Issuance
      of 2 common shares for non-employee directors’
compensation
              
              
              117
              
              
              
              —
              
              
              
              —
              
              
              
              117Net
      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
  
   53
   
  Common
                Shares
              
              
              Retained
                Earnings
              
              
              Cumulative
                Other
                Comprehensive
                Income (Loss)
              
              
              TotalBalance,
      November 30, 2008
              
              $
              28,926
              
              
              $
              231,230
              
              
              $
              (4,298
              )
              
              $
              255,858Comprehensive
      income (loss):Net
      income
              
              
              —
              
              
              
              63,171
              
              
              
              —
              
              
              
              63,171Interest
      rate hedge adjustment, net of taxes of $931
              
              
              —
              
              
              
              —
              
              
              
              1,513
              
              
              
              1,513Foreign
      currency translation adjustment
              
              
              —
              
              
              
              —
              
              
              
              1,632
              
              
              
              1,632Unrealized
      actuarial gains and losses, net of taxes of $168
              
              
              —
              
              
              
              —
              
              
              
              274
              
              
              
              274Total
      comprehensive income
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              66,590Stock
      option expense
              
              
              7,851
              
              
              
              —
              
              
              
              —
              
              
              
              7,851Stock
      options exercised
              
              
              2,914
              
              
              
              —
              
              
              
              —
              
              
              
              2,914Tax
      benefit realized from stock option plans
              
              
              311
              
              
              
              —
              
              
              
              —
              
              
              
              311Stock
      repurchases
              
              
              (34,633
              )
              
              
              —
              
              
              
              —
              
              
              
              (34,633
              )Issuance
      of 2 common shares for non-employee directors’
compensation
              
              
              119
              
              
              
              —
              
              
              
              —
              
              
              
              119Issuance
      of 487 common shares
              
              
              28,700
              
              
              
              —
              
              
              
              —
              
              
              
              28,700Tax
      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.
   54
 Consolidated
Statements of Cash Flows
 For
the Years Ended November 30, 2009, 2008 and 2007
 (In
thousands)
  2009
              
              
              2008
              
              
              2007OPERATING
      ACTIVITIES:Net
      income
              
              $
              63,171
              
              
              $
              66,286
              
              
              $
              59,690Adjustments
      to reconcile net income to net cash provided by operating
      activities:Depreciation
      and amortization
              
              
              7,667
              
              
              
              8,386
              
              
              
              8,843Deferred
      income taxes
              
              
              1,854
              
              
              
              18,139
              
              
              
              12,718Tax
      benefit realized from stock options exercised
              
              
              (311
              )
              
              
              (3,709
              )
              
              
              (8,291
              )Stock
      option expense
              
              
              7,770
              
              
              
              5,970
              
              
              
              5,622Loss
      on early extinguishment of debt
              
              
              1,571
              
              
              
              526
              
              
              
              2,633Other,
      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
              )
              
              
              1,249Accounts
      payable and accrued liabilities
              
              
              2,990
              
              
              
              1,747
              
              
              
              24,180Net
      cash provided by operating activities
              
              
              110,050
              
              
              
              92,158
              
              
              
              86,734INVESTING
      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
              )
              
              
              1,910Net
      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
              
              
              —
              
              
              
              —
              
              
              
              400,000Proceeds
      from borrowings under revolving credit facility
              
              
              1,000
              
              
              
              151,500
              
              
              
              159,000Repayments
      of revolving credit facility
              
              
              (20,500
              )
              
              
              (162,000
              )
              
              
              (129,000
              )Change
      in bank overdraft
              
              
              (723
              )
              
              
              (6,400
              )
              
              
              1,760Repurchase
      of common shares
              
              
              (34,633
              )
              
              
              (26,327
              )
              
              
              (23,601
              )Proceeds
      from exercise of stock options
              
              
              2,914
              
              
              
              8,372
              
              
              
              16,661Purchase
      of note hedge
              
              
              —
              
              
              
              —
              
              
              
              (29,500
              )Proceeds
      from issuance of warrants
              
              
              —
              
              
              
              —
              
              
              
              17,430Increase
      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
              
              
              —
              
              
              
              —
              
              
              
              909Tax
      benefit realized from stock options exercised
              
              
              311
              
              
              
              3,709
              
              
              
              8,291Net
      cash (used in) provided by financing activities
              
              
              (73,532
              )
              
              
              (69,146
              )
              
              
              257,953EFFECT
      OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS
              
              
              222
              
              
              
              46
              
              
              
              343CASH
      AND CASH EQUIVALENTS:Increase
      (decrease) for the year
              
              
              32,456
              
              
              
              16,903
              
              
              
              (75,120
              )At
      beginning of year
              
              
              32,310
              
              
              
              15,407
              
              
              
              90,527At
      end of year
              
              $
              64,766
              
              
              $
              32,310
              
              
              $
              15,407
  The
accompanying notes are an integral part of these consolidated financial
statements.
  55
 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.
  56
 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.
  57
 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-
 
 58
 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.
  59
 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.
 
 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.  ASC 718 also requires the stock option
compensation expense to be recognized over the period during which an employee
is required to provide service in exchange for the award (the vesting
period).
  60
 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
              
              
              2007Income
      from operations
              
              $
              7,770
              
              
              $
              5,970
              
              
              $
              5,622Provision
      for income taxes
              
              
              2,727
              
              
              
              2,012
              
              
              
              1,940Net
      income
              
              $
              5,043
              
              
              $
              3,958
              
              
              $
              3,682Basic
      net income per share
              
              $
              0.26
              
              
              $
              0.21
              
              
              $
              0.19Diluted
      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
              
              
              2007Risk-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.
 
 61
 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 CodificationTM (“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.
  62
 (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
              
              
              2007NET
      INCOME:
              
              $
              63,171
              
              
              $
              66,286
              
              
              $
              59,690NUMBER
      OF COMMON SHARES:Weighted
      average outstanding
              
              
              19,178
              
              
              
              18,980
              
              
              
              18,927Issued
      upon assumed exercise of
                outstanding
      stock options
              
              
              —
              
              
              
              53
              
              
              
              345Issued
      upon assumed exercise of
                convertible
      notes
              
              
              103
              
              
              
              328
              
              
              
              69Effect
      of issuance of restricted common shares
              
              
              —
              
              
              
              3
              
              
              
              9Weighted
      average and potential dilutive outstanding (1)
              
              
              19,281
              
              
              
              19,364
              
              
              
              19,350NET
      INCOME PER COMMON SHARE:Basic
              
              $
              3.29
              
              
              $
              3.49
              
              
              $
              3.15Diluted
              
              $
              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.
    63
 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
              
              
              2007Shares
      Under
                Option
              
              
              Weighted
      Average
                ExercisePrice
              
              
              Shares
      Under
                Option
              
              
              Weighted
      Average
                Exercise
      Price
              
              
              Shares Under
                Option
              
              
              Weighted
      Average
                ExercisePriceOutstanding
      at beginning of year
              
              
              1,510
              
              
              $
              50.23
              
              
              
              1,458
              
              
              $
              40.43
              
              
              
              1,936
              
              
              $
              27.63Granted
              
              
              387
              
              
              
              55.55
              
              
              
              368
              
              
              
              70.85
              
              
              
              427
              
              
              
              60.05Exercised
              
              
              (75
              )
              
              
              39.06
              
              
              
              (303
              )
              
              
              27.69
              
              
              
              (824
              )
              
              
              20.23Cancelled
              
              
              (12
              )
              
              
              61.26
              
              
              
              (13
              )
              
              
              58.82
              
              
              
              (81
              )
              
              
              43.36Outstanding
      at end of year
              
              
              1,810
              
              
              $
              51.75
              
              
              
              1,510
              
              
              $
              50.23
              
              
              
              1,458
              
              
              $
              40.43Options
      exercisable at year-end
              
              
              877
              
              
              $
              43.94
              
              
              
              607
              
              
              $
              37.74
              
              
              
              571
              
              
              $
              29.56Weighted
      average fair value of options granted
              
              
              
              
              
              $
              21.00
              
              
              
              
              
              
              $
              27.97
              
              
              
              
              
              
              $
              24.63Fair
      value of options granted
              
              
              
              
              
              $
              8,122
              
              
              
              
              
              
              $
              10,277
              
              
              
              
              
              
              $
              10,505Fair
      value of options vested
              
              
              
              
              
              $
              7,808
              
              
              
              
              
              
              $
              5,970
              
              
              
              
              
              
              $
              5,665Intrinsic
      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
              
              70.91Total
              
              1,810
              
              51.75
              
              3.96
              
              877
              
              43.94
  64
 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.
  65
 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
              
              
              2008Revolving
      Credit Facility due 2013 at a variable rate of 6.07% as of November
      30, 2008
              
              $
              —
              
              
              $
              19,5002.0%
      Convertible Senior Notes due 2013
              
              
              96,300
              
              
              
              125,0001.625%
      Convertible Senior Notes due 2014
              
              
              100,000
              
              
              
              100,000Term
      Loan due 2013 at a variable rate of 5.62% and 6.57% as of November 30,
      2009 and 2008, respectively
              
              
              104,500
              
              
              
              107,5007.0%
      Senior Subordinated Notes due 2014
              
              
              90,240
              
              
              
              107,500Total
      long-term debt
              
              
              391,040
              
              
              
              459,500Less:  current
      maturities
              
              
              3,000
              
              
              
              3,000Total
      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.
  66
 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).
 
 67
 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.
 
 68
 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
              
              $
              3,0002011
              
              
              3,0002012
              
              
              3,0002013
              
              
              191,8002014
              
              
              190,240$
              391,040
  Cash
interest payments during fiscal 2009, 2008 and 2007 were $18,864, $22,247 and
$26,671, respectively.
  69
 (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, 2009Level 1
              
              
              Level 2
              
              
              Level 3
              
              
              TotalLiabilitiesInterest
      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.
 
 70
 (7)           INCOME
TAXES
  The
provision for income taxes includes the following components for fiscal 2009,
2008 and 2007:
  2009
              
              
              2008
              
              
              2007Current:Federal
              
              $
              29,193
              
              
              $
              13,428
              
              
              $
              16,850State
              
              
              4,186
              
              
              
              1,191
              
              
              
              1,674Deferred
              
              
              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
              
              
              2008Deferred
      tax assets:Allowances
      and accruals
              
              $
              1,816
              
              
              $
              1,511Inventory
      reserve
              
              
              661
              
              
              
              484Stock-based
      compensation expense
              
              
              6,390
              
              
              
              3,822Allowance
      for product returns
              
              
              932
              
              
              
              1,194Net
      operating loss carryforwards
              
              
              2,621
              
              
              
              1,844Accrued
      postretirement health care benefits
              
              
              356
              
              
              
              491Note
      hedge call option
              
              
              13,509
              
              
              
              18,315Foreign
      tax credit
              
              
              1,943
              
              
              
              1,988Other
              
              
              3,628
              
              
              
              3,641Gross
      deferred tax assets
              
              
              31,856
              
              
              
              33,290Valuation
      allowance
              
              
              —
              
              
              
              —Net
      deferred tax assets
              
              
              31,856
              
              
              
              33,290Deferred
      tax liabilities:Depreciation
      and amortization
              
              
              66,805
              
              
              
              63,976Prepaid
      advertising
              
              
              363
              
              
              
              637Other
              
              
              104
              
              
              
              121Gross
      deferred tax liabilities
              
              
              67,272
              
              
              
              64,734Net 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.
  71
 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
              
              
              2007Expected
      federal tax provision
              
              $
              34,056
              
              
              $
              34,970
              
              
              $
              31,878State
      income taxes, net of federal income tax benefit
              
              
              2,867
              
              
              
              2,077
              
              
              
              1,922Permanent
      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
              
              $
              7,673Increase
      for current year positions
              
              
              1,211Increase
      for prior period positions
              
              
              227Decrease
      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
              
              
              2008Raw
      materials and work in process
              
              $
              22,741
              
              
              $
              16,753Finished
      goods
              
              
              26,034
              
              
              
              24,180Total
      inventories
              
              $
              48,775
              
              
              $
              40,933
  International
inventories included above were $3,694 and $3,328 at November 30, 2009 and 2008,
respectively.
  72
 Property,
plant and equipment consisted of the following at November 30, 2009 and
2008:
  2009
              
              
              2008Land
              
              $
              1,123
              
              
              $
              1,123Buildings
      and improvements
              
              
              11,794
              
              
              
              11,228Machinery
      and equipment
              
              
              65,503
              
              
              
              60,269Package
      design and tooling
              
              
              8,956
              
              
              
              8,241Construction
      in progress
              
              
              4,196
              
              
              
              4,824Total
      property, plant and equipment
              
              
              91,572
              
              
              
              85,685Less
      – 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
              
              
              2008Interest
              
              $
              2,096
              
              
              $
              3,216Salaries,
      wages and commissions
              
              
              4,561
              
              
              
              5,333Product
      advertising and promotion
              
              
              3,455
              
              
              
              2,611Litigation
      settlements and legal fees
              
              
              1,305
              
              
              
              799Income
      taxes payable
              
              
              7,666
              
              
              
              4,636Interest
      rate swap
              
              
              906
              
              
              
              2,602Other
              
              
              1,356
              
              
              
              2,096Total
      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.
  73
 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
      EndedNovember 30, 2007Total
      revenue
              
              $
              432,559Net
      income
              
              
              60,472Earnings
      per share – basic:
              
              
              3.20Earnings
      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.
  74
 Net periodic (benefit) cost for fiscal
2009, 2008 and 2007 was comprised of the following components:
  Pension Plan
              
              
              Retiree Health Plan2009
              
              
              2008
              
              
              2007
              
              
              2009
              
              
              2008
              
              
              2007Service
      cost
              
              $
              —
              
              
              $
              —
              
              
              $
              —
              
              
              $
              6
              
              
              $
              7
              
              
              $
              21Interest
      cost
              
              
              605
              
              
              
              576
              
              
              
              609
              
              
              
              59
              
              
              
              55
              
              
              
              56Expected
      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 Plan2009
              
              
              2008
              
              
              2009
              
              
              2008Plan
      assets at fair value, beginning of year
              
              $
              8,873
              
              
              $
              11,883
              
              
              $
              —
              
              
              $
              —Actual
      return on plan assets
              
              
              1,294
              
              
              
              (2,320
              )
              
              
              —
              
              
              
              —Employer
      contribution
              
              
              —
              
              
              
              —
              
              
              
              59
              
              
              
              58Benefits
      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 Plan2009
              
              
              2008
              
              
              2009
              
              
              2008Benefit
      obligation, beginning of year
              
              $
              9,226
              
              
              $
              10,165
              
              
              $
              936
              
              
              $
              1,003Service
      cost
              
              
              —
              
              
              
              —
              
              
              
              6
              
              
              
              7Interest
      cost
              
              
              605
              
              
              
              576
              
              
              
              59
              
              
              
              55Actuarial
      (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 Plan2009
              
              
              2008
              
              
              2009
              
              
              2008Plan
      assets at fair value
              
              $
              9,933
              
              
              $
              8,873
              
              
              $
              —
              
              
              $
              —Benefit
      obligation
              
              
              9,797
              
              
              
              9,226
              
              
              
              935
              
              
              
              936Funded
      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
              )
  75
 Amounts
recognized in our consolidated balance sheets as of November 30, 2009 and 2008
consist of the following:
  Pension Plan
              
              
              Retiree Health Plan2009
              
              
              2008
              
              
              2009
              
              
              2008Deferred
      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
              
              RangeCorporate
      & 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
              
              
              2008Mutual
      funds
              
              
              87
              %
              
              
              84
              %Equity
      securities
              
              
              13
              
              
              
              16Total
              
              
              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 PaymentsPension Plan
              
              
              Retiree Health Plan2010
              
              $
              695
              
              
              $
              602011
              
              
              700
              
              
              
              622012
              
              
              705
              
              
              
              632013
              
              
              710
              
              
              
              642014
              
              
              715
              
              
              
              662015-2019
              
              
              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.
  76
 (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
              
              
              2007Revenues:Domestic
              
              $
              438,846
              
              
              $
              423,088
              
              
              $
              393,493International
      (1)
              
              
              24,496
              
              
              
              31,791
              
              
              
              29,885Total
              
              $
              463,342
              
              
              $
              454,879
              
              
              $
              423,378Long-Lived
      Assets (2)Domestic
              
              $
              610,344
              
              
              $
              646,676
              
              
              $
              646,926International
              
              
              2,187
              
              
              
              2,237
              
              
              
              2,233Total
              
              $
              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
              
              
              2007Medicated
      skin care
              
              $
              158,013
              
              
              $
              141,942
              
              
              $
              123,456Topical
      pain care
              
              
              95,407
              
              
              
              96,779
              
              
              
              95,858Oral
      care
              
              
              70,353
              
              
              
              62,872
              
              
              
              48,863Internal
      OTC
              
              
              44,096
              
              
              
              48,006
              
              
              
              45,043Medicated
      dandruff shampoos
              
              
              36,488
              
              
              
              35,737
              
              
              
              36,934Dietary
      supplements
              
              
              18,296
              
              
              
              19,491
              
              
              
              26,121Other
      OTC and toiletry products
              
              
              16,193
              
              
              
              18,261
              
              
              
              17,218Total
              
              $
              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 DexatrimPPA
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.
 
 77
 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 Dexatrimcontaining PPA which
involved alleged injuries by Dexatrim products containing
PPA manufactured and sold prior to our acquisition of Dexatrimon 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 theDexatrim 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.
 
 78
 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, andSchipperseeks compensatory
damages against defendants, both individually and severally.
  On
January 6, 2010, plaintiff in the Pirelliactionmoved to consolidate
the actions and appoint its counsel as lead counsel in the consolidated
action.  On January 8, 2010, we moved to dismiss the Pirelliaction 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
 
 79
 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 thePamprin 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.
  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.
  80
 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.
  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 theIcy 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
              
              $
              7392011
              
              
              4742012
              
              
              1442013
              
              
              292014
              
              
              19Thereafter
              
              
              5$
              1,410
  Rental
expense was $2,448, $2,648 and $2,395 for fiscal 2009, 2008 and 2007,
respectively.
  81
 The
minimum commitments under noncancelable endorsement contracts related to our
advertising as of November 30, 2009 are as follows:
  2010
              
              $
              1,4002011
              
              
              900$
              2,300
  The
minimum noncancelable purchase commitments related to inventory and equipment as
of November 30, 2009 are as follows:
  2010
              
              $
              5,7592011
              
              
              3,2532012
              
              
              5532013
              
              
              5532014
              
              
              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.
  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,
 
 82
 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
$64,596.
  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.
  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 closing 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
 
 83
 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.
  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.
             84
 Note
14
  CHATTEM,
INC. AND SUBSIDIARIES
 CONSOLIDATING
BALANCE SHEETS
  NOVEMBER
30, 2009
 (In
thousands)
  CHATTEM
              
              
              GUARANTOR
                SUBSIDIARY
                COMPANIES
              
              
              NON-GUARANTOR
                SUBSIDIARY
                COMPANIES
              
              
              ELIMINATIONS
              
              
              CONSOLIDATEDASSETSCURRENT
      ASSETS:Cash
      and cash equivalents
              
              $
              52,521
              
              
              $
              421
              
              
              $
              11,824
              
              
              $
              —
              
              
              $
              64,766Accounts
      receivable, less allowances of $10,041
              
              
              48,624
              
              
              
              16,953
              
              
              
              7,933
              
              
              
              (18,903
              )
              
              
              54,607Interest
      receivable
              
              
              17
              
              
              
              38
              
              
              
              —
              
              
              
              (55
              )
              
              
              —Inventories,
      net
              
              
              43,611
              
              
              
              1,470
              
              
              
              3,694
              
              
              
              —
              
              
              
              48,775Deferred
      income taxes
              
              
              5,544
              
              
              
              —
              
              
              
              41
              
              
              
              —
              
              
              
              5,585Prepaid
      expenses and other current assets
              
              
              2,030
              
              
              
              —
              
              
              
              494
              
              
              
              (30
              )
              
              
              2,494Total
      current assets
              
              
              152,347
              
              
              
              18,882
              
              
              
              23,986
              
              
              
              (18,988
              )
              
              
              176,227PROPERTY,
      PLANT AND EQUIPMENT, NET
              
              
              33,664
              
              
              
              775
              
              
              
              626
              
              
              
              —
              
              
              
              35,065OTHER
      NONCURRENT ASSETS:Patents,
      trademarks and other purchased product rights, net
              
              
              2,396
              
              
              
              635,799
              
              
              
              1,561
              
              
              
              (62,290
              )
              
              
              577,466Debt
      issuance costs, net
              
              
              9,860
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              9,860Investment
      in subsidiaries
              
              
              573,520
              
              
              
              64,682
              
              
              
              97,690
              
              
              
              (735,892
              )
              
              
              —Note
      receivable
              
              
              —
              
              
              
              34,694
              
              
              
              —
              
              
              
              (34,694
              )
              
              
              —Other
              
              
              2,542
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              2,542Total
      other noncurrent assets
              
              
              588,318
              
              
              
              735,175
              
              
              
              99,251
              
              
              
              (832,876
              )
              
              
              589,868TOTAL
      ASSETS
              
              $
              774,329
              
              
              $
              754,832
              
              
              $
              123,863
              
              
              $
              (851,864
              )
              
              $
              801,160LIABILITIES AND SHAREHOLDERS’
      EQUITYCURRENT
      LIABILITIES:Current
      maturities of long-term debt
              
              $
              3,000
              
              
              $
              —
              
              
              $
              —
              
              
              $
              —
              
              
              $
              3,000Accounts
      payable
              
              
              20,165
              
              
              
              —
              
              
              
              2,051
              
              
              
              —
              
              
              
              22,216Bank
      overdrafts
              
              
              461
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              461Accrued
      liabilities
              
              
              33,368
              
              
              
              1,791
              
              
              
              5,176
              
              
              
              (18,990
              )
              
              
              21,345Total
      current liabilities
              
              
              56,994
              
              
              
              1,791
              
              
              
              7,227
              
              
              
              (18,990
              )
              
              
              47,022LONG-TERM
      DEBT, less current maturities
              
              
              393,977
              
              
              
              (7,737
              )
              
              
              36,494
              
              
              
              (34,694
              )
              
              
              388,040DEFERRED
      INCOME TAXES
              
              
              (19,688
              )
              
              
              62,823
              
              
              
              (2,134
              )
              
              
              —
              
              
              
              41,001OTHER
      NONCURRENT LIABILITIES
              
              
              935
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              935INTERCOMPANY
      ACCOUNTS
              
              
              18,200
              
              
              
              (24,605
              )
              
              
              6,405
              
              
              
              —
              
              
              
              —SHAREHOLDERS’
      EQUITYPreferred
      shares, without par value, authorized 1,000, none issued
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —Common
      shares, without par value, authorized 100,000, issued and outstanding
      19,004
              
              
              30,640
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              30,640Share
      capital of subsidiaries
              
              
              —
              
              
              
              641,659
              
              
              
              78,999
              
              
              
              (720,658
              )
              
              
              —Dividends
              
              
              —
              
              
              
              (56,462
              )
              
              
              —
              
              
              
              56,462
              
              
              
              —Retained
      earnings
              
              
              294,401
              
              
              
              135,669
              
              
              
              (2,568
              )
              
              
              (133,101
              )
              
              
              294,401325,041
              
              
              
              720,866
              
              
              
              76,431
              
              
              
              (797,297
              )
              
              
              325,041Accumulated
      other comprehensive income (loss), net of taxes:Interest
      rate hedge adjustment
              
              
              (274
              )
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              (274
              )Foreign
      currency translation adjustment
              
              
              413
              
              
              
              1,694
              
              
              
              (560
              )
              
              
              (883
              )
              
              
              664Unrealized
      actuarial gains and losses
              
              
              (1,269
              )
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              (1,269
              )Total
      shareholders’ equity
              
              
              323,911
              
              
              
              722,560
              
              
              
              75,871
              
              
              
              (798,180
              )
              
              
              324,162TOTAL
      LIABILITIES AND SHAREHOLDERS’ EQUITY
              
              $
              774,329
              
              
              $
              754,832
              
              
              $
              123,863
              
              
              $
              (851,864
              )
              
              $
              801,160
 
  85
 Note
14
  CHATTEM,
INC. AND SUBSIDIARIES
 CONSOLIDATING
BALANCE SHEETS
  NOVEMBER
30, 2008
 (In
thousands)
  CHATTEM
              
              
              GUARANTOR
                SUBSIDIARY
                COMPANIES
              
              
              NON-GUARANTOR
                SUBSIDIARY
                COMPANIES
              
              
              ELIMINATIONS
              
              
              CONSOLIDATEDASSETSCURRENT
      ASSETS:Cash
      and cash equivalents
              
              $
              22,055
              
              
              $
              1,570
              
              
              $
              8,685
              
              
              $
              —
              
              
              $
              32,310Accounts
      receivable, less allowances of $9,718
              
              
              44,175
              
              
              
              16,226
              
              
              
              5,242
              
              
              
              (16,226
              )
              
              
              49,417Interest
      receivable
              
              
              108
              
              
              
              641
              
              
              
              (91
              )
              
              
              (658
              )
              
              
              —Inventories,
      net
              
              
              35,795
              
              
              
              1,811
              
              
              
              3,327
              
              
              
              —
              
              
              
              40,933Deferred
      income taxes
              
              
              3,932
              
              
              
              —
              
              
              
              36
              
              
              
              —
              
              
              
              3,968Prepaid
      expenses and other current assets
              
              
              4,024
              
              
              
              —
              
              
              
              332
              
              
              
              (1,905
              )
              
              
              2,451Total
      current assets
              
              
              110,089
              
              
              
              20,248
              
              
              
              17,531
              
              
              
              (18,789
              )
              
              
              129,079PROPERTY,
      PLANT AND EQUIPMENT, NET
              
              
              30,792
              
              
              
              775
              
              
              
              676
              
              
              
              —
              
              
              
              32,243OTHER
      NONCURRENT ASSETS:Patents,
      trademarks and other purchased product rights, net
              
              
              3,341
              
              
              
              674,057
              
              
              
              1,561
              
              
              
              (62,289
              )
              
              
              616,670Debt
      issuance costs, net
              
              
              12,253
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              12,253Investment
      in subsidiaries
              
              
              597,821
              
              
              
              64,682
              
              
              
              97,690
              
              
              
              (760,193
              )
              
              
              —Note
      receivable
              
              
              —
              
              
              
              34,694
              
              
              
              —
              
              
              
              (34,694
              )
              
              
              —Other
              
              
              2,727
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              2,727Total
      other noncurrent assets
              
              
              616,142
              
              
              
              773,433
              
              
              
              99,251
              
              
              
              (857,176
              )
              
              
              631,650TOTAL
      ASSETS
              
              $
              757,023
              
              
              $
              794,456
              
              
              $
              117,458
              
              
              $
              (875,965
              )
              
              $
              792,972LIABILITIES AND SHAREHOLDERS’
      EQUITYCURRENT
      LIABILITIES:Current
      maturities of long-term debt
              
              $
              3,000
              
              
              $
              —
              
              
              $
              —
              
              
              $
              —
              
              
              $
              3,000Accounts
      payable
              
              
              16,463
              
              
              
              —
              
              
              
              1,736
              
              
              
              (83
              )
              
              
              18,116Bank
      overdrafts
              
              
              1,184
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              1,184Accrued
      liabilities
              
              
              34,594
              
              
              
              699
              
              
              
              4,708
              
              
              
              (18,708
              )
              
              
              21,293Total
      current liabilities
              
              
              55,241
              
              
              
              699
              
              
              
              6,444
              
              
              
              (18,791
              )
              
              
              43,593LONG-TERM
      DEBT, less current maturities
              
              
              455,900
              
              
              
              (1,200
              )
              
              
              36,494
              
              
              
              (34,694
              )
              
              
              456,500DEFERRED
      INCOME TAXES
              
              
              (24,111
              )
              
              
              60,766
              
              
              
              (1,243
              )
              
              
              —
              
              
              
              35,412OTHER
      NONCURRENT LIABILITIES
              
              
              1,609
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              1,609INTERCOMPANY
      ACCOUNTS
              
              
              12,526
              
              
              
              (18,962
              )
              
              
              6,436
              
              
              
              —
              
              
              
              —SHAREHOLDERS’
      EQUITYPreferred
      shares, without par value, authorized 1,000, none issued
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —Common
      shares, without par value, authorized 100,000, issued and outstanding
      18,978
              
              
              28,926
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              28,926Share
      capital of subsidiaries
              
              
              —
              
              
              
              641,659
              
              
              
              77,935
              
              
              
              (719,594
              )
              
              
              —Dividends
              
              
              —
              
              
              
              (69,628
              )
              
              
              —
              
              
              
              69,628
              
              
              
              —Retained
      earnings
              
              
              231,230
              
              
              
              179,428
              
              
              
              (6,416
              )
              
              
              (173,012
              )
              
              
              231,230260,156
              
              
              
              751,459
              
              
              
              71,519
              
              
              
              (822,978
              )
              
              
              260,156Accumulated
      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
              )
              
              
              255,858TOTAL
      LIABILITIES AND  SHAREHOLDERS’ EQUITY
              
              $
              757,023
              
              
              $
              794,456
              
              
              $
              117,458
              
              
              $
              (875,965
              )
              
              $
              792,972
 
 
 86
 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
              
              
              CONSOLIDATEDTOTAL
      REVENUES
              
              $
              427,217
              
              
              $
              90,952
              
              
              $
              21,346
              
              
              $
              (76,173
              )
              
              $
              463,342COSTS
      AND EXPENSES:Cost
      of sales
              
              
              127,511
              
              
              
              4,998
              
              
              
              10,867
              
              
              
              (3,608
              )
              
              
              139,768Advertising
      and promotion
              
              
              96,681
              
              
              
              4,321
              
              
              
              4,682
              
              
              
              —
              
              
              
              105,684Selling,
      general and administrative
              
              
              56,388
              
              
              
              1,042
              
              
              
              2,870
              
              
              
              —
              
              
              
              60,300Impairment
      of indefinite-lived intangible assets
              
              
              —
              
              
              
              38,258
              
              
              
              —
              
              
              
              —
              
              
              
              38,258Equity
      in subsidiary income
              
              
              (24,981
              )
              
              
              —
              
              
              
              —
              
              
              
              24,981
              
              
              
              —Total
      costs and expenses
              
              
              255,599
              
              
              
              48,619
              
              
              
              18,419
              
              
              
              21,373
              
              
              
              344,010INCOME
      FROM OPERATIONS
              
              
              171,618
              
              
              
              42,333
              
              
              
              2,927
              
              
              
              (97,546
              )
              
              
              119,332OTHER
      INCOME (EXPENSE):Interest
      expense
              
              
              (20,828
              )
              
              
              —
              
              
              
              (4,034
              )
              
              
              4,078
              
              
              
              (20,784
              )Investment
      and other income, net
              
              
              288
              
              
              
              4,078
              
              
              
              4,775
              
              
              
              (8,814
              )
              
              
              327Loss
      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
              )
              
              
              97,304PROVISION
      FOR INCOME TAXES
              
              
              22,831
              
              
              
              11,698
              
              
              
              (396
              )
              
              
              —
              
              
              
              34,133NET
      INCOME (LOSS)
              
              $
              63,171
              
              
              $
              25,869
              
              
              $
              3,848
              
              
              $
              (29,717
              )
              
              $
              63,171
   
 87
 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
              
              
              CONSOLIDATEDTOTAL
      REVENUES
              
              $
              413,450
              
              
              $
              89,033
              
              
              $
              24,624
              
              
              $
              (72,228
              )
              
              $
              454,879COSTS
      AND EXPENSES:Cost
      of sales
              
              
              118,000
              
              
              
              5,370
              
              
              
              11,194
              
              
              
              (2,944
              )
              
              
              131,620Advertising
      and promotion
              
              
              105,873
              
              
              
              6,193
              
              
              
              6,027
              
              
              
              —
              
              
              
              118,093Selling,
      general and administrative
              
              
              58,185
              
              
              
              697
              
              
              
              3,708
              
              
              
              —
              
              
              
              62,590Product
      recall expenses
              
              
              5,479
              
              
              
              —
              
              
              
              790
              
              
              
              —
              
              
              
              6,269Litigation
      settlement
              
              
              567
              
              
              
              —
              
              
              
              10,704
              
              
              
              —
              
              
              
              11,271Equity
      in subsidiary income
              
              
              (42,411
              )
              
              
              —
              
              
              
              —
              
              
              
              42,411
              
              
              
              —Total
      costs and expenses
              
              
              245,693
              
              
              
              12,260
              
              
              
              32,423
              
              
              
              39,467
              
              
              
              329,843INCOME
      FROM OPERATIONS
              
              
              167,757
              
              
              
              76,773
              
              
              
              (7,799
              )
              
              
              (111,695
              )
              
              
              125,036OTHER
      INCOME (EXPENSE):Interest
      expense
              
              
              (25,134
              )
              
              
              —
              
              
              
              (4,236
              )
              
              
              4,060
              
              
              
              (25,310
              )Investment
      and other income, net
              
              
              189
              
              
              
              4,074
              
              
              
              3,012
              
              
              
              (6,560
              )
              
              
              715Loss
      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
              )
              
              
              99,915PROVISION
      FOR INCOME TAXES
              
              
              11,828
              
              
              
              25,139
              
              
              
              (3,338
              )
              
              
              —
              
              
              
              33,629NET
      INCOME (LOSS)
              
              $
              66,286
              
              
              $
              50,755
              
              
              $
              (5,846
              )
              
              $
              (44,909
              )
              
              $
              66,286
 
 
 
 88
 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
              
              
              CONSOLIDATEDTOTAL
      REVENUES
              
              $
              378,225
              
              
              $
              92,089
              
              
              $
              22,875
              
              
              $
              (69,811
              )
              
              $
              423,378COSTS
      AND EXPENSES:Cost
      of sales
              
              
              115,001
              
              
              
              7,125
              
              
              
              10,932
              
              
              
              (4,003
              )
              
              
              129,055Advertising
      and promotion
              
              
              96,471
              
              
              
              9,844
              
              
              
              6,004
              
              
              
              (113
              )
              
              
              112,206Selling,
      general and administrative
              
              
              55,120
              
              
              
              320
              
              
              
              2,438
              
              
              
              —
              
              
              
              57,878Acquisition
      expenses
              
              
              2,057
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              2,057Equity
      in subsidiary income
              
              
              (46,302
              )
              
              
              —
              
              
              
              —
              
              
              
              46,302
              
              
              
              —Total
      costs and expenses
              
              
              222,347
              
              
              
              17,289
              
              
              
              19,374
              
              
              
              42,186
              
              
              
              301,196INCOME
      FROM OPERATIONS
              
              
              155,878
              
              
              
              74,800
              
              
              
              3,501
              
              
              
              (111,997
              )
              
              
              122,182OTHER
      INCOME (EXPENSE):Interest
      expense
              
              
              (30,142
              )
              
              
              —
              
              
              
              (2,645
              )
              
              
              2,857
              
              
              
              (29,930
              )Investment
      and other income, net
              
              
              801
              
              
              
              2,589
              
              
              
              3,428
              
              
              
              (5,358
              )
              
              
              1,460Loss
      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
              )
              
              
              91,079PROVISION
      FOR INCOME TAXES
              
              
              5,121
              
              
              
              24,797
              
              
              
              1,471
              
              
              
              —
              
              
              
              31,389NET
      INCOME (LOSS)
              
              $
              59,690
              
              
              $
              46,052
              
              
              $
              2,751
              
              
              $
              (48,803
              )
              
              $
              59,690
 
  
 
 89
 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
              
              
              CONSOLIDATEDOPERATING
      ACTIVITIES:Net
      income (loss)
              
              $
              63,171
              
              
              $
              25,869
              
              
              $
              3,848
              
              
              $
              (29,717
              )
              
              $
              63,171Adjustments
      to reconcile net income (loss)  to net cash provided by (used
      in) operating activities:Depreciation
      and amortization
              
              
              7,513
              
              
              
              —
              
              
              
              154
              
              
              
              —
              
              
              
              7,667Deferred
      income taxes
              
              
              694
              
              
              
              2,057
              
              
              
              (897
              )
              
              
              —
              
              
              
              1,854Tax
      benefit realized from stock options exercised
              
              
              (311
              )
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              (311
              )Stock
      option expense
              
              
              7,770
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              7,770Loss
      on early extinguishment of debt
              
              
              1,571
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              1,571Other,
      net
              
              
              339
              
              
              
              —
              
              
              
              (222
              )
              
              
              —
              
              
              
              117Impairment
      of long-lived assets
              
              
              —
              
              
              
              38,258
              
              
              
              —
              
              
              
              —
              
              
              
              38,258Equity
      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
              )
              
              
              2,990Net
      cash provided by (used in) operating activities
              
              
              42,203
              
              
              
              67,493
              
              
              
              354
              
              
              
              —
              
              
              
              110,050INVESTING
      ACTIVITIES:Purchase
      of property, plant and equipment
              
              
              (6,945
              )
              
              
              —
              
              
              
              8
              
              
              
              —
              
              
              
              (6,937
              )Increase
      in other assets, net
              
              
              1,025
              
              
              
              —
              
              
              
              1,628
              
              
              
              —
              
              
              
              2,653Net
      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
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              1,000Repayments
      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
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              2,914Tax
      benefit realized from stock options exercised
              
              
              311
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              311Increase
      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
              
              
              
              —
              
              
              
              222CASH
      AND CASH EQUIVALENTSIncrease
      (decrease) for the year
              
              
              30,466
              
              
              
              (1,149
              )
              
              
              3,139
              
              
              
              —
              
              
              
              32,456At
      beginning of year
              
              
              22,055
              
              
              
              1,570
              
              
              
              8,685
              
              
              
              —
              
              
              
              32,310At
      end of year
              
              $
              52,521
              
              
              $
              421
              
              
              $
              11,824
              
              
              $
              —
              
              
              $
              64,766
 
 
 
 90
 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
              
              
              CONSOLIDATEDOPERATING
      ACTIVITIES:Net
      income (loss)
              
              $
              66,286
              
              
              $
              50,755
              
              
              $
              (5,846
              )
              
              $
              (44,909
              )
              
              $
              66,286Adjustments
      to reconcile net income (loss) to net cash provided by (used in) operating
      activities:Depreciation
      and amortization
              
              
              8,134
              
              
              
              —
              
              
              
              252
              
              
              
              —
              
              
              
              8,386Deferred
      income taxes
              
              
              3,643
              
              
              
              15,734
              
              
              
              (1,238
              )
              
              
              —
              
              
              
              18,139Stock
      option expense
              
              
              5,970
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              5,970Loss
      on early extinguishment of debt
              
              
              526
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              526Tax
      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
              
              
              
              —
              
              
              
              2,331Prepaid
      expenses and other current assets
              
              
              (2,115
              )
              
              
              —
              
              
              
              (31
              )
              
              
              1,755
              
              
              
              (391
              )Accounts
      payable and accrued liabilities
              
              
              3,171
              
              
              
              5
              
              
              
              (126
              )
              
              
              (1,303
              )
              
              
              1,747Net
      cash provided by (used in) operating activities
              
              
              29,314
              
              
              
              68,377
              
              
              
              (5,533
              )
              
              
              —
              
              
              
              92,158INVESTING
      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
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              151,500Repayments
      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
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              8,372Tax
      benefit realized from stock options exercised
              
              
              3,709
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              3,709Changes
      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
              
              
              
              —
              
              
              
              46CASH
      AND CASH EQUIVALENTSIncrease
      (decrease) for the year
              
              
              17,370
              
              
              
              980
              
              
              
              (1,447
              )
              
              
              —
              
              
              
              16,903At
      beginning of year
              
              
              4,685
              
              
              
              590
              
              
              
              10,132
              
              
              
              —
              
              
              
              15,407At
      end of year
              
              $
              22,055
              
              
              $
              1,570
              
              
              $
              8,685
              
              
              $
              —
              
              
              $
              32,310
 
  
 
 91
 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
              
              
              CONSOLIDATEDOPERATING
      ACTIVITIES:Net income (loss)
              
              $
              59,690
              
              
              $
              46,052
              
              
              $
              2,751
              
              
              $
              (48,803
              )
              
              $
              59,690Adjustments to reconcile net income (loss)to net cash provided by
      operating activities:Depreciation
      and amortization
              
              
              8,480
              
              
              
              —
              
              
              
              363
              
              
              
              —
              
              
              
              8,843Deferred
      income taxes
              
              
              1,875
              
              
              
              10,847
              
              
              
              (4
              )
              
              
              —
              
              
              
              12,718Stock
      option expense
              
              
              5,622
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              5,622Loss
      on early extinguishment of debt
              
              
              2,633
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              2,633Tax
      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
              
              
              
              1,249Accounts
      payable and accrued liabilities
              
              
              27,814
              
              
              
              (441
              )
              
              
              4,243
              
              
              
              (7,436
              )
              
              
              24,180Net
      cash provided by operating activities
              
              
              32,324
              
              
              
              50,090
              
              
              
              4,320
              
              
              
              —
              
              
              
              86,734INVESTING
      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
              
              
              
              —
              
              
              
              1,910Net
      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
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              400,000Proceeds
      from borrowings under revolving credit facility
              
              
              159,000
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              159,000Repayments
      of revolving credit facility
              
              
              (129,000
              )
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              (129,000
              )Bank
      overdraft
              
              
              1,760
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              1,760Repurchase
      of common shares
              
              
              (23,601
              )
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              (23,601
              )Proceeds
      from exercise of stock options
              
              
              16,661
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              16,661Purchase
      of note hedge
              
              
              (29,500
              )
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              (29,500
              )Proceeds
      from issuance of warrant
              
              
              17,430
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              17,430Increase
      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
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              909Tax
      benefit realized from stock options exercised
              
              
              8,291
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              8,291Changes
      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
              )
              
              
              —
              
              
              
              257,953EFFECT
      OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS
              
              
              —
              
              
              
              —
              
              
              
              343
              
              
              
              —
              
              
              
              343CASH
      AND CASH EQUIVALENTSIncrease
      for the year
              
              
              (75,513
              )
              
              
              (1,377
              )
              
              
              1,770
              
              
              
              —
              
              
              
              (75,120
              )At
      beginning of year
              
              
              80,198
              
              
              
              1,967
              
              
              
              8,362
              
              
              
              —
              
              
              
              90,527At
      end of year
              
              $
              4,685
              
              
              $
              590
              
              
              $
              10,132
              
              
              $
              —
              
              
              $
              15,407
 
  92
 (15)           QUARTERLY INFORMATION
(Unaudited and in thousands, except per share amounts)
    Quarter EndedTotal
              
              
              February 28
              
              
              May 31
              
              
              August 31
              
              
              November 30FISCAL
      2009:Total
      revenues
              
              $
              463,342
              
              
              
              116,092
              
              
              
              121,830
              
              
              
              115,171
              
              
              
              110,249Gross
      profit
              
              $
              323,574
              
              
              
              80,835
              
              
              
              84,699
              
              
              
              80,406
              
              
              
              77,634Net
      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
              
              
              
              105,461Gross
      profit
              
              $
              323,259
              
              
              
              86,040
              
              
              
              84,075
              
              
              
              80,176
              
              
              
              72,968Net
      income
              
              $
              66,286
              
              
              
              14,873
              
              
              
              20,732
              
              
              
              13,966
              
              
              
              16,715Net
      income per share:Basic  (1)
              
              $
              3.49
              
              
              
              .78
              
              
              
              1.08
              
              
              
              .74
              
              
              
              .88Diluted
      (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.
   
         93


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
  94
 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.
  95
 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 REGISTRANTZan
      Guerry*
              61
              Chairman
      of the Board and
                Chief
      Executive Officer; DirectorRobert
      E. Bosworth*
              62
              President
      and Chief Operating Officer;
                DirectorAndrea
      M. Crouch
              51
              Vice
      President – Brand ManagementRon
      Galante
              66
              Vice
      President – New Business DevelopmentRobert
      B. Long*
              38
              Vice
      President and Chief Financial OfficerB.
      Derrill Pitts
              67
              Vice
      President – Operations
 
 J.
      Blair Ramey
              43
              Vice
      President – MarketingJohn
      L. Stroud
              49
              Senior
      Vice President – MarketingCharles
      M. Stafford
              59
              Vice
      President – SalesJoseph
      J. Czerwinski
              60
              Vice
      President – Product DevelopmentTheodore
      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.
  96
 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.
  (c)           Compliance with Section
16(a) of the Exchange Act
  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.
  97
  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.
  
  
 98
 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
                
                References2.1
                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)
   99
 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,
      200210.2
                  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, 200210.4
                  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 Company23.1
                    Consent
      of Independent Registered Public Accounting Firm31.1
                    Certification
      required by Rule 13a-14(a) under the Securities Exchange
    Act31.2
                    Certification
      required by Rule 13a-14(a) under the Securities Exchange
      Act32
                    Certification
      required by Rule 13a-14(b) under the Securities Exchange Act of 1934 and
      18 U.S.C. Section 135099.1
                    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 OfficerBy:
              /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