q3 2009 earning report of chattem inc

FORM 10-QCHATTEM INC - CHTTFiled: October 06, 2009 (period: August 31, 2009)

Quarterly report which provides a continuing view of a company's financial position

Table of Contents

10-Q - FORM 10-Q DATED AUGUST 31, 2009

PART I.

Item 1. Financial Statements PART I.

Item 1. Financial Statements Item 2. Management s Discussion and Analysis of Financial Condition and

Results of Operations

Item 3. Quantitative and Qualitative Disclosures About Market Risks Item 4. Controls and Procedures PART II.

Item 1. Legal Proceedings Item 1A. Risk Factors Item 2. Unregistered Sales of Equity Securities and Use of Proceeds Item 3. Defaults Upon Senior Securities Item 4. Submission of Matters to a Vote of Security Holders Item 5. Other Information Item 6. Exhibits SIGNATURES Exhibit Index

EX-10.1 (SEVENTH AMENDMENT TO CREDIT AGREEMENT)

EX-31.1 (302 CERTIFICATION - CEO)

EX-31.2 (302 CERTIFICATION - CFO)

EX-32 (906 CERTIFICATION)

UNITED STATESSECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

QUARTERLY REPORT

PURSUANT TO SECTION 13 OR 15(d) OFTHE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended August 31, 2009Commission file number 0-5905

CHATTEM, INC.A TENNESSEE CORPORATION

I.R.S. EMPLOYER IDENTIFICATION NO. 62-01563001715 WEST 38TH STREET

CHATTANOOGA, TENNESSEE 37409TELEPHONE: 423-821-4571

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

YES � NO

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 preceding12 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 ora smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reportingcompany” in Rule 12b-2 of the Exchange Act. (Check one): Large accelerated filer � Accelerated filer Non-accelerated filer (Do not check if a smaller reporting company)

Smaller reporting company

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

As of September 30, 2009, 19,043,177 shares of the Company’s common stock, without par value, were outstanding.

Source: CHATTEM INC, 10-Q, October 06, 2009

CHATTEM, INC.

INDEX

PAGE NO.PART I. FINANCIAL INFORMATION Item 1. Financial Statements

Consolidated Balance Sheets as of August 31, 2009 and November 30, 2008 3

Consolidated Statements of Income for the Three and Nine Months Ended August 31, 2009 and August 31, 2008 5

Consolidated Statements of Cash Flows for the Nine Months Ended August 31, 2009 and August 31, 2008 6

Notes to Consolidated Financial Statements 7

Item 2. Management's Discussion and Analysis of Financial Condition

and Results of Operations 28 Item 3. Quantitative and Qualitative Disclosures About Market Risk 41 Item 4. Controls and Procedures 41 PART II. OTHER INFORMATION Item 1. Legal Proceedings 42 Item 1A. Risk Factors 42 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 42 Item 3. Defaults Upon Senior Securities 42 Item 4. Submission of Matters to a Vote of Security Holders 42 Item 5. Other Information 42 Item 6. Exhibits 43 SIGNATURES 44

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PART 1. FINANCIAL INFORMATION

Item 1. Financial Statements

CHATTEM, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS(In thousands)

ASSETS

AUGUST 31, 2009

NOVEMBER 30, 2008

(Unaudited) CURRENT ASSETS: Cash and cash equivalents $ 59,400 $ 32,310 Accounts receivable, less allowances of $11,126 at August 31, 2009 and $9,718 at November 30, 2008 48,589 49,417 Inventories 42,336 40,933 Deferred income taxes 4,009 3,968 Prepaid expenses and other current assets 7,625 2,451 Total current assets 161,959 129,079 PROPERTY, PLANT AND EQUIPMENT, NET 32,893 32,243 OTHER NONCURRENT ASSETS: Patents, trademarks and other purchased product rights, net 615,956 616,670 Debt issuance costs, net 9,340 12,253 Other 2,609 2,727 Total other noncurrent assets 627,905 631,650 TOTAL ASSETS $ 822,757 $ 792,972

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

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CONSOLIDATED BALANCE SHEETS(In thousands)

LIABILITIES AND SHAREHOLDERS’ EQUITY

AUGUST 31, 2009

NOVEMBER 30, 2008

(Unaudited) CURRENT LIABILITIES: Current maturities of long-term debt $ 3,000 $ 3,000 Accounts payable and other 14,746 18,116 Bank overdraft — 1,184 Accrued liabilities 23,435 21,293 Total current liabilities 41,181 43,593 LONG-TERM DEBT, less current maturities 396,920 456,500 DEFERRED INCOME TAXES 50,206 35,412 OTHER NONCURRENT LIABILITIES 1,346 1,609 COMMITMENTS AND CONTINGENCIES (Note 18) SHAREHOLDERS’ EQUITY: Preferred shares, without par value, authorized 1,000, none issued — — Common shares, without par value, authorized 100,000, issued and outstanding 19,043 at August 31, 2009 and 18,978 at November 30, 2008 36,749 28,926 Retained earnings 298,454 231,230 335,203 260,156 Cumulative other comprehensive income (loss), net of tax: Interest rate hedge adjustment (800) (1,787) Foreign currency translation adjustment 244 (968) Unrealized actuarial gains and losses (1,543) (1,543) Total shareholders’ equity 333,104 255,858 TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY $ 822,757 $ 792,972


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CONSOLIDATED STATEMENTS OF INCOME(Unaudited and in thousands, except per share amounts)

FOR THE THREE MONTHS

ENDED AUGUST 31, FOR THE NINE MONTHS

ENDED AUGUST 31, 2009 2008 2009 2008 TOTAL REVENUES $ 115,171 $ 111,929 $ 353,093 $ 349,418 COSTS AND EXPENSES: Cost of sales 34,765 31,753 107,153 99,127 Advertising and promotion 22,866 26,789 78,424 91,532 Selling, general and administrative 15,275 15,024 45,031 45,676 Litigation settlement — 11,196 — 11,196 Product recall (income) expenses — (112) — 5,931 Total costs and expenses 72,906 84,650 230,608 253,462 INCOME FROM OPERATIONS 42,265 27,279 122,485 95,956 OTHER INCOME (EXPENSE): Interest expense (5,126) (6,176) (16,075) (19,293) Investment and other income, net 45 109 223 362 Loss on early extinguishment of debt (405) — (1,101) (526) Total other income (expense) (5,486) (6,067) (16,953) (19,457) INCOME BEFORE INCOME TAXES 36,779 21,212 105,532 76,499 PROVISION FOR INCOME TAXES 13,351 7,246 38,308 26,928 NET INCOME $ 23,428 $ 13,966 $ 67,224 $ 49,571 NUMBER OF COMMON SHARES: Weighted average outstanding-basic 19,026 18,784 19,236 19,002 Weighted average and potential dilutive

outstanding 19,161 19,004 19,323 19,385 NET INCOME PER COMMON SHARE: Basic $ 1.23 $ .74 $ 3.49 $ 2.61 Diluted $ 1.22 $ .73 $ 3.48 $ 2.56


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CONSOLIDATED STATEMENTS OF CASH FLOWS(Unaudited and in thousands)

FOR THE NINE MONTHS ENDED

AUGUST 31, 2009 2008 OPERATING ACTIVITIES: Net income $ 67,224 $ 49,571 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 5,671 6,316 Deferred income taxes 12,635 12,404 Tax benefit realized from stock options exercised (325) (2,342) Stock-based compensation 5,667 4,281 Loss on early extinguishment of debt 1,101 526 Other, net (1) 137 Changes in operating assets and liabilities: Accounts receivable 828 (7,567) Inventories (1,363) 2,611 Prepaid expenses and other current assets (5,174) (5,885) Accounts payable and accrued liabilities (2,376) 17,248 Net cash provided by operating activities 83,887 77,300 INVESTING ACTIVITIES: Purchases of property, plant and equipment (3,623) (3,567) Decrease (increase) in other assets, net 1,986 (1,255) Net cash used in investing activities (1,637) (4,822) FINANCING ACTIVITIES: Repayment of long-term debt (11,380) (37,250) Proceeds from borrowings under revolving credit facility 1,000 148,000 Repayments of revolving credit facility (20,500) (158,500) Change in bank overdraft (1,184) (7,584) Repurchase of common shares (26,107) (26,327) Proceeds from exercise of stock options 2,587 4,487 Tax benefit realized from stock options exercised 325 2,342 Debt retirement costs (18) — Net cash used in financing activities (55,277) (74,832) EFFECT OF EXCHANGE RATE CHANGESON CASH AND CASH EQUIVALENTS 117 (22) CASH AND CASH EQUIVALENTS: Increase (decrease) for the period 27,090 (2,376) At beginning of period 32,310 15,407 At end of period $ 59,400 $ 13,031 PAYMENTS FOR: Interest $ 10,743 $ 14,129 Taxes $ 23,412 $ 10,733


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Unaudited)

All monetary and share amounts (other than per share amounts) in these Notes are expressed in thousands.

1. BASIS OF PRESENTATION

The accompanying unaudited consolidated financial statements have been prepared in accordance with generally acceptedaccounting principles for interim financial information and the instructions to Form 10-Q and Rule 10-01 of RegulationS-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles in theUnited States for complete financial statements. These consolidated financial statements should be read in conjunction with theaudited consolidated financial statements and related notes thereto included in our Annual Report on Form 10-K for the year endedNovember 30, 2008. The accompanying unaudited consolidated financial statements, in the opinion of management, include alladjustments necessary for a fair presentation. All such adjustments are of a normal recurring nature.

2. CASH AND CASH EQUIVALENTS

We consider all short-term deposits and investments with original maturities of three months or less to be cash equivalents.

3. RECENT ACCOUNTING PRONOUNCEMENTS

In December 2007, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial AccountingStandards (“SFAS”) No. 141R, “Business Combinations” (“SFAS 141R”). SFAS 141R establishes principles and requirements forhow the acquirer in a business combination recognizes and measures the identifiable assets acquired, liabilities assumed and intangibleassets acquired and determines what information to disclose to enable users of the financial statements to evaluate the nature andfinancial effects of the business combination. The provisions of SFAS 141R are effective for acquisitions closing after the first annualreporting period beginning after December 15, 2008. Accordingly, we will apply the provisions of SFAS 141R prospectively tobusiness combinations consummated beginning in the first quarter of our fiscal 2010. We do not expect SFAS 141R to have an effecton our previous acquisitions.

In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities—anamendment of FASB Statement No. 133” (“SFAS 161”). SFAS 161 requires enhanced disclosures about an entity’s derivative andhedging activities. SFAS 161 amends and expands the disclosure requirements of SFAS No. 133, “Accounting for DerivativeInstruments and Hedging Activities”, with the intent to provide users of financial statements adequate information about howderivative and hedging activities affect an entity’s financial position, financial performance and cash flows. SFAS 161 is effective forquarterly interim periods beginning after November 15, 2008 and fiscal years that include those quarterly interim periods. We haveincluded all disclosures as required by SFAS 161, none of which have a material impact on our financial statements.

In April 2008, the FASB issued FASB Staff Position (“FSP”) No. FAS 142-3, “Determination of the Useful Life ofIntangible Assets” (“FSP FAS 142-3”). In determining the useful life of intangible assets, FSP FAS 142-3 removes the requirement toconsider whether an intangible asset can be renewed without substantial cost of material modifications to the existing terms andconditions and, instead, requires an entity to consider its own historical experience in renewing similar arrangements. FSP FAS 142-3also requires expanded disclosure related to the determination of intangible asset useful lives. FSP FAS 142-3 is effective forfinancial statements issued for fiscal years beginning after December 15, 2008, or our fiscal 2010. We are currently evaluating theimpact, if any, of FSP FAS 142-3.

In May 2008, the FASB issued FSP Accounting Principles Board (“APB”) Opinion No. 14-1, “Accounting for ConvertibleDebt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement)” (“FSP 14-1”). FSP 14-1specifies that issuers of convertible debt instruments should separately account for the liability and equity components of theinstrument in a manner that will reflect the entity’s non-convertible debt borrowing rate on the instrument’s issuance date wheninterest is recognized in subsequent periods. Upon adoption of FSP 14-1, 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 liabilityand equity component by determining the fair value of the liability component using our non-convertible debt borrowing rate at thetime the Convertible Notes were issued. The difference between the proceeds of the Convertible Notes and the calculated fair value ofthe liability component will be recorded as a debt discount with a corresponding increase to common shares in our consolidatedbalance sheet. The debt discount will be amortized as additional non-cash interest expense over the remaining life of the ConvertibleNotes using the effective interest rate method. Although FSP 14-1 will have no impact on our cash flows, FSP 14-1 will result inadditional non-cash interest expense until maturity or early extinguishment of the Convertible Notes. The

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provisions of FSP 14-1 are to be applied retrospectively to all periods presented upon adoption and are effective for fiscal yearsbeginning after December 15, 2008, or our fiscal 2010, and interim periods within those fiscal years. Upon adoption of FSP 14-1, weestimate non-cash interest expense will increase for the fiscal years ended November 30, 2009 and 2008 by approximately $6,600 and$7,200 (or $0.22 and $0.25 per share), respectively. The additional non-cash interest expense is expected to increase each fiscal yearas the Convertible Notes approach their respective maturity dates and accrete to their face values.

In December 2008, the FASB issued FSP No. FAS 132(R)-1, “Employers’ Disclosures about Postretirement Benefit PlanAssets” (“FSP 132R-1”). FSP 132R-1 enhances the required disclosures about plan assets in an employer’s defined benefit pension orother postretirement plan, including investment allocations decisions, inputs and valuations techniques used to measure the fair valueof plan assets and significant concentrations of risks within plan assets. FSP 132R-1 is effective for financial statements issued forfiscal years ending after December 15, 2009, or our fiscal 2010. We are currently evaluating the impact, if any, of FSP 132R-1.

In April 2009, the FASB issued FSP No. 107-1 and Accounting Principles Board (“APB”) 28-1, “Interim Disclosures aboutFair Value of Financial Instruments” (“FSP 107-1”). FSP 107-1, which requires disclosures about the fair value of financialinstruments in interim financial statements as well as in annual financial statements, was effective for us for the quarter ended August31, 2009. The adoption of FSP 107-1 did not have a material impact on our financial statements.

In May 2009, the FASB issued SFAS No. 165, “Subsequent Events” (“SFAS 165”), which provides general standards ofaccounting for and disclosure of subsequent events. SFAS No. 165 clarifies that management must evaluate, as of each reportingperiod (i.e. interim and annual), events or transactions that occur after the balance sheet date through the date the financial statementsfor such reporting period are issued. It also requires management to disclose the date through which subsequent events have beenevaluated and whether that is the date on which the financial statements were issued. Statement 165 is effective prospectively forinterim or annual financial periods ending after June 15, 2009. The Company adopted SFAS No. 165 in the third quarter of fiscal 2009(see Note 19).

In June 2009, the FASB issued SFAS No. 168, “The FASB Accounting Standards Codification and the Hierarchy ofGenerally Accepted Accounting Principles, a replacement of FASB Statement No. 162” (“SFAS 168”). SFAS 168 eliminates theprevious levels of U.S. GAAP. It does not include any guidance or interpretations of GAAP beyond what is already reflected in theFASB literature. It merely takes previously issued FASB standards and other authoritative pronouncements, changes the nomenclaturepreviously used to refer to FASB standards, and includes them in specific topic areas. SFAS 168 is effective for financial statementsissued for interim and annual periods ending after September 15, 2009. We are currently evaluating the impact, if any, of SFAS 168.

4. STOCK-BASED COMPENSATION

We currently provide stock-based compensation under five stock incentive plans that have been approved by ourshareholders. Our 1999 Non-Statutory Stock Option Plan for Non-Employee Directors allows for the issuance of up to 200 shares ofcommon stock. The 2000 Non-Statutory Stock Option Plan provides for the issuance of up to 1,500 shares of common stock. The2003 and 2005 Stock Incentive Plans both provide for the issuance of up to 1,500 shares of common stock. The 2009 EquityIncentive 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 allof these plans generally vest over four years from the date of grant as specified in the plans or by the compensation committee of ourboard 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 SFAS No. 123 (revised 2004), “Share-Based Payment”(“SFAS 123R”), which requires the recognition of the cost of employee services received in exchange for an award of equityinstruments in the financial statements and is measured based on the grant date fair value of the award. SFAS 123R also requires thestock option compensation expense to be recognized over the period during which an employee is required to provide service inexchange for the award (the vesting period).

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The following table represents the impact of stock-based compensation expense on our consolidated statements of income

during the three and nine months ended August 31, 2009 and 2008, respectively:

Three Months Ended

August 31, Nine Months Ended

August 31, 2009 2008 2009 2008 Income from operations $ 2,124 $ 1,701 $ 5,667 $ 4,281 Provision for income taxes 771 581 2,057 1,507 Net income $ 1,353 $ 1,120 $ 3,610 $ 2,774 Basic net income per share $ 0.07 $ 0.06 $ 0.19 $ 0.15 Diluted net income per share $ 0.07 $ 0.06 $ 0.19 $ 0.14

The stock option compensation expense is included partly in cost of sales, advertising and promotion expenses and selling,general and administrative expenses in the accompanying consolidated statements of income. We capitalized $224 and $185 of stockoption compensation cost as a component of the carrying cost of inventory on-hand as of August 31, 2009 and 2008, respectively.

There were no options granted during the three months ended August 31, 2009. The weighted average grant-date fair value ofstock options granted during the three months ended August 31, 2008 was $25.31, and for the nine months ended August 31, 2009 and2008 was $20.99 and $27.98, respectively. The fair value of each stock option grant was estimated on the date of grant using a FlexLattice Model. The following assumptions were used to determine the fair value of stock option grants during the nine months endedAugust 31, 2009 and 2008:

Nine Months Ended

August 31, 2009 2008 Expected life 6.0 years 6.0 years Volatility 37% 36% Risk-free interest rate 2.61% 3.84% Dividend yield 0% 0% Forfeitures 0.3% 0.3%

The expected life of stock options represents the period of time that the stock options granted are expected to be outstandingbased on historical exercise trends. The expected volatility is based on the historical price volatility of our common stock andconsideration of the volatility of our common stock. The risk-free interest rate represents the U.S. Treasury bill rate for the expectedlife of the related stock options. The dividend yield represents our anticipated cash dividend over the expected life of the stockoptions. In connection with using the Flex Lattice Model to determine the fair value of stock option grants, the forfeiture rate wasdetermined by analyzing post vesting stock option activity for three separate groups (non-employee directors, officers and otheremployees).

A summary of stock option activity for the nine months ended August 31, 2009 is presented below:

SharesUnder

Option

WeightedAverage

Exercise Price

WeightedAverage

RemainingContractual Life

Aggregate

Intrinsic Value Outstanding at December 1,2008 1,510 $ 50.23 Granted 386 55.53 Exercised (68) 38.07 Cancelled (13) 61.26 Outstanding at August31, 2009 1,815 $ 51.74 4.2 years $ 21,426 Exercisable at August31, 2009 875 $ 43.94 3.4 years $ 16,393

The total fair value of stock options that vested during the three and nine months ended August 31, 2009 and 2008 was$2,128 and $1,677 and $5,707 and $4,282, respectively. The total intrinsic value of stock options exercised during the three and ninemonths ended August 31, 2009 and 2008 was $932 and $1,860 and $1,739 and $6,563, respectively.

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As of August 31, 2009, we had $18,000 of unrecognized compensation cost related to stock options that will be recorded

over a weighted average period of 2.7 years.

We are also authorized to grant restricted shares of common stock to employees under our stock incentive plans that havebeen approved by shareholders. The restricted shares under these plans meet the definition of “nonvested shares” in SFAS 123R. Therestricted shares generally vest over a four year service period commencing upon the date of grant. The total fair market value ofrestricted shares on the date of grant is amortized to expense on a straight line basis over the four-year vesting period. Theamortization expense related to restricted shares during the three and nine months ended August 31, 2009 and 2008 was $0 and $64and $43 and $221, respectively. All grants of restricted shares were fully vested effective February 28, 2009.

Restricted share activity under the plans for the nine months ended August 31, 2009 is summarized as follows:

Number of

Shares

WeightedAverage

Grant DateFair Value

Nonvested at December 1, 2008 1 $ 35.37 Granted – – Vested 1 35.37 Forfeited – – Nonvested at August 31, 2009 – –

5. EARNINGS PER SHARE

The following table presents the computation of per share earnings for the three and nine months ended August 31, 2009 and2008, respectively:

For the Three Months Ended August 31,

For the Nine Months Ended August 31,

2009 2008 2009 2008

NET INCOME $ 23,428 $ 13,966 $ 67,224 $ 49,571

NUMBER OF COMMON SHARES: Weighted average outstanding 19,026 18,784 19,236 19,002 Issued upon assumed exercise of outstanding stockoptions(1) – 50 – 70 Issued upon assumed conversion of convertible notes 135 167 87 310 Effect of issuance of restricted common shares – 3 – 3 Weighted average and potential dilutive outstanding 19,161 19,004 19,323 19,385 NET INCOME PER COMMON SHARE: Basic $ 1.23 $ .74 $ 3.49 $ 2.61 Diluted $ 1.22 $ .73 $ 3.48 $ 2.56

(1) Because their effects are anti-dilutive, excludes shares issuable under stock option plans whose grant price was greater than theaverage market price of common shares outstanding as follows: 1,119 and 756 shares for the three months ended August 31, 2009 and2008, respectively, and 925 and 562 shares for the nine months ended August 31, 2009 and 2008, respectively.

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6. LONG-TERM DEBT

Long-term debt consisted of the following as of August 31, 2009 and November 30, 2008:

2009 2008 Revolving Credit Facility due 2010 at a variable rate of 6.07% asof November 30, 2008 $ – $ 19,500 2.0% Convertible Senior Notes due 2013 96,300 125,000 1.625% Convertible Senior Notes due 2014 100,000 100,000 Term Loan due 2013 at a variable rate of 5.93% and 6.57% as ofAugust 31, 2009 and November 30, 2008, respectively 105,250 107,500 7.0% Senior Subordinated Notes due 2014 98,370 107,500 Total long-term debt 399,920 459,500 Less: current maturities (3,000) (3,000)Total long-term debt, net of current maturities $ 396,920 $ 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 commercialbanks 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 Facilityand an additional $50,000, subject to successful syndication. In November 2005, we entered into an amendment to our RevolvingCredit Facility (the “Amended Revolving Credit Facility”) that, among other things, increased our borrowing capacity under thefacility from $50,000 to $100,000, increased our flexibility to repurchase shares of our stock, improved our borrowing rate under thefacility and extended the maturity date to November 2010. Upon successful syndication, we had the ability to increase the borrowingcapacity under the Amended Revolving Credit Facility by $50,000 to an aggregate of $150,000. In November 2006, we entered intoan amendment to our Amended Revolving Credit Facility that, among other things, permitted the sale of the 2.0% Convertible SeniorNotes due 2013 (the “2.0% Convertible Notes”). In January 2007, we completed an amendment to the Amended Revolving CreditFacility providing for up to a $100,000 revolving credit facility and a $300,000 term loan (the “Credit Facility”). The Credit Facilityincludes “accordion” features that permit us under certain circumstances to increase our borrowings under the revolving credit facilityby $50,000 and to borrow an additional $50,000 as a term loan, subject to successful syndication. In April 2007, we entered into anamendment to our Credit Facility that, among other things, permitted the sale of the 1.625% Convertible Senior Notes due 2014 (the“1.625% Convertible Notes”) and reduced the applicable interest rates on the revolving credit facility portion of our CreditFacility. Effective September 30, 2009, we entered into an amendment to our Credit Facility, see Note 19.

As of August 31, 2009 and November 30, 2008, we had $0 and $19,500, respectively, of borrowings outstanding under therevolving credit facility portion of our Credit Facility. As of September 30, 2009, we had $0 of borrowings outstanding under therevolving credit facility portion of our Credit Facility and our borrowing capacity was $100,000.

The term loan borrowings are to be repaid in increments of $750 each calendar quarter. The principal outstanding afterscheduled repayment and any unscheduled prepayments matures and is payable January 2013. In January 2008, we utilizedborrowings under the revolving credit facility portion of our Credit Facility to repay $35,000 of the term loan under the CreditFacility. In connection with such repayment, we retired a proportional share of the term loan debt issuance costs and recorded theresulting 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 capitalstock of our domestic subsidiaries held by us and by the assets of the guarantors (our domestic subsidiaries). The Credit Facilitycontains covenants, representations, warranties and other agreements by us that are customary in credit agreements and securityinstruments 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. At August 31, 2009, we were in compliance with all applicable financialand restrictive covenants under the Credit Facility.

In February 2004, we issued and sold $125,000 of our 7.0% Senior Subordinated Notes due 2014 (the “7.0% SubordinatedNotes”). During fiscal 2005, we repurchased $17,500 of our 7.0% Subordinated Notes in the open market at an average premium of1.6% over the principal amount of the 7.0% Subordinated Notes. During the third quarter of fiscal 2009, we repurchased $9,130 ofour 7.0% Subordinated Notes in open market transactions at an average premium of 0.2% 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 relateddebt issuance costs. The premium paid for the 7.0% Subordinated Notes combined with the early extinguishment of the proportionaldebt issuance costs resulted in a loss on extinguishment of $405. The outstanding

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balance of the 7.0% Subordinated Notes was reduced to $98,370 as of August 31, 2009. Subsequent to August 31, 2009, werepurchased additional 7.0% Subordinated Notes, see Note 19.

Interest payments on the 7.0% Subordinated Notes are due semi-annually in arrears in March and September. Our domesticsubsidiaries are guarantors of the 7.0% Subordinated Notes. The guarantees of the 7.0% Subordinated Notes are unsecured seniorsubordinated obligations of the guarantors. At any time after March 1, 2009, we may redeem any of the 7.0% Subordinated Notesupon not less than 30 nor more than 60 days’ notice at redemption prices (expressed in percentages of principal amount), plus accruedand unpaid interest, if any, and liquidation damages, if any, to the applicable redemption rate, if redeemed during the twelve-monthperiods beginning March 2009 at 103.500%, March 2010 at 102.333%, March 2011 at 101.167% and March 2012 and thereafter at100.000%. As of September 30, 2009, no such redemption has occurred.

The indenture governing the 7.0% Subordinated Notes, among other things, limits our ability and the ability of our restrictedsubsidiaries 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 restrictedsubsidiaries, (vii) enter into transactions with affiliates, (viii) issue guarantees of debt and (ix) sell assets or merge with othercompanies. In addition, if we experience specific changes in control, we must offer to purchase the 7.0% Subordinated Notes at101.0% of their principal amount plus accrued and unpaid interest.

In November 2006, we entered into an interest rate swap (“swap”) agreement effective January 2007. The swap hasdecreasing notional principal amounts beginning October 2007 and a swap rate of 4.98% over the life of the agreement. During thesecond quarter of fiscal 2008, we retired a portion of the swap for approximately $270 and during the first quarter of fiscal 2009, weretired an additional portion of the swap for approximately $195, which was recorded as additional interest expense in theaccompanying consolidated statement of income. As of August 31, 2009, we had $75,500 of LIBOR based borrowings hedged underthe provisions of the swap. During the nine months ended August 31, 2009, the decrease in fair value of the swap of $987, net of tax,was recorded to cumulative other comprehensive income. The fair value of the swap of $1,743 is included in accrued liabilities. Asof August 31, 2009, the swap was deemed to be an effective cash flow hedge. The fair value of the swap is valued by a thirdparty. The agreement governing the swap terminates in January 2010.

In November 2006, we completed a private offering of $125,000 of the 2.0% Convertible Notes to qualified institutionalpurchasers 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 aninitial conversion price of $58.92 per share, upon the occurrence of certain events, including the closing price of our common stockexceeding 130% of the initial conversion price per share, or $76.59 per share, for 20 of the last 30 consecutive trading days of thefiscal quarter (the “prescribed measurement period”). The evaluation of the classification of the 2.0% Convertible Notes occurs eachfiscal quarter.

Upon conversion, a holder will receive, in lieu of common stock, an amount of cash equal to the lesser of (i) the principalamount of the 2.0% Convertible Notes, or (ii) the conversion value, determined in the manner set forth in the indenture governing the2.0% Convertible Notes, of a number of shares equal to the conversion rate. If the conversion value exceeds the principal amount ofthe 2.0% Convertible Notes on the conversion date, we will also deliver, at our election, cash or common stock or a combination ofcash and common stock with respect to the conversion value upon conversion. If conversion occurs in connection with a change ofcontrol, we may be required to deliver additional shares of our common stock by increasing the conversion rate with respect to suchnotes. The maximum aggregate number of shares that we would be obligated to issue upon conversion of the 2.0% Convertible Notesis 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 notehedge, the Counterparty is required to deliver to us the number of shares of our common stock that we are obligated to deliver to theholders of the 2.0% Convertible Notes with respect to the conversion, calculated exclusive of shares deliverable by us by reason ofany additional premium relating to the 2.0% Convertible Notes or by reason of any election by us to unilaterally increase theconversion rate pursuant to the indenture governing the 2.0% Convertible Notes. The note hedge expires at the close of trading onNovember 15, 2013, which is the maturity date of the 2.0% Convertible Notes, although the Counterparty will have ongoingobligations with respect to 2.0% Convertible Notes properly converted on or prior to that date with respect to which the Counterpartyhas been timely notified of such conversion.

In addition, we issued warrants to the Counterparty that could require us to issue up to approximately 1,634 shares of ourcommon stock on November 15, 2013 upon notice of exercise by the Counterparty. The exercise price is $74.82 per share, whichrepresented a 60.0% premium over the closing price of our shares of common stock on November 16, 2006. If the Counterpartyexercises 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 theinitially established exercise price.

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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 aggregateprincipal 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 the2.0% Convertible Notes debt issuance costs and recorded the resulting loss on early extinguishment of debt of $696 in the first quarterof fiscal 2009.

In April 2007, we completed a private offering of $100,000 of the 1.625% Convertible Notes to qualified institutionalinvestors pursuant to Rule 144A under the Securities Act of 1933. The 1.625% Convertible Notes bear interest at an annual rate of1.625%, payable semi-annually in May and November of each year. The 1.625% Convertible Notes are convertible into our commonstock at an initial conversion price of $73.20 per share, upon the occurrence of certain events, including the closing price of ourcommon stock exceeding 130% of the initial conversion price per share, or $95.16 per share, for the prescribed measurementperiod. The evaluation of the classification of the 1.625% Convertible Notes occurs each fiscal quarter.

Upon conversion, a holder will receive, in lieu of common stock, an amount of cash equal to the lesser of (i) the principalamount of the 1.625% Convertible Notes, or (ii) the conversion value, determined in the manner set forth in the indenture governingthe 1.625% Convertible Notes, of a number of shares equal to the conversion rate. If the conversion value exceeds the principalamount of the 1.625% Convertible Note on the conversion date, we will also deliver, at our election, cash or common stock or acombination of cash and common stock with respect to the conversion value upon conversion. If conversion occurs in connection witha change of control, we may be required to deliver additional shares of our common stock by increasing the conversion rate withrespect 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 isdesigned to mitigate potential dilution from the conversion of the 1.625% Convertible Notes. Under the note hedge, the Counterpartyis 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 additionalpremium relating to the 1.625% Convertible Notes or by reason of any election by us to unilaterally increase the conversion ratepursuant 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 to1.625% Convertible Notes properly converted on or prior to that date with respect to which the Counterparty has been timely notifiedof such conversion.

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

Pursuant to EITF 90-19, “Convertible Bonds with Issuer Option to Settle for Cash upon Conversion” (“EITF 90-19”), EITF00-19, “Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock” (“EITF00-19”) and EITF 01-6, “The Meaning of Indexed to a Company’s Own Stock” (“EITF 01-6”), the 2.0% Convertible Notes and the1.625% Convertible Notes are accounted for as convertible debt in the accompanying consolidated balance sheet and the embeddedconversion option in the 2.0% Convertible Notes and the 1.625% Convertible Notes have not been accounted for as separatederivatives. Additionally, pursuant to EITF 00-19 and EITF 01-6, the note hedges and warrants are accounted for as equitytransactions, and therefore, the payments associated with the issuance of the note hedges and the proceeds received from the issuanceof the warrants were recorded as a charge and an increase, respectively, in common shares in shareholders’ equity as separate equitytransactions.

For income tax reporting purposes, we have elected to integrate the 2.0% Convertible Notes and the 1.625% ConvertibleNotes and the respective note hedge transactions. Integration of the note hedge with the 2.0% Convertible Notes and the 1.625%Convertible Notes, respectively, 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 the1.625% Convertible Notes, respectively, for income tax reporting purposes. The income tax benefit related to each respectiveconvertible note issuance was recognized as a deferred tax asset.

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The future maturities of long-term debt to be funded for the next five successive fiscal years and those thereafter as of August

31, 2009 are as follows:

2009 $ 750 2010 3,000 2011 3,000 2012 3,000 2013 191,800 Thereafter 198,370 $ 399,920

7. FAIR VALUE MEASUREMENTS

We currently measure and record in the accompanying consolidated financial statements an interest rate swap at fairvalue. SFAS 157 establishes a fair value hierarchy for those instruments measured at fair value that distinguishes betweenassumptions based on market data (observable inputs) and our own assumptions (unobservable inputs). The hierarchy consists ofthree 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 thata market participant would use.

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

The following table summarizes the financial instruments measured at fair value in the accompanying consolidated balancesheet as of August 31, 2009:

Fair Value Measurements as of

August 31, 2009 Level 1 Level 2 Level 3 Total Liabilities Interest rate swap (1) $ – $ 1,743 $ – $ 1,743

(1) The total fair value of the interest rate swap is classified as a current liability as of August 31, 2009 and matures on January

15, 2010. We value this financial instrument using the “Income Approach” valuation technique. This method uses valuationtechniques to convert future amounts to a single present value amount. The measurement is based on the value indicated bycurrent market expectations about those future amounts.

SFAS 157 requires separate disclosure of assets and liabilities measured at fair value on a recurring basis, as documented above, fromthose measured at fair value on a nonrecurring basis. As of August 31, 2009, no assets or liabilities are measured at fair value on anonrecurring basis.

At August 31, 2009 and November 30, 2008, the carrying value of the 7.0% Subordinated Notes and the term loan portion ofour Credit Facility approximated fair value based on market prices and market volume for same or similar issues. At August 31, 2009and November 30, 2008, the fair value of the 2.0% Convertible Notes was determined to be $100,096 and $153,965, respectively,based upon consideration of our closing stock price of $61.24 and $72.57, respectively, and determination of conversion value asdefined in the indenture under which the 2.0% Convertible Notes were issued. At August 31, 2009 and November 30, 2008, the fairvalue of the 1.625% Convertible Notes was determined to be $83,664 and $99,143, respectively, based upon consideration of ourclosing stock price and determination of conversion value as defined in the indenture under which the 1.625% Convertible Notes wereissued.

8. ADVERTISING EXPENSES

We incur significant expenditures on television, radio and print advertising to support our nationally brandedover-the-counter (“OTC”) health care products, toiletries and dietary supplements. Customers purchase products from us with theunderstanding that the brands will be supported by our extensive media advertising. This advertising supports the retailers’ saleseffort and maintains the important brand franchise with the consuming public. Accordingly, we consider our advertising program

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to be clearly implicit in our sales arrangements with our customers. Therefore, we allocate a percentage of the necessary supportingadvertising expenses to each dollar of sales by charging a percentage of sales on an interim basis based upon anticipated annual salesand advertising expenditures (in accordance with APB Opinion No. 28, “Interim Financial Reporting”) and adjusting that accrual tothe actual expenses incurred at the end of the year.

9. SHIPPING AND HANDLING

Shipping and handling costs of $3,535 and $3,823 were included in selling, general and administrative expenses for the threemonths ended August 31, 2009 and 2008, respectively, and $10,953 and $11,806 for the nine months ended August 31, 2009 and2008, respectively.

10. PATENT, TRADEMARKS AND OTHER PURCHASED PRODUCT RIGHTS

The carrying value of trademarks, which are not subject to amortization under the provisions of SFAS No. 142, “Goodwilland Other Intangible Assets” (“SFAS 142”), was $613,329 as of August 31, 2009 and November 30, 2008, respectively. The grosscarrying amount of intangible assets subject to amortization at August 31, 2009 and November 30, 2008, which consist primarily ofnon-compete agreements and distribution rights, was $7,028. The related accumulated amortization of intangible assets at August 31,2009 and November 30, 2008 was $4,401 and $3,687, respectively. Amortization of our intangible assets subject to amortizationunder the provisions of SFAS 142 for the three months ended August 31, 2009 and 2008 was $231 and $228, respectively, and for thenine months ended August 31, 2009 and 2008 was $714 and $661, respectively.

Estimated annual amortization expense for these assets for the next five successive fiscal years and those thereafter as ofAugust 31, 2009 are as follows:

2009 $ 231 2010 925 2011 925 2012 208 2013 75 Thereafter 263 $ 2,627

11. INVENTORIES

Inventories consisted of the following as of August 31, 2009 and November 30, 2008:

2009 2008 Raw materials and work in process $ 18,640 $ 16,753 Finished goods 23,696 24,180 Total inventories $ 42,336 $ 40,933

12. ACCRUED LIABILITIES

Accrued liabilities consisted of the following as of August 31, 2009 and November 30, 2008:

2009 2008 Interest $ 4,874 $ 3,216 Salaries, wages and commissions 3,813 5,333 Product advertising and promotion 2,934 2,611 Litigation settlement and legal fees 1,069 799 Income taxes payable 8,293 4,636 Interest rate swap 1,743 2,602 Other 709 2,096 Total accrued liabilities $ 23,435 $ 21,293

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13. COMPREHENSIVE INCOME

Comprehensive income consisted of the following components for the three and nine months ended August 31, 2009 and2008, respectively:

For the Three MonthsEnded

August 31,

For the Nine MonthsEnded

August 31, 2009 2008 2009 2008 Net income $ 23,428 $ 13,966 $ 67,224 $ 49,571 Other – interest rate hedge adjustment, net oftax of $312, $145, $607 and $(38),respectively 508 235 987 23 Other – foreign currency translation adjustment 71 (651) 1,212 (491) Total $ 24,007 $ 13,550 $ 69,423 $ 49,103

14. STOCK REPURCHASE

During the three months ended August 31, 2009, we did not repurchase any of our common stock. In the nine months endedAugust 31, 2009, we repurchased 491 shares of our common stock for $26,107 at an average price per share of $53.13. In the threeand nine months ended August 31, 2008, we repurchased 231 and 418 shares of our common stock for $13,773 and $26,327 at anaverage price per share of $59.65 and $62.94, respectively. The repurchased shares were retired and returned to unissued. EffectiveSeptember 30, 2009 our Board of Directors increased the authorization to repurchase our common stock to a total of $100,000, seeNote 19.

15. RETIREMENT PLANS AND POSTRETIREMENT HEALTH CARE BENEFITS

DEFINED BENEFIT PENSION PLAN

We have a noncontributory defined benefit pension plan (the “Pension Plan”), which covers substantially all employees as ofDecember 31, 2000. The Pension Plan provides benefits based upon years of service and employee compensation to employees whohad completed one year of service prior to December 31, 2000. On December 31, 2000, benefits and participation in the Pension Planwere frozen. Contributions to the Pension Plan are calculated by an independent actuary and have been sufficient to provide benefitsto participants and meet the funding requirements of the Employee Retirement Income Security Act of 1974. Plan assets as of August31, 2009 and November 30, 2008 were invested primarily in United States government and agency securities and corporate debt andequity securities.

Net periodic pension benefit for the three and nine months ended August 31, 2009 and 2008 included the followingcomponents:

For the Three MonthsEnded

August 31,

For the Nine MonthsEnded

August 31, 2009 2008 2009 2008 Interest cost $ 146 $ 152 $ 437 $ 457 Amortization of loss 46 – 139 – Expected return on plan assets (170) (234) (510) (703)Net periodic pension cost (benefit) $ 22 $ (82) $ 66 $ (246)

No employer contributions were made for the nine months ended August 31, 2009 and 2008, and no employer contributionsare expected to be made for the Pension Plan in fiscal 2009.

DEFINED CONTRIBUTION PLAN

We sponsor a defined contribution plan that covers substantially all employees. Eligible employees are allowed to contributetheir eligible compensation up to the applicable annual elective deferral and salary reduction limits as set fourth by the IRS. We makematching contributions of 25% on the first 6% of contributed compensation. The cost of the matching contribution totaled $78 and$75 for the three months ended August 31, 2009 and 2008, respectively, and $238 and $225 for the nine months ended August 31,2009 and 2008, respectively. In addition to matching contributions, safe harbor contributions equaling 3% of eligible annualcompensation are made on behalf of eligible participants. Safe harbor contributions totaled $228 and $218 for the three months endedAugust 31, 2009 and 2008, respectively, and $703 and $675 for the nine months ended August 31, 2009

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and 2008, respectively. Total matching and safe harbor contributions for fiscal 2009 are expected to approximate amounts funded infiscal 2008. Total matching and safe harbor contributions in fiscal 2008 were $1,172.

POSTRETIREMENT HEALTH CARE BENEFITS PLAN

We maintain a postretirement health care benefits plan (the “Retiree Health Plan”) for certain eligible employees over the ageof 65. On May 31, 2006, Retiree Health Plan eligibility was restricted to current retirees and those active employees that wereretirement eligible as of that date (age 55 and 10 years of service or age 65). Contributions to the Retiree Health Plan are limited toapproximately $2 per participant per year and are paid monthly on a fully insured basis. Participants are required to pay any insurancepremium amount in excess of the $2 employer contribution. Employer contributions expected for fiscal 2009 are approximately $95.

Net periodic postretirement health benefit for the three and nine months ended August 31, 2009 and 2008 included the followingcomponents:

For the ThreeMonths Ended

August 31,

For the NineMonths Ended

August 31, 2009 2008 2009 2008 Service cost $ 2 $ 5 $ 5 $ 16 Interest cost 14 14 42 42 Recognized net actuarial gain – (24) – (72)Net periodic postretirement health cost (benefit) $ 16 $ (5) $ 47 $ (14)

16. INCOME TAXES

We account for income taxes using the asset and liability approach as prescribed by SFAS 109, FIN 48, and other applicableFSP’s and FASB Interpretations. This approach requires recognition of deferred tax assets and liabilities for the expected future taxconsequences of events that have been included in our consolidated financial statements or tax returns. Using the enacted tax rates ineffect for the year in which the differences are expected to reverse, deferred tax assets and liabilities are determined based on thedifferences between the financial reporting and the tax basis of an asset or liability. We record income tax expense in our consolidatedfinancial statements based on an estimated annual effective income tax rate. Our estimated tax rate for the nine months ended August31, 2009 and 2008 was 36.3% and 35.2%, respectively. The unrecognized tax benefit increased to $8,892 as of August 31, 2009. Thisincrease consists primarily of the deduction of certain elements of compensation in our 2008 federal and state tax returns.

17. PRODUCT SEGMENT INFORMATION

Net sales within our single healthcare business segment for the three and nine months ended August 31, 2009 and 2008 are asfollows:

For the Three Months Ended

August 31, For the Nine Months Ended

August 31, 2009 2008 2009 2008 Medicated skin care $ 38,429 $ 35,806 $ 117,856 $ 107,931 Topical pain care 26,023 24,192 72,380 74,279 Oral care 17,089 15,859 53,839 47,045 Internal OTC 11,307 12,149 34,357 36,633 Medicated dandruff shampoos 7,216 7,654 26,304 26,940 Dietary supplements 5,141 4,939 14,982 15,446 Other OTC and toiletry products 3,391 4,364 15,884 16,695 Total domestic net sales 108,596 104,963 335,602 324,969 International revenues 6,575 6,966 17,491 24,449 Total revenues $ 115,171 $ 111,929 $ 353,093 $ 349,418

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18. 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 ofproducts containing Phenylpropanolamine (“PPA”), which was an active ingredient in most of our Dexatrim products until November2000. The lawsuits filed in federal court were transferred to the United States District Court for the Western District of Washingtonbefore 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. Rothsteinof the United States District Court for the Western District of Washington entered a final order and judgment certifying the class andgranting approval of the Dexatrim PPA settlement. The Dexatrim PPA settlement included claims against us involving allegedinjuries by Dexatrim products containing PPA in which the alleged injury occurred after December 21, 1998, the date we acquired theDexatrim brand. A total of 14 claimants with alleged injuries that occurred after December 21, 1998 elected to opt-out of the classsettlement. Subsequently, we have settled twelve of the opt-out claims. The other two opt-outs have not filed lawsuits against us, andwe believe the applicable statutes of limitation have run against their claims.

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

We were also named as a defendant in approximately 206 lawsuits relating to Dexatrim containing PPA which involvedalleged injuries by Dexatrim products containing PPA manufactured and sold prior to our acquisition of Dexatrim on December 21,1998. The DELACO Company (“DELACO”), successor by merger to the Thompson Medical Company, Inc., which owned the brandprior 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. Wefiled 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 bythe DELACO bankruptcy court on July 28, 2005. In accordance with the DELACO bankruptcy plan, a settlement trust establishedunder 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 andsettled our indemnity claim filed in the DELACO bankruptcy. The confirmation of the DELACO bankruptcy plan effectively releasedus 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 ofdietary supplements containing ephedrine alkaloids and on February 6, 2004 published a final rule with respect to these products. Thefinal rule prohibits the sale of dietary supplements containing ephedrine alkaloids because such supplements present an unreasonablerisk of illness or injury. The final rule became effective on April 11, 2004. We discontinued the manufacturing and shipment ofDexatrim containing ephedrine in September 2002. During April to June 2008, we received notification from an attorney of 26individual claims alleging the development of pulmonary arterial hypertension as a result of ingesting Dexatrim containing ephedrineand/or PPA in 1998 through 2003. In September 2008, we resolved all of these claims for $13,250, of which approximately $2,545was funded from the proceeds of the Dexatrim settlement trust. We are not currently aware of any additional product liability claimsrelating to Dexatrim.

We were previously named as a defendant in a putative class action lawsuit filed by California consumer Robert O.Wilkinson in the United States District Court for the Southern District of California relating to the labeling, advertising, promotionand sale of Chattem’s Garlique product. We were served with this lawsuit on July 5, 2007. On May 21, 2009, this case wasdismissed with prejudice to Wilkinson but without prejudice to any potential class.

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

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longer marketing these products. We conducted the recall to the consumer level. We recalled these products because we receivedsome consumer reports of first, second and third degree burns, as well as skin irritation resulting from consumer use or possiblemisuse of the products. As of September 30, 2009, there were approximately 150 consumers with pending claims against us and fiveproducts liability lawsuits pending against us alleging burns and skin irritation from the use of the Icy Hot Heat Therapy products. Wemay receive additional claims and/or lawsuits in the future alleging burns and/or skin irritation from use of our Heat Therapyproducts. 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 assertedpatent infringement claims against Endo Pharmaceuticals, Inc.; Johnson & Johnson Consumer Products Company, Inc.; TheMentholatum Company, Inc.; and Prince of Peace Enterprises, Inc. LecTec seeks injunctive relief, and compensatory and enhanceddamages for the alleged infringement, and attorneys’ fees and expenses. LecTec filed a motion for preliminary injunction against usand the other defendants in February 2009 seeking an order preventing us and the other defendants from selling the specified patchproducts while the litigation is pending. We responded to the motion on August 30, 2009 and LecTec filed a reply on September 30,2009. The motion is now before the court and we expect a ruling by the end of the year. The trial date is currently scheduled forJanuary 4, 2011. 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 NewYork alleging that our Act Total Care product infringes Colgate-Palmolive’s Total trademark. The complaint seeks injunctive reliefand damages. We filed an answer on September 24, 2009 that denies all material allegations made in the complaint. The case is notyet set for trial.

Other claims, suits and complaints arise in the ordinary course of our business involving such matters as patents andtrademarks, product liability, environmental matters, employment law issues and other alleged injuries or damage. The outcome ofsuch litigation cannot be predicted, but, in the opinion of management, based in part upon assessments from counsel, all such otherpending matters are without merit or are of such kind or involve such other amounts that are not reasonably estimable or would nothave 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 aresubject to annual renewal. For the current annual policy period beginning September 1, 2009, we maintain product liability insurancecoverage in the amount of $10,000 through our captive insurance subsidiary, of which approximately $2,107 has been funded as ofSeptember 30, 2009. 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., theprevious owner of Sportscreme and Aspercreme. The petition sought a determination that 10% trolamine salicylate, the activeingredient in Sportscreme and Aspercreme, was clinically proven to be an effective active ingredient in external analgesic OTC drugproducts and should be included in the FDA's yet-to-be finalized monograph for external analgesics. We are working to developalternate formulations for Sportscreme and Aspercreme in the event that the FDA does not consider the available clinical data toconclusively 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 currentlyformulated after expiration of an anticipated grace period. If this occurred, we believe we could still market these products ashomeopathic products or reformulate them using other ingredients included in the FDA monograph. We believe that the monograph isunlikely to become final and take effect before the end of 2009.

Certain of our topical analgesic products are currently marketed under an FDA tentative final monograph for externalanalgesics. 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 tothe FDA information regarding the safety of our Icy Hot patches and arguments to support the inclusion of patch products in the finalmonograph. 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 thatwould allow the patches to be marketed under the final monograph even if the final monograph does not explicitly allow them. TheCHPA submission to the FDA was made on October 15, 2003. The FDA has not responded to our or CHPA’s submission. The mostrecent Unified Agenda of Federal Regulatory and Deregulatory Actions published in the Federal Register provided a target finalmonograph publication date of December 2009. If the final monograph excludes products in patch, plaster or poultice form, we wouldhave to file and obtain approval of a new drug application (“NDA”) in order to continue to market the Icy Hot, Capzasin andAspercreme 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, orpending FDA review and approval of an NDA. The preparation

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of an NDA would likely take us six to 24 months and would be expensive. It typically takes the FDA at least 12 months to rule on anNDA once it is submitted and there is no assurance that an NDA would be approved. Sales of our Icy Hot, Capzasin, and Aspercremepatches and Icy Hot Sleeve products represented approximately 8% of our consolidated total revenues in fiscal 2008.

We have responded to certain questions with respect to efficacy received from the FDA in connection with clinical studiesfor pyrilamine maleate, one of the active ingredients used in certain of the Pamprin and Prēmsyn PMS products. While we addressedall of the FDA questions in detail, the final monograph for menstrual drug products, which has not yet been issued, will determine ifthe FDA considers pyrilamine maleate safe and effective for menstrual relief products. If pyrilamine maleate were not included in thefinal monograph, we would be required to reformulate the products to continue to provide the consumer with multi-symptom reliefbenefits. We believe that any adverse finding by the FDA would likewise affect our principal competitors in the menstrual productcategory and that finalization of the menstrual products monograph is not imminent. Moreover, we have formulated alternativePamprin 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 analgesicingredient acetaminophen, an ingredient found in Pamprin and Premsyn PMS. We are participating in an industry-wide effort toreassure the FDA that the current recommended dosing regimens are safe and effective and that proper labeling and public educationby 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 PremsynPMS. The final rule requires that acetaminophen-containing OTC products include on their labeling new liver warnings and directionsfor use. In addition, the ingredient name "acetaminophen" must be made more prominent on the products’ labeling. The final rule’scompliance date for all affected products is April 29, 2010. We will be revising our product labels to comply with this FDA finalrule. 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 discusspotential steps to reduce acetaminophen-related liver injury. The joint Advisory Committee generally agreed that clearer labeling andbetter public education are necessary but recommended that FDA take certain administrative actions to further protect the public, suchas changing the directions for use of OTC products to reduce the maximum milligrams per dose and the maximum total dailydosage. If FDA agrees with the Advisory Committee and implements these changes, it could affect the labeling and formulation ofcertain maximum-strength (500 mg) versions of Pamprin and Premsyn PMS. After citing a lack of data and urging FDA to conductfurther research, a majority of the joint Advisory Committee voted against removing OTC combination acetaminophen products fromthe market or limiting package sizes. We believe that FDA will address these issues in its future efforts to finalize the monograph oninternal analgesic products and, prior to monograph closure, may issue revised labeling requirements within the next year that willcause 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 requirementsrelating to the characterization of a product’s ability to reduce UVA radiation. In September 2007, the FDA published a new proposedrule amending the previously stayed final monograph on sunscreens to include new formulation options, labeling requirements andtesting standards for measuring UVA protection and revised testing for UVB protection. When implemented, the final rule willrequire all sunscreen manufacturers to conduct new testing and revise the labeling of their products within eighteen months afterissuance 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 asProposition 65. Proposition 65 prohibits businesses from exposing consumers to chemicals that the state has determined cause canceror reproduction toxicity without first giving fair and reasonable warning unless the level of exposure to the carcinogen or reproductivetoxicant falls below prescribed levels. From time to time, one or more ingredients in our products could become subject to an inquiryunder 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 casewe would be required to demonstrate that exposure is below a “no significant risk” level for consumers. Any such claims may causeus to incur significant expense, and we may face monetary penalties or injunctive relief, or both, or be required to reformulate ourproduct to acceptable levels. The State of California under Proposition 65 is also considering the inclusion of titanium dioxide on thestate’s list of suspected carcinogens. Titanium dioxide has a long history of widespread use as an excipient in prescription and OTCpharmaceuticals, cosmetics, dietary supplements and skin care products and is an active ingredient in our Bullfrog Superblockproducts. We have participated in an industry-wide submission to the State of California, facilitated through the CHPA, presentingevidence that titanium dioxide presents “no significant risk” to consumers.

On February 8, 2008, we initiated a voluntary nationwide recall of all lots of the medical device, Icy Hot Heat Therapy AirActivated Heat patch (Back and Arm, Neck and Leg), including consumer “samples” that were included on a limited promotionalbasis in cartons of our 3 oz. Aspercreme product. The recall was due to adverse events reports which associated

20


the use of the products with temporary or medically reversible health consequences, skin irritation and burns. The recall wasvoluntary and conducted with the full knowledge of the FDA. On February 5-8, 2008, the FDA conducted a medical device inspectionof our manufacturing plant, manufacturing records, and consumer complaint handling system related to the manufacture anddistribution of the Heat Therapy device. On February 8, 2008, the FDA issued a Form FDA-483 noting three inspectionalobservations pertaining to medical device reporting, device correction reports, and corrective and preventive action procedures. Weresponded 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 theinspectional observations and requesting additional information to correct the observations. On June 24, 2008, we responded to thewarning letter addressing the noted violations and providing the requested documentation. On September 22, 2008, the FDAresponded stating that our response to the warning letter was thorough and appeared to adequately address the FDA’s concerns. Weare no longer marketing the Icy Hot Heat Therapy products. 19. SUBSEQUENT EVENTS

On September 8, 2009, we repurchased $6,975 of our 7.0% Subordinated Notes in open market transactions at a premium of1.5% above the face amount of the 7.0% Subordinated Notes. In connection with the repurchase of the 7.0% Subordinated Notes, weretired a proportional share of the related debt issuance costs. The premium paid for the 7.0% Subordinated Notes combined with theearly extinguishment of the proportional debt issuance costs resulted in a loss on extinguishment of debt of $411 that will be recordedin our fourth quarter of fiscal 2009.

Effective September 30, 2009, we entered into an amendment to our Credit Facility that, among other things, extends thematurity date of the revolving credit facility portion of our Credit Facility to January 2013, increases the applicable interest rates in therevolving credit facility portion of our Credit Facility and increases our flexibility to repurchase shares of our common stock and our7.0% Subordinated Notes. Borrowings under the revolving credit facility portion of our Credit Facility bears interest at LIBOR plusapplicable percentages of 2.25% to 2.75% or the highest of the federal funds rate plus 0.50%, the prime rate, or the Eurodollar baserate plus 1.00% (the “Base Rate”), plus applicable percentages of 1.25% to 1.75%. Borrowings under the term loan portion of ourCredit Facility bear interest at either LIBOR plus 1.75% or the Base Rate plus 0.75%.

Effective September 30, 2009, in connection with the amendment to our Credit Facility, our Board of Directors increased theauthorization to repurchase our common stock to a total of $100,000 under the terms of our existing stock repurchase program. As ofSeptember 30, 2009, the current amount available under the authorization from the Board of Directors was $100,000.

We performed an evaluation of subsequent events through October 6, 2009.

20. 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 thelong-term debt of Chattem, and the non-guarantor direct and indirect wholly-owned subsidiaries of Chattem are presentedbelow. Signal is 89% owned by Chattem and 11% owned by Canada. SunDex and Canada are wholly-owned subsidiaries ofChattem. The guarantees of Signal, SunDex and Canada are full and unconditional and joint and several. The guarantees of Signal,SunDex and Canada as of August 31, 2009 arose in conjunction with Chattem’s Credit Facility and Chattem’s issuance of the 7.0%Subordinated Notes (See Note 6). The maximum amount of future payments the guarantors would be required to make under theguarantees as of August 31, 2009 is $203,620.

21


Note 20CHATTEM, INC. AND SUBSIDIARIESCONSOLIDATING BALANCE SHEETS

AUGUST 31, 2009(Unaudited and in thousands)

CHATTEM

GUARANTORSUBSIDIARYCOMPANIES

NON-GUARANTORSUBSIDIARYCOMPANIES ELIMINATIONS CONSOLIDATED

ASSETS CURRENT ASSETS:

Cash and cash equivalents $ 47,751 $ 501 $ 11,148 $ — $ 59,400 Accounts receivable, less

allowances of $11,126 42,857 18,045 5,732 (18,045) 48,589 Interest receivable 107 718 (90) (735) — Inventories 36,883 1,506 3,947 — 42,336 Deferred income taxes 3,969 — 40 — 4,009 Prepaid expenses and other

current assets 7,522 — 103 — 7,625 Total current assets 139,089 20,770 20,880 (18,780) 161,959

PROPERTY, PLANT ANDEQUIPMENT, NET 31,492 775 626 — 32,893 OTHER NONCURRENTASSETS:

Patents, trademarks andother purchasedproduct rights, net 2,628 674,057 1,561 (62,290) 615,956

Debt issuance costs, net 9,340 — — — 9,340 Investment in subsidiaries 608,230 64,682 97,690 (770,602) — Note receivable — 34,694 — (34,694) — Other 2,609 — — — 2,609

Total other noncurrentassets 622,807 773,433 99,251 (867,586) 627,905

TOTAL ASSETS $ 793,388 $ 794,978 $ 120,757 $ (886,366) $ 822,757 LIABILITIES ANDSHAREHOLDERS’EQUITY CURRENT LIABILITIES:

Current maturities oflong-term debt $ 3,000 $ — $ — $ — $ 3,000

Accounts payable andother 13,359 — 1,387 — 14,746

Accrued liabilities 38,336 251 3,630 (18,782) 23,435 Total current liabilities 54,695 251 5,017 (18,782) 41,181

LONG-TERM DEBT, lesscurrent maturities 412,323 (17,203) 36,494 (34,694) 396,920 DEFERRED INCOMETAXES (21,119) 72,567 (1,242) — 50,206 OTHER NONCURRENTLIABILITIES 1,346 — — — 1,346

13,046 (20,528) 7,482 — —


INTERCOMPANYACCOUNTS SHAREHOLDERS’EQUITY:

Preferred shares, withoutpar value,authorized 1,000, noneissued — — — — —

Common shares, withoutpar value,authorized 100,000,issued and outstanding19,043 36,749 — — — 36,749

Shares of subsidiaries — 641,659 78,999 (720,658) — Dividends — (31,197) — 31,197 — Retained earnings 298,454 147,735 (5,013) (142,722) 298,454

335,203 758,197 73,986 (832,183) 335,203 Cumulative other

comprehensive income(loss) net of tax

Interest rate hedgeadjustment (800) — — — (800)

Foreign currencytranslation adjustment 237 1,694 (980) (707) 244

Unrealized actuarial gainsand losses (1,543) — — — (1,543) Total shareholders’equity 333,097 759,891 73,006 (832,890) 333,104

TOTAL LIABILITIESANDSHAREHOLDERS’EQUITY $ 793,388 $ 794,978 $ 120,757 $ (886,366) $ 822,757

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Note 20

CHATTEM, INC. AND SUBSIDIARIESCONSOLIDATING BALANCE SHEETS

NOVEMBER 30, 2008(In thousands)

CHATTEM


NON-GUARANTORSUBSIDIARYCOMPANIES

ELIMINATIONS

CONSOLIDATED

ASSETS CURRENT ASSETS:

Cash and cash equivalents $ 22,055 $ 1,570 $ 8,685 $ — $ 32,310 Accounts receivable, less

allowances of $9,718 44,175 16,226 5,242 (16,226) 49,417 Interest receivable 108 641 (91) (658) — Inventories, net 35,795 1,811 3,327 — 40,933 Deferred income taxes 3,932 — 36 — 3,968 Prepaid expenses and other

current assets 4,024 — 332 (1,905) 2,451 Total current assets 110,089 20,248 17,531 (18,789) 129,079

PROPERTY, PLANT ANDEQUIPMENT, NET 30,792 775 676 — 32,243 OTHER NONCURRENTASSETS:

Patents, trademarks andother purchased productrights, net 3,341 674,057 1,561 (62,289) 616,670

Debt issuance costs, net 12,253 — — — 12,253 Investment in subsidiaries 597,821 64,682 97,690 (760,193) — Note receivable — 34,694 — (34,694) — Other 2,727 — — — 2,727

Total other noncurrentassets 616,142 773,433 99,251 (857,176) 631,650

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

LIABILITIES ANDSHAREHOLDERS’EQUITY CURRENT LIABILITIES:

Current maturities oflong-term debt $ 3,000 $ — $ — $ — $ 3,000 Accounts payable 16,463 — 1,736 (83) 18,116 Bank overdrafts 1,184 — — — 1,184 Accrued liabilities 34,594 699 4,708 (18,708) 21,293

Total current liabilities 55,241 699 6,444 (18,791) 43,593 LONG-TERM DEBT, lesscurrent maturities 455,900 (1,200) 36,494 (34,694) 456,500 DEFERRED INCOMETAXES (24,111) 60,766 (1,243) — 35,412 OTHER NONCURRENTLIABILITIES 1,609 — — — 1,609 INTERCOMPANYACCOUNTS 12,526 (18,962) 6,436 — —


SHAREHOLDERS’EQUITY

Preferred shares, withoutpar value, authorized1,000, none issued — — — — —

Common shares, withoutpar value, authorized100,000, issued andoutstanding 18,978 28,926 — — — 28,926

Share capital ofsubsidiaries — 641,659 77,935 (719,594) —

Dividends — (69,628) — 69,628 — Retained earnings 231,230 179,428 (6,416) (173,012) 231,230

260,156 751,459 71,519 (822,978) 260,156 Cumulative othercomprehensive income(loss), net of tax:

Interest rate hedgeadjustment (1,787) — — — (1,787)Foreign currency

translation adjustment (968) 1,694 (2,192) 498 (968)Unrealized actuarial

gains and losses (1,543) — — — (1,543)Total shareholders’

equity 255,858 753,153 69,327 (822,480) 255,858

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

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Note 20

CHATTEM, INC. AND SUBSIDIARIESCONSOLIDATING STATEMENTS OF INCOME

FOR THE NINE MONTHS ENDED AUGUST 31, 2009(Unaudited and in thousands)

CHATTEM



TOTAL REVENUES $ 325,295 $ 70,647 $ 15,297 $ (58,146) $ 353,093 COSTS AND EXPENSES:

Cost of sales 98,174 3,956 7,579 (2,556) 107,153 Advertising and

promotion 71,746 3,203 3,475 — 78,424 Selling, general and

administrative 42,800 929 1,302 — 45,031 Product recall expenses (509) — 509 — — Equity in subsidiaryincome (37,381) — — 37,381 —

Total costs andexpenses 174,830 8,088 12,865 34,825 230,608

INCOME (LOSS) FROMOPERATIONS 150,465 62,559 2,432 (92,971) 122,485 OTHER INCOME(EXPENSE):

Interest expense (16,109) — (2,028) 2,062 (16,075)Investment and other

income, net 173 2,063 2,006 (4,019) 223 Loss on early

extinguishment ofdebt (1,101) — — — (1,101)

Royalties (53,197) (2,384) (9) 55,590 — Corporate allocations 1,583 (1,431) (152) — — Intercompany R&Dexpense 2,727 (2,727) — — —

Total other income(expense) (65,924) (4,479) (183) 53,633 (16,953)

INCOME (LOSS)BEFORE INCOMETAXES 84,541 58,080 2,249 (39,338) 105,532 PROVISIONFOR INCOME TAXES 17,317 20,145 846 — 38,308 NET INCOME (LOSS) $ 67,224 $ 37,935 $ 1,403 $ (39,338) $ 67,224

24


Note 20

CHATTEM, INC. AND SUBSIDIARIESCONSOLIDATING STATEMENTS OF INCOME


CHATTEM



TOTAL REVENUES $ 317,818 $ 68,598 $ 18,342 $ (55,340) $ 349,418 COSTS AND EXPENSES:

Cost of sales 89,316 3,745 8,369 (2,303) 99,127 Advertising and

promotion 82,308 4,560 4,664 — 91,532 Selling, general and

administrative 43,392 430 1,854 — 45,676 Litigation settlement 491 — 10,705 — 11,196 Product recall expenses 5,129 — 802 — 5,931 Equity in subsidiaryincome (30,498) — — 30,498 —

Total costs andexpenses 190,138 8,735 26,394 28,195 253,462

INCOME (LOSS) FROMOPERATIONS 127,680 59,863 (8,052) (83,535) 95,956 OTHER INCOME(EXPENSE):

Interest expense (19,279) — (1,927) 1,913 (19,293)Investment and other

income, net 87 1,922 2,141 (3,788) 362 Loss on early

extinguishment ofdebt (526) — — — (526)

Royalties (50,592) (2,444) — 53,036 — Corporate allocations 1,543 (1,423) (120) — —

Total other income(expense) (68,767) (1,945) 94 51,161 (19,457)

INCOME (LOSS)BEFORE INCOMETAXES 58,913 57,918 (7,958) (32,374) 76,499 PROVISIONFOR INCOME TAXES 9,342 20,388 (2,802) — 26,928 NET INCOME (LOSS) $ 49,571 $ 37,530 $ (5,156) $ (32,374) $ 49,571

25


Note 20

CHATTEM, INC. AND SUBSIDIARIESCONSOLIDATING STATEMENTS OF CASH FLOWS


CHATTEM


NON-GUARANTORSUBSIDIARYCOMPANIES

ELIMINATIONS CONSOLIDATED

OPERATING ACTIVITIES:

Net income (loss) $ 67,224 $ 37,935 $ 1,403 $ (39,338) $ 67,224 Adjustments to reconcile

net income (loss) to netcash provided by (usedin)operating activities: Depreciation and

amortization 5,559 — 112 — 5,671 Deferred income taxes 838 11,800 (3) — 12,635 Tax benefit realized from

stock options exercised (325) — — — (325)Stock-basedcompensation 5,667 — — — 5,667 Loss on early

extinguishment of debt 1,101 — — — 1,101 Other, net 116 — (117) — (1)Equity in subsidiaryincome (39,338) — — 39,338 — Changes in operating

assets and liabilities: Accounts receivable 1,318 (1,819) (490) 1,819 828 Interest receivable 1 (77) (1) 77 — Inventories (1,049) 305 (619) — (1,363)Prepaid expenses and

other current assets (3,498) — 229 (1,905) (5,174)Accounts payable and

accrued liabilities (509) (448) (1,428) 9 (2,376)Net cash provided by

(used in) operatingactivities 37,105 47,696 (914) — 83,887

INVESTING ACTIVITIES:

Purchases of property, plantand equipment (3,645) — 22 — (3,623)

Decrease in other assets, net 843 — 1,143 — 1,986 Net cash (used in)

provided byinvesting activities (2,802) — 1,165 — (1,637)

FINANCING ACTIVITIES:

Repayment of long-termdebt (11,380) — — — (11,380)Proceeds from borrowings

under revolving creditfacility 1,000 — — — 1,000

Repayments of revolvingcredit facility (20,500) — — — (20,500)

Change in bank overdraft (1,184) — — — (1,184)Repurchase of common

shares (26,107) — — — (26,107)Proceeds from exercise of

stock options 2,587 — — — 2,587 325 — — — 325


Tax benefit realized fromstock options exercised

Debt retirement costs (18) — — — (18)Intercompany debt proceeds

(payments) 16,003 (16,003) — — — Changes in intercompany

accounts 1,427 (1,565) 138 — — Dividends paid 29,240 (31,197) 1,957 — —

Net cash (used in)provided by financingactivities (8,607) (48,765) 2,095 — (55,277)

EFFECT OF EXCHANGE

RATE CHANGES ONCASH AND CASHEQUIVALENTS — — 117 — 117

CASH AND CASH

EQUIVALENTS: Increase (decrease) for theperiod 25,696 (1,069) 2,463 — 27,090 At beginning of period 22,055 1,570 8,685 — 32,310 At end of period $ 47,751 $ 501 $ 11,148 $ — $ 59,400

26


Note 20

CHATTEM, INC. AND SUBSIDIARIESCONSOLIDATING STATEMENTS OF CASH FLOWS


CHATTEM



OPERATING ACTIVITIES:

Net income (loss) $ 49,571 $ 37,530 $ (5,156) $ (32,374) $ 49,571 Adjustments to reconcile

net income (loss) to netcash provided byoperating activities:

Depreciation andamortization 6,208 — 108 — 6,316

Deferred income taxes 603 11,801 — — 12,404 Tax benefit realized from

stock options exercised (2,342) — — — (2,342)Stock-based compensation 4,281 — — — 4,281 Loss on early

extinguishment of debt 526 — — — 526 Other, net 115 — 22 — 137 Equity in subsidiary income (32,374) — — 32,374 — Changes in operating assets

and liabilities: Accounts receivable (5,444) (442) (2,123) 442 (7,567)Interest receivable — (15) — 15 — Inventories 1,009 1,378 224 — 2,611 Prepaid expenses andother current assets (5,843) — 108 (150) (5,885)Accounts payable and

accrued liabilities 5,497 101 11,957 (307) 17,248 Net cash provided by

operating activities 21,807 50,353 5,140 — 77,300 INVESTING ACTIVITIES:

Purchases of property, plantand equipment (3,326) — (241) — (3,567)

Decrease (increase) in otherassets, net (1,333) — 78 — (1,255)Net cash used in

investing activities (4,659) — (163) — (4,822) FINANCING ACTIVITIES:

Repayment of long-termdebt (37,250) — — — (37,250)

Proceeds from borrowingsunder revolving creditfacility 148,000 — — — 148,000

Repayments of revolvingcredit facility (158,500) — — — (158,500)

Change in bank overdraft (7,584) — — — (7,584)Repurchase of common

shares (26,327) — — — (26,327)Proceeds from exercise of

stock options 4,487 — — — 4,487 Tax benefit realized from

stock options exercised 2,342 — — — 2,342 Changes in intercompany

accounts 2,977 1,903 (4,880) — —


Dividends paid 50,623 (52,498) 1,875 — — Net cash used in

financing activities (21,232) (50,595) (3,005) — (74,832) EFFECT OF EXCHANGE

RATE CHANGES ONCASH AND CASHEQUIVALENTS — — (22) — (22)

CASH AND CASH

EQUIVALENTS: (Decrease) increase for the

period (4,084) (242) 1,950 — (2,376)At beginning of period 4,685 590 10,132 — 15,407 At end of period $ 601 $ 348 $ 12,082 $ — $ 13,031

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Item 2. 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 in conjunction withthe audited consolidated financial statements and related notes thereto included in our 2008 Annual Report on Form 10-K filed withthe Securities and Exchange Commission (“SEC”). This discussion and analysis contains forward-looking statements that involverisks, uncertainties and assumptions. The actual results may differ materially from those anticipated in these forward-lookingstatements as a result of a number of factors, including, but not limited to, those described in our filings with the SEC.

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

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

• Icy Hot, Aspercreme and Capzasin – topical pain care;

• ACT and Herpecin-L – oral care;

• Unisom, Pamprin and Kaopectate – internal OTC;

• Selsun Blue – medicated dandruff shampoos;

• Dexatrim, Garlique and New Phase – dietary supplements; and

• Bullfrog, Ultraswim and Sun-In – other OTC and toiletry products.

Our products target niche markets that are often outside the focus of larger companies where we believe we can achieve andsustain significant market share through product innovation and strong advertising and promotion support. Many of our products areamong the U.S. market leaders in their respective categories. For example, our portfolio of topical pain care brands, our Cortizone-10anti-itch ointment and our Gold Bond medicated body powders have the leading U.S. market share in these categories. We support ourbrands through extensive and cost-effective advertising and promotion, the expenditures for which represented approximately 22% ofour total revenues for the nine months ended August 31, 2009. We sell our products nationally through mass merchandiser, drug andfood channels, principally utilizing our own sales force.

Our experienced management team has grown our business by acquiring brands, developing product line extensions andincreasing market penetration of our existing products.

Developments During Fiscal 2009

Products

In the first nine months of fiscal 2009, we introduced the following product line extensions: ACT Total Care, Gold BondUltimate Protecting Lotion, Gold Bond Anti-Itch Lotion, Gold Bond Foot Pain Cream, Gold Bond Ultimate Concentrated Therapy,Cortizone-10 Cooling Gel, Cortizone-10 Easy Relief Applicator, Icy Hot No-Mess Applicator, Icy Hot Medicated Roll, CapzasinQuick 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 aggregateprincipal amount of our outstanding 2.0% Convertible Senior Notes due 2013 (“2.0% Convertible Notes”). Upon completion of thetransaction, the balance of the remaining 2.0% Convertible Notes was reduced to $96.3 million outstanding. In connection with thistransaction, we retired a proportional share of the 2.0% Convertible Notes debt issuance costs and recorded the resulting loss on earlyextinguishment of debt of $0.7 million in the first quarter of fiscal 2009.

28


Stock Repurchase

During the first nine months of fiscal 2009, we repurchased 491,392 shares of our common stock under our stock repurchaseprogram for $26.1 million at an average price per share of $53.13. Effective September 30, 2009, our board of directors increased theauthorization back to a total of $100.0 million of our common stock under the terms of our existing stock repurchase program.

7.0% Senior Subordinated Notes Repurchase

During the third quarter of fiscal 2009, we repurchased $9.1 million of our 7.0% Senior Subordinated Notes (“7.0%Subordinated Notes) in open market transactions at an average premium of 0.2% above the face amount of the 7.0% SubordinatedNotes. In connection with the repurchase of the $9.1 million of 7.0% Subordinated Notes, we retired a proportional share of therelated debt issuance costs. The premium paid for the $9.1 million of 7.0% Subordinated Notes combined with the earlyextinguishment of the proportional debt issuance costs resulted in a loss on extinguishment of debt of $0.4 million in our third quarterof fiscal 2009.

Subsequent to August 31, we repurchased an additional $7.0 million of our 7.0% Subordinated Notes in open markettransactions at a premium of 1.5% above the face amount of the 7.0% Subordinated Notes. In connection with the repurchase of $7.0million of the 7.0% Subordinated Notes, we retired a proportional share of the related debt issuance costs. The premium paid for the$7.0 million of 7.0% Subordinated Notes combined with the early extinguishment of the proportional debt issuance costs resulted in aloss on extinguishment of debt of $0.4 million that will be recorded in our fourth quarter of fiscal 2009.

Credit Facility Amendment

Effective September 30, 2009, we entered into an amendment to our Credit Facility that, among other things, extends thematurity date of the revolving credit facility portion of our Credit Facility to January 2013, increases the applicable interest rates onthe revolving credit facility portion of our Credit Facility and increases our flexibility to repurchase shares of our common stock andour 7.0% Subordinated Notes.

Manufacturing Expansion

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

29


Results of Operations

The following table sets forth, for the periods indicated, certain items from our unaudited Consolidated Statements of Incomeexpressed as a percentage of total revenues:

For the Three Months

Ended August 31, For the Nine Months

Ended August 31, 2009 2008 2009 2008 TOTAL REVENUES 100.0% 100.0% 100.0% 100.0% COSTS AND EXPENSES: Cost of sales 30.2 28.4 30.3 28.4 Advertising and promotion 19.8 23.9 22.2 26.2 Selling, general and administrative 13.3 13.4 12.8 13.0 Litigation settlement – 10.0 – 3.2 Product recall (income) expenses – (0.1) – 1.7 Total costs and expenses 63.3 75.6 65.3 72.5 INCOME FROM OPERATIONS 36.7 24.4 34.7 27.5 OTHER INCOME (EXPENSE): Interest expense (4.4) (5.5) (4.6) (5.5) Investment and other income, net – 0.1 0.1 0.1 Loss on early extinguishment of debt (0.4) – (0.3) (0.2) Total other income (expense) (4.8) (5.4) (4.8) (5.6) INCOME BEFORE INCOME TAXES 31.9 19.0 29.9 21.9 PROVISION FOR INCOME TAXES 11.6 6.5 10.9 7.7 NET INCOME 20.3% 12.5% 19.0% 14.2%

Critical Accounting Policies

The preparation of financial statements in accordance with U.S. generally accepted accounting principles requiresmanagement to use estimates. Several different estimates or methods can be used by management that might yield differentresults. The following are the significant estimates used by management in the preparation of the unaudited consolidated financialstatements for the three and nine months ended August 31, 2009.

Allowance for Doubtful Accounts

As of August 31, 2009, an estimate was made of the collectibility of the outstanding accounts receivable balances. Thisestimate requires the utilization of outside credit services, knowledge about the customer and the customer’s industry, newdevelopments in the customer’s industry and operating results of the customer as well as general economic conditions and historicaltrends. When all these facts are compiled, a judgment as to the collectibility of the individual account is made. Many factors canimpact this estimate, including those noted in this paragraph. The adequacy of the estimated allowance may be impacted by thedeterioration in the financial condition of a large customer, weakness in the economic environment resulting in a higher level ofcustomer bankruptcy filings or delinquencies and the competitive environment in which the customer operates. During the thirdquarter of fiscal 2009, we performed a detailed assessment of the collectibility of trade accounts receivable and did not make anysignificant adjustments to our estimate of allowance for doubtful accounts. The balance of allowance for doubtful accounts was $0.5million and $0.4 million at August 31, 2009 and November 30, 2008, respectively.

Revenue Recognition

Revenue is recognized when our products are shipped to our customers. It is generally our policy across all classes ofcustomers that all sales are final. As is common in the consumer products industry, customers return products for a variety of reasonsincluding products damaged in transit, discontinuance of a particular size or form of product and shipping errors. As sales arerecorded, we accrue an estimated amount for product returns, as a reduction of these sales, based upon our historical

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experience and consideration of discontinued products, product divestitures, estimated inventory levels held by our customers andretail point of sale data on existing and newly introduced products. The level of returns may fluctuate from our estimates due toseveral factors including weather conditions, customer inventory levels and competitive conditions. We charge the allowance accountresulting from this accrual with any authorized deduction from remittance by the customer or product returns upon receipt of theproduct or evidence of its destruction.

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

Our estimate of product returns for seasonal and non-seasonal products as of August 31, 2009 was $2.8 million and $1.0million, respectively, and $1.4 million and $1.3 million, respectively, as of November 30, 2008. For the nine months ended August31, 2009, we increased our estimate of returns for seasonal products by approximately $1.4 million, which resulted in a decrease to netsales in our consolidated financial statements, and decreased our estimate for non-seasonal returns by approximately $0.3 million,which resulted in an increase to net sales in our consolidated financial statements. During the nine months ended August 31, 2008, weincreased our estimate of returns for seasonal products by approximately $1.9 million, which resulted in a decrease to net sales in ourconsolidated financial statements, and decreased our estimate of returns for non-seasonal products by approximately $0.3 million,which resulted in an increase to net sales in our consolidated financial statements. Each percentage point change in the seasonal andnon-seasonal return rate would impact net sales by approximately $0.2 million and $0.6 million, respectively, for the nine monthsended August 31, 2009.

We routinely enter into agreements with customers to participate in promotional programs. The costs of these programs arerecorded as either advertising and promotion expense or as a reduction of sales as prescribed by Emerging Issues Task Force 01-9,“Accounting for Consideration Given by a Vendor to a Customer (Including a Reseller of the Vendor’s Products)” (“EITF 01-9”). Asignificant 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 programsprovided uniquely by the customer. We also enter into cooperative advertising programs with certain customers, the cost of which isrecorded as advertising and promotion expense. In order for retailers to receive reimbursement under such programs, the retailer mustmeet 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 utilizevendor allowances in the form of temporary price reductions, scan downs, display activity and participations in in-store programsprovided uniquely by the customer. We estimate the accrual for outstanding coupons by utilizing a third-party clearinghouse to trackcoupons issued, coupon value, distribution and expiration dates, quantity distributed and estimated redemption rates that are providedby us. We estimate the redemption rates of issued coupons based on internal analysis of historical coupon redemption rates andexpected future retail sales by considering recent point of sale data. The estimate for vendor allowances is based on estimated unitsales of a product under a program and amounts committed for such programs in each fiscal year. Estimated unit sales are determinedby considering customer forecasted sales, point of sale data and the nature of the program being offered. The three most recent yearsof expected program payments versus actual payments made and current year retail point of sale trends are analyzed to determinefuture expected payments. Customer delays in requesting promotional program payments due to their audit of program participationand resulting request for reimbursement is also considered to evaluate the accrual for vendor allowances. The costs of these programsare often variable based on the number of units actually sold. As of August 31, 2009, the accrued liability related to couponredemption and reserve for vendor allowances was $2.0 million and $5.6 million, respectively, and $1.8 million and $5.1 million,respectively, as of August 31, 2008. Each percentage point change in promotional program participation and advertising andpromotion expense would impact net sales by $0.2 million and an insignificant amount, respectively, for the nine months endedAugust 31, 2009.

Income Taxes

We account for income taxes using the asset and liability approach as prescribed by SFAS 109, FIN 48 and other applicableFSP’s and FASB Interpretations. This approach requires recognition of deferred tax assets and liabilities for the expected future taxconsequences of events that have been included in our consolidated financial statements or tax returns. Using the enacted tax rates ineffect for the year in which the differences are expected to reverse, deferred tax assets and liabilities are determined based on thedifferences between the financial reporting and the tax basis of an asset or liability. We

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adopted FIN 48, as amended by FSP FIN 48-1, on December 1, 2007. FIN 48 clarifies the accounting for uncertainty in income taxesrecognized in the financial statements in accordance with SFAS 109. We record income tax expense in our consolidated financialstatements based on an estimated annual effective income tax rate. Our estimated tax rate for the nine months ended August 31, 2009and 2008 was 36.3% and 35.2%, respectively.

Accounting for Acquisitions and Intangible Assets

We account for our acquisitions under the purchase method of accounting for business combinations as prescribed by SFASNo. 141, “Business Combinations” (“SFAS 141”). Under SFAS 141, the cost, including transaction costs, are allocated to theunderlying net assets, based on their respective estimated fair values. Business combinations consummated beginning in the firstquarter of our fiscal 2010 will be accounted for under SFAS 141R.

We account for our intangible assets in accordance with SFAS 142. Under SFAS 142, intangible assets with indefinite usefullives are not amortized but are reviewed for impairment at least annually. Intangible assets with finite lives are amortized over theirestimated 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 andliabilities acquired can significantly affect net income. For example, the useful life of property, plant, and equipment acquired willdiffer substantially from the useful life of brand licenses and trademarks. Consequently, to the extent a longer-lived asset is ascribedgreater value under the purchase method than a shorter-lived asset or a value is assigned to an indefinite-lived asset, net income in agiven period may be higher.

Determining the fair value of certain assets and liabilities acquired is judgmental in nature and often involves the use ofsignificant estimates and assumptions. An area that requires significant judgment is the fair value and useful lives of intangibleassets. 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 relationshipsand non-compete agreements. We have determined that our trademarks have indefinite useful lives, as cash flows from the use of thetrademarks are expected to be generated indefinitely. The useful lives of our intangible assets are reviewed as circumstances dictateusing the guidance of applicable accounting literature.

The value of our intangible assets is exposed to future adverse changes if we experience declines in operating results orexperience significant negative industry or economic trends. We review our indefinite-lived intangible assets for impairment at leastannually by comparing the carrying value of the intangible assets to its estimated fair value. The estimate of fair value is determinedby discounting the estimate of future cash flows of the intangible assets. Consistent with our policy, we perform the annualimpairment testing of our indefinite-lived intangible assets during our fourth quarter ending November 30, with the most recent testperformed in the quarter ended November 30, 2008. No impairment or adjustment to the carrying value of our indefinite-livedintangible assets was required as a result of this testing.

Fair Value Measurements

On December 1, 2007, we adopted SFAS 157, which provides guidance for using fair value to measure assets andliabilities. SFAS 157 applies both to items recognized and reported at fair value in the financial statements and to items disclosed atfair value in the notes to the financial statements. SFAS 157 does not change existing accounting rules governing what can or must berecognized and reported at fair value and clarifies that fair value is defined as the price received to sell an asset, or paid to transfer aliability, in an orderly transaction between market participants at the measurement date. Additionally, SFAS 157 does not eliminatepracticability exceptions that exist in accounting pronouncements amended by SFAS 157 when measuring fair value. As a result, weare not required to recognize any new assets or liabilities at fair value.

SFAS 157 also establishes a framework for measuring fair value. Fair value is generally determined based on quoted marketprices in active markets for identical assets or liabilities. If quoted market prices are not available, SFAS 157 provides guidance onalternative 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 SFAS 123R, which requires the recognition of the cost ofemployee services received in exchange for an award of equity instruments in the financial statements and is measured based on thegrant date fair value of the award. The fair value of each stock option grant is estimated using a Flex Lattice Model. The inputassumptions used in determining fair value are the expected life of the stock options, the expected volatility of our common stock, therisk-free interest rate over the expected life of the option and the expected forfeiture rate of the options

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granted. We recognize stock option compensation expense over the period during which an employee provides service in exchangefor the award (the vesting period).

Comparison of Three Months Ended August 31, 2009 and 2008

To facilitate discussion of our operating results for the three months ended August 31, 2009 and 2008, we have included thefollowing selected data from our unaudited Consolidated Statements of Income:

Increase (Decrease) 2009 2008 Amount Percentage (dollars in thousands) Domestic net sales $ 108,596 $ 104,963 $ 3,633 3.5%International revenues (including royalties) 6,575 6,966 (391) (5.6) Total revenues 115,171 111,929 3,242 2.9 Cost of sales 34,765 31,753 3,012 9.5 Advertising and promotion expense 22,866 26,789 (3,923) (14.6) Selling, general and administrative expense 15,275 15,024 251 1.7 Litigation settlement – 11,196 (11,196) (100.0) Product recall income – 112 (112) (100.0) Interest expense 5,126 6,176 (1,050) (17.0) Loss on early extinguishment of debt 405 – 405 100.0 Net income 23,428 13,966 9,462 67.8

Domestic Net Sales

Domestic net sales for the three months ended August 31, 2009 increased $3.6 million, or 3.5%, to $108.6 million from$105.0 million in the prior year quarter. A comparison of domestic net sales for the categories of products included in our portfolio ofOTC healthcare products is as follows:

Increase (Decrease) 2009 2008 Amount Percentage (dollars in thousands) Medicated skin care $ 38,429 $ 35,806 $ 2,623 7.3%Topical pain care 26,023 24,192 1,831 7.6 Oral care 17,089 15,859 1,230 7.8 Internal OTC 11,307 12,149 (842) (6.9) Medicated dandruff shampoos 7,216 7,654 (438) (5.7) Dietary supplements 5,141 4,939 202 4.1 Other OTC and toiletry products 3,391 4,364 (973) (22.3) Total $ 108,596 $ 104,963 $ 3,633 3.5

Net sales in the medicated skin care category increased $2.6 million, or 7.3%, in the third quarter of fiscal 2009 compared tothe prior year quarter, primarily as a result of the launch of Gold Bond Ultimate Concentrated Therapy in the third quarter of fiscal2009, the launches of Gold Bond Anti-Itch Lotion, Gold Bond Foot Pain Cream, Gold Bond Ultimate Protecting Lotion, Cortizone-10Cooling Gel and Cortizone-10 Easy Relief during the first quarter of fiscal 2009 and the continued growth of our existing Gold Bondlotion business partially offset by a decrease in our Gold Bond powder business.

Net sales in the topical pain care category increased $1.8 million, or 7.6%, in the third quarter of fiscal 2009 compared to theprior year quarter, primarily as a result of the second quarter launch of Icy Hot Medicated Roll and first quarter launch of Icy HotNo-Mess Applicator in fiscal 2009. The increase was partially offset by lower sales of Aspercreme and certain other smaller brands inthe category, reduced product count at certain retail customers and the reduction of our estimate of Icy Hot Pro Therapy returns in thethird quarter of fiscal 2008.

Net sales in the oral care category increased $1.2 million, or 7.8%, in the third quarter of fiscal 2009 compared to the prioryear quarter as a result of the launch of ACT Total Care in the first quarter of fiscal 2009 and the continued performance of ACTRestoring and ACT Rinse.

Net sales in the internal OTC category decreased $0.8 million, or 6.9%, in the third quarter of fiscal 2009 compared to theprior year quarter due to increased competitive pressure from private label brands within the category and decreased distribution atcertain retail customers of certain of our products within this category.

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Net sales in the medicated dandruff shampoos category decreased $0.4 million, or 5.7%, in the third quarter of fiscal 2009compared to the prior year quarter, primarily resulting from a decline in sales of Selsun Salon products due to distribution changes inconnection with the launch and initial sell-in of Selsun Blue Itchy Dry Scalp in the first quarter of fiscal 2009.

Net sales in the dietary supplements category increased $0.2 million, or 4.1%, in the third quarter of fiscal 2009 compared tothe prior year quarter, primarily as a result of the growth of Dexatrim Max Complex 7, partially offset by a decline in sales ofGarlique.

Net sales in the other OTC and toiletry products category decreased $1.0 million, or 22.3%, in the third quarter of fiscal 2009compared to the prior year quarter, primarily as a result of the timing of shipments of Bullfrog.

Domestic sales variances were principally the result of changes in unit sales volume with the exception of certain selectedproducts for which we implemented a unit sales price increase in December 2008 and the $1.8 million increase in utilization ofpromotion programs considered a vendor allowance per the provisions of EITF 01-9, which are accounted for as a reduction of totalrevenues and not as a component of advertising and promotion expense in the three month period ended August 31, 2009 as comparedto the same year ago period.

International Revenues

For the third quarter of fiscal 2009, international revenues decreased $0.4 million, or 5.6%, compared to the prior yearquarter, primarily as a result of unfavorable exchange rates that decreased revenues by approximately $0.6 million and the unfavorablemacro-economic conditions in the markets where our products are sold, partially offset by successful product launches in the Canadianmarket.

Cost of Sales

Cost of sales in the third quarter of fiscal 2009 was 30.2% as a percentage of total revenues compared to 28.4% in the prioryear quarter and gross margin for the same period of fiscal 2009 was 69.8% compared to 71.6% in the prior year quarter. Thedecrease in gross margin was primarily attributable to the increased cost of certain raw material input components and an increasedutilization of promotional programs by retailers to reduce product prices to consumers, the costs of which are recorded as a reductionof total revenues rather than advertising and promotion expense.

Advertising and Promotion Expense

Advertising and promotion expenses in the third quarter of fiscal 2009 decreased $3.9 million, or 14.6%, compared to theprior year quarter and were 19.8% of total revenues in the third quarter of fiscal 2009 compared to 23.9% for the prior yearquarter. The decrease in advertising and promotion expense was a result of greater utilization of promotional programs by retailers toreduce product prices to consumers, the costs of which are recorded as a reduction of total revenues rather than advertising andpromotion expense, and reduced product sampling programs, partially offset by an increase in marketing research expenses.

Selling, General and Administrative Expense

Selling, general and administrative expenses in the third quarter of fiscal 2009 increased $0.3 million, or 1.7%, compared tothe prior year quarter. Selling, general and administrative expenses were 13.3% and 13.4% of total revenues for the third quarter offiscal 2009 and 2008, respectively. The decrease in selling, general and administrative expenses as a percentage of total revenues wasattributable to reduced transportation costs related to outbound product shipments.

Litigation Settlement

During the third quarter of fiscal 2008, we reached a settlement on all 26 known claims alleging pulmonary arterialhypertension as a result of the ingestion of Dexatrim products in 1998 through 2003. Included as litigation settlement in theconsolidated statements of income is the settlement of the 26 claims totaling $13.3 million and $0.5 million of legal expenses, whichwas partially offset by $2.6 million funded with proceeds of the Dexatrim litigation settlement trust. There was no correspondingcharge in the third quarter of fiscal 2009.

Product Recall Income

Product recall income in the third quarter of fiscal 2008 represented a $0.6 million adjustment to reduce the estimated chargesthat were initially recorded related to the voluntary recall of Icy Hot Heat Therapy initiated in February 2008, offset by legal fees andsettlement payments of approximately $0.5 million incurred during the quarter. There was no corresponding charge in the thirdquarter of fiscal 2009.

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Interest Expense

Interest expense decreased $1.1 million, or 17.0%, in the third quarter of fiscal 2009 compared to the prior year quarterreflecting the repayment of $22.5 million in principal outstanding under our Credit Facility since August 31, 2008, the exchange of487,123 shares of our common stock for $28.7 million of the 2.0% Convertible Notes in December 2008 and the repurchase of $9.1million of our 7.0% Subordinated Notes in the third quarter of fiscal 2009. Until our indebtedness is reduced substantially, interestexpense will continue to represent a significant percentage of our total revenues.

Loss on Early Extinguishment of Debt

During the third quarter of fiscal 2009, we repurchased $9.1 million of our 7.0% Subordinated Notes in open markettransactions at an average premium of 0.2% above the face amount of the 7.0% Subordinated Notes. In connection with therepurchase of the 7.0% Subordinated Notes, we retired a proportional share of the related debt issuance costs. The premium paid forthe $9.1 million of 7.0% Subordinated Notes combined with the early extinguishment of the proportional debt issuance costs resultedin a net loss on extinguishment of debt of $0.4 million. There was no corresponding charge in the third quarter of fiscal 2008.

Comparison of Nine Months Ended August 31, 2009 and 2008

To facilitate discussion of our operating results for the nine months ended August 31, 2009 and 2008, we have included thefollowing selected data from our unaudited Consolidated Statements of Income:

Increase (Decrease) 2009 2008 Amount Percentage (dollars in thousands) Domestic net sales $ 335,602 $ 324,969 $ 10,633 3.3%International revenues (including royalties) 17,491 24,449 (6,958) (28.5) Total revenues 353,093 349,418 3,675 1.1 Cost of sales 107,153 99,127 8,026 8.1 Advertising and promotion expense 78,424 91,532 (13,108) (14.3) Selling, general and administrative expense 45,031 45,676 (645) (1.4) Litigation settlement – 11,196 (11,196) (100.0) Product recall expenses – 5,931 (5,931) (100.0) Interest expense 16,075 19,293 (3,218) (16.7) Loss on early extinguishment of debt 1,101 526 575 109.3 Net income 67,224 49,571 17,653 35.6

Domestic Net Sales

Domestic net sales for the nine months ended August 31, 2009 increased $10.6 million, or 3.3%, as compared to thecorresponding period of 2008. A comparison of domestic net sales for the categories of products included in our portfolio of OTChealthcare products is as follows:

Increase (Decrease) 2009 2008 Amount Percentage (dollars in thousands) Medicated skin care $ 117,856 $ 107,931 $ 9,925 9.2%Topical pain care 72,380 74,279 (1,899) (2.6) Oral care 53,839 47,045 6,794 14.4 Internal OTC 34,357 36,633 (2,276) (6.2) Medicated dandruff shampoos 26,304 26,940 (636) (2.4) Dietary supplements 14,982 15,446 (464) (3.0) Other OTC and toiletry products 15,884 16,695 (811) (4.9) Total $ 335,602 $ 324,969 $ 10,633 3.3

Net sales in the medicated skin care category increased $9.9 million, or 9.2%, for the first nine months of fiscal 2009compared to the same period in fiscal 2008, primarily as a result of the launch of Gold Bond Ultimate Concentrated Therapy in thethird quarter to fiscal 2009, the launches of Gold Bond Anti-Itch Lotion, Gold Bond Foot Pain Cream, Gold Bond Ultimate

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Protecting Lotion, Cortizone-10 Cooling Gel and Cortizone-10 Easy Relief during the first quarter of fiscal 2009 and the continuedgrowth of our existing Gold Bond lotion business partially offset by a decrease in our Gold Bond powder business.

Net sales in the topical pain care category decreased $1.9 million, or 2.6%, for the first nine months of fiscal 2009 comparedto the same period in fiscal 2008, primarily as a result of the discontinuance of shipments of Icy Hot Heat Therapy following thevoluntary recall of the product announced on February 8, 2008, lower sales of Aspercreme and certain other smaller brands in thecategory, reduced product count at certain retail customers and the reduction of our estimate of Icy Hot Pro Therapy returns in thethird quarter of fiscal 2008. The decrease was partially offset by the first quarter launch of Icy Hot No-Mess Applicator and the secondquarter launch of Icy Hot Medicated Roll in fiscal 2009. Excluding sales of Icy Hot Heat Therapy, sales in the category weregenerally unchanged compared to the prior year period.

Net sales in the oral care category increased $6.8 million, or 14.4%, for the first nine months of fiscal 2009 compared to thesame period in fiscal 2008 as a result of the launch of ACT Total Care in the first quarter of fiscal 2009 and the continued performanceof ACT Restoring and ACT Rinse.

Net sales in the internal OTC category decreased $2.3 million, or 6.2%, for the first nine months of fiscal 2009 compared tothe same period in fiscal 2008 primarily as a result of increased competitive pressure from private label brands within the category, thelack of new products in fiscal 2009 similar to the first quarter launch of Unisom Sleepmelts in fiscal 2008 and decreased distribution atcertain retail customers of certain products within this category.

Net sales in the medicated dandruff shampoos category decreased $0.6 million, or 2.4%, for the first nine months of fiscal2009 compared to the same period in fiscal 2008 primarily resulting from a decline in sales of Selsun Salon products as a result ofdistribution changes to accommodate the launch of Selsun Blue Itchy Dry Scalp in the first quarter of fiscal 2009, offset by the initialsell-in of Selsun Blue Itchy Dry Scalp.

Net sales in the dietary supplements category decreased $0.5 million, or 3.0%, for the first nine months of fiscal 2009compared to the same period in fiscal 2008, primarily as a result of a decline in sales of Garlique and Sunsource, partially offset bysales 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 $0.8 million, or 4.9%, for the first nine months of fiscal2009 compared to the same period in fiscal 2008, primarily due to reduced sales of certain smaller brands in the category.

Domestic sales variances were principally the result of changes in unit sales volume with the exception of certain selectedproducts for which we implemented a unit sales price increase effective April 2008 and December 2008 and the $8.5 million increasein utilization of promotion programs considered a vendor allowance per the provisions of EITF 01-9, which are accounted for as areduction of total revenues and not as a component of advertising and promotion expense in the nine month period ended August 31,2009 as compared to the same year ago period.

International Revenues

For the nine months ended August 31, 2009, international revenues decreased $7.0 million, or 28.5%, compared to the sameperiod in fiscal 2008, primarily as a result of terminating shipments to certain distributors serving Latin American markets to reducethe potential for diversion of English language packaging back to the United States market, unfavorable exchange rates that decreasedrevenues by approximately $2.3 million and the unfavorable macro-economic conditions in the markets where our products aresold. We are in the process of identifying new distributors for the affected markets and are also converting the packaging for themajor products sold in these markets to local Spanish language.

Cost of Sales

Cost of sales for the nine months ended August 31, 2009 was 30.3% as a percentage of total revenues compared to 28.4% inthe prior year period and gross margin for the same period of fiscal 2009 was 69.7% compared to 71.6% in the prior year period. Thedecrease in gross margin was primarily attributable to the increased cost of certain raw material input components and an increasedutilization of promotional programs by retailers to reduce product prices to consumers, the costs of which are recorded as a reductionof total revenues rather than advertising and promotion expense.

Advertising and Promotion Expense

Advertising and promotion expenses for the nine months ended August 31, 2009 decreased $13.1 million, or 14.3%,compared to the same period in fiscal 2008 and were 22.2% of total revenues for the nine months ended August 31, 2009 as comparedto 26.2% for the same period in fiscal 2008. The decrease in advertising and promotion expense was a result of greater utilization ofpromotional programs by retailers to reduce product prices to consumers, the costs of which are recorded as

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a reduction of total revenues rather than advertising and promotion expense, and reduced product sampling programs, partially offsetby an increase in marketing research expenses.

Selling, General and Administrative Expense

Selling, general and administrative expenses for the nine months ended August 31, 2009 decreased $0.6 million, or 1.4%,compared to the same period of fiscal 2008 and were 12.8% and 13.0% of total revenues for the nine months ended August 31, 2009and 2008, respectively. The decrease in selling, general and administrative expenses as a percentage of total revenues was attributableto favorable foreign currency translation adjustments resulting from intercompany transactions and reduced transportation costsrelated to outbound product shipments.

Litigation Settlement

During the third quarter of fiscal 2008, we reached a settlement on all 26 known claims alleging pulmonary arterialhypertension as a result of the ingestion of Dexatrim products in 1998 through 2003. Included as litigation settlement in theconsolidated statements of income is the settlement of the 26 claims totaling $13.3 million and $0.5 million of legal expenses, whichwas partially offset by $2.6 million funded with proceeds from the Dexatrim litigation settlement trust. There was no correspondingcharge in fiscal 2009.

Product Recall Expenses

The $5.9 million of product recall expenses in the first nine months of fiscal 2008 relates to the voluntary recall of our IcyHot Heat Therapy product initiated in February 2008. The product recall expenses include product returns, inventory obsolescence,destruction costs, consumer refunds, legal fees, settlement payments and other estimated expenses. The estimate was made bymanagement based on consideration of on-hand inventory and retail point of sales data at the time of the initial recall and was adjustedduring the third quarter of fiscal 2008. There was no corresponding charge in fiscal 2009.

Interest Expense

Interest expense decreased $3.2 million, or 16.7%, for the nine months ended August 31, 2009 compared to the same periodfor fiscal 2008 reflecting the repayment of $22.5 million in principal outstanding under our Credit Facility since August 31, 2008, theexchange of 487,123 shares of our common stock for $28.7 million of the 2.0% Convertible Notes in December 2008 and therepurchase of $9.1 million of our 7.0% Subordinated Notes in the third quarter of fiscal 2009. Until our indebtedness is reducedsubstantially, 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 inaggregate principal of our outstanding 2.0% Convertible Notes. In connection with this transaction, we retired a proportional share ofthe 2.0% Convertible Notes debt issuance costs and recorded the resulting amount as loss on early extinguishment of debt of $0.7million in the first quarter of fiscal 2009. During the third quarter of fiscal 2009, we repurchased $9.1 million of our 7.0%Subordinated Notes in open market transactions at an average premium of 0.2% above the face amount of the 7.0% SubordinatedNotes. In connection with the repurchase of the 7.0% Subordinated Notes, we retired a proportional share of the related debt issuancecosts. The premium paid for the $9.1 million of 7.0% Subordinated Notes combined with the early extinguishment of the proportionaldebt issuance costs resulted in a net loss on extinguishment of debt of $0.4 million recorded in the third quarter of fiscal 2009.

During the first quarter of fiscal 2008, we utilized borrowings under the revolving credit facility portion of our Credit Facilityto repay $35.0 million of the term loan under the Credit Facility. In connection with the term loan repayment, we retired aproportional share of the term loan debt issuance costs and recorded the resulting amount as loss on extinguishment of debt of $0.5million.

Liquidity and Capital Resources

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

Cash of $83.9 million and $77.3 million was provided by operating activities for the nine months ended August 31, 2009 and2008, respectively. The increase in cash flows from operating activities over the prior year period was primarily attributable to

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increased net income, offset by changes in our working capital balances as compared to the similar working capital balances as ofNovember 30, 2008.

Investing activities used cash of $1.6 million and $4.8 million in the nine months ended August 31, 2009 and 2008, respectively. Cashflow used in investing activities primarily resulted from the purchase of manufacturing equipment and the initial expendituresnecessary for the construction of a new manufacturing facility being constructed in Chattanooga, Tennessee.

Financing activities used cash of $55.3 million and $74.8 million in the nine months ended August 31, 2009 and 2008,respectively. Cash flow used in financing activities in fiscal 2009 was used to repay $21.8 million outstanding under the CreditFacility, repurchase $9.1 million of our 7.0% Subordinated Notes and the repurchase of 491,392 shares of our common stock. Cashflow used in financing activities in fiscal 2008 was used to repay $47.8 million of principal outstanding under the Credit Facility andthe repurchase of 418,281 shares of our common stock.

As of August 31, 2009, our total debt was $399.9 million, consisting of $98.4 million of the 7.0% Subordinated Notes, $96.3million of the 2.0% Convertible Notes, $100.0 million of the 1.625% Convertible Notes and $105.3 million outstanding under the termloan portion of our Credit Facility. As of August 31, 2009, no amounts were outstanding under the revolving credit facility portion ofour Credit Facility and we were in compliance with all applicable financial and restrictive covenants under the Credit Facility. As ofSeptember 30, 2009, we had no borrowings outstanding under the revolving credit facility portion of our Credit Facility and ourborrowing capacity was $100.0 million.

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

Historically, our primary foreign operations have been through our Canadian and United Kingdom (“U.K.”)subsidiaries. Our European business is conducted through Chattem Global Consumer Products Limited, a wholly-owned subsidiarylocated in Limerick, Ireland. In connection with the acquisition of ACT in Western Europe in May 2007, we established ChattemGreece, a wholly-owned subsidiary located in Alimos Attica, Greece. In November 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 ofour Selsun Blue products throughout Peru. The functional currencies of these subsidiaries are Canadian dollars, British pounds, Eurosand Peruvian Sol, 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 SFAS No. 52, “Foreign CurrencyTranslation”. For the nine months ended August 31, 2009 and 2008, these subsidiaries accounted for 5% and 7% of total revenues,respectively, and 2% and 2% of total assets, respectively. It has not been our practice to hedge our assets and liabilities or ourintercompany transactions due to the inherent risks associated with foreign currency hedging transactions and the timing of paymentsbetween us and our foreign subsidiaries. Historically, gains or losses from foreign currency transactions have not had a materialimpact on our operating results. A gain of $0.5 million and loss of $0.3 million resulting from foreign currency transactions for thenine months ended August 31, 2009 and 2008, respectively, are included in selling, general and administrative expenses in theunaudited consolidated statements of income. Recent Accounting Pronouncements

In December 2007, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial AccountingStandards (“SFAS”) No. 141R, “Business Combinations” (“SFAS 141R”). SFAS 141R establishes principles and requirements forhow the acquirer in a business combination recognizes and measures the identifiable assets acquired, liabilities assumed and intangibleassets acquired and determines what information to disclose to enable users of the financial statements to evaluate the nature andfinancial effects of the business combination. The provisions of SFAS 141R are effective for acquisitions closing after the first annualreporting period beginning after December 15, 2008. Accordingly, we will apply the provisions of SFAS 141R prospectively tobusiness combinations consummated beginning in the first quarter of our fiscal 2010. We do not expect SFAS 141R to have an effecton our previous acquisitions.

In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities—anamendment of FASB Statement No. 133” (“SFAS 161”). SFAS 161 requires enhanced disclosures about an entity’s derivative andhedging activities. SFAS 161 amends and expands the disclosure requirements of SFAS No. 133, “Accounting for DerivativeInstruments and Hedging Activities”, with the intent to provide users of financial statements adequate information about howderivative and hedging activities affect an entity’s financial position, financial performance and cash flows. SFAS 161 is effective

38


for quarterly interim periods beginning after November 15, 2008 and fiscal years that include those quarterly interim periods. We haveincluded all disclosures as required by SFAS 161, none of which have a material impact on our financial statements.

In April 2008, the FASB issued FASB Staff Position (“FSP”) No. FAS 142-3, “Determination of the Useful Life ofIntangible Assets” (“FSP FAS 142-3”). In determining the useful life of intangible assets, FSP FAS 142-3 removes the requirement toconsider whether an intangible asset can be renewed without substantial cost of material modifications to the existing terms andconditions and, instead, requires an entity to consider its own historical experience in renewing similar arrangements. FSP FAS 142-3also requires expanded disclosure related to the determination of intangible asset useful lives. FSP FAS 142-3 is effective forfinancial statements issued for fiscal years beginning after December 15, 2008, or our fiscal 2010. We are currently evaluating theimpact, if any, of FSP FAS 142-3.

In May 2008, the FASB issued FSP Accounting Principles Board (“APB”) Opinion No. 14-1, “Accounting for ConvertibleDebt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement)” (“FSP 14-1”). FSP 14-1specifies that issuers of convertible debt instruments should separately account for the liability and equity components of theinstrument in a manner that will reflect the entity’s non-convertible debt borrowing rate on the instrument’s issuance date wheninterest is recognized in subsequent periods. Upon adoption of FSP 14-1, 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 liabilityand equity component by determining the fair value of the liability component using our non-convertible debt borrowing rate at thetime the Convertible Notes were issued. The difference between the proceeds of the Convertible Notes and the calculated fair value ofthe liability component will be recorded as a debt discount with a corresponding increase to common shares in our consolidatedbalance sheet. The debt discount will be amortized as additional non-cash interest expense over the remaining life of the ConvertibleNotes using the effective interest rate method. Although FSP 14-1 will have no impact on our cash flows, FSP 14-1 will result inadditional non-cash interest expense until maturity or early extinguishment of the Convertible Notes. The provisions of FSP 14-1 areto 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 FSP 14-1, we estimate non-cash interestexpense will increase for the fiscal years ended November 30, 2009 and 2008 by approximately $6,600 and $7,200 (or $0.22 and$0.25 per share), respectively. The additional non-cash interest expense is expected to increase each fiscal year as the ConvertibleNotes approach their respective maturity dates and accrete to their face values.

In December 2008, the FASB issued FSP No. FAS 132(R)-1, “Employers’ Disclosures about Postretirement Benefit PlanAssets” (“FSP 132R-1”). FSP 132R-1 enhances the required disclosures about plan assets in an employer’s defined benefit pension orother postretirement plan, including investment allocations decisions, inputs and valuations techniques used to measure the fair valueof plan assets and significant concentrations of risks within plan assets. FSP 132R-1 is effective for financial statements issued forfiscal years ending after December 15, 2009, or our fiscal 2010. We are currently evaluating the impact, if any, of FSP 132R-1.

In April 2009, the FASB issued FSP No. 107-1 and Accounting Principles Board (“APB”) 28-1, “Interim Disclosures aboutFair Value of Financial Instruments” (“FSP 107-1”). FSP 107-1, which requires disclosures about the fair value of financialinstruments in interim financial statements as well as in annual financial statements, was effective for us for the quarter ended August31, 2009. The adoption of FSP 107-1 did not have a material impact on our financial statements.

In May 2009, the FASB issued SFAS No. 165, “Subsequent Events” (“SFAS 165”), which provides general standards ofaccounting for and disclosure of subsequent events. SFAS No. 165 clarifies that management must evaluate, as of each reportingperiod (i.e. interim and annual), events or transactions that occur after the balance sheet date through the date the financial statementsfor such reporting periods are issued. It also requires management to disclose the date through which subsequent events have beenevaluated and whether that is the date on which the financial statements were issued. Statement 165 is effective prospectively forinterim or annual financial periods ending after June 15, 2009. The Company adopted SFAS No. 165 in the third quarter of fiscal2009.

In June 2009, the FASB issued SFAS No. 168, “The FASB Accounting Standards Codification and the Hierarchy of GenerallyAccepted Accounting Principles, a replacement of FASB Statement No. 162” (“SFAS 168”). SFAS 168 eliminates the previous levelsof U.S. GAAP. It does not include any guidance or interpretations of GAAP beyond what is already reflected in the FASB literature. Itmerely takes previously issued FASB standards and other authoritative pronouncements, changes the nomenclature previously used torefer to FASB standards, and includes them in specific topic areas. SFAS 168 is effective for financial statements issued for interimand annual periods ending after September 15, 2009. We are currently evaluating the impact, if any, of SFAS 168.

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Forward Looking Statements

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

• we face significant competition in the OTC healthcare, toiletries and dietary supplements markets; • 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 effected 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; • our acquisition strategy is subject to risk and may not be successful; • our initiation of a voluntary recall of our Icy Hot Heat Therapy products could expose us to additional product

liability claims; • we may receive additional claims that allege personal injury from ingestion of Dexatrim; • litigation may adversely affect our business, financial condition and results of operations; • 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; • our product liability insurance coverage may be insufficient to cover existing or future liability claims; • our business is regulated by numerous federal, state and foreign governmental authorities, which subjects us to

elevated compliance costs, risks of non-compliance and the potential adverse effect of new or changing regulations; • 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 may be adversely affected by fluctuations in buying decisions of mass merchandise, drug and food trade buyers

and the trend toward retail trade consolidation; • we rely on third party manufacturers for a portion of our product portfolio, including products under our Gold Bond,

Icy Hot, Selsun, Dexatrim, ACT, Unisom and Cortizone-10 brands; • our dietary supplement business could suffer as a result of injuries caused by dietary supplements in general,

unfavorable scientific studies or negative press; • our business could be adversely affected if we are unable to successfully protect our intellectual property or defend

claims of infringement by others; • because most of our operations are located in Chattanooga, Tennessee, we are subject to regional and local risks; • we depend on sole or limited source suppliers for ingredients in certain of our products, and our inability to buy

these ingredients would prevent us from manufacturing these products; • we are subject to the risk of doing business internationally; • the terms of our outstanding debt obligations limit certain of our activities; • to service our indebtedness, we will require a significant amount of cash; • our operations are subject to significant environmental laws and regulations; • we are dependent on certain key executives, the loss of whom could have a material adverse effect on our business; • our shareholder rights plan and charter contain provisions that may delay or prevent a merger, tender offer or other

change of control of us; • the trading price of our common stock may be volatile; • we have no current intentions of paying dividends to holders of our common stock;

40


• 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 consist of intangibles; and • other risks described in our Securities and Exchange Commission filings. Item 3. 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 adverselyaffect our results of operations and financial condition. We seek to minimize the risks from these interest rates and foreign currencyexchange rate fluctuations through our regular operating and financing activities.

Our exposure to interest rate risk currently relates to amounts outstanding under our Credit Facility. Effective September 30,2009, borrowings under the revolving credit facility portion of our Credit Facility bear interest at LIBOR plus applicable percentagesof 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 leverageratio. The term loan under our Credit Facility bears interest at either LIBOR plus 1.75% or the Base Rate plus 0.75%. As ofSeptember 30, 2009, we had no borrowings outstanding under the revolving credit facility portion of our Credit Facility and $104.5million was outstanding under the term loan portion of our Credit Facility, of which $76.3 million was bearing interest at LIBOR plus1.75% and $28.2 million was bearing interest at the Base Rate plus 0.75%. The weighted average variable rate for the term loan was2.72%. The 7.0% Subordinated Notes, the 1.625% Convertible Notes and the 2.0% Convertible Notes are fixed interest rateobligations.

In November 2006, we entered into an interest rate swap (“swap”) agreement effective January 2007. The swap hasdecreasing notional principal amounts beginning October 2007 and a swap rate of 4.98% over the life of the agreement. As of August31, 2009, the decrease in fair value for the nine months ended August 31, 2009 of $1.0 million, net of tax, was recorded to cumulativeother comprehensive income and the swap was deemed to be an effective cash flow hedge as of August 31, 2009 and expires onJanuary 15, 2010.

The impact on our results of operations of a one-point rate change on the September 30, 2009 outstanding $104.5 millionterm loan balance of our Credit Facility for the next twelve months would be approximately $0.5 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 Peruviansubsidiaries. Assets and liabilities of these subsidiaries are translated to U.S. dollars at quarter-end exchange rates. Income andexpense items are translated at average rates of exchange prevailing during the year. Translation adjustments are accumulated as aseparate component of shareholders' equity. Gains and losses, which result from transactions denominated in foreign currencies, areincluded in selling, general and administrative expenses in our consolidated statements of income. The potential loss resulting from ahypothetical 10.0% adverse change in the quoted foreign currency exchange rate amounts to approximately $1.5 million as of August31, 2009.

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

Item 4. Controls and Procedures

Under the supervision and with the participation of our management, including our Chief Executive Officer and ChiefFinancial Officer, we have evaluated the effectiveness of our disclosure controls and procedures (as such terms are defined in Rules13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), as of August 31, 2009 (the“Evaluation Date”). Based on such evaluation, such officers have concluded that, as of the Evaluation Date, our disclosure controlsand procedures were effective in alerting them on a timely basis to material information relating to us (including our consolidatedsubsidiaries) required to be included in our reports filed or submitted under the Exchange Act.

There was no change in internal control over financial reporting during the quarter ended August 31, 2009 that has affectedour internal control over financial reporting.

41


PART II. OTHER INFORMATIONItem 1. Legal Proceedings

See Note 18 of Notes to Consolidated Financial Statements included in Part 1, Item 1 of this Report.

Item 1A. Risk Factors

There have been no material changes from the risk factors previously disclosed in our Annual Report on Form 10-K for the fiscal yearended November 30, 2008.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

A summary of the common stock repurchase activity for our third quarter of fiscal 2009 is as follows:

Period

Total

Number ofShares

Purchased

AveragePrice PaidPer Share

(1)

Total Numberof Shares

Purchased asPart of

PubliclyAnnounced

Plans or Programs (2)

ApproximateDollar Value that

may yet bePurchased under

the Plans or Programs (2)

June 1– June 30 – $ – – $ 47,806,121 July 1 – July 31 – – – 47,806,121 August 1 – August 31 – – – 47,806,121 Total Third Quarter – $ – – $ 47,806,121

(1) Average price paid per share includes broker commissions.

(2) On September 30, 2009, our Board of Directors increased the authorization to a total of $100.0 million of our common stockunder the terms of our existing stock repurchase program. There is no expiration date specified for our stock buybackprogram.

Item 3. Defaults Upon Senior Securities None.

Item 4. Submission of Matters to a Vote of Security Holders None.

Item 5. Other Information

Effective September 30, 2009, we entered into a seventh amendment (the “Seventh Amendment”) to our amended CreditFacility, with Signal, SunDex and Canada, as guarantors, the Lenders (as defined in the amended Credit Facility) party thereto, andBank of America, N.A., as agent for the Lenders. Under the terms of the Seventh Amendment, the maturity date of the revolvingcredit facility portion of the amended Credit Facility has been extended to January 2, 2013, which is also the maturity date of the termloan portion of the amended Credit Facility. In addition, the Seventh Amendment, among other things, (i) increases the applicableinterest rates for borrowings under the revolving credit facility portion of the amended Credit Facility (which will bear interest at (x)LIBOR plus applicable percentages of 2.25% to 2.75% or (y) the highest of the federal funds rate plus 0.50%, the prime rate, or theEurodollar base rate plus 1.00% (the “Base Rate”) plus applicable percentages of 1.25% to 1.75%) and the fees payable by us (whichwill range from 0.375% to 0.500%) with respect to unused revolving loan commitments, and (ii) modifies certain covenants whichincreases our flexibility to repurchase shares of our common stock and our 7.0% Subordinated Notes.

After giving effect to the Seventh Amendment, the amended Credit Facility continues to provide for up to $100,000,000 ofrevolving loan borrowing capacity, with the ability to increase such capacity by up to $50,000,000, and a term loan, of which$105,250,000 was outstanding as of August 31, 2009. Borrowings under the term loan portion of the amended Credit Facility bearinterest at either LIBOR plus 1.75% or the Base Rate plus 0.75%. Except as set forth in the Seventh Amendment, the covenants andevents of default contained in the amended Credit Facility, which are customary in credit agreements and security instruments relatingto financings of this type, remain unchanged as a result of our entry into the Seventh Amendment.

The foregoing summary description of the Seventh Amendment is qualified in its entirety by reference to the full text of theSeventh Amendment, which is attached hereto as Exhibit 10.1 and incorporated by reference herein.


42


Item 6. Exhibits

Exhibits (numbered in accordance with Item 601 of Regulation S-K):

Exhibit Number Description

10.1 Seventh Amendment to Credit Agreement, dated as of September 30, 2009, among Chattem, Inc., its domesticsubsidiaries, identified lenders and Bank of America, N.A., as agent

31.1 Certification required by Rule 13a-14(a) under the Securities Exchange Act of 1934


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

43


CHATTEM, INC.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on itsbehalf by the undersigned thereunto duly authorized.

CHATTEM, INC. (Registrant) Dated: October 6, 2009 By: /s/ Zan Guerry Zan Guerry Chairman and Chief Executive Officer Dated: October 6, 2009 By: /s/ Robert B. Long Robert B. Long Vice President and Chief Financial Officer

44


Chattem, Inc. and Subsidiaries

Exhibit Index

Exhibit Number Description

10.1 Seventh Amendment to Credit Agreement, dated as of September 30, 2009, among Chattem, Inc., its domesticsubsidiaries, identified lenders and Bank of America, N.A., as agent



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

45


EXHIBIT 10.1

SEVENTH AMENDMENT TO CREDIT AGREEMENT

THIS SEVENTH AMENDMENT TO CREDIT AGREEMENT (this “ Amendment”), dated as of September 30, 2009, is by andamong CHATTEM, INC., a Tennessee corporation (the “ Borrower”), each of the Borrower’s Domestic Subsidiaries (individually a“Guarantor” and collectively with the Borrower, the “Credit Parties”), the Lenders party hereto and BANK OF AMERICA, N.A., asagent for the Lenders (in such capacity, the “Agent”).

W I T N E S S E T H

WHEREAS, the Credit Parties, the Lenders, and the Agent are parties to that certain Credit Agreement dated as of February 26, 2004(as amended from time to time, the “Credit Agreement”);

WHEREAS, the Borrower has requested that the Lenders amend the Credit Agreement; and

WHEREAS, the Lenders have agreed to amend the Credit Agreement on the terms and conditions hereinafter set forth.

NOW, THEREFORE, in consideration of the agreements hereinafter set forth, and for other good and valuable consideration, thereceipt and adequacy of which are hereby acknowledged, the parties hereto agree as follows:

PART IDEFINITIONS

Unless otherwise defined herein or the context otherwise requires, terms used in this Amendment, including its preamble and recitals,have the meanings provided in the Credit Agreement.

PART IIAMENDMENTS TO CREDIT AGREEMENT

SUBPART 2.1 The following definitions are hereby added to Section 1.1 of the Credit Agreement in the appropriatealphabetical order to read as follows:

“Extending Revolving Lenders” means those Lenders agreeing to extend their Revolving Commitments to January2, 2013 pursuant to the Seventh Amendment, and any of their successors and permitted assigns of such RevolvingCommitments in accordance with Section 11.3. The Extending Revolving Lenders as of the Seventh Amendment EffectiveDate are identified on Schedule 1.1(a). The term “Extending Revolving Lender” shall also include any Lender agreeing tobecome an Extending Revolving Lender pursuant to an Assignment and Assumption with a Non-Extending RevolvingLender as contemplated by Section 11.3(i).

“IDB” means the Industrial Development Board of the City of Chattanooga, Tennessee.

“Impacted Lender” means any Lender as to which (a) the Issuing Lender has a good faith belief that the Lender hasdefaulted in fulfilling its obligations under one or more other syndicated credit facilities or (b) an entity that controls theLender has been deemed insolvent or become subject to a bankruptcy or other similar proceeding.

“Net Loss” means, for any period, the net loss after taxes for such period of the Borrower and its Subsidiaries on aconsolidated basis, as determined in accordance with GAAP.


“Non-Extending Revolving Lenders” means those Lenders whose Revolving Commitments terminate on November

15, 2010 and any of their successors and permitted assigns of such Revolving Commitments in accordance with Section11.3. The Non-Extending Lenders as of the Seventh Amendment Effective Date are identified on Schedule 1.1(a) hereto.

“PILOT Program Property” means that certain “ACT plant” of the Borrower located at 3350 Broad Street,Chattanooga, Tennessee 37408.

“PILOT Program Sale and Leaseback Transaction” means the sale and leaseback transaction entered into by theBorrower and the IDB with respect to the PILOT Program Property.

“Seventh Amendment” means that certain Seventh Amendment to Credit Agreement by and among the Borrower,the Guarantors, the Lenders party thereto and the Agent dated as of the Seventh Amendment Effective Date.

“Seventh Amendment Effective Date” means September 30, 2009.

SUBPART 2.2 The definition of “ Applicable Percentage” in Section 1.1 of the Credit Agreement is hereby amended to readas follows:

“Applicable Percentage” means for purposes of calculating (a) the applicable interest rate for any day for RevolvingLoans having a Termination Date of January 2, 2013, the applicable rate for any day for the Letter of Credit Fees with respectto any Lender’s Revolving Commitment that terminates on January 2, 2013 and the applicable rate for any day for theUnused Fee with respect to any Lender’s Revolving Commitment that terminates on January 2, 2013, the appropriateapplicable percentages corresponding to the Leverage Ratio in effect as of the most recent Calculation Date as shown below:

PricingLevel

LeverageRatio

ApplicablePercentage For

Eurodollar Loansand Letter ofCredit Fee

ApplicablePercentageFor Base

RateLoans

ApplicablePercentage forUnused Fees

I <1.50 to 1.0 2.25% 1.25% 0.375%

II >1.50 to 1.0 but <2.50 to 1.0 2.50% 1.50% 0.500%

III > 2.50 to 1.0but < 3.50 to 1.0 2.50% 1.50% 0.500%

IV > 3.50 to 1.0 2.75% 1.75% 0.500%

(b) the applicable interest rate for any day for Revolving Loans having a Termination Date of November 15, 2010, theapplicable rate for any day for the Letter of Credit Fees with respect to any Lender’s Revolving Commitment that terminateson November 15, 2010 and the applicable rate for any day for the Unused Fee with respect to any Lender’s RevolvingCommitment that terminates on November 15, 2010, the appropriate applicable percentages corresponding to the LeverageRatio in effect as of the most recent Calculation Date as shown below:

- 2 -


PricingLevel

LeverageRatio

Applicable PercentageFor Eurodollar Loansand Letter of Credit

Fee

Applicable Percentage

For Base RateLoans

Applicable Percentage

forUnused Fees

I <1.50 to 1.0 0.875% 0.000% 0.200%

II >1.50 to 1.0 but <2.50 to 1.0 1.000% 0.000% 0.250%

III > 2.50 to 1.0but < 3.50 to 1.0 1.250% 0.000% 0.300%

IV > 3.50 to 1.0 1.500% 0.000% 0.350%

(c) the applicable interest rate for any day for the Term Loan, a percentage per annum equal to (i) 1.75% for EurodollarLoans and (ii) 0.75% for Base Rate Loans and (d) the applicable interest rate for any day for the Incremental Term Loan, thepercentage(s) per annum set forth in the Incremental Term Loan Joinder Agreement. The Applicable Percentage forRevolving Loans, Letter of Credit Fees and the Unused Fee shall be determined and adjusted quarterly on the date (each a“Calculation Date”) five Business Days after the date by which the Borrower is required to provide the officer’s certificate inaccordance with the provisions of Section 7.1(c); provided, however, if the Borrower fails to provide the officer’s certificaterequired by Section 7.1(c) on or before the most recent Calculation Date or fails to deliver a copy of such officer’s certificateto the Agent as required by Section 7.1(c), the Applicable Percentage for Revolving Loans, Letter of Credit Fees and theUnused Fee from such Calculation Date shall be based on Pricing Level IV in the applicable pricing grid above until suchtime that an appropriate officer’s certificate is provided whereupon the Applicable Percentage shall be determined by the thencurrent Leverage Ratio. Each Applicable Percentage for Revolving Loans, Letter of Credit Fees and the Unused Fee shall beeffective from one Calculation Date until the next Calculation Date. Any adjustment in the Applicable Percentage shall beapplicable to all existing Revolving Loans and Letters of Credit as well as any new Revolving Loans or Letters of Creditmade or issued. The Applicable Percentage in effect from the Seventh Amendment Effective Date through the first BusinessDay immediately following the date the officer’s certificate is delivered pursuant to Section 7.1(c)(i) for the fiscal quarterending August 31, 2009 shall be determined based upon Pricing Level III in the applicable pricing grid set forthabove. Notwithstanding anything to the contrary contained in this definition, the determination of the Applicable Percentagefor any period shall be subject to the provisions of Section 3.6(c).

SUBPART 2.3 The definition of “Base Rate” in Section 1.1 of the Credit Agreement is hereby amended to read as follows:

“Base Rate” means for any day a fluctuating rate per annum equal to the highest of (a) the Federal Funds Rate plus1/2 of 1%, (b) the rate of interest in effect for such day as publicly announced from time to time by Bank of America as its“prime rate” and (c) the Eurodollar Base Rate plus 1.00%. The “prime rate” is a rate set by Bank of America based uponvarious factors including Bank of America’s costs and desired return, general economic conditions and other factors, and isused as a reference point for pricing some loans, which may be priced at, above, or below such announced rate. Any changein the “prime rate” announced by Bank of America shall take effect at the opening of business on the day specified in thepublic announcement of such change.

- 3 -


SUBPART 2.4 The definition of “ Eligible Assignee” in Section 1.1 of the Credit Agreement is hereby amended to read as

follows:

“Eligible Assignee” means any Person that meets the requirements to be an assignee under Section 11.3(b)(v), (vi) and (vii)(subject to such consents, if any, as may be required under Section 11.3(b)(iii)).

SUBPART 2.5 The definition of “Eurodollar Base Rate” in Section 1.1 of the Credit Agreement is hereby amended to readas follows:

“Eurodollar Base Rate” means:

(a) for any Interest Period with respect to a Eurodollar Rate Loan, the rate per annum equal to the British BankersAssociation LIBOR Rate (“BBA LIBOR”), as published by Reuters (or other commercially available source providingquotations of BBA LIBOR as designated by the Agent from time to time) at approximately 11:00 a.m., London time, twoBusiness Days prior to the commencement of such Interest Period, for Dollar deposits (for delivery on the first day of suchInterest Period) with a term equivalent to such Interest Period. If such rate is not available at such time for any reason, thenthe “Eurodollar Rate” for such Interest Period shall be the rate per annum determined by the Agent to be the rate at whichdeposits in Dollars for delivery on the first day of such Interest Period in same day funds in the approximate amount of theEurodollar Rate Loan being made, continued or converted by Bank of America and with a term equivalent to such InterestPeriod would be offered by Bank of America’s London Branch to major banks in the London interbank eurodollar market attheir request at approximately 11:00 a.m. (London time) two Business Days prior to the commencement of such InterestPeriod; and

(b) for any interest rate calculation with respect to a Base Rate Loan, the rate per annum equal to (i) BBA LIBOR, atapproximately 11:00 a.m. London time two Business Days prior to the date of determination (provided that if such day is nota Business Day, the next preceding Business Day) for Dollar deposits being delivered in the London interbank market for aterm of one month commencing that day or (ii) if such published rate is not available at such time for any reason, the rate perannum determined by the Agent to be the rate at which deposits in Dollars for delivery on the date of determination in sameday funds in the approximate amount of the Base Rate Loan being made, continued or converted by Bank of America andwith a term equal to one month would be offered by Bank of America’s London Branch to major banks in the Londonintrabank eurodollar market at their request at approximately 11:00 a.m., London time on the date of determination.

SUBPART 2.6 The definition of “ Interest Payment Date” in Section 1.1 of the Credit Agreement is hereby amended to readas follows:

“Interest Payment Date” means (a) as to Base Rate Loans and Swingline Loans, the last Business Day of each fiscalquarter of the Borrower and on the applicable Termination Date, the Term Loan Maturity Date and the Incremental TermLoan Maturity Date (if any) and (b) as to Eurodollar Loans, on the last day of each applicable Interest Period and on theapplicable Termination Date, the Term Loan Maturity Date and the Incremental Term Loan Maturity Date (if any) and inaddition if the Interest Period for a Eurodollar Loan is more than 3 months, then at 3 month intervals beginning on the date 3months from the beginning of the Interest Period.

SUBPART 2.7 Subclause (b) in the definition of “ Interest Period” in Section 1.1 of the Credit Agreement is hereby amendedto read as follows:

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(b) no Interest Period with respect to any Revolving Loan shall extend beyond the applicable Termination Date

with respect to such Revolving Loan,

SUBPART 2.8 The definition of “ Letter of Credit Expiration Date” in Section 1.1 of the Credit Agreement is herebyamended to read as follows:

“Letter of Credit Expiration Date” means the day that is thirty days prior to the applicable Termination Date (or, ifsuch day is not a Business Day, the next preceding Business Day).

SUBPART 2.9 The definition of “ Permitted Liens” in Section 1.1 of the Credit Agreement is hereby amended to add thefollowing new clause (l) at the end thereof to read as follows:

and (l) Liens, if any, in favor of the Issuing Lender and/or the Swing Line Lender to cash collateralize or otherwise secure theobligations of a Defaulting Lender or an Impacted Lender to fund risk participations hereunder.

SUBPART 2.10 The definition of “ Revolving Commitment” in Section 1.1 of the Credit Agreement is hereby amended toread as follows:

“Revolving Commitment” means, with respect to each Lender, the commitment of such Lender in an aggregateprincipal amount at any time outstanding not to exceed the amount set forth opposite such Lender’s name on Schedule 1.1(a),or in the Assignment and Assumption pursuant to which such Lender becomes a party hereto, as applicable, as such amountmay be adjusted from time to time in accordance with this Agreement, (i) to make Revolving Loans in accordance with theprovisions of Section 2.1(a), (ii) to purchase participation interests in Letters of Credit in accordance with the provisions ofSection 2.2 and (iii) to purchase participation interests in Swingline Loans in accordance with the provisions of Section 2.3.

SUBPART 2.11 The definition of “ Revolving Committed Amount” in Section 1.1 of the Credit Agreement is herebyamended to read as follows:

“Revolving Committed Amount” means the Revolving Commitments of all of the Lenders. The aggregate principalamount of the Revolving Commitments in effect on the Seventh Amendment Effective Date is ONE HUNDRED MILLIONDOLLARS ($100,000,000); provided such amount may be reduced pursuant to the terms hereof; provided further that suchamount may be increased to up to ONE HUNDRED FIFTY MILLION DOLLARS ($150,000,000) pursuant to Section2.1(g).

SUBPART 2.12 The definition of “ Termination Date” in Section 1.1 of the Credit Agreement is hereby amended to read asfollows:

“Termination Date” means (a) with respect to the Revolving Commitment of each Non-Extending RevolvingLender, November 15, 2010 and (b) with respect to the Revolving Commitment of each Extending Revolver Lender, January2, 2013.

SUBPART 2.13 The definition of “ Treasury Management Agreement” in Section 1.1 of the Credit Agreement is herebyamended to read as follows:

“Treasury Management Agreement” means any agreement governing the provision of treasury or cash managementservices, including deposit accounts, overdraft, credit or debit card,

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funds transfer, automated clearinghouse, zero balance accounts, returned check concentration, controlled disbursement,lockbox, account reconciliation and reporting and trade finance services and other cash management services.

SUBPART 2.14 Section 2.1(a) of the Credit Agreement is hereby amended to read as follows:

(a) Revolving Commitment. Subject to the terms and conditions set forth herein, each Lender severallyagrees to make revolving loans (each a “Revolving Loan” and collectively the “Revolving Loans”) to the Borrower, inDollars, at any time and from time to time, during the period from and including the Closing Date to but not including theapplicable Termination Date (or such earlier date if the applicable Revolving Commitments have been terminated as providedherein); provided, however, that (i) the sum of the aggregate amount of Revolving Loans outstanding plus the aggregateamount of LOC Obligations outstanding plus the aggregate amount of Swingline Loans outstanding shall not exceed theaggregate Revolving Commitments then in effect, and (ii) with respect to each individual Lender, such Lender’s outstandingRevolving Loans shall not exceed such Lender’s Commitment Percentage of the aggregate Revolving Commitments then ineffect.

SUBPART 2.15 Section 2.2(a)(ii) of the Credit Agreement is hereby amended to read as follows:

(ii) The Issuing Lender shall not issue any Letter of Credit if:

(A) the expiry date of such requested Letter of Credit would occur more than twelve months afterthe date of issuance, unless Lenders holding more than fifty percent (50%) of the Revolving Commitments haveapproved such expiry date; or

(B) the expiry date of such requested Letter of Credit would occur after the applicable Letter ofCredit Expiration Date, unless all the applicable Lenders with a Revolving Commitment have approved such expirydate.

SUBPART 2.16 Section 2.2(a)(iii)(F) of the Credit Agreement is hereby amended to read as follows:

(F) a default of any Lender’s obligations to fund under Section 2.2(c) exists or any Lender is at such time aDefaulting Lender or an Impacted Lender hereunder, unless the Issuing Lender has entered into satisfactory arrangementswith the Borrower or such Lender to eliminate the Issuing Lender’s risk with respect to such Lender.

SUBPART 2.17 The following subsection (vii) is hereby added at the end of Section 2.2(c) of the Credit Agreement to readas follows:

(vii) It is understood and agreed that with respect to any Letters of Credit having an expiry date later thanNovember 10, 2010, only the Extending Revolving Lenders shall have a participation interest in such Letters of Credit (eachsuch participation interest to be based on such Extending Revolver Lender’s Commitment Percentage of only thoseRevolving Commitments with a Termination Date of January 2, 2013).

SUBPART 2.18 The first sentence in Section 2.3(a) of the Credit Agreement is hereby amended to read as follows:

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Subject to the terms and conditions set forth herein, the Swingline Lender may, in its discretion and in reliance upon theagreements of the other Lenders set forth in this Section 2.3, make swingline loans (each a “Swingline Loan” and collectivelythe “Swingline Loans”) to the Borrower, in Dollars, at any time and from time to time, during the period from and includingthe Closing Date to but not including the applicable Termination Date (or such earlier date if the Revolving CommittedAmount has been terminated as provided herein) in an aggregate amount not to exceed at any time outstanding the amount ofthe Swingline Committed Amount, notwithstanding the fact that such Swingline Loans, when aggregated with theCommitment Percentages of the outstanding principal amount of Revolving Loans and LOC Obligations of the SwinglineLender in its capacity as a Lender of Revolving Loans, may exceed the amount of such Lender’s Revolving Commitment;provided, however, that (i) the sum of the aggregate amount of Revolving Loans outstanding plus the aggregate amount ofLOC Obligations outstanding plus the aggregate amount of Swingline Loans outstanding shall not exceed the RevolvingCommitted Amount, and (ii) the outstanding Swingline Loans shall not exceed the Swingline Committed Amount, andprovided, further, that the Borrower shall not use the proceeds of any Swingline Loan to refinance any outstanding SwinglineLoan.

SUBPART 2.19 Section 3.4(a) of the Credit Agreement is hereby amended to read as follows:

(a) Unused Fees. In consideration of the Revolving Commitments of the Lenders hereunder, the Borroweragrees to pay to the Agent for the account of each Lender with a Revolving Commitment a fee (the “Unused Fee”) computedat a per annum rate on the Unused Revolving Committed Amount during the Unused Fee Calculation Period (hereinafterdefined) equal to the Applicable Percentage for Unused Fees then in effect; provided, that (i) no Unused Fee shall accrue onthe Revolving Commitment of a Defaulting Lender so long as such Lender shall be a Defaulting Lender and (ii) any UnusedFee accrued with respect to the Revolving Commitment of a Defaulting Lender during the period prior to the time suchLender became a Defaulting Lender and unpaid at such time shall not be payable by the Borrower so long as such Lendershall be a Defaulting Lender. The Unused Fee shall commence to accrue on the Closing Date and shall be due and payable inarrears on the last business day of each March, June, September and December (and any date that the Revolving CommittedAmount is reduced as provided in Section 2.1(d) and the applicable Termination Date) for the immediately preceding quarter(or portion thereof) (each such quarter or portion thereof for which the Unused Fee is payable hereunder being herein referredto as an “Unused Fee Calculation Period”), beginning with the first of such dates to occur after the Closing Date.

SUBPART 2.20 Section 3.5(a) of the Credit Agreement is each hereby amended to read as follows:

(a) Revolving Loans. (i) On November 15, 2010, the entire outstanding principal balance of all RevolvingLoans having a Termination Date of November 15, 2010, together with accrued but unpaid interest and all other sums owingwith respect thereto, shall be due and payable in full, unless accelerated sooner pursuant to Section 9, and (ii) on January 2,2013, the entire outstanding principal balance of all Revolving Loans having a Termination Date of January 2, 2013, togetherwith accrued but unpaid interest and all other sums owing with respect thereto, shall be due and payable in full, unlessaccelerated sooner pursuant to Section 9.

SUBPART 2.21 The first sentence of Section 3.6(a) of the Credit Agreement is hereby amended to read as follows:

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Except for Base Rate Loans, in which case interest shall be computed on the basis of a 365 or 366 day year as the case maybe, all computations of interest and fees hereunder shall be made on the basis of the actual number of days elapsed over ayear of 360 days.

SUBPART 2.22 Section 3.11 of the Credit Agreement is hereby amended to read as follows:

3.11 Inability To Determine Interest Rate.

If prior to the first day of any Interest Period, the Agent shall have determined (which determination shall beconclusive and binding upon the Borrower) that, by reason of circumstances affecting the relevant market, adequate andreasonable means do not exist for ascertaining the Interest Period with respect to a proposed Eurodollar Rate Loan or inconnection with a Base Rate Loan, the Agent shall promptly give telecopy or telephonic notice thereof to the Borrower andthe Lenders. If such notice is given (a) any Eurodollar Loans requested to be made on the first day of such Interest Periodshall be made as Base Rate Loans as to which the interest rate is not determined with reference to the Eurodollar Rate, (b)any Loans that were to have been converted on the first day of such Interest Period to or continued as Eurodollar Loans shallbe converted to or continued as Base Rate Loans as to which the interest rate is not determined with reference to theEurodollar Rate and (c) any outstanding Eurodollar Loans shall be converted, on the first day of such Interest Period, to BaseRate Loans as to which the interest rate is not determined with reference to the Eurodollar Rate. Until such notice has beenwithdrawn by the Agent, no further Eurodollar Loans or Base Rate Loans as to which the interest rate is determined withreference to the Eurodollar Rate shall be made or continued as such, nor shall the Borrower have the right to convert BaseRate Loans to Eurodollar Loans.


3.12 Illegality.

Notwithstanding any other provision herein, if the adoption of or any change in any Requirement of Law or in theinterpretation or application thereof occurring after the Closing Date shall make it unlawful for any Lender to make ormaintain Eurodollar Loans, or to determine or charge interest rates based upon the Eurodollar Rate, as contemplated by thisCredit Agreement, (a) such Lender shall promptly give written notice of such circumstances to the Borrower and the Agent(which notice shall be withdrawn whenever such circumstances no longer exist), (b) the commitment of such Lenderhereunder to make Eurodollar Loans, continue Eurodollar Loans as such and convert Base Rate Loans to Eurodollar Loansor, if such notice relates to the unlawfulness or asserted unlawfulness of charging interest based on the Eurodollar Rate, tomake Base Rate Loans as to which the interest rate is determined with reference to the Eurodollar Rate shall forthwith becanceled and, until such time as it shall no longer be unlawful for such Lender to make or maintain Eurodollar Loans or BaseRate Loans as to which the interest is determined with reference to the Eurodollar Rate, such Lender shall then have acommitment only to make a Base Rate Loan as to which the rate of interest is not determined with reference to the EurodollarRate when a Eurodollar Loan is requested and (c) such Lender’s Loans then outstanding as Eurodollar Loans or Base RateLoans as to which the interest rate is determined with reference to the Eurodollar Rate, if any, shall be convertedautomatically to Base Rate Loans as to which the rate of interest is not determined with reference to the Eurodollar Rate onthe respective last days or the then current Interest Periods with respect to such Loans or within such earlier period asrequired by law. If any such conversion of a Eurodollar Loan or a Base Rate Loan as to which the interest rate is determinedwith reference to the Eurodollar Rate occurs on a day which is not the last day of the then current Interest Period with respectthereto,

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the Borrower shall pay to such Lender such amounts, if any, as may be required pursuant to Section 3.15. Notwithstandingthe foregoing and despite the illegality for such a Lender to make, maintain or fund Eurodollar Rate Loans or Base RateLoans as to which the interest rate is determined with reference to the Eurodollar Base Rate, that Lender shall remaincommitted to make Base Rate Loans and shall be entitled to recover interest at the Base Rate. Upon any such prepayment orconversion, the Borrower shall also pay accrued interest on the amount so prepaid or converted.

SUBPART 2.24 The language preceding the first proviso in Section 3.16 of the Credit Agreement is hereby amended to readas follows:

If (a) any Lender delivers a notice to the Borrower pursuant to Sections 3.10, 3.13 or 3.14, (b) a Lender (a“Non-Consenting Lender”) does not consent to a proposed change, waiver, discharge or termination with respect to anyCredit Document that has been approved by the Required Lenders as provided in Section 11.6 or (c) any Lender is aDefaulting Lender, then the Borrower shall have the right, if no Default or Event of Default then exists, to either (i) replacesuch Lender (the “Replaced Lender”) with one or more additional banks or financial institutions (collectively, the“Replacement Lender”),

SUBPART 2.25 The following subsection (o) is hereby added at the end of Section 7.1 of the Credit Agreement to read asfollows:

(o) PILOT Program. Promptly upon the consummation of any PILOT Program Sale and LeasebackTransaction, the Borrower shall provide copies of the documentation governing such PILOT Program Sale and LeasebackTransaction to the Agent.

SUBPART 2.26 Subclause (d) in Section 8.5 of the Credit Agreement is hereby amended to read as follows:

(d) sales of product lines (or the right to produce a consumer product or products) provided that (i) the dispositions permittedunder this subparagraph (d) during any fiscal year shall be limited to product lines (or the right to produce a consumerproduct or products) having aggregate sales for the four fiscal quarter period ending immediately preceding the sale thatresult in EBITDA for such four fiscal quarter period in an aggregate amount not exceeding ten percent (10%) of EBITDA forsuch four fiscal quarter period and (ii) the Credit Parties shall have delivered to the Agent a Pro Forma ComplianceCertificate demonstrating that after giving effect to any such disposition on a Pro Forma Basis, the Credit Parties and theirSubsidiaries would have been in compliance with all the financial covenants set forth in Section 7.12,


8.7 Restricted Payments.

No Credit Party will, nor will it permit any of its Subsidiaries to, directly or indirectly, (a) declare or pay anydividends (whether cash or otherwise) or make any other distribution upon any shares of its Capital Stock of any class (otherthan dividends or distributions payable in Capital Stock) or (b) purchase, redeem or otherwise acquire or retire or make anyprovisions for redemption, acquisition or retirement of any shares of its Capital Stock of any class or any warrants or optionsto purchase any such shares (other than the purchase, redemption, acquisition or retirement of any shares of Capital Stock orany warrants or options to purchase any such shares with shares of Capital Stock) (any such declaration, payment,distribution, purchase,

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redemption or other acquisition, a “Restricted Payment”); provided, however, (i) the Subsidiaries of the Borrower may paydividends to the Borrower and (ii) the Borrower may purchase, redeem, acquire or retire shares of its Capital Stock of anyclass or any warrants or options to purchase any such shares of its Capital Stock occurring subsequent to the SeventhAmendment Effective Date in an aggregate amount (on a cumulative basis) not to exceed an amount equal to (A) $55 millionplus (B) an amount equal to 50% of Net Income (excluding any net gain or loss resulting from an Asset Disposition asdetermined in accordance with GAAP) for any fiscal quarter ending subsequent to the Seventh Amendment Effective Date(or less an amount equal to 100% of Net Loss (excluding any net gain or loss resulting from an Asset Disposition asdetermined in accordance with GAAP) for any fiscal quarter ending subsequent to the Seventh Amendment Effective Date);provided, that (x) before and after giving effect to any such repurchase or retirement, no Default or Event of Default existsand (y) after giving effect to any such repurchase or retirement, the Borrower shall have at least twenty percent (20%) ofavailability under the Revolving Committed Amount. For the avoidance of doubt, the parties hereto agree that (a) nothingcontained in this Section 8.7 shall prohibit the Borrower from using $32,042,500 of the proceeds from the issuance of theConvertible Notes to fund a convertible note hedge transaction with an affiliate of Merrill Lynch & Co. on the date of theissuance of the Convertible Notes, which transaction is designed to offset the Borrower’s exposure to potential dilution of itscommon stock upon the conversion of the Convertible Notes and (b) the use of such proceeds as described above shall not beconsidered a Restricted Payment.


8.11 Subordinated Debt.

Notwithstanding Section 8.10, no Credit Party will (a) make or offer to make any principal payments with respect tothe Subordinated Debt, (b) redeem or offer to redeem any of the Subordinated Debt or (c) deposit any funds intended todischarge or defease any or all of the Subordinated Debt; provided, however, the Borrower may redeem or prepay theSubordinated Debt; provided, that (i) no Default or Event of Default exists before or after giving effect to any suchredemption or prepayment and (ii) after giving effect to any such redemption or prepayment, the Borrower shall have at leasttwenty percent (20%) of availability under the Revolving Committed Amount. The Subordinated Debt or the SubordinatedIndenture may not be amended or modified in any material manner without the prior written consent of the Required Lenders,it being specifically understood and agreed that no amendment to Article Four or Article Twelve of the SubordinatedIndenture shall be made without the prior written consent of the Required Lenders.


8.13 Sale Leasebacks.

Other than the PILOT Program Sale and Leaseback Transaction, no Credit Party will, nor will it permit any of itsSubsidiaries to, directly or indirectly become or remain liable as lessee or as guarantor or other surety with respect to anylease, of any property (whether real or personal or mixed), whether now owned or hereafter acquired, (a) which such CreditParty or Subsidiary has sold or transferred or is to sell or transfer to any other Person other than a Credit Party or (b) whichsuch Credit Party or Subsidiary intends to use for substantially the same purpose as any other property which has been sold oris to be sold or transferred by such Credit Party or Subsidiary to any Person in connection with such lease.


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8.14 Negative Pledges.

None of the Credit Parties will, nor will it permit any of its Subsidiaries to, enter into, assume or become subject toany agreement prohibiting or otherwise restricting the creation or assumption of any Lien upon its properties or assets,whether now owned or hereafter acquired, or requiring the grant of any security for such obligation if security is given forsome other obligation, except for (a) as set forth in Section 4.12 of the Subordinated Indenture and (b) lien restrictions of IDBwith respect to the PILOT Program Property provided that any such lien restrictions of IDB provide for an exception for afirst priority lien in favor of the Agent for the benefit of the holders of the Credit Party Obligations in the PILOT ProgramProperty.


8.15 Capital Expenditures.

The Credit Parties and their Subsidiaries will not make Capital Expenditures, in any fiscal year, that would exceed$10,000,000 in the aggregate plus up to $5,000,000 of the unused amount available for Capital Expenditures under thisSection 8.15 for the immediately preceding fiscal year (excluding any carry forward available from any prior fiscal year otherthan the immediately preceding fiscal year); provided, however, in addition to the maximum annual Capital Expenditurespermitted by the preceding clause, the Credit Parties shall also be permitted to make one time Capital Expenditures not toexceed $18,000,000 in the aggregate related to the Borrower’s construction of a new facility at its Broad Street location inChattanooga, Tennessee to be used for the manufacture of ACT mouthwash.

SUBPART 2.32 A new subsection (vii) is hereby added immediately following subsection (vi) in Section 11.3(b) of theCredit Agreement to read as follows:

(vii) No Assignment to Defaulting Lenders or Impacted Lenders. No such assignment shall be made to anyDefaulting Lender or any Impacted Lender.

SUBPART 2.33 A new subsection (i) is hereby added at the end of Section 11.3 of the Credit Agreement to read as follows:

(i) Assignment by a Non-Extending Revolving Lender. If a Non-Extending Revolving Lender assigns all or aportion of such Non-Extending Revolving Lender’s Revolving Commitment and Revolving Loans (including suchNon-Extending Revolving Lender’s participations in LOC Obligations and/or Swingline Loans) to an Eligible Assigneepursuant to the terms of this Section 11.3, such Eligible Assignee may agree in the applicable Assignment and Assumption tobecome an Extending Revolving Lender with respect to such assigned Revolving Commitments, Revolving Loans andparticipations in such LOC Obligations and/or Swingline Loans and agree in the applicable Assignment and Assumption toextend the Termination Date with respect to such assigned Revolving Commitments, Revolving Loans and participations inLOC Obligations and/or Swingline Loans to January 2, 2013. In the event such Eligible Assignee agrees to become anExtending Revolver Lender with respect to any assigned interest from a Non-Extending Revolving Lender, such assignedRevolving Commitments, Revolving Loans and participations in LOC Obligations and/or Swingline Loans of such ExtendingRevolving Lender shall, commencing on the effective date of such Assignment and Assumption, automatically begin toreceive the more favorable pricing with respect to Revolving Loans, Letter of Credit Fees and Unused Fees contained insubclause (b) of the definition of

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“Applicable Percentage” consistent with the Revolving Loans, Letter of Credit Fees and Unused Fees of the other ExtendingRevolving Lenders. For the avoidance of doubt, the parties hereto agree that the extension of the Termination Date andincrease in pricing described above in this clause (i) with respect to any such assigned interest shall occur automatically onthe effective date of the applicable Assignment and Assumption without the need for any amendment to this Agreement.

SUBPART 2.34 The Revolving Commitments of each Lender set forth on Schedule 1.1(a) of the Credit Agreement are herebyamended to read as provided on Schedule 1.1(a) attached hereto. Schedule 1.1(a) attached hereto also identifies the ExtendingRevolving Lenders and the Non-Extending Revolving Lenders as of the Seventh Amendment Effective Date.

SUBPART 2.35 A new Section 8 is hereby added immediately following Section 7 in Exhibit 11.3 of the Credit Agreementto read as follows:

8. Election to become an Extending Revolving Lender: By checking the box at the end of this Section 8, theAssignee hereby elects to become an Extending Revolving Lender under the Credit Agreement andacknowledges and agrees that as an Extending Revolving Lender, the Assigned Interest shall have aTermination Date of January 2, 2013. �

PART IIICONDITIONS TO EFFECTIVENESS

This Amendment shall be and become effective upon satisfaction of the following conditions precedent:

(a) receipt by the Agent of counterparts of this Amendment duly executed by the Borrower, the Guarantors,the Required Lenders, each Lender with a Revolving Commitment and the Agent;

(b) receipt by the Agent of a certificate of a Responsible Officer of the Borrower, (i) certifying that theorganization documents of each Credit Party delivered on the Closing Date have not been amended, supplemented orotherwise modified since the Closing Date (except to the extent the Agent has been notified thereof in such certificate) andremain in full force and effect (as so amended, supplemented or otherwise modified, as applicable) as of the SeventhAmendment Effective Date and (ii) attaching resolutions of each Credit Party and certifying that such resolutions have notbeen amended, supplemented or otherwise modified and remain in full force and effect as of the Seventh AmendmentEffective Date; and

(c) receipt by the Agent and the Lenders of all fees due and owing to them as of the date hereof, together withreimbursement for all reasonable, documented out-of-pocket expensed owing to the Agent.

PART IVMISCELLANEOUS

SUBPART 4.1 Representations and Warranties . Each Credit Party hereby represents and warrants to the Agent and the Lenders that(a) no Default or Event of Default exists on and as of the date

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hereof, (b) each Credit Party has the requisite corporate power and authority to execute, deliver and perform this Amendment and (c)the representations and warranties set forth in Section 6 of the Credit Agreement are true and correct in all material respects as of thedate hereof (except for those which expressly relate to an earlier date). Each Credit Party acknowledges and confirms that theBorrower’s obligations to repay the outstanding principal amount of the Loans are unconditional and not subject to any offsets,defenses or counterclaims.

SUBPART 4.2 Acknowledgment. Each Guarantor hereby acknowledges and consents to all of the terms and conditions of thisAmendment and agrees that this Amendment does not operate to reduce or discharge the Guarantors’ obligations under the CreditAgreement or the other Credit Documents.

SUBPART 4.3 Cross-References . References in this Amendment to any Part or Subpart are, unless otherwise specified, to such Partor Subpart of this Amendment.

SUBPART 4.4 Credit Document. This Amendment shall constitute a Credit Document under the terms of the Credit Agreement.

SUBPART 4.5 References in Other Credit Documents . All references to the Credit Agreement in each of the Credit Documents shallhereafter mean the Credit Agreement as amended by this Amendment. Except as specifically amended hereby or otherwise agreed,the Credit Agreement is hereby ratified and confirmed and shall remain in full force and effect according to its terms.

SUBPART 4.6 Counterparts/Telecopy . This Amendment may be executed by the parties hereto in several counterparts, each ofwhich shall be deemed to be an original and all of which shall constitute together but one and the same agreement. Delivery ofexecuted counterparts of this Amendment by telecopy shall be effective as an original and shall constitute a representation that anoriginal shall be delivered.

SUBPART 4.7 Governing Law. THIS AMENDMENT SHALL BE DEEMED TO BE A CONTRACT MADE UNDER ANDGOVERNED BY THE INTERNAL LAWS OF THE STATE OF NEW YORK.

SUBPART 4.8 Successors and Assigns . This Amendment shall be binding upon and inure to the benefit of the parties hereto andtheir respective successors and assigns.

[remainder of page intentionally left blank]

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IN WITNESS WHEREOF the Borrower, the Guarantors and the Lenders have caused this Amendment to be duly executed on thedate first above written. BORROWER:

CHATTEM, INC.,a Tennessee corporation

By: /s/ Robert E. Bosworth

Name: Robert E. BosworthTitle: President and Chief Operating Officer

GUARANTORS:

SIGNAL INVESTMENT & MANAGEMENT CO.,a Delaware corporation


Name: Robert E. BosworthTitle: President SUNDEX, LLC,a Tennessee limited liability company


Name: Robert E. BosworthTitle: President CHATTEM (CANADA) HOLDINGS, INC.,a Delaware corporation


Name: Robert E. BosworthTitle: President

CHATTEM, INC.



BANK OF AMERICA, N.A.,

in its capacity as Agent By: /s/ Anne M. Zeschke

Name: Anne M. ZeschkeTitle: Vice President

BANK OF AMERICA, N.A.,

in its capacity as a Lender

By: /s/ John M. Hall

Name: John M. HallTitle: Senior Vice President SUNTRUST BANK

By: /s/ E. Donald Besch, Jr.

Name: E. Donald Besch, Jr.Title: Managing Director

BRANCH BANKING AND TRUST COMPANY

By: /s/ R. Andrew Beam

Name: R. Andrew BeamTitle: Senior Vice President

NATIONAL CITY BANK

By: /s/ Deroy Scott

Name: Deroy ScottTitle: Vice President

WACHOVIA BANK, NATIONAL ASSOCIATION

By: /s/ Bryan Hulker

Name: Bryan HulkerTitle: Vice President

CHATTEM, INC.SEVENTH AMENDMENT TO CREDIT AGREEMENT


AIB DEBT MANAGEMENT, LIMITED By: /s/ Joseph Augustini

Name: Joseph Augustini Title: Senior Vice President By: /s/ Shane O’Driscoll

Name: Shane O’Driscoll Title: Assistant Vice President



APOSTLE LOOMIS SAYLES CREDIT OPPORTUNITIESFUND, As Lender

By:Loomis, Sayles & Company, L.P.Its Investment Manager

By: Loomis, Sayles & Company, Incorporated,Its General Partner

By: /s/ Mary McCarthy

Name: Mary McCarthyTitle: Vice President



APOSTLE LOOMIS SAYLES SENIOR LOAN FUND,As Lender







BLUEMOUNTAIN CLO III LTD.

By:BlueMountain Capital Management, LLCIts Collateral Manager

By: /s/ Michael Abatemarco

Name: Michael AbatemarcoTitle: Associate



KDPAM for Boeing Co. Employees Retirement Fund

By: /s/ Kathy A. News

Name: Kathy A. NewsTitle: Sr. Portfolio Manager

KDP Asset Management



SILVERMINE CAPITAL MANAGEMENT, LLC

CANNINGTON FUNDING LTD.Silvermine Capital Management LLCAs Investment Manager

By: /s/ Gregory C. Smith

Name: Gregory C. SmithTitle: Vice President



CAVALRY CLO I, LTD

By: Regiment Capital Management, LLCas its Investment Advisor

By: Regiment Capital Advisors, LPits Manager and pursuant to delegated authority

By: Regiment Capital Advisors, LLCits General Partner

By: /s/ William Heffron

Name: William HeffronTitle: Authorized Signatory

CHATTEM, INC.



CENT CDO 12 LIMITED

By: RiverSource Investments, LLCas Collateral Manager

By: /s/ Robin C. Stancil

Name: Robin C. StancilTitle: Director of Operations



CENT CDO 14 LIMITED






CENT CDO III, LIMITED




CHATTEM, INC.



CONFLUENT 3 LIMITED

By: Morgan Stanley Investment Management Inc.as Investment Manager

By: /s/ Robert Drobny

Name: Robert DrobnyTitle: Executive Director



CREDOS FLOATING RATE FUND, L.P. By: Shenkman Capital Management, Inc., its General Partner By: /s/ Richard H. Weinstein

Name: Richard H. Weinstein Title: Executive Vice President



FRANKLIN CLO IV, LIMITED

By: /s/ David Ardini

Name: David ArdiniTitle: Vice President

CHATTEM, INC.



FRANKLIN FLOATING RATE DAILY ACCESS FUND

By: /s/ Richard Hsu

Name: Richard HsuTitle: Vice President



FRANKLIN FLOATING RATE MASTER SERIES

By: /s/ Richard Hsu


CHATTEM, INC.



FRANKLIN TEMPLETON SERIES II FUNDS FLOATINGRATE II FUND

By: /s/ Richard Hsu


CHATTEM, INC.



GALLATIN CLO III 2007-1, LTD,As Assignee

By: Ursa Mine Credit Advisors, LLCas its Collateral Manager

By: /s/ Niall Rosenzweig

Name: Niall RosenzweigTitle: Principal

CHATTEM, INC.



LATITUDE CLO II, LTD

By: /s/ Kirk Wallace

Name: Kirk WallaceTitle: Senior Vice President

CHATTEM, INC.



LCM III, LTD.

By: Lyon Capital Management LLC,as Collateral Manager

By: /s/ Sophie A. Venon

Name: Sophie A. VenonTitle: Portfolio Manager



LCM V LTD.






LCM VI, LTD.






SILVERMINE CAPITAL MANAGEMENT, LLC

LOAN FUNDING XIII for itself or as agentfor Corporate Funding XIII, as a Lender

By: /s/ Gregory C. Smith

Name: Gregory C. SmithTitle: Vice PresidentSilvermine Capital Management, LLC

CHATTEM, INC.



LOOMIS SAYLES CAYMAN LEVERAGED SENIOR LOANFUND LTD., As Lender

By: Loomis, Sayles & Company, L.P.Its Investment Adviser






LOOMIS SAYLES CLO I, LTD.,As Lender

By:Loomis, Sayles & Company, L.P.Its Collateral Manager




CHATTEM, INC.



LOOMIS SAYLES LEVERAGED SENIOR LOAN FUND,LTD., As Lender







THE LOOMIS SAYLES SENIOR LOAN FUND, LLC,As Lender

By:Loomis, Sayles & Company, L.P.Its Managing Member




CHATTEM, INC.



MOUNTAIN VIEW CLO II, LTD.

By:Seix Investment Advisors LLC,as Collateral Manager

By: /s/ George Goudelias

Name: George GoudeliasTitle: Managing Director



NATIXIS LOOMIS SAYLES SENIOR LOAN FUND,As Lender





CHATTEM, INC.



QUALCOMM GLOBAL TRADING, INC.

By:Morgan Stanley Investment Management Inc.as Investment Manager

By: /s/ Robert Drobny

Name: Robert DrobnyTitle: Executive Director



OLD WESTBURY GLOBAL OPPORTUNITIES FUND

By:Shenkman Capital Management, Inc.,as Investment Manager

By: /s/ Richard H. Weinstein

Name: Richard H. WeinsteinTitle: Executive Vice President

CHATTEM, INC.



ONE WALL STREET CLO I, LTD

By: /s/ Josephine H. Shin

Name: Josephine H. ShinTitle: Senior Vice President



ONE WALL STREET CLO II, LTD

By: /s/ Josephine H. Shin

Name: Josephine H. ShinTitle: Senior Vice President

CHATTEM, INC.



RIVERSOURCE BOND SERIES, INC. – RIVERSOURCEFLOATING RATE FUND


Name: Robin C. StancilTitle: Assistant Vice President

CHATTEM, INC.



SEQUILS-CENTURION V, LTD.




CHATTEM, INC.



SILVER CREST CBNA LOAN FUNDING LLC

By: /s/ Andrew Valko

Name: Andrew ValkoTitle: Attorney-in-Fact



STANFIELD VEYRON CLO, LTD.

By: Stanfield Capital Partners as its Collateral Manager

By: /s/ David Frey

Name: David FreyTitle: Partner

CHATTEM, INC.



KDPAM for State Retirement & Pension System of Maryland


Name: Kathy A. NewsTitle: Sr. Portfolio ManagerKDP Asset Management

CHATTEM, INC.



VENTURE VII CDO LIMITED

By its investment advisor,MJX Asset Management LLC

By: /s/ John J. Wagner

Name: John J. WagnerTitle: Managing Director

CHATTEM, INC.



VENTURE VIII CDO LIMITED

By its investment advisor,MJX Asset Management LLC

By: /s/ John J. Wagner

Name: John J. WagnerTitle: Managing Director

CHATTEM, INC.



KDPAM for Veronica Atkins Marital Trust


Name: Kathy A. NewsTitle: Sr. Portfolio ManagerKDP Asset Management



XL RE EUROPE LIMITED

By: Stanfield Capital Partners as its Collateral Manager

By: /s/ David Frey

Name: David FreyTitle: Partner



Schedule 1.1(a)

Lender

Revolving Commitmentsthrough the Termination

Dateof

November 15, 2010

Revolving CommitmentPercentage through the

Termination Date ofNovember 15, 2010

Revolving Commitmentsthrough the Termination

Date ofJanuary 2, 2013

Revolving CommitmentPercentage through the

Termination Date ofJanuary 2, 2013

Bank of America, N.A. $45,000,000 45.000000000% $45,000,000 45.000000000%

National City Bank $20,000,000 20.000000000% $20,000,000 20.000000000%

Branch Banking andTrust Company $15,000,000 15.000000000% $15,000,000 15.000000000%

SunTrust Bank $10,000,000 10.000000000% $10,000,000 10.000000000%

Wachovia Bank,National Association $10,000,000 10.000000000% $10,000,000 10.000000000%

Total $100,000,000 100.000000000% $100,000,000 100.000000000%



EXHIBIT 31.1

CERTIFICATION

I, Zan Guerry, Chairman and Chief Executive Officer, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Chattem, Inc.;2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a

material fact necessary to make the statements made, in light of the circumstances under which such statements weremade, not misleading with respect to the period covered by this quarterly report;

3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairlypresent in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, theperiods presented in this quarterly report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls andprocedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (asdefined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a. designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designedunder our supervision, to ensure that material information relating to the registrant, including its consolidatedsubsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterlyreport is being prepared;

b. designed such internal control over financial reporting, or caused such internal control over financial reporting to bedesigned under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and thepreparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c. evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report ourconclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered bythis report based on such evaluation; and

d. disclosed in this report any change in the registrant’s internal control over financial reporting that occurredduring the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materiallyaffect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control overfinancial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or personsperforming the equivalent functions):

a. all significant deficiencies and material weaknesses in the design or operation of internal control over financialreporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize andreport financial information; and

b. any fraud, whether or not material, that involves management or other employees who have a significant role in theregistrant’s internal control over financial reporting.

Date: October 6, 2009

/s/ Zan Guerry Zan Guerry,Chairman and Chief Executive Officer


EXHIBIT 31.2

CERTIFICATION

I, Robert B. Long, Vice President and Chief Financial Officer, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Chattem, Inc.;2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a

material fact necessary to make the statements made, in light of the circumstances under which such statements weremade, not misleading with respect to the period covered by this quarterly report;

3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairlypresent in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, theperiods presented in this quarterly report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls andprocedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (asdefined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a. designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designedunder our supervision, to ensure that material information relating to the registrant, including its consolidatedsubsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterlyreport is being prepared;

b. designed such internal control over financial reporting, or caused such internal control over financial reporting to bedesigned under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and thepreparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c. evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report ourconclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered bythis report based on such evaluation; and

d. disclosed in this report any change in the registrant’s internal control over financial reporting that occurredduring the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materiallyaffect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control overfinancial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or personsperforming the equivalent functions):

a. all significant deficiencies and material weaknesses in the design or operation of internal control over financialreporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize andreport financial information; and

b. any fraud, whether or not material, that involves management or other employees who have a significant role in theregistrant’s internal control over financial reporting.

Date: October 6, 2009

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


EXHIBIT 32

CertificationPursuant to Section 906 of the Sarbanes-Oxley Act of 2002

(Subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code)

Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, UnitedStates Code), each of the undersigned officers of Chattem, Inc., a Tennessee corporation (the “Company”), does hereby certify, tosuch officer’s knowledge, that:

The Quarterly Report on Form 10-Q for the quarter ended August 31, 2009 (the “Form 10-Q”) of the Company fully complies withthe requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and information contained in the Form 10-Q fairlypresents, in all material respects, the financial condition and results of operations of the Company.

Dated: October 6, 2009 /s/ Zan Guerry Zan Guerry,Chairman and Chief Executive Officer

Dated: October 6, 2009 /s/ Robert B. Long Robert B. LongVice President and Chief Financial Officer

The foregoing certification is being furnished solely pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and(b) of Section 1350, Chapter 63 of Title 18, United States Code) and is not being filed as part of the Form 10-Q, or as a separatedisclosure document.

A SIGNED ORIGINAL OF THIS WRITTEN STATEMENT REQUIRED BY SECTION 906 HAS BEEN PROVIDED TOCHATTEM, INC. AND WILL BE RETAINED BY CHATTEM, INC. AND FURNISHED TO THE SECURITIES ANDEXCHANGE COMMISSION OR ITS STAFF UPON REQUEST.

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q3 2009 earning report of chattem inc

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