CHATTEM, INC.

 

AMENDED AND RESTATED AUDIT COMMITTEE CHARTER

 

I. PURPOSE

 

The primary purpose of the Audit Committee is to represent and assist the Board of Directors in fulfilling its oversight responsibility relating to: (i) the integrity of the Company’s financial statements; (ii) the financial reporting process; (iii) the Company’s systems of internal accounting and financial controls; (iv) the performance of the Company’s independent auditors and their qualifications and independence; and (v) the Company’s compliance with ethics policies and legal and regulatory requirements.

 

It shall be the responsibility of the Audit Committee to maintain free and open communication between the Audit Committee, the Board of Directors, the independent auditor and management of the Company. In discharging its oversight role, the Audit Committee is empowered to investigate any matter brought to its attention with full access to all books, records, facilities and personnel of the Company and to engage independent counsel and other advisers as it determines necessary to carry out its duties.

 

II. COMPOSITION

 

The Audit Committee shall be comprised of three or more directors as appointed by the Board of Directors, each of whom shall be “independent”. Members of the Committee shall be considered independent as long as they (i) do not directly or indirectly accept any consulting, advisory or other compensatory fee from the Company, (ii) are not an affiliated person of the Company or any of its subsidiaries, other than in their capacity as a member of the Audit Committee, the Board of Directors, or any other Board committee, (iii) meet the independence requirements of the Nasdaq Stock Market, Inc. (“NASDAQ”), and (iv) do not own or control 20% or more of the Company’s voting securities. Furthermore, no member of the Audit Committee shall have participated in the preparation of the financial statements of the Company at any time during the three years prior to his service on the Audit Committee.

 

All members of the Audit Committee must have a working familiarity with basic finance and accounting practices and be able to read and understand fundamental financial statements, and the Committee shall have at least one member who has past experience in finance or accounting, requisite professional certification in accounting or other comparable experience or background which results in the member’s financial sophistication. The Board of Directors shall determine annually whether at least one member of the Audit Committee is an “audit committee financial expert,” as defined by the regulations promulgated by the Securities and Exchange Commission (“SEC”).

 

Audit Committee members and the Committee Chairman shall be appointed by a committee of the Board of Directors comprised solely of independent directors or a majority of independent directors of the Board of Directors meeting in executive session and shall serve at the pleasure of the Board.

 

III. MEETINGS

 

The Audit Committee shall meet at least two times annually, or more frequently as circumstances dictate. In addition, the Audit Committee shall have discussions with the independent auditor and management quarterly to review the Company’s financial statements in advance of the Company’s earnings releases. As part of its job to foster open communication, the Audit Committee shall meet at least twice a year with management and the independent auditor in separate executive sessions to discuss any matters that the Audit Committee or either of these groups believe should be discussed privately.

 

IV. RESPONSIBILITIES AND DUTIES

 

The primary responsibility of the Audit Committee is to oversee the Company’s financial reporting process on behalf of the Board of Directors and report the results of their activities to the Board. Management is responsible for the preparation, presentation, and integrity of the Company’s financial statements and for the appropriateness of the accounting principles and reporting policies that are used by the Company. The independent auditors are responsible for auditing the Company’s financial statements and for reviewing the Company’s unaudited interim financial statements.

 

In carrying out its responsibilities, the Audit Committee believes its policies and procedures should remain flexible, in order to best react to changing conditions and circumstances and to ensure to the Board and shareholders of the Company that the accounting and reporting practices of the Company are in accordance with all requirements and are of a high quality.

 

The following shall be the principal duties and responsibilities of the Audit Committee. These are set forth as a guide with the understanding that the Audit Committee may supplement them as appropriate.

 

(a) Oversight of Audit Process

 

 

1.

The Audit Committee shall be directly responsible for the appointment, retention and termination (subject, if applicable, to shareholder ratification), compensation, and oversight of the work of the independent auditor, including resolution of disagreements between management and the auditor regarding financial reporting.

 

 

 

 

 

2.

The Audit Committee shall pre-approve all audit and permissible non-audit services provided by the independent auditor and shall not engage the independent auditors to perform the specific non-audit services proscribed by law or regulation. The Audit Committee may delegate pre-approval authority to a member of the Audit Committee or establish appropriate procedures to pre-approve all audit and non-audit services to be provided by the independent auditor. The decisions of any Audit Committee member to whom pre-approval authority is delegated must be presented to the full Audit Committee at its next scheduled meeting.

 

 

3.

The Audit Committee shall ensure that the independent auditor submits annually a formal written statement regarding relationships and services which may impact the objectivity and independence of the independent auditor; discuss with the independent auditor any disclosed relationships or services that may impact the objectivity and independence of the independent auditor; and take appropriate action to oversee the independence of the independent auditor.

 

 

 

 

 

4.

At least annually, the Audit Committee shall obtain and review a report by the independent auditors describing the firm’s internal quality control procedures and any material issues raised by the most recent internal quality control review, or peer review, of the firm, or by any inquiry or investigation by governmental or professional authorities, within the preceding five years, respecting one or more independent audits carried out by the firm, and any steps taken to deal with any such issues.

 

 

5.

The Audit Committee shall meet with the independent auditor and financial management of the Company to review the scope of the proposed audit for the current year and the audit procedures to be utilized, and at the conclusion thereof, to review such audit, including any comments or recommendations of the independent auditor.

 

 

6.

The Audit Committee shall review the internal audit function of the Company including the independence and authority of its reporting obligations, the proposed audit plans for the coming year and the coordination of such plans with the independent auditor.

 

 

7.

The Audit Committee shall provide sufficient opportunity for the independent auditor to meet with the members of the Audit Committee without members of management present. Among the items to be discussed in these meetings are the independent auditor’s evaluation of the Company’s financial and accounting personnel.

 

 

8.

Following completion of the annual audit, the Audit Committee shall review separately with management and the independent auditor any significant difficulties encountered during the course of the audit, including any restrictions on the scope of work or access to required information and the cooperation that the independent auditors received during the course of the audit.

 

 

9.

The Audit Committee shall set clear hiring policies for employees or former employees of the independent auditors that meet SEC regulations and NASDAQ listing standards.

 

 

10.

The Audit Committee shall discuss with management, the internal auditors, and the independent auditors the adequacy and effectiveness of Company’s accounting and financial controls, including the Company’s policies and procedures to assess, monitor and manage business risks, and legal and ethical compliance programs.

 

 

11.

The Audit Committee shall oversee the rotation of the lead (or coordinating) audit partner having primary responsibility for the audit and the audit partner responsible for reviewing the audit at least once every five years, and oversee the rotation of other audit partners, in accordance with the rules of the SEC.

 

(b) Financial Reporting

 

 

1.

The Audit Committee shall review the interim financial statements and disclosures under Management’s Discussion and Analysis of the Financial Condition and Results of Operations (“M,D&A”) with management and the independent auditors prior to the filing of the Company’s Quarterly Reports on Form 10-Q. Also, the Audit Committee shall discuss the results of the quarterly review and any other matters required to be communicated to the Audit Committee by the independent auditors under generally accepted auditing standards. The Chairman of the Committee may represent the entire Committee for purposes of this review.

 

 

2.

The Audit Committee shall review with management and the independent auditors the financial statements and disclosures under M,D&A to be included in the Company’s Annual Report on Form 10-K. Also, the Audit Committee shall discuss the results of the annual audit and any other matters required to be communicated to the Audit Committee by the independent auditors under generally accepted auditing standards.

 

 

3.

The Audit Committee shall review and discuss the type and presentation of information to be included in earnings press releases as well as financial information and earnings guidance provided to analysts and rating agencies.

 

 

4.

The Audit Committee shall discuss guidelines and policies governing the process by which management assesses and manages the integrity of the Company’s financial reporting processes, both internal and external, and disclosure controls and procedures.

 

 

5.

The Audit Committee shall inquire of management as to its assessment of the effectiveness of internal controls as of the end of the most recent fiscal year and the independent auditor’s attestation of management’s assessment (effective beginning fiscal year 2004).

 

 

6.

The Audit Committee shall:

 

 

(i)

consider the independent auditor’s judgments about the quality and appropriateness (and not just acceptability) of the Company’s accounting principles and judgments as applied in its financial reporting, on both an annual and quarterly basis.

 

 

(ii)

consider and recommend to the Board, if appropriate, changes to the Company’s auditing and accounting principles and practices as suggested by the independent auditor or management.

 

 

(iii)

establish regular and separate systems of reporting to the Audit Committee by management and the independent auditor regarding any significant judgments made in management’s preparation of the financial statements and the view of each as to the appropriateness of such judgments.

 

 

(iv)

receive regular reports from the independent auditor on the critical policies and practices of the Company, and all alternative treatments of financial information within generally accepted accounting principles that have been discussed with management.

 

 

7.

The Audit Committee shall review with the independent auditor and the Company’s legal counsel, compliance matters and any legal or regulatory matter that could have a significant impact on the Company’s financial statements.

 

 

8.

The Audit Committee shall establish procedures for the receipt, retention and treatment of complaints received by the Company regarding accounting, internal accounting controls, or auditing matters, and the confidential, anonymous submission by employees of the Company of concerns regarding questionable accounting or auditing matters.

 

 

9.

The Audit Committee shall report Committee actions to the Board of Directors with such recommendations as the Committee may deem appropriate.

 

 

10.

The Audit Committee shall prepare a report for inclusion in the Company’s annual proxy statement.

 

 

11.

The Audit Committee shall review and approve all transactions between the Company and officers and directors, or affiliates of officers or directors, that are not a normal part of the Company’s business.

 

(c) Process Improvement

 

 

1.

The Audit Committee shall inquire of the independent auditor and the Company’s financial and accounting personnel regarding the adequacy and effectiveness of the accounting and financial controls of the Company, and elicit any recommendations for the improvement of such internal control procedures for particular areas where new or more detailed controls or procedures are desirable.

 

 

2.

The Audit Committee shall review with the independent auditor and management the extent to which changes or improvements in financial or accounting practices, as approved by the Audit Committee, have been implemented.

 

 

3.

The Audit Committee shall investigate any matter brought to its attention within the scope of its duties, with the power to retain independent counsel for this purpose if, in its judgment, that is appropriate.

 

 

4.

The Audit Committee shall review activities, organizational structure and qualifications of the financial and accounting personnel of the Company.

 

 

5.

The Audit Committee shall oversee the conduct of appropriate review of all related party transactions (as defined in NASDAQ listing standards) for potential conflicts of interest situations on an ongoing basis. All such related party transactions must be approved by the Audit Committee.

 

 

6.

The Audit Committee shall annually review and assess the adequacy of this Charter, amend it as appropriate, and seek and receive Board approval of the proposed changes.

 

 

7.

The Audit Committee shall provide members of the Audit Committee with appropriate educational opportunities to assure an understanding of the business and environment in which the Company operates.