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<SEC-DOCUMENT>0000912057-01-006894.txt : 20010307
<SEC-HEADER>0000912057-01-006894.hdr.sgml : 20010307
ACCESSION NUMBER: 0000912057-01-006894
CONFORMED SUBMISSION TYPE: 10-K
PUBLIC DOCUMENT COUNT: 12
CONFORMED PERIOD OF REPORT: 20001130
FILED AS OF DATE: 20010228

FILER:

COMPANY DATA:
COMPANY CONFORMED NAME: CHATTEM INC
CENTRAL INDEX KEY: 0000019520
STANDARD INDUSTRIAL CLASSIFICATION: PHARMACEUTICAL PREPARATIONS [2834]
IRS NUMBER: 620156300
STATE OF INCORPORATION: TN
FISCAL YEAR END: 1130

FILING VALUES:
FORM TYPE: 10-K
SEC ACT:
SEC FILE NUMBER: 000-05905
FILM NUMBER: 1557408

BUSINESS ADDRESS:
STREET 1: 1715 W 38TH ST
CITY: CHATTANOOGA
STATE: TN
ZIP: 37409
BUSINESS PHONE: 4238214571

MAIL ADDRESS:
STREET 1: 1715 W 38TH ST
CITY: CHATTANOOGA
STATE: TN
ZIP: 37409

FORMER COMPANY:
FORMER CONFORMED NAME: CHATTEM DRUG & CHEMICAL CO
DATE OF NAME CHANGE: 19790111
</SEC-HEADER>
<DOCUMENT>
<TYPE>10-K
<SEQUENCE>1
<FILENAME>a2039699z10-k.txt
<DESCRIPTION>FORM 10-K
<TEXT>

<PAGE>

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-K

ANNUAL REPORT
PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934

FOR THE FISCAL YEAR ENDED NOVEMBER 30, 2000 COMMISSION FILE NUMBER 0-5905

CHATTEM, INC.
A TENNESSEE CORPORATION
IRS EMPLOYER IDENTIFICATION NO. 62-0156300
1715 WEST 38TH STREET
CHATTANOOGA, TENNESSEE 37409
TELEPHONE: 423-821-4571

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

NAME OF EACH EXCHANGE ON
TITLE OF EACH CLASS WHICH REGISTERED
------------------------- ----------------

NONE NONE

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:

COMMON STOCK, WITHOUT PAR VALUE

REGISTRANT HAS FILED ALL REPORTS REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 DURING THE PRECEDING 12 MONTHS AND HAS BEEN
SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS.

DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM 405 OF REGULATION S-K WILL NOT
BE CONTAINED IN THE DEFINITIVE PROXY STATEMENT INCORPORATED BY REFERENCE IN PART
III OF THIS FORM 10-K.

AS OF FEBRUARY 23, 2001 THE AGGREGATE MARKET VALUE OF VOTING SHARES HELD BY
NON-AFFILIATES WAS $58,559,795.
AS OF FEBRUARY 23, 2001 8,867,751 COMMON SHARES WERE OUTSTANDING.

DOCUMENTS INCORPORATED BY REFERENCE:

PORTIONS OF THE REGISTRANT'S ANNUAL REPORT TO SHAREHOLDERS FOR FISCAL YEAR ENDED
NOVEMBER 30, 2000 (THE "2000 ANNUAL REPORT TO SHAREHOLDERS") ARE INCORPORATED BY
REFERENCE IN PARTS I, II AND IV OF THIS REPORT. PORTIONS OF THE REGISTRANT'S
DEFINITIVE PROXY STATEMENT DATED MARCH 12, 2001 (THE "PROXY STATEMENT") ARE
INCORPORATED BY REFERENCE IN PART III OF THIS REPORT.

<PAGE>

PART I

ITEM 1. BUSINESS

GENERAL

Chattem, Inc. (the "Company") is a leading marketer and manufacturer of a
variety of branded consumer products, including over-the-counter ("OTC") health
care and toiletries and skin care products. The Company's high quality branded
products target niche market segments and are among the market leaders in their
respective categories. Through creative and cost effective marketing techniques,
we support these brands on a national level across all major distribution
channels, including food, drug and mass merchandisers.

Our portfolio of branded products includes:

- OTC health care products, including the GOLD BOND line of
medicated powder, cream and lotion products; topical
analgesics such as FLEXALL, SPORTSCREME, ASPERCREME,
CAPZASIN and ICY HOT; an appetite suppressant, DEXATRIM;
premenstrual internal analgesics including PAMPRIN;
dietary supplements under the SUNSOURCE label, including
GARLIQUE, PROPALMEX and REJUVEX; and other branded OTC
health care products.

- Toiletries and skin care products, including PHISODERM
skin cleansers and acne products and BULLFROG sunblock.

Several of these brands have the number one market share in their categories,
including GOLD BOND medicated powders.

The Company conducts a portion of its business through three wholly-owned
subsidiaries. One subsidiary owns or licenses substantially all of the
trademarks and intangibles associated with the Company's domestic consumer
products business and licenses the Company's use thereof. Certain foreign sales
operations are conducted through Canadian and United Kingdom subsidiaries.

For purposes of this report, the "Company" or "we" refers to Chattem, Inc. and
its wholly-owned subsidiaries. Trademarks of the Company appear in this report
in all capitalized letters.

<PAGE>

DEVELOPMENTS DURING FISCAL 2000

Fiscal 2000 was highlighted by the sale of the Ban-Registered Trademark- product
line, the voluntary withdrawal from the marketplace of DEXATRIM containing
phenylpropanolamine ("PPA"), the repurchase of 876,500 shares of the Company's
common stock, the retirement of $5,400,000 principal amount of 12.75% senior
subordinated notes, the payment in their entirety of the revolving line of
credit and term loans and fourth quarter charges of approximately $19,300,000,
which includes certain nonrecurring items.

On September 15, 2000 the Company completed the sale of its Ban product line to
The Andrew Jergens Company, a wholly owned subsidiary of Kao Corporation. Under
the terms of the sale agreement, the Company received $160,000,000 cash at
closing, plus the right to receive up to an additional $6,500,000 in future
payments based upon sales levels of Ban in 2001 and 2002. Concurrent with the
closing of the sale of Ban, the Company used $52,194,000 of the net proceeds to
retire all of the outstanding balances of the Company's revolving line of credit
and term loans and accrued interest thereon, with the balance of the net
proceeds being retained by the Company.

On October 19, 2000, a Nonprescription Drugs Advisory Committee ("NDAC")
commissioned by the United States Food and Drug Administration ("FDA") to review
the safety of PPA, the active ingredient in the Company's DEXATRIM brand,
determined that there is an association between PPA and hemorrhagic stroke, and
recommended that PPA not be considered generally recognized as safe for OTC use
as a nasal decongestant or for weight control. In response to a request from the
FDA to voluntarily cease marketing its DEXATRIM with PPA, the Company announced
on November 7, 2000 its decision to cease shipping DEXATRIM with PPA immediately
and to accept product returns from any retailers which decide to discontinue
marketing DEXATRIM with PPA.

During fiscal 2000 the Company repurchased 876,500 shares of its common stock,
without par value, for $9,489,000 in accordance with the Company's previously
announced stock buyback program.

During fiscal 2000 the Company retired $5,400,000 principal amount of its 12.75%
senior subordinated notes due 2004.

As a result of the early retirement of the revolving line of credit and term
loans and the retirement of a portion of the 12.75% senior subordinated notes
due 2004, the Company recorded in 2000 an extraordinary loss of $920,000, net of
income tax benefit. This loss related to the write off of debt issuance costs
associated with the bank debt and the 12.75% notes as well as the premium paid
on the retirement of the 12.75% notes.

During the fourth quarter of fiscal 2000, the Company recorded approximately
$19,300,000 in charges, including certain nonrecurring items that adversely
impacted financial results. These charges included a $4,208,000 loss before
taxes in connection with the sale of Ban, an impairment charge of $810,000 in
connection with the pending sale of NORWICH Aspirin, a reserve of $5,600,000
for DEXATRIM with PPA estimated product returns, a write down of $2,788,000
for inventories of DEXATRIM with PPA, a $4,000,000 product returns reserve
and a $1,331,000 inventory obsolescence reserve against the Company's
SUNSOURCE products. The Company also recorded a $578,000 interest expense
charge related to the termination of interest rate swaps.

In October 2000 the Company's board of directors adopted an amendment to the
Company's non-contributory defined benefit pension plan ("the Plan") that
freezes benefits of the Plan and prohibits new entrants to the Plan effective
December 31, 2000. This action by the board of directors resulted in a
curtailment gain in the Plan of $1,912,000 in 2000.

Effective December 1, 1999, the Company adopted Statement of Position (SOP)
98-5, "Reporting on the Costs of Start-up Activities", issued by the American
Institute of Certified Public Accountants. SOP 98-5 requires costs of start-up
activities to be expensed as incurred. The initial adoption of this SOP was
recorded as the cumulative effect of a change in an accounting principle. The
one-time charge, net of income tax benefit, was $542,000 in fiscal 2000.

Ban-Registered Trademark- is the registered trademark of Kao Corporation.

<PAGE>

On December 11, 2000, the Company initiated a consent solicitation and tender
offer for certain of its outstanding senior subordinated notes. On January 17,
2001, the Company announced the successful completion of the consent
solicitation and tender offer pursuant to which it retired $70,462,000
principal amount of its 8.875% senior subordinated notes due 2008 and
$7,397,000 principal amount of its 12.75% senior subordinated notes due 2004.
The consideration paid for the consent solicitation and tender offer was
$64,737,000, which was provided by the proceeds of the Ban sale.

Strategically, the Company will continue to seek sales increases through a
combination of acquisitions and internal growth while maintaining high operating
income levels. As previously high-growth brands mature, sales increases will
become even more dependent on acquisitions and the development of successful
line extensions of existing products. During fiscal 2000 the Company introduced
the following line extensions/new products: DEXATRIM Natural, GOLD BOND
Sensitive Skin Fragrance Free Lotion, PHISODERM Blemish Patch, BULLFROG QUIK GEL
Sport Spray, BULLFROG AgeProof, BULLFROG Sparkle Block, NEW PHASE and OMNIGEST
EZ. Line extensions, product introductions and acquisitions require a
significant amount of introductory advertising and promotional support. For a
period of time these products do not generate a commensurate amount of sales or
earnings. As a result, the Company may experience a short-term adverse impact on
its profitability.

GROWTH STRATEGY

The Company seeks to expand its business through:

ACQUISITIONS. Brand acquisitions afford the Company the opportunity to
leverage its advertising and promotional capabilities and utilize existing
distribution channels and, in certain instances, existing manufacturing
facilities, to attain incremental sales increases accompanied by higher
operating margins. The Company seeks to acquire brands with unrealized
potential that have been under-marketed by larger firms or have achieved
limited success by entrepenuers. The Company focuses its acquisition efforts
on niche markets in the consumer products sector where it is able to gain a
significant market position. As many of the Company's larger competitors
rationalize their product lines or businesses, we anticipate an increase in
the number and size of attractive brand acquisition opportunities.

Two recent examples of the execution of this strategy are the Company's
acquisitions of:

The brands acquired from Thompson Medical in December 1998. With the topical
analgesic products acquired in this purchase (SPORTSCREME, ASPERCREME, CAPZASIN
and ARTHRITIS HOT), the Company became the leading marketer in the U.S. of
brands in this category. Also acquired in this purchase was DEXATRIM, an
appetite suppressant.

GOLD BOND in April 1996. GOLD BOND is the leading medicated powder with a
rapidly growing presence in the lotion market. Annual sales of GOLD BOND have
approximately doubled since the time of the acquisition, while operating margins
have increased during the same period.

INTERNAL GROWTH. The Company seeks to increase its market share for its existing
brands by focusing on increased market penetration and brand awareness and
introducing product line extensions. Product line extensions allow the Company
to maximize the value of the base brand through an increased market presence and
new market entry. Recent examples of product line extensions include: DEXATRIM
Natural, GOLD BOND Sensitive Skin Fragrance Free Lotion, PHISODERM Blemish
Patch, BULLFROG QUIK GEL Sport Spray, BULLFROG AgeProof, BULLFROG Sparkle Block,
and NEW PHASE and OMNIGEST EZ from SUNSOURCE.

DIVESTITURES. Strategically, the Company continually evaluates its products as
part of its growth strategy and, in instances where the Company's objectives are
not realized, will dispose of these brands and redeploy the assets to acquire
other brands or reduce indebtedness.

Recent examples of the execution of this strategy are the Company's divestiture
of the Ban product line of antiperspirants and deodorants in fiscal 2000 and the
Cornsilk-Registered Trademark- oil control makeup brand in fiscal 1998.

Cornsilk-Registered Trademark- is the registered trademark of Del Laboratories,
Inc.

<PAGE>

PRODUCTS

The objective of the Company is to offer high quality brand name products in
niche market segments in which its products can be among the market leaders in
their respective categories. The Company strives to achieve its objective by
identifying brands with favorable demographic appeal, quickly modifying products
and promotions in response to changing consumer demands and developing creative
and cost-effective marketing and advertising programs. The Company competes in
the following product categories: OTC health care and toiletries and skin care.
The Company manufactures products accounting for approximately 70% of its sales
volume at its facility in Chattanooga, Tennessee, with GOLD BOND medicated
powders, the SUNSOURCE products and DEXATRIM being produced by contract
manufacturers.

The Company's product brands by market segment are:

OTC HEALTH CARE

GOLD BOND - medicated powders and lotion, antibiotic
ointment and anti-itch cream
FLEXALL - topical analgesic
ICY HOT - topical analgesic
SPORTSCREME - topical analgesic
ASPERCREME - topical analgesic
CAPZASIN - P - topical analgesic
CAPZASIN - HP - topical analgesic
ARTHRITIS HOT - topical analgesic
PAMPRIN - menstrual internal analgesic
PREMSYN PMS - premenstrual internal analgesic
HERPECIN-L - cold sore and fever blister balm
BENZODENT - topical oral analgesic
DEXATRIM - appetite suppressant
GARLIQUE - garlic extract
REJUVEX - menopausal supplement
HARMONEX - emotional and physical well-being
PROPALMEX - prostate health
MELATONEX - sleep aid
REPOSE - stress relief
NEW PHASE - menopausal supplement
OMNIGEST EZ - digestion aid

TOILETRIES AND SKIN CARE

PHISODERM - facial cleanser and acne medicine
MUDD - facial mask and cleanser
BULLFROG - sunscreen and sunblock
ULTRASWIM - chlorine removing shampoo, conditioner and
body wash
SUN-IN - spray-in hair lightener

The following table sets forth the Company's net sales attributable to domestic
and international OTC health care, toiletries and skin care, other products and
total products during the past three fiscal years (in thousands of dollars):

<PAGE>

FISCAL YEAR ENDED NOVEMBER 30,
----------------------------------------------------------------------------------
2000 1999 1998
------------------------- ------------------------- --------------------------
SALES PERCENTAGE SALES PERCENTAGE SALES PERCENTAGE
----- ---------- ----- ---------- ----- ----------
<S> <C> <C> <C> <C> <C> <C>
Domestic:
OTC Health Care............ $ 146,941 58.1% $ 167,718 56.2% $ 114,060 51.8%
Toiletries and Skin Care... 84,725 33.5 108,718 36.5 84,850 38.6
International:
OTC Health Care............ 6,234 2.5 4,538 1.5 3,249 1.5
Toiletries and Skin Care... 14,344 5.7 16,932 5.7 17,004 7.7
Other Products................ 455 0.2 236 0.1 901 0.4
--------- ------ --------- ------ --------- ------

Total Products.......... $ 252,699 100.0% $ 298,142 100.0% $ 220,064 100.0%
========= ====== ========= ====== ========= ======

Ban sales included in the
above table................. $ 61,443 24.3% $ 86,659 29.1% $ 58,664 26.7%
========= ===== ========= ===== ========= =====

</TABLE>

<PAGE>

OTC HEALTH CARE

The Company markets a diversified portfolio of brand name OTC health care
products, many of which are among the market leaders in the U.S. in their
respective categories.

The GOLD BOND brand, which is over 100 years old, competes in the adult and baby
medicated powder, foot powder, therapeutic lotion, anti-itch cream and
antibiotic ointment markets. GOLD BOND is the leading brand in the medicated
powder category and is a rapidly growing presence in the lotion market. Total
retail sales for the brand have grown from less than $28,000,000 when the brand
was acquired in fiscal 1996 to over $60,000,000 in fiscal 2000. In 1997 the
Company added two line extensions, GOLD BOND Foot Powder and GOLD BOND Medicated
Body Lotion. GOLD BOND Antibiotic Ointment was introduced during the first
quarter of 1999. The product line is heavily supported by national television
and radio advertising throughout most of the year, as well as with consumer
promotions. As evidenced by the success of the lotion, foot powder and ointment
extensions, GOLD BOND continues to represent an opportunity for growth both
through sales increases among the existing products and the introduction of line
extensions.

With the acquisition of the Thompson Medical brands in late 1998, Chattem became
the U.S. market leader in topical analgesics. The Company's strong market
position as well as the advancing age of the U.S. population and the increasing
interest in physical fitness combine to provide solid growth prospects within
the topical analgesic category. FLEXALL is an aloe vera based topical analgesic
used primarily by chronic pain sufferers to alleviate pain and inflammation in
joints and secondarily by sufferers of muscle strain. Introduced in fiscal 1999,
FLEXALL QUIK GEL, which provides fast relief without any mess, was accompanied
by an advertising campaign featuring future NFL Hall of Famer Joe Montana.

Uniquely positioned as the brand that goes on "icy to dull the pain and gets hot
to relax it away", ICY HOT is available in a cream, balm and stick. This dual
action extra strength product appeals to younger users just entering the
category as well as older consumers who want to remain active. ICY HOT Patch,
concentrated pain relief that lasts for hours and is easy to apply even to the
lower back, will be introduced in fiscal 2001.

Former Thompson Medical brands round out the Company's topical analgesic
portfolio. ASPERCREME provides odor free relief of arthritis and other chronic
pain while SPORTSCREME is targeted at serious athletes as well as "weekend
warriors". CAPZASIN, which contains capsicin, the active ingredient that doctors
recommend most, is focused on the arthritis sufferer looking for clinically
proven relief. ARTHRITIS HOT provides relief at a value price. The Company
supports the topical analgesic brands with extensive national television and
radio advertising as well as targeted consumer promotions.

The Company competes in the menstrual analgesic segment with two brands:
PAMPRIN, a combination drug targeted towards relief of menstrual symptoms, and
PREMSYN PMS, targeted towards the symptoms of premenstrual syndrome. The Company
uses a mix of television and radio advertising as well as point of entry
sampling to support these brands.

HERPECIN-L, Chattem's entry in the lip care category, is uniquely formulated to
treat and protect cold sores by moisturizing lips to help prevent cracking and
promote healing. Available in a stick and a jar, HERPECIN-L contains a sunblock
to help protect lips from the harmful rays of the sun. The Company uses radio
advertising to generate trial use during the peak winter and summer cold sore
seasons.

BENZODENT is a dental analgesic cream in an adhesive base for use as an oral
topical analgesic for pain related to dentures. Acquired in 1994, BENZODENT is
principally supported by sampling consumers at the time they are fitted with
dentures as well as other professional marketing targeted toward dentists.

DEXATRIM is a line of appetite suppressants which was acquired in December 1998.
In fiscal 2000 DEXATRIM entered the herbal diet aid category with DEXATRIM
Natural. DEXATRIM Natural is a drug-free, all natural diet aid with special dual
action that curbs your appetite and helps your body burn fat and calories.
DEXATRIM Natural is currently available in Green Tea and Caffeine Free versions,
and in

<PAGE>

an Ephedrine-Free product in fiscal 2001. DEXATRIM Natural will be supported
through high levels of television and radio advertising in 2001.

As discussed in "Developments During Fiscal 2000" of this report, DEXATRIM
containing PPA was discontinued as a product line in the fourth quarter of
fiscal 2000.

GARLIQUE garlic tablets support cardiovascular health and are uniquely
positioned in the marketplace as a "one per day" high potency garlic supplement.
Most major GARLIQUE competitors require multiple daily dosages. Consumers have a
high level of interest in this odorless, drug-free, all natural approach to
maintaining normal cholesterol levels. GARLIQUE is currently being promoted by
Larry King, the radio and television personality.

REJUVEX is a dietary supplement for women in the pre and post-menopausal age
group. REJUVEX helps women to maintain comfort during a phase of life that is
often fraught with numerous discomforts. Additionally, REJUVEX, high in
magnesium, helps promote strong healthy bones in a population that is at risk
for development of osteoporosis. REJUVEX provides an estrogen-free avenue of
natural support.

HARMONEX is a combination of St. John's Wort, proven to help maintain and
promote emotional balance, and Siberian ginseng, an herb providing a boost to
physical well-being. In clinical trials, the scientifically standardized St.
John's Wort extract used in HARMONEX helped maintain a healthy emotional balance
in study subjects.

PROPALMEX is an herbal supplement for men over forty. PROPALMEX supports
prostate health and promotes free urinary flow. As men age, natural changes in
hormone balance result in conditions which tend to cause a swelling of the
prostate. This benign condition plagues most men past middle age and PROPALMEX
is the all natural, drug-free approach to maintenance of a healthy prostate.

MELATONEX is formulated to support a natural sleep cycle by supplementing the
body's production of melatonin, a hormone necessary for a good night's sleep. As
individuals age, they produce less melatonin, tend to sleep less and have more
difficulty falling asleep and staying asleep.

REPOSE Stress Relief Formula was launched during the summer of 1999. A
combination of standardized kava and Siberian ginseng as well as essential
vitamins and minerals, REPOSE promotes quick relaxation while replenishing lost
nutrients and helping the body adapt to stress.

NEW PHASE, introduced in 2000, is a unique isoflavone and herbal complex
providing natural phytoestrogen support for women. NEW PHASE is carefully
formulated to meet the needs of women experiencing the natural, normal change of
estrogen levels and helps maintain strong bones and good cardiovascular health.

OMNIGEST EZ, also introduced in 2000, promotes healthy digestion, heading off
discomforts before they start. OMNIGEST EZ contains a unique blend of seven
digestive enzymes from plants that work along with the digestive enzymes
produced by your own body to help in the digestion of fats, proteins,
carbohydrates, cellulose and dairy product.

TOILETRIES AND SKIN CARE

The Company markets a portfolio of brand name toiletries and skin care products,
many of which are among the market leaders in the U.S. in their respective
categories.

PHISODERM is a line of facial cleansers developed by dermatologists which
retains an ethical, troubled skin reputation. The line includes several formulas
of liquid cleansers including one for infants and a bar soap. In 1999 PHISODERM
added a 4-Way Daily Acne Cleanser and in 2000 a Blemish Patch to the line which
have generated incremental new business to the brand. In 2000 the PHISODERM acne
products enjoyed strong growth and became the product line's second largest
segment. Consumer support for the brand was focused on the acne business and
included advertising in teen magazines, concentrated television

<PAGE>

advertising on teen cable programs and extensive sampling. In 2001 the Company
anticipates further expanding the acne portion of the business with unique
line extensions.

MUDD is a line of deep cleaning clay-based products for the face. Target
consumers for MUDD are women between the ages of 18 and 49. MUDD Masque is
available in four formulas and is a market leader in the masque category. In
1999 the Company introduced MUDD Self-Heating Skin Cleanser which is a deep
cleaning scrub product. The MUDD Self-Heating Skin Cleanser is unique because it
generates heat upon contact with water to open pores for maximum deep cleansing.
In 2000 the masque products enjoyed sales growth and increased market share
based on expanded distribution and television advertising.

BULLFROG is the line of ultimate waterproof sunblocks for outdoor active
consumers. In 1999 two new products were added to the line: BULLFROG MAGIC
BLOCK, a disappearing color sunblock, and BULLFROG QUIK STICK, the highest sun
protection stick with aloe and vitamin E. In 2000, three additional new products
were added to the line: BULLFROG QUIK GEL Sport Spray, an active sport spray
version of the most popular selling BULLFROG QUIK GEL formula, BULLFROG
AgeProof, a broad spectrum UVA/UVB daily wear sunblock with Parsol 1789, and
BULLFROG Sparkle Block, a disappearing color sunblock with sparkles. The Company
will continue to support the brand with a comprehensive brand plan which
includes an active new product program and targeted consumer advertising,
promotions and sampling programs.

ULTRASWIM is a line of chlorine removing shampoos, conditioners and soaps.
ULTRASWIM has a unique formula that performs chlorine removal better than any
comparable hair care or skin care product on the market. The Company supports
this brand through targeted print advertising to competitive, recreational and
exercise swimmers and through event sponsorship with targeted sampling programs.
In 2001 ULTRASWIM will be relaunched with a new hair formula and package design.

SUN-IN competes in the spray-in hair lightener segment of the hair care market.
In 1999 SUN-IN introduced Super Streaks, a hair lightener in a gel form similar
to a styling gel. This item, which offers the SUN-IN teen user a hair lightener
with added control, has provided incremental volume to the base business. The
brand is supported through strong consumer promotions executed on shelf and a
seasonal radio campaign on teen radio stations.

<PAGE>

INTERNATIONAL

Certain of the Company's products are sold in foreign countries. The
international business is concentrated in Canada, Europe and Central and South
America.

Sales in Canada and Europe are conducted by subsidiary companies located and
locally staffed in Canada and the United Kingdom, respectively. General export
sales are handled by the Company from its offices in Chattanooga. Most of the
products sold in international markets are manufactured by the Company at its
Chattanooga facilities and are packaged by subsidiary companies in small
facilities in Canada and the United Kingdom with the assistance, from time to
time, of outside contract packagers.

The GOLD BOND, FLEXALL, PAMPRIN, PHISODERM, ULTRASWIM, SUN-IN, MUDD, ASPERCREME
and DEXATRIM brands are sold in Canada. Consumer product sales in the United
Kingdom and on the continent of Western Europe are currently limited to toiletry
and skin care products. The Company's hair lightener is sold on the continent
under the SPRAY BLOND trademark and in the United Kingdom as SUN-IN. MUDD,
Cornsilk (through a license agreement) and ULTRASWIM are the other products sold
by the Company's U.K. subsidiary in Europe.

The Company's export division services various distributors primarily located in
Central and South America and the Caribbean. The Company sells various products
into these markets including GOLD BOND, ICY HOT, DEXATRIM and PHISODERM.

MANUFACTURING AND QUALITY CONTROL

The Company manufactures approximately 70% of the sales volume of its products
at its Chattanooga plants. GOLD BOND medicated powders, DEXATRIM and the
SUNSOURCE brands are manufactured by third party contract manufacturers. The
Company believes it has adequate capacity to meet anticipated demand for its
products. New products that are consistent with currently manufactured products
can generally be manufactured with the adaptation of existing equipment and
facilities, the addition of new equipment at relatively small cost or through
readily available contract manufacturers. For additional information about the
extent of utilization of the Company's manufacturing facilities, see
"Properties", Item 2, in this report.

The Company's third party manufacturers produce certain products including GOLD
BOND medicated powders, DEXATRIM and the SUNSOURCE brands. In most cases, the
manufacturer is not obligated under a contract that fixes the term of its
commitment. Manufacturers may experience problems with product quality or
timeliness of product delivery. Manufacturers may also discontinue production of
brands for us upon little or no advance notice. In each case, we believe that
other contract manufacturers could be quickly secured if any of our current
contractors cease to perform adequately. However, if this occurs and we cannot
find other contract manufacturers, we may be forced to shift production to
in-house facilities. This may cause manufacturing delays, which would cause
disruption in our ability to fill orders. This could adversely affect our
business.

To monitor the quality of its products, the Company maintains an internal
quality control system supported by an on-site microbiology laboratory. We have
quality control inspectors who regularly test our products and processes and
shepherd the products through the manufacturing cycle. Outside consultants also
are employed from time to time to monitor product development and the
effectiveness of the Company's operations.

The Company has not experienced any material adverse effect on its business as a
result of shortages of energy, raw materials or packaging materials used in the
manufacture of its products. Certain of our products contain specialized
ingredients that we obtain from international and domestic third party
suppliers. An unexpected interruption or a shortage in supply could adversely
affect our business derived from these products. We may not be able to raise
prices quickly enough to immediately offset the effects of any increase in the
costs of these specialized ingredients or fill customer orders in the event of a
supply shortage. At present, we do not foresee any significant problems in
obtaining our ingredients requirements

<PAGE>

at reasonable prices, but an unexpected interruption or a shortage in supply
could adversely affect our business in the future.

PRODUCT DEVELOPMENT

The Company's product development expenditures were $1,837,000, $1,839,000, and
$1,369,000 in the fiscal years ended November 30, 2000, 1999 and 1998,
respectively. No material customer-sponsored product development activities were
undertaken during these periods. The Company expects product development
expenditures to increase in fiscal 2001 due to greater emphasis on developing
line extension opportunities.

The product development effort focuses on developing improved formulations for
existing products and on the creation of formulations for product line
extensions. The preservation and improvement of the quality of the Company's
products are also integral parts of its overall strategy.

DISTRIBUTION

The Company's domestic products are sold primarily through food, drug and mass
merchandiser accounts. Internationally, the products are sold by a national
broker in Canada, the Company's own sales force in the United Kingdom and by
distributors in Western Europe, Central and South America and the Caribbean.

Wal-Mart Stores, Inc. accounts for more than 10% of the Company's consolidated
net sales. No other customer accounts for more than 10% of consolidated net
sales. Boots Plc, a U.K. retailer, Shoppers Drug Mart, a Canadian retailer, and
Continental Export Corporation, a Miami based export distributor, account for
more than 10% of the international consumer products sales in their respective
regions.

The Company generally maintains sufficient inventories to meet customer orders
as received absent unusual and infrequent situations. At present, the Company
has no significant backlog of customer orders and is promptly meeting customer
requirements.

The Company does not generally experience wide variances in the amount of
inventory it maintains. Inventory levels were increased during fiscals 1996-1999
largely as a result of product acquisitions and line extensions in those years.
The decline in inventories in 2000 was largely the result of the sale of Ban and
write downs for DEXATRIM with PPA and SUNSOURCE inventories. Although not
contractually obligated to do so, in certain circumstances the Company allows
its customers to return unsold merchandise and, for seasonal products, the
Company provides extended payment terms to its customers.

MARKETING

The Company allocates a significant portion of its revenues to the advertising
and promotion of its products. Expenditures for these purposes were 42.3%,
39.5%, and 39.3%, respectively, as a percentage of net sales during each of the
fiscal years ended November 30, 2000, 1999 and 1998.

The Company's marketing objective is to develop and execute professionally
designed, creative and cost-effective advertising and promotional programs. The
manner in which the Company executes promotional programs and purchases
advertising time creates more flexibility in terms of adjusting spending levels.
The Company believes that balancing advertising, trade promotion and consumer
promotion expenditures on a cost-effective basis is essential to its ability to
compete successfully.

The Company develops for each of its major brands advertising strategies and
executions that sell the product by focusing on the particular strengths and
market position of the product rather than just entertaining the viewer. The
Company achieves cost-effective advertising by minimizing certain expenses, such
as production of commercials and payments to advertising agencies. Additionally,
working with its outside media agencies, the Company pursues a strategy for
buying spot and cable television as well us network radio that it believes
results in significant efficiencies as compared to traditional media buying
methods. New product launches are supported with a substantial level of
advertising and promotional spending. We often use celebrity endorsements to
increase awareness of our products, such as Larry King's

<PAGE>

endorsement of GARLIQUE and Joe Montana's endorsement of FLEXALL. Where
appropriate, we use radio and print advertising and 15-second television
advertisements. In our advertisements, we have successfully used personal
testimonials from individuals attesting to the effectiveness of our products.

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

SEASONALITY

Seasonality is an important factor affecting the operations of the Company.
During recent fiscal years, the Company's first quarter net sales and gross
profit have trailed the other fiscal quarters on average from 25% to 35% because
of slower sales of consumer products, the seasonality of BULLFROG and SUN-IN,
and lower levels of promotional campaigns during this quarter.

COMPETITION

The Company competes in the OTC health care and toiletries and skin care
markets. These markets are highly competitive and are characterized by the
frequent introduction of new products, including the movement of prescription
drugs to the OTC market, often accompanied by major advertising and promotional
programs. We compete primarily on the basis of product quality, price, brand
loyalty and consumer acceptance. Our competitors include other OTC
pharmaceutical companies and large consumer products companies, many of which
have considerably greater financial and marketing resources than us. In
addition, our competitors have often been willing to use aggressive spending on
trade promotions and advertising as a strategy for building market share at the
expense of their competitors, including us. The private label or generic
category has also become increasingly competitive in certain of the Company's
product markets. Our products continue to compete for shelf space among
retailers which are increasingly consolidating.

TRADEMARKS AND PATENTS

Our trademarks are of material importance to our business and are among our most
important assets. In fiscal year 2000, substantially all of our net sales were
from products bearing proprietary brands names, including Ban (which was sold in
September 2000), GOLD BOND, FLEXALL, ICY HOT, ASPERCREME, PAMPRIN, GARLIQUE,
PHISODERM, DEXATRIM and BULLFROG. Accordingly, our future success may depend in
part upon the goodwill associated with our brand names, particularly GOLD BOND
and DEXATRIM.

Our principal brand names are registered in the United States and certain
foreign countries. However, we cannot assure you that the steps we take to
protect our proprietary rights in our brand names will be adequate to prevent
the misappropriation of these registered brand names in the United States or
abroad. In addition, the laws of some foreign countries do not protect
proprietary rights in brand names to the same extent as do the laws of the
United States.

Through our subsidiary, Signal Investment & Management Co., we maintain and have
applied for patent, trademark and copyright protection in the United States
relating to certain of our existing and proposed products and processes. We
cannot assure you that we will be able to successfully protect our intellectual
property, and the loss of our intellectual property protection could adversely
affect our business. Additionally, we license certain intellectual property from
third parties, and we cannot assure you that these third parties can
successfully maintain their intellectual property rights. The sales of certain
of our products rely on our ability to maintain and extend our licensing
agreements with third parties, and we cannot assure

<PAGE>

you that we will be successful in maintaining these licensing agreements. If
we lose the right to use these licenses, our business could be adversely
affected.

The Company also owns patents related to the ICY HOT stick topical analgesics,
which expire in 2007. After expiration of the patents, the Company expects that
this product will continue to compete in the market primarily on the basis of
the goodwill associated with the brand.

GOVERNMENT REGULATION

The manufacturing, distribution, processing, formulation, packaging, labeling
and advertising of the Company's products are subject to regulation by federal
agencies, including, but not limited to:

- the United States Food and Drug Administration ("FDA");
- the Federal Trade Commission ("FTC");
- the Consumer Product Safety Commission;
- the United States Department of Agriculture;
- the United States Postal Service;
- the United States Environmental Protection Agency ("EPA"); and
- the Occupational Safety and Health Administration ("OSHA").

These activities are also regulated by various agencies of the states,
localities and foreign countries in which our products are sold. In particular,
the FDA regulates the safety, manufacturing, labeling and distribution of
dietary supplements, including vitamins, minerals and herbs, food additives, OTC
and prescription drugs, medical devices and cosmetics. The regulations that are
promulgated by the FDA relating to the manufacturing process are known as
current good manufacturing practices, or GMP's. In addition, the FTC has
overlapping jurisdiction with the FDA to regulate the promotion and advertising
of OTC pharmaceutical, dietary supplement and functional toiletries and skin
care products.

All of the Company's OTC drug products are regulated pursuant to the FDA's
monograph system for OTC drugs. The monographs set out the active ingredients
and labeling indications that are permitted for certain broad categories of OTC
drug products, such as topical analgesics. Compliance with the monograph
provisions means that the product is generally recognized as safe and effective
and is not misbranded. Products that comply with monograph standards do not
require pre-market approval from the FDA. Future changes in the monographs could
result in the Company having to revise product labeling and formulations, which
would require the submission of a new drug application or abbreviated new drug
application.

The Company responded to certain questions with respect to efficacy received
from the FDA in connection with clinical studies for pyrilamine maleate, one of
the active ingredients used in certain of the PAMPRIN and PREMSYN PMS products.
While the Company addressed all of the FDA questions in detail, the final
monograph for menstrual drug products, which has not yet been issued, will
determine if the FDA considers pyrilamine maleate safe and effective for
menstrual relief products. The Company has been actively monitoring the process
and does not believe that either PAMPRIN or PREMSYN PMS will be materially
adversely affected by the FDA review. The Company believes that any adverse
finding by the FDA would likewise affect the Company's principal competitors in
the menstrual product category.

The Dietary Supplement Health and Education Act of 1994 ("DSHEA") was enacted on
October 25, 1994. DSHEA amends the Federal Food, Drug and Cosmetic Act by
defining dietary supplements, which include vitamins, mineral, nutritional
supplements, herbs and botanicals, as a new category of food separate from
conventional food. DSHEA provides a regulatory framework to ensure safe, quality
dietary supplements and to foster the dissemination of accurate information
about such products. Under DSHEA, the FDA is generally prohibited from
regulating dietary supplements as food additives or as drugs unless product
claims, such as claims that a product may diagnose, mitigate, cure or prevent an
illness, disease or malady, permit the FDA to attach drug status to a product.

<PAGE>

DSHEA provides for specific nutritional labeling requirements for dietary
supplements effective January 1, 1997, and the FDA's final regulations require
that all dietary supplements must be labeled in compliance with the regulations
no later than March 23, 1999. DSHEA permits substantiated, truthful and
non-misleading statements of nutritional support to be made in labeling, such as
statements describing general well-being resulting from consumption of a dietary
ingredient or the role of a nutrient or dietary ingredient in affecting or
maintaining a structure or function of the body. The FDA has adopted a final
regulation, effective February 7, 2000, distinguishing between permitted claims
and impermissible disease-related claims for dietary supplements. The Company
anticipates that the FDA will promulgate GMPs which are specific to dietary
supplements and require at least some of the quality control provisions
contained in the GMPs for drugs, which are more rigorous than the GMPs for
foods.

The FDA has finalized some of its regulations to implement DSHEA, including
those relating to nutritional labeling requirements and nutritional support
claims. The FDA also has under development additional regulations and guidelines
to implement DSHEA. Newly adopted and future regulations may require expanded or
different labeling for our vitamin and nutritional products. We cannot determine
what effect these regulations, when fully implemented, will have on our business
in the future. These regulations could require the recall, reformulation or
discontinuance of certain products, additional recordkeeping, warnings,
notification procedures and expanded documentation of the properties of certain
products and scientific substantiation regarding ingredients, product claims and
safety. Failure to comply with applicable FDA requirements can result in
sanctions being imposed on the Company or the manufacture of our products,
including warning letters, product recalls and seizures, injunctions or criminal
prosecution.

As part of its regulatory authority, the FDA may periodically conduct audits of
the physical facilities, machinery, processes and procedures that we and our
competitors use to manufacture products. The FDA may perform these audits at any
time without advanced notice. As a result of these audits, the FDA may order us
to make certain changes in our manufacturing facilities and processes. We may be
required to make additional expenditures to comply with these orders or possibly
discontinue selling certain products until we comply with these orders. As a
result, our business could be adversely affected. In December 1998, the FDA
conducted an inspection of one of our manufacturing facilities in Chattanooga,
Tennessee. In connection with that inspection, the FDA observed certain
processes and procedures that needed to be changed or improved. The Company has
responded to the FDA's concerns and believes that it has implemented changes
that address and satisfy the FDA's observations. No further contact by the FDA
has been made to date, but the Company expects a follow-up visit by FDA
personnel in the future.

In 1994, the Nonprescription Drug Manufacturers Association (now the Consumer
Healthcare Products Association ("CHPA")) initiated a large scale study in
conjunction with the Yale University School of Medicine to investigate a
possible association, if any, of stroke in women aged 18 to 49 using PPA, the
active ingredient in certain of the DEXATRIM products (the "Yale Study"). PPA is
also used in other over-the-counter medications which were also part of the
study. In May 2000, the results of the Yale Study were filed with the FDA. The
investigators concluded that the results of the Yale Study suggest that PPA
increases the risk of hemorrhagic stroke. The FDA indicated at that time that no
immediate action was required and scheduled an FDA advisory panel to meet in
October 2000 to discuss the results of this study. The CHPA questioned the
execution of the Yale Study and disagreed with its conclusions.

On October 19, 2000, a NDAC, commissioned by the FDA to review the safety of
PPA, determined that there is an association between PPA and hemorrhagic stroke
and recommended that PPA not be considered generally recognized as safe for OTC
use as a nasal decongestant or for weight control. In response to a request from
the FDA to voluntarily cease marketing DEXATRIM with PPA, the Company announced
on November 7, 2000 its decision to immediately cease shipping DEXATRIM with PPA
and to accept product returns from any retailers who decide to discontinue
marketing DEXATRIM with PPA. To date, the FDA has not issued any final
determination concerning PPA or products containing PPA.

The NDAC'S determination and the FDA's request to voluntarily cease marketing
DEXATRIM with PPA may increase the likelihood that claims relating to the
existence of PPA in DEXATRIM will be filed against the Company. While the
Company maintains product liability insurance through third party insurers that
it believes to be adequate, there can be no assurance that such coverage will be
sufficient to satisfy such claims.

<PAGE>

Certain states and localities have enacted, or are considering enacting,
restrictions on the sale of products that contain PPA, synthetic ephedrine or
naturally-occurring sources of ephedrine. These restrictions include the
prohibition of over-the-counter (OTC) sales, required warnings or labeling
statements, recordkeeping and reporting requirements, the prohibition of sales
to minors, per-transaction limits on the quantity of product that may be
purchased, and limitations on advertising and promotion. In such states or
localities these restrictions could adversely affect the sale of DEXATRIM
Natural, which contains naturally-occurring sources of ephedrine. Failure to
comply with these restrictions could also lead to regulatory enforcement action,
including the seizure of violative products, product recalls, and civil or
criminal fines or other penalties.

The Company was notified in October, 2000 that the FDA denied the citizens
petition submitted by Thompson Medical Company, Inc., previous owner of
SPORTSCREME and ASPERCREME, seeking a determination that 10% trolamine
salicylate was clinically proven to be an effective active ingredient in
external analgesic OTC drug products, and thus should be included in the FDA's
yet-to-be finalized monograph for external analgesics. In the same
correspondence the FDA recommended that the Company meet with the FDA to agree
on an acceptable clinical study protocol to determine the efficacy of 10%
trolamine salicylate as an active ingredient in OTC external analgesic drug
products. The Company cannot predict the timing or outcome of any FDA decision
on the proposed protocol, although an agreement is not expected to occur until
at least the middle of fiscal 2001. If the study protocol is approved, the
Company expects that it will take one to two years to produce the clinical data
for FDA review. The FDA could finalize the OTC external analgesic monograph
before the protocol and clinical data results are finalized, which would place
10% trolamine salicylate in non-monograph status. The Company is working to
develop alternate formulas for SPORTSCREME and ASPERCREME in the event that
clinical data does not support the efficacy of trolamine salicylate.

ENVIRONMENTAL

The Company continuously assesses compliance of its operations with applicable
federal, state and local environmental laws and regulations. The Company's
policy is to record liabilities for environmental matters when loss amounts are
probable and reasonably determinable. The Company's manufacturing sites utilize
chemicals and other potentially hazardous materials and generates both hazardous
and non-hazardous waste, the transportation, treatment, storage and disposal of
which are regulated by various government agencies, and has engaged
environmental consultants on a regular basis to assist its compliance efforts.
The Company is currently in substantial compliance with all applicable
environmental permits and is aware of its responsibilities under applicable
environmental laws. Any expenditures necessitated by changes in law and
permitting requirements cannot be predicted at this time, although such costs
are not expected to be material to the Company's financial position or results
of operations.

Since the early 1980's, the U.S. Environmental Protection Agency ("EPA") has
been investigating the extent of, and the health effects resulting from,
contamination of Chattanooga Creek, which runs through a major manufacturing
area of Chattanooga in the vicinity of the Company's manufacturing facilities.
The contamination primarily stems from the dumping of coal tar into the creek
during World War II when the federal government was leasing and operating a coke
and chemical plant adjacent to the creek. However, the EPA has been
investigating virtually all businesses that have discharged any wastewater into
the creek. A 2 1/2 mile stretch of Chattanooga Creek was placed on the National
Priorities List as a Superfund site under the Comprehensive Environmental
Response, Compensation and Recovery Act in September of 1995 and remediation of
the creek bed commenced in mid-1997. The Company could be named as a potentially
responsible party in connection with such site due to the Company's historical
discharge of wastewater into the creek. However, considering the nature of the
Company's wastewater, as well as the fact that the Company's discharge point is
downstream from the old coke and chemical plant that was operated by the
government, and the availability of legal defenses and expected cost sharing,
the Company does not believe that any liability associated with such site will
be material to its financial position or results of operations.

In December 1998, the Company was named in a lawsuit with 37 other companies as
potentially responsible parties for the disposal of waste materials found at a
site in Birmingham, Alabama. Although the facts

<PAGE>

surrounding this case are unclear, the Company believes a company it used
periodically during 1986 and 1987 to treat, store and dispose of waste
materials from its manufacturing processes improperly disposed of these waste
materials. The Company cannot currently assess its potential liability
resulting from this lawsuit, but if the Company is found liable its business
could be adversely affected.

PRODUCT LIABILITY AND INSURANCE

An inherent risk of the Company's business is exposure to product liability
claims brought by users of the Company's products or by others. Except as set
forth in Item 3, "Legal Proceedings", of this Form 10-K, the Company is not
aware of any material claims pending or threatened against the Company or its
products that if adversely decided would negatively affect us. While the Company
will continue to attempt to take what it considers to be appropriate
precautions, there can be no assurance that it will avoid significant product
liability exposure. The Company maintains product liability insurance,
principally through third party insurers, that it believes to be adequate;
however, there can be no assurance that it will be able to retain its existing
coverage or that such coverage will be cost-justified or sufficient to satisfy
future claims, if any. The NDAC's determination and the FDA's request to
voluntarily cease marketing DEXATRIM with PPA has increased the likelihood that
claims relating to the existence of PPA in DEXATRIM will be filed against the
Company.

EMPLOYEES

The Company employs approximately 381 persons on a full-time basis in the U.S.
and 34 persons at its foreign subsidiaries' offices. The Company's employees are
not represented by any organized labor union, and management considers its labor
relations to be good.

RISK FACTORS

The Company's business is subject to a number of risks. Some of those risks are
described in "Competition," "Governmental Regulation" and "Manufacturing and
Quality Control" included in this Form 10-K. In addition to the other
information contained in this Form 10-K, the following risk factors should be
carefully considered.

RISKS RELATED TO POTENTIAL FUTURE ACQUISITIONS

Future acquisitions by the Company could result in the incurrence of substantial
additional indebtedness, which could adversely affect the Company's business,
financial condition and results of operations. Acquisitions involve numerous
risks, including difficulties in integrating the operations, technologies,
services and products of the acquired companies and the diversion of
management's attention from other business concerns. If the Company makes any
acquisitions, there can be no assurance that those acquisitions will be
successful or that its business will not be adversely affected.

Much of the Company's future growth depends on its ability to complete
additional acquisitions. There can be no assurance that the Company will be able
either to identify qualified acquisition candidates or successfully integrate
any of its future acquisitions into its operations. There can be no assurance
that the Company will complete any future acquisitions or that acquisitions will
contribute favorably to the Company's operations and financial condition.

PRODUCT DEVELOPMENT RISKS

The Company's future growth is also dependent on new product development. New
product initiatives may not be successfully implemented because of difficulty in
assimilation, development costs and diversion of management time. The Company
evaluates opportunities to develop new products through product line extensions
and product modifications in the ordinary course of its business. Product line
extensions and product modifications involve numerous risks, including
difficulties in the assimilation of the developed products, the expenses
incurred in connection with the product development and the diversion of
management's attention from other business concerns. There can be no assurance
that the Company will successfully develop product line extensions or integrate
newly developed products into the Company's

<PAGE>

business. In addition, there can be no assurance that newly developed products
will contribute favorably to the Company's operations and financial condition.

RELIANCE ON BRANDS; INTELLECTUAL PROPERTY CONCERNS

If the Company is unable to successfully protect its intellectual property, the
Company's business could be adversely affected. The Company's trademarks are of
material importance to its business and are among its most important assets. In
fiscal year 2000, substantially all of the Company's net sales were from
products bearing proprietary brand names, including Ban (which was sold in
September 2000), GOLD BOND, FLEXALL, ICY HOT, ASPERCREME, PAMPRIN, GARLIQUE,
PHISODERM and DEXATRIM. Accordingly, the Company's future success may depend in
part upon the goodwill associated with its brand names, particularly GOLD BOND
and DEXATRIM.

The Company's principal brand names are registered in the United States and
certain foreign countries. However, there can be no assurance that the steps the
Company takes to protect its proprietary rights in its brand names will be
adequate to prevent the misappropriation of these registered brand names in the
United States or abroad. In addition, the laws of some foreign countries do not
protect proprietary rights in brand names to the same extent as do the laws of
the United States.

Through its subsidiary, Signal Investment & Management Co., the Company
maintains or has applied for patent, trademark and copyright protection in the
United States relating to certain of its existing and proposed products and
processes. There can be no assurance that the Company will be able to
successfully protect its intellectual property or that patents, trademarks or
copyrights will be granted with respect to intellectual property that the
Company believes is proprietary, and the loss of its intellectual property
protection could adversely affect the Company's business. Additionally, the
Company licenses certain intellectual property from third parties, and there can
be no assurance that these third parties can successfully maintain their
intellectual property rights. The sale of certain of the Company's products rely
on its ability to maintain and extend its licensing agreements with third
parties, and there can be no assurance that we will be successful in maintaining
these licensing agreements. If the Company loses the right to use these
licenses, its business could be adversely affected.

RISK OF LOSS OF MATERIAL CUSTOMER

For the year ended November 30, 2000, sales to Wal-Mart Stores, Inc.
("Wal-Mart") accounted for approximately 24% of the Company's total sales.
Consistent with industry practice, the Company does not operate under a
long-term written supply contract with Wal-Mart or any of its other customers.
The Company's business would be adversely affected by the loss of Wal-Mart as a
continuing major customer. No other customer accounted for more than 10% of the
Company's sales in fiscal 2000.

PUBLIC PERCEPTION

The Company's dietary supplement and appetite suppressant business could be
adversely affected if any of its products or similar products distributed by
other companies prove to be harmful to consumers or if scientific studies
provide unfavorable findings regarding the safety or effectiveness of its
products or any similar products. In 2000, the NDAC report and the FDA request
that the Company voluntarily cease marketing DEXATRIM with PPA were widely
reported in the media. There can be no assurance that DEXATRIM products which do
not contain PPA will not suffer from negative public perception, which could
adversely affect the ongoing DEXATRIM business.

The Company's dietary supplements products contain vitamins, minerals, herbs and
other ingredients that the Company regards as safe when taken as directed by the
Company and that various scientific studies have suggested may offer health
benefits. While the Company conducts extensive quality control testing on its
products, the Company generally does not conduct or sponsor clinical studies
relating to the benefits of its products, although the Company did conduct a
limited number of clinical studies in 2000. The Company is highly dependent upon
consumers' perception of the overall integrity of the dietary supplements
business, as

<PAGE>

well as the safety and quality of products in that industry and similar
products distributed by other companies which may not adhere to the same
quality standards as the Company.

In the past and particularly in 2000, appetite suppressants, including DEXATRIM,
have been the subject of negative press that has affected the public's
perception of these products. The Company will market and advertise DEXATRIM
that does not contain PPA as safe and effective to offset its past negative
perception, but there can be no assurance that DEXATRIM or any of the Company's
products will not suffer from negative public perception.

DEPENDENCE ON THIRD PARTY MANUFACTURERS

The Company's business could be adversely affected if its third party
manufacturers cease to perform adequately. The Company uses third party
manufacturers to make products representing approximately 30% of its sales
volume, including GOLD BOND medicated powders, the SUNSOURCE line and DEXATRIM.
In most cases, the manufacturer is not obligated under a contract that fixes the
term of its commitment. Manufacturers may experience problems with product
quality or timeliness of product delivery. Manufacturers may also discontinue
production of products for the Company or increase their manufacturing costs
upon little or no advance notice. In any case, the Company believes that it
could find other contract manufacturers quickly if any of its current
contractors cease to perform adequately. However, if this occurs and the Company
cannot find other contract manufacturers, the Company may be forced to shift
production to in-house facilities. This may cause manufacturing delays, which
would cause disruption in the Company's ability to fill orders. This could
adversely affect the Company's business.

PRODUCT LIABILITY AND INSURANCE

The Company is constantly at risk that consumers and users of its products will
bring lawsuits alleging product liability. Except as disclosed in "Legal
Proceedings", Item 3 in this Report, the Company is not aware of any claims
pending against it or its products that if adversely decided would materially
adversely effect its business. While the Company will continue to attempt to
take what it considers to be appropriate precautions, there can be no assurance
that these precautions will enable the Company to avoid significant product
liability exposure in the future. The Company maintains product liability
insurance through third party providers. The Company believes its insurance
coverage is adequate; however, there can be no assurance that the Company will
be able to retain its existing coverage or that this coverage will be
cost-justified or sufficient to satisfy any future claims. The NDAC's
determination and the FDA's request to voluntarily cease marketing DEXATRIM with
PPA have increased the likelihood that claims relating to the existence of PPA
in DEXATRIM will be filed against the Company.

LEVERAGE

As of November 30, 2000, the Company's long-term debt was $304,077,000. The
degree to which the Company is leveraged could have important consequences,
including, but not limited to, the following: (i) the Company's ability to
obtain additional financing in the future for working capital, capital
expenditures, acquisitions, general corporate purposes or other purposes may be
limited or become impaired; (ii) while the Company's indebtedness is currently
at fixed interest rates, in the future a portion of the Company's borrowings may
be at variable rates of interest, which could result in higher interest expenses
in the event of increases in interest rates; and (iii) such indebtedness
contains and will contain financial and restrictive covenants, the failure to
comply with which may result in an event of default which, if not cured or
waived, could have a material adverse effect on the Company.

Shortly after the end of fiscal 2000, the Company initiated a consent
solicitation and tender offer for its outstanding senior subordinated debt,
which resulted in the retirement of $77,859,000 of its long-term debt. After the
conclusion of the tender offer, the Company's long-term debt was $226,302,000.

<PAGE>

DEPENDENCE ON SENIOR MANAGEMENT

The Company's future performance will depend to a significant degree upon the
efforts and abilities of certain members of senior management, in particular
those of Zan Guerry, Chairman of the Board and Chief Executive Officer, and A.
Alexander Taylor, II, President and Chief Operating Officer. The loss of the
services of either Messrs. Guerry or Taylor, each of whom has an employment
agreement with the Company, could have an adverse effect on the Company's
business.

RISKS OF FOREIGN OPERATIONS

For the year ended November 30, 2000, 8.1% of the Company's net sales were
attributable to its international business. The Company is subject to the risk
of doing business internationally, including unexpected changes in, or
impositions of, legislative or regulatory requirements, fluctuations in the
United States dollar against foreign currencies, which could increase the price
of the Company's products in foreign markets or increase the cost of certain raw
materials purchased by the Company, delays resulting from difficulty in
obtaining export licenses, tariffs and other barriers and restrictions,
potentially longer payment cycles, greater difficulty in accounts receivable
collection, potentially adverse tax treatment and the burden of complying with a
variety of foreign laws. In addition, the Company is subject to general
geopolitical risks, such as political and economic instability and changes in
diplomatic and trade relationships, which could affect, among other things,
customers' inventory levels and consumer purchasing. Although the Company has
not to date experienced any material adverse effect as a result of such factors,
there can be no assurance that such factors will not adversely affect the
Company in the future. In addition, the laws of certain foreign countries may
not protect the Company's intellectual property rights to the same extent as the
laws of the United States.

VOLATILITY OF STOCK PRICE

The trading price of the common stock could be subject to significant
fluctuations in response to variations in the results of the Company's
operations, its leveraged financial position, general trends in the consumer
products industry, the relative illiquidity of the Company's common stock and
stock market conditions generally.

DIVIDEND POLICY

The Company intends to retain its earnings, if any, for use in its operations
and repayment of outstanding indebtedness and has no current intention of paying
dividends to the holders of common stock.

<PAGE>

ITEM 2. PROPERTIES

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

<TABLE>
<CAPTION>
Total Area Total Buildings Square
(Acres) (Square Feet) Use Feet
---------- --------------- ----------------------- -------
<S> <C> <C> <C> <C>
Owned Properties:
Chattanooga, Tennessee 10.0 120,700 Manufacturing 80,000
Office & Administration 40,700
Chattanooga, Tennessee 8.5 68,300 Manufacturing
& Warehousing 50,600
Office 17,700
Leased Properties:
Chattanooga, Tennessee (1) 3.1 135,200 Warehousing 103,800
Chattanooga, Tennessee (2) 0.1 3,800 Warehousing &
Manufacturing 35,200
Chattanooga, Tennessee (3) 3.1 135,000 Warehousing 125,000
Office 10,000
Mississauga, Ontario, Canada (4) 0.3 20,015 Warehousing 15,515
Office & Administration 3,000
Packaging 1,500
Basingstoke, Hampshire, England (5) 0.5 21,900 Warehousing 13,900
Office & Administration 6,500
Packaging 1,500
</TABLE>

NOTES:

(1) Leased on a month-to-month basis for a monthly rental of $34,547. A
twelve month termination notice is required.
(2) Leased on a month-to-month basis for a monthly rental of $1,575.
(3) Leased under a two year lease ending January 31, 2001 for a monthly rental
of $33,750.
(4) Leased under a lease ending November 30, 2004 at a monthly rental,
including property taxes and other incidentals, of approximately $8,838.
(5) Leased under leases ending in 2014 and 2015 at a monthly rental, including
property taxes and other incidentals, of approximately $15,765.

The Company is currently operating its facilities at approximately 70% of
total capacity. These facilities are FDA registered and are capable of
further utilization through the use of a full-time second shift and the
addition of a third shift.

ITEM 3. LEGAL PROCEEDINGS

Note 10 of the Notes to Consolidated Financial Statements beginning on page
38 of the Company's 2000 Annual Report to Shareholders is incorporated herein
by reference.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

20
<PAGE>

PART II

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER
MATTERS

The information found on pages 21 and 36 to 37 of the Company's 2000 Annual
Report to Shareholders is incorporated herein by reference.

ITEM 6. SELECTED FINANCIAL DATA

The information found on page 20 of the Company's 2000 Annual Report to
Shareholders is incorporated herein by reference.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

The information found on pages 9 to 19 of the Company's 2000 Annual Report to
Shareholders is incorporated herein by reference.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The information found on pages 20 to 56 of the Company's 2000 Annual Report
to Shareholders is incorporated herein by reference.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

None.

21
<PAGE>

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

(a) DIRECTORS

The information found in the Company's 2001 Proxy Statement under the
heading "Information about Nominees and Continuing Directors" is hereby
incorporated by reference.

(b) EXECUTIVE OFFICERS

The following table lists the names of the executive officers and other
key employees of the Company as of February 23, 2001, their ages, their
positions and offices with the Company and the year in which they were first
elected or appointed to these positions:

NAME AGE POSITION WITH REGISTRANT FIRST ELECTED
- -------------------------- --- ------------------------ -------------
<S> <C> <C> <C>
Zan Guerry 52 Chairman of the Board and 1990
Chief Executive Officer; Director

A. Alexander Taylor II 47 President and Chief Operating Officer; 1998
Director

Andrea M. Crouch 42 Vice-President - Toiletries Marketing 1995

Ron Galante 56 Vice-President - New Business Development 1993

Christopher S. Keller 31 Director of Finance 2000

Richard W. Kornhauser 46 Vice-President - OTC and SUNSOURCE 2000
Marketing

Robert S. Marshall 35 Vice-President - Marketing 2000

Elaine M. Morefield, Ph.D. 43 Vice-President - Research and Development 2000

B. Derrill Pitts 57 Vice-President - Operations 1984

Charles M. Stafford 50 Vice-President - Sales 1994

</TABLE>

Mr. Guerry has served as Chairman of the Board since June 1990 and as Chief
Executive Officer since January 1998. Previously he served as Vice President and
Chief Financial Officer from 1980 until 1983, as Executive Vice President from
1983 to 1990, as President of Chattem Consumer Products from 1989 to 1994, as
Chief Operating Officer from 1989 to 1990 and as President of the Company from
1990 to 1998. Mr. Guerry was first elected as a director of the Company in 1981.

Mr. Taylor was elected to his present positions with the Company in January
1998. Previously he was a partner from 1983 to 1998 with the law firm Miller &
Martin, general counsel to the Company. Mr. Taylor was first elected as a
director of the Company in 1993.

22
<PAGE>

Ms. Crouch joined the Company in 1985 as an Assistant Brand Manager. In 1995,
she was named to her current position. Previously she worked with Hayes
Microcomputer Products and Arthur Andersen LLP. She was denoted an executive
officer of the Company in January 1999.

Mr. Galante was appointed to his present position with the Company in June 1993.
Previously he served as General Manager of Chattem (Canada) Inc. from June 1990
until May 1993 and as Director of Marketing for many of the Company's domestic
brands from 1980 until 1993. He was denoted an executive officer of the Company
in January 1999.

Mr. Keller joined the Company in 2000. Previously he held the position of
Business Analyst with Dyson-Kissner-Moran Corporation. He worked in investment
management and private equity from 1992 to 1997.

Mr. Kornhauser joined the Company in 2000 as Vice President-OTC and SUNSOURCE.
Prior to joining the Company, Mr. Kornhauser served as Vice President Group
Marketing Director with Combe Incorporated from October 1990 until May 2000.
Previously he held sales, marketing and advertising positions with American Home
Products, Revlon, Ted Bates, and Del Laboratories.

Mr. Marshall joined the Company in 1994 as a Brand Manager. In 1995 he was
promoted to Group Marketing Manager in Toiletries, in 1996 to Vice President-OTC
Marketing and in 2000 to his current position. Previously he worked in brand
management at Procter & Gamble. He was denoted an executive officer of the
Company in January 1999.

Dr. Morefield joined the Company in 2000 as Vice President-Research and
Development. She has sixteen years of pharmaceutical research and development
experience. Her most recent position was Director of Formulation Development for
the Whitehall-Robins division of American Home Products.

Mr. Pitts is a long-term employee and has served in all manufacturing operation
disciplines since joining Chattem in 1966. He was promoted to Vice President in
1984 and was denoted an executive officer of the Company in January 1999.

Mr. Stafford was appointed to his present position in June 1994. Previously he
served as Director of Field Sales and Zone Sales Manager. Prior to joining the
Company in 1983, Mr. Stafford held sales management positions with Johnson &
Johnson and Schering Plough. He was denoted an executive officer of the Company
in January 1999.

The information found in the Company's 2001 Proxy Statement under the
heading "Section 16(a) Beneficial Reporting Compliance" is hereby
incorporated by reference.

ITEM 11. EXECUTIVE COMPENSATION

The information found in the Company's 2001 Proxy Statement under the heading
"Executive Compensation and Other Information" is hereby incorporated by
reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The information found in the Company's 2001 Proxy Statement under the heading
"Voting Securities and Principal Holders Thereof" is hereby incorporated by
reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

None.

<PAGE>

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORT ON FORMS 8-K

(a) 1. The consolidated financial statements and the related report of
independent public accountants required to be filed with this Report
are incorporated by reference from pages 22 to of the Company's 2000
Annual Report to Stockholders.

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

<TABLE>
<CAPTION>
Exhibit
Number Description of Exhibit References
------- ---------------------- ----------
<S> <C> <C>
3 Restated Charter of Chattem, Inc., as
amended (13)

Amended and Restated By-Laws of
Chattem, Inc. (1)

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

Form of Indenture dated August 3, 1994
between Chattem, Inc. and SouthTrust
Bank of Alabama, N.A. relating to the
12.75% Series B Senior Subordinated
Notes due 2004 (3)

Following Amendments to and Supplemental
Indentures to Form of Indenture dated
August 3, 1994 between Chattem, Inc. and
SouthTrust Bank of Alabama, N.A. relating
to the 12.75% Series B Senior
Subordinated Notes due 2004: First, dated May 23,
1995; Second, dated March 19, 1998; Third, dated
December 27, 2000

Form of Indenture dated March 24, 1998
between Chattem, Inc. and SouthTrust Bank
of Alabama, N.A. relating to the 8.875%
Senior Subordinated Notes due 2008 (4)

First Amendment and Supplemental
Indenture dated January 3, 2001 to Form
of Indenture dated March 24, 1998 between
Chattem, Inc. and SouthTrust Bank of
Alabama, N.A. relating to the 8.875%
Senior Subordinated Notes due 2008.

10 Material Contracts -

Lease Agreements, as amended, dated
February 1, 1996 between Tammy
Development Company and Chattem, (5) and (6)
Inc. for warehouse space at 3100
Williams Street, Chattanooga, Tennessee

24
<PAGE>

<CAPTION>
Exhibit
Number Description of Exhibit References
------- ---------------------- ----------
<S> <C> <C>
Asset Purchase Agreement dated June 6,
1996 between Campbell Laboratories,
Inc., seller, and Chattem, Inc. and Signal
Investment & Management Co.,
purchasers, for the HERPECIN-L
business (6)

10 Asset Purchase and Sale Agreement dated
May 23, 1997 by and among Chattem,
Inc., Signal Investment & Management
Co., and Sunsource International, Inc.
and Mindbody, Inc. (without schedules
and exhibits) for the SUNSOURCE
business (7)

First Amended and Restated Master
Trademark License Agreement between
Signal Investment & Management Co.
and Chattem, Inc., effective
June 30, 1992 (8)

Chattem, Inc. Non-Statutory Stock
Option Plan- 1998 (8)

Asset Purchase Agreement dated
February 22, 1998 by and among
Bristol-Myers Squibb Company, Chattem,
Inc. and Signal Investment &
Management Co. for the Ban business (9)

Asset Purchase and Sale Agreement dated
May 12, 1998 by and among Chattem,
Inc., Signal Investment & Management
Co. and Del Laboratories, Inc for the
sale of the Cornsilk business (10)

Commercial Lease dated April 1, 1998
between Chattem, Inc., lessee, and Kenco
Group, Inc., lessor, for warehouse space
Located at 4309 Distribution Avenue,
Chattanooga, Tennessee. (11)

Purchase and Sale Agreement dated
November 16, 1998 by and among Thompson
Medical Company, Inc., Chattem, Inc. and
Signal Investment & Management Co. for
certain products (12)

25
<PAGE>

<CAPTION>
Exhibit
Number Description of Exhibit References
------- ---------------------- ----------
<S> <C> <C>
10 Termination Agreement dated November 30,
1999 to SUNSOURCE Asset Purchase and Sale
Agreement dated May 23, 1997 (13)

Chattem, Inc. Non-Statutory Stock Option
Plan - 2000 (13)

Asset Sale Agreement dated August 24,
2000 by and among The Andrew Jergens
Company, Chattem, Inc. and Signal
Investment & Management Co. for the Ban
business. (14)

Form of Employment Agreements-
Zan Guerry
A. Alexander Taylor II

Form of Amended and Restated Severance
Agreements-
Zan Guerry
A. Alexander Taylor II

Form of Amended and Restated Non-Competition
and Severance Agreements-
Andrea M. Crouch
Ron Galante
Christopher S. Keller
Richard W. Kornhauser
Robert S. Marshall
Elaine M. Morefield
B. Derrill Pitts
Charles M. Stafford

11 Computation of Per Share Earnings

13 2000 Annual Report to Shareholders of
Chattem, Inc.

21 Subsidiaries of the Company

23 Consent of Independent Public
Accountants
</TABLE>

26
<PAGE>

REFERENCES:

Previously filed as an exhibit to and incorporated by reference from:

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

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

(3) Form S-2 Registration Statement (No. 33-80770).

(4) Form S-4/A Registration Statement (No. 333-53627).

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

(6) Form 10-K for the year ended November 30, 1996.

(7) Form 8-K dated June 26, 1997.

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

(9) Form 8-K dated March 24, 1998.

(10) Form 8-K dated May 12, 1998.

(11) Form 10-K for the year ended November 30, 1998.

(12) Form 8-K dated December 21, 1998.

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

(14) Form 8-K dated September 15, 2000.

(b) Form 8-K dated September 15, 2000, relating to the sale of the Ban brand,
was filed with the Securities and Exchange Commission during the three
months ended November 30, 2000.

(c) The Financial Statements and related report of independent public
accountants required to be filed with this report pursuant to Rule 3-10(a)
of Article 3 of Regulation S-X are incorporated by reference from pages 8
to 15 of Signal Investment & Management Co.'s Form 10-K for the fiscal
year ended November 30, 2000.

27
<PAGE>

SIGNATURES

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

Dated: February 23, 2001 CHATTEM, INC.

By: /s/ ZAN GUERRY
--------------------------------------
Zan Guerry
Title: Chairman and Chief
Executive Officer

By: /s/ CHRISTOPHER S. KELLER
--------------------------------------
Christopher S. Keller
Title: Director of Finance

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

Signature Title Date
- ---------------------------- ------------------------ -------
<S> <C> <C>

/s/ Zan Guerry Chairman of the Board 2-23-01
- ---------------------------- and Director
Zan Guerry (Chief Executive Officer)

/s/ A. Alexander Taylor II President and Director 2-23-01
- ---------------------------- (Chief Operating Officer)
A. Alexander Taylor II

/s/ Louis H. Barnett Director 2-23-01
- ----------------------------
Louis H. Barnett

/s/ Robert E. Bosworth Director 2-23-01
- ----------------------------
Robert E. Bosworth

/s/ Richard E. Cheney Director 2-23-01
- ----------------------------
Richard E. Cheney

/s/ Scott L. Probasco, Jr. Director 2-23-01
- ----------------------------
Scott L. Probasco, Jr.

/s/ Philip H. Sanford Director 2-23-01
- ----------------------------
Philip H. Sanford
</TABLE>

28
<PAGE>

CHATTEM, INC. AND SUBSIDIARIES
EXHIBIT INDEX

EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------
<S> <C>
4.1 Amendments to and Supplemental Indentures to Form of
Indenture dated August 3, 1994 relating to the 12.75%
Series B Senior Subordinated Notes due 2004

4.2 First Amendment to and Supplemental Indenture to
Form of Indenture dated March 24, 1998 relating to
the 8.875% Senior Subordinated Notes due 2008

10.1 Form of Employment Agreements--
Zan Guerry
A. Alexander Taylor II

10.2 Form of Amended and Restated Severance Agreements
Zan Guerry
A. Alexander Taylor II

10.3 Form of Amended and Restated Non-Competition and Severance
Agreements--
Andrea M. Crouch
Ron Galante
Christopher S. Keller
Richard W. Kornhauser
Robert S. Marshall
Elaine M. Morefield
B. Derrill Pitts
Charles M. Stafford

11 Computation of per share earnings

13 2000 Annual Report to Shareholders of Chattem, Inc.

21 Subsidiaries of the Company

23 Consent of Independent Public Accountants
</TABLE>

</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-4.1A
<SEQUENCE>2
<FILENAME>a2039699zex-4_1a.txt
<DESCRIPTION>EXH 4.1A
<TEXT>

<PAGE>

Exhibit 4.1A

AMENDMENT TO AND SUPPLEMENTAL INDENTURE

THIS AMENDMENT is made this 23rd day of May, 1995, by and
among Chattem, Inc., a Tennessee corporation (the "Company"), Signal Investment
& Management Co., a Delaware corporation (the "Guarantor") and SouthTrust Bank
of Alabama, National Association, a national banking association (the
"Trustee"), under the following circumstances:

A. The Company has issued its Series B Senior
Subordinated Notes due 2004 in the aggregate principal amount of $75,000,000
(herein the "Notes").

B. The Notes are secured by the Indenture dated
August 3, 1994 among the Company, the Guarantor and the Trustee ("Indenture").

C. The Company and the Guarantor, having received the
written approval of the holders of at least a majority in interest in
principal amount of the Notes pursuant to Section 9.02 of the Indenture, and
the Trustee desire to amend the Indenture in order to amend the definition of
Permitted Investment as provided hereinafter.

NOW, THEREFORE, in consideration of the premises and of the
mutual covenants and agreements contained in this Agreement, the parties agree:

1. The definition of "Permitted Investment" as set
forth in Section 1.01 of the Indenture shall be deleted in its entirety and
in lieu thereof shall be inserted the following:

"Permitted Investments" means (i) any Investments in
the Company or in a Wholly Owned Subsidiary of the Company
that is a Guarantor; (ii) any Investments in Cash Equivalents;
(iii) Investments by the Company or any Subsidiary of the
Company in a Person, if as a result of such Investment (a)
such Person becomes a Wholly Owned Subsidiary of the Company
and a Guarantor or (b) such Person is merged, consolidated or
amalgamated with or into, or transfers or conveys
substantially all of its assets to, or is liquidated into, the
Company or a Wholly Owned Subsidiary of the Company that is a
Guarantor; (iv) any investment that would be a Cash Equivalent
but for its maturity being greater than six months, provided
such maturity is not greater than one year; (v) Investments
consisting

<PAGE>

of consideration received by the Company or a Wholly Owned
Subsidiary of the Company that is a Guarantor in an Asset
Sale which consideration is not and is not required to be
in the form of cash or Cash Equivalents pursuant to Section
4.10 hereof; and (vi) shares of capital stock, notes,
warrants or other securities received by the Company or a
Wholly Owned Subsidiary that is a Guarantor in partial or
total satisfaction of obligations created in the ordinary
course of business pursuant to a plan of reorganization,
liquidation, restructuring, decree or order by a court
having jurisdiction under the Federal bankruptcy laws, as
now or hereafter constituted, or under any other applicable
Federal or state bankruptcy, insolvency, receivership or
other similar laws or pursuant to an assignment for the
benefit of creditors or voluntary settlement or
restructuring.

2. Except as expressly set forth herein, this
Amendment to the Indenture shall not supersede or otherwise modify the terms
and conditions of the Indenture.

IN WITNESS WHEREOF, this Amendment to the Indenture has been
executed by a duly authorized officer of the Company, the Guarantor and the
Trustee.

Dated as of May 23, 1995.

ATTEST: CHATTEM, INC.

By: By:
------------------------------------ --------------------------------
Secretary Robert E. Bosworth,
Executive Vice President
[CORPORATE SEAL]

Dated as of May 23, 1995.

ATTEST: SIGNAL INVESTMENT & MANAGEMENT
CO., a Guarantor

By: By:
------------------------------------ --------------------------------
Secretary Robert E. Bosworth,,
President
[CORPORATE SEAL]

<PAGE>

Dated as of May 23, 1995.

ATTEST: SOUTHTRUST BANK OF ALABAMA,
NATIONAL ASSOCIATION

By: By:
------------------------------------ --------------------------------
Name:
Title:
[CORPORATE SEAL]

</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-4.1B
<SEQUENCE>3
<FILENAME>a2039699zex-4_1b.txt
<DESCRIPTION>EXH 4.1B
<TEXT>

<PAGE>

Exhibit 4.1B

SECOND AMENDMENT TO AND SUPPLEMENTAL INDENTURE

THIS SECOND AMENDMENT TO AND SUPPLEMENTAL INDENTURE ("Second
Amendment") is made this 19th day of March, 1998, by and among Chattem, Inc., a
Tennessee corporation (the "Company"), Signal Investment & Management Co., a
Delaware corporation (the "Guarantor") and SouthTrust Bank, National
Association, a national banking association (the "Trustee"), under the
following circumstances:

A. The Company has issued its Series B Senior Subordinated
Notes due 2004 in the original aggregate principal amount of $75,000,000
(herein the "Notes").

B. The Notes are secured by the Indenture dated August 3,
1994 among the Company, the Guarantor and the Trustee ("Indenture").

C. The Company and the Guarantor, having received the written
approval of the holders of at least a majority in interest in principal amount
of the Notes pursuant to Section 9.02 of the Indenture, and the Trustee desire
to amend the Indenture as provided hereinafter.

NOW, THEREFORE, in consideration of the premises and of the
mutual covenants and agreements contained in this Second Amendment, the parties
agree:

1. The second paragraph of Section 4.09 of the Indenture
shall be deleted in its entirety and in lieu thereof shall be inserted the
following:

The foregoing limitations will not apply to (a) the
incurrence by the Company of Indebtedness under the New Credit
Agreement of up to $50 million in aggregate principal amount
at any time outstanding, (b) Indebtedness outstanding on the
Issuance Date, (c) the incurrence by the Company of
Indebtedness represented by the Securities, (d) the incurrence
by the Company of Indebtedness issued in exchange for, or the
proceeds of which are used to extend, refinance, renew,
replace or refund Indebtedness referred to in clauses (b) or

<PAGE>

(c) above (the "Refinancing Indebtedness"); PROVIDED, HOWEVER,
that unless the proceeds of such Refinancing Indebtedness will
be used to retire all outstanding Securities (1) the principal
amount of such Refinancing Indebtedness shall not exceed the
principal amount of the Indebtedness so extended, refinanced,
renewed, replaced, substituted or refunded (plus the amount of
premiums and expenses incurred in connection therewith); (2)
the Refinancing Indebtedness shall have a Weighted Average
Life to Maturity equal to or greater than the remaining
Weighted Average Life to Maturity of (x) the Securities or (y)
the Indebtedness being extended, refinanced, renewed, replaced
or refunded, whichever has the shorter Weighted Average Life
to Maturity; and (3) if applicable, the Refinancing
Indebtedness shall be subordinated in right of payment to the
Securities on terms at least as favorable to the Holders of
Securities as those contained in the documentation governing
the Indebtedness being extended, refinanced, renewed, replaced
or refunded, (e) intercompany Indebtedness between or among
the Company and any of its Wholly Owned Subsidiaries that are
Guarantors, (f) Hedging Obligations that are incurred in order
to fix or hedge interest rate risk with respect to floating
rate Indebtedness that is permitted by the terms of this
Indenture, or (g) the guarantee by the Company or any of the
Guarantors of Indebtedness of the Company or any Guarantor
that is permitted to be incurred by another provision of this
covenant.

2. The effectiveness of this Second Amendment is conditioned
upon (i) the closing of the Company's acquisition of the BAN line of
anti-perspirant/deodorant products from Bristol-Myers Squibb Company pursuant to
an agreement dated February 22, 1998, and (ii) at the time the condition in this
Section 2(i) is satisfied, the absence of any existing or proposed law or
regulation which would, and the absence of any injunction or action or other
proceeding (pending or threatened) which (in the

2
<PAGE>

case of any action or proceeding, if adversely determined) would, make unlawful
or invalid or enjoin or delay the implementation of this Second Amendment, the
entering into of this Second Amendment or the payment of any consent fee or
question the legality or validity of any thereof. Each of the foregoing
conditions to the effectiveness of this Second Amendment is for the sole
benefit of the Company and may be waived by the Company at any time.

3. Except as expressly set forth herein, this Second
Amendment shall not supersede or otherwise modify the terms and conditions of
the Indenture.

3
<PAGE>

IN WITNESS WHEREOF, this Second Amendment to and Supplemental
Indenture has been executed by a duly authorized officer of the Company, the
Guarantor and the Trustee.

Dated as of March 19, 1998.

ATTEST: CHATTEM, INC.

By: By:
--------------------------- ---------------------------
Secretary A. Alexander Taylor, II
President
[CORPORATE SEAL]

Dated as of March 19, 1998.

ATTEST: SIGNAL INVESTMENT & MANAGEMENT
CO., a Guarantor

By: By:
--------------------------- ---------------------------
Secretary A. Alexander Taylor, II
President
[CORPORATE SEAL]

Dated as of March 19, 1998.

ATTEST: SOUTHTRUST BANK, NATIONAL
ASSOCIATION

By: By:
--------------------------- ---------------------------
Name:
Title:
[CORPORATE SEAL]

</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-4.1C
<SEQUENCE>4
<FILENAME>a2039699zex-4_1c.txt
<DESCRIPTION>EXH 4.1C
<TEXT>

<PAGE>

Exhibit 4.1C

THIRD AMENDMENT TO AND SUPPLEMENTAL INDENTURE

THIS THIRD AMENDMENT TO AND SUPPLEMENTAL INDENTURE ("Third
Amendment") is made this 27th day of December, 2000, by and among Chattem, Inc.,
a Tennessee corporation (the "Company"), Signal Investment & Management Co., a
Delaware corporation (the "Guarantor") and SouthTrust Bank (the "Trustee"),
under the following circumstances:

A. The Company has issued its 12 3/4% Senior
Subordinated Notes due 2004 in the original aggregate principal amount of
$75,000,000 (herein the "Notes").

B. The Notes are secured by the Indenture dated
August 3, 1994 among the Company, the Guarantor and the Trustee
("Indenture"), which was amended by Supplemental Indentures dated May 23,
1995 and March 24, 1998.

NOW, THEREFORE, in consideration of the premises and of the
mutual covenants and agreements contained in this Third Amendment, the parties
agree:

1. Section 4.07 of the Indenture shall be deleted in
its entirety and in lieu thereof shall be inserted the following:

Section 4.07. LIMITATION ON RESTRICTED PAYMENTS. The
Company will not, and will not permit any of its Subsidiaries to,
directly or indirectly: (i) declare or pay any dividend or make any
Distribution on account of the Company's or any of its Subsidiaries'
Equity Interests (other than dividends or Distributions payable in
Equity Interests (other than Disqualified Stock of the Company or
dividends or Distributions payable to the Company or, in the case of a
Subsidiary, from such Subsidiary to any Wholly Owned Subsidiary of the
Company that is a Guarantor); (ii) purchase, redeem or otherwise
acquire or retire for value any Equity Interests of the Company or any

<PAGE>

Subsidiary or other Affiliate of the Company (other than any such
Equity Interests owned by the Company or any Wholly Owned Subsidiary of
the Company that is a Guarantor); (iii) purchase, redeem or otherwise
acquire or retire for value any Indebtedness that is pari passu with or
subordinated to the Securities (other than the Securities or the 1998
Notes (as hereinafter defined) (including pursuant to the 1998 Notes
Offer (as hereinafter defined)); (iv) redeem, repurchase or defease
(including, without limitation, in substance or legal defeasance) or in
any other manner acquire or retire for value by the Company or any
Subsidiary of any Junior Debt or debt ranking pari passu with the
Securities prior to any scheduled maturity, scheduled repayment or
scheduled sinking fund payment; or (v) make any Restricted Investment
(all such payments and other actions set forth in clauses (i) through
(iv) above plus the net amount of Restricted Investment being
collectively referred to as "Restricted Payments"), unless, at the time
of such Restricted Payment:

(a) no Default or Event of Default shall have
occurred and be continuing or would occur as a consequence
thereof;

(b) the Company would, at the time of such
Restricted Payment and after giving pro forma effect
thereto as if such Restricted Payment had been made at the
beginning of the applicable four-quarter period immediately
preceding such Restricted Payment, have been permitted to
incur at least $1.00 of additional Indebtedness pursuant to
the Fixed Charge Coverage Ratio test set forth in the first
paragraph of Section 4.09 hereof; and

(c) such Restricted Payment, together with the
aggregate of all other Restricted Payments made by the Company
and its Subsidiaries after the date of this Indenture
(including Restricted Payments permitted by clause (i) of the
next succeeding paragraph), is less than the sum of (x) 50% of
the Consolidated Net Income of the Company for the period
(taken as one accounting period) from the date of this
Indenture to the

<PAGE>

end of the Company's most recently ended fiscal quarter
(or, if such Consolidated Net Income for such period is a
deficit, minus, 100% of such deficit, plus (y) 100% of the
aggregate net cash proceeds received by the Company from
the issue or sale of Equity Interests of the Company or any
security convertible or exchangeable for any such Equity
Interests that has been so converted or exchanged (other
than Equity Interests or other securities sold to a
Subsidiary of the Company and other than Disqualified
Stock).

The foregoing provisions shall not prohibit (i) up to
an aggregate of $1.0 million of additional Restricted Payments since
the Issuance Date; (ii) the payment of any dividend within 60 days
after the date of declaration thereof, if at said date of declaration
such payment would have complied with the provisions of this Indenture;
(iii) the redemption, repurchase, retirement or other acquisition of
any Equity Interests of the Company in exchange for, or out of the
proceeds of, the substantially concurrent sale (other than to a
Subsidiary of the Company that is a Guarantor) of other Equity
Interests of the Company (other than any Disqualified Stock) or (iv)
the Company from redeeming Junior Debt with the proceeds from the
issuance of Junior Debt, so long as such Junior Debt has a Weighted
Average Life to Maturity greater than the remaining Weighted Average
Life to Maturity to the Junior Debt so redeemed; provided, however,
that except in the case of clause (ii), no Default or Event of Default
shall have occurred or be continuing or would occur as a consequence
thereof.

Not later than 10 days prior to making any Restricted
Payment, the Company shall deliver to the Trustee an Officers'
Certificate stating that such Restricted Payment is permitted and
setting forth the basis upon which the calculations required by the
covenant "Limitation on Restricted Payments" were computed, which
calculations may be based upon the Company's latest available financial
statements.

For purposes of this Indenture, the "1998 Notes"
means the Company's outstanding 8 7/8% Senior Subordinated Notes due
2008 which were originally

<PAGE>

issued in 1998, and the "1998 Notes Offer" means the Company's offer
to purchase for cash $75.3 million of the 1998 Notes, pursuant to
the Offer to Purchase and Consent Solicitation Statement dated
December 11, 2000, as such offer to purchase may be amended by the
Company.

2. The amendment to the Indenture set forth in
Section 1 above shall not become operative unless and until the Notes are
accepted for purchase by the Company pursuant to the Offer to Purchase and
Consent Solicitation Statement dated December 11, 2000.

3. Except as expressly set forth herein, this Third
Amendment shall not supersede or otherwise modify the terms and conditions of
the Indenture.

[Signature Page Follows]

<PAGE>

IN WITNESS WHEREOF, this Third Amendment to and Supplemental
Indenture has been executed by a duly authorized officer of the Company, the
Guarantor and the Trustee.

Dated as of December 27, 2000.

ATTEST: CHATTEM, INC.

By: By:
----------------------------- --------------------------------
Secretary A. Alexander Taylor, II
President

Dated as of December 27, 2000.

ATTEST: SIGNAL INVESTMENT & MANAGEMENT
CO., a Guarantor

By: By:
----------------------------- --------------------------------
Secretary A. Alexander Taylor, II
President

Dated as of December 27, 2000.

ATTEST: SOUTHTRUST BANK

By: By:
----------------------------- --------------------------------
Name: Judy Seier
Title: Vice President

</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-4.2
<SEQUENCE>5
<FILENAME>a2039699zex-4_2.txt
<DESCRIPTION>EXH 4.2
<TEXT>

<PAGE>

EXHIBIT 4.2

FIRST AMENDMENT TO AND SUPPLEMENTAL INDENTURE

THIS FIRST AMENDMENT TO AND SUPPLEMENTAL INDENTURE ("First
Amendment") is made this 3rd day of January, 2001, by and among Chattem, Inc., a
Tennessee corporation (the "Company"), Signal Investment & Management Co., a
Delaware corporation (the "Guarantor") and SouthTrust Bank (the "Trustee"),
under the following circumstances:

A. The Company has issued its 8 7/8% Senior Subordinated Notes
due 2008 in the original aggregate principal amount of $275,000,000 (herein the
"Notes").

B. The Notes are secured by the Indenture dated March 24, 1998
among the Company, the Guarantor and the Trustee ("Indenture").

C. The Company and the Guarantor, having received the written
approval of the holders of at least a majority in interest in principal amount
of the Notes pursuant to Section 9.02 of the Indenture, and the Trustee desire
to amend the Indenture as provided hereinafter.

NOW, THEREFORE, in consideration of the premises and of the
mutual covenants and agreements contained in this First Amendment, the parties
agree:

1. The definition of "Fixed Charge Coverage Ratio" in Section
1.01 of the Indenture shall be deleted in its entirety and in lieu thereof shall
be inserted the following:

"Fixed Charge Coverage Ratio" means with respect to
any Person for any period, the ratio of the
Consolidated Cash Flow of such Person and its
Restricted Subsidiaries for such period to the Fixed
Charges of such Person and its Restricted
Subsidiaries for such period. In the event that the
referent Person or any of its restricted Subsidiaries
incurs, assumes, Guarantees or redeems any
Indebtedness (other than revolving credit borrowings)
or issues or redeems preferred stock subsequent to the

<PAGE>

commencement of the period for which the Fixed
Charge Coverage Ratio is being calculated but prior
to the date on which the event for which the
calculation of the Fixed Charge Coverage Ratio is
made (the "Calculation Date"), then the Fixed Charge
Coverage Ratio shall be calculated giving pro forma
effect to such incurrence, assumption, Guarantee or
redemption of Indebtedness, or such issuance or
redemption of preferred stock, as if the same had
occurred at the beginning of the applicable
four-quarter reference period. In addition, for
purposes of making the computation referred to above,
(i) acquisitions that have been made by the Company
or any of its Restricted Subsidiaries, including
through mergers or consolidations and including any
related financing transactions, during the
four-quarter reference period or subsequent to such
reference period and on or prior to the Calculation
Date shall be deemed to have occurred on the first
day of the four-quarter reference period and
Consolidated Cash Flow for such reference period
shall be calculated without giving effect to clause
(iii) of the proviso set forth in the definition of
Consolidated Net Income, and (ii) the Consolidated
Cash Flow attributable to discontinued operations, as
determined in accordance with GAAP, and operations or
businesses disposed of prior to the Calculation Date,
shall be excluded, and (iii) the Consolidated Cash
Flow attributable only to the Company's DEXATRIM-Registered
Trademark- products containing phenylpropanolamine shall
be excluded, and (iv) the Fixed Charges attributable to
discontinued operations, as determined in accordance
with GAAP, and operations or businesses disposed of
prior to the Calculation

2
<PAGE>

Date, shall be excluded, but only to the extent
that the obligations giving rise to such Fixed
Charges shall not be obligations of the referent
Person or any of its Restricted Subsidiaries
following the Calculation Date.

2. Section 4.07 of the Indenture shall be deleted in its
entirety and in lieu thereof shall be inserted the following:

Section 4.07. RESTRICTED PAYMENTS. The Company
shall not, and shall not permit any of its Restricted
Subsidiaries to, directly or indirectly: (i) declare or pay
any dividend or make any other payment or distribution on
account of the Company's or any of its Restricted
Subsidiaries' Equity Interests (including, without limitation,
any payment in connection with any merger or consolidation
involving the Company or any of its Restricted Subsidiaries)
or to the direct or indirect holders of the Company's or any
of its Restricted Subsidiaries' Equity Interests in their
capacity as such (other than dividends or distributions
payable in Equity Interests (other than Disqualified Stock) of
the Company or dividends or other distributions payable to the
Company or a Restricted Subsidiary of the Company); (ii)
purchase, redeem or otherwise acquire or retire for value
(including, without limitation, in connection with any merger
or consolidation involving the Company) any Equity Interests
of the Company or any direct or indirect parent of the Company
or other Affiliate of the Company (other than any such Equity
Interests owned by the Company or any Wholly Owned Restricted
Subsidiary of the Company); (iii) make any payment on or with
respect to, or purchase, redeem, defease or otherwise acquire
or retire for value any Indebtedness that is pari passu with
or subordinated to the Notes (other than Notes or the 1994
Notes (as hereinafter defined)

3
<PAGE>

(including pursuant to the 1994 Notes Offer (as hereinafter
defined)), except a payment of interest or principal at
Stated Maturity; or (iv) make any Restricted Investment
(all such payments and other actions set forth in clauses
(i) through (iv) above being collectively referred to as
"Restricted Payments"), unless, at the time of and after
giving effect to such Restricted Payment:

(a) no Default or Event of Default shall have
occurred and be continuing or would occur as a
consequence thereof;

(b) the Company would, at the time of such
Restricted Payment and after giving pro forma effect
thereto as if such Restricted Payment had been made
at the beginning of the applicable four-quarter
period, have been permitted to incur at least $1.00
of additional Indebtedness pursuant to the Fixed
Charge Coverage Ratio test set forth in Section 4.09;
and

(c) such Restricted Payment, together with the
aggregate amount of all other Restricted Payments
made by the Company and its Restricted Subsidiaries
after the date of this Indenture (excluding Restricted
Payments permitted by clauses (ii), (iii) and (iv) of
the next succeeding paragraph), is less than the sum,
without duplication, of (i) 50% of the Consolidated Net
Income of the Company for the period (taken as one
accounting period) from the beginning of the first
fiscal quarter commencing after the date of this
Indenture to the end of the Company's most recently
ended fiscal quarter for which internal financial
statements are available at the time of such Restricted
Payment (or, if such Consolidated Net Income

4
<PAGE>

for such period is a deficit, less 100% of such deficit)
plus (ii) 100% of the aggregate net cash proceeds
received by the Company since the date of this Indenture
as a contribution to its common equity capital or from
the issue or sale of Equity Interests of the Company
(other than Disqualified Stock) or from the issue or sale
of Disqualified Stock or debt securities of the Company
that have been converted into such Equity Interests
(other than Equity Interests (or Disqualified Stock or
convertible debt securities) sold to a Subsidiary of
the Company), plus (iii) to the extent that any
Restricted Investment that was made after the date of
this Indenture is sold for cash or otherwise liquidated
or repaid for cash, the lesser of (A) the cash return of
capital with respect to such Restricted Investment (less
the cost of disposition, if any) and (B) the initial
amount of such Restricted Investment plus (iv) $7.5
million.

The foregoing provisions shall not prohibit
(i) the payment of any dividend within 60 days after the date
of declaration thereof, if at said date of declaration such
payment would have complied with the provisions of this
Indenture; (ii) the redemption, repurchase, retirement,
defeasance or other acquisition of any pari passu or
subordinated Indebtedness or Equity Interests of the Company
in exchange for, or out of the net cash proceeds of the
substantially concurrent sale (other than to a Restricted
Subsidiary of the Company) of, other Equity Interests of the
Company (other than any Disqualified Stock); provided that the
amount of any such net cash proceeds that are utilized for any
such redemption, repurchase, retirement, defeasance or other
acquisition shall be excluded from clause (c)(ii) of the
preceding paragraph; (iii)

5
<PAGE>

the defeasance, redemption, repurchase or other acquisition of
pari passu or subordinated Indebtedness with the net cash
proceeds from an incurrence of Permitted Refinancing
Indebtedness; (iv) the payment of any dividend by a Restricted
Subsidiary of the Company to the holders of its common Equity
Interests on a pro rata basis; and (v) the repurchase,
redemption or other acquisition or retirement for value of any
Equity Interests of the Company or any Restricted Subsidiary
of the Company held by any member of the Company's (or any of
its Restricted Subsidiaries') management pursuant to any
management equity subscription agreement or stock option
agreement; provided that the aggregate price paid for all such
repurchased, redeemed, acquired or retired Equity Interests
shall not exceed $500,000 in any twelve-month period and no
Default or Event of Default shall have occurred and be
continuing immediately after such transaction.

The Board of Directors may designate any
Restricted Subsidiary to be an Unrestricted Subsidiary if such
designation would not cause a Default. For purposes of making
such determination, all outstanding Investments by the Company
and its Restricted Subsidiaries (except to the extent repaid
in cash) in the Subsidiary so designated shall be deemed to be
Restricted Payments at the time of such designation and shall
reduce the amount available for Restricted Payments under the
first paragraph of this covenant. All such outstanding
Investments shall be deemed to constitute Investments in an
amount equal to the fair market value of such Investments at
the time of such designation. Such designation shall only be
permitted if such Restricted Payment would be permitted at
such time and if such Restricted Subsidiary otherwise meets
the definition of an Unrestricted Subsidiary.

6
<PAGE>

The amount of all Restricted Payments (other
than cash) shall be the fair market value on the date of the
Restricted Payment of the asset(s) or securities proposed to
be transferred or issued by the Company or such Restricted
Subsidiary, as the case may be, pursuant to the Restricted
Payment. The fair market value of any non-cash Restricted
Payment shall be determined by the Board of Directors whose
resolution with respect thereto shall be delivered to the
Trustee, such determination to be based upon an opinion or
appraisal issued by an accounting, appraisal or investment
banking firm of national standing if such fair market value
exceeds $10.0 million. Not later than the date of making any
Restricted Payment, the Company shall deliver to the Trustee
an Officers' Certificate stating that such Restricted Payment
is permitted and setting forth the basis upon which the
calculations required by this Section 4.07 were computed,
together with a copy of any fairness opinion required by this
Indenture.

For purposes of this Indenture, the "1994
Notes" means the Company's outstanding 12 3/4% Senior
Subordinated Notes due 2004 which were originally issued in
1994, and the "1994 Notes Offer" means the Company's offer to
purchase for cash $7.9 million of the 1994 Notes, pursuant to
the Offer to Purchase and Consent Solicitation Statement dated
December 11, 2000, as such offer to purchase may be amended by
the Company.

3. Section 4.10 of the Indenture shall be deleted in its
entirety and in lieu thereof shall be inserted the following:

Section 4.10 ASSET SALES. The Company shall
not, and shall not permit any of its Restricted Subsidiaries
to, consummate an Asset Sale unless (i) the Company (or the
Restricted Subsidiary, as the case may be) receives
consideration at

7
<PAGE>

the time of such Asset Sale at least equal to the fair market
value (evidenced by a resolution of the Board of Directors set
forth in an Officers' Certificate delivered to the Trustee) of
the assets or Equity Interests issued or sold or otherwise
disposed of and (ii) at least 75% of the consideration
therefor received by the Company or such Restricted Subsidiary
is in the form of cash or Qualified Proceeds, provided, that
the aggregate fair market value of Qualified Proceeds which
may be received in consideration for Asset Sales pursuant to
this clause (ii) shall not exceed $5.0 million since the Issue
Date; provided, further that the amount of (x) any liabilities
(as shown on the Company's or such Restricted Subsidiary's
most recent balance sheet), of the Company or any Restricted
Subsidiary (other than contingent liabilities and liabilities
that are by their terms subordinated to the Notes or any
guarantee thereof) that are assumed by the transferee of any
such assets pursuant to a customary novation agreement that
releases the Company or such Restricted Subsidiary from
further liability and (y) any securities, notes or other
obligations received by the Company or any such Restricted
Subsidiary from such transferee that are contemporaneously
(subject to ordinary settlement periods) converted by the
Company or such Restricted Subsidiary into cash (to the extent
of the cash received), shall be deemed to be cash for purposes
of this provision.

Within 365 days after the receipt of any Net
Proceeds from an Asset Sale, the Company may apply such Net
Proceeds, at its option, (a) to permanently repay (and reduce
the commitments under) Senior Indebtedness of the Company or a
Guarantor or (b) to the acquisition of a Permitted Business,
or a majority of the Voting Stock of, a Permitted Business,
the making of a capital

8
<PAGE>

expenditure or the acquisition of other long-term assets that
are used or useful in a Permitted Business. Pending the final
application of any such Net Proceeds, the Company may
temporarily reduce revolving credit borrowings or otherwise
invest such Net Proceeds in any manner that is not prohibited
by this Indenture. Any Net Proceeds from Asset Sales that are
not applied or invested as provided in the first sentence of
this paragraph, other than Available BAN Net Proceeds (as
hereinafter defined), shall be deemed to constitute "Excess
Proceeds." When the aggregate amount of Excess Proceeds
exceeds $5.0 million, the Company shall be required to make an
offer to all Holders of Notes and all holders of other
Indebtedness containing provisions similar to those set forth
in this Indenture with respect to offers to purchase or redeem
with the proceeds of sales of assets (an "Asset Sale Offer")
to purchase the maximum principal amount of Notes and such
other Indebtedness that may be purchased out of the Excess
Proceeds, at an offer price in cash in an amount equal to 100%
of the principal amount thereof plus accrued and unpaid
interest and Liquidated Damages thereon, if any, to the date
of purchase, in accordance with the procedures set forth in
this Indenture and such other Indebtedness. To the extent that
any Excess Proceeds remain after consummation of an Asset Sale
Offer, the Company may use such Excess Proceeds for any
purpose not otherwise prohibited by this Indenture. If the
aggregate principal amount of Notes and such other Indebtedness
tendered into such Asset Sale Offer surrendered by Holders
thereof exceeds the amount of Excess Proceeds, the Trustee
shall select the Notes and such other Indebtedness to be
purchased on a pro rata basis. Upon completion of such offer
to purchase, the amount of Excess Proceeds shall be reset at
zero.

9
<PAGE>

For purposes of this Indenture, "BAN Sale"
means the Company's sale of the BAN line of deodorant and
anti-perspirant products to The Andrew Jergens Company, a
wholly-owned subsidiary of Kao Corporation, on September 15,
2000 for a purchase price of $160 million cash plus the right
to receive up to an additional $6.5 million in future payments
based upon levels of BAN sales in 2001 and 2002, and
"Available BAN Net Proceeds" means the Net Proceeds from the
BAN Sale remaining after the repayment of the Senior Credit
Facility.

4. The amendments to the Indenture set forth in Sections 1, 2
and 3 above shall not become operative unless and until the Notes are accepted
for purchase by the Company pursuant to the Offer to Purchase and Consent
Solicitation Statement dated December 11, 2000, as amended.

5. Except as expressly set forth herein, this First Amendment
shall not supersede or otherwise modify the terms and conditions of the
Indenture.

[Signature Page Follows]

10
<PAGE>

IN WITNESS WHEREOF, this First Amendment to and Supplemental
Indenture has been executed by a duly authorized officer of the Company, the
Guarantor and the Trustee.

Dated as of January 3, 2001.

ATTEST: CHATTEM, INC.

By: By:
--------------------------- ---------------------------------
Secretary A. Alexander Taylor, II
President

Dated as of January 3, 2001.

ATTEST: SIGNAL INVESTMENT & MANAGEMENT
CO., a Guarantor

By: By:
--------------------------- ---------------------------------
Secretary A. Alexander Taylor, II
President

Dated as of January 3, 2001.

ATTEST: SOUTHTRUST BANK

By: By:
--------------------------- ---------------------------------
Name: Judy Seier
Title: Vice President

</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.1
<SEQUENCE>6
<FILENAME>a2039699zex-10_1.txt
<DESCRIPTION>EXH 10.1
<TEXT>

<PAGE>

Exhibit 10.1

EMPLOYMENT AGREEMENT

THIS AGREEMENT has been made and entered into as of the 1st
day of August, 2000 between CHATTEM, INC., a Tennessee corporation ("Company")
and _______________ ("Executive").

WITNESSETH

WHEREAS, the Executive currently serves as a key employee of
the Company and his services and knowledge with respect to the Company and its
business strategies and operations are critical to maintaining the Company's
position in its industry against its competitors;

WHEREAS, the Board of Directors of the Company has determined
that it is in the best interests of the Company and its shareholders to secure
the Executive's continued services, and in the event of his departure, the
Executive's agreement to not compete with the Company for a period sufficient to
allow stability to the Company in its business strategies and operations.

NOW, THEREFORE, in consideration of the mutual covenants
herein contained, and for other good and valuable consideration, the receipt and
legal sufficiency of which are hereby acknowledged, Company and Executive agree
as follows:

1. STATED TERM. This Employment Agreement shall be
deemed to commence on August 1, 2000, and unless it is terminated earlier in
the manner provided below in this Agreement, shall continue for a term of
three years and upon each anniversary date of this Agreement shall be deemed
to automatically renew for a new three year term from such anniversary date.
Not later than each anniversary date of this Agreement, either party shall
have the right to provide written notice of their intention to have the
Agreement expire at the end of the then-pending three year term period
without automatic renewal.

2. DUTIES. During the term of employment set forth in
this Agreement, Company shall employ Executive, and Executive shall serve, as
Chairman of the Board and Chief Executive Officer, or in such other similar
positions as may be assigned by the Company's Board of Directors. Executive
shall perform faithfully the duties assigned to Executive by the Board of
Directors of Company pursuant to this Agreement to the best of Executive's
ability and shall devote substantially all of Executive's business time and
attention to Company's business.

<PAGE>

3. SALARY. Company shall pay to Executive a salary at
the rate of $370,000 per annum in equal monthly installments or on whatever
basis the Company pays other executives. The Compensation Committee of the
Board of Directors of the Company shall at least annually evaluate and
establish a base salary for Executive for the upcoming year in an amount
determined to be appropriate by the Compensation Committee.

4. INCENTIVE COMPENSATION. Executive shall be
entitled to participate in the Company's annual incentive compensation plan
and any other plans subsequently adopted by the Company and shall be eligible
to receive grants of stock options pursuant to the terms of the Company's
stock option plans established for its executives as approved by the
Compensation Committee of the Board of Directors from time to time.

5. WITHHOLDING OF TAXES. Any payments to Executive,
to the estate of Executive, or to the designated beneficiary or beneficiaries
of Executive pursuant to the terms of this Agreement shall be reduced by such
amounts as are required to be withheld under all present and future federal,
state and local tax laws and regulations and other laws and regulations.

6. BENEFITS. During the term of employment hereunder,
Executive shall be entitled, to the extent Executive is otherwise eligible,
to participate fully in all benefits provided by Company for its employees
generally, including, but not limited to, any retirement plans, life, health,
and long-term disability insurance maintained from time to time by Company.
Executive shall also receive an allowance for the use of an automobile for
the duration of this Agreement and such other perquisites as may be
established by the Company from time to time for its executives.

7. EXPENSE ALLOWANCE. Executive is authorized to
incur, or to cause Company to incur, reasonable expenses in connection with
the performance of Executive's duties hereunder. Company shall reimburse
Executive for all such expenses upon the presentation by Executive from time
to time of an itemized account of such expenditures.

8. VACATION. Executive shall be entitled to paid
vacation days each year in such amounts as may be permitted under the
Company's vacation policies generally. The timing of Executive's vacation
shall be scheduled in a reasonable manner by Company and the Executive.

9. TERMINATION BEFORE EXPIRATION OF STATED TERM. The
Executive's employment pursuant to this Agreement shall terminate prior

<PAGE>

to the expiration of its stated term upon the first to occur of the following:

(a) The voluntary resignation of Executive.

(b) Executive's death.

(c) Executive's permanent disability. The term
"permanent disability" shall mean physical or mental incapacity of a nature
which has prevented or will prevent Executive, in the sole judgment of the Board
of Directors of Company, from performing on a full-time basis each of the
material duties of Executive for a period of 12 consecutive weeks or 24 weeks
within any period of 12 consecutive months.

(d) Executive's employment being terminated by
Company for cause. Termination "for cause" shall be limited solely to
termination because of Executive's indictment or conviction for a felony or
other crime involving substantial moral turpitude, alcoholism, drug addiction or
the gross, active misfeasance of the Executive with regard to his duties with
the Company. Termination for cause shall occur immediately upon delivery to
Executive of a notice of such action by Company, which notice shall specify the
ground for such termination.

(e) Executive's employment being terminated by
Company without cause. Termination "without cause" shall mean termination of
employment on any basis other than by expiration of the stated term, voluntary
resignation, death, permanent disability, or termination for cause, provided
that, voluntary resignation when the Company constructively discharges the
Executive shall also be deemed termination without cause. "Constructively
Discharges" shall mean changes the location of Executive's principal place of
employment from Chattanooga, Tennessee, or reduces the Executive's status,
duties, responsibilities or direct or indirect compensation, (including future
increases commensurate with those given other managers of the Company), or so
alters the style or philosophy of the conduct of the Company's business, in the
opinion of the Executive, as to cause it to be undesirable to the Executive to
remain in the employ of the Company.

10. DUTIES OF EXECUTIVE ON TERMINATION. Upon the
termination of his employment under this Agreement, Executive shall
immediately return any and all property of Company in the possession of
Executive, including, without limitation, all documents, contracts, financial
information and records.

<PAGE>

11. COMPENSATION PAYABLE TO EXECUTIVE ON TERMINATION.
The rights of Executive to compensation upon termination of employment are as
follows:

(a) In the case of the expiration of the stated
term of the Agreement, Company shall pay to Executive any salary and bonus
accrued to the date of expiration of the Agreement.

(b) In the case of the death of Executive,
Company shall pay to Executive's beneficiary or beneficiaries designated in
writing to Company, or to Executive's estate in the absence or lapse of such
designation, the salary, as in effect at the date of Executive's death, through
the last day of the month in which death occurred and any accrued bonus as of
the last day of the month in which death occurred.

(c) In the case of the permanent disability of
Executive, Company shall pay to Executive the salary, as in effect at the date
of Executive's permanent disability, through the last day of the month in which
such permanent disability is determined and any accrued bonus as of the last day
of the month in which such permanent disability occurred.

(d) If Executive's employment is terminated for
cause, Company's only obligation to Executive shall be payment of the salary
accrued on the date on which such termination occurs.

(e) If Executive's employment is terminated as
a result of a voluntary resignation, Executive shall be entitled to continuing
monthly payments of 75 percent of Executive's monthly base salary at the time of
termination payable during the period of non-competition provided in Section 12
below.

(f) If Executive's employment is terminated
without cause, including voluntary resignation when the Company constructively
discharges the Executive, the Executive shall be entitled to receive (i)
continuing monthly payments equal to 75 percent of Executive's monthly base
salary at the time of termination payable during the period of non-competition
provided in Section 12 below, and (ii) a lump sum payment equal to 25 percent of
the amount that would have been payable during the remainder of the three year
term to the Executive based upon the Executive's base salary at the time of
termination as liquidated damages for the early termination of this Agreement
provided that such amount shall be proportionately refunded to the Company by
the Executive to the extent the Executive is successful during the remainder of
the stated term of the Agreement in securing employment in

<PAGE>

a comparable executive position with another employer in Chattanooga,
Tennessee, with a base salary at least equal to the base salary of Executive
upon termination of employment. In addition, the Company shall continue to
provide to the Executive at its cost and expense health, medical and life
insurance benefits at substantially the same level of benefits as the
Executive has at the date of termination of employment during the remainder
of the stated term of the Agreement.

12. NON-COMPETE. Executive covenants and agrees that
Executive will not, at any time during the term of this Agreement and, in the
event of termination for cause, termination upon voluntary resignation, or
termination without cause, for a period of 18 months following such
termination of employment, accept compensation or anything of value from, nor
offer or provide any services, including consulting services, to any person,
company, partnership, joint venture or other entity in a capacity involving,
in whole or in part, health and beauty aid products sold over-the-counter
which are competitive with the products of Company existing on the date of
termination of employment with annual sales for the Company's most recently
completed fiscal year in excess of $10 million. This provision applies only
to entities selling the above specified products in competition with the
Company in the United States.

13. CONFIDENTIALITY OBLIGATIONS. During the term of
this Agreement and for a period of 18 months following termination of
employment, the Executive agrees to maintain all confidential information and
trade secrets obtained during the course of his employment with the Company
as confidential and to disclose the same to no one, other than in the
furtherance of the Company's business in the normal course or to a fellow
employee with a reasonable need to know, unless the Executive can demonstrate
by documentary evidence that such information was (1) known to him prior to
his employment with the Company; (2) subsequently became part of the public
domain through no fault of his own; or (3) was subsequently disclosed to him
by a third party not in violation of any obligation of confidentiality and
non-use with the Company.

14. INJUNCTION. Executive expressly recognizes that
any breach of the provisions of this Agreement is likely to result in
irreparable injury to Company and that monetary damages may not adequately
compensate Company for such breach. Therefore, Executive agrees that Company
shall be entitled, if it so elects, to institute and prosecute proceedings in
any court of competent jurisdiction not only to obtain damages for any breach
of this Agreement, but also to enforce the specific performance of this
Agreement by Executive and to enjoin Executive from activities in violation
of this Agreement.

<PAGE>

Further, Executive agrees that any breach of the provisions of this Agreement
shall automatically toll and suspend the period of restraint for the amount
of time that the breach continues.

15. ATTORNEY FEES AND OTHER COSTS. If any legal action
or other proceeding is brought for the enforcement of this Agreement, or
because of an alleged dispute, breach, default or misrepresentation in
connection with any provision of this Agreement, Company shall be entitled to
recover reasonable attorney fees as well as court costs and all expenses not
taxable as court costs. This remedy shall include, without limitation, all
such fees, costs and expenses incident to appeals.

16. NO WAIVER OF BREACHES. The failure of a party to
require the performance of a provision of this Agreement shall not constitute
a waiver of a subsequent breach or nullify the effect of such provision.

17. GOVERNING LAW. This Agreement shall be construed
in accordance with the laws of Tennessee.

18. NOTICES. Any notice required or permitted herein
shall be in writing and shall be mailed, postage prepaid, or sent by
overnight courier, properly addressed to the other party at the address set
forth below, subject to change by written notice of either party to the other:

Company:

Chattem, Inc.
1715 West 38th Street
Chattanooga, TN 37409
Attention: President

Executive:

-------------------------

Any notice shall be considered given when deposited in the U.S. Mail or
delivered to an overnight courier.

19. SURVIVAL OF OBLIGATIONS. All covenants,
agreements, representations and warranties made herein or otherwise made in
writing

<PAGE>

by either party to this Agreement shall survive the execution and delivery of
this Agreement and the performance of the services contemplated hereby.

20. SEVERABILITY. If any one or more of the provisions
contained in this Agreement shall for any reason be held to be excessively
broad as to time, duration, geographical scope, activity or subject, it shall
be construed, by limiting and reducing it, so as to be enforceable to the
extent compatible with the applicable law as it shall then appear. If,
moreover, any one or more of the provisions contained in this Agreement shall
for any reason be held to be invalid, illegal or unenforceable in any
respect, such invalidity, illegality, or unenforceability shall not affect
any other provision of this Agreement, but this Agreement shall be construed
as if such invalid, illegal or unenforceable provision had never been
contained therein.

21. ENTIRE AGREEMENT. This Agreement and the Severance
Agreement dated simultaneously herewith constitute the full and complete
understanding and agreement of the parties with respect to the employment of
Executive by Company and supersede all prior understandings and agreements
regarding Executive's employment. This Agreement may be modified only by a
written instrument executed by both parties.

IN WITNESS WHEREOF, the parties have executed this Agreement
as of the date first above written.

CHATTEM, INC.

By:
-----------------------------------
Title:
--------------------------------

--------------------------------------
[Executive]

</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.2
<SEQUENCE>7
<FILENAME>a2039699zex-10_2.txt
<DESCRIPTION>EXH 10.2
<TEXT>

<PAGE>

EXHIBIT 10.2

AMENDED AND RESTATED SEVERANCE AGREEMENT

This Agreement is made and entered into as of the 1st of
August, 2000, by and between CHATTEM, INC., a Tennessee corporation (the
"Company") and ____________ (the "Executive").

WITNESSETH

WHEREAS, the Company is desirous of assuring itself of
continuity of management through the hiring and retention of certain key
executives, and to foster their unbiased and analytical assessment of any offer
to acquire control of the Company;

WHEREAS, the Company believes it is in the best interests of
the Company and its stockholders to provide the Executive with adequate
financial security and sufficient encouragement to the Executive to remain with
the Company notwithstanding the possibility of a change of control of the
Company;

WHEREAS, the Company and the Executive have previously entered
that certain Non-Competition and Severance Agreement dated November 6, 1985, as
amended May 31, 1995, which provides certain benefits in the event of a change
in control of the Company, which the Company desires to amend and restate in the
form hereinafter set forth; and

WHEREAS, the Executive is willing to continue to provide
services for the long-term benefit of the Company and its shareholders in
exchange for the specified severance benefits provided hereunder.

NOW, THEREFORE, the Company and the Executive do hereby agree
as follows:

1. TERM. The term of this Agreement shall commence
as of the day and year first above written and continue
indefinitely thereafter for a period ending three (3)
years after the termination of the Executive's
employment with the Company.

2. SEVERANCE BENEFITS. If the Company Discharges or
Constructively Discharges the Executive during the term
of this Agreement within twenty-four (24) months after
the occurrence of a Change in Control, he shall receive
a Severance Benefit. In addition, after a Change in
Control, the Executive shall be entitled to resign his

<PAGE>

position with the Company and elect to receive the
Severance Benefit (the "Election") at any time during
the period commencing one-hundred and eighty (180) days
after the Change in Control and ending two-hundred and
forty (240) days after the Change in Control
notwithstanding that the fact that no Discharge or
Constructive Discharge has occurred. These terms are
hereby defined as follows: 1.

A. "Change in Control":

(i) Change of one-third (1/3) or more of any
directors of the Company within any twelve (12) month
period; or

(ii) Change of one-half (1/2) or more of the
directors of the Company within any twenty-four (24)
month period; or

(iii) Acquisition by any person of the
ownership or right to vote of thirty-five (35%)
percent or more of the Company's outstanding voting
shares. "Person" shall mean any person, corporation,
partnership, or any entity and any affiliate or
associate thereof. "Affiliate" and "associate" shall
have the meanings assigned to them in Rule 12(b)(2)
of the General Rules and Regulations under the
Securities Exchange Act of 1934.

B. "Discharges": terminates the Executive for any
reason other than indictment or conviction for a
felony or other crime involving substantial moral
turpitude, disability, death, alcoholism, drug
addiction or the gross, active misfeasance of the
Executive with regard to his duties with the Company.

C. "Constructively Discharges": changes location or
reduces the Executive's status, duties,
responsibilities or direct or indirect compensation,
(including future increases commensurate with those
given other managers of the Company), or so alters
the style or philosophy of the conduct of the
Company's business, in the opinion of the Executive,
as to

<PAGE>

cause it to be undesirable to the Executive to
remain in the employ of the Company.

D. "Severance Benefit": a payment equal to two-hundred
ninety-nine (299%) percent of the Executive's average
annual includible compensation from the Company
during the five (5) most recently completed taxable
years before the date on which the Change in Control
occurs. Any partial taxable years shall be
annualized. If the event that the Executive's
employment is less than five (5) years, the average
annual compensation should be calculated based on the
rate of compensation for the actual term of
employment.

Notwithstanding the foregoing Severance Benefit
formula, any payments to which the Executive is
entitled upon Discharge or Constructive Discharge
from the Company shall be adjusted so that the
aggregate present value of all "parachute
payments" (as defined in Section 280G of the
Internal Revenue Code of 1986, as amended from
time to time (the "Code") to which the Executive
is entitled is less than 300% of the Executive's
"annualized includible compensation for the base
period" as defined in the Code, unless, taking
into account the applicable federal, state and
local income taxes and the excise tax imposed by
Section 4999, the payment of the full Severance
Benefit results in the receipt by the Executive on
an after-tax basis of the greatest amount of
benefit under this Section 2 notwithstanding that
all or some portion of such Severance Benefit may
be taxable under Section 4999 of the Code. The
determination as to whether there is any
adjustment (and the extent thereof) in the
payments due the Executive because of this
paragraph shall be made in writing within thirty
(30) days after Discharge or Constructive
Discharge or Election, by the Company's
independent certified public accounts on the date
of the Change in Control and shall be final and
binding on the Executive and the Company. The
Company shall furnish said independent certified

<PAGE>

public accountants with all data required to make
said determination within ten (10) days after
Discharge or Constructive Discharge or Election.
If there is any such adjustment, the Executive may
elect in the Executive's sole discretion which
payments or distributions shall be reduced and/or
which payments or distributions shall be deferred
and promptly notify the Company in writing of such
election.

3. PAYMENT. The Severance Benefit shall be paid to the
Executive in a lump sum or, at the Executive's
election, in two (2) equal installments with the first
to be made not later than thirty (30) days after
Discharge or Constructive Discharge or Election and
the second installment one (1) year after the first
installment was paid. No interest shall be due upon
the Severance Benefit unless it is not paid when due
and in which case interest shall accrue thereon at the
applicable Federal rate used to determined present
value under Section 280G of the Internal Revenue Code
of 1986, as amended.

4. ARBITRATION OF ALL DISPUTES. Any controversy or claim
arising out of or relating to this Agreement or the
breach thereof, shall be settled by arbitration in the
City of Chattanooga in accordance with the laws of the
State of Tennessee by three (3) arbitrators, one of
whom shall be appointed by the Company, one by the
Executive and the third of whom shall be appointed by
the first two arbitrators. If the first two
arbitrators cannot agree on the appointment of a third
arbitrator, then the third arbitrator shall be
appointed by the American Arbitration Association. The
arbitration shall be conducted in accordance with the
rules of the American Arbitration Association.
Judgement upon the award rendered by the arbitrators
may be entered in any court having jurisdiction
thereof. In the event that it shall be necessary or
desirable for the Executive to retain legal counsel
and/or incur other costs and expenses in connection
with the enforcement of any and all of his rights
under this Agreement, the Company shall pay (or the
Executive shall be entitled to recover from the
Company, as the case may be) his reasonable attorneys'
fees and costs and expenses in connection with the
enforcement of his

<PAGE>

said rights (including the enforcement of any
arbitration award in court), regardless of the final
outcome, unless the arbitrators shall determine that
under the circumstances recovery by the Executive of
all or a part of any such fees and costs and expenses
would be unjust.

5. NOTICES. Any notices, requests, demands and other
communications provided for by this Agreement shall be
sufficient if in writing and if sent by registered or
certified mail to the Executive at the last address he
has filed in writing with the Company or, in the case
of the Company, at its principal executive offices
addressed to the President.

6. NON-ALIENATION. The Executive shall not have any
right to pledge, hypothecate, anticipate or in any way
create a lien upon any amounts provided under this
Agreement; and no benefits payable hereunder shall be
assignable in anticipation of payment either by
voluntary or involuntary acts, or by operation of law.
Notwithstanding the foregoing provisions, in the event
that the Executive dies following Discharge or
Constructive Discharge after a Change in Control but
before receiving all of his Severance Benefit, the
unpaid Severance Benefit shall be paid to his Estate
in accordance with the terms of this Agreement.

7. GOVERNING LAW. The provisions of this Agreement shall
be construed in accordance with the laws of the State of
Tennessee.

8. AMENDMENT. This Agreement may not be amended or
cancelled except by the mutual agreement of the parties
in writing.

9. SUCCESSORS TO THE COMPANY. Except as otherwise
provided herein, this Agreement shall be binding upon
and inure to the benefit of the Company and any
successor of the Company.

10. SEVERABILITY. In the event that any provision or
portion of this Agreement shall be determined to be
invalid or unenforceable for any reason, the remaining
provisions of this Agreement shall be unaffected
thereby and shall remain in full force and effect.

<PAGE>

IN WITNESS WHEREOF, the Executive has hereunto set his hand
and, pursuant to the authorization from its Board of Directors, the Company has
caused these presents to be executed in its name on its behalf, and its
corporate seal to be hereunto affixed and attested by its Secretary, all as of
the day and year first above written.

-------------------------------------
[Executive]

CHATTEM, INC.

By:
----------------------------------
Title:
----------------------------

ATTEST:

- ----------------------------
Secretary
(SEAL)

</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.3
<SEQUENCE>8
<FILENAME>a2039699zex-10_3.txt
<DESCRIPTION>EXH 10.3
<TEXT>

<PAGE>

Exhibit 10.3

AMENDED AND RESTATED
NON-COMPETITION AND SEVERANCE AGREEMENT

This Agreement is made and entered into as of the 1st of
August, 2000, by and between CHATTEM, INC., a Tennessee corporation (the
"Company") and __________________ (the "Executive").

WITNESSETH

WHEREAS, the Company desires to impose upon the Executive
obligations of confidentiality and to restrict his ability to obtain employment
with certain competitors of the Company; and

WHEREAS, the Company and the Executive have previously entered
that certain Non-Competition and Severance Agreement dated February 18, 2000,
which provides certain benefits in the event of a change in control of the
Company, which the Company desires to amend and restate in the form hereinafter
set forth; and

WHEREAS, the Executive is willing to accept obligations of
confidentiality and non-competition in exchange for specified severance
benefits;

NOW, THEREFORE, the Company and the Executive do hereby agree
as follows:

1. TERM. The term of this Agreement shall commence as
of the day and year first above written and continue indefinitely thereafter
for a period ending three (3) years after the termination of the Executive's
employment with the Company.

2. CONFIDENTIALITY OBLIGATIONS. During the term of
this Agreement the Executive agrees to maintain all confidential information
and trade secrets obtained during the course of his employment with the
Company as confidential and to disclose the same to no one, other than in the
furtherance of the Company's business in the normal course or to a fellow
employee with a reasonable need to know, unless the Executive can demonstrate
by documentary evidence that such information was (1) known to him prior to
his employment with the Company; (2) subsequently became part of the public
domain through no fault of his own; or (3)

<PAGE>

was subsequently disclosed to him by a third party not in violation of any
obligation of confidentiality and non-use with the Company.

3. NON-COMPETE. In the event of a Change in Control
(as hereinafter defined) while Executive is employed by the Company and
during the term of this Agreement, Executive will not accept compensation or
anything of value from, nor offer or provide any services, including
consulting services, to any person, company, partnership, joint venture or
other entity which has or does a significant business involving, in whole or
in part, health and beauty aid products sold over the counter. This provision
applies only to entities selling the above specified products in competition
with the Company in the United States.

4. SEVERANCE BENEFITS. If the Company Discharges or
Constructively Discharges the Executive during the term of this Agreement
within twenty-four (24) months after the occurrence of a Change in Control,
he shall receive a Severance Benefit. In addition, after a Change in Control,
the Executive shall be entitled to resign his position with the Company and
elect to receive the Severance Benefit (the "Election") at any time during
the period commencing one-hundred and eighty (180) days after the Change in
Control and ending two-hundred and forty (240) days after the Change in
Control notwithstanding that the fact that no Discharge or Constructive
Discharge has occurred. These terms are hereby defined as follows:

A. "Change in Control":

(i) Change of one-third (1/3) or more of
any directors of the Company within any
twelve (12) month period; or

(ii) Change of one-half (1/2) or more of
the directors of the Company within any
twenty-four (24) month period; or

(iii) Acquisition by any person of the
ownership or right to vote of thirty-five
(35%) percent or more of the Company's
outstanding voting shares. "Person" shall
mean any person, corporation, partnership, or
any entity and any affiliate or associate
thereof. "Affiliate" and "associate" shall
have the meanings assigned to them in Rule
12(b)(2) of the General Rules and Regulations
under the Securities Exchange Act of 1934.

<PAGE>

B. "Discharges": terminates the Executive for any
reason other than indictment or conviction
for a felony or other crime involving
substantial moral turpitude, disability,
death, alcoholism, drug addiction or the
gross, active misfeasance of the Executive
with regard to his duties with the Company.

C. "Constructively Discharges": changes location or
reduces the Executive's status, duties,
responsibilities or direct or indirect
compensation, (including future increases
commensurate with those given other managers
of the Company), or so alters the style or
philosophy of the conduct of the Company's
business, in the opinion of the Executive, as
to cause it to be undesirable to the
Executive to remain in the employ of the
Company.

D. "Severance Benefit": a payment equal to two-
hundred ninety-nine (299%) percent of the
Executive's average annual includible
compensation from the Company during the five
(5) most recently completed taxable years
before the date on which the Change in
Control occurs. Any partial taxable years
shall be annualized. If the event that the
Executive's employment is less than five (5)
years, the average annual compensation should
be calculated based on the rate of
compensation for the actual term of
employment.

<PAGE>

paragraph shall be made in writing within
thirty (30) days after Discharge or
Constructive Discharge or Election, by the
Company's independent certified public
accounts on the date of the Change in Control
and shall be final and binding on the
Executive and the Company. The Company shall
furnish said independent certified public
accountants with all data required to make
said determination within ten (10) days after
Discharge or Constructive Discharge or
Election. If there is any such adjustment,
the Executive may elect in the Executive's
sole discretion which payments or
distributions shall be reduced and/or which
payments or distributions shall be deferred
and promptly notify the Company in writing of
such election.

5. PAYMENT. The Severance Benefit shall be paid to
the Executive in a lump sum or, at the Executive's election, in two (2) equal
installments with the first to be made not later than thirty (30) days after
Discharge or Constructive Discharge or Election and the second installment
one (1) year after the first installment was paid. No interest shall be due
upon the Severance Benefit unless it is not paid when due and in which case
interest shall accrue thereon at the applicable Federal rate used to
determined present value under Section 280G of the Internal Revenue Code of
1986, as amended.

6. CONTINUATION OF BENEFITS. The Company shall
continue to provide to the Executive at its cost and expense health, medical
and life insurance benefits at substantially the same level of benefits as
the Executive has at the date he becomes entitled to the Severance Benefit in
accordance with Section 4 hereof for a period of two (2) years following the
date the Executive becomes entitled to such Severance Benefit.

7. ARBITRATION OF ALL DISPUTES. Any controversy or
claim arising out of or relating to this Agreement or the breach thereof,
shall be settled by arbitration in the City of Chattanooga in accordance with
the laws of the State of Tennessee by three (3) arbitrators, one of whom
shall be appointed by the Company, one by the Executive and the third of whom
shall be appointed by the first two arbitrators. If the first two arbitrators
cannot agree on the appointment of a third arbitrator, then the third
arbitrator shall be appointed by the American Arbitration Association. The
arbitration shall be conducted in accordance with the rules of the American
Arbitration Association. Judgement upon the award rendered by the

<PAGE>

arbitrators may be entered in any court having jurisdiction thereof. In the
event that it shall be necessary or desirable for the Executive to retain
legal counsel and/or incur other costs and expenses in connection with the
enforcement of any and all of his rights under this Agreement, the Company
shall pay (or the Executive shall be entitled to recover from the Company, as
the case may be) his reasonable attorneys' fees and costs and expenses in
connection with the enforcement of his said rights (including the enforcement
of any arbitration award in court), regardless of the final outcome, unless
the arbitrators shall determine that under the circumstances recovery by the
Executive of all or a part of any such fees and costs and expenses would be
unjust.

8. NOTICES. Any notices, requests, demands and other
communications provided for by this Agreement shall be sufficient if in
writing and if sent by registered or certified mail to the Executive at the
last address he has filed in writing with the Company or, in the case of the
Company, at its principal executive offices addressed to the President.

9. NON-ALIENATION. The Executive shall not have any
right to pledge, hypothecate, anticipate or in any way create a lien upon any
amounts provided under this Agreement; and no benefits payable hereunder
shall be assignable in anticipation of payment either by voluntary or
involuntary acts, or by operation of law. Notwithstanding the foregoing
provisions, in the event that the Executive dies following Discharge or
Constructive Discharge after a Change in Control but before receiving all of
his Severance Benefit, the unpaid Severance Benefit shall be paid to his
Estate in accordance with the terms of this Agreement.

10. GOVERNING LAW. The provisions of this Agreement
shall be construed in accordance with the laws of the State of Tennessee.

11. AMENDMENT. This Agreement may not be amended or
cancelled except by the mutual agreement of the parties in writing.

12. SUCCESSORS TO THE COMPANY. Except as otherwise
provided herein, this Agreement shall be binding upon and inure to the
benefit of the Company and any successor of the Company.

13. SEVERABILITY. In the event that any provision or
portion of this Agreement shall be determined to be invalid or unenforceable
for any reason, the remaining provisions of this Agreement shall be
unaffected thereby and shall remain in full force and effect.

<PAGE>

-------------------------------------
[Exeuctive]

CHATTEM, INC.

By:
----------------------------------
Title:
----------------------------
ATTEST:

- ----------------------------
Secretary
(SEAL)

</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-11
<SEQUENCE>9
<FILENAME>a2039699zex-11.txt
<DESCRIPTION>EX-11
<TEXT>

<PAGE>

EXHIBIT 11

CHATTEM, INC. AND SUBSIDIARIES
STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS
FOR THE YEARS ENDED NOVEMBER 30, 2000, 1999 AND 1998
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

2000 1999 1998
----------- ----------- -----------
<S> <C> <C> <C>
NET INCOME:
Income (loss) before extraordinary loss and
change in accounting principle........... $ (197) $ 22,541 $ 18,128
Extraordinary loss......................... (920) (2,385) (2,859)
Change in accounting principle............. (542) -- --
----------- ----------- -----------
Net income (loss)...................... $ (1,659) $ 20,156 $ 15,269
=========== =========== ===========

NUMBER OF COMMON SHARES:
Weighted average outstanding.............. 9,411 9,747 9,374
Issued upon assumed exercise of
outstanding stock options and stock
warrants................................ -- 277 361
----------- ----------- -----------
Weighted average and dilutive potential
outstanding............................. 9,411 10,024 9,735
=========== =========== ===========

NET INCOME (LOSS) PER COMMON
SHARE:
Basic:
Income (loss) before extraordinary loss
and change in accounting principle... $ (.02) $ 2.31 $ 1.93
Extraordinary loss..................... (.10) (.24) (.30)
Change in accounting principle......... (.06) -- --
----------- ----------- -----------
Total basic.......................... $ (.18) $ 2.07 $ 1.63
=========== =========== ===========
Diluted:
Income (loss) before extraordinary loss
and change in accounting principle... $ (.02) $ 2.25 $ 1.86
Extraordinary loss..................... (.10) (.24) (.29)
Change in accounting principle......... (.06) -- --
----------- ----------- -----------
Total diluted........................ $ (.18) $ 2.01 $ 1.57
=========== =========== ===========

</TABLE>

</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-13
<SEQUENCE>10
<FILENAME>a2039699zex-13.txt
<DESCRIPTION>EX-13
<TEXT>

<PAGE>
EXHIBIT 13

TO THE SHAREHOLDERS

FISCAL 2000 REVIEW

For each of the last three years we have written to you about this being the
greatest period in Chattem's history highlighted by dynamic growth in sales and
earnings. This year, unfortunately, we must write about a disappointing year,
which included approximately $19.3 million in fourth quarter charges resulting
in a $.02 per share loss for the year before extraordinary items and cumulative
effect of an accounting change. Net sales were $252.7 million, operating income
was $38.9 million and earnings before interest, taxes, depreciation and
amortization ("EBITDA") were $51.3 million for fiscal 2000. Cash earnings
(earnings plus non-cash amortization) per share were $.62. We had set much
higher goals for Chattem.

While these results are disappointing, they should not simply be dismissed as a
bad year. In fact, a number of positive highlights occurred in this unusual and
complex year. Below we have discussed both the disappointments and positives
Chattem experienced in 2000.

In terms of disappointments, clearly the loss of $.02 per share and the $19.3
million of charges were the most significant. Included in the charges was $8.4
million relating to the discontinuation of DEXATRIM with phenylpropanolamine
("PPA") as a result of action taken by the FDA in November 2000. We were
extremely surprised and displeased that the FDA took this action despite strong
scientific evidence supporting the safety of PPA. SUNSOURCE had another poor
year, as the entire herbal market was very weak. Finally, GOLD BOND, which has
been our strongest performer for several years, had a weak year with sales down
about 10% due to private label competition and a cool, wet summer in the
Northeast affecting GOLD BOND powder sales.

Perhaps surprising to you is our belief that we had more successes in 2000 than
disappointments. Clearly, the most dramatic success was the reduction of
long-term indebtedness by $144 million from November 30, 1999 until January 17,
2001. This resulted primarily from the repayment of $52 million of bank debt in
September when Ban-Registered Trademark- was sold, and then the retirement of
approximately $78 million of senior subordinated notes for $65 million shortly
after the fiscal year end. The subordinated notes buy-back was initiated in
December 2000 but not completed until January 2001, and is included as a part of
our fiscal 2000 review because it was linked directly to the sale of Ban which
occurred in September 2000. For Chattem to thrive and grow in the future, we
felt this debt reduction was essential.

We also purchased approximately 877,000 shares of common stock during the fiscal
year, and have shrunk our share base approximately 10% since the buy-back
program was instituted in February 1999. We think this is an appropriate
investment for all Chattem shareholders.

Another major highlight was the sale of Ban for $160 million cash, plus
contingency payments which could total another $6.5 million. We acquired Ban
at a time when the deodorant market was stable with little competitive
activity, which we expected to continue. When Dove-Registered Trademark- was
launched with the largest marketing budget in deodorant category history we
felt the competitive dynamics had changed significantly and we should exit
the category. We operated Ban for more than two years making over $60 million
in operating income. Although we recorded a $4.2 million loss on the sale of
Ban, this is more than offset by an extraordinary pretax gain of
approximately $12 million on the high yield note repurchase which will be
recorded in the first quarter of 2001, and which was made possible by the
proceeds from the Ban sale. We retain $35 million from the Ban sale which is
now free to be used for acquisitions as opposed to being required to be used
to retire subordinated notes at par.

Finally, we had a number of marketing successes during 2000. The entire topical
analgesic portfolio was up in sales over fiscal 1999 by 7%, with particularly
strong results from ASPERCREME, CAPSAZIN and ICY HOT. Also, PHISODERM, MUDD and
HERPECIN all enjoyed double-digit sales increases. Additionally, somewhat lost
in the negative news about DEXATRIM with PPA was the very successful launch of
DEXATRIM Natural, which gave consumers a PPA-free weight loss alternative.

Looking back on the problem areas and the successes, we think it is clear why we
called fiscal 2000 an unusual and complex year.

<PAGE>

FISCAL 2001 OUTLOOK*

As we write this, we do so with a strong sense of optimism. The phrase "when the
going gets tough, the tough get going" best captures the current spirit at
Chattem. Our Company may have had a tough 2000, but all of our employees have
responded with energy, hard work and enthusiasm to see that we do not have
another poor year. Specifically, we are managing costs aggressively, putting in
place new marketing initiatives and focusing on acquisitions and innovative
technology for new products.

All of our brands have marketing plans with numerous marketing initiatives.
However, each year there are usually a handful of brands that will in all
likelihood determine our success. This year we have four key brands with
important marketing initiatives that if successful should ensure a return to the
profitability and growth you have come to expect from Chattem.

First, GOLD BOND, as mentioned, has been a strong growth brand for us since its
acquisition in 1996 and our most important goal is to restore this growth
through new products and more effective advertising and promotion. We worked
particularly hard on this initiative during the second half of fiscal 2000, and
the most recent A.C. Neilsen data tracking consumer sales is encouraging. Also,
we have one new GOLD BOND product targeted for launch late summer and another
for introduction in early 2002.

Second, with the discontinuation of PPA, the success of DEXATRIM Natural is
vitally important. Again, early results are promising, with DEXATRIM Natural
apparently picking up a significant portion of regular DEXATRIM users. Also, the
sell-in of the new 90 count DEXATRIM Natural bottles plus DEXATRIM Natural
Ephedra Free has gone exceptionally well. We have significant advertising
devoted to DEXATRIM Natural, particularly in the first six months of fiscal
2001. Finally, we are on schedule to launch a new diet product in the fall.

Third, the ICY HOT Patch, which began shipping around the first of calendar
2001, is a promising new product. We will start a major advertising campaign in
April, targeting the millions of backache and chronic pain sufferers. This
analgesic ointment on an adhesive patch is truly a revolutionary way to deliver
long-lasting topical pain relief without any mess.

Finally, PAMPRIN has commenced its most aggressive advertising campaign in years
to defend against the recently launched Women's Tylenol-Registered Trademark-.
Again, early Nielsen results are encouraging as most Women's Tylenol sales
appear to be coming from market growth and not loyal PAMPRIN users.

Taking all of the above plans into consideration, we are currently estimating
sales of $180-$185 million, EBITDA of $38-40 million and earnings per share of
$.60-$.65 for fiscal 2001. The estimates are prior to any extraordinary items
which may be recorded during the year. We have built this budget estimating flat
sales for most brands, continuing sales declines from SUNSOURCE and modest
growth from those brands under which we are launching new products. We believe
this is a realistic way to approach fiscal 2001, as we hope to deliver to you
only positive surprises.

Acquisitions have been and will continue to be a major source of growth. With
$35 million in cash and a strong organizational structure with capacity for
additional business, we are aggressively seeking acquisitions and other
strategic opportunities that fit our strategy of unique products with leadership
positions in niche categories.

In closing, our managers, directors and employees are dedicated to a strong
rebound in 2001, which we look forward to sharing with you throughout this year.

- -------------------------------- -------------------------------
CHAIRMAN and CEO PRESIDENT and COO

*The statements in this section constitute "forward looking statements" within
the meaning of the Private Securities Litigation Reform Act of 1995.

Ban-Registered Trademark- is the registered trademark of Kao Corporation.

Tylenol-Registered Trademark- is the registered trademark of McNeil
Consumer Brands, Inc.

Dove-Registered Trademark- is the registered trademark of
Chesebrough-Pond's Inc.

<PAGE>

CHATTEM CONSUMER PRODUCTS

DOMESTIC PRODUCT OVERVIEW

OTC HEALTH CARE PRODUCTS

MEDICATED SKIN CARE PRODUCTS

The GOLD BOND brand, which is over 100 years old, competes in the adult and baby
medicated powder, foot powder, therapeutic lotion, anti-itch cream and
antibiotic ointment markets. GOLD BOND is the leading brand in the medicated
powder category and is a rapidly growing presence in the lotion market. Total
retail sales for the brand have grown from less than $28,000,000 when the brand
was acquired in fiscal 1996 to over $60,000,000 in fiscal 2000. In 1997 the
Company added two line extensions, GOLD BOND Foot Powder and GOLD BOND Medicated
Body Lotion. GOLD BOND Antibiotic Ointment was introduced during the first
quarter of 1999. The product line is heavily supported by national television
and radio advertising throughout most of the year, as well as with consumer
promotions. As evidenced by the success of the lotion, foot powder and ointment
extensions, GOLD BOND continues to represent an opportunity for growth both
through the existing products and the introduction of line extensions.

TOPICAL ANALGESICS

INTERNAL ANALGESICS

<PAGE>

LIP CARE

APPETITE SUPPRESSANT

DEXATRIM is a line of appetite suppressants which was acquired in December of
1998. In fiscal 2000 DEXATRIM entered the herbal diet aid category with DEXATRIM
Natural. DEXATRIM Natural is a drug-free, all natural diet aid with special dual
action that curbs your appetite and helps your body burn fat and calories.
DEXATRIM Natural is currently available in Green Tea and Caffeine Free versions,
and in an Ephedrine-Free product in fiscal 2001. DEXATRIM Natural will be
supported through high levels of television and radio advertising in 2001.
DEXATRIM containing PPA was discontinued as a product line in the fourth quarter
of 2000.

DIETARY SUPPLEMENTS

The Company competes in the U.S. nutritional supplement category with its
SUNSOURCE line which includes GARLIQUE, REJUVEX, HARMONEX, PROPALMEX, MELATONEX,
REPOSE, NEW PHASE and OMNIGEST EZ. These products are distributed primarily
through the food, drug and mass merchandiser trade channels.

REJUVEX is a dietary supplement for women in the pre and post-menopausal age
group. REJUVEX helps women maintain comfort during a phase of life that is
often fraught with numerous discomforts. Additionally, REJUVEX, high in
magnesium, helps promote strong healthy bones in a population that is at risk
for development of osteoporosis. REJUVEX provides an estrogen-free avenue of
natural support.

<PAGE>

TOILETRIES AND SKIN CARE PRODUCTS

FACIAL CLEANSERS AND MASQUES

PHISODERM is a line of facial cleansers developed by dermatologists which
retains an ethical, troubled skin reputation. The line includes several formulas
of liquid cleansers including one for infants and a bar soap. In 1999 PHISODERM
added a 4-Way Daily Acne Cleanser and in 2000 a Blemish Patch to the line which
have generated incremental new business to the brand. In 2000 the acne products
of the PHISODERM business enjoyed strong growth and became the product line's
second largest segment. Consumer support for the brand was focused on the acne
business and included advertising in teen magazines, concentrated television
advertising on teen cable programs and extensive sampling. In 2001 the Company
anticipates further expanding the acne portion of the business with unique new
line extensions.

MUDD is a line of deep cleaning clay-based products for the face. Target
consumers for MUDD are women between the ages of 18 and 49. MUDD Masque is
available in four formulas and is a market leader in the masque category. In
1999 the Company introduced MUDD Self-Heating Skin Cleanser which is a deep
cleaning scrub product. The MUDD Self-Heating Skin Cleanser is unique because it
generates heat upon contact with water to open pores for maximum deep cleansing.
In 2000 the masque products enjoyed strong growth and increased market share
based on expanded distribution and a television advertising test.

SEASONALS

BULLFROG is the line of ultimate waterproof sunblocks for outdoor active
consumers. In 1999 two new products were added to the line: BULLFROG MAGIC
BLOCK, a disappearing color sunblock, and BULLFROG QUIK STICK, the highest sun
protection stick with aloe and vitamin E. In 2000, three additional new products
were added to the line: BULLFROG QUIK GEL Sport Spray, an active sport spray
version of the most popular selling BULLFROG QUIK GEL formula, BULLFROG
AgeProof, a broad spectrum UVA/UVB daily wear sunblock with Parsol 1789 and
BULLFROG Sparkle Block, a disappearing color sunblock with sparkles. The Company
will continue to support the brand with a comprehensive brand plan which
includes targeted consumer advertising, promotions and sampling programs.

<PAGE>

INTERNATIONAL MARKET OVERVIEW

EUROPE

Chattem's European business is conducted through Chattem (U.K.) Limited, a
wholly-owned subsidiary located in Basingstoke, Hampshire, England. This unit
also services distributors in Australia and the Middle East. Manufacturing and
packaging of the products are conducted principally in the U.K. with a limited
number of ingredients purchased from Chattem. Chattem (U.K.) employs its own
sales force in the United Kingdom while distributors are used to market and sell
its products on the Western European continent. Due to the difficulty and
expense involved in the registration of OTC health care brands in Europe, the
unit markets exclusively the Company's toiletries and skin care products.
Chattem's products in Europe include SUN-IN, a range of MUDD face and body
products and ULTRASWIM. Cornsilk-Registered Trademark- is sold under a licensing
arrangement with another company. SPRAY BLOND Spray-In Hair Lightener is only
marketed on the European continent.

CANADA

Chattem (Canada) Inc. is a wholly-owned subsidiary based in Mississauga,
Ontario, Canada which markets and distributes certain of Chattem's consumer
products throughout Canada. The manufacturing of the brands is principally done
in the Company's facilities in Chattanooga while some packaging takes place in
Mississauga. The division utilizes a national broker for its sales efforts.
Brands marketed and sold in Canada include GOLD BOND, PAMPRIN, MUDD, SUN-IN,
ULTRASWIM, PHISODERM, ASPERCREME and DEXATRIM.

U.S. EXPORT

The U.S. Export division services various distributors primarily located in the
Caribbean and Central and South America. The Company sells ICY HOT, GOLD BOND,
PAMPRIN, MUDD, PHISODERM and DEXATRIM into these markets with the primary focus
being the development of its OTC health care products.

Cornsilk-Registered Trademark- is the registered trademark of Del Laboratories,
Inc.

<PAGE>

MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following analysis of the financial condition and results of operations
should be read in conjunction with the audited consolidated financial statements
and related notes thereto included elsewhere in this Annual Report.

GENERAL

Fiscal 2000 was highlighted by the sale of the Ban product line, the voluntary
withdrawal from the marketplace of DEXATRIM containing PPA, the repurchase of
876,500 shares of the Company's common stock, the retirement of $5,400,000
principal amount of 12.75% senior subordinated notes, the payment in their
entirety of the revolving line of credit and term loans and fourth quarter
charges of approximately $19,300,000, which includes certain nonrecurring
items.

On September 15, 2000 the Company completed the sale of its Ban product line to
The Andrew Jergens Company, a wholly owned subsidiary of Kao Corporation. Under
the terms of the sale agreement, the Company received $160,000,000 cash at
closing, plus the right to receive up to an additional $6,500,000 in future
payments based upon sales levels of Ban in 2001 and 2002. Concurrent with the
closing of the sale of Ban, the Company used $52,194,000 of the net proceeds to
retire all of the outstanding balances of the revolving line of credit and term
loans and accrued interest thereon, with the balance of the net proceeds being
retained by the Company.

<PAGE>

On October 19, 2000, a Nonprescription Drugs Advisory Committee ("NDAC")
commissioned by the United States Food and Drug Administration ("FDA") to review
the safety of PPA, the active ingredient in certain of the Company's DEXATRIM
brands, determined that there is an association between PPA and hemorrhagic
stroke and recommended that PPA not be considered generally recognized as safe
for OTC use as a nasal decongestant or for weight control. In response to a
request from the FDA to voluntarily cease marketing DEXATRIM with PPA, the
Company announced on November 7, 2000 its decision to immediately cease shipping
DEXATRIM with PPA and to accept product returns from any retailers who decide to
discontinue marketing DEXATRIM with PPA.

During 2000 the Company repurchased and retired 876,500 shares of its common
stock, without par value, for $9,489,000 in accordance with the Company's
previously announced stock buyback program.

During 2000 the Company retired $5,400,000 principal amount of its 12.75% senior
subordinated notes due 2004.

As a result of the early retirement of the revolving line of credit and term
loans and the retirement of a portion of the 12.75% senior subordinated notes
due 2004, the Company recorded in 2000 an extraordinary loss of $920,000, net of
income tax benefit. This loss related to the write-off of debt issuance costs
associated with the bank debt and the 12.75% notes as well as the premium paid
on the retirement of the 12.75% notes.

<PAGE>

During the fourth quarter of fiscal 2000, Chattem recorded approximately
$19,300,000 in charges, including certain nonrecurring items, that adversely
impacted financial results. These charges included a $4,208,000 loss before
taxes in connection with the sale of Ban, an impairment charge of $810,000 in
connection with the pending sale of NORWICH Aspirin, a reserve of $5,600,000 for
DEXATRIM with PPA estimated product returns, a write down of $2,788,000 for
inventories of DEXATRIM with PPA, a $4,000,000 product returns reserve and a
$1,331,000 inventory obsolescence reserve against the Company's SUNSOURCE
products. The Company also recorded a $578,000 interest expense charge related
to the termination of interest rate swaps.

Effective December 1, 1999, the Company adopted Statement of Position (SOP)
98-5, "Reporting on the Costs of Start-up Activities", issued by the American
Institute of Certified Public Accountants ("AICPA"). SOP 98-5 requires costs of
start-up activities to be expensed as incurred. The initial adoption of this SOP
was recorded as the cumulative effect of a change in an accounting principle.
The one-time charge, net of income tax benefit, was $542,000 in fiscal 2000.

<PAGE>

On December 11, 2000, the Company initiated a consent solicitation and tender
offer for certain of its outstanding senior subordinated notes. On January 17,
2001, the Company announced the successful completion of the consent
solicitation and tender offer pursuant to which it retired $70,462,000 principal
amount of its 8.875% senior subordinated notes due 2008 and $7,397,000 principal
amount of its 12.75% senior subordinated notes due 2004. The consideration paid
for the consent solicitation and tender offer was $64,937,000, which was
provided by the proceeds of the Ban sale.

<PAGE>

RESULTS OF OPERATIONS

The following table sets forth, for income (loss) before extraordinary loss and
change in accounting principle and for the periods indicated, certain items from
the Company's Consolidated Statements of Income expressed as a percentage of net
sales.

<TABLE>
<CAPTION>
Year Ended November 30
-----------------------------------
2000 1999 1998
--------- -------- --------
<S> <C> <C> <C>
NET SALES . . . . . . . . . . . . . . . . . . . . 100.0% 100.0% 100.0%
--------- -------- --------
COST AND EXPENSES:
Cost of sales . . . . . . . . . . . . . . . . 29.7 25.4 27.7
Advertising and promotion . . . . . . . . . . 42.3 39.5 39.3
Selling, general and administrative. . . . . . 12.6 10.9 12.4
--------- -------- --------
Total costs and expenses . . . . . . . . 84.6 75.8 79.4
--------- -------- --------
INCOME FROM OPERATIONS . . . . . . . . . . . . . 15.4 24.2 20.6
--------- -------- --------
OTHER INCOME (EXPENSE):
Interest expense . . . . . . . . . . . . . . (14.1) (12.3) (12.1)
Investment and other income, net. . . . . . . .6 .2 .4
Gain (loss) on product divestitures . . . . . (2.0) -- 4.3
--------- -------- --------
Total other income (expense). . . . . . (15.5) (12.1) (7.4)
--------- -------- --------
INCOME (LOSS) BEFORE INCOME TAXES . . . . . . . . (.1) 12.1 13.2

PROVISION FOR (BENEFIT FROM) INCOME TAXES . . . . -- 4.5 4.9
--------- -------- --------
INCOME (LOSS) BEFORE EXTRAORDINARY LOSS AND
CHANGE IN ACCOUNTING PRINCIPLE. . . . . . . . (.1)% 7.6% 8.3%
========= ======== ========
</TABLE>

FISCAL 2000 COMPARED TO FISCAL 1999

Net sales for the year ended November 30, 2000 decreased $45,443,000, or 15.2%,
to $252,699,000 from $298,142,000 for the previous fiscal year. The decrease was
largely the result of the sale of Ban and providing for expected returns of
DEXATRIM with PPA and certain SUNSOURCE products. The decrease consisted of a
$44,488,000, or 16.1%,

<PAGE>

decrease in domestic consumer products sales from $276,632,000 in 1999 to
$232,144,000 in 2000 and a decrease of $955,000, or 4.4%, in international
sales to $20,555,000 from $21,510,000.

In 2000, sales of OTC health care products decreased $19,081,000, or 11.1%, to
$153,175,000 from $172,256,000 in 1999, while sales of toiletries and skin care
products declined $26,581,000, or 21.2%, from $125,650,000 in 1999 to
$99,069,000 in 2000. Other sales increased $219,000, or 92.8%, to $455,000 in
the current period from $236,000 in the prior fiscal year.

In the domestic OTC health care product segment in 2000 sales increases were
recognized for all of the topical analgesic products, most notably ICY HOT and
ASPERCREME, and HERPECIN-L. Declines in sales were recorded for the SUNSOURCE
brands as a result of continuing weakness of the dietary supplements' market,
PAMPRIN, PREMSYN PMS, GOLD BOND and DEXATRIM. In 2000 sales increases were
realized for MUDD and PHISODERM of the domestic toiletries and skin care
category, while sales decreased for Ban, SUN-IN and BULLFROG. Sales variances
were largely the result of changes in the volume of unit sales of the particular
brand.

The increase in sales of the topical analgesic products was attributed
principally to increased marketing support. MUDD and PHISODERM sales benefited
from line extension introductions in 1999 and 2000 (MUDD Self-Heating Skin
Cleanser, PHISODERM 4-Way Daily Acne Cleanser and PHISODERM Blemish Patch) and

<PAGE>

increased marketing support, while HERPECIN-L sales were positively impacted
by more effective advertising and promotional campaigns.

As previously stated, the Ban product line was sold in the fourth quarter of
2000, therefore markedly affecting its sales for 2000. Prior to the sale,
however, Ban sales had declined, principally as a result of the introduction of
a new, heavily promoted antiperspirant and deodorant product by a competitor and
reduced marketing support. GOLD BOND sales declined primarily due to increased
competition from less expensive private label brands and reduced advertising and
promotion expenditures. BULLFROG sales were affected principally by the loss of
a major customer, while PAMPRIN, PREMSYN PMS and SUN-IN sales were largely
influenced by reduced marketing support. As previously discussed, the decline in
sales of DEXATRIM reflects the voluntary withdrawal from the marketplace of
DEXATRIM containing PPA. Sales of the remaining brands were relatively flat or
showed modest declines in 2000.

International sales from the Canadian operation increased $645,000, or 9.6%, for
2000, but the United Kingdom business decreased $1,109,000, or 10.3%. The
increase in Canadian sales was primarily associated with the launch of GOLD BOND
Medicated Lotion of the OTC health care segment, while Ban, SUN-IN and MUDD of
the toiletries and skin care product group constituted the principal decreases
in United Kingdom sales. U. S. export sales declined $491,000, or 12.1%, for
fiscal 2000, with the decrease being largely associated with sales of Ban of the
toiletries and skin care segment, for reasons

<PAGE>

previously discussed. Sales variances were principally the result of changes
in the volume of unit sales of the particular brand.

Cost of sales as a percentage of net sales in 2000 was 29.7% compared to 25.4%
in 1999. The percentage increase of 4.3% in 2000 was primarily the result of the
inventory write downs of $4,119,000 to cost of sales, and allowances for returns
of $9,600,000 to net sales, as discussed previously.

Advertising and promotion expenses were 42.3% of net sales in 2000 compared to
39.5% in 1999, although the cost of such expenses decreased $10,967,000, or
9.3%, to $106,868,000 in 2000 from $117,835,000 in 1999. This decrease in the
cost of such expenses was the result of the sale of Ban and reduced spending for
generally all of the Company's product lines except MUDD, BULLFROG, PHISODERM,
and NEW PHASE and OMNIGEST EZ of SUNSOURCE. The increase in the percent of
advertising and promotion to net sales in 2000 over 1999 was primarily due to
charges to sales in the fourth quarter of 2000 of approximately $9,600,000 as
discussed previously.

Selling, general and administrative expenses decreased $500,000, or 1.5%, to
$31,994,000 in 2000 from $32,494,000 in 1999 but increased as a percentage of
net sales to 12.6% in 2000 from 10.9% in 1999. This dollar decrease was largely
associated with increases in direct selling costs, freight and field sales
expenses, but was more than offset by decreases in annual bonus and the pension
plan curtailment gain. The increase in the percent of selling, general and
administrative expenses to net sales in 2000 over 1999 was

12
<PAGE>

principally the result of the sale of Ban and charges to sales in the fourth
quarter of 2000 of approximately $9,600,000 as discussed previously.

Interest expense decreased $843,000, or 2.3%, to $35,729,000 in 2000 from
$36,572,000 in 1999 primarily as a result of payment of all of the outstanding
revolver and term bank loan balances on September 15, 2000 and the retirement of
$5,400,000 principal amount of the 12.75% senior subordinated notes, but was
offset by a $578,000 charge in the fourth quarter related to the write off of an
interest rate swap termination loss because the underlying debt was retired.
Until the Company's indebtedness is reduced substantially, interest expense will
continue to represent a significant percentage of the Company's net sales.

Investment and other income increased $987,000, or 170.5%, to $1,566,000 in 2000
from $579,000 in 1999. The increase was due primarily to interest income from
temporary investments made with the remaining proceeds from the sale of Ban
after the retirement of the Company's revolver and term bank loans on September
15, 2000.

Loss before extraordinary loss and change in accounting principle was $197,000
in 2000 compared to income before extraordinary loss in 1999 of $22,541,000. The
loss in 2000 resulted primarily from reduced sales and the approximately
$19,300,000 of previously discussed charges, including the losses on the sale of
Ban, and the DEXATRIM with PPA product issues.

<PAGE>

Cash earnings (net income before extraordinary loss on early extinguishment of
debt and change in accounting principle plus non-cash amortization) is one of
the key standards used by the Company to measure operating performance, but it
may not be comparable to similarly titled measures reported by other companies.
Cash earnings is used to supplement operating income as an indicator of
operating performance and not as an alternative to measures defined and required
by generally accepted accounting principles. Cash earnings for fiscal 2000 were
$5,894,000, or $.62 per share, as compared to $29,507,000, or $2.94 per share,
for fiscal 1999, an 80.0% decrease. The Company's earnings before interest,
taxes, depreciation and amortization (EBITDA) for fiscal 2000 was $51,251,000 as
compared to $85,383,000 for fiscal 1999, a 40.0% decrease. The EBITDA margin
decreased from 28.6% of net sales in 1999 to 20.3% in 2000.

FISCAL 1999 COMPARED TO FISCAL 1998

Net sales for the year ended November 30, 1999 increased $78,078,000, or 35.5%,
to $298,142,000 from $220,064,000 for the previous fiscal year. The increase
consisted of a $76,821,000, or 38.4%, increase in domestic consumer products
sales from $199,811,000 in 1998 to $276,632,000 in 1999 and an increase of
$1,257,000, or 6.2%, in international sales to $21,510,000 from $20,253,000.

For the year ended November 30, 1999, sales of the OTC health care products
increased $54,947,000, or 46.8%, to $172,256,000 from $117,309,000 in 1998,
while sales of toiletries and skin care brands increased $23,796,000, or 23.4%,
from $101,854,000 in

<PAGE>

1998 to $125,650,000 in 1999. Other sales declined $665,000, or 73.8%, to
$236,000 in 1999 from $901,000 in 1998.

In the domestic OTC health care product segment in 1999, sales increases were
recognized for all of the Thompson Medical brands, acquired in December 1998,
GOLD BOND, FLEXALL and HERPECIN-L, while sales declines were realized for the
PREMSYN PMS, NORWICH Aspirin and SUNSOURCE product lines. In the current period
in the domestic toiletries and skin care category, sales increases were recorded
for the MUDD and PHISODERM brands with sales decreases being recognized for
ULTRASWIM and Cornsilk, which was sold in May 1998. Sales variances were largely
the result of changes in the volume of unit sales of the particular brand.

The increase in the sales of the GOLD BOND brand was primarily due to the
introduction of the line extensions of medicated lotion in mid-1998 and
antibiotic ointment in early 1999. HERPECIN-L sales benefited from more
effective marketing support, while FLEXALL, MUDD and PHISODERM realized
incremental sales from the introductions of QUIK GEL, Self-Heating Skin Cleanser
and 4-Way Daily Acne Cleanser, respectively, in 1999.

The sales declines for the PREMSYN PMS, ULTRASWIM and NORWICH Aspirin product
lines were largely the result of decreased marketing support and the maturation
of these brands. The decrease in sales of the SUNSOURCE products was
attributable to a general decline in sales of the dietary supplements market
category and increased

<PAGE>

competition. The modest sales declines experienced by certain of the other
domestic products were primarily due to increased competition in their
respective categories, the maturation of these brands and, in certain cases,
reduced marketing support.

In 1999 sales of the international consumer products segment increased
$1,377,000, or 25.9%, for the Canadian operation, but declined $335,000, or
3.0%, for the United Kingdom business. Ban, the Thompson Medical brands and the
GOLD BOND product line accounted for the net sales increase in Canada, while
sales decreases were recognized for all of the product lines marketed by the
United Kingdom operation, except for Ban sales to the Far East. The limited
number of product lines offered and increased competition contributed to the
decline in the United Kingdom business. U.S. export sales increased $215,000, or
5.6%, to $4,054,000 in 1999 from $3,839,000 in 1998, with most of the increase
associated with Ban, the Thompson Medical brands and GOLD BOND. All sales
variances were largely the result of changes in the volume of unit sales of the
particular brand.

Cost of sales as a percentage of net sales in 1999 was 25.4% compared to 27.7%
in 1998. This improvement was principally due to increased sales of higher gross
margin brands and more efficient purchasing and manufacturing operations.

Advertising and promotion expenses increased $31,243,000, or 36.1%, to
$117,835,000 in 1999 from $86,592,000 in 1998 and were 39.5% of net sales
compared to 39.3% in 1998. This increase was largely associated with advertising
and promotional expense

<PAGE>

incurred in connection with Ban, the Thompson Medical brands, GOLD BOND and
PHISODERM. Increases in advertising and promotion in 1999 were also recorded
for FLEXALL, SUN-IN, MUDD and REPOSE of the SUNSOURCE product line. Declines
in spending were recorded for the PAMPRIN, ICY HOT, PREMSYN PMS, HERPECIN-L
and SUNSOURCE (except for REPOSE) product lines.

Selling, general and administrative expenses increased $5,130,000, or 18.7%, to
$32,494,000 in 1999 from $27,364,000 in 1998 but decreased as a percentage of
net sales to 10.9% in 1999 from 12.4% in 1998. This dollar increase was largely
associated with increases in direct selling costs, freight and field sales
expenses as a result of increased sales from acquired brands and associated
increases in corporate administrative and service departmental expenses. The
decline in 1999 from 1998 in the percentage of selling, general and
administrative expenses to net sales reflected the increase in net sales without
a corresponding increase in overhead costs.

Interest expense increased $9,896,000, or 37.1%, to $36,572,000 in 1999 from
$26,676,000 in 1998 primarily as a result of increased indebtedness associated
with the acquisitions of Ban and the Thompson Medical brands.

Investment and other income decreased $302,000, or 34.3%, to $579,000 in 1999
from $881,000 in 1998. The decrease was due primarily to the Company's sale of
its remaining investment in Elcat, Inc.

<PAGE>

A gain of $9,548,000 on the sale of the Cornsilk brand was recognized in 1998.

Income before extraordinary loss increased $4,413,000, or 24.3%, to $22,541,000
in 1999 from $18,128,000 in 1998, which includes the gain of $6,302,000, net of
taxes, from the sale of Cornsilk. This increase resulted primarily from
increased sales, offset in part by increases in sales related costs and interest
expense.

<PAGE>

LIQUIDITY AND CAPITAL RESOURCES

The Company has historically financed its operations and acquisitions with a
combination of internally generated funds and borrowings. The Company's
principal uses of cash are operating expenses, servicing long-term debt,
acquisitions, working capital, repurchases of its common stock and capital
expenditures.

Cash provided by operating activities was $26,507,000 and $26,922,000 for 2000
and 1999, respectively. The decrease in cash flows from operations from 1999 to
2000 was primarily the result of the decrease in net income offset in part by
decreases in accounts receivable and inventories.

Investing activities provided cash of $152,796,000 and used cash of $100,504,000
in 2000 and 1999, respectively. The increase of cash in 2000 reflected the
proceeds from the sale of the Ban product line while the 1999 use of cash
represents the purchase of the Thompson Medical brands. In 2000, capital
expenditures totaled $5,673,000 compared to $9,830,000 in 1999. The decrease was
due primarily to the substantial completion in 1999 of the replacement of the
Company's information technology systems and the extensive renovation of a
manufacturing and warehouse facility purchased in fiscal 1998. Capital
expenditures are expected to be approximately $2,500,000 in fiscal 2001.

<PAGE>

Financing activities used cash of $78,991,000 in 2000 but provided cash of
$73,770,000 in 1999. The use of cash in 2000 consisted primarily of repayment of
all of the outstanding balances of the revolver and term bank loans and the
retirement of $5,400,000 principal amount of the 12.75% senior subordinated
notes due 2004. In December 1998 the Company financed the acquisition of the
Thompson Medical brands with the proceeds of a $90,000,000 bank credit agreement
and 125,500 shares of common stock valued at approximately $39.84 per share.

Until June 30, 2003, the Company is obligated to pay an annual royalty on
HERPECIN-L for the greater of $214,000 or 5% of the brand's annual net sales.

On December 11, 2000, the Company initiated a consent solicitation and tender
offer for certain of its outstanding senior subordinated notes. On January 17,
2001 the Company announced the successful completion of the consent solicitation
and tender offer pursuant to which it retired $70,462,000 principal amount of
its 8.875% senior subordinated notes due 2008 and $7,397,000 principal amount of
its 12.75% senior subordinated notes due 2004. Total consideration paid for the
consent solicitation and tender offer was $64,937,000, which was provided by the
proceeds from the Ban sale.

<PAGE>

The following table presents certain working capital data at November 30, 2000
and 1999 or for the respective years then ended:

<TABLE>
<CAPTION>
ITEM 2000 1999
- -------------------------------------------------- ------------- -----------
<S> <C> <C>
Working capital (current assets less current
liabilities) . . . . . . . . . . . . . . . . . $126,029,000 $26,413,000
Current ratio (current assets divided by current
liabilities) . . . . . . . . . . . . . . . . . 3.77 1.40
Quick ratio (cash and cash equivalents and
receivables divided by current liabilities). . 3.15 .86
Average accounts receivable turnover . . . . . . . 5.28 6.51
Average inventory turnover . . . . . . . . . . . . 3.50 3.19
Working capital as a percentage of total assets. . 31.34% 5.37%
</TABLE>

The major increase in the current and quick ratios and working capital at
November 30, 2000 as compared to November 30, 1999 was primarily due to the
increase in cash and cash equivalents resulting from the sale of Ban in
September 2000.

<PAGE>

Total debt outstanding at November 30, 2000 was $304,077,000 compared to
$369,950,000 at November 30, 1999. The net decrease of $65,873,000 in 2000
reflected the payment of the entire outstanding balances of the revolver and
term bank loans and $5,400,000 principal amount of the Company's 12.75% senior
subordinated notes due 2004.

As of November 30, 2000, the remaining amount authorized by the Company's board
of directors under the stock buyback plan was $6,599,000, however, the Company
is limited in its ability to repurchase shares due to restrictions under the
terms of the indentures with respect to which its senior subordinated notes were
issued.

Management of the Company believes that cash generated by operations and its
strong cash and cash equivalents balance will be sufficient to fund the
Company's current commitments and proposed operations. Also on December 21,
1998, the Company filed with the Securities and Exchange Commission a shelf
registration for $250,000,000 of debt and equity securities, of which
$75,000,000 was utilized in the sale of the 8.875% notes in May 1999.

<PAGE>

FOREIGN OPERATIONS

The Company's primary foreign operations are conducted through its Canadian and
United Kingdom subsidiaries. The functional currencies of these subsidiaries are
Canadian dollars and British pounds, 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 Currency Translation." For the years ended November 30,
2000 and 1999, these subsidiaries accounted for 6.7% and 5.9% of total revenues,
respectively, and 2.0% of total assets for both years. It has not been the
Company's practice to hedge its assets and liabilities in Canada and the United
Kingdom or its intercompany transactions due to the inherent risks associated
with foreign currency hedging transactions and the timing of payment between the
Company and its two foreign subsidiaries. Historically, gains or losses from
foreign currency transactions have not had a material impact on the Company's
operating results. Losses of $20,000 and $26,000 for the years ended November
30, 2000 and 1999, respectively, resulted from foreign currency transactions.
See "Foreign Currency Translation" in Note 2 of Notes to Consolidated Financial
Statements.

<PAGE>

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

In April 1998, the AICPA issued Statement of Position (SOP) 98-5 "Reporting on
the Costs of Start-Up Activities". SOP 98-5 requires costs of start-up
activities and organization costs to be expensed as incurred. This SOP is
effective for financial statements for fiscal years beginning after December 15,
1998. The Company recorded the initial application of this SOP in December 1999
as the cumulative effect of a change in accounting principle of approximately
$542,000, net of income tax benefit.

In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 established accounting and
reporting standards requiring that every derivative instrument (including
certain derivative instruments embedded in other contracts) be recorded in the
balance sheet as either an asset or liability measured at its fair value. SFAS
No. 133 requires that changes in the derivative's fair value be recognized
currently in earnings unless specific hedge accounting criteria are met. Special
accounting for qualifying hedges allow a derivative's gains and losses to offset
related results on the hedged item in the income statement, and requires that a
company must formally document, designate and assess the effectiveness of
transactions that receive hedge accounting. SFAS No. 137 delayed the effective
date of SFAS No. 133 until fiscal years beginning after June 15, 2000. SFAS No.
133 cannot be applied retroactively. SFAS No. 133 must be applied to (a)
derivative instruments and (b) certain derivative instruments embedded in hybrid
contracts that were issued, acquired or substantively modified after December
31, 1997 (and, at the Company's election,

<PAGE>

before January 1, 1999). SFAS No. 133 could increase volatility in earnings
and other comprehensive income. However, as the Company does not have any
derivative instruments as of November 30, 2000, there will be no impact of
adoption at the Company's effective date of December 1, 2000.

In September 2000, the Emerging Issues Task Force (EITF) of the FASB reached a
final consensus on Issue No. 00-10, "Accounting for Shipping and Handling Fees
and Costs". EITF 00-10 is effective the fourth quarter of 2001 and addresses the
income statement classification of amounts charged to customers for shipping and
handling, as well as costs incurred related to shipping and handling. The EITF
concluded that amounts billed to a customer in a sale transaction related to
shipping and handling should be classified as revenue. The EITF also concluded
that if costs incurred related to shipping and handling are significant and not
included in cost of sales, an entity should disclose both the amount of such
costs and the line item on the income statement that includes them. Costs
incurred related to shipping and handling included in revenues will be
required to be reclassified to cost of sales. The Company currently
classifies shipping and handling costs billed to the customer as revenues and
costs related to shipping and handling as a selling expense. The amount of
shipping and handling costs included in selling expense for 2000, 1999 and
1998 was $7,380,000, $6,581,000 and $4,506,000, respectively. The adoption of
this pronouncement in 2001 will not have an impact on the Company's results
of operations or the financial condition of the Company.

<PAGE>

In November 2000, the EITF finalized EITF Issue No. 00-14, "Accounting for
Certain Sales Incentives". EITF 00-14 addresses the recognition, measurement and
income statement classification for sales incentives offered to its customers.
Sales incentives include discounts, coupons, rebates, "buy one get one free"
promotions and generally any other offers that entitle a customer to receive a
reduction in the price of a product or service by submitting a claim for a
refund or rebate. Under EITF 00-14, the reduction in or refund of the selling
price of the product or service resulting from any cash sales incentives should
be classified as a reduction of revenue. Currently, the Company recognizes all
sales incentives as an advertising and promotion expense. Although this
pronouncement will not have any impact on the results of operations or financial
condition of the Company, the presentation prescribed will have an effect of
reducing net sales and advertising and promotion expenses in comparison to prior
years. The Company must adopt EITF 00-14 for all periods presented in the fourth
quarter of fiscal 2001. The impact of adopting for fiscals 2000, 1999 and 1998
would have decreased net sales and advertising and promotion expense by
approximately $10,931,000, $9,032,000 and $4,122,000, respectively.

SEASONALITY

Seasonality is an important factor affecting the operations of the Company.
During recent fiscal years, the Company's first quarter's net sales and gross
profit have trailed the other fiscal quarters on average from 25% to 35% because
of slower sales of consumer products, the seasonality of BULLFROG and SUN-IN and
lower levels of promotional campaigns during this quarter.

<PAGE>

FORWARD LOOKING STATEMENTS

The Company may from time to time make written and oral forward looking
statements. Written forward looking statements may appear in documents filed
with the Securities and Exchange Commission, in press releases and in reports to
shareholders. The Private Securities Litigation Reform Act of 1995 contains a
safe harbor for forward looking statements. The Company relies on this safe
harbor in making such disclosures. The forward looking statements are based on
management's current beliefs and assumptions about expectations, estimates,
strategies and projections for the Company. These statements are not guarantees
of future performance and involve risks, uncertainties and assumptions that are
difficult to predict. Therefore, actual outcomes and results may differ
materially from what is expressed or forecasted in such forward looking
statements. The Company undertakes no obligation to update publicly any forward
looking statements whether as a result of new information, future events or
otherwise. The risks, uncertainties and assumptions regarding forward looking
statements include, but are not limited to, the impact of the loss of sales of
DEXATRIM with PPA; the increased likelihood that claims relating to the
existence of PPA in DEXATRIM will be filed against the Company; product demand
and market acceptance risks; product development risks, such as delays or
difficulties in developing, producing and marketing new products or line
extensions; the impact of competitive products, pricing and advertising;
constraints resulting from financial condition of the Company, including the
degree to which the Company is leveraged, debt service requirements and
restrictions under

<PAGE>

indentures; government regulations; risks of loss of material customers;
public perception regarding the Company's products; dependence on third party
manufacturers; environmental matters; product liability and insurance; and
other risks described in the Company's Securities and Exchange Commission
filings.

<PAGE>

SELECTED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

YEAR ENDED NOVEMBER 30,
----------------------------------------------------------------
2000 1999 1998 1997 1996
--------- --------- -------- --------- ---------
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA

NET SALES....................... $ 252,699 $ 298,142 $ 220,064 $ 143,235 $ 118,903
OPERATING COSTS AND EXPENSES.... 213,819 225,941 174,845 117,732 102,214
--------- --------- -------- --------- ---------
INCOME FROM OPERATIONS .......... 38,880 72,201 45,219 25,503 16,689
OTHER EXPENSE, NET.............. (39,181) (35,993) (16,247) (14,640) (11,069)
--------- --------- -------- --------- ---------
INCOME (LOSS) BEFORE INCOME TAXES,
EXTRAORDINARY LOSS AND CHANGE IN
ACCOUNTING PRINCIPLE............. (301) 36,208 28,972 10,863 5,620

PROVISION FOR (BENEFIT FROM)
INCOME TAXES..................... (104) 13,667 10,844 3,847 1,816
--------- --------- -------- --------- ---------
INCOME (LOSS) BEFORE EXTRAORDINARY
LOSS AND CHANGE IN ACCOUNTING
PRINCIPLE........................ $ (197) $ 22,541 $ 18,128 $ 7,016 $ 3,804
========= ========= ======== ========= =========
PER SHARE DATA

INCOME (LOSS) PER DILUTED SHARE
BEFORE EXTRAORDINARY LOSS AND CHANGE
IN ACCOUNTING PRINCIPLE........... $ (.02) $ 2.25 $ 1.86 $ .77 $ .47
========= ========= ======== ========= =========
BALANCE SHEET DATA
(At End of Period)

TOTAL ASSETS....................... $ 402,076 $ 491,624 $ 369,012 $ 178,744 $ 152,183
========= ========= ======== ========= =========
LONG-TERM DEBT, less current
maturities........................ $ 304,077 $ 358,950 $ 273,913 $ 133,475 $ 127,438
========= ========= ======== ========= =========
</TABLE>

<PAGE>

MARKET PRICES

The Company's common shares trade over-the-counter on the National Market System
under the NASDAQ symbol CHTT. A quarterly summary of the high and low market
prices per common share as reported by NASDAQ is shown below:

2000 1999
------------------ -------------------
QUARTER ENDED: HIGH LOW HIGH LOW
------- ------ ------ ------
<S> <C> <C> <C> <C>
February......................... 23.438 16.250 50.250 24.625
May.............................. 18.875 11.813 41.688 29.750
August........................... 16.000 9.750 38.375 24.000
November......................... 12.313 4.500 28.125 17.625
</TABLE>

Based upon transfer agent records, the Company's common shares were held by
approximately 2,500 shareholders as of February 23, 2001.

<PAGE>

CONSOLIDATED BALANCE SHEETS
NOVEMBER 30, 2000 AND 1999
(IN THOUSANDS)

2000 1999
-------- --------
<S> <C> <C>
ASSETS

CURRENT ASSETS:
Cash and cash equivalents................................ $102,534 $ 2,308
Accounts receivable, less allowance for doubtful accounts
of $1,025 in 2000 and $900 in 1999...................... 40,691 55,032
Refundable and deferred income taxes..................... 12,401 6,951
Inventories.............................................. 15,052 27,818
Prepaid expenses and other current assets................ 884 929
-------- --------
Total current assets................................. 171,562 93,038
-------- --------
PROPERTY, PLANT AND EQUIPMENT, NET......................... 27,059 25,752
-------- --------
OTHER NONCURRENT ASSETS:
Patents, trademarks and other purchased
product rights, net.................................... 191,980 356,295
Debt issuance costs, net................................. 8,829 11,469
Other.................................................... 2,646 5,070
-------- --------
Total other noncurrent assets........................ 203,455 372,834
-------- --------
TOTAL ASSETS...................................... $402,076 $491,624
======== ========
</TABLE>

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.

<PAGE>

CONSOLIDATED BALANCE SHEETS
NOVEMBER 30, 2000 AND 1999
(IN THOUSANDS)

2000 1999
--------- ---------
<S> <C> <C>

LIABILITIES AND SHAREHOLDERS' EQUITY

CURRENT LIABILITIES:
Current maturities of long-term debt............................... $ -- $ 11,000
Accounts payable................................................... 8,790 18,573
Payable to bank.................................................... 1,529 4,905
Accrued liabilities................................................ 35,214 32,147
--------- ---------
Total current liabilities........................................ 45,533 66,625
--------- ---------
LONG-TERM DEBT, less current maturities.............................. 304,077 358,950
--------- ---------
DEFERRED INCOME TAXES................................................ 12,919 15,326
--------- ---------
OTHER NONCURRENT LIABILITIES......................................... 1,894 2,022
--------- ---------
COMMITMENTS AND CONTINGENCIES (Notes 5 and 10)

SHAREHOLDERS' EQUITY:
Preferred shares, without par value, authorized 1,000,
none issued...................................................... -- --
Common shares, without par value, authorized 50,000, issued
8,861 in 2000 and 9,707 in 1999.................................. 1,845 2,021
Paid-in surplus.................................................... 64,443 72,850
Accumulated deficit................................................ (26,463) (24,804)
--------- ---------
39,825 50,067
Cumulative other comprehensive income-
Foreign currency translation adjustment.......................... (2,172) (1,366)
--------- ---------
Total shareholders' equity..................................... 37,653 48,701
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY................. $ 402,076 $ 491,624
========= =========
</TABLE>

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.

<PAGE>

CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED NOVEMBER 30, 2000, 1999 AND 1998
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

2000 1999 1998
--------- --------- ----------
<S> <C> <C> <C>
NET SALES.................................................... $ 252,699 $ 298,142 $ 220,064
--------- --------- ----------
COSTS AND EXPENSES:
Cost of sales.............................................. 74,957 75,612 60,889
Advertising and promotion.................................. 106,868 117,835 86,592
Selling, general and administrative........................ 31,994 32,494 27,364
--------- --------- ----------
Total costs and expenses................................. 213,819 225,941 174,845
--------- --------- ----------
INCOME FROM OPERATIONS....................................... 38,880 72,201 45,219
--------- --------- ----------
OTHER INCOME (EXPENSE):
Interest expense........................................... (35,729) (36,572) (26,676)
Investment and other income, net........................... 1,566 579 881
Gain (loss) on product divestitures........................ (5,018) -- 9,548
--------- --------- ----------
Total other income (expense)............................. (39,181) (35,993) (16,247)
--------- --------- ----------
INCOME (LOSS) BEFORE INCOME TAXES, EXTRAORDINARY LOSS
AND CHANGE IN ACCOUNTING PRINCIPLE.......................... (301) 36,208 28,972

PROVISION FOR (BENEFIT FROM) INCOME TAXES.................... (104) 13,667 10,844
--------- --------- ----------
INCOME (LOSS) BEFORE EXTRAORDINARY LOSS AND CHANGE IN
ACCOUNTING PRINCIPLE........................................ (197) 22,541 18,128

EXTRAORDINARY LOSS ON EARLY EXTINGUISHMENT OF DEBT,
NET OF INCOME TAX BENEFIT................................... (920) (2,385) (2,859)

CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE,
NET OF INCOME TAX BENEFIT................................... (542) -- --
--------- --------- ----------
NET INCOME (LOSS)............................................ $ (1,659) $ 20,156 $ 15,269
========= ========= ==========
NUMBER OF COMMON SHARES:
Weighted average outstanding - basic....................... 9,411 9,747 9,374
========= ========= ==========
Weighted average outstanding - dilutive.................... 9,411 10,024 9,735
========= ========= ==========
NET INCOME (LOSS) PER COMMON SHARE:
Basic:
Income (loss) before extraordinary loss and change in
accounting principle.................................... $(.02) $ 2.31 $ 1.93
Extraordinary loss....................................... (.10) (.24) (.30)
Change in accounting principle........................... (.06) -- --
--------- --------- ----------
Total basic............................................ $(.18) $ 2.07 $ 1.63
========= ========= ==========
Diluted:
Income (loss) before extraordinary loss and change in
accounting principle................................... $(.02) $ 2.25 $ 1.86
Extraordinary loss....................................... (.10) (.24) (.29)
Change in accounting principle........................... (.06) -- --
--------- --------- ----------
Total diluted.......................................... $(.18) $ 2.01 $ 1.57
========= ========= ==========
</TABLE>

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.

<PAGE>

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED NOVEMBER 30, 2000, 1999 AND 1998
(IN THOUSANDS, EXCEPT SHARE DATA)

Foreign
Currency
Common Paid-in Accumulated Translation
Shares Surplus Deficit Adjustment Total
------- -------- ----------- ------------ ---------
<S> <C> <C> <C> <C> <C>
Balance, November 30, 1997 ............. $ 1,945 $ 63,975 $ (60,229) $ (1,321) $ 4,370
Net income............................ -- -- 15,269 -- 15,269
Stock options exercised............... 28 3,699 -- -- 3,727
Stock warrants exercised.............. 21 1,394 -- -- 1,415
Foreign currency translation
adjustment.......................... -- -- -- (30) (30)
------- -------- ----------- ------------ ---------
Balance, November 30, 1998 ............. 1,994 69,068 (44,960) (1,351) 24,751
Net income............................ -- -- 20,156 -- 20,156
Stock options exercised............... 10 1,775 -- -- 1,785
Stock warrants exercised.............. 26 860 -- -- 886
Stock repurchases..................... (36) (3,876) -- -- (3,912)
Issuance of 128,082 common shares
in connection with product
acquisitions........................ 27 5,023 -- -- 5,050
Foreign currency translation
adjustment.......................... -- -- -- (15) (15)
------- -------- ----------- ------------ ---------
Balance, November 30, 1999.............. 2,021 72,850 (24,804) (1,366) 48,701
Net loss.............................. -- -- (1,659) -- (1,659)
Stock options exercised............... 6 847 -- -- 853
Stock repurchases..................... (183) (9,306) -- -- (9,489)
Issuance of 3,312 common shares
for non-employee directors'
compensation........................ 1 52 -- -- 53
Foreign currency translation
adjustment.......................... -- -- -- (806) (806)
------- -------- ----------- ------------ ---------
Balance, November 30, 2000.............. $ 1,845 $ 64,443 $ (26,463) $ (2,172) $ 37,653
======= ======== =========== ============ =========
</TABLE>

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.

34
<PAGE>

CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED NOVEMBER 30, 2000, 1999 AND 1998
(IN THOUSANDS)

2000 1999 1998
-------- -------- --------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss)...................................... $ (1,659) $ 20,156 $ 15,269
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization....................... 14,943 15,064 9,827
Deferred income tax provision (benefit)............. (5,734) 4,598 2,351
(Gain) loss on product divestitures................. 5,018 -- (9,548)
Extraordinary loss on early extinguishment of
debt, net......................................... 920 2,385 2,859
Cumulative effect of change in accounting
principle, net.................................... 542 -- --
Dividend receivable from Elcat, Inc................. -- (279) (462)
Other, net.......................................... 15 -- (28)
Changes in operating assets and liabilities, net of
acquisitions and divestitures:
Accounts receivable............................ 14,341 (17,428) (12,054)
Inventories.................................... 7,240 (4,683) 1,836
Prepaid expenses and other current assets...... (1,538) (159) (102)
Accounts payable and accrued liabilities....... (7,581) 7,268 10,842
-------- -------- --------
Net cash provided by operating activities.... 26,507 26,922 20,790
-------- -------- --------
INVESTING ACTIVITIES:
Purchases of property, plant and equipment............... (5,673) (9,830) (9,050)
Purchases of patents, trademarks and other product rights -- (91,127) (168,402)
Proceeds from product divestitures....................... 160,000 -- 11,965
Proceeds from sale of investments........................ -- 3,381 4,000
Proceeds from sales of property, plant and equipment..... 11 272 1,085
Increase in other assets................................. (1,542) (3,200) (1,193)
-------- -------- --------
Net cash provided by (used in) investing
activities................................. 152,796 (100,504) (161,595)
-------- -------- --------
FINANCING ACTIVITIES:
Repayment of long-term debt.............................. (95,000) (165,481) (145,028)
Proceeds from long-term debt............................. 29,000 242,281 291,365
Change in payable to bank................................ (3,376) 3,879 (1,592)
Repurchase of common shares.............................. (9,489) (3,912) --
Proceeds from exercise of stock options and warrants..... 237 2,104 3,316
Debt issuance costs...................................... (363) (5,101) (9,971)
-------- -------- --------
Net cash provided by (used in) financing
activities................................. (78,991) 73,770 138,090
-------- -------- --------
EFFECT OF EXCHANGE RATE CHANGES ON CASH
AND CASH EQUIVALENTS................................... (86) 44 (67)
-------- -------- --------
CASH AND CASH EQUIVALENTS:
Increase (decrease) for the year........................ 100,226 232 (2,782)
At beginning of year.................................... 2,308 2,076 4,858
-------- -------- --------
At end of year.......................................... $102,534 $ 2,308 $ 2,076
======== ======== ========
SCHEDULE OF NON-CASH INVESTING AND FINANCING
ACTIVITIES:
Issuance of 125,500 shares of common stock at $39.84 per
share to fund portion of Thompson Medical brands'
acquisition. $ -- $ 5,000 $ --
Issuance of 2,582 shares of common stock at $19.365 per
share as part of agreement to settle future contingency
payments to the former owners of SUNSOURCE.............. $ -- $ 50 $ --
Additions to trademarks and other product rights by
assumption of certain liabilities....................... $ -- $ 1,525 $ 8,000
</TABLE>

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.

35
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE: ALL MONETARY AMOUNTS ARE EXPRESSED IN THOUSANDS OF DOLLARS UNLESS
CONTRARILY EVIDENT.

(1) NATURE OF OPERATIONS

Chattem, Inc. and its wholly-owned subsidiaries (the Company) market
and manufacture branded consumer products in two primary segments,
over-the-counter (OTC) health care products segment and the toiletries and
skin care products segment. The products are sold primarily through mass
merchandisers, independent and chain drug stores, drug wholesalers, and food
stores in the United States and in various markets in approximately 50
countries throughout the world.

(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

BASIS OF CONSOLIDATION

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

CASH AND CASH EQUIVALENTS

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

INVENTORIES

Inventory costs include materials, labor and factory overhead.
Inventories in the United States are valued at the lower of last-in, first-out
(LIFO) cost or market, while international inventories are valued at the lower
of first-in, first-out (FIFO) cost or market.

PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment are recorded at cost. The Company
capitalized interest of $31, $255, and $0 in 2000, 1999 and 1998, respectively.
Depreciation is computed using the straight-line method over the estimated
useful lives of 10 to 40 years for buildings and improvements and 3 to 12 years
for machinery and equipment. Expenditures for maintenance and repairs are
charged to expense as incurred. Depreciation expense for 2000, 1999 and 1998 was
$2,504, $1,936 and $1,597, respectively.

36
<PAGE>

PATENTS, TRADEMARKS AND OTHER PURCHASED PRODUCT RIGHTS

The costs of acquired patents, trademarks and other purchased product
rights are capitalized and amortized over periods ranging from 5 to 40 years. At
November 30, 2000 the weighted average life of patents, trademarks and other
purchased product rights was 25.5 years. Total accumulated amortization of these
assets at November 30, 2000 and 1999 was $24,964 and $26,393, respectively.
Amortization expense for 2000, 1999 and 1998 was $9,151, $9,874 and $6,180,
respectively. Royalty expense related to other purchased product rights for
2000, 1999 and 1998 was $23, $498, and $523, respectively. Amortization and
royalty expense are included in advertising and promotion expense in the
accompanying consolidated statements of income.

The Company continually evaluates whether events and circumstances have
occurred that indicate the remaining useful life of long-lived assets might
warrant revision or that the remaining balance may not be recoverable. When
factors indicate that long-lived assets should be evaluated for possible
impairment, the Company uses an estimate of the future undiscounted net cash
flows of the related assets over the remaining lives of the assets in measuring
whether long-lived assets are recoverable. In connection with the Company's
pending sale of NORWICH Aspirin, the Company determined an impairment had
occurred, resulting in a fiscal 2000 charge of $810.

DEBT ISSUANCE COSTS

The Company has incurred debt issuance costs in connection with its
long-term debt. These costs are capitalized and amortized over the term of the
debt. Amortization expense related to debt issuance costs was $1,565, $1,556 and
$986 in 2000, 1999 and 1998, respectively. Accumulated amortization of these
costs was $3,674 and $2,859 at November 30, 2000 and 1999, respectively.

PAYABLE TO BANK

Payable to bank includes checks outstanding in excess of certain cash
balances.

REVENUE RECOGNITION

Revenue is recognized when the Company's products are shipped to its
customers.

It is the Company's policy across all classes of customers that all
sales are final. As is common in the consumer products industry, product is
returned by the customer due to a number of reasons. Examples include product
damaged in transit, discontinuance of a particular size or form of product,
shipping error, etc. The Company maintains and evaluates an allowance for
returns and will record a return upon receipt of the product or deduction by the
customer.

RESEARCH AND DEVELOPMENT

Research and development costs relate primarily to the development of
new products and are expensed as incurred. Such expenses were $1,837, $1,839 and
$1,369 in 2000, 1999 and 1998, respectively.

37
<PAGE>

ADVERTISING EXPENSES

The cost of advertising is expensed in the fiscal year in which the
related advertising takes place. Production and communication costs are expensed
in the period in which the related advertising begins running. Advertising
expense for 2000, 1999 and 1998 was $46,028, $54,764 and $44,386, respectively.
At November 30, 2000 and 1999, the Company reported $669 and $1,210,
respectively, of advertising paid for in 2000 and 1999 which will run or did run
in the next fiscal year. These amounts are included in other noncurrent assets
in the accompanying consolidated balance sheets.

38
<PAGE>

NET INCOME PER COMMON SHARE

For the years ended November 30, 2000, 1999 and 1998, the weighted
average and dilutive potential common shares outstanding consisted of the
following:

<TABLE>
<CAPTION>
2000 1999 1998
------ ------ ------
<S> <C> <C> <C>
Weighted average common shares
outstanding.......................................... 9,411 9,747 9,374
Dilutive potential shares:
Stock options........................................ -- 277 332
Warrants............................................. -- -- 29
------ ------ ------
Weighted average and dilutive potential common
shares outstanding................................... 9,411 10,024 9,735
====== ====== ======
</TABLE>

Due to the net loss sustained in 2000, the impact of stock options outstanding
would be antidilutive.

FOREIGN CURRENCY TRANSLATION

Assets and liabilities of the Company's Canadian and U.K. subsidiaries
are translated to United States dollars at year-end exchange rates. Income and
expense items are translated at average rates of exchange prevailing during the
year. Translation adjustments are accumulated as a separate component of
shareholders' equity. Gains and losses which result from foreign currency
transactions are included in the accompanying consolidated statements of income.

USE OF ESTIMATES

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates.

DERIVATIVE FINANCIAL INSTRUMENTS

The Company has entered into interest rate swap agreements from time to
time as a means of managing its interest rate exposure and not for trading
purposes. These agreements have the effect of converting a portion of the
Company's variable rate obligations to fixed rate obligations. Net amounts paid
or received are reflected as adjustments to interest expense. The Company was
not a party to any interest rate swap agreements at November 30, 2000 and 1999.

39
<PAGE>

CONCENTRATIONS OF CREDIT RISK

Financial instruments which subject the Company to concentrations of
credit risk consist primarily of accounts receivable and short-term cash
investments. The Company's exposure to credit risk associated with nonpayment of
accounts receivable is affected by conditions or occurrences within the retail
industry. As a result, the Company performs ongoing credit evaluations of its
customers' financial position but generally requires no collateral from its
customers. The Company's largest customer accounted for 24%, 19% and 17% of
sales in 2000, 1999 and 1998, respectively. No other customer exceeded 10% of
the Company's sales in 2000, 1999 or 1998. Short-term cash investments are
placed with high credit-quality financial institutions or in low risk, liquid
instruments. No losses have been experienced on such investments.

RECENT ACCOUNTING PRONOUNCEMENTS

In April 1998, the American Institute of Certified Public Accountants
issued Statement of Position (SOP) 98-5, "Reporting on the Costs of Start-Up
Activities". SOP 98-5 requires costs of start-up activities and organization
costs to be expensed as incurred. This SOP is effective for financial statements
for fiscal years beginning after December 15, 1998. The Company recorded the
initial application of this SOP in December 1999 as the cumulative effect of a
change in accounting principle of $542, net of income tax benefit.

In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for
Derivative Instruments and Hedging Activities." SFAS No.133 established
accounting and reporting standards requiring that every derivative instrument
(including certain derivative instruments embedded in other contracts) be
recorded on the balance sheet as either an asset or liability measured at its
fair value. SFAS No. 133 requires that changes in the derivative's fair value be
recognized currently in earnings unless specific hedge accounting criteria are
met. Special accounting for qualifying hedges allow a derivative's gains and
losses to offset related results on the hedged item in the income statement, and
requires that a company must formally document, designate and assess the
effectiveness of transactions that receive hedge accounting. SFAS No. 137
delayed the effective date of SFAS No. 133 until fiscal years beginning after
June 15, 2000. SFAS No. 133 cannot be applied retroactively. SFAS No. 133 must
be applied to (a) derivative instruments and (b) certain derivative instruments
embedded in hybrid contracts that were issued, acquired or substantively
modified after December 31, 1997 (and, at the Company's election, before January
1, 1999). SFAS No. 133 could increase volatility in earnings and other
comprehensive income. However, as the Company does not have any derivative
instruments as of November 30, 2000, there will be no impact of adoption at the
Company's effective date of December 1, 2000.

In September 2000, the Emerging Issues Task Force (EITF) of the FASB
reached a final consensus on Issue No. 00-10, "Accounting for Shipping and
Handling Fees and Costs". EITF 00-10 is effective the fourth quarter of 2001 and
addresses the income statement classification of amounts charged to customers
for shipping and handling, as well as costs incurred related to shipping and
handling. The EITF concluded that amounts billed to a customer in a sale
transaction related to shipping and handling should be classified as revenue.
The EITF also concluded that if costs incurred related to shipping and handling
are significant and not included in cost of sales, an entity should disclose
both the amount of such costs and the line item on the income statement that
includes them. Costs incurred related to shipping and handling included in
revenues will be required to be reclassified to cost of sales. The Company
currently classifies shipping and handling costs billed to the customer as
revenues and costs related to shipping and handling as a selling expense. The
amount of shipping and handling costs

40
<PAGE>

included in selling expense for 2000, 1999 and 1998 was $7,380, $6,581 and
$4,506, respectively. The adoption of this pronouncement in 2001 will not
have an impact on the Company's results of operations or the financial
condition of the Company.

In November 2000, the EITF finalized EITF Issue No. 00-14, "Accounting
for Certain Sales Incentives". EITF 00-14 addresses the recognition, measurement
and income statement classification for sales incentives offered to customers.
Sales incentives include discounts, coupons, rebates, "buy one get one free"
promotions and generally any other offers that entitle a customer to receive a
reduction in the price of a product or service by submitting a claim for a
refund or rebate. Under EITF 00-14, the reduction in or refund of the selling
price of the product or service resulting from any cash sales incentives should
be classified as a reduction of revenue. Currently, the Company recognizes all
sales incentives as an advertising and promotion expense. Although this
pronouncement will not have any impact on the results of operations or financial
condition of the Company, the presentation prescribed will have an effect of
reducing net sales and advertising and promotion expense in comparison to prior
years. The Company must adopt EITF 00-14 for all periods presented in the fourth
quarter of fiscal 2001. The impact of adopting for fiscals 2000, 1999 and 1998
would have decreased net sales and advertising and promotion expense by
approximately $10,931, $9,032 and $4,122, respectively.

STOCK-BASED COMPENSATION

The Company accounts for its stock-based compensation plans under
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees". Effective fiscal 1997, the Company adopted the disclosure option of
SFAS No. 123, "Accounting for Stock-Based Compensation".

RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the
current period's presentation.

(3) INVESTMENT IN ELCAT, INC.

As part of the consideration for the sale of the Company's specialty
chemicals division in 1995, the Company received 40,000 shares of 13.125%
cumulative, convertible preferred stock of Elcat, Inc. (the Elcat Preferred
Shares) having a total par value of $5,000.

In 1998, Elcat, Inc. (Elcat) redeemed 22,960 of these shares for $4,000
($2,870 par value and $1,130 accumulated dividends). The remaining 17,040 Elcat
Preferred Shares and accumulated dividends were redeemed in 1999 for $3,381
($2,130 par value and $1,251 accumulated dividends).

(4) PENSION PLANS

The Company has a noncontributory defined benefit pension plan (the
Plan) which covers substantially all employees. The Plan provides benefits based
upon years of service and the employee's compensation. The Company's
contributions are based on computations by independent actuaries. Plan assets at
November 30, 2000 and 1999 were invested primarily in United States government
and agency securities and corporate debt and equity securities. In October 2000
the Company's board of directors adopted an amendment to the Plan that freezes
benefits of the Plan and prohibits new entrants to the Plan effective December
31, 2000. This action by the board of directors resulted in a curtailment gain
of $1,912 in 2000.

41
<PAGE>

Net periodic pension cost for the years ended November 30, 2000, 1999
and 1998 included the following components:

<TABLE>
<CAPTION>
2000 1999 1998
-------- -------- --------
<S> <C> <C> <C>
Service cost (benefits earned during the period)...... $ 789 $ 834 $ 661
Interest cost on projected benefit obligation ........ 794 747 739
Actual (return) loss on plan assets .................. (325) 1,528 (3,226)
Net amortization and deferral......................... (337) (2,558) 2,677
Curtailment gain...................................... (1,912) -- --
-------- -------- --------
Net pension cost(benefit)............................. $ (991) $ 551 $ 851
======== ======== ========
</TABLE>

The change in the projected benefit obligation resulted from the
following components for the years ended November 30, 2000 and 1999:

<TABLE>
<CAPTION>
2000 1999
--------- ---------
<S> <C> <C>
Projected benefit obligation, beginning of year........ $ 10,063 $ 11,275
Service cost........................................... 789 834
Interest cost.......................................... 794 747
Actuarial (gain) loss.................................. 355 (1,636)
Benefits paid.......................................... (1,327) (1,157)
Curtailment of benefits................................ (4,228) --
--------- ---------
Projected benefit obligation, end of year.............. $ 6,446 $ 10,063
========= =========
</TABLE>

The change in plan assets resulted from the following components for
the years ended November 30, 2000 and 1999:

<TABLE>
<CAPTION>
2000 1999
--------- --------
<S> <C> <C>
Fair value of plan assets, beginning of year............... $ 7,659 $ 9,879
Actual (return) loss on plan assets........................ 325 (1,528)
Employer contribution...................................... 300 465
Benefits paid.............................................. (1,327) (1,157)
--------- --------
Fair value of plan assets, end of year..................... $ 6,957 $ 7,659
========= ========

</TABLE>

The following table sets forth the funded status of the Plan as of
November 30, 2000 and 1999:

<TABLE>

2000 1999
-------- ---------
<S> <C> <C>
Plan assets at fair market value............................... $ 6,957 $ 7,659
Projected benefit obligation................................... (6,446) (10,063)
-------- ---------
Plan assets greater (less) than projected benefit
obligation................................................... 511 (2,404)
Unrecognized net loss.......................................... -- 1,806
Unrecognized prior service cost................................ -- (98)
Unrecognized initial asset..................................... -- (85)
-------- ---------
Pension asset (liability) recognized in balance sheets
at end of year............................................... $ 511 $ (781)
======== =========

</TABLE>

The discount rate used in determining the actuarial present value of
the projected benefit obligation was 8% and 6.75% in 2000 and 1999,
respectively. The rate of increase in future

<PAGE>

compensation levels used was 4.5% in both 2000 and 1999. The expected
long-term rate of return on plan assets was 9.0% in both 2000 and 1999.

The Company has a defined contribution plan covering substantially all
employees. Eligible participants can contribute up to 15% of their annual
compensation and receive a 25% matching employer contribution up to 6% of their
annual compensation. The defined contribution plan expense was $178, $198 and
$148 in 2000, 1999 and 1998, respectively.

(5) LONG-TERM DEBT

Long-term debt consisted of the following at November 30, 2000 and 1999:

<TABLE>
<CAPTION>
2000 1999
---------- ----------
<S> <C> <C>
8.875% Senior Subordinated Notes, due 2008, plus
unamortized premium of $233 for 2000 and $265
for 1999................................................... $ 275,233 $ 275,265
12.75% Senior Subordinated Notes, due 2004, net
of unamortized discount of $301 for 2000 and
$460 for 1999.............................................. 28,844 34,085
Revolving line of credit payable to banks at variable
rates...................................................... -- 5,000
Term loans payable to banks at variable rates................ -- 55,600
---------- ----------
Total long-term debt......................................... 304,077 369,950
Less: current maturities.................................... -- 11,000
---------- ----------
Total long-term debt, net of current maturities.............. $ 304,077 $ 358,950
========== ==========

</TABLE>

Concurrent with the closing of the sale of Ban on September 15, 2000
(Note 12), the Company used $52,194 of the net proceeds from the sale to retire
all of the outstanding balances of the revolving line of credit and the term
loans and accrued interest thereon.

On March 24, 1998, the Company issued at par value $200,000 of 8.875%
Senior Subordinated Notes due 2008 (the 8.875% Notes). The proceeds of the note
offering were used to fund the Ban purchase (Note 12), repay revolving bank
indebtedness and provide additional working capital.

On May 7, 1999 the Company issued an additional $75,000 of its 8.875%
(priced to yield 8.8125%) Senior Subordinated Notes under its indenture relating
to the issuance of its $200,000 of 8.875% Notes on March 24, 1998. The
additional notes were issued under the Company's $250,000 shelf registration
statement filed on December 21, 1998 with the Securities and Exchange
Commission. The net proceeds from the issuance of the additional notes were used
to retire $41,500 of the then outstanding balance of the Company's $115,000 term
bank loan and the outstanding balance of $25,500 of its revolving bank loan.

The 8.875% Notes mature on April 1, 2008 and interest is payable
semi-annually on April 1 and October 1 of each year. The 8.875% Notes are senior
subordinated obligations of the Company and are subordinated in right of payment
to all existing and future senior debt of the Company. The 8.875% Notes, which
were registered under the Securities Act of 1933, are not callable until April
1, 2003, after which they may be redeemed at the option of the Company. Upon the
occurrence of certain events constituting a change of control, the holders of
the 8.875% Notes may require the Company to repurchase the 8.875% Notes at a
purchase price equal to 101% of the principal amount thereof, plus accrued and

43
<PAGE>

unpaid interest. The 8.875% Notes are guaranteed by Signal Investment &
Management Co., a wholly-owned subsidiary of the Company.

The 8.875% Notes are issued under an indenture with an indenture
trustee, which restricts, among other things, the ability of the Company and its
subsidiaries to (i) incur additional indebtedness, (ii) pay dividends, (iii)
sell or issue capital stock of a subsidiary, (iv) create encumbrances on the
ability of any subsidiary to pay dividends or make other restricted payments,
(v) engage in certain transactions with affiliates, (vi) dispose of certain
assets, (vii) merge or consolidate with or into, or sell or otherwise transfer
all or substantially all their properties and assets as an entirety to another
person, or (viii) create additional liens.

In 1994, the Company issued $75,000 of 12.75% Senior Subordinated Notes
due 2004 (the 12.75% Notes) with five year warrants to purchase 417,182 shares
of common stock (the Warrants). The 12.75% Notes consisted of 75,000 units, each
consisting of $1.0 principal amount of the 12.75% Notes and a warrant to
purchase shares of the Company's common stock (Note 9). The price of the 12.75%
Notes was $73,967, or 98.6% of the original principal amount, resulting in a
discount of $1,033. The value assigned to the Warrants was $955, resulting in a
total original issue discount of $1,988. The proceeds of the 12.75% Notes were
used to repay amounts outstanding under a prior credit agreement.

The 12.75% Notes mature on June 15, 2004, and interest is payable
semi-annually on June 15 and December 15 of each year. The 12.75% Notes are
senior subordinated obligations of the Company and are subordinated in right of
payment to all existing and future senior debt of the Company. The 12.75% Notes,
which were registered under the Securities Act of 1933, are callable on June 15,
2001, after which they may be redeemed at the option of the Company. Upon the
occurrence of certain events constituting a change of control, the holders of
the 12.75% Notes may require the Company to repurchase the 12.75% Notes at a
purchase price equal to 101% of the principal amount thereof, plus accrued and
unpaid interest. The 12.75% Notes are guaranteed by Signal Investment &
Management Co., a wholly-owned subsidiary of the Company. The 12.75% Notes are
redeemable at the option of the Company in whole or in part after June 15, 2001
at a redemption price equal to 101.594% of the principal amount and at 100% of
the principal amount in 2002 and thereafter.

The 12.75% Notes are issued under an indenture with an indenture
trustee. The indenture places on the Company restrictions similar to those
required under the terms of the indenture associated with the 8.875% Notes.

On December 11, 2000, the Company initiated a consent solicitation and
tender offer for certain of its outstanding senior subordinated notes. On
January 17, 2001, the Company announced the successful completion of the consent
solicitation and tender offer pursuant to which it retired $70,462 principal
amount of its 8.875% senior subordinated notes due 2008 and $7,397 principal
amount of its 12.75% senior subordinated notes due 2004. Total consideration
paid for the consent solicitation and tender offer was $64,937, which was
provided by the proceeds of the Ban sale (Note 12).

During 2000, 1999 and 1998, the Company prepaid previously outstanding
long-term debt with funds received from refinancings, the sale of Ban and
Cornsilk (Note 12), cash from operations, the redemption of the Elcat Preferred
Shares and the issuance of the 8.875% Notes. In connection with the repayment of
those borrowings, the Company incurred net extraordinary losses, net of income
tax benefit, in 2000, 1999 and 1998 of $920, $2,385 and $2,859, respectively, or
$.10, $.24 and $.29 per diluted share, respectively. These losses related to the
write-off of debt issuance and other deferred financing costs and the premiums
paid on the retirement of the 12.75% Notes.

44
<PAGE>

Future maturities of long-term debt are as follows:

<TABLE>
<S> <C>
2001................................... $ --
2002................................... --
2003................................... --
2004................................... 29,145
2005................................... --
Thereafter............................. 275,000
----------
$ 304,145
Less: net unamortized discount........ (68)
----------
$ 304,077
==========

</TABLE>

Cash interest payments during 2000, 1999 and 1998 were $33,596, $34,822
and $23,669, respectively, net of $31 and $255 capitalized in 2000 and 1999,
respectively.

(6) DERIVATIVE FINANCIAL INSTRUMENTS

On July 21, 1997, the Company entered into two interest rate swap
agreements with a financial institution in notional amounts of $40,000 and
$5,000. The Company entered into these agreements as hedges on its variable rate
debt and not for trading purposes. The swaps were scheduled to expire July 22,
2002. In connection with the May 1999 refinancing of its long-term debt, the
Company terminated these agreements, which resulted in a $1,155 loss. This loss
was deferred by the Company and was being written off as interest expense over
the original life of the swaps. In connection with the September 2000 retirement
of the underlying variable rate debt, the Company wrote off the unamortized
portion of the loss to interest expense. The amounts of this loss charged to
interest expense in 2000 and 1999 were $942 and $213, respectively.

(7) FAIR VALUE OF FINANCIAL INSTRUMENTS

Unless otherwise indicated elsewhere in the notes to the consolidated
financial statements, the carrying value of the Company's financial instruments
approximates fair value.

At November 30, 2000, the estimated fair value of the 12.75% Notes
exceeded their carrying value by approximately $36, while the carrying value of
the 8.875% Notes exceeded their estimated fair value by approximately $55,646.
The fair value was estimated based on quoted market prices for the same or
similar issues.

(8) INCOME TAXES

The provision (benefit) for income taxes from income (loss) before
extraordinary loss and change in accounting principle includes the following
components for the years ending November 30, 2000, 1999 and 1998:

<TABLE>
<CAPTION>
2000 1999 1998
-------- -------- --------
<S> <C> <C> <C>
Current:
Federal........................................ $ 5,053 $ 8,115 $ 8,034
State.......................................... 577 954 459
Deferred....................................... (5,734) 4,598 2,351
-------- -------- --------
$ (104) $13,667 $10,844
======== ======== ========

</TABLE>

45
<PAGE>

Deferred income tax assets and liabilities reflect the impact of
temporary differences between the amounts of assets and liabilities for
financial reporting and income tax reporting purposes. Temporary differences and
carryforwards which give rise to deferred tax assets and liabilities at November
30, 2000 and 1999 are as follows:

<TABLE>
<CAPTION>
2000 1999
-------- -------
<S> <C> <C>
Deferred tax assets:
Allowances and accruals.................... $ 1,049 $ 893
Inventory reserve.......................... 1,890 314
Accrued promotional expenses .............. 2,783 4,587
Allowance for product returns.............. 4,382 723
Accrued postretirement health care
benefits................................. 596 583
Other...................................... 2,016 1,550
-------- -------
Gross deferred tax assets ............... 12,716 8,650
-------- -------
Deferred tax liabilities:
Depreciation and amortization............... 14,512 16,008
Prepaid advertising ........................ 261 331
Inventory................................... 196 196
Other....................................... 388 490
-------- -------
Gross deferred tax liabilities............ 15,357 17,025
-------- -------
Net deferred liability ................. $ 2,641 $ 8,375
======== ========

</TABLE>

The difference between the provision (benefit) for income taxes and the
amount computed by multiplying income (loss) before income taxes, extraordinary
loss and change in accounting principle by the U.S. statutory rate for the years
ended November 30, 2000, 1999 and 1998 is summarized as follows:

<TABLE>
<CAPTION>
2000 1999 1998
------- --------- ---------
<S> <C> <C> <C>
Expected tax provision (benefit)........... $ (105) $ 12,673 $ 10,140
Dividend exclusion benefit ................ -- (69) (85)
State income taxes, net of federal
income tax benefit....................... (11) 1,327 1,076
Other, net................................. 12 (264) (287)
------- --------- ---------
$ (104) $ 13,667 $ 10,844
------- --------- ---------

</TABLE>

Income taxes paid in 2000, 1999 and 1998 were $9,119, $8,179 and
$1,980, respectively. The Company received income tax refunds of $23 and $350
during 1999 and 1998, respectively.

<PAGE>

(9) SHAREHOLDERS' EQUITY

STOCK OPTIONS

The Company's 1993 Non-Statutory Stock Option Plan provides for
issuance of up to 350,000 shares of common stock to key employees. In addition,
the Company's 1994 Non-Statutory Stock Option Plan and the 1994 Non-Statutory
Stock Option Plan for Non-Employee Directors provide for the issuance of up to
350,000 and 80,000 shares, respectively, of common stock. The Company's 1998
Non-Statutory Stock Option Plan provides for issuance of up to 700,000 shares of
common stock to key employees, while the 1999 Non-Statutory Stock Option Plan
for Non-Employee Directors allows issuance of up to 100,000 shares of common
stock. The 2000 Non-Statutory Stock Option Plan provides for the issuance of
up to 750,000 shares of common stock. Options vest ratably over four years
and are exercisable for a period of up to ten years from the date of grant.

For SFAS No. 123 purposes, the fair value of each option grant has been
estimated as of the date of grant using the Black-Scholes option-pricing model
with the following weighted average assumptions for grants in 2000, 1999 and
1998: expected dividend yield of 0%, expected volatility of 57%, 58% and 51%,
risk-free interest rates of 6.41%, 4.81% and 5.42% and expected lives of six
years.

Had compensation expense for stock option grants been determined based on
the fair value at the grant dates consistent with the method prescribed by SFAS
No. 123, the Company's net income (loss) and net income (loss) per share would
have been adjusted to the pro forma amounts for the years ended November 30,
2000, 1999 and 1998 as indicated below:

<TABLE>
<CAPTION>
2000 1999 1998
--------- -------- ---------
<S> <C> <C> <C>
Net income (loss):
As reported ....................... $(1,659) $20,156 $15,269
Pro forma ......................... $(2,456) $18,980 $14,599

Net income (loss) per share, basic:
As reported........................ $ (.18) $ 2.07 $ 1.63
Pro forma.......................... $ (.26) $ 1.95 $ 1.56

Net income (loss) per share, diluted:
As reported ....................... $ (.18) $ 2.01 $ 1.57
Pro forma ......................... $ (.26) $ 1.89 $ 1.50

</TABLE>

<PAGE>

A summary of the activity of stock options during 2000, 1999 and 1998 is
presented below (shares in thousands):

<TABLE>
<CAPTION>
2000 1999 1998
--------------------------- --------------------------- ----------------------------
<S> <C> <C> <C> <C> <C> <C>
Weighted Weighted Weighted
Shares Average Shares Average Shares Average
Under Exercise Under Exercise Under Exercise
Option Price Option Price Option Price
--------- ---------- ------------ ----------- ------------ -------------
Outstanding at beginning of
year............................ 849 $ 15.92 762 $ 11.17 584 $ 6.75
Granted....................... 674 18.45 136 39.38 470 13.89
Exercised..................... (27) 8.65 (46) 7.50 (292) 6.70
Cancelled..................... (728) 22.14 (3) 14.71 -- --
-------- ----------- -----------
Outstanding at end of year........ 768 $ 12.50 849 $ 15.92 762 $ 11.17
======== ========== ============ =========== ============ =============
Options exercisable at year-
end.............................. 484 $ 11.50 239 $ 10.24 96 $ 7.48
======== ========== ============ =========== ============ =============
Weighted average fair value of
options granted.................. $ 11.13 $ 23.25 $ 7.69
========== =========== ============

</TABLE>

Compensation expense for stock option grants with exercise prices below
the market price at the date of grant is recognized ratably over the vesting
period. In 1998, options were granted to purchase 175,000 shares, which were at
market price on the date of approval by the board of directors but at prices
below the market price on the date of shareholder approval. Compensation expense
recorded for this grant was $525, $525 and $350 in 2000, 1999 and 1998,
respectively.

A summary of the exercise prices for options outstanding under the
Company's stock-based compensation plans at November 30, 2000, is presented
below (shares in thousands):

<TABLE>
<CAPTION>
Weighted Weighted
Weighted Average Average Average Exercise
Exercise Price Shares Under Exercise Remaining Life in Shares Price of Shares
Range Option Price Years Exercisable Exercisable
- ------------------ -------------- ----------------- ------------------- ------------- --------------------
<S> <C> <C> <C> <C> <C>
$ 4.63 - $ 5.25 110 $ 4.87 5.15 110 $ 4.87
$ 7.13 - $ 9.50 114 8.38 4.90 99 8.37
$12.75 - $18.81 525 14.09 7.49 263 14.31
$25.63 - $38.81 19 39.93 8.20 12 38.11
------------- -------------
Total 768 $ 12.50 6.79 484 $ 11.50
============= ================ ================= ============= ===================

</TABLE>

<PAGE>

PREFERRED SHARES

The Company is authorized to issue up to 1,000,000 preferred shares
in series and with rights established by the board of directors. At November
30, 2000 and 1999, no shares of any series of preferred stock were issued and
outstanding.

EMPLOYEE STOCK OWNERSHIP PLAN

Effective June 1, 1989, the Company established an Employee Stock
Ownership Plan providing for the issuance of up to 360,000 shares of the
Company's common stock. At November 30, 2000, no contributions had been made
to the plan.

COMMON STOCK WARRANTS

During 1999, 22,400 warrants were exercised to acquire 131,196
shares. During 1998, 35,568 warrants were exercised to acquire 208,337
shares. At November 30, 2000, no warrants were outstanding since the right to
exercise the remaining outstanding warrants expired on August 16, 1999.

STOCK BUYBACK

In 1999 the Company's board of directors authorized repurchases of
the Company's common stock, not to exceed $10,000 in the aggregate. In April
2000, the Company's board of directors authorized repurchases of up to an
additional $10,000 of the Company's common stock. Under these authorizations,
172,500 shares at a cost of $3,912 were reacquired in 1999 and 876,500 shares
at a cost of $9,489 were repurchased in 2000. The repurchased shares were
retired and returned to unissued. As of November 30, 2000, $6,599 was
available for share repurchases under the board of directors current
authorization; however, the Company is limited in its ability to repurchase
shares by restrictions under the terms of the indentures with respect to
which its senior subordinated notes were issued.

SHAREHOLDER RIGHTS PLAN

On January 26, 2000, the Company's board of directors adopted a
Shareholder Rights Plan. Under the plan, Rights were constructively
distributed as a dividend at the rate of one Right for each share of common
stock, without par value, of the Company held by shareholders of record as of
the close of business on February 11, 2000. Each Right initially will entitle
shareholders to buy one one-hundredth of a share of a new Series A Junior
Participating Preferred Stock at an exercise price to $90.00 per Right,
subject to adjustment. The Rights generally will be exercisable only if a
person or group acquires beneficial ownership of 15% or more of the Company's
common stock. The Rights will expire on February 11, 2010.

(10) CONTINGENCIES

GENERAL LITIGATION

The Company has been named as a defendant in a lawsuit brought by
the Center for Environment Health ("CEH") contending that the Company
violated the California Safe Drinking Water and Toxic Enforcement Act of 1998
(Proposition 65) by selling to California consumers without a warning topical
skin care products containing zinc oxide which in turn contains lead. The
lawsuit contends that the purported failure to comply with Proposition 65
requirements also constitutes a violation of the California Business &
Professions Code Section 1700 ET SEQ. Violations of either Proposition 65 or
Business &

<PAGE>

Profession Code 1700 ET SEQ. render a defendant liable for civil penalties of
up to $2.5 per day per violation.

The Company has also been named as a defendant in a lawsuit filed in
San Francisco Superior Court on December 29, 1999, JOHNSON et al v.
BRISTOL-MYERS SQUIBB CO., et al., Case No. 308872. This is a putative class
action brought by two named plaintiffs on behalf of the general public in
California, against the same entities that are defendants in the CEH lawsuit.
As with the CEH lawsuit, the Johnson lawsuit alleges that the Company
violated Proposition 65 by selling to California consumers without a warning
topical skin care product containing zinc oxide which in turn contains lead.
The lawsuit does not assert claims directly under Proposition 65, but asserts
that the alleged failure to comply with Proposition 65 gives rise to claims
under California's Business and Professions Code Sections 17200 ET SEQ.,
17500 ET SEQ., and the Civil Code Section 1750 ET SEQ. The lawsuit seeks
injunctive and equitable relief, restitution, the disgorgement of allegedly
wrongfully obtained revenues and damages.

The plaintiffs in the two separate actions have been granted leave
by the court to file separate amended complaints that would include a claim
based upon the allegation that zinc oxide allegedly also contains cadmium.
The plaintiffs have not yet done so, as they are awaiting a ruling by the
court at their request to file a consolidated amended complaint.

The Company intends to vigorously defend these claims. At this stage
of the proceedings, it is not possible to determine the outcome of these
matters or the effect of their resolution on the Company's financial position
or operating results. Management believes that the Company's defenses will
have merit; however, there can be no assurance that the Company will be
successful in its defense or that these lawsuits will not have a material
adverse effect on the Company's results of operations for some period or on
the Company's financial position.

In February 1999 a complaint was filed against the Company by
Genderm Corporation ("Genderm") in the U.S. District Court for the District
of Arizona. The complaint alleged, among other things, that the formulations
of CAPZASIN-P, CAPZASIN-HP and ICY-HOT Arthritis Therapy Gel infringed U.S.
Patent 4,485,450 owned by Joel Bernstein, M.D. and licensed to Genderm (the
"Patent"). The complaint requested injunctive relief, compensatory and treble
damages, costs and attorneys fees. A hearing on the preliminary injunction
was held on April 13-14, 1999. On May 6, 1999 U.S. District Court for the
District of Arizona held that Genderm had carried its burden of proving a
substantial likelihood of success and ultimately showing that the Patent was
infringed and issued a preliminary injunction prohibiting the Company from
shipping CAPZASIN-P cream, CAPZASIN-HP cream and ICY HOT Arthritis Therapy
Gel. Following the issuance of a preliminary injunction, the Company reached
a settlement pursuant to which the Company made a single payment of $750 in
1999 in exchange for the dismissal of the complaint and a fully paid license
to use the Patent until its expiration. The settlement cost was recorded as a
settlement of a pre-acquisition contingency.

Other claims, suits and complaints arise in the ordinary course of
the Company's business involving such matters as patents and trademarks,
product liability, environmental matters and other alleged injuries or
damage. The outcome of such litigation cannot be predicted, but, in the
opinion of management, based in part upon the opinion of counsel, all such
pending matters are without merit or are of such kind or involve such amounts
as would not have a material adverse effect on the consolidated operating
results or financial position of the Company if disposed of unfavorably.

REGULATORY

In 1994 the Nonprescription Drug Manufacturers Association (now the
Consumer Healthcare Products Association) ("CHPA") initiated a large-scale
study in conjunction with the Yale University

<PAGE>

School of Medicine to investigate a possible association, if any, of stroke
in women aged 18 to 49 using PPA, the active ingredient in certain of the
DEXATRIM products (the "Yale Study"). PPA is also used in other
over-the-counter medications which are also part of the Study. In May 2000,
the results of the Yale Study were filed with the Food and Drug
Administration ("FDA"). The investigators concluded that the results of the
Yale Study suggest that PPA increases the risk of hemorrhagic stroke. The FDA
indicated at that time that no immediate action was required and scheduled an
FDA advisory panel to meet in October 2000 to discuss the results of the
study. The CHPA has questioned the execution of the Yale Study and disagreed
with its conclusions.

On October 19, 2000, a Nonprescription Drugs Advisory Committee
("NDAC"), commissioned by the FDA to review the safety of PPA, determined
that there is an association between PPA and hemorrhagic stroke and
recommended that PPA not be considered generally recognized as safe for OTC
use as a nasal decongestant or for weight control. In response to a request
from the FDA to voluntarily cease marketing DEXATRIM with PPA, the Company
announced on November 7, 2000 its decision to immediately cease shipping
DEXATRIM with PPA and to accept product returns from any retailers who decide
to discontinue marketing DEXATRIM with PPA. As a result of these decisions,
the Company recorded allowances for product returns of $5,600 and inventory
write-offs of $2,788. To date, the FDA has not issued any final
determinations concerning PPA or products containing PPA.

The NDAC's determination and the FDA's request to voluntarily cease
marketing DEXATRIM with PPA may increase the likelihood that claims relating
to the existence of PPA in DEXATRIM will be filed against the Company.

Certain states and localities have enacted, or are considering
enacting, restrictions on the sale of products that contain synthetic
ephedrine or naturally-occurring sources of ephedrine. These restrictions
include the prohibition of over-the-counter (OTC) sales, required warnings or
labeling statements, recordkeeping and reporting requirements, the
prohibition of sales to minors, per transaction limits on the quantity of
product that may be purchased, and limitations on advertising and promotion.
In such states or localities these restrictions could adversely affect the
sale of DEXATRIM Natural, which contains naturally occurring sources of
ephedrine. Failure to comply with these restrictions could also lead to
regulatory enforcement action, including the seizure of violative products,
product recalls, and civil or criminal fines or other penalties.

The Company was notified in October, 2000 that the FDA denied the
citizens petition submitted by Thompson Medical Company, Inc., previous owner
of SPORTSCREME and ASPERCREME, seeking a determination that 10% trolamine
salicylate was clinically proven to be an effective active ingredient in
external analgesic OTC drug products, and thus should be included in the
FDA's yet-to-be finalized monograph for external analgesics. In the same
correspondence the FDA recommended that the Company meet with the FDA to
agree on an acceptable clinical study protocol to determine the efficacy of
10% trolamine salicylate as an active ingredient in OTC external analgesic
drug products. The Company cannot predict the timing or outcome of any FDA
decision on the proposed protocol, although an agreement is not expected to
occur until at least the middle of fiscal 2001. If the study protocol is
approved, the Company expects that it will take one to two years to produce
the clinical data for FDA review. The FDA could finalize the OTC external
analgesic monograph before the protocol and clinical data results are
finalized, which would place 10% trolamine salicylate in non-monograph
status. The Company is working to develop alternate formulas for SPORTSCREME
and ASPERCREME in the event that clinical data does not support the efficacy
of trolamine salicylate.

<PAGE>

(11) SUPPLEMENTAL FINANCIAL INFORMATION

Inventories consisted of the following at November 30, 2000 and 1999:

<TABLE>
<CAPTION>
2000 1999
-------- ---------
<S> <C> <C>
Raw materials and work in process ......................... $ 6,793 $ 12,542
Finished goods ............................................ 10,247 17,190
Excess of current cost over LIFO value .................... (1,988) (1,914)
-------- ---------
Total inventories ....................................... $ 15,052 $ 27,818
======== =========
</TABLE>

International inventories included above, valued on a lower of FIFO
cost or market at November 30, 2000 and 1999, were $2,670 and $2,611,
respectively.

Property, plant and equipment consisted of the following at November
30, 2000 and 1999:

<TABLE>
<CAPTION>
2000 1999
-------- --------
<S> <C> <C>
Land ........................................ $ 879 $ 879
Buildings and improvements................... 5,326 3,836
Machinery and equipment...................... 42,603 34,894
Construction in progress..................... 272 6,074
Less - accumulated depreciation.............. (22,021) (19,931)
-------- --------
Property, plant and equipment, net......... $ 27,059 $ 25,752
======== ========
</TABLE>

Accrued liabilities consisted of the following at November 30, 2000 and 1999:

<TABLE>
<CAPTION>
2000 1999
------- -------
<S> <C> <C>
Interest.......................................... $ 5,810 $ 6,326
Salaries, wages and commissions .................. 1,103 2,098
Product promotion expense......................... 7,663 15,880
Product acquisitions and divestitures............. 10,413 2,999
Allowances for product returns.................... 9,600 --
Other............................................. 625 4,844
------- -------
Total accrued liabilities....................... $35,214 $32,147
======= =======
</TABLE>

The allowances for product returns consists of $5,600 for estimated
returns of the Company's DEXATRIM with PPA products (Note 10) and $4,000 for
estimated returns of SUNSOURCE products.

(12) ACQUISITION AND SALE OF BRANDS

On September 15, 2000 the Company completed the sale of its Ban
product line to The Andrew Jergens Company, a wholly owned subsidiary of Kao
Corporation. Under the terms of the sales agreement, the Company received
$160,000 cash at closing, plus the right to receive up to an additional
$6,500 in future payments based upon levels of sales of Ban in 2001 and 2002.
The Company recognized a loss of $4,208 on the divestiture. Concurrent with
the closing of the sale of Ban the Company used $52,194 of the net proceeds
to retire all of the outstanding balances of the revolving line of credit and
term loans and accrued interest thereon, with the balance of the net proceeds
being retained by the Company.

<PAGE>

On March 24, 1998, the Company acquired the Ban line of
antiperspirant and deodorant products from Bristol-Myers Squibb Company for a
purchase price of approximately $165,000 and assumed liabilities of $8,000.
The Company acquired the Ban trademarks, formulae, certain patents pertaining
to antiperspirant/deodorant technology, technical information, inventory,
manufacturing equipment and packaging related assets used in the manufacture
of Ban, but not the right to sell Ban in Japan. The purchase price of
$173,000 was allocated $8,200 to inventory and $164,800 to trademarks and
other product rights which were assigned a useful life of 40 years.

On December 21, 1998, the Company acquired the DEXATRIM,
SPORTSCREME, ASPERCREME, CAPZASIN-P, CAPZASIN-HP and ARTHRITIS HOT brands
(the "Thompson Medical brands") from Thompson Medical Company, Inc. for
$95,000. The purchase price consisted of $90,000 cash and 125,500 shares of
the Company's common stock. The cash portion of the purchase price was
financed by a new senior credit facility. The purchase price of $95,000 was
allocated $3,493 to inventory and $91,507 to trademarks and other product
rights which were assigned a useful life of 40 years.

The following unaudited consolidated pro forma information assumes
the acquisition of the Thompson Medical brands and the divestiture of Ban and
related long-term borrowings and repayment thereof had occurred on December
1, 1998:

PRO FORMA CONSOLIDATED RESULTS OF OPERATIONS (UNAUDITED)

<TABLE>
<CAPTION>
2000 1999
--------- ---------
<S> <C> <C>
Net sales.................................... $ 191,256 $ 215,945

Income (loss) before extraordinary loss
and change in accounting principle......... (5,610) 9,632

Net income (loss)............................ (7,072) 7,247

Earnings (loss) per share - basic:

Income (loss) before extraordinary
loss and change in accounting
principle................................ (.60) .99

Net income (loss).......................... (.75) .74

Earnings (loss) per share - diluted:

Income (loss) before extraordinary
loss and change in accounting
principle................................ (.60) .96

Net income (loss).......................... (.75) .72
</TABLE>

The pro forma consolidated results of operations include adjustments to give
effect to amortization of intangible assets, interest expense on acquisition
debt or repayment thereof and certain other adjustments, together with
related income tax effects. The pro forma information is for comparative
purposes only and does not purport to be indicative of the results that would
have occurred had the acquisition, disposition and

<PAGE>

borrowings occurred at the beginning of the periods presented, or indicative
of the results that may occur in the future.

On May 12, 1998, the Company sold the Cornsilk oil control makeup
brand to Del Laboratories, Inc. for $10,750, plus inventories and the
assumption of certain liabilities. The Company sold, at a gain of $9,548,
Cornsilk trademarks, formulae, technical information, inventory and other
related assets but will continue to operate the Cornsilk business in the
United Kingdom pursuant to a licensing agreement. The Company used the net
proceeds from the sale to reduce bank indebtedness.

On June 26, 1997, the Company purchased certain assets of Sunsource
International, Inc. and an affiliated company (SUNSOURCE) including the
exclusive worldwide rights to five leading branded dietary supplement
products. The purchase price for the trademarks, inventory and receivables
was approximately $32,000, net of certain assumed liabilities. The $32,000
was allocated $1,786 to inventory and receivables and $30,214 to trademarks
and other product rights which were assigned a useful life of 40 years.
Financing of the SUNSOURCE acquisition was provided by an expansion of the
Company's senior bank credit agreement and the issuance of 300,000 shares of
Chattem, Inc. common stock to SUNSOURCE. Additional payments were scheduled
to be earned by SUNSOURCE over a six year period from the date of closing if
sales exceed certain levels as defined in the purchase agreement. In 1998 the
Company paid the former owners of SUNSOURCE $2,500 and forgave $5,625 of
amounts due the Company, in exchange for a 50% reduction in any future
additional payments under the purchase agreement. In 1999, the Company paid
the former owners of SUNSOURCE $1,650 and issued 2,582 shares of its common
stock in exchange for cancellation of the right to receive any future
additional payments under the purchase agreement. The consideration paid in
1998 and 1999 was capitalized as additional purchase price.

(13) ACCRUED POSTRETIREMENT HEALTH CARE BENEFITS

The Company maintains certain postretirement health care benefits
for eligible employees. Employees become eligible for these benefits if they
meet certain age and service requirements. The Company pays a portion of the
cost of medical benefits for certain retired employees over the age of 65.
Effective January 1, 1993, the Company's contribution is a service-based
percentage of the full premium. The Company pays these benefits as claims are
incurred.

Net periodic postretirement health care benefits cost for the years
ended November 30, 2000, 1999 and 1998, included the following components:

<TABLE>
<CAPTION>
2000 1999 1998
----- ----- -----
<S> <C> <C> <C>
Service cost (benefits earned during the period)... $ 32 $ 31 $ 19
Interest cost on accumulated postretirement
benefit obligation............................... 80 76 82
Amortization of net gain........................... (22) (10) (18)
----- ----- -----
Net periodic postretirement benefits cost ......... $ 90 $ 97 $ 83
===== ===== =====
</TABLE>

The change in the accumulated benefit obligation resulted from the
following components for the years ended November 30, 2000 and 1999:

<TABLE>
<CAPTION>
2000 1999
------- --------
<S> <C> <C>
Accumulated benefit obligation, beginning of
year.................................................... $ 1,023 $ 1,220

<PAGE>
Service cost.............................................. 32 31
Interest cost............................................. 80 76
Effect of plan amendment.................................. -- 174
Actuarial gain............................................ (29) (443)
Benefits paid............................................. (55) (35)
------- --------
Accumulated benefit obligation, end of year............... $ 1,051 $ 1,023
======= ========
</TABLE>

The following table sets forth the funded status of the plan at November
30, 2000 and 1999:

<TABLE>
<CAPTION>
2000 1999
------- -------
<S> <C> <C>
Accumulated benefit obligation...................... $ 1,051 $ 1,023
Fair value of plan assets........................... -- --
------- -------
Funded status....................................... (1,051) (1,023)
Unrecognized prior service cost..................... 144 159
Unrecognized actuarial gain......................... (622) (630)
------- -------
Accrued postretirement benefits cost................ $ (1,529) $ (1,494)
======= =======
</TABLE>

For measurement purposes, a 6.0% annual rate of increase in the per
capita cost of covered health care benefits was assumed in 2000 and 1999. The
weighted-average discount rate used in determining the accumulated
postretirement benefit obligation was 8.0% and 6.75% at November 30, 2000 and
1999, respectively. Due to premium caps in place which limit the Company's
expense, a 1% increase in the assumed health care cost trend rate would not
affect the accumulated postretirement benefit obligation as of November 30,
2000, or the aggregate of the service and interest cost components of the net
annual postretirement benefit cost for the year ended November 30, 2000.

(14) COMPREHENSIVE INCOME

Comprehensive income (loss) consisted of the following components for
the years ended November 30, 2000, 1999 and 1998, respectively:

<TABLE>
<CAPTION>
2000 1999 1998
--------- -------- ---------
<S> <C> <C> <C>
Net income (loss)........................ $ (1,659) $ 20,156 $ 15,269
Other-foreign currency translation
adjustment............................. (806) (15) (30)
--------- -------- ---------
Total................................ $ (2,465) $ 20,141 $ 15,239
========= ======== =========
</TABLE>

(15) PRODUCT AND GEOGRAPHICAL SEGMENT INFORMATION

The Company operates in two primary segments that are based on the
different types of products offered. The OTC health care segment includes
medicated skin care products, topical analgesics, internal analgesics, lip
care, appetite suppressant and dietary supplement products. The toiletries
and skin care segment includes antiperspirants and deodorants, facial
cleaners and masques and seasonal products. The accounting policies of the
segments are the same as those described in the summary of significant
accounting policies. Certain assets, including the majority of property,
plant and equipment and deferred tax assets are not allocated to the
identifiable segments.

The Company's largest customer accounted for 15%, 11% and 7% of OTC
health care net sales and 9%, 8% and 10% of toiletries and skin care net
sales in 2000, 1999 and 1998, respectively.

In the table below the following items are included in the indicated
captions:

55
<PAGE>

Variable contribution margin: net sales less variable cost of goods
sold, advertising, promotion, market research, freight out, sales
commissions, royalties, bad debts and inventory obsolescence. The
Company evaluates the performance of its operating segments based on
variable contribution margins.

Depreciation and amortization: amortization of the cost of trademarks
and other product rights with unallocated depreciation and other
amortization expense being shown under the "Not Classified" caption.

Identifiable/total assets: primarily identified unamortized cost of
trademarks and other product rights and total inventory cost with the
remainder of total assets being shown under the "Not Classified"
heading.

<PAGE>

<TABLE>
<CAPTION>
PRODUCT CLASSIFICATIONS
------------------------------------------------------------
OTC TOILETRIES
HEALTH AND NOT
TOTAL CARE SKINCARE CLASSIFIED
--------- --------- ---------- ----------
<S> <C> <C> <C> <C>
2000:
Net sales..................................... $ 252,699 $ 153,175 $ 99,069 $ 455
Variable contribution margin.................. 84,902 56,666 28,199 37
Depreciation and amortization................. 14,943 5,241 4,010 5,692
Identifiable assets/total assets.............. 402,076 186,449 26,233 189,394

1999:
Net sales..................................... $ 298,142 $ 172,256 $ 125,650 $ 236
Variable contribution margin.................. 116,356 68,582 47,429 345
Depreciation and amortization................. 15,064 5,087 4,935 5,042
Identifiable assets/total assets.............. 491,624 198,189 194,241 99,194

1998:
Net sales..................................... $ 220,064 $ 117,309 $ 101,854 $ 901
Variable contribution margin.................. 81,815 42,978 38,488 349
Depreciation and amortization................. 9,827 2,753 3,567 3,507
Identifiable assets/total assets.............. 369,012 101,509 198,231 69,272

</TABLE>

The reconciliation of variable contribution margin, as shown above,
to income (loss) before income taxes, extraordinary loss and change in
accounting principle is as follows:

<TABLE>
<CAPTION>
2000 1999 1998
-------- --------- --------
<S> <C> <C> <C>
Variable contribution margin...................................... $ 84,902 $ 116,356 $ 81,815
Less divisional and corporate overhead not allocated to
product groups.................................................. 46,022 44,155 36,596
-------- --------- --------
Income from operations............................................ 38,880 72,201 45,219
-------- --------- --------
Other income (expense):
Interest expense................................................ (35,729) (36,572) (26,676)
Investment and other income, net................................ 1,566 579 881
Gain (loss) on product divestitures............................. (5,018) -- 9,548
-------- --------- --------
Total other income (expense)................................... (39,181) (35,993) (16,247)
-------- --------- --------
Income (loss) before income taxes, extraordinary loss and
change in accounting principle................................. $ (301) $ 36,208 $ 28,972
======== ========= ========

</TABLE>

Geographical segment information is as follows for the years ended
November 30, 2000, 1999 and 1998:

<TABLE>
<CAPTION>
2000 1999 1998
--------- --------- ---------
<S> <C> <C> <C>
Net Sales:
Domestic........................................ $ 232,144 $ 276,632 $ 199,811
International (1)............................... 20,555 21,510 20,253
--------- --------- ---------
Total......................................... $ 252,699 $ 298,142 $ 220,064
========= ========= =========
Long-Lived Assets (2)
Domestic........................................ $ 218,739 $ 381,694 $ 289,972
International................................... 300 353 471
--------- --------- ---------
Total......................................... $ 219,039 $ 382,047 $ 290,443
========= ========= =========
</TABLE>

(1) International sales includes export sales from U.S. operations.
(2) Consists of book value of property, plant, equipment, trademarks and other
product rights.

<PAGE>

(16) CONSOLIDATING FINANCIAL STATEMENTS

The condensed consolidating financial statements, for the dates or
periods indicated, of Chattem, Inc. ("Chattem"), Signal Investment & Management
Co. ("Signal"), the guarantor of the long-term debt of Chattem, and the
non-guarantor wholly-owned subsidiary companies of Chattem are presented below.
Signal is a wholly-owned subsidiary of Chattem; the guarantee of Signal is full
and unconditional and joint and several.

<PAGE>

Note 16
CHATTEM, INC. AND SUBSIDIARIES

CONSOLIDATING BALANCE SHEETS

NOVEMBER 30, 2000
(Unaudited and in thousands)

<TABLE>
<CAPTION>
NON-GUARANTOR
SUBSIDIARY ELIMINATIONS
CHATTEM SIGNAL COMPANIES DR, (CR.) CONSOLIDATED
------- -------- ------------- ------------- ------------
<S> <C> <C> <C> <C> <C>
ASSETS

CURRENT ASSETS:
Cash and cash equivalents................... $ 5,515 $ 95,747 $ 1,272 $ -- $ 102,534
Accounts receivable, less allowance for
doubtful accounts of $1,025............... 35,772 1,154 3,765 -- 40,691
Refundable and deferred income taxes........ 12,250 -- 151 -- 12,401
Inventories................................. 12,596 -- 2,456 -- 15,052
Prepaid expenses and other current assets... 711 -- 173 -- 884
--------- --------- --------- --------- ---------
Total current assets...................... 66,844 96,901 7,817 -- 171,562
--------- --------- --------- --------- ---------
PROPERTY, PLANT AND EQUIPMENT,
NET........................................ 26,759 -- 300 -- 27,059
--------- --------- --------- --------- ---------
OTHER NONCURRENT ASSETS:
Patents, trademarks and other purchased
product rights, net....................... 4,198 187,782 -- -- 191,980
Debt issuance costs, net.................... 8,829 -- -- -- 8,829
Investment in subsidiaries.................. 8,280 -- -- (8,280) --
Other....................................... 2,646 -- -- -- 2,646
--------- --------- --------- --------- ---------
Total other noncurrent assets............. 23,953 187,782 -- (8,280) 203,455
--------- --------- --------- --------- ---------
TOTAL ASSETS............................ $ 117,556 $ 284,683 $ 8,117 $ (8,280) $ 402,076
========= ========= ========= ========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY

CURRENT LIABILITIES:
Accounts payable............................ $ 8,426 $ -- $ 364 $ -- $ 8,790
Payable to bank............................. 1,529 -- -- -- 1,529
Accrued liabilities......................... 33,898 -- 1,316 -- 35,214
--------- --------- --------- --------- ---------
Total current liabilities................. 43,853 -- 1,680 -- 45,533
--------- --------- --------- --------- ---------
LONG-TERM DEBT, less current maturities....... 304,077 -- -- -- 304,077
--------- --------- --------- --------- ---------
DEFERRED INCOME TAXES......................... 2,798 10,121 -- -- 12,919
--------- --------- --------- --------- ---------
OTHER NONCURRENT LIABILITIES.................. 1,894 -- -- -- 1,894
--------- --------- --------- --------- ---------
INTERCOMPANY ACCOUNTS......................... (275,101) 277,272 (2,171) -- --
--------- --------- --------- --------- ---------
SHAREHOLDERS' EQUITY:
Preferred shares, without par value,
authorized 1,000, none issued............. -- -- -- -- --
Common shares, without par value,
authorized 50,000, issued 8,861........... 1,845 2 8,278 8,280 1,845
Paid-in surplus............................. 64,443 -- -- -- 64,443
Accumulated deficit......................... (25,771) (2,712) 2,020 -- (26,463)
--------- --------- --------- --------- ---------
Total..................................... 40,517 (2,710) 10,298 8,280 39,825
Cumulative other comprehensive income -
Foreign currency translation adjustment.... (482) -- (1,690) -- (2,172)
--------- --------- --------- --------- ---------
Total shareholders' equity................ 40,035 (2,710) 8,608 8,280 37,653
--------- --------- --------- --------- ---------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY................. $ 117,556 $ 284,683 $ 8,117 $ 8,280 $ 402,076
========= ========= ========= ========= =========

</TABLE>

<PAGE>

Note 16
CHATTEM, INC. AND SUBSIDIARIES

CONSOLIDATING BALANCE SHEETS

NOVEMBER 30, 1999
(Unaudited and in thousands)

NON-GUARANTOR
SUBSIDIARY ELIMINATIONS
CHATTEM SIGNAL COMPANIES DR, (CR.) CONSOLIDATED
------- -------- ------------- ------------- ------------
<S> <C> <C> <C> <C> <C>
ASSETS

CURRENT ASSETS:
Cash and cash equivalents...................$ 550 $ 16 $ 1,742 $ -- $ 2,308
Accounts receivable, less allowance for
doubtful accounts of $900................. 50,541 -- 4,491 -- 55,032
Deferred income taxes....................... 6,951 -- -- -- 6,951
Inventories................................. 25,519 -- 2,299 -- 27,818
Prepaid expenses and other current assets... 739 -- 190 -- 929
--------- --------- --------- --------- ---------
Total current assets...................... 84,300 16 8,722 -- 93,038
--------- --------- --------- --------- ---------
PROPERTY, PLANT AND EQUIPMENT,
NET........................................ 25,399 -- 353 -- 25,752
--------- --------- --------- --------- ---------
OTHER NONCURRENT ASSETS:
Patents, trademarks and other purchased
product rights, net....................... 5,533 350,762 -- -- 356,295
Debt issuance costs, net.................... 11,469 -- -- -- 11,469
Investment in subsidiaries.................. 9,930 -- -- (9,930) --
Other....................................... 4,709 -- 361 -- 5,070
--------- --------- --------- --------- ---------
Total other noncurrent assets............. 31,641 350,762 361 (9,930) 372,834
--------- --------- --------- --------- ---------
TOTAL ASSETS............................$ 141,340 $ 350,778 $ 9,436 $ (9,930) $ 491,624
========= ========= ========= ========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY

CURRENT LIABILITIES:
Current maturities of long-term debt........$ 11,000 $ -- $ -- $ -- $ 11,000
Accounts payable............................ 18,053 -- 520 -- 18,573
Payable to bank............................. 4,905 -- -- -- 4,905
Accrued liabilities......................... 30,630 -- 1,517 -- 32,147
--------- --------- --------- --------- ---------
Total current liabilities................. 64,588 -- 2,037 -- 66,625
--------- --------- --------- --------- ---------
LONG-TERM DEBT, less current maturities 358,950 -- -- -- 358,950
--------- --------- --------- --------- ---------
DEFERRED INCOME TAXES........................ 2,776 12,550 -- -- 15,326
--------- --------- --------- --------- ---------
OTHER NONCURRENT LIABILITIES................. 2,022 -- -- -- 2,022
--------- --------- --------- --------- ---------
INTERCOMPANY ACCOUNTS........................ (334,574) 336,612 (2,038) -- --
--------- --------- --------- --------- ---------
SHAREHOLDERS' EQUITY:
Preferred shares, without par value,
authorized 1,000, none issued............ -- -- -- -- --
Common shares, without par value,
authorized 50,000, issued 9,707.......... 2,021 2 9,928 9,930 2,021
Paid-in surplus............................ 72,850 -- -- -- 72,850
Accumulated deficit........................ (26,819) 1,614 401 -- (24,804)
--------- --------- --------- --------- ---------
Total.................................... 48,052 1,616 10,329 9,930 50,067
Cumulative other comprehensive income -
Foreign currency translation adjustment... (474) -- (892) -- (1,366)
--------- --------- --------- --------- ---------
Total shareholders' equity............... 47,578 1,616 9,437 9,930 48,701
--------- --------- --------- --------- ---------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY................ $ 141,340 $ 350,778 $ 9,436 $ 9,930 $ 491,624
========= ========= ========= ========= =========
</TABLE>

<PAGE>

Note 16
CHATTEM, INC. AND SUBSIDIARIES

CONSOLIDATING STATEMENTS OF INCOME

FOR THE YEAR ENDED NOVEMBER 30, 2000
(Unaudited and in thousands)

<TABLE>
<CAPTION>
NON-GUARANTOR
SUBSIDIARY ELIMINATIONS
CHATTEM SIGNAL COMPANIES DR, (CR.) CONSOLIDATED
------- -------- ------------- ------------- ------------
<S> <C> <C> <C> <C> <C>
NET SALES................................... $ 235,707 $ -- $ 16,992 $ -- $ 252,699
--------- --------- --------- --------- ---------
COSTS AND EXPENSES:
Cost of sales............................. 69,700 -- 5,257 -- 74,957
Advertising and promotion................. 90,975 8,865 7,028 -- 106,868
Selling, general and administrative....... 29,141 14 2,839 -- 31,994
--------- --------- --------- --------- ---------
Total costs and expenses................ 189,816 8,879 15,124 -- 213,819
--------- --------- --------- --------- ---------
INCOME FROM OPERATIONS...................... 45,891 (8,879) 1,868 -- 38,880
--------- --------- --------- --------- ---------
OTHER INCOME (EXPENSE):
Interest expense.......................... (35,729) -- -- -- (35,729)
Investment and other income,net........... 129 1,352 85 -- 1,566
Loss on product divestitures.............. -- (5,018) -- -- (5,018)
Royalties................................. (11,754) 12,051 (297) -- --
Corporate allocations..................... 37 -- (37) -- --
--------- --------- --------- --------- ---------
Total other income (expense)........... (47,317) 8,385 (249) -- (39,181)
--------- --------- --------- --------- ---------
INCOME (LOSS) BEFORE INCOME TAXES,
EXTRAORDINARY LOSS AND CHANGE IN
ACCOUNTING PRINCIPLE...................... (1,426) (494) 1,619 -- (301)

PROVISION FOR (BENEFIT FROM) INCOME
TAXES..................................... (373) (168) 437 -- (104)
--------- --------- --------- --------- ---------
INCOME (LOSS) BEFORE EXTRAORDINARY LOSS
AND CHANGE IN ACCOUNTING PRINCIPLE........ (1,053) (326) 1,182 -- (197)

EXTRAORDINARY LOSS ON EARLY
EXTINGUISHMENT OF DEBT, NET OF INCOME
TAX BENEFIT............................... (920) -- -- -- (920)

CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE, NET OF INCOME
TAX BENEFIT............................... (542) -- -- -- (542)
--------- --------- --------- --------- ---------
NET INCOME (LOSS)........................... $ (2,515) $ (326) $ 1,182 $ -- $ (1,659)
========= ========= ========= ========= =========

</TABLE>

<PAGE>

Note 16
CHATTEM, INC. AND SUBSIDIARIES

CONSOLIDATING STATEMENTS OF INCOME

FOR THE YEAR ENDED NOVEMBER 30, 1999
(Unaudited and in thousands)

NON-GUARANTOR
SUBSIDIARY ELIMINATIONS
CHATTEM SIGNAL COMPANIES DR, (CR.) CONSOLIDATED
------- -------- ------------- ------------- ------------
<S> <C> <C> <C> <C> <C>
NET SALES..................................... $ 280,686 $ -- $ 17,456 $ -- $ 298,142
--------- --------- --------- --------- ---------
COSTS AND EXPENSES:
Cost of sales............................... 69,810 -- 5,802 -- 75,612
Advertising and promotion................... 102,079 9,487 6,269 -- 117,835
Selling, general and administrative......... 29,230 15 3,249 -- 32,494
--------- --------- --------- --------- ---------
Total costs and expenses.................. 201,119 9,502 15,320 -- 225,941
--------- --------- --------- --------- ---------
INCOME FROM OPERATIONS........................ 79,567 (9,502) 2,136 -- 72,201
--------- --------- --------- --------- ---------
OTHER INCOME (EXPENSE):
Interest expense............................ (36,572) -- -- -- (36,572)
Investment and other income, net............ 521 (6) 64 -- 579
Royalties................................... (13,448) 13,743 (295) -- --
Premium revenue............................. (20) -- 20 -- --
Corporate allocations....................... 33 -- (33) -- --
--------- --------- --------- --------- ---------
Total other income (expense)............. (49,486) 13,737 (244) -- (35,993)
--------- --------- --------- --------- ---------
INCOME BEFORE INCOME TAXES AND
EXTRAORDINARY LOSS.......................... 30,081 4,235 1,892 -- 36,208

PROVISION FOR INCOME TAXES.................... 11,437 1,440 790 -- 13,667
--------- --------- --------- --------- ---------
INCOME BEFORE EXTRAORDINARY
LOSS........................................ 18,644 2,795 1,102 -- 22,541

EXTRAORDINARY LOSS ON EARLY
EXTINGUISHMENT OF DEBT, NET OF INCOME
TAX BENEFIT................................. (2,385) -- -- -- (2,385)
--------- --------- --------- --------- ---------
NET INCOME.................................... $ 16,259 $ 2,795 $ 1,102 $ -- $ 20,156
========= ========= ========= ========= =========

</TABLE>

<PAGE>

Note 16
CHATTEM, INC. AND SUBSIDIARIES

CONSOLIDATING STATEMENTS OF INCOME

FOR THE YEAR ENDED NOVEMBER 30, 1998
(Unaudited and in thousands)

NON-GUARANTOR
SUBSIDIARY ELIMINATIONS
CHATTEM SIGNAL COMPANIES DR, (CR.) CONSOLIDATED
------- -------- ------------- ------------- ------------
<S> <C> <C> <C> <C> <C>
NET SALES..................................... $ 203,650 $ -- $ 16,414 $ -- $ 220,064
--------- --------- --------- --------- ---------
COSTS AND EXPENSES:
Cost of sales............................... 55,654 -- 5,235 -- 60,889
Advertising and promotion................... 74,462 5,859 6,271 -- 86,592
Selling, general and administrative......... 24,278 18 3,068 -- 27,364
--------- --------- --------- --------- ---------
Total costs and expenses.................. 154,394 5,877 14,574 -- 174,845
--------- --------- --------- --------- ---------
INCOME FROM OPERATIONS........................ 49,256 (5,877) 1,840 -- 45,219
--------- --------- --------- --------- ---------
OTHER INCOME (EXPENSE):
Interest expense............................ (26,676) -- -- -- (26,676)
Investment and other income, net............ 816 3 62 -- 881
Gain on product divestiture................. -- 9,548 -- -- 9,548
Royalties................................... (9,629) 9,891 (262) -- --
Premium revenue............................. (350) -- 350 -- --
Corporate allocations....................... 41 -- (41) -- --
--------- --------- --------- --------- ---------
Total other income (expense)............. (35,798) 19,442 109 -- (16,247)
--------- --------- --------- --------- ---------
INCOME BEFORE INCOME TAXES AND
EXTRAORDINARY LOSS..................... 13,458 13,565 1,949 -- 28,972

PROVISION FOR INCOME TAXES............ 6,000 4,612 232 -- 10,844
--------- --------- --------- --------- ---------
INCOME BEFORE EXTRAORDINARY
LOSS..................................... 7,458 8,953 1,717 -- 18,128

EXTRAORDINARY LOSS ON EARLY
EXTINGUISHMENT OF DEBT, NET OF INCOME
TAX BENEFIT.............................. (2,859) -- -- -- (2,859)
--------- --------- --------- --------- ---------
NET INCOME................................. $ 4,599 $ 8,953 $ 1,717 $ -- $ 15,269
========= ========= ========= ========= =========

</TABLE>

<PAGE>

Note 16
CHATTEM, INC. AND SUBSIDIARIES

CONSOLIDATING STATEMENTS OF CASH FLOWS

FOR THE YEAR ENDED NOVEMBER 30, 2000
(Unaudited and in thousands)

<TABLE>
<CAPTION>
NON-GUARANTOR
SUBSIDIARY ELIMINATIONS
CHATTEM SIGNAL COMPANIES DR, (CR.) CONSOLIDATED
------- -------- ------------- ------------- ------------
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss)............................. $ (2,515) $ (326) $ 1,182 $ -- $ (1,659)
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation and amortization............... 5,978 8,865 100 -- 14,943
Deferred income tax benefit................. (5,410) (168) (156) -- (5,734)
Loss on product divestitures................ -- 5,018 -- -- 5,018
Extraordinary loss on early extinguishment
of debt, net.............................. 920 -- -- -- 920
Cumulative effect of change in accounting
principle, net............................ 542 -- -- -- 542
Other, net.................................. 9 -- 6 -- 15
Changes in operating assets and liabilities,
net of acquisitions and divestitures:
Accounts receivable....................... 15,178 (1,154) 317 -- 14,341
Inventories............................... 7,618 -- (378) -- 7,240
Prepaid and other current assets.......... (1,873) -- 335 -- (1,538)
Accounts payable and accrued liabilities.. (7,793) -- 212 -- (7,581)
--------- --------- --------- --------- ---------
Net cash provided by operating
activities............................ 12,654 12,235 1,618 -- 26,507
--------- --------- --------- --------- ---------
INVESTING ACTIVITIES:
Purchases of property, plant and equipment.... (5,582) -- (91) -- (5,673)
Proceeds from product divestiture ............ 160,000 -- -- -- 160,000
Proceeds from sales of property, plant
and equipment............................... 11 -- -- -- 11
Increase in other assets, net................. (1,542) -- -- -- (1,542)
--------- --------- --------- --------- ---------
Net cash provided by (used in) investing
activities............................ 152,887 -- (91) -- 152,796
--------- --------- --------- --------- ---------
FINANCING ACTIVITIES:
Repayment of long- term debt.................. (95,000) -- -- -- (95,000)
Proceeds from long-term debt.................. 29,000 -- -- -- 29,000
Change in payable to bank..................... (3,376) -- -- -- (3,376)
Repurchase of common shares................... (9,489) -- -- -- (9,489)
Proceeds from exercise of stock options....... 237 -- -- -- 237
Debt issuance costs........................... (363) -- -- -- (363)
Changes in intercompany accounts.............. (85,678) 87,496 (1,818) -- --
Dividends paid................................ 4,000 (4,000) -- -- --
--------- --------- --------- --------- ---------
Net cash provided by (used in) financing
activities............................ (160,669) 83,496 (1,818) -- (78,991)
--------- --------- --------- --------- ---------
EFFECT OF EXCHANGE RATE CHANGES ON CASH
AND CASH EQUIVALENTS.......................... 93 -- (179) -- (86)
--------- --------- --------- --------- ---------
CASH AND CASH EQUIVALENTS:
Increase (decrease) for the year.............. 4,965 95,731 (470) -- 100,226
At beginning of year.......................... 550 16 1,742 -- 2,308
--------- --------- --------- --------- ---------
At end of year................................ $ 5,515 $ 95,747 $ 1,272 $ -- $ 102,534
========= ========= ========= ========= =========

</TABLE>

<PAGE>

Note 16
CHATTEM, INC. AND SUBSIDIARIES

CONSOLIDATING STATEMENTS OF CASH FLOWS

FOR THE YEAR ENDED NOVEMBER 30, 1999
(Unaudited and in thousands)

<TABLE>
<CAPTION>
NON-GUARANTOR
SUBSIDIARY ELIMINATIONS
CHATTEM SIGNAL COMPANIES DR, (CR.) CONSOLIDATED
------- -------- ------------- ------------- ------------
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net income................................... $ 16,259 $ 2,795 $ 1,102 $ -- $ 20,156
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization.............. 5,429 9,487 148 -- 15,064
Extraordinary loss on early extinguishment
of debt, net............................. 2,385 -- -- -- 2,385
Dividend receivable from Elcat, Inc........ (279) -- -- -- (279)
Deferred income tax........................ 3,158 1,440 -- -- 4,598
Other, net................................. (8) 8 -- -- --
Changes in operating assets and
liabilities, net of acquisitions:
Accounts receivable...................... (16,598) -- (830) -- (17,428)
Inventories.............................. (5,366) -- 683 -- (4,683)
Prepaid and other current assets......... (241) -- 82 -- (159)
Accounts payable and accrued
liabilities............................ 6,880 -- 388 -- 7,268
--------- --------- --------- --------- ---------
Net cash provided by operating
activities........................... 11,619 13,730 1,573 -- 26,922
--------- --------- --------- --------- ---------
INVESTING ACTIVITIES:
Purchases of property, plant and equipment... (9,789) -- (41) -- (9,830)
Purchases of trademarks and other related (91,127) -- -- -- (91,127)
assets....................................
Sale of investments.......................... 2,994 387 -- -- 3,381
Proceeds from sales of property, plant
and equipment............................. 272 -- -- -- 272
Increase in other assets..................... (3,200) -- -- -- (3,200)
--------- --------- --------- --------- ---------
Net cash provided by (used in)
investing activities................ (100,850) 387 (41) -- (100,504)
--------- --------- --------- --------- ---------
FINANCING ACTIVITIES:
Repayment of long-term debt.................. (165,481) -- -- -- (165,481)
Proceeds from long-term debt................. 242,281 -- -- -- 242,281
Change in payable to bank................... 3,879 -- -- -- 3,879
Repurchase of common shares.................. (3,912) -- -- -- (3,912)
Proceeds from exercise of stock options
and warrants............................... 2,104 -- -- -- 2,104
Debt issuance costs.......................... (5,101) -- -- -- (5,101)
Change in intercompany accounts.............. 12,106 (10,112) (1,994) -- --
Dividends paid............................... 4,000 (4,000) -- -- --
--------- --------- --------- --------- ---------
Net cash provided by (used in)
financing activities............... 89,876 (14,112) (1,994) -- 73,770
--------- --------- --------- --------- ---------
EFFECT OF EXCHANGE RATE CHANGES ON CASH
AND CASH EQUIVALENTS......................... -- -- 44 -- 44
--------- --------- --------- --------- ---------
CASH AND CASH EQUIVALENTS:
Increase (decrease) for the year.............. 645 5 (418) -- 232
At beginning of year.......................... (95) 11 2,160 -- 2,076
--------- --------- --------- --------- ---------
At end of year................................ $ 550 $ 16 $ 1,742 $ -- $ 2,308
========= ========= ========= ========= =========

</TABLE>

<PAGE>

Note 16
CHATTEM, INC. AND SUBSIDIARIES

CONSOLIDATING STATEMENTS OF CASH FLOWS

FOR THE YEAR ENDED NOVEMBER 30, 1998
(Unaudited and in thousands)

<TABLE>
<CAPTION>
NON-GUARANTOR
SUBSIDIARY ELIMINATIONS
CHATTEM SIGNAL COMPANIES DR, (CR.) CONSOLIDATED
------- -------- ------------- ------------- ------------
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net income.................................... $ 4,599 $ 8,953 $ 1,717 $ -- $ 15,269
Adjustments to reconcile net income to --
net cash provided by operating activities
Depreciation and amortization............... 3,829 5,859 139 -- 9,827
Extraordinary loss on early
extinguishment of debt, net............... 2,859 -- -- -- 2,859
Dividend receivable from Elcat, Inc......... (462) -- -- -- (462)
Deferred income tax provision............... (2,261) 4,612 -- -- 2,351
Gain on product divestiture................. -- (9,548) -- -- (9,548)
Other, net.................................. (28) -- -- -- (28)
Changes in operating assets and
liabilities, net of acquisitions:
Accounts receivable....................... (11,968) -- (86) -- (12,054)
Inventories............................... 2,570 -- (734) -- 1,836
Prepaid and other current assets.......... 80 -- (182) -- (102)
Accounts payable and accrued liabilities.. 10,482 -- 360 -- 10,842
--------- --------- --------- --------- ---------
Net cash provided by operating
activities........................... 9,700 9,876 1,214 -- 20,790
--------- --------- --------- --------- ---------
INVESTING ACTIVITIES:
Purchases of property, plant and equipment.... (8,988) -- (62) -- (9,050)
Purchases of trademarks and other related
assets...................................... (168,402) -- -- -- (168,402)
Proceeds from product divestiture............. 11,965 -- -- -- 11,965
Proceeds from sale of investments............. 4,000 -- -- -- 4,000
Proceeds from sales of property, plant
and equipment............................... 1,085 -- -- -- 1,085
Increase in other assets...................... (798) (395) -- -- (1,193)
--------- --------- --------- --------- ---------
Net cash used in investing
activities........................... (161,138) (395) (62) -- (161,595)
--------- --------- --------- --------- ---------
FINANCING ACTIVITIES:
Repayment of long-term debt................... (145,028) -- -- -- (145,028)
Proceeds from long-term debt.................. 291,365 -- -- -- 291,365
Change in payable to bank..................... (1,592) -- -- -- (1,592)
Proceeds from exercise of stock options
and warrants................................ 3,316 -- -- -- 3,316
Debt issuance costs........................... (9,971) -- -- -- (9,971)
Changes in intercompany accounts.............. 6,259 (5,525) (734) -- --
Dividends paid................................ 4,000 (4,000) -- -- --
--------- --------- --------- --------- ---------
Net cash provided by (used in)
financing activities................. 148,349 (9,525) (734) -- 138,090
--------- --------- --------- --------- ---------
EFFECT OF EXCHANGE RATE CHANGES ON CASH
AND CASH EQUIVALENTS.......................... (2) -- (65) -- (67)
--------- --------- --------- --------- ---------
CASH AND CASH EQUIVALENTS:
Increase (decrease) for the year.............. (3,091) (44) 353 -- (2,782)
At beginning of year.......................... 2,996 55 1,807 -- 4,858
--------- --------- --------- --------- ---------
At end of year................................ $ (95) $ 11 $ 2,160 $ -- $ 2,076
========= ========= ========= ========= =========

</TABLE>

<PAGE>

(17) QUARTERLY INFORMATION (UNAUDITED AND IN THOUSANDS, EXCEPT PER SHARE
AMOUNTS)

<TABLE>
<CAPTION>
QUARTER ENDED
--------------------------------------------------------
TOTAL FEBRUARY 28 MAY 31 AUGUST 31 NOVEMBER 30
----- ----------- ------ --------- -----------
<S> <C> <C> <C> <C> <C>
FISCAL 2000:
Net sales.......................... $ 252,699 62,371 79,636 73,253 37,439
Gross profit....................... $ 177,742 45,689 58,181 54,094 19,778
Before extraordinary loss and
change in accounting principle:
Income(loss)..................... $ (197) 3,608 6,219 5,151 (15,175)
Income (loss) per share,
diluted (1).................... $ (.02) .37 .65 .55 (1.66)
Total:
Net income(loss)................. $ (1,659) 3,066 6,109 5,151 (15,985)
Net income (loss) per share,
diluted (1).................... $ (.18) .31 .64 .55 (1.75)

FISCAL 1999:
Net sales.......................... $ 298,142 62,728 83,441 78,661 73,312
Gross profit....................... $ 222,530 45,848 61,647 57,616 57,419
Before extraordinary loss:
Income........................... $ 22,541 3,577 6,921 5,957 6,086
Income per share,
diluted (1).................... $ 2.25 .35 .69 .59 .61
Total:
Net income....................... $ 20,156 3,150 5,764 5,424 5,818
Net income per share,
diluted (1).................... $ 2.01 .31 .57 .54 .58

</TABLE>

(1) THE SUM OF THE QUARTERLY EARNINGS PER SHARE AMOUNTS MAY DIFFER
FROM ANNUAL EARNINGS PER SHARE BECAUSE OF THE DIFFERENCES IN
THE WEIGHTED AVERAGE NUMBER OF COMMON SHARES AND DILUTIVE
POTENTIAL SHARES USED IN THE QUARTERLY AND ANNUAL
COMPUTATIONS.

<PAGE>

REPORT OF INDEPENDENT
PUBLIC ACCOUNTANTS

TO CHATTEM, INC.:

We have audited the accompanying consolidated balance sheets of Chattem, Inc.
(a Tennessee corporation) and subsidiaries as of November 30, 2000 and 1999,
and the related consolidated statements of income, shareholders' equity and
cash flows for each of the three years in the period ended November 30, 2000.
These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Chattem, Inc. and
subsidiaries as of November 30, 2000 and 1999, and the results of their
operations and their cash flows for each of the three years in the period
ended November 30, 2000 in conformity with accounting principles generally
accepted in the United States.

ARTHUR ANDERSEN LLP

Chattanooga, Tennessee
January 26, 2001

</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-21
<SEQUENCE>11
<FILENAME>a2039699zex-21.txt
<DESCRIPTION>EXH 21
<TEXT>

<PAGE>

EXHIBIT 21

CHATTEM, INC. AND SUBSIDIARIES
SUBSIDIARIES OF THE COMPANY

NAME OF SUBSIDIARY STATE OR COUNTRY OF INCORPORATION
------------------ ---------------------------------

Chattem (Canada) Inc. Canada
Chattem (U.K.) Limited England
HBA Insurance Ltd. Bermuda
Signal Investment & Management Co. Delaware

31
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-23
<SEQUENCE>12
<FILENAME>a2039699zex-23.txt
<DESCRIPTION>EXH 23
<TEXT>

<PAGE>

EXHIBIT 23

CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS

As independent public accountants, we hereby consent to the incorporation of
our report included in Chattem, Inc.'s 2000 annual report and incorporated by
reference in the Form 10-K into the Company's previously filed Registration
Statements on Form S-8 (Nos. 33-35386, 33-78524, 33-78922, and 33-61267), Form
S-3 (Nos. 33-69961, 33-69397, 33-31113, 33-03091 and 33-85348), Form S-2 (No.
33-80770) and Form S-4 (No. 33-53627).

ARTHUR ANDERSEN LLP

Chattanooga, Tennessee
February 23, 2001

32
</TEXT>
</DOCUMENT>
</SEC-DOCUMENT>
-----END PRIVACY-ENHANCED MESSAGE-----