CHATTEM INC, 10-K, 1996-02-28

CHATTEM INC
10-K, 1996-02-28
PHARMACEUTICAL PREPARATIONS

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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, 1995 COMMISSION FILE NUMBER 0-5905

CHATTEM, INC.
A TENNESSEE CORPORATION
I.R.S. 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
BE CONTAINED IN THE DEFINITIVE PROXY STATEMENT INCORPORATED BY REFERENCE IN
PART III OF THIS FORM 10-K.

AS OF FEBRUARY 21, 1996, THE AGGREGATE MARKET VALUE OF VOTING SHARES HELD BY
NON-AFFILIATES WAS $20,801,317.
AS OF FEBRUARY 21, 1996, 7,292,199 COMMON SHARES WERE OUTSTANDING.

DOCUMENTS INCORPORATED BY REFERENCE:

PORTIONS OF THE REGISTRANT'S ANNUAL REPORT TO SHAREHOLDERS FOR FISCAL YEAR ENDED
NOVEMBER 30, 1995 (THE "1995 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 8, 1996 (THE "PROXY STATEMENT") ARE
INCORPORATED BY REFERENCE IN PART III OF THIS REPORT.

<PAGE>

PART I

ITEM 1. BUSINESS

GENERAL

Chattem, Inc. (the "Company") was incorporated in Tennessee in 1909 after having
commenced business operations in 1879. The Company is a diversified
manufacturer and marketer of consumer products. The Company manufactures and
markets branded over-the-counter ("OTC") pharmaceuticals, such as FLEX-ALL 454,
ICY HOT, PAMPRIN, PREMSYN PMS, BENZODENT and NORWICH Aspirin, and functional
toiletries and cosmetics, including CORN SILK, BULLFROG, ULTRASWIM, SUN-IN,
MUDD and PHISODERM. In the OTC drug market, the Company believes that its
topical analgesic and menstrual and premenstrual internal analgesic brands are
among the market leaders in the U.S. in their categories. Certain of the
Company's functional toiletries and cosmetics products, such as SUN-IN and
ULTRASWIM, are believed by the Company to be brand leaders in the U.S. in their
categories.

The Company's growth strategy is to seek continued growth through a combination
of brand acquisitions and internal growth. As a part of this strategy, the
Company continually evaluates its products and businesses, and in instances in
which products or businesses fail to realize the Company's objectives, the
Company will dispose of these products or businesses and redeploy these assets
to products and businesses with greater growth potential.

The Company conducts certain aspects of its business through four wholly owned
subsidiaries. One subsidiary owns or licenses substantially all of the
trademarks and intangibles associated with its domestic consumer products
business and licenses the Company's use thereof. Certain foreign sales
operations are conducted through Canadian and United Kingdom subsidiaries.
Product liability insurance is provided by a captive insurance subsidiary
incorporated in Bermuda.

For purposes of this report, the "Company" 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 1995

On May 26, 1995, the Company completed the sale of its specialty chemicals
division to privately- held Elcat, Inc. ("Elcat"). The Company received
$25,000,000 from the sale of the specialty chemicals division consisting of
$20,000,000 in cash and $5,000,000 of 13.125% cumulative, convertible preferred
stock of Elcat. The net cash proceeds were used to repay long-term debt of
approximately $12,000,000. The Company recognized a net gain of $9,334,000 (net
of tax)from the sale and an extraordinary charge (after tax) of $367,000
relating to the early extinguishment of the debt.

The Company's operations continue to be affected by the payment of a special
cash dividend ("Special Dividend") of $20.00 per share in June, 1993 to holders
of its common stock. In order to pay the Special Dividend and related fees and
expenses, the Company borrowed approximately $97,000,000. The funding of the
Special Dividend resulted in a substantial negative balance in the Company's
shareholders' equity and significantly increased the use of leverage in the
Company's capital structure. The consequences to the Company have been
significantly increased interest expense and repayment obligations and more
vulnerability to adverse business conditions.

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.
The Company strives to achieve its objective by identifying brands with
favorable demographic appeal, being flexible in modifying products and
promotions in response to changing consumer demands and developing creative and
cost-effective marketing and advertising programs. The Company manufactures
substantially all of its products at its manufacturing facility in Chattanooga,
Tennessee.

<PAGE>

The Company's product brands are:

OTC PHARMACEUTICALS
- FLEX-ALL 454 - topical analgesic
- ICY HOT - topical analgesic
- PAMPRIN - menstrual internal analgesic
- PREMSYN PMS - premenstrual internal analgesic
- NORWICH Aspirin - internal analgesic
- BENZODENT - topical oral analgesic
- SOLTICE - analgesic balm
- BLIS-TO-SOL - anti-fungal product

FUNCTIONAL TOILETRIES AND COSMETICS
- CORN SILK - oil absorbing facial make-up
- BULLFROG - sunscreen and sunblock
- ULTRASWIM - chlorine removing shampoo
- SUN-IN - spray-on hair lightener
- MUDD - facial mask and cleanser
- PHISODERM - facial cleanser

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

<TABLE>
<CAPTION>
FISCAL YEAR ENDED
--------------------------------------------------------------
NOVEMBER 30, 1995 NOVEMBER 30, 1994 NOVEMBER 30, 1993
----------------- ----------------- -----------------
PRODUCT CLASS SALES PERCENTAGE SALES PERCENTAGE SALES PERCENTAGE
- ------------- ----- ---------- ----- ---------- ----- ----------
<S> <C> <C> <C> <C> <C> <C>
Domestic:
OTC Pharmaceuticals................. $ 48,700 48.4% $51,673 54.8% $49,590 55.2%
Functional Toiletries and
Cosmetics.......................... 37,519 37.3 29,888 31.7 25,920 28.9
International:
OTC Pharmaceuticals................. 2,463 2.5 2,243 2.4 3,361 3.7
Functional Toiletries and
Cosmetics.......................... 10,885 10.8 9,484 10.0 9,908 11.0
Other Products....................... 1,031 1.0 1,082 1.1 1,082 1.2
-------- ----- ------- ----- ------- -----
Total Consumer Products............. $100,598 100.0% $94,370 100.0% $89,861 100.0%
-------- ----- ------- ----- ------- -----
</TABLE>

<PAGE>

GROWTH STRATEGY

The Company's consumer products have historically grown through acquisition of
new brands and expansion of existing brands. The Company seeks acquisitions of
embryonic brands which have achieved success in limited geographic regions or of
more developed brands with unrealized potential. With embryonic brands, the
Company utilizes its marketing ability, sales force and manufacturing
capabilities to build on the regional strength of the brand and launch the
product nationally. For example, prior to its acquisition by the Company, FLEX-
ALL 454 had developed a significant market share in Denver and Phoenix, but was
virtually unknown in the balance of the country. After its acquisition by the
Company in 1989, FLEX-ALL 454, which had sales of less than $1,000,000 at the
time of acquisition, had exceeded $15,000,000 in gross sales in each of 1995 and
1994. As to brands with unrealized potential, the Company seeks to acquire from
larger firms brands that have been undermarketed because the products are not of
sufficient size to warrant attention by the larger firms. Two products in this
category were acquired in 1994: BENZODENT, a dental analgesic cream acquired
from The Procter & Gamble Company ("Procter & Gamble"), and PHISODERM, a line of
facial cleaners acquired from Sterling Winthrop Inc. ("Sterling"). ICY HOT is
an earlier example of this type of acquisition and has experienced significant
growth since its acquisition in 1991. In considering product acquisitions, the
Company also seeks products that complement existing brands through increased
marketing presence, shared promotions and shared distribution channels.

The Company endeavors to expand its existing products through line extensions
of existing brands, which capitalize on consumer awareness of the brand
names. An example of this strategy was the introduction and national launch
of Maximum Strength FLEX-ALL 454 in August 1993. As another example, the
Company plans a national launch of PHISODERM Antibacterial skin cleanser
during 1996. Efforts are also made to develop new and creative marketing
strategies and executions to expand both trade distribution and consumer
usage.

OTC PHARMACEUTICALS

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

<PAGE>

FLEX-ALL 454 is an aloe-vera based topical analgesic used primarily by people
with arthritic symptoms to alleviate pain and irritation in joints and
secondarily by persons suffering from muscle strain. The Company believes that
the advancing age of the U.S. population and the emphasis on fitness and
physical activity will increase the overall market size of the topical analgesic
market. The Company supports the brand with a marketing program that features
Joe Namath and the endorsement of all the professional trainers of the National
Football League, the National Hockey League, the National Basketball Association
and Major League Baseball.

ICY HOT provides the Company with a second entry into the topical analgesic
market segment. ICY HOT is an extra strength dual action product, as
distinguished from FLEX-ALL 454. The Company supports this brand with
national advertising and strong promotional programs.

In the menstrual analgesic segment, the Company markets PAMPRIN, a combination
drug specifically designed for relief of menstrual symptoms, and PREMSYN PMS, a
product formulated to relieve mild to moderate symptoms of premenstrual
syndrome. PAMPRIN was developed internally by the Company over 30 years ago,
while PREMSYN PMS was introduced by the Company in 1983. Factors affecting the
menstrual analgesic segment include the introduction of competing general
analgesic brands of ibuprofen for OTC distribution in 1986, the introduction by
Procter & Gamble of another non-steroidal general analgesic product in 1994
along with demographic trends of target consumers, women aged 18 to 49.

NORWICH is a pharmaceutical-quality aspirin-based analgesic which complements
the Company's other OTC pharmaceuticals by offering consumers another choice in
the analgesic market segment and by permitting shared product promotions. The
Company positions the brand as a reasonably priced alternative between private
label generic aspirin and high-priced, heavily-advertised brands.

BENZODENT is a dental analgesic cream in an adhesive base for use as an oral,
topical analgesic for pain related to dentures. The Company acquired BENZODENT
from Procter & Gamble in 1994 and will seek to increase the market share of this
brand through advertising and promotional programs.

Additionally, the Company manufactures and markets on a regional basis two
smaller proprietary drug brands: SOLTICE, an external analgesic, and BLIS-TO-
SOL, an anti-fungal product.

<PAGE>

FUNCTIONAL TOILETRIES AND COSMETICS

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

The CORN SILK brand is a line of facial makeup products for women with oily or
combination skin. All CORN SILK products utilize an exclusive ingredient for
absorbing the excess facial oils that break down the color and coverage of other
makeup. The CORN SILK brand includes powder used by women to fix and finish
their makeup and also liquid makeup, blush and concealer. Liquid makeup is used
to even skin tone, blush to add color and concealer to cover blemishes. The
Company supports the brand by a television advertising campaign complemented by
print advertising in selected women's magazines.

In the sunscreen and sunblock category, BULLFROG provides long-lasting, water-
durable protection from the sun. Due to escalating consumer awareness of skin
damage from sun exposure, the Company expects the sun protection segment of the
sun care market to continue to expand rapidly. Positioned as a line of highly
efficacious sunblock products in a unique, highly concentrated formula, the
Company believes that the BULLFROG brand should continue to benefit from this
overall market growth as well as increasing brand awareness, broader product
offerings and increased consumer advertising, promotion and sampling programs.

ULTRASWIM is a leading line of chlorine removing shampoo, conditioner and soap.
ULTRASWIM has a patented formula that the Company believes makes it superior to
formulations of other products in removing chlorine. ULTRASWIM has also
benefited as it has moved beyond the competitive swim segment to include
exercise and recreational swimmers.

SUN-IN is the number one product line in the spray-on hair lightener market.
The target customers within this market segment are light-haired women between
the ages of 12 and 24. The Company supports SUN-IN's position as the market
leader through recent improvements in the formula and package, seasonal
advertising to teens and consumer promotions in retail stores.

MUDD is a line of clay-based products which provide deep cleansing of the face
for healthier, cleaner skin. Target customers for MUDD are women between the
ages of 18 and 49. In fiscal 1995, the Company relaunched MUDD with improved
formulas and updated packaging. The relaunch was supported by television
advertising and promotional programs.

<PAGE>

PHISODERM is a line of facial cleansers consisting of several formulas of liquid
cleansers, including one for infants, and a bar soap. Acquired in 1994,
PHISODERM is the Company's second entry into the facial cleanser category.
Positioned as a deep cleaning but gentle facial cleanser, the Company, in fiscal
1995, improved the formula, updated the packaging and provided television
advertising and promotional support to enable this brand to regain the larger
market share it once enjoyed.

INTERNATIONAL

The Company's products are also sold in foreign countries. This 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. 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.

Many of the Company's major domestic products are currently sold in Canada,
including the FLEX-ALL 454, PAMPRIN, SUN-IN, CORN SILK, MUDD, ULTRASWIM and
PHISODERM brands.

Consumer product sales in the United Kingdom and on the continent of Western
Europe are currently limited to toiletry and cosmetic products. The Company's
hair lightener product is sold on the continent under the SPRAY BLOND trademark
and in the United Kindgom as SUN-IN. MUDD, CORN SILK and ULTRASWIM are the
other primary consumer products sold by the Company's international division in
Europe.

The Company's export division services various distributors primarily located in
the Caribbean, Mexico and Peru. The Company sells various products into these
markets with the primary focus being the development of its OTC pharmaceuticals,
principally ICY HOT and PAMPRIN. The Company continues to look for established
distributors in Central and South America.

<PAGE>

MANUFACTURING

The Company manufactures a substantial portion of its products at its
Chattanooga plant. Currently, the Company has adequate capacity to meet
anticipated demand for its products. New products can generally be manufactured
with the adaptation of existing equipment and facilities, with 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.

To monitor the quality of its products, the Company maintains an internal
quality control system supported by an on-site microbiology laboratory. 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 or other raw materials used in the manufacture of
its products. At present, the Company does not foresee any significant problems
in obtaining its requirements at reasonable prices, but no assurances can be
given that raw material or energy shortages will not adversely affect its
operations in the future.

RESEARCH AND DEVELOPMENT

The Company's research and development expenditures were $1,140,000, $893,000
and $930,000 in the fiscal years ended November 30, 1995, 1994 and 1993,
respectively. No material customer-sponsored research and development
activities were undertaken during these periods. The Company expects to
maintain the same general level of expenditures in fiscal 1996.

The research and 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.

<PAGE>

DISTRIBUTION

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

Wal-Mart Stores, Inc. accounts for more than 10% of the sales 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, accounts for more than 10%
of the international consumer products segment's sales.

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 fiscal 1995 to
support several promotions and normal buildup for orders on seasonal products.
In certain circumstances, the Company allows its customers to return unsold
merchandise and, for seasonal products, provides extended payment terms to its
customers.

<PAGE>

MARKETING

The Company allocates a significant portion of its revenues to the
advertising and promotion of its products. Expenditures for these purposes
were 37.0%, 35.3%, and 40.4%, respectively, as a percentage of net sales
during each of the fiscal years ended November 30, 1995, 1994 and 1993. Due
to the maturation of the brand and the decision to strongly support other
brands, advertising and promotion expenses to support FLEX-ALL 454 were
reduced in fiscal 1995 by 18.9%.

The Company's marketing objective is to develop and execute creative and cost-
effective advertising and promotion 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 promotions and consumer promotions expenditures on
a cost effective basis is an essential element in its ability to compete
successfully.

The Company develops advertising strategies and executions for each of its major
brands that focus on the particular attributes and market positions of the
products. The Company achieves cost-effective advertising by minimizing certain
expenses, such as production of commercials and payments to advertising
agencies.

The Company works directly with retailers to develop for each brand promotional
calendars and campaigns 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

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 international consumer products and the relative absence of
promotional campaigns during this quarter.

<PAGE>

COMPETITION

The OTC pharmaceutical and functional toiletry products' markets in which the
Company competes are highly competitive. The markets 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. The Company competes primarily on the basis of product quality,
price, brand loyalty and consumer acceptance. The Company's competitors include
other OTC pharmaceutical companies and large consumer products companies, many
of which have considerably greater financial and marketing resources than the
Company. The products offered by these companies are often supported by much
larger advertising and promotional expenditures and are generally backed by
larger sales forces. In addition, the Company's competitors have often been
willing to use aggressive spending on trade promotions as a strategy for
building market share at the expense of their competitors, including the
Company. The private label or generic category has also become more competitive
in certain of the Company's product markets. Another factor affecting the OTC
pharmaceutical and toiletry products business is the consolidation of retailers
and increasingly more competitive negotiations for access to shelf space.

TRADEMARKS AND PATENTS

The Company's trademarks are of material importance to its business and are
among its most important assets, although, except in the case of the FLEX-ALL
454 trademark, its business as a whole is not materially dependent upon
ownership of any one trademark. The Company, either through a wholly-owned
subsidiary or directly, owns or licenses all of the trademarks associated with
its business. All of the Company's brands have recognized trademarks associated
with them, and the Company's significant domestic trademarks have been
registered on the principal register of the United States Patent and Trademark
Office. Federally registered trademarks have a perpetual life as long as they
are timely renewed and used properly as trademarks, subject to the right of
third parties to seek cancellation of the marks.

The Company also owns patents related to the ULTRASWIM shampoo and CORN SILK
facial powder, both of which expire in 1998, and ICY HOT stick topical
analgesic, which expires in 2007. After expiration of the patents, the
Company expects that these products will continue to compete in the market
primarily on the basis of the goodwill associated with the brands.

<PAGE>

GOVERNMENT REGULATION

The Company's products are generally subject to government regulations,
primarily those of the U.S. Food and Drug Administration ("FDA"). Certain of
the Company's consumer products are regulated by the FDA as OTC drugs, with
the rest of the products being regulated as "cosmetics". All such products
must comply with FDA regulations governing the safety of the products
themselves or the ingredients used in their manufacture. FDA regulations for
all pharmaceutical products also include requirements for product labeling
and for adherence to "current good manufacturing practices".

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 (e.g., topical analgesics). Compliance with monograph provisions
means that the product is generally recognized as safe and effective, and is not
misbranded. Future changes in the monographs could result in the Company having
to revise product labeling and formulations.

The Company responded to certain questions received from FDA early in 1995 in
connection with clinical studies for pyrilamine maleate, one of the active
ingredients used in PAMPRIN and PREMSYN PMS. While the Company addressed all
of the FDA questions in detail, the final monograph for menstrual drug
products will determine if the FDA considers pyrilamine maleate safe and
effective for menstrual relief products. Additional clinical testing of this
ingredient may be required.

The Company has been actively monitoring the process and does not believe
that PAMPRIN and 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.

With regard to all of the Company's products, the FDA may revise applicable
regulations or provide new interpretations of existing regulations which could
necessitate product labeling changes, reformulations or other changes in the
Company's products or the conduct of its business. While it is impossible to
predict the impact of future FDA actions, to date the Company has not been
adversely affected as a result of compliance with FDA regulations.

<PAGE>

In addition to the FDA regulations discussed above, the Company is subject to
numerous other statutory and regulatory restrictions, including regulations
relating to product packaging. The application of these product packaging
regulations has required the Company to convert certain of its PAMPRIN products
sold in foil pouches to bottles with child resistant caps. This conversion was
completed in 1995 and involved plant modification and the installation of
additional packaging equipment.

ENVIRONMENTAL

The Company is continuously engaged in assessing 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 site utilizes chemicals and other potentially hazardous materials
and generates both hazardous and non-hazardous waste, the transportation,
treatment, storage and disposal of which are regulated by various governmental
agencies. The Company is a member of the Chattanooga Manufacturers Association,
a trade association which promotes industry awareness of developments in
environmental matters, has engaged environmental consultants on a regular basis
to assist its compliance efforts, is currently in 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.

<PAGE>

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. 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.

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. The Company has
not had any material claims in the past and is not aware of any material claims
pending or threatened against the Company or its products. 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 a captive insurance subsidiary, 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.

EMPLOYEES

The Company employs approximately 305 persons on a full-time basis in the U.S.
and 27 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.

<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 adjacent to the Company's headquarters on land owned by the
Company. The Company leases the primary warehouse and distribution center,
located at 3100 Williams Street, Chattanooga, Tennessee, for its domestic
consumer products. The following table describes in detail the principal
properties owned and leased by the Company:

<TABLE>
<CAPTION>
FACILITY
TOTAL --------------------------
TOTAL AREA BUILDINGS SQUARE
ACRES (SQUARE FEET) USE FEET
---------- ------------- ----- ------
<S> <C> <C> <C> <C>
Owned Properties:
Chattanooga, Tennessee 10 109,800 Manufacturing 72,700
Warehousing 1,900
Office &
Administration 35,200
Leased Properties:
Chattanooga, Tennessee (1) 2.0 100,000 Warehousing 100,000
Chattanooga, Tennessee (2) 0.1 9,600 Warehousing &
Manufacturing 9,600
Mississauga, Ontario,
Canada (3) 0.3 15,000 Warehousing 10,500
Office &
Administration 3,000
Packaging 1,500
Basingstoke, Hampshire,
England (4) 0.3 21,900 Warehousing 13,900
Office &
Administration 6,500
Packaging 1,500
</TABLE>

NOTES:
(1) Leased under a five year lease ending January 31, 2001 for a monthly rental
of $23,750.
(2) Leased under a five year lease ending January 31, 2001 for a monthly rental
of $2,280.
(3) Leased under a lease ending November 1996, with an option to extend the
lease until November 2004, at a monthly rental including property taxes
and other incidentals of approximately $6,433.
(4) Leased under leases ending in 2014 and 2015 at a monthly rental including
property taxes and other incidentals of approximately $18,960.

<PAGE>

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 full-time second and third shifts.

ITEM 3. LEGAL PROCEEDINGS

Note 10 to the Consolidated Financial Statements on page 30 of the
Company's 1995 Annual Report to Shareholders is incorporated herein by
reference.

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

None.

<PAGE>

PART II

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

The information found on pages 15, 28 and 29 of the Company's 1995 Annual Report
to Shareholders is incorporated herein by reference.

ITEM 6. SELECTED FINANCIAL DATA

The information found on page 15 of the Company's 1995 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 14 of the Company's 1995 Annual Report to
Shareholders is incorporated herein by reference.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA

The information found on pages 15 to 35 of the Company's 1995 Annual Report to
Shareholders is incorporated herein by reference.

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

None.

<PAGE>

PART III

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS OF THE
REGISTRANT

(a) DIRECTORS
The information found in the Company's 1996 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 of the
Company as of February 21, 1996, their ages, their positions and
offices with the Company and the year in which they were first
elected to these positions:

<TABLE>
<CAPTION>
POSITION WITH FIRST
NAME AGE REGISTRANT ELECTED
- ---- --- ------------- -------
<S> <C> <C> <C>
Zan Guerry 47 Chairman of the Board;
President and Chief
Executive Officer;
Director 1990

Robert E. Bosworth 48 Executive Vice President
and Chief Financial Officer;
Director 1990
</TABLE>

Mr. Guerry was elected to his present positions with the Company in June
1990. 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 and as Chief Operating Officer from
1989 to 1990. Mr. Guerry was first elected as a director of the Company in
1981.

Mr. Bosworth was elected to his present positions with the Company in June 1990.
Previously he served as Vice President and Chief Financial Officer of the
Company from 1985 to 1990. Mr. Bosworth was first elected as a director of the
Company in 1986.

<PAGE>

ITEM 11. EXECUTIVE COMPENSATION

The information found in the Company's 1996 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 1996 Proxy Statement under the heading
"Voting Securities and Principal Holders Thereof" is hereby incorporated by
reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

A. Alexander Taylor II, a director of the Company, is a partner in the law firm
of Miller & Martin, general counsel to the Company.

Robert M. Boyd, Jr., a director and former executive officer of the Company,
received $84,167 in consulting fees during Fiscal 1995 for services rendered
to the Company in a capacity other than as a director.

Louis H. Barnett, a director of the Company, received $33,000 in consulting
fees during Fiscal 1995 for services rendered to the Company other than as a
director.

Scott L. Probasco, Jr., a director of the Company, is the Chairman of the
Executive Committee of SunTrust Bank, Tennessee, N.A. (SunTrust). SunTrust
provides routine banking services to the Company and participates in the
Company's credit facility.

<PAGE>

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORT ON FORM 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 16 to 33 of the Company's 1995 Annual
Report to Shareholders.

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 Amended and Restated Charter of
Chattem, Inc. (7)

4 Amended and Restated By-Laws of
Chattem, Inc. (16)

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 (10)

10 Material Contracts -

ULTRASWIM License Agreement (1)

BULLFROG Purchase Agreement (2)

Purchase and Sale Agreement dated
March 6, 1989 between Chattem, Inc.
and Ari-Med Pharmaceuticals, Inc.
relating to the products FLEX-ALL
454 and FLEX-ALL 5000 (3)

Chattem, Inc. Employee Stock Ownership
Plan dated August 25, 1989 (4)
</TABLE>

<PAGE>

<TABLE>
<CAPTION>
Exhibit
NUMBER Description of Exhibit References
------- ----------------------------------------- ----------
<S> <C> <C>
10 Chattem, Inc. Savings and Investment
Plan dated June 11, 1990 (5)

Non-Competition and Severance Agree-
ments as Amended -
Zan Guerry
Robert E. Bosworth (6) and (16)

Lease Agreement between Atlantis Real
Estate Corporation and Chattem
(Canada) Inc. and Chattem, Inc. for Unit
1, 2220 Argentia Road, Mississauga,
Ontario, Canada (7)

Lease Agreement between Guildhall
Property Holdings Limited and Chattem
(U.K.) Limited for Unit 7, Ringway
Centre, Edison Road, Basingstoke,
Hampshire, England (7)

Chattem, Inc. Non-Statutory Stock Option
Plan - 1993 (8)

Manufacturing Agreement dated May 12, 1993
between Chattem, Inc. and Procter & Gamble
Pharmaceuticals, Inc. relating to NORWICH
Aspirin products (9)

Stock Purchase Agreement dated June 11,
1993 between Chattem, Inc. and First
Union Capital Partners, Inc. (10)

Registration Agreement dated June 11, 1993
between Chattem, Inc. and First Union
Capital Partners, Inc. (10)
</TABLE>

<PAGE>

<TABLE>
<CAPTION>
Exhibit
NUMBER Description of Exhibit References
------- ----------------------------------------- ----------
<S> <C> <C>
10 Chattem, Inc. Non-Statutory Stock Option
Plan - 1994 (10)

Chattem, Inc. Non-Statutory Stock Option
Plan for Non-Employee Directors - 1994 (11)

Asset Purchase and Sale Agreement dated
May 12, 1994 between The Procter & Gamble
Company and Signal Investment & Management
Co. for the BENZODENT Business (12)

Purchase and Sale Agreement dated June 3,
1994 between Chattem (Canada) Inc. and
Cosmetic Import Company Limited (13)

Purchase Agreement dated June 10, 1994
between Chattem, Inc.and Kidder, Peabody
& Co. Incorporated (13)

Note Registration Rights Agreement dated
June 17, 1994 between Chattem, Inc.and
Kidder, Peabody & Co. Incorporated (13)

Warrant Registration Rights Agreement
dated June 17, 1994 between Chattem, Inc.
and Kidder, Peabody & Co. Incorporated (13)

Asset Purchase and Sale Agreement dated
June 17, 1994 between Sterling Winthrop Inc.
and Signal Investment & Management Co. (13)

Working Capital Credit Agreement dated
June 17, 1994 among Chattem, Inc., the
lenders named therein and The First
National Bank of Chicago, as Agent. (13)
</TABLE>

<PAGE>

<TABLE>
<CAPTION>
Exhibit
NUMBER Description of Exhibit References
------- ----------------------------------------- ----------
<S> <C> <C>
10 Acquisition Credit Agreement dated
June 17, 1994 among Chattem, Inc., the
lenders named therein and The First
National Bank of Chicago, as Agent. (13)

Renewal Lease Agreement dated December 5,
1994 between Atlantis Real Estate
Corporation and Chattem (Canada) Inc. and
Chattem, Inc. for Unit 1, 2220 Argentia
Road, Mississauga, Ontario, Canada (14)

Agreement of Purchase and Sales dated
April 11, 1995, by and among Chattem
Chemicals, Inc., as buyer, Elcat, Inc.,
as parent, and Chattem, Inc., as seller,
of Specialty Chemicals division (15)

Lease Agreements dated February 1, 1996
between Tammy Development Company and
Chattem, Inc. for warehouse space at
3100 Williams Street, Chattanooga,
Tennessee (16)

Non-Competition and Severance Agreements -
Gary M. Galante
Joey B. Hogan
Howard E. Ottley
B. Derrill Pitts
Charles M. Stafford (16)

11 Computation of Per Share Earnings (16)

13 1995 Annual Report to Shareholders of
Chattem, Inc. (16)

22 Subsidiaries of the Company (16)

24 Consent of Independent Public Accountants (16)
</TABLE>

<PAGE>

REFERENCES:
Previously filed as an exhibit to and incorporated by reference from:
(1) Form 10-K for the year ended May 31, 1986.
(2) Form 10-Q for the quarter ended February 28, 1987.
(3) Form 10-K for the year end May 31, 1989.
(4) Form S-8 Registration Statement (No. 33-30742).
(5) Form S-8 Registration Statement (No. 33-35386).
(6) Form 10-K for the year ended November 30, 1991.
(7) Form 10-K for the year ended November 30, 1992.
(8) Form S-8 Registration Statement (No. 33-55640).
(9) Form 10-K for the year ended November 30, 1993.
(10) Form S-8 Registration Statement (No. 33-78524).
(11) Form S-8 Registration Statement (No. 33-78522).
(12) Form 8-K dated May 12, 1994.
(13) Form S-2 Registration Statement (No. 33-80770).
(14) Form 10-K for the year ended November 30, 1994.
(15) Form 8-K dated April 11, 1995.
(16) Filed as an exhibit to this Form 10-K for the year ended
November 30, 1995.

(b) There were no Form 8-K's filed with the Securities and Exchange
Commission during the three months ended November 30, 1995.

(d) The Financial Statements and the 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 6 to 13 of Signal Investment & Management Co.'s Form 10-K for the
fiscal year ended November 30, 1995.

<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 22, 1996 CHATTEM, INC.
By: /S/ Robert E. Bosworth
-----------------------------------
Title: Executive Vice President and
Chief Financial Officer

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

<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------- ----- ----
<S> <C> <C>
/s/ Zan Guerry Chairman of the Board, 2/22/96
- ------------------------- President and Director
Zan Guerry (Chief Executive Officer)

/s/ Samuel E. Allen Director 2/22/96
- -------------------------
Samuel E. Allen

/s/ Louis H. Barnett Director 2/22/96
- --------------------------
Louis H. Barnett

/s/ Robert E. Bosworth Executive Vice President and 2/22/96
- --------------------------- Chief Financial Officer and
Robert E. Bosworth Director (Principal Financial
and Accounting Officer)

/s/ Robert M. Boyd, Jr. Director 2/22/96
- --------------------------
Robert M. Boyd, Jr.

/s/ Richard E. Cheney Director 2/22/96
- --------------------------
Richard E. Cheney

/s/ Scott L. Probasco, Jr. Director 2/22/96
- --------------------------
Scott L. Probasco, Jr.

/s/ A. Alexander Taylor, II Director 2/22/96
- --------------------------
A. Alexander Taylor, II
</TABLE>

<PAGE>

CHATTEM, INC. AND SUBSIDIARIES
EXHIBIT INDEX

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------- ----------------------
<S> <C>
4 Amended and Restated By-Laws of Chattem, Inc.

10.1 Admendment to Non-Competition and Severance Agreements -
Zan Guerry
Robert E. Bosworth

10.2 Lease agreements dated February 1, 1996 between Tammy
Development Company and Chattem, Inc. for warehouse
space at 3100 Williams Street, Chattanooga, Tennessee

10.3 Non-Competition and Severance Agreements -
Gary M. Galante
Joey B. Hogan
Howard E. Ottley
B. Derrill Pitts
Charles M. Stafford

11 Computation of per share earnings

13 1995 Annual Report to Shareholders of Chattem, Inc.

22 Subsidiaries of the Company

24 Consent of Independent Public Accountants

</TABLE>

<PAGE>

EXHIBIT 4

AMENDED, 3/1/95

AMENDED AND RESTATED BY-LAWS

ARTICLE I - SHAREHOLDERS

Section 1. Annual Meeting. The annual meeting of shareholders
shall be held on such date, at such time and place as may be designated by
the board of directors.

Section 2. Fixing of Record Date. For the purpose of determining
shareholders entitled to notice of or entitled to vote at any meeting of
shareholders, or shareholders entitled to receive payment of any dividend, or
in order to make a determination of shareholders for any other proper
purpose, the record date shall be fifteen days prior to the date on which the
action requiring such determination of shareholders is to be taken. The board
of directors may fix in advance another record date, not more than 70 days nor
less than 10 days prior to the date on which the action is to taken.

Section 3. Proxies. All proxies shall be filed with the secretary
of the corporation before or at the time of the meeting.

ARTICLE II - DIRECTORS
(Effective 3/1/95)
Section 1. Number and Compensation. There shall be from 7 to 12
directors of the corporation. Compensation of directors shall be determined
by the board.

Section 2. Regular Meetings. Regular meetings of the board,
without notice, shall be held immediately after the annual meeting of
shareholders and on the fourth Wednesday of January, April, and July, at the
corporation headquarters in Chattanooga, or at such other date and place as
may be determined by the board.

Section 3. Special Meetings. Special meetings of the board may be
called by the chairman of the board, the president or any three directors.

Section 4. Notice. Notice of any special meeting shall be given at
least one (1) day prior thereto by oral, telegraphic, electronic or written
notice given or delivered personally to each director or at least three (3)
days prior thereto if such notice is given by regular, registered or
certified mail. If mailed, such notice shall be deemed to be delivered when
deposited in the United States mail addressed to the director at his home or
business address.

<PAGE>

AMENDED, 3/1/95

Section 5. Indemnification. Any person made or threatened to be
made a party to a suit or proceeding by reason of the fact that he or his
intestate was, is, or shall be a director or officer or Audit Committee
member of the corporation or at the request of the corporation a director or
officer or Audit Committee member of another corporation controlled by the
corporation, shall be indemnified by this corporation to the maximum extent
and upon the conditions provided by the laws of the State of Tennessee,
including Tennessee Code Annotated, Sections 48-1-407 through 48-1-411.

Section 6. Action Without Meeting. The board may take any action
which it is required or permitted to take by law without a meeting upon
written consent setting forth the action so taken and signed by all of the
directors entitled to vote thereon.

Section 7. Committees. The majority of the entire board, by
resolution, may designate committees and delegate to them such authority of
the board as it deems desirable within the limits prescribed by Tennessee law.

Section 8. Advisory Directors. The board may appoint advisory
directors who shall act only in the capacity of providing general policy
advice to the board. In any action where a recorded vote of the directors is
taken, the vote of elected directors shall determine the outcome.

ARTICLE III - OFFICERS

Section 1. Election. The board shall elect all officers for terms
of one year. Assistant officers, if any, shall not be considered officers for
the purposes of this section, and shall be appointed and subject to removal
by the president.

Section 2. Vacancies. A vacancy in any office subject to board
election may be filled by the board.

Section 3. Chairman of the Board. The chairman of the board shall
be the chief executive officer. He shall preside at any meetings of the board
and of the shareholders.

Section 4. President. The President shall have management and
control of the affairs of the corporation in accordance with policies
promulgated by the board.

- 2 -

<PAGE>

AMENDED, 3/1/95

Section 5. The Vice Presidents. In the event of the absence,
death, or inability to act of the president, the executive vice president
shall perform the duties and be vested with the powers of the president. The
vice presidents shall perform such duties as from time to time may be
assigned to them by the president or by the board of directors.

Section 6. The Secretary. The secretary shall: (a) see that all
notices are duly given in accordance with the provisions of these by-laws and
as required by law; (b) take minutes of meetings of the directors and
shareholders; (c) perform such other duties as may be assigned to him by the
president or by the board.

Section 7. Assistant Secretaries. The assistance secretaries shall
perform such duties as may be assigned to them by the secretary.

Section 8. Salaries. Salaries of officers shall be determined by
the board and may be changed by the board at any time.

ARTICLE IV - SHARES

Section 1. Signatures. All certificates for shares shall be signed
by the president or executive vice president or such vice president as may be
designated by the board and the secretary or an assistant secretary.

Section 2. Transfer. Transfer of shares shall be made only on the
share transfer books of the corporation.

Section 3. Voting upon Shares of Other Corporations Held by the
Corporation. The president shall have authority to vote in person or by
proxy on behalf of the corporation at any meeting of shareholders of any
corporation in which the corporation may hold shares. The board may confer
like powers upon any other officer.

ARTICLE V -- FISCAL YEAR

The fiscal year of the corporation shall begin on December 1 and end
on November 30.

- 3 -

<PAGE>

AMENDED, 3/1/95

ARTICLE VI - SEAL

The corporate seal shall be circular, and the inscription thereof
shall include the corporate name and state of incorporation.

ARTICLE VII - AMENDMENT

The by-laws may be amended by the vote of a majority of the board.

- 4 -

<PAGE>

EXHIBIT 10.1

AMENDMENT TO
------------
NON-COMPETITION AND SEVERANCE AGREEMENT
---------------------------------------

THIS AMENDMENT is made this 31st day of May, 1995, by and between
CHATTEM, INC., a Tennessee corporation (the "Company") and John Pemberton
Guerry, an executive of the Company (the "Executive"), under the following
circumstances:

The Company and the Executive have entered into a Non-Competition
and Severance Agreement dated May 16, 1990 (the "Agreement"), pursuant to
which, among other things, the Executive agreed in certain circumstances not
to compete with the Company and the Company agreed to pay the Executive a
severance benefit upon the discharge or constructive discharge of the
Executive following a Change in Control. The Company and the Executive now
desire to amend the Agreement to provide that during the three (3) year
period following the time when the Executive is entitled to receive the
severance benefit, the Company will continue to provide to the Executive
health, medical and life insurance benefits.

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

1. The Agreement shall be amended by adding a new section, which
shall provide as follows:

<PAGE>

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 time he becomes entitled to
the Severance Benefit in accordance with Section 4 hereof for a
period of three (3) years following the date the Executive
becomes entitled to such Severance Benefit.

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

_______________________________
JOHN PEMBERTON GUERRY

CHATTEM, INC.

By: ___________________________
ROBERT E. BOSWORTH
Executive Vice President

ATTEST:

By: ___________________________
Secretary

(SEAL)

- 2 -

<PAGE>
EXHIBIT 10.2
COMMERCIAL LEASE

THIS LEASE, made as of the last date of execution as entered on the last page
of this agreement between TAMMY DEVELOPMENT COMPANY hereinafter referred to
as "Landlord", and CHATTEM, INC. hereinafter referred to as "Tenant".

WITNESSETH:

ARTICLE 1. PREMISES, TERM AND USE

SECTION 1. PREMISES. Landlord hereby leases to Tenant, and Tenant, hereby
leases from Landlord, in consideration of the rents to be paid and the
covenants and agreements to be performed and observed by Tenant, the
following described space of approximately 100,000 square feet known as PHASE
II-A AND PHASE II-B, SOUTH BROAD STREET CENTER, CHATTANOOGA, TENNESSEE
hereinafter referred to as "The Premises", including the ancillary parking
area and the non-exclusive right to use the common driveway for ingress and
egress.

SECTION 2. TERM. The term of the lease shall be FIVE years commencing on the
First day of FEBRUARY 1996 and ending on the last day of JANUARY 2001.

SECTION 3. PERMITTED USE. The Premises shall be used for LIGHT MANUFACTURING,
WAREHOUSING AND DISTRIBUTION and for no other use without Landlord's prior
written consent.

SECTION 4. ZONING. Landlord warrants that the premises are zoned to permit
the uses setforth in Article 1, Section 3 and are in compliance with all
applicable laws, ordinances, regulations of the United States and the State,
County and City where the premises are located. The Premises are currently
zoned M-1.

ARTICLE 2. RENT

SECTION 1. MINIMUM RENT. During the term of this lease, Tenant covenants and
agrees to pay the Landlord a fixed minimum rent (hereinafter called the
"Minimum Rent"), in equal monthly installments on the first day of each and
every month in advance, payable to TAMMY DEVELOPMENT COMPANY - 4289 BONNY
OAKS DRIVE, SUITE 201, CHATTANOOGA, TN 37406:

(i) Commencing FEBRUARY 1, 1996 and Terminating JANUARY 31, 1998 a
minimum rent of TWO HUNDRED EIGHTY FIVE THOUSAND AND 00/100 DOLLARS
($285,000) per year payable in equal monthly installments of TWENTY
THREE THOUSAND SEVEN HUNDRED FIFTY AND 00/100 DOLLARS ($23,750.00);

(i) Commencing February 1, 1998 and Terminating January 31, 2001 a
minimum rent of Three Hundred Thousand and 00/100 DOLLARS
($300,000.00) per year payable in equal monthly installments of
TWENTY FIVE THOUSAND AND 00/100 DOLLARS ($25,000.00);

SECTION 2. TERMINATION NOTICE. At anytime after the end of the 48th month of
the base term, both parties shall be required to provide a twelve month
advance termination notice to the other party citing its intention to
terminate the lease agreement. This condition specifically imposes an
obligation upon both parties to either terminate the lease as of January 31,
2001 or the termination date of the lease will automatically be extended in
consecutive monthly increments and the lease will continue under the same
terms and conditions, except as to the rental, until otherwise modified or
terminated in writing. The rental for the carryover term, if applicable,
commencing February 1, 2001, will be calculated based on a rate of $3.15 per
square foot, per annum.

SECTION 3. PROMPT PAYMENT WITHOUT DEMAND. Time is of the essence of this
lease and Tenant shall pay the rent herein reserved at the time and place
specified without deduction, setoff, notice, or demand. Tenant expressly
waives any and all requirements for written notice for nonpayment of rent.

ARTICLE 3. TAXES AND INSURANCE

SECTION 1. REAL ESTATE TAXES AND INSURANCE PREMIUMS. The landlord shall pay
all real estate taxes and assessments ("real estate taxes") and insurance
premiums imposed upon the land and building, provided,however, that Tenant
shall reimburse Landlord for the increase in its proportionate share of any
increases in the amount of real estate taxes and insurance premiums paid or
payable by Landlord on the land and building for each calendar year during
the term of this lease, and extensions, if any, over the amount which
Landlord paid for such real estate taxes (which proportionate share is hereby
agreed to be $29,453.88) and insurance premiums (which proportionate share is
hereby agreed to be $4,114.69). For the purpose of this Article, it shall be
presumed that any insurance premiums or taxes paid or payable will be for the
calendar year in which it becomes due and irrespective of any policy year or
period. In the event the total amount of taxes and insurance results in a net
decrease below the base year amounts, no reduction in rent below the minimum
rent set out in Article 2 will be allowed, nor will such decreases below the
base year amounts offset future increases.

SECTION 2. PROPORTIONATE SHARE. Tenant's proportionate share of any increases
under Section 1 above shall be deemed to be 96.16 percent (%).

<PAGE>

SECTION 3. LIMITATIONS ON INSURANCE PREMIUMS PAYABLE BY TENANT. Landlord and
Tenant agree that the insurance coverage contemplated by this Article shall
include fire and extended coverage, in an amount not to exceed the building
replacement cost and in any amount sufficient to avoid co-insurance, public
liability insurance, business interuption/rental abatement insurance, and may
include other coverage commonly included in an All Risk Insurance Policy.

SECTION 4. CONTEST OF TAX ASSESSMENT. In the event of an increase in real
estate taxes hereunder, the Landlord may contest such increase through the
appropriate proceedings (however, nothing herein shall require Landlord to
contest any increases) and Tenant agrees to pay its proportionate share of
Landlord's cost in contesting such taxes. Tenant may elect to contest such
increase or participate with the Landlord to contest such increases through
the appropriate proceedings. Tenant must agree in writing to the
proportionate share of Landlord's cost of contesting such tax.

SECTION 5. PERSONAL PROPERTY TAXES. Tenant shall pay and be liable for all
taxes levied against personal property and trade fixtures placed by Tenant in
the premises and for any real estate taxes assessed as a result of Tenant's
improvements, alterations or installations.

SECTION 6. PAYMENT OF TAXES OR INSURANCE BY TENANT. The amount of taxes or
insurance premiums due from Tenant to Landlord hereunder, if any, shall be
treated as rent for all purposes of this lease and shall be payable by Tenant
to Landlord within 30 calender days after Landlord bills Tenant for such
increases. Increases, if any, for the year during which this lease commences
or terminates shall be prorated in accordance with the length of time Tenant
occupied the premises in said year.

SECTION 7. TAX ON RENTS. Should the United States of America, the State of
Tennessee, Hamilton County, the City of Chattanooga, or any other
governmental unit or agency, whether now existing or hereafter created, be
given the power to levy and collect tax from Landlord on the rentals payable
hereunder, other than general income taxes, inheritance or gift taxes, Tenant
agrees to reimburse Landlord in full for the amount of taxes so paid by
Landlord on the rentals payable under this lease. Any sums payable by Tenant
hereunder shall constitute additional rent and be included in Tenant's
monthly installment, in addition to the minimum rent, or in any payment of
additional rent.

SECTION 8. LIABILITY INSURANCE. Tenant, at Tenant's expense, shall procure
and maintain throughout the term of this lease public liability insurance
covering the premises, and the use and occupancy of same, including any
adjoining sidewalks, and parking areas, in a company or companies acceptable
to Landlord and licensed to do business in Tennessee under a policy
satisfactory in form to Landlord, naming Hudson Companies Incorporated, as
Landlord, as an additional insured, with limits of not less than $500,000.00
combined single limit. The policy or policies shall contain the provision
that they may not be canceled without first giving Landlord not less than
fifteen (15) days prior written notice. Duplicate policies or certificates of
all insurance shall be delivered to Landlord not less than (5) days prior to
each effective date.

SECTION 9. PERSONAL PROPERTY INSURANCE. It shall be Tenant's sole
responsibility to insure and keep insured, at Tenant's expense, all personal
property which is owned by the Tenant, or any other authorized occupant of
the leased premises, and which is placed or stored in the leased premises or
elsewhere in the building of which they are a part; and it is agreed that
Landlord shall have no responsibility to effect such insurance.

ARTICLE 4. USES PROHIBITED

The premises and all building and improvements thereon shall, during the term
of this lease, be used only and exclusively for the purposes set forth in
Article 1. Section 3, and no part of the premises or improvements thereon
shall be used in any manner whatsoever for any purposes in violation of the
laws, ordinances, regulations or orders of the United States, or of the
State, County and/or City where the premises are located, or of any duly
constituted subdivision, department or board thereof. Tenant shall not
knowingly use or occupy the premises or any part thereof, or suffer or permit
the same to be used or occupied for any business or purpose deemed extra
hazardous on account of fire or otherwise; and if by reason of the use and
occupancy of the premises, the policy covering the premises (Fire Insurance,
Extended Coverage or Liability) is to be canceled or the rate of said
insurance shall be increased, the Landlord shall have the option of
terminating this lease, or on demand, Tenant will pay to Landlord the amount
of such increase (but such increase in the rate of insurance shall not be
deemed a breach of this covenant by Tenant). Tenant covenants and agrees that
Tenant will not create or maintain, or permit others to create or maintain,
any nuisances, including without limiting the foregoing language, loud
noises, sound effects, offensive odors, smoke or dust in or about the leased
premises. Tenant shall comply in all respects with all applicable federal,
state and local laws, rules regulations and orders including without
limitation, those relating to pollution, reclamation or protection of the
environment, including laws relating to emissions, discharges, releases or
threatened releases of pollutants, contaminants, or hazardous or toxic
materials or waste into the air, water, or land, or otherwise relating to the
manufacture, processing distribution, use, treatment, storage disposal,
transport or handling of pollutants, contaminants, or hazardous or toxic
materials or wastes. Tenant shall indemnify, defend and hold Landlord
harmless from and against any loss, cost damage or expense, including without
limitation, attorney's fees and costs of site investigation and clean up,
incurred by or imposed upon landlord as a result of the breach by Tenant of
its obligations in this Article 4.

<PAGE>

ARTICLE 5. CONDITION AND CARE OF PREMISES

Tenant, at his own expense, shall keep the premises clean, neat, and free
from trash and rubbish, and shall not commit, or permit others to commit any
waste, damage, or injury to the leased premises or the building by Tenant,
invitees, or other persons whom Tenant permits to be in or about the leased
premises. Tenant shall use reasonable diligence to keep the sidewalks
adjoining the premises, if any, free from ice and snow and at all times broom
clean and free of trash, litter, or obstructions of any kind. Tenant agrees
to maintain a fully charged dry chemical fire extinguisher of adequate
capacity of use within the premises.

ARTICLE 6. MAINTENANCE, REPAIRS, AND ALTERATIONS

SECTION 1. OBLIGATIONS OF TENANT. Except for the repairs required of Landlord
pursuant to Sections 2 of this Article 6, Tenant shall repair and maintain
the Demised Premises, inside in good order, condition, and repair (including
any such replacement and restoration as is required for that purpose) without
limitation, interior painting, all plate glass, windows, doors, hardware,
plumbing fixtures, electric fixtures and equipment, light fixtures, bulbs &
ballasts, the heating, ventilating, and air conditioning systems, walls,
floors, floor coverings, ceilings and all machinery, equipment and facilities
forming apart of the Premises. Should Tenant fail to make any repairs or
restoration for which Tenant is responsible under this lease, Landlord may,
but will not be obligated to, make same at Tenant's expense, and the cost
thereof shall be considered additional rent due hereunder payable immediately.

SECTION 2. OBLIGATIONS OF LANDLORD. Except for any repairs necessitated by
the negligent act or omission of Tenant, its agents, servants, or invitees,
or by any unusual use of the Premises by Tenant, Landlord shall repair and
maintain in good order and condition and replace when necessary the
electrical wiring, plumbing pipes, sprinkler systems, roof and structural
portions of the building, including, but not limited to, bearing walls,
foundations, roof, and all outside appurtenances to the building.

SECTION 3. ALTERATIONS AND ADDITIONS. Tenant shall not make any alterations
or additions to the premises without Landlord's prior written consent.
Landlord shall not be liable for the cost of any alterations or additions,
all of which are hereinafter referred to in this paragraph as "alterations"
made by Tenant, and Tenant shall indemnify and save Landlord harmless on
account of claims for mechanic's materialmen's or other liens in connection
with any alterations made by Tenant, and any such liens shall exist only
against Tenant's leasehold interest, and not against Landlord's interest,
whether in fee or otherwise. Upon Landlord's request, Tenant shall provide
Landlord a waiver of lien from any contractor performing work on the
Premises. All alterations made by Tenant shall be in full compliance with all
applicable building laws, ordinances and regulations. All alterations that
may be made by either of the parties shall inure to Landlord's benefit and
shall become a part of the premises and shall belong to Landlord absolutely
as soon as made.

ARTICLE 7. INDEMNIFICATION

Landlord shall not be liable for any loss, damage or injury to person or
property occurring, except due to the gross negligence or intentional conduct
of the landlord or its agents, in or about the premises, and Tenant shall
indemnify and hold Landlord harmless from any and all such injuries and
damages, and shall defend any claims or legal actions arising, therefrom, and
pay all judgements resulting therefrom and shall reimburse Landlord for all
costs and expenses, including attorney's fees, paid or incurred by landlord
as a result thereof. Without in any way limiting the general language of the
sentence immediately proceeding, Landlord shall not be liable for loss of or
damage to any property at any time located in or about the premises, whether
or not Tenant is the owner hereof, including, but not limited to, any loss,
damage or injury resulting from steam, gas or electricity, or from water,
rain, snow, ice or other substance which may leak into, or issue or flow from
any part of the premises or from the pipes or plumbing work of the premises,
or from or into any other place or quarter. Landlord shall be under no
liability to Tenant on account of any discontinuance of heat, electricity,
sewer, water, air conditioning, sprinkler, gas and/or other utility,
convenience, service or facility, however such discontinuance may be caused,
and shall be under no obligation to see that such discontinuance is
rectified, and no such discontinuance shall constitute conservative eviction
or any ground for termination of this lease by Tenant. Landlord shall
indemnify Tenant and hold Tenant harmless from any and all losses, damages
and injuries resulting from the gross negligence of the Landlord or its
agents, and shall defend any claims or legal actions arising therefrom and
shall reimburse Tenant for all costs and expenses, including attorney fees,
paid or incurred by Tenant as a result thereof.

ARTICLE 8. DAMAGE OR DESTRUCTION BY FIRE OR OTHER CASUALTY

If at any time the premises becomes totally untenantable by reason of damage
or loss by fire or other casualty and such fire or other casualty shall not
have been caused by the negligence or wrongful act or omission of Tenant,
Tenant's servant, agents, licensees or invitees, the rent shall abate until
the premises have been restored to tenantable condition, but nothing herein
is to be constructed as requiring Landlord to rebuild or restore the
premises. In the event of a loss from fire or other casualty, Landlord shall
have the election not to rebuild or recondition the premises which such
election may be exercised by written notice thereof to Tenant, given within
thirty (30) days from the date of said loss. For purposes of this Article 8,
"totally untenantable" shall mean that the premises had been damaged to the
extent that the interior of the premises and the contents therein are exposed
to the elements.

<PAGE>

If Landlord exercises such election, this lease shall cease and terminate,
effective on the date of such loss, and Tenant shall pay the accrued rent up
to the date of such loss, or Landlord, if the rent has been paid beyond such
date, will refund to Tenant the proportionate part of any such rent prepaid,
and thereupon this lease shall become null and void, without further
obligations on the part of either party hereto, even though the building may
at a later date be rebuilt, restored or reconditioned.

ARTICLE 9. SIGNS

Except for the existing signs, no signs shall be constructed or painted on
the windows, outside walls, roof or exterior of the premises without the
prior written consent of Landlord.

ARTICLE 10. LANDLORD'S RIGHT TO GO ON PREMISES

Tenant shall permit Landlord and/or Landlord's agents or employees at all
reasonable hours to enter the Premises and examine them or to show them to
persons wishing to rent or purchase the same, or to make repairs,
alternations, or other work thereto, taking any space needed therefor, and no
compensation shall be asked or claim made by Tenant by reason of any
inconvenience or annoyance arising from anything that may be done in
repairing, altering, working on or protecting the Premises or Building of
which same may be a part, however, the necessity may arise, but this
paragraph shall not be construed as imposing any duty on Landlord to make any
repairs, alterations or additions. Tenant shall permit Landlord and/or
Landlord's agents, but only during the four months preceding the termination
of this Lease, to place upon the windows, walls or doors of the premises "FOR
SALE" and/or "FOR RENT" signs, and allow the same to remain there without
molestation and without any claim being made by Tenant for compensation on
account thereof.

ARTICLE 11. UTILITIES AND SERVICES

Tenant shall pay for all gas, electricity, heat, water, sewer charges, and
all other utilities used on or about the Premises, and shall pay any charges
of any company furnishing water or pressure for any sprinkler system, fire
hydrants or standpipe serving the premises. Tenant shall pay its
proportionate share of all special assessments imposed by any governmental
entity on the Premises including, but not limited to, the Storm Water Fee
instituted by the City to service the property. Tenant shall maintain heat in
the premises as necessary to prevent the freezing of plumbing and sprinkler
systems. Tenant shall also pay all charges for cleaning services or private
garbage service used by Tenant.

ARTICLE 12. NO ASSIGNMENT OR SUBLETTING

Neither Tenant nor any court officer thereof, nor any receiver or trustee in
bankruptcy shall assign or transfer this Lease or any part thereof nor shall
the premises be sublet in whole or in part, without Landlord's prior written
consent: such consent shall not be unreasonably withheld provided, however,
that Tenant, while not in default hereunder, shall have the right to sub-let
portions or sections of the premises for departments handling some of the
items ordinarily handled in the business for which the premises may be used
as provided in Article I hereinabove. Tenant shall always remain liable for
any default of any assignee, transferee or sub-tenant.

ARTICLE 13. REMOVAL OF FIXTURES

Provided Tenant is not in default hereunder, Tenant shall have the right on
or before the termination of this Lease, to remove any trade fixtures that
were purchased and provided by Tenant, and which are susceptible of being
removed without damage to the Building or the Premises, provided Tenant
exercises such right before this lease is terminated, and provided Tenant
furnishes Landlord in advance adequate security satisfactory to Landlord that
the Building and Premises will be restored to their original condition at
Tenant's expense immediately after such removal. This right of removal shall
not include any right to remove any heating, air conditioning, plumbing,
wiring, linoleum or carpeting, and shall not, as a matter of course, include
any fixtures that were furnished or paid for by Landlord. Any such items
remaining on the Premises or in the Building after such date of termination
shall, at Landlord's option, be deemed the property of Landlord for such
disposition as Landlord sees fit or Landlord may require Tenant to remove all
of Tenant's property.

ARTICLE 14. WAIVER PROVISION

The failure of Landlord to insist on strict performance of any of the terms,
conditions and covenants herein shall not be deemed to be a waiver of any
rights of remedies that Landlord may have and shall not be deemed a waiver of
any subsequent breach in the terms, conditions and covenants herein contained
except as may expressly waived.

ARTICLE 15. DEFAULT PROVISIONS

If: (i) Tenant shall default in payment of the rent due hereunder and such
default shall continue for a period of Ten (10) days after the due date of
the rent, Landlord will give the Tenant written notice of default and five
(5) business days following the notice to cure the default: or (ii) the
leased premises become deserted or stand vacant or are used for purpose other
than that stated in Article I herein: or (iii) Tenant be in under any
other covenant, agreement, obligation or condition of this lease and fails to
cure such default within thirty (30) days after written notice thereof from
Landlord (or if such default shall be of such a nature that it cannot be
cured completely within such thirty (30) day period. Tenant shall not have
property commenced with such thirty (30) day period and shall not thereafter
proceed with reasonable diligence and good faith to remedy such default):

<PAGE>

(iv) Tenant shall file a voluntary petition in bankruptcy, reorganization or
receivership, become insolvent, be adjudicated bankrupt, or make an
assignment for the benefit of creditors, or if any involuntary petition in
bankruptcy, reorganization or receivership is filed against Tenant and not
dismissed within sixty (60) days, any such event shall, at Landlord's option,
constitute a default of Tenant hereunder and Landlord, at Landlord's option
and without further notice to Tenant, which is hereby expressly waived, may
at any time declare this lease terminated and this lease shall expire as
fully and completely as if that day were the date herein originally fixed for
the expiration of the term, and Tenant shall quit and surrender the premises
to Landlord, but Tenant shall nevertheless continue to remain liable
hereunder. Landlord may at any time thereafter re-enter the leased premises
and remove all persons and property therefrom by any suitable action or
proceeding at law or in equity or by force or otherwise, without being liable
for any prosecution thereof or any damages arising therefrom and repossess and
enjoy the leased premises. Such re-entry shall not relieve Tenant of the
obligation to make the rental payments required by this Lease at the time and
in the manner provided herein. Upon such re-entry, Landlord may, but shall
not be required to, repair, alter, remodel and/or change the character of the
leased premises as Landlord may see fit and/or at any time relet the premises
in whole or in part for any period or time that the Landlord elects, whether
longer or shorter than the unexpired portion of the term of this lease, as
agent of Tenant, or otherwise, in the name of Landlord or of Tenant, as
Landlord may see fit and Landlord may receive the rents therefor, applying
the same first to the payment of such reasonable expenses as Landlord may
have incurred in entering, dispossessing, reletting, repairing or altering
the premises, and then to the fulfillment of the covenants of Tenant herein,
including but not limited to the rental payments required hereunder,
retaining any such balances until the date the term of this lease would
otherwise have expired as security for the payment of all obligations of
Tenant which may arise and be unpaid during such period. In attempting to
relet the leased premises, Landlord shall be the sole judge as to whether or
not proposed tenant is suitable and acceptable. Landlord shall not, by
receiving partial payments of rents in arrears, be deemed to have waived any
rights herein for nonpayment of rent of for any other default on the part of
Tenant.

ARTICLE 16. NOTICE REQUIREMENTS

All notices required or permitted by the terms of this lease shall be given
by United States registered or certified mail, addressed to Tenant c/o
Chattem, Attn: Derrill Pitts 1715 West 38th Street, Chattanooga, TN 37409 and
addressed to Tammy Development Company 4289 Bonny Oaks Drive, Suite 201,
Chattanooga, TN 37406. The date when such notice shall be deemed to have been
given shall be the date when it is deposited in the United States Mails,
postage prepaid, in accordance with the provisions of this paragraph. Any
address or addressee herein specified may be changed from time to time by
either party by written notice given to the other party as above provided,
such change or address or addressee to become effective at the expiration of
five (5) calendar days from the date of the notice of change.

ARTICLE 17. SURRENDER

Tenant, and Tenant's assignees and/or sub-tenants, if any, shall surrender
the premises to Landlord at the expiration of the term hereof, or any
extension hereof, or upon termination of this lease by virtue of Tenants'
default, broom clean and in good condition, damage by fire or other casualty
not caused by the negligence of Tenant, Tenant's employees, agents, officers
and invitees, excepted. If Tenant shall default in so surrendering the
premises, then Tenant's occupancy subsequent to such expiration shall be
deemed to be that of a tenant at will, and in no event from month to month,
or from year to year, subject to all of the terms, covenants and conditions
of this lease applicable thereto, and no extension or renewal of this lease
shall be deemed to have occurred by such holding over.

ARTICLE 18. CONDEMNATION

In the event that the term of this lease or any extension or renewal thereof
either the entire premises or the building of which the premises are a part,
or such substantial part of either as to render the remaining premises or
building untenantable, are acquired by governmental or quasi-governmental
authority by exercise of the power or eminent domain, this lease shall be
adjusted at the time possession must be surrendered to such authority for all
purposes, and prepaid or unpaid rent shall be adjusted between the parties as
of such date. In the event that only such portion of the premises or the
building is acquired by such authority by the exercise of such power as will
leave the remaining premises in a condition suitable for use by Tenant in its
business, the monthly rental payments from the date of such acquisition to
the end of the original or any extended term hereof shall be reduced in
proportion to the resulting loss of use of said premises by Tenant, but such
reduction shall not exceed Landlord's award attributable to the premises. In
the event such partial acquisition and reduction in rent, Landlord agrees to
make promptly, at Landlord's expense, all necessary alterations and repairs
which shall be required because of such partial acquisition by eminent
domain, to restore the premises to a safe and tenable condition, but only to
the extent of proceeds of condemnation make available to Landlord. Tenant
shall have no claim against Landlord or the condemning authority for any
acquisition of the leasehold interest, provided that nothing herein contained
shall in any way prejudice or interfere with any claim which Tenant may have
against the authority exercising the power of eminent domain for damages or
otherwise for destruction or interference with the business of Tenant in the
premises so long as such claim does not diminish Landlord's claim. For
purposes of this section, acquisition of all or a part of the premises by
governmental or quasi-governmental authority by means of voluntary
negotiations and contract shall be deemed to be acquisition by exercise of
the power of eminent domain.

ARTICLE 19. WAIVER OF SUBROGATION

Each of the parties hereto waives any and all rights to recovery against the
other or against the officers, employees, agents, representatives, of such
other party for loss of or damage to such waiving party or its property or the
property of others under its control, arising from any cause insured against
under the standard form of fire insurance policy

<PAGE>

ARTICLE 19. WAIVER OF SUBROGATION

Each of the parties hereto waives any and all rights of recovery against the
other or against the officers, employees, agents, representatives of such
other party for loss of or damage to such waiving party or its property or
the property of others under its control, arising from any cause insured
against under the standard form of fire insurance policy with all permissible
extension endorsements covering additional perils or under any other policy
of insurance carried by such waiving party in lieu thereof, provided said
waiver does not adversely affect such insurance.

ARTICLE 20. LEASE SUBORDINATION

Tenant agrees that its interest in the leased premises shall be and remain
subject and subordinate to the lien of any existing mortgage, deed of trust,
security instrument, or other lien applicable to the leased premises, the
property of which the leased premises are a part and/or its contents. Upon
request of Landlord, Tenant will enter into a written agreement subordinating
the lease to the lien of any future mortgage, deed of trust, security
instrument, or other lien applicable to the leased premises and any
extensions or renewals thereof and to all advances made or hereafter to be
made on the security thereof, irrespective of the date of execution or
recordation, provided that mortgagee consents that Tenant's possession of the
premises and Tenant's rights and privileges under the lease, or any renewals,
modifications, or extensions thereof shall not be diminished or interfered
with by that mortgagee and Tenant's occupancy of the premises shall not be
disturbed by that mortgagee during the term of the lease or any renewals,
modifications, or extensions thereof for so long as Tenant is not in default
(beyond any period given Tenant to cure such default) in the payment of rent
or in the performance of any of the terms, covenants, or conditions of the
lease on Tenant's part to be performed.

ARTICLE 21. ATTORNMENT

If, by reason of any default by Landlord as mortgagor or grantor under any
present and/or future mortgage, deed of trust security instrument, or other
lien, Landlord's equitable title or fee simple title is terminated through
foreclosure or trustee sale or otherwise at the instance of the holder of
such mortgage, deed of trust, security instrument, or other lien, Tenant
hereby agrees to attorn to the purchaser at the foreclosure or trustee sale
and will recognize such purchaser as Landlord under the lease.

ARTICLE 22. QUIET ENJOYMENT

Provided Tenant shall pay all rents as herein agreed and keep and perform all
of the terms, covenants and conditions hereof, Tenant shall peaceably possess
and quietly enjoy the demised premises without disturbance or interruption
subject only to the terms and conditions of this Lease.

ARTICLE 23. RIGHTS OF SUCCESSORS AND ASSIGNS

The terms, covenants and conditions in this Lease shall apply to and inure to
the benefit of and be binding upon the parties hereto and upon their
respective executors, heirs, legal representatives, successors and assigns,
as the case may be.

ARTICLE 24. LANDLORD REPRESENTATIONS

The Landlord represents and warrants that:

(i) Landlord is the fee owner of the demised premises and has all
right, power and authority to execute, deliver and perform this lease;

(ii) the execution, delivery and performance of this Lease by
Landlord do not violate any provision of applicable law or any agreement,
instrument or document to which Landlord is a party or by which its assets
may be bound or affected.

ARTICLE 25. RECORDING

Owner and Tenant hereby agree to execute a memorandum of lease in form
satisfactory to Tenant. Tenant may, at Tenant's sole cost and expense,
promptly record such memorandum of lease in the registrar's office of the
County in which the Leased Premises are located.

ARTICLE 26. ESTOPPEL CERTIFICATE

Tenant agrees, with seven (7) days after written request by Landlord, to
execute, acknowledge and deliver to and in favor of any proposed mortgagee or
purchaser of the Premises, an estoppel certificate, in the form customarily
used by such proposed mortgagee or purchaser, stating, among other things (i)
whether this Lease is in full force and effect, (ii) whether this Lease has
been modified or amended and, if so, identifying and describing any such
modification or amendment, (iii) the date to which rent and other charge has
been paid, and (iv) whether the party furnishing such certificate knows of
any default on the part of the Landlord or has any claim against such
Landlord and, if so, specifying the nature of such default or claim.

ARTICLE 27. TERMINOLOGY

Whenever Landlord and Tenant are herein referred to, such reference shall be
construed as applying to their respective successors in interest, and in the
singular or plural number, and in the masculine, feminine or neuter gender,
whichever is properly applicable.

<PAGE>

ARTICLE 28. CAPTIONS

The captions of this lease are for convenience only and are not a part of
this lease and do not in any way limit or amplify the terms and provisions of
this lease.

ARTICLE 29. ENTIRE AGREEMENT

This lease contains all of the agreements between the parties hereto and may
not be modified in any manner unless by agreement in writing signed by all
parties hereto or their successors in interest.

DATE 8-1-95 DATE 7/21/95
------------------------------- ---------------------------
LANDLORD: Tammy Development Company TENANT: Chattem, Inc.

By:-------------------------------- By:----------------------------

WITNESS: WITNESS:
- ----------------------------------- -------------------------------

<PAGE>

EXHIBIT 10.2

COMMERCIAL LEASE

WITNESSETH:

ARTICLE 1. PREMISES, TERM AND USE

SECTION 1. PREMISES. Landlord hereby leases to Tenant, and Tenant, hereby
leases from Landlord, in consideration of the rents to be paid and the
covenants and agreements to be performed and observed by Tenant, the
following described space of approximately 9,600 square feet known as PHASE I,
SOUTH BROAD STREET CENTER, CHATTANOOGA, TENNESSEE hereinafter referred to as
"The Premises", including the ancillary parking area and the non-exclusive
right to use the common driveway for ingress and egress.

SECTION 2. TERM. The term of the lease shall be FIVE years commencing on the
First day of FEBRUARY 1996 and ending on the last day of JANUARY 2001.

SECTION 3. PERMITTED USE. The Premises shall be used for LIGHT MANUFACTURING,
WAREHOUSING AND DISTRIBUTION and for no other use without Landlord's prior
written consent.

ARTICLE 2. RENT

(i) Commencing FEBRUARY 1, 1996 and Terminating JANUARY 31, 1998 a minimum
rent of TWENTY-SEVEN THOUSAND THREE HUNDRED SIXTY AND 00/100 DOLLARS
($27,360) per year payable in equal monthly installments of TWO
THOUSAND TWO HUNDRED EIGHTY AND 00/100 DOLLARS ($2,280.00);

(i) Commencing FEBRUARY 1, 1998 and Terminating JANUARY 31, 2001 a minimum
rent of TWENTY EIGHT THOUSAND EIGHT HUNDRED AND 00/100 DOLLARS
($28,800.00) per year payable in equal monthly installments of
TWO THOUSAND FOUR HUNDRED AND 00/100 DOLLARS ($2,400.00);

ARTICLE 3. TAXES AND INSURANCE

SECTION 1. REAL ESTATE TAXES AND INSURANCE PREMIUMS. The landlord shall pay
all real estate taxes and assessments ("real estate taxes") and insurance
premiums imposed upon the land and building, provided,however, that Tenant
shall reimburse Landlord for the increase in its proportionate share of any
increases in the amount of real estate taxes and insurance premiums paid or
payable by Landlord on the land and building for each calendar year during
the term of this lease, and extensions, if any, over the amount which
Landlord paid for such real estate taxes (which proportionate share is hereby
agreed to be $3,345.37) and insurance premiums (which proportionate share is
hereby agreed to be $490.19). For the purpose of this Article, it shall be
presumed that any insurance premiums or taxes paid or payable will be for the
calendar year in which it becomes due and irrespective of any policy year or
period. In the event the total amount of taxes and insurance results in a net
decrease below the base year amounts, no reduction in rent below the minimum
rent set out in Article 2 will be allowed, nor will such decreases below the
base year amounts offset future increases.

SECTION 2. PROPORTIONATE SHARE. Tenant's proportionate share of any increases
under Section 1 above shall be deemed to be 19.36 percent (%).

<PAGE>
SECTION 3. LIMITATIONS ON INSURANCE PREMIUMS PAYABLE BY TENANT. Landlord and
Tenant agree that the insurance coverage contemplated by this Article shall
include fire and extended coverage: in an amount not to exceed the building
replacement cost and in any amount sufficient to avoid co-insurance, public
liability insurance, business interruption/rental abatement insurance, and
may include other coverage commonly included in an All Risk Insurance Policy.

SECTION 4. CONTEST OF TAX ASSESSMENT. In the event of an increase in real
estate taxes hereunder, the Landlord may contest such increase through the
appropriate proceedings (however, nothing herein shall require Landlord to
contest any increases) and Tenant agrees to pay its proportionate share of
Landlord's cost in contesting such taxes if these costs were additional taxes
in the year paid. Landlord must notify Tenant of proposed increases in taxes.
Tenant may elect to contest such increase or participate with the Landlord to
contest such increases through the appropriate proceedings. Tenant must agree
in writing to the proportionate share of Landlord's cost of contesting such
tax.

SECTION 6. PAYMENT OF TAXES OR INSURANCE BY TENANT. The amount of taxes or
insurance premiums due from Tenant to Landlord hereunder, if any, shall be
treated as rent for all purposes of this lease and shall be payable by Tenant
to Landlord within 30 calendar days after Landlord bills Tenant for such
increases. Increases, if any, for the year during which this lease commences
or terminates shall be prorated in accordance with the length of time Tenant
occupied the premises in said year.

SECTION 7. TAX ON RENTS. Should the United States of America, the State of
Tennessee, Hamilton County, the City of Chattanooga, or any other
governmental unit or agency, whether now existing or hereafter created, be
given the power to levy and collect tax from Landlord on the rental payable
hereunder, other than general income taxes, inheritance or gift taxes. Tenant
agrees to reimburse Landlord in full for the amount of taxes so paid by
Landlord on the rentals payable under this lease. Any sums payable by Tenant
hereunder shall constitute additional rent and be included in Tenant's
monthly installment, in addition to the minimum rent, or in any payment of
additional rent.

SECTION 9. PERSONAL PROPERTY INSURANCE. It shall be Tenant's sole
responsibility to insure and keep insured, at Tenant's expense, all personal
property which is owned by the Tenant, or any other authorized occupant of
the leased premises, and which is placed or stored in the leased premises or
elsewhere in the building of which they are a part: and it is agreed that
Landlord shall have no responsibility to effect such insurance.

ARTICLE 4. USES PROHIBITED

The premises and all buildings and improvements thereon shall, during the
term of this lease, be used only and exclusively for the purposes set fort in
Article 1, Section 3, and no part of the premises or improvements thereon
shall be used in any manner whatsoever for any purposes in violation of the
laws, ordinances, regulations or orders of the United States, or of the
State, County and/or City where the premises are located, or of any duly
constituted subdivision, department or board thereof. Tenant shall not
knowingly use or occupy the premises or any part thereof, or suffer or permit
the same to be used or occupied for any business or purpose deemed extra
hazardous on account of fire or otherwise: and if by reason of the use and
occupancy of the premises, the policy covering the premises (Fire Insurance,
Extended Coverage or Liability) is to be canceled or the rate of said
insurance shall be increased, the Landlord shall have the option of
terminating this lease, or on demand, Tenant will pay to Landlord the amount
of such increase (but such increase in the rate of insurance shall not be
deemed a breach of this covenant by Tenant). Tenant covenants and agrees that
Tenant will not create or maintain, or permit others to create or maintain,
any nuisances, including without limiting the foregoing language, loud
noises, sound effects, offensive odors, smoke or dust in or about the leased
premises, Tenant shall comply in all respects with all applicable federal,
state and local laws, rules regulations and orders including without
limitation, those relating to pollution, reclamation or protection of the
environment, including laws relating to emissions, discharges, releases or
threatened releases of pollutants, contaminants, or hazardous or toxic
materials or waste into the air, water, or land, or otherwise relating to the
manufacture, processing distribution, use, treatment, storage disposal,
transport or handling of pollutants, contaminants or hazardous or toxic
materials or wastes. Tenant shall indemnify, defend and hold Landlord
harmless from and against any loss, cost damage or expense, including without
limitation, attorney's fees and costs of site investigation and clean up,
incurred by or imposed upon landlord as a result of the breach by Tenant of
its obligations in this Article 4.

<PAGE>

ARTICLE 5. CONDITION AND CARE OF PREMISES

Tenant acknowledges that he has examined the leased premises and accepts them
as being in good condition and state of repair and that the capacity of the
mechanical equipment (electrical, plumbing, heating and air conditioning), if
any, is of adequate capacity for Tenant's use, and Landlord does not warrant
their condition in any respect. Tenant, at his own expense, shall keep the
premises clean, neat, and free from trash and rubbish, and shall not commit,
or permit others to commit any waste, damage, or injury to the leased premises
or the building by Tenant, invitees, or other persons whom Tenant permits to
be in or about the leased premises. Tenant shall use reasonable diligence to
keep the sidewalks adjoining the premises, if any, free from ice and snow and
at all times broom clean and free of trash, litter, or obstructions of any kind.
Tenant agrees to maintain a fully charged dry chemical fire extinguisher of
adequate capacity of use within the premises.

ARTICLE 6. MAINTENANCE, REPAIRS, AND ALTERATIONS

ARTICLE 7. INDEMNIFICATION

ARTICLE 8. DAMAGE OR DESTRUCTION BY FIRE OR OTHER CASUALTY

<PAGE>

ARTICLE 9. SIGNS

Except for the existing signs, no signs shall be constructed or painted on
the windows, outside walls, roof or exterior of the premises without the
prior written consent of Landlord.

ARTICLE 10. LANDLORD'S RIGHT TO GO ON PREMISES

ARTICLE 11. UTILITIES AND SERVICES

ARTICLE 12. NO ASSIGNMENT OR SUBLETTING

ARTICLE 13. REMOVAL OF FIXTURES

ARTICLE 14. WAIVER PROVISION

ARTICLE 15. DEFAULT PROVISIONS

<PAGE>

such thrity (30) day period, Tenant shall not have properly commenced with
such thrity (30) day period and shall not thereafter proceed with reasonable
diligence and good faith to remedy such default); (iv) Tenant shall file a
voluntary petition in bankruptcy, reorganization or receivership, become
insolvent, be adjudicated bankrupt, or make an assignment for the benefit
of creditors, or if any involuntary petition in bankruptcy, reorganization or
receivership is filed against Tenant and not dismissed within sixty (60) days,
any such event shall, at Landlord's option, constitute a default of Tenant
hereunder and Landlord, at Landlord's option and without further notice to
Tenant, which is hereby expressly waived, may at any time declare this lease
terminated and this lease shall expire as fully and completely as if that day
were the date herein originally fixed for the expiration of the term, and
Tenant shall quit and surrender the premises to Landlord, but Tenant shall
nevertheless continue to remain liable hereunder. Landlord may at any time
thereafter re-enter the leased premises and remove all persons and property
therefrom by any suitable action or proceeding at law or in equity or by force
or otherwise, without being liable for any prosecution thereof or any damages
arising therefrom and repossess and enjoy the leased premises. Such re-entry
shall not relieve Tenant of the obligation to make the rental payments required
by this Lease at the time and in the manner provided herein. Upon such re-entry,
Landlord may, but shall not be required to, repair, alter, remodel and/or change
the character of the leased premises as Landlord may see fit and/or at any time
relet the premises in whole or in part for any period or time that the Landlord
elects, whether longer or shorter than the unexpired portion of the term of
this lease, as agent of Tenant, or otherwise, in the name of Landlord or of
Tenant, as Landlord may see fit and Landlord may receive the rents therefor,
applying the same first to the payment of such reasonable expenses as Landlord
may have incurred in entering, dispossessing, reletting, repairing or altering
the premises, and then to the fulfillment of the covenants of Tenant herein,
including but not limited to the rental payments required hereunder, retaining
any such balances until the date the term of this lease would otherwise have
expired as security for the payment of all obligations of Tenant which may
arise and be unpaid during such period. In attempting to relet the leased
premises, Landlord shall be the sole judge as to whether or not proposed
tenant is suitable and acceptable. Landlord shall not, by receiving partial
payments of rents in arrears, be deemed to have waived any rights herein for
nonpayment of rent of for any other default on the part of Tenant.

ARTICLE 16. NOTICE REQUIREMENTS

ARTICLE 17. SURRENDER

Tenant, and Tenant's assignees and/or sub-tenants, if any, shall surrender
the premises to Landlord at the expiration of the term hereof, or any
extension hereof, or upon termination of this lease by virtue of Tenant's
default, broom clean and in good condition, damage by fire or other casualty
not caused by the negligence of Tenant, Tenant's employees, agents, officers
and invitees, excepted. If Tenant shall default in so surrendering the
premises, then Tenant's occupancy subsequent to such expiration shall be
deemed to be that of a tenant at will, and in no event from month to month,
or from year to year, subject to all of the terms, covenants and conditions
of this lease applicable thereto, and no extension or renewal of this lease
shall be deemed to have occurred by such holding over.

ARTICLE 18. CONDEMNATION

In the event that the term of this lease or any extension or renewal thereof
either the entire premises or the building of which the premises are a part,
or such substantial part of either as to render the remaining premises or
building untenantable, are acquired by governmental or quasi-governmental
authority by exercise of the power or eminent domain, this lease shall be
adjusted at the time possession must be surrendered to such authority for all
purposes, and prepaid or unpaid rent shall be adjusted between the parties as
of such date. In the event that only such portion of the premises or the
building is acquired by such authority by the exercise of such power as will
leave the remaining premises in a condition suitable for use by Tenant in its
business, the monthly rental payments from the date of such acquisition to
the end of the original or any extended term hereof shall be reduced in
proportion to the resulting loss of use of said premises by Tenant, but such
reduction shall not exceed Landlord's award attributable to the premises. In
the event such partial acquisition and reduction in rent, Landlord agrees to
make promptly, at Landlord's expense, all necessary alterations and repairs
which shall be required because of such partial acquisition by eminent
domain, to restore the premises to a safe and tenable condition, but only to
the extent of proceeds of condemnation made available to Landlord. Tenant
shall have no claim against Landlord or the condemning authority for any
acquisition of the leasehold interest, provided that nothing herein contained
shall in any way prejudice or interfere with any claim which Tenant may have
against the authority exercising the power of eminent domain for damages or
otherwise for destruction or interference with the business of Tenant in the
premises so long as such claim does not diminish Landlord's claim. For
purposes of this section, acquisition of all or a part of the premises by
governmental or quasi-governmental authority by means of voluntary
negotiations and contract shall be deemed to be acquisition by exercise of
the power of eminent domain.

<PAGE>

ARTICLE 19. WAIVER OF SUBROGATION

ARTICLE 20. LEASE SUBORDINATION

ARTICLE 21. ATTORNMENT

ARTICLE 22. QUIET ENJOYMENT

ARTICLE 23. RIGHTS OF SUCCESSORS AND ASSIGNS

ARTICLE 24. LANDLORD REPRESENTATIONS

The Landlord represents and warrants that:

(i) Landlord is the fee owner of the demised premises and has all
right, power and authority to execute, deliver and perform this lease;

ARTICLE 25. RECORDING

ARTICLE 26. ESTOPPEL CERTIFICATE

ARTICLE 27. TERMINOLOGY

<PAGE>

ARTICLE 27. TERMINOLOGY

Whenever Landlord and Tenant are herein referred to, such reference shall be
contrued as applying to their respective successors, and in the singular or
plural number, and in the masculine, feminine or neuter gender, whichever is
properly applicable.

ARTICLE 28. CAPTIONS

The captions of this lease are for convenience only and are not a part of
this lease and do not in any way limit or amplify the terms and provisions of
this lease.

ARTICLE 29. ENTIRE AGREEMENT

This lease contains all of the agreements between the parties hereto and may
not be modified in any manner unless by agreement in writing signed by all
parties hereto or their successors in interest.

DATE 8-1-95 DATE 7/21/95
------------------------------- ---------------------------
LANDLORD: Tammy Development Company TENANT: Chattem, Inc.

By:-------------------------------- By:----------------------------

WITNESS: WITNESS:
- ----------------------------------- -------------------------------

<PAGE>

EXHIBIT 10.3

NON-COMPETITION AND SEVERANCE AGREEMENT

This Agreement is made and entered into as of this 31st day of May,
1995 by and between Chattem, Inc., a Tennessee corporation (the "Company")
and B. DERRILL PITTS (the "Executive").

WITNESSETH:
----------

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

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 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 two (2) 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

<PAGE>

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.

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. 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

- 2 -

<PAGE>

(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

- 3 -

<PAGE>

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 (200%)
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. In 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.

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 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 determine present value
under Section 280(G) of the Internal Revenue Code of 1986 as amended.

- 4 -

<PAGE>

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 arbitrations shall be
conducted in accordance with the rules of the American Arbitration
Association. Judgment 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 said rights (including the enforcement of any arbitration
award in court), regardless of

- 5 -

<PAGE>

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. NO-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 canceled 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.

- 6 -

<PAGE>

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

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.

___________________________
B. DERRILL PITTS

ATTEST: CHATTEM, INC.

___________________________ By ________________________
Secretary Robert E. Bosworth
Executive Vice President
(SEAL)

<PAGE>

EXHIBIT 11

CHATTEM, INC. AND SUBSIDIARIES
STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS
FOR THE YEARS ENDED NOVEMBER 30, 1995, 1994 AND 1993
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

1995 1994 1993
------------------------------
<S> <C> <C> <C>
NET INCOME (LOSS):
Continuing operations ........................ $ 2,325 $ 2,110 $(1,100)
Discontinued operations ...................... 10,008 1,500 2,379
Extraordinary loss on early extinguishment
of debt, net ............................... (367) (1,556) (480)
Cumulative effect of accounting change,
net ........................................ -- -- 569
-------- -------- --------
Net income .............................. $11,966 $ 2,054 $ 1,368
======== ======== ========

WEIGHTED AVERAGE NUMBER OF COMMON AND
COMMON EQUIVALENT SHARES OUTSTANDING:
Weighted number of common shares
outstanding .............................. 7,292 7,292 6,303
Shares issued upon assumed exercise
of outstanding stock options ............. -- -- 38
-------- -------- --------
Weighted average number of common and
common equivalent shares outstanding ..... 7,292 7,292 6,341
======== ======== ========

NET INCOME (LOSS) PER COMMON SHARE:
Continuing operations ...................... $ .32 $ .29 $ (.17)
Discontinued operations .................... 1.37 .21 .38
Extraordinary loss on early extinguishment
of debt, net ............................. (.05) (.21) (.08)
Cumulative effect of accounting change,
net ...................................... -- -- .09
-------- -------- --------
Net income per common share........... $ 1.64 $ .29 $ .22
======== ======== ========
</TABLE>

<PAGE>

CONTENTS

Financial Highlights .................................................. 1

President's Letter .................................................... 2

Product and Market Summary ............................................ 5

Management's Discussion and Analysis .................................. 9

Selected Financial Data ............................................... 15

Consolidated Balance Sheets ........................................... 16

Consolidated Statements of Income ..................................... 18

Consolidated Statements of Shareholders' Equity (Deficit) ............. 19

Consolidated Statements of Cash Flows ................................. 20

Notes to Consolidated Financial Statements ............................ 21

Report of Independent Public Accountants .............................. 33

<PAGE>

CHATTEM, INC.
FINANCIAL HIGHLIGHTS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

1995 1994 1993
<S> <C> <C> <C>
EARNINGS PER SHARE FROM
CONTINUING OPERATIONS $ 0.32 $ 0.29 $ (0.17)

COMMON AND COMMON
EQUIVALENT SHARES
OUTSTANDING 7,292 7,292 6,341

DIVIDENDS PER SHARE $ -- $ -- $ 20.20

NET SALES
($ Millions)

95 100.6

94 94.4

93 89.9

92 90.2

91 84.1

INCOME FROM OPERATIONS
Before Nonrecurring and Unusual Charges
($ Millions)

95 14.8

94 13.1

93 7.3

92 8.2

91 5.2

</TABLE>

<PAGE>

I am pleased to report that 1995 was another very successful year highlighted
by record operating income before nonrecurring and unusual charges of $14.8
million and the strategic divestiture of Chattem Chemicals. The following is
a list of significant accomplishments during the year:

- - Operating income before nonrecurring and unusual charges rose 13% to $14.8
million, representing 14.7% of sales.

- - International operating income surged to $1.3 million from $120 thousand a
year ago. This was led by strong performances in Canada and the United
Kingdom.

- - BULLFROG sales increased 29% led by BULLFROG for Kids, the new BULLFROG
Quick Gel, a revolutionary sunblock, and regained sales to a major
customer.

- - MUDD was successfully relaunched with two new products, Sea Mask and Aloe
Mask, in bold, exciting new packaging. At year end, MUDD consumer sales
were increasing 25% due to this relaunch.

- - Net debt, funded debt less cash and cash equivalents and investments, was
reduced by $23 million due to the Chattem Chemical divestiture and
increased profits.

<PAGE>

- - The operating income increase was achieved through increased sales, a
slight increase in gross margin percentage and reduced administrative
costs. The sales increase was supported by a 12% rise in advertising
and promotion expenses exemplifying our continuing commitment to our
brands.

- - Finally, we profitably divested Chattem Chemicals to Elcat, Inc., resulting
in an after-tax gain of $9.3 million or $1.28 per share. In addition to
reducing the Company's debt, this action completely focuses our efforts on
the consumer products business.

In terms of disappointments, the main issue was significant new competition
in several of our larger markets. First, the topical analgesic market had
unprecedented activity with the launch of two major new products,
Zostrix-Registered Trademark- and CAPSAZIN-P-TM-, which at year end had
garnered about 15% market share. In addition, Ben-Gay-Registered Trademark-
relaunched its product line backed by strong advertising and promotion
support. Due to this higher level of competition, FLEX-ALL sales declined
19%. I will address our response in my 1996 outlook section.

Although not at the unprecedented level of competition encountered in the
topical analgesics, the face cleanser and cosmetic markets also had
significant new competition. In the cleanser category, Neutrogena-Registered
Trademark-, Clean & Clear-Registered Trademark-, and OIL of OLAY-Registered
Trademark- had strong new products and support levels. This made our
PHISODERM relaunch more difficult.

<PAGE>

In cosmetics, the major new product focus was on the "age defying" products
from Revlon-Registered Trademark- and Maybelline-Registered Trademark-. CORN
SILK factory sales were stable but at year end we saw some decline in
consumer sales as these new products gained share and the oil control
category declined.

1996 OUTLOOK

1996 will simply be Chattem's most aggressive year in our history in terms of
new product activity. The biggest event is our May 1 launch of PHISODERM
Antibacterial Skin Cleanser. This product has been our most tested product
ever and we feel very good about its chances for success.

The PHISODERM heritage of hospital and doctor usage is ideal for an
antibacterial hand soap. Also, the category size of approximately $180
million is the correct size for our corporate strategy of being a leader in
small to medium markets of $50 million-$200 million.

We will support this exciting launch with strong advertising and promotional
support. We should be the leading advertiser in the category during 1996.
This new launch will come at an expense of approximately $.20 per share which
we think is an appropriate investment to support this important new product.

<PAGE>

A second major new product will be PHISODERM Sensitive which will continue
our relaunch program for PHISODERM Face Cleansers. This new product will
appeal to consumers with sensitive skin, which represents over 40% of all
women. Also, PHISODERM Sensitive will be unfragranced, an important
attribute for many face cleanser users.

A third major new product is FLEX-ALL Ultra Plus. FLEX-ALL has been a
Menthol only product in terms of active ingredients. Ultra Plus will add two
more ingredients, Methyl Salicylate and Camphor, and will be positioned as
three ingredient strength for fast and long lasting pain relief. In testing,
many consumers prefer the Menthol only relief but also many prefer the
strength of the three ingredient product. We think the combination of
FLEX-ALL and FLEX-ALL Ultra Plus will meet all consumer's pain relief needs.

In addition to these three major launches, we have several other new products
for our other brands. CORN SILK Liquid has been reformulated to provide more
natural, lighter coverage. ULTRASWIM will introduce a shower gel to address
dry itchy skin caused by chlorine damage. Also, we will be continuing our
support behind the new MUDD products which began shipping in the last half of
1995.

<PAGE>

Our primary focus for the year will be to support these important product
launches. However, we will continue our emphasis on cost-reduction efforts
which have yielded savings of several million dollars over the past two
years. We believe we can achieve further efficiencies in terms of material
costs, commercial production and media buying.

From a cultural and people standpoint, I am extremely proud of the effort our
employees put forth to achieve the 1995 results in spite of the competition
we faced. Also, I can tell you I have never seen the enthusiasm as high
within the Company as it is for 1996. I hope and believe this enthusiasm and
effort will enable Chattem to have another successful year.

<PAGE>

PRODUCT AND MARKET SUMMARY

MISSION AND OBJECTIVE
The mission of the Company is the satisfaction of consumer needs in personal
and health care areas through the marketing of brand name products which are
of excellent quality and proven efficacy. These products compete in small to
medium size over-the-counter (OTC) pharmaceuticals or functional toiletries
and cosmetics markets, with an ideal retail market size of $50 million to
$200 million, in which its products can be among the market leaders. These
products are advertised through national media and are distributed through
the food, drug and mass merchandiser classes of trade. The objective of the
Company is to create or maintain a leadership position in each of its markets
and to thereby provide superior earnings while also building the value of
each brand.

DOMESTIC PRODUCT OVERVIEW

OTC PHARMACEUTICALS - TOPICAL ANALGESICS
The Company competes in the topical external analgesic category, a $190
million market, with its FLEX-ALL 454, ICY HOT and SOLTICE brands. BENZODENT
competes in the denture irritation segment, a $37 million segment, within the
overall topical oral analgesic category.

FLEX-ALL 454, the second largest brand in its category, is an aloe vera-based
topical analgesic used by the trainers of all 102 professional football,
baseball, basketball and hockey teams, and is the official locker room
product of the National Football League. The brand's current product line
includes Original and Maximum Strength FLEX-ALL 454, which contain menthol as
the active ingredient. The new Ultra Plus product, which begins distribution
in mid 1996, contains three active ingredients; menthol, methyl salicylate
and camphor.

<PAGE>

ICY HOT, the fifth largest brand in its category, completed 1995 with its
third straight year of double digit sales growth. It is the only brand in
the category with three product forms; a cream, a balm and a chill stick.
Its unique positioning as the product offering "Icy and Hot Therapy for Pain"
and high brand awareness among consumers continues to provide growth
opportunities.

BENZODENT, a topical oral analgesic, is the only brand positioned to be
applied directly to dentures to relieve denture pain. For additional pain
relief, the product contains the maximum amount of benzocaine allowable in
the category. 1995 represented the first year in the brand's history in which
it received a full year of targeted advertising and promotional support.

Additionally, the Company manufactures and markets two smaller proprietary
drug brands, SOLTICE, a topical external analgesic, and BLIS-TO-SOL, an
antifungal foot care product. Limited regional support will continue to be
done on an opportunistic basis.

OTC PHARMACEUTICALS - INTERNAL ANALGESICS
The Company competes in the menstrual pain relief category, a $63 million
market, with its PAMPRIN and PREMSYN PMS brands. NORWICH Aspirin competes in
the general analgesic category.

PAMPRIN, the number two brand in the menstrual analgesics category, is a
combination drug specifically designed for relief of menstrual symptoms.
Multi-Symptom PAMPRIN effectively relieves multiple menstrual discomforts
with three active ingredients. Maximum Pain Relief PAMPRIN provides superior
relief from cramps by being the only non-ibuprofen, non-aspirin cramp relief
product. Maximum Strength PREMSYN PMS, the third largest brand in the
category, effectively relieves both the physical and emotional symptoms of
PMS.

<PAGE>

NORWICH, a high-quality, reasonably-priced aspirin franchise, complements the
other OTC pharmaceuticals of the division. The brand is principally focused
both in sales and marketing support in the northeast and west coast. The
brand continues to decline about 10% per year principally due to the
continued expansion of private label aspirin and reduced advertising and
promotion support in lieu of other strategic brand priorities.

COSMETICS
The Company competes in the oil control face make-up segment, a $99 million
market, within the overall cosmetics category with its CORNSILK brand.
CORNSILK, the number three brand in the oil control make-up segment, is the
original make-up especially formulated to be oil free as well as able to
absorb excess facial oils. The product is available in translucent no-color
and shades of the original powder Classic line, and also in shades of the new
powder Natural Matte line. The line also includes shaded liquids.

TOILETRIES - SKIN CLEANSERS AND MASKS
The Company competes in the face cleanser category, a $335 million market,
with its PHISODERM brand. MUDD, a line of clay-based facial mask products,
is the Company's entry into the facial masks and scrubs category, a $42
million market.

<PAGE>

PHISODERM, a specialty face cleanser, is a product that through its pH
balanced formula provides the consumer with superior cleansing without the
harsh, drying effect of soaps. The brand offers adult products available in
different skin types, normal to oily or dry, as well as a product designed
for use on babies. Following the acquisition of PHISODERM in mid 1994, the
brand was completely restaged in 1995 with new packaging and products while
being supported with meaningful advertising and promotion levels for the
first time in four years. To complement the restaged line, an unfragranced
PHISODERM Sensitive will be launched in 1996 appealing to consumers with
sensitive skin. Capitalizing on the heritage of hospital and doctor usage,
PHISODERM Antibacterial Skin Cleanser will also be launched in 1996.

After two years of minimal support and declining sales, the Company
relaunched MUDD in mid 1995 with new packaging and two line extensions, Sea
Mask and Aloe Mask. The relaunch has been and will be supported by
television and promotional support and as a result is the fastest growing
brand in the mask and scrub category.

TOILETRIES - SEASONALS

The Company competes in the suncare category with products that have a sun
protection factor(SPF) of greater than 15, a $221 million market, with its
BULLFROG sunblock line. SUN-IN competes in the spray on hair lightener
category, a $9 million market, while ULTRASWIM shampoo and conditioner are
essentially the only products in the small chlorine removal market.

For the second straight year BULLFROG AMPHIBIOUS FORMULA SUNBLOCK continues
to be one of the fastest growing brands in its category. The product is a
unique waterproof gel sunblock that provides all-day sun protection, in or
out of the water, with just one application. The line includes body gels and
lotions and a stick product, for adults and children, with SPF's ranging from
18 to 36.

<PAGE>

The other seasonal products, SUN-IN hair lighteners and ULTRASWIM chlorine
removal shampoo and conditioner, continue to be the market leaders in these
small niche categories. ULTRASWIM has a patented formula and is endorsed by
Janet Evans, four time Olympic gold medalist, in its marketing efforts.

INTERNATIONAL MARKET OVERVIEW

CANADA
Chattem (Canada) Inc. is a wholly-owned subsidiary based in Mississauga,
Ontario which markets and distributes Chattem's consumer products throughout
the country. 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 in Canada include PAMPRIN, FLEX-ALL, CORNSILK, MUDD, SUN-IN,
ULTRASWIM and PHISODERM. In addition, Chattem owns the marketing and
distribution rights for SHY, a line of feminine hygiene and douche products;
ACNOMEL, a medicated acne mask; as well as AQUA CARE and ROSE MILK.

<PAGE>

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 is performed principally in the
U.K. with a limited number of ingredients purchased from Chattem. In the
U.K., the division employs its own sales force while exclusive 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
pharmaceuticals in Europe, the unit markets exclusively the Company's
toiletry products. Chattem's products in Europe include SUN-IN, a range of
MUDD Face and Body products, ULTRASWIM, BRONZ SILK and CORNSILK. SPRAY BLOND
Spray-In Hair Lightener is only marketed on the continent.

U.S. EXPORT

The U.S. Export division services various distributors primarily located in
the Caribbean, Mexico and Peru. The Company sells various products into
these markets with the primary focus being the development of its OTC
pharmaceuticals, principally ICY HOT and PAMPRIN. The Company continues to
look for established distributors in Central and South America capitalizing
on the success and heritage of ICY HOT in these regions.

11
<PAGE>

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

GENERAL

On May 26, 1995, the Company completed the sale of its specialty chemicals
division to privately-held Elcat, Inc. ("Elcat"). The Company received
$25,000,000 from the sale of the specialty chemicals division consisting of
$20,000,000 in cash and $5,000,000 of 13.125% cumulative, convertible
preferred stock of Elcat. The net cash proceeds were used to repay long-term
debt of approximately $12,000,000. The Company recognized a gain of
$9,334,000 (net of tax) from the sale and an extraordinary charge (after tax)
of $367,000 relating to the early extinguishment of the debt.

The results of operations and the gain on disposal of the specialty chemicals
division have been separately classified as discontinued operations in the
accompanying Consolidated Statements of Income.

As a result of the sale of the specialty chemicals division, unless otherwise
indicated, the following discussion and analysis of financial condition and
results of operations relate only to the continuing operations of the
Company, which are the domestic and international consumer products
businesses.

<PAGE>

The Company experienced an increase in net sales, operating income, income
from continuing operations and net income for the year ended November 30,
1995. Net sales increased 6.6% to $100,598,000 from $94,370,000 in 1994.
Operating income before nonrecurring and unusual charges increased 12.8% to
$14,770,000 from $13,099,000 in 1994. Income from continuing operations
increased 10.2% to $2,325,000 from $2,110,000 in 1994, while net income,
which includes the net income from discontinued operations, the net gain on
disposal of the specialty chemicals division and the extraordinary charge
relating to the early extinguishment of debt, increased to $11,966,000 from
$2,054,000 in fiscal year 1994.

In fiscal year 1995 as compared to fiscal year 1994, earnings per share from
continuing operations increased $.03, or 10.3%, to $.32 while total earnings
per share increased $1.35 to $1.64. Total earnings per share for the year
ended November 30, 1995 include the net income from discontinued operations,
the net gain on disposition of the specialty chemicals division and the net
loss on early extinguishment of debt. The reduction in interest expense as a
result of the retirement of long-term debt discussed previously is estimated
to be approximately $1,400,000 on an annual basis. Until the Company's
indebtedness is reduced significantly, net income will likely continue to be
adversely impacted by interest expense.

<PAGE>

The Company also will recognize annually approximately $656,000 in dividends
on the cumulative, convertible preferred stock of Elcat, which was received
as a part of the proceeds from the sale of the specialty chemicals division.

The Company will continue to seek increases in sales through a combination of
acquisitions and internal growth while maintaining high operating income. As
previously high growth brands mature, sales increases will become even more
dependent on acquisitions and the development of successful line extensions.
Strategically, the Company continually evaluates its products and business as
part of its sales growth strategy and, in instances where the Company's
objectives are not realized, will dispose of these brands or businesses and
redeploy the assets to products or businesses with greater growth potential
or to reduce indebtedness.

<PAGE>

RESULTS OF OPERATIONS

The following table sets forth for continuing operations certain items from
the Company's Consolidated Statements of Income, for the periods indicated,
expressed as a percentage of net sales:

<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER 30,
------------------------------
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
Net Sales ................................................ 100.0% 100.0% 100.0%
Costs and Expenses:
Cost of sales ........................................ 29.6 30.2 29.7
Advertising and promotion ............................ 37.0 35.3 40.4
Selling, general and administrative .................. 18.7 20.6 21.8
Nonrecurring and unusual charges ..................... 0.3 0.6 6.1
------ ------ ------
Total costs and expenses .......................... 85.6 86.7 98.0
------ ------ ------
Income From Operations .................................. 14.4 13.3 2.0
Other Income (Expense), Net ............................. (10.8) (9.8) (3.9)
------ ------ ------
Income (Loss) Before Income Taxes ....................... 3.6 3.5 (1.9)
Provision For (Benefit From) Income Taxes ............... 1.3 1.3 (0.7)
------ ------ ------
Income (loss) From Continuing Operations ................ 2.3% 2.2% (1.2)%
====== ====== ======
</TABLE>

FISCAL 1995 COMPARED TO FISCAL 1994 FOR CONTINUING OPERATIONS

Net sales for the year ended November 30, 1995 increased $6,228,000, or 6.6%,
to $100,598,000 as compared to $94,370,000 for the previous fiscal year. The
increase in net sales was attributable to a $4,607,000, or 5.6%, increase in
domestic consumer products sales to $87,250,000 from $82,643,000 in fiscal
1994 and an increase of $1,621,000, or 13.8%, in international consumer
products sales to $13,348,000 from $11,727,000.

<PAGE>

For domestic consumer products, net sales increases in 1995 over 1994 were
realized for the BULLFROG (28.8%), ICY HOT (8.6%), SUN-IN and MUDD brands,
while decreases were recorded for the major product lines of FLEX-ALL 454
(19.4%), PREMSYN PMS, ULTRASWIM, PAMPRIN and NORWICH Aspirin. Sales of
BENZODENT and PHISODERM, products acquired in May and June 1994,
respectively, increased a combined $7,159,000 over their respective 1994
short periods. All sales variances were largely the result of changes in
volume.

The increase in sales of the BULLFROG and SUN-IN brands was led by new
products, good summer weather, increased advertising and promotion
expenditures and, in the case of BULLFROG, the addition of a previously lost
major customer. The MUDD brand introduced new packaging and two new products
in 1995 and both MUDD and the ICY HOT brand received increased marketing
support.

The decline in sales of FLEX-ALL 454 reflects increased competition in the
topical analgesic product category and decreased advertising and promotion
expenditures. Sales declines for the other products listed above are
primarily the result of the maturation of these brands along with reduced
marketing support in most cases.

<PAGE>

International consumer products sales for fiscal year 1995 increased
$756,000, or 24.0%, for the Canadian operation and $631,000, or 8.5%, for the
United Kingdom business. The addition of PHISODERM to the product line in
Canada accounted for practically all of the net increase in sales in that
country, although increases were realized for the PAMPRIN, MUDD and SUN-IN
brands. Decreases in sales of CORN SILK and FLEX-ALL 454 were recorded also.
Sales increases for the SUN-IN and CORN SILK brands were recognized in 1995
for the United Kingdom business, while sales declines were registered for the
BRONZ SILK, MUDD and ULTRASWIM product lines. U.S. export sales increased
$234,000, or 21.0%, in fiscal 1995. All sales variances were principally due
to volume changes.

Cost of goods sold as a percentage of net sales decreased to 29.6% in 1995
from 30.2% in the 1994 fiscal year. This improvement in 1995 was essentially
the result of a shift in the mix of sales of domestic consumer products to
higher gross margin brands, a full year of in-house production for PHISODERM,
and reduced inventory obsolescence charges.

Advertising and promotion expenses increased by $3,906,000, or 11.7%, in 1995
and was 37.0% of net sales compared to 35.3% in the 1994 fiscal year. This
increase was principally due to full year advertising and promotion support
for the BENZODENT and PHISODERM product lines.

<PAGE>

The decrease of $609,000, or 3.1%, in selling, general and administrative
expenses in 1995 was largely associated with increases in direct selling
costs, freight and field sales expenses, as a result of increased sales, with
large decreases in administrative and corporate personnel and bonuses more
than offsetting the increase in selling expenses.

The Company recognized a nonrecurring and unusual charge of $302,000 in 1995
and $559,000 in 1994 related to the repricing of the Company's stock options
in connection with the payment of the Special Dividend in 1993.

Interest expense increased $1,716,000, or 18.3%, in the 1995 fiscal year as a
result of the refinancing of long-term debt in 1994 at higher interest rates
and increased outstanding indebtedness related to the acquisition of
BENZODENT and PHISODERM in that year. Total long-term notes payable
decreased by $17,297,000 in 1995, largely due to the application of the net
proceeds from the sale of the specialty chemicals division to repay
indebtedness. This debt reduction favorably impacted interest expense for
approximately half the 1995 fiscal year. Until the Company's indebtedness is
reduced substantially, interest expense will continue to represent a
significant percentage of the Company's net sales.

<PAGE>

In 1995 a gain of $729,000 on the sale of an interest rate cap was recognized
but deferred. This amount is to be amortized over the remaining life of the
original cap agreement. The portion allocated to fiscal 1995 was $454,000,
which was credited to interest expense.

The increase of $341,000 in investment income in 1995 primarily reflects the
pro-rata accrual of the previously discussed dividend to be received on the
cumulative, convertible preferred stock of Elcat.

During 1994, the Company realized a loss of $512,000 from the sale of the
distribution rights to ALGEMARIN in Canada.

Other income and expense for 1995 includes a loss of $380,000 related to the
disposition of certain assets. During 1994, the Company realized a gain of
$484,000 on the sale of an interest rate swap.

Income taxes decreased to 35.6% of income from continuing operations before
income taxes from 35.9% in 1994.

Income from continuing operations increased by $215,000, or 10.2%, in the
1995 fiscal year. The increase mainly resulted from increased sales and
lower selling, general and administrative expenses.

<PAGE>

FISCAL 1994 COMPARED TO FISCAL 1993 FOR CONTINUING OPERATIONS

Net sales rose 5.0% to $94,370,000 from $89,861,000 in 1993. This was led by
a 7.9% increase in domestic consumer product sales to $82,643,000 from
$76,592,000 in 1993. The domestic consumer products sales growth was offset
by a 11.6% decrease in international consumer product sales to $11,727,000
from $13,269,000 in 1993.

The growth in domestic consumer products sales resulted primarily from
$6,257,000 of partial year sales from the two newly acquired products,
PHISODERM and BENZODENT. The remaining brands were basically flat with sales
in 1994 declining $206,000. Absent the new products, sales of the division's
OTC pharmaceuticals increased 1.8% in 1994 led by strong sales of PAMPRIN,
PREMSYN PMS and ICY HOT. Sales of FLEX-ALL 454 decreased for the first time
by 21.0% from 1993 sales levels, while NORWICH Aspirin sales declined 22.8%
from 1993 due to continued inroads by private label products and general
analgesics. Although revenues from CORN SILK and SUN-IN increased in 1994,
the division's overall sales of cosmetic and toiletry brands declined 4.3%.
The loss of a major retail customer due to account consolidation in 1994
resulted in a 15.4% sales drop for BULLFROG versus 1993. ULTRASWIM and MUDD
also registered sales decreases of 9.3% and 19.5%, respectively. All sales
variances were largely the result of changes in volume except for the CORN
SILK and SUN-IN brands.

<PAGE>

The decline in sales of the international division reflected the efforts
initiated in 1993 to reorganize the division to a more profitable unit. In
Canada, ALGEMARIN, an unprofitable line of bath products, was sold in June.
As a result of a poor Christmas season, above normal returns of ALGEMARIN in
the spring of 1994 had a negative impact on overall sales. During the fourth
quarter of 1993, certain distributor arrangements were terminated on the
Western European continent and within the U.S. export unit, and marketing
efforts to others were significantly reduced leading to decreased sales in
1994. The acquisition of PHISODERM in Canada added $796,000 in partial year
sales. All sales variances were primarily due to change in volume.

Cost of goods as a percentage of net sales increased to 30.2% from 29.7% in
1993. The increase was primarily the result of a shift in mix of sales to
lower gross margin brands, e.g., ICY HOT, CORN SILK and PHISODERM. Reflected
also in this increase was the write-off of approximately $425,000 of
inventory related to the unsuccessful launch of Nighttime PAMPRIN.

Advertising and promotion expense decreased $2,926,000, or 8.1%, to
$33,336,000 in 1994 from $36,262,000 in the previous year. The decrease was
primarily the result of $2,988,000 in reduced advertising spending for
FLEX-ALL 454 and NORWICH Aspirin. The reduction in advertising spending for
these two brands reflected management's recognition of the maturation of
FLEX-ALL 454 and the marginal benefits of the national advertising campaign
for NORWICH Aspirin in 1993. The division also spent $1,310,000 in
advertising and promotion expenditures on the two acquired brands, PHISODERM
and BENZODENT.

<PAGE>

Selling, general and administrative expenses decreased by $165,000 to
$19,440,000 from $19,605,000 in 1993 and declined as a percentage of the
Company's net sales to 20.6% from 21.8% in 1993. This slight improvement
compared to 1993 was realized even with the incremental expense of incentive
bonuses to management and for additional compensation to sales personnel and
independent sales agents as a result of increased sales for the year.

In 1994, the Company recognized a nonrecurring and unusual charge of $559,000
related to the repricing of the Company's stock options in connection with
the payment of the Special Dividend in June 1993. The total charge related
to the noncash, remeasured compensation was $1,987,000 and is being amortized
over the vesting period of the options. The amount recorded in 1993 as part
of the nonrecurring and unusual charge was $956,000.

Interest expense increased to $9,360,000 from $3,879,000 in 1993 as a result
of higher outstanding indebtedness related to the payment of the Special
Dividend in June 1993, the consummation of the two acquisitions and higher
interest rates related to the senior subordinated notes issue in June of 1994.

Net investment income increased substantially to $186,000 from a loss of
$522,000 in 1993. The loss incurred in 1993 related to liquidation of the
investment portfolio with the proceeds being used to reduce bank debt and
partially fund the payment of the Special Dividend.

During 1994, the Company realized a loss of $512,000 from the sale of the
distribution rights to ALGEMARIN in Canada. During 1993, the Company
realized a gain of $867,000 from the sale of the BLACK-DRAUGHT and NULLO
brands.

<PAGE>

Other income and expense for 1994 includes a gain of $484,000 on the sale of
an interest rate swap.

Income taxes decreased to 35.9% of income from continuing operations before
income taxes from 36.7% in 1993. See Note 7 of Notes to Consolidated
Financial Statements.

Based on increased sales, planned reductions in advertising and promotion and
the reduction in nonrecurring and unusual charges, but offset in part by an
increase in interest expense, income from continuing operations increased to
$2,110,000 in 1994 from a loss of $1,100,000 in 1993.

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, working capital, capital
expenditures and to service long-term debt.

Cash provided by operating activities was $713,000 and $16,405,000 for 1995
and 1994, respectively. The decrease in cash flows from operations from 1994
to 1995 was primarily the result of changes in accounts receivable,
inventories and accounts payable and accrued liabilities.

Investing activities provided cash of $16,762,000 in 1995 and used cash of
$23,753,000 in 1994. The 1995 amount includes the proceeds from the sale of
the Company's specialty chemicals division. The acquisitions of PHISODERM
and BENZODENT are reflected in 1994. In 1995, capital expenditures totaled
$2,836,000 compared to $2,764,000 in 1994. Expenditures of this nature are
expected to be approximately $2,500,000 in fiscal 1996.

Financing activities used cash of $16,873,000 and provided cash of $5,831,000
in 1994. The use of cash in 1995 is primarily due to the net repayment of
$17,297,000 long-term debt with the proceeds from the sale of the Company's
specialty chemicals division and excess cash generated from operations. During
1994, the Company repaid a portion of its long-term debt with the proceeds
from the issuance of Senior Subordinated notes.

<PAGE>

The following table presents certain working capital data at November 30,
1995 and 1994 or for the respective years then ended:

ITEM 1995 1994*
- ------------------------------------ ----------- -----------
<S> <C> <C>
Working capital (current assets less $10,254,000 $ 9,901,000
current liabilities)
Current ratio (current assets divided 1.49 1.51
by current liabilities)
Quick ratio (cash equivalents, short- .96 1.09
term investments and receivables
divided by current liabilities)
Average accounts receivable turnover 5.86 5.34
Average inventory turnover 3.99 3.47
Working capital as a percentage of
total assets 12.29% 12.31%

</TABLE>

*After removing the net assets of the specialty chemicals division, which was
sold in 1995.

The decrease in the current and quick ratios at November 30, 1995 as compared
to November 30, 1994 was primarily due to a combination of a decrease in
accounts receivable and increases in inventories, accounts payable and
accrued liabilities related to the divestiture of the specialty chemicals
division.

<PAGE>

Total debt outstanding was $79,689,000 at November 30, 1995 compared to
$96,986,000 at November 30, 1994. Under the terms of the current bank
facility, $17,000,000 was available at November 30, 1995 under a working
capital line of credit for general operating purposes. The availability of
credit is determined based on the Company's accounts receivable and
inventories. A separate $12,500,000 revolving line of credit for acquisition
purposes was available and unused at year-end. The Company also has
additional borrowing capacity of approximately $1,600,000 against life
insurance policies owned by the Company, all of which was available at
November 30, 1995.

In connection with the sale of the specialty chemicals division, management
of the Company believes that it has recorded adequate amounts to cover costs
related to environmental remediation of the property sold and other costs
associated with the separation of the consumer products and specialty
chemicals businesses. These estimated costs have been charged to the gain on
the disposal of that division.

Management of the Company believes that cash flows generated by operations,
along with funds available under its bank credit facility and from borrowing
against approximately $1,600,000 of cash value under certain insurance
policies, will be sufficient to fund the Company's current commitments and
proposed operations.

<PAGE>

FOREIGN OPERATIONS

The Company's primary foreign operations are conducted through its Canadian
and U.K. 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, 1995 and 1994, these subsidiaries accounted for 13% and
12% of total revenues, respectively, and 9% and 10% of total assets,
respectively. It has not been the Company's practice to hedge its assets and
liabilities in the U.K. and Canada 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. Gains of $129,000 and
$82,000 for the years ended November 30, 1995 and 1994, respectively,
resulted from foreign currency transactions. See "Foreign Currency
Translation" in Note 2 of Notes to the Consolidated Financial Statements.

<PAGE>

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

YEAR ENDED NOVEMBER 30,
----------------------------------------------------------
1995 1994 1993 1992 1991
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA
NET SALES .......................................... $100,598 $ 94,370 $ 89,861 $ 90,221 $ 84,085
OPERATING COSTS AND EXPENSES ....................... 86,130 81,830 88,111 82,045 78,899
-------- -------- -------- -------- --------
INCOME FROM OPERATIONS ............................... 14,468 12,540 1,750 8,176 5,186
OTHER INCOME (EXPENSE), NET .......................... (10,858) (9,248) (3,489) (1,328) (2,198)
-------- -------- -------- -------- --------
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE
INCOME TAXES ...................................... 3,610 3,292 (1,739) 6,848 2,988
PROVISION FOR (BENEFIT FROM) INCOME TAXES ............ 1,285 1,182 (639) 2,329 957
-------- -------- -------- -------- --------
INCOME (LOSS) FROM CONTINUING OPERATIONS ............. $ 2,325 $ 2,110 $ (1,100) $ 4,519 $ 2,031
======== ======== ======== ======== ========

PER COMMON SHARE DATA
INCOME (LOSS) FROM CONTINUING OPERATIONS ............. $ .32 $ .29 $ (.17) $ .90 $ .50
DIVIDENDS ............................................ $ -- $ -- $ 20.20 $ .30 $ .22

BALANCE SHEET DATA
(At End of Period)
TOTAL ASSETS ......................................... $ 83,410 $ 85,442 $ 69,534 $ 97,571 $ 64,122

LONG-TERM DEBT, less current maturities .............. $ 78,089 $ 94,486 $ 83,000 $ 22,784 $ 29,278

</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:

1995 1994
----------------- -----------------
QUARTER ENDED: HIGH LOW HIGH LOW
-------- ------- -------- -------
<S> <C> <C> <C> <C>
February ............................ 6 3/16 4 9/16 8 5/8 6 3/4
May ................................. 6 1/4 4 3/4 7 3/4 5 3/4
August .............................. 5 3/4 4 3/4 6 1/2 5
November ............................ 5 1/4 4 1/4 7 3/8 5 1/8

</TABLE>

Based upon transfer agent records, the Company's common shares were held by
approximately 2,500 shareholders as of February 21, 1996.

<PAGE>

CONSOLIDATED BALANCE SHEETS
NOVEMBER 30, 1995 AND 1994
(IN THOUSANDS)

ASSETS 1995 1994
---- ----
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents ............................................ $ 3,636 $ 3,034
Accounts receivable, less allowance for doubtful accounts
of $286 in 1995 and $850 in 1994 ................................... 16,248 18,069
Refundable and deferred income taxes ................................. 1,400 1,015
Inventories .......................................................... 8,678 6,247
Prepaid expenses and other current assets ............................ 1,112 929
Net current assets of discontinued operations ........................ - 2,402
------- -------
Total current assets ............................................... 31,074 31,696
------- -------

PROPERTY, PLANT AND EQUIPMENT, NET ..................................... 9,330 8,491
------- -------
OTHER NONCURRENT ASSETS:
Investment in Elcat, Inc. ............................................ 5,328 -
Patents, trademarks and other purchased product rights, net .......... 31,007 32,455
Debt issuance costs, net ............................................. 3,073 3,771
Deferred income taxes ................................................ 98 1,598
Other ................................................................ 3,500 4,818
Net noncurrent assets of discontinued operations ..................... - 2,613
------- -------
Total other noncurrent assets ..................................... 43,006 45,255
------- -------
TOTAL ASSETS ................................................... $83,410 $85,442
======= =======
</TABLE>

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

<PAGE>
CONSOLIDATED BALANCE SHEETS
NOVEMBER 30, 1995 AND 1994
(IN THOUSANDS)

LIABILITIES AND SHAREHOLDERS' DEFICIT 1995 1994
---- ----
<S> <C> <C>
CURRENT LIABILITIES:
Current maturities of long-term debt ............................... $ 1,600 $ 2,500
Accounts payable ................................................... 5,462 4,942
Payable to bank .................................................... 1,184 1,301
Accrued liabilities ................................................ 12,574 10,650
------- -------
Total current liabilities ........................................ 20,820 19,393
------- -------

LONG-TERM DEBT, less current maturities .............................. 78,089 94,486
------- -------

OTHER NONCURRENT LIABILITIES ......................................... 1,922 1,114
------- -------

COMMITMENTS AND CONTINGENCIES (Notes 6, 10 and 12)

SHAREHOLDERS' DEFICIT:
Preferred shares, without par value, authorized
1,000, none issued ............................................... - -
Common shares, without par value, authorized 20,000, issued
7,292 in 1995 and 1994 ........................................... 1,519 1,519
Paid-in surplus .................................................... 52,099 51,797
Accumulated deficit ................................................ (69,386) (81,352)
------- -------
(15,768) (28,036)
Foreign currency translation adjustment ............................ (1,653) (1,515)
------- -------
Total shareholders' deficit ...................................... (17,421) (29,551)
------- -------

TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIT ..................... $83,410 $85,442
======= =======

</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED
FINANCIAL STATEMENTS.

<PAGE>

CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED NOVEMBER 30, 1995, 1994 AND 1993
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>

1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
NET SALES $100,598 $94,370 $89,861
-------- ------- -------
COSTS AND EXPENSES:
Cost of sales ..................................................... 29,755 28,495 26,717
Advertising and promotion ......................................... 37,242 33,336 36,262
Selling, general and administrative ............................... 18,831 19,440 19,605
Nonrecurring and unusual charges (Note 14) ........................ 302 559 5,527
-------- ------- -------
Total costs and expenses ........................................ 86,130 81,830 88,111
-------- ------- -------
INCOME FROM OPERATIONS .............................................. 14,468 12,540 1,750
-------- ------- -------
OTHER INCOME (EXPENSE):
Interest expense .................................................. (11,076) (9,360) (3,879)
Investment income (loss) .......................................... 527 186 (522)
Gain (loss) on product divestitures ............................... - (512) 867
Other income (expense), net ....................................... (309) 438 45
-------- ------- -------
Total other income (expense) .................................... (10,858) (9,248) (3,489)
-------- ------- -------
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES ........ 3,610 3,292 (1,739)
PROVISION FOR (BENEFIT FROM) INCOME TAXES ........................... 1,285 1,182 (639)
-------- ------- -------
INCOME (LOSS) FROM CONTINUING OPERATIONS ............................ 2,325 2,110 (1,100)
-------- ------- -------
DISCONTINUED OPERATIONS:
Income from operations, less provision for income taxes
of $417, $840 and $1,382, respectively .......................... 674 1,500 2,379
Gain on disposal, less provision for income taxes of $5,696 ....... 9,334 - -
-------- ------- -------
Income from discontinued operations ............................... 10,008 1,500 2,379
-------- ------- -------
INCOME BEFORE EXTRAORDINARY LOSS AND CUMULATIVE EFFECT OF
ACCOUNTING CHANGES ................................................ 12,333 3,610 1,279
EXTRAORDINARY LOSS ON EARLY EXTINGUISHMENT OF DEBT, NET OF
INCOME TAXES (Note 6) ............................................. (367) (1,556) (480)
CUMULATIVE EFFECT OF ACCOUNTING CHANGES, NET OF INCOME
TAXES (Note 3) .................................................... - -- 569
-------- ------- -------
NET INCOME .......................................................... $ 11,966 $ 2,054 $ 1,368
======== ======= =======
NET INCOME (LOSS) PER COMMON SHARE:
From continuing operations ........................................ $ .32 $ .29 $ (.17)
Discontinued operations ........................................... 1.37 .21 .38
Extraordinary loss ................................................ (.05) (.21) (.08)
Cumulative effect of accounting changes ........................... - - .09
-------- ------- -------
Net income per common share ..................................... $ 1.64 $ .29 $ .22
======== ======= =======
WEIGHTED AVERAGE NUMBER OF COMMON AND COMMON EQUIVALENT
SHARES OUTSTANDING ................................................ 7,292 7,292 6,341
======== ======= =======
</TABLE>

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

<PAGE>

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED NOVEMBER 30, 1995, 1994 AND 1993
(IN THOUSANDS)

<TABLE>
<CAPTION>
NET UNREALIZED FOREIGN
RETAINED LOSS ON CURRENCY
COMMON PAID-IN EARNINGS LONG-TERM TRANSLATION
SHARES SURPLUS (DEFICIT) INVESTMENTS ADJUSTMENT TOTAL
-------- --------- ---------- ------------ ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Balance, November 30, 1992 ............................ $1,094 $34,938 $ 24,796 $(797) $(1,424) $ 58,607
Net income ........................................... -- -- 1,368 -- -- 1,368
Dividends ............................................ -- -- (109,570) -- -- (109,570)
Issuance of common shares ............................ 389 12,016 -- -- -- 12,405
Stock options granted ................................ -- 956 -- -- -- 956
Exercise of stock options ............................ 36 1,120 -- -- -- 1,156
Tax benefit from exercise of stock options ........... -- 1,253 -- -- -- 1,253
Decrease in net unrealized loss on long-term
investments ....................................... -- -- -- 797 -- 797
Foreign currency translation adjustment .............. -- -- -- -- (445) (445)
------ ------- -------- ----- ------- --------
Balance, November 30, 1993 ............................ 1,519 50,283 (83,406) -- (1,869) (33,473)
Net income ........................................... -- -- 2,054 -- -- 2,054
Issuance of warrants ................................. -- 955 -- -- -- 955
Stock options granted ................................ -- 559 -- -- -- 559
Foreign currency translation adjustment .............. -- -- -- -- 354 354
------ ------- -------- ----- ------- --------
Balance, November 30, 1994 ............................ 1,519 51,797 (81,352) -- (1,515) (29,551)
Net income ........................................... -- -- 11,966 -- -- 11,966
Stock options granted ................................ -- 302 -- -- -- 302
Foreign currency translation adjustment .............. -- -- -- -- (138) (138)
------ ------- -------- ----- ------- --------
Balance, November 30, 1995 ............................ $1,519 $52,099 $(69,386) $ -- $(1,653) $(17,421)
====== ======= ======== ===== ======= ========
</TABLE>

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

<PAGE>

CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED NOVEMBER 30, 1995, 1994 AND 1993
(IN THOUSANDS)

1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income ........................................................ $ 11,966 $ 2,054 $ 1,368
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization ................................... 4,072 4,036 3,387
Cumulative effect of accounting changes, net .................... -- -- (569)
Deferred income tax provision ................................... 645 303 393
Gain on sale of specialty chemicals division .................... (9,334) -- --
Loss (gain) on product divestitures ............................. -- 512 (867)
Repriced stock option expense ................................... 302 559 956
Loss (gain) on sales of assets .................................. (454) 6 (757)
Extraordinary loss on extinguishment of debt, net ............... 367 1,556 480
Dividend receivable from Elcat, Inc. ............................ (328) -- --
Other, net ...................................................... 771 983 (343)
Changes in operating assets and liabilities:
Accounts receivable ........................................... 1,973 (1,704) 1,682
Refundable and deferred income taxes .......................... 106 828 (941)
Inventories ................................................... (2,488) 3,832 495
Prepaid expenses and other current assets ..................... (166) 133 317
Accounts payable and accrued liabilities ...................... (6,602) 3,064 1,852
Payable to bank ............................................... (117) 243 230
-------- ------- -------
Net cash provided by operating activities ....................... 713 16,405 8,550
-------- ------- -------
INVESTING ACTIVITIES:
Purchases of property, plant and equipment ........................ (2,836) (2,764) (2,297)
Proceeds from sale of specialty chemicals division, net ........... 19,397 -- --
Net decrease in long-term investments ............................. -- -- 5,062
Proceeds from short-term investments .............................. -- -- 23,212
Proceeds from notes and sales of assets ........................... 227 549 619
Purchases of patents, trademarks and other product rights ......... -- (20,272) (1,750)
Increase in other assets .......................................... (26) (1,266) (790)
-------- ------- -------
Net cash provided by (used in) investing activities ............. 16,762 (23,753) 24,056
-------- ------- -------
FINANCING ACTIVITIES:
Repayment of long-term debt ....................................... (48,704) (112,831) (42,900)
Proceeds from long-term debt ...................................... 31,100 48,706 104,116
Proceeds from sale of interest rate cap ........................... 984 -- --
Proceeds from issuance of senior subordinated notes ............... -- 73,012 --
Proceeds from issuance of common stock, net ....................... -- -- 12,405
Common stock dividends paid ....................................... -- -- (109,570)
Proceeds from issuance of stock warrants .......................... -- 955 --
Exercise of stock options ......................................... -- -- 1,156
Tax benefit from exercise of stock options ........................ -- -- 1,253
Debt issuance costs ............................................... (253) (4,011) (2,630)
Other, net ........................................................ -- -- (712)
-------- ------- -------
Net cash provided by (used in) financing activities ............. (16,873) 5,831 (36,882)
-------- ------- -------
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS ........ -- 89 30
-------- ------- -------
CASH AND CASH EQUIVALENTS:
Increase (decrease) for the year .................................. 602 (1,428) (4,246)
At beginning of year .............................................. 3,034 4,462 8,708
-------- ------- -------
At end of year .................................................... $ 3,636 $ 3,034 $ 4,462
======== ======= =======
</TABLE>

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

<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

(1) GENERAL
--------------------------------------------------------------------------

Chattem, Inc. and its wholly-owned subsidiaries (the Company) are
primarily engaged in manufacturing and marketing branded consumer
products. The consumer products are sold nationwide and in many
international markets, primarily through independent and chain drug
stores, drug wholesalers, mass merchandisers and food stores.

(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 in
consolidation.

CASH AND CASH EQUIVALENTS

For purposes of the statements of cash flows, 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. Depreciation is
provided using both straight-line and accelerated methods 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.

<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. Total accumulated amortization of these assets at November 30,
1995 and 1994 was $7,291 and $5,824, respectively. Amortization expense
for 1995, 1994 and 1993 was $1,467, $1,309 and $1,179, respectively.
Royalty expense related to other purchased product rights for 1995,
1994 and 1993 was $1,030, $1,703, and $1,974, respectively.
Amortization and royalty expense are included in advertising and
promotion expense in the accompanying consolidated statements of income.

DEBT ISSUANCE COSTS

The Company has incurred debt issuance costs in connection with its
long-term debt (Note 6). These costs are capitalized and amortized over
the term of the debt. Amortization expense related to debt issuance
costs was $471, $439, and $214 in 1995, 1994 and 1993, respectively.
Accumulated amortization of these costs was $711 and $240 at November
30, 1995 and 1994, 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.

RESEARCH AND DEVELOPMENT

Research and development costs relate primarily to the development of
new products and are expensed as incurred. Such expenses were $1,140,
$893, and $930, in 1995, 1994 and 1993, respectively.

ADVERTISING EXPENSES

The cost of advertising is expensed in the fiscal year in which the
related advertising takes place. At November 30, 1995 and 1994, the
Company reported $709 and $806, respectively, of advertising as prepaid
assets included in other noncurrent assets in the accompanying
consolidated balance sheets. The adoption of the AICPA's Statement of
Position 93-7, "Reporting on Advertising Costs", did not have a
significant effect on the Company's consolidated financial position.

<PAGE>

NET INCOME PER COMMON SHARE

Net income per common share is based on the weighted average number of
common shares outstanding after consideration of common share
equivalents having a dilutive effect (Note 8).

FOREIGN CURRENCY TRANSLATION

The financial statements of the Company's Canadian and U.K.
subsidiaries are translated into United States currency in accordance
with SFAS No. 52, "Foreign Currency Translation." Assets and
liabilities 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' deficit. Gains
and losses which result from foreign currency transactions are included
in the accompanying consolidated statements of income.

INCOME TAXES

As discussed in Note 3, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes,"
effective December 1, 1992. SFAS No. 109 requires an asset and
liability approach to accounting for deferred income taxes based on
currently enacted tax rates and differences in financial reporting and
income tax bases of assets and liabilities.

ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS

In March 1995, the Financial Accounting Standards Board issued SFAS No.
121 on accounting for the impairment of long-lived assets, certain
identifiable intangibles, and goodwill related to assets to be held and
used. SFAS No. 121 also establishes accounting standards for long-lived
assets and certain identifiable intangibles to be disposed of. The
Company is required to adopt the provisions of SFAS No. 121 no later
than December 1, 1996, although earlier implementation is permitted.
SFAS No. 121 is required to be applied prospectively for assets to be
held and used. The initial application of SFAS No. 121 to assets held
for disposition is required to be reported as the cumulative effect of
a change in accounting principle. The adoption of SFAS No. 121 is not
expected to have a significant impact on the consolidated financial
position or results of operations of the Company.

RECLASSIFICATIONS

Certain prior year amounts have been reclassified to conform to the
1995 presentation.

<PAGE>

(3) ACCOUNTING CHANGES
--------------------------------------------------------------------------

Effective December 1, 1992, the Company adopted SFAS No. 106,
"Employers' Accounting for Postretirement Benefits Other Than
Pensions," and SFAS No. 109, "Accounting for Income Taxes," using the
cumulative catch-up method. SFAS No. 106 requires that the expected
cost of providing postretirement health care benefits be charged to
expense during the years in which the employees render service (Note
13). The cost of these benefits was historically recognized as expense
when paid. The adoption of SFAS No. 106 resulted in a net charge to
income of $731 ($1,160 before income taxes), or $.12 per share, for
the cumulative effect of this change in accounting principle.

SFAS No. 109 requires a change from the deferral method to the asset
and liability method of accounting for income taxes. Adoption of SFAS
No. 109 resulted in a net credit to income of $1,300, or $.21 per
share, for the cumulative effect of this change in accounting principle.

(4) INVESTMENT IN ELCAT, INC.
--------------------------------------------------------------------------

Investment in Elcat, Inc. (Elcat) consists of 40,000 shares of 13.125%
cumulative, convertible preferred stock of Elcat (the Preferred Shares)
which was received as part of the consideration from the sale of the
Company's specialty chemicals division (Note 15). The Preferred Shares
are nonvoting and are convertible, in whole or in part, at any time on
or after April 1, 1998, into a 21% common stock ownership of Elcat. At
the option of Elcat, the Preferred Shares may be redeemed, in whole or
in part, on or after April 1, 1998, at par value ($125 per share) plus
any accrued and unpaid dividends. If all of the then outstanding
Preferred Shares are not converted or redeemed on or before April 1,
2005, Elcat is obligated to redeem all of the then outstanding
Preferred Shares at par value plus any accrued and unpaid dividends.

The dividends on the Preferred Shares accumulate annually but are
non-payable until the shares are called or redeemed. After three years,
however, if the shares are still outstanding, a cash dividend of $200
will be received by the Company in fiscal year 1999, increasing ratably
to the full $656 in fiscal year 2002.

This investment is classified as held-to-maturity and is accounted for
using the cost method of accounting.

(5) PENSION PLAN
--------------------------------------------------------------------------

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, 1995 and 1994 were invested
primarily in United States government and agency securities, corporate
debt securities and common stocks.

<PAGE>

Pension cost for the years ended November 30, 1995, 1994 and 1993
included the following components:

1995 1994 1993
------ ------ ------
<S> <C> <C> <C>
Service cost (benefits earned during the
period) ....................................... $ 544 $ 581 $ 456
Interest cost on projected benefit obligation ... 745 743 618
Actual loss (return) on plan assets ............. (828) 220 (815)
Net amortization and deferral ................... 98 (1,223) (206)
------ ------ ------
Net pension cost ................................ $ 559 $ 321 $ 53
====== ====== ======
</TABLE>

The following table sets forth the funded status of the Plan as of
November 30, 1995 and 1994:

<TABLE>
<CAPTION>
1995 1994
------ ------
<S> <C> <C>
Actuarial present value of benefit obligations:
Vested benefit obligation ............................... $ 6,560 $ 5,585
Nonvested benefit obligation ............................ 686 912
------- -------
Accumulated benefit obligation ........................ $ 7,246 $ 6,497
======= =======

Plan assets at fair market value .......................... $ 6,166 $ 8,137
Projected benefit obligation .............................. (9,885) (9,119)
------- -------

Plan assets less than projected benefit obligation ........ (3,719) (982)
Unrecognized net loss ..................................... 3,344 2,265
Unrecognized prior service cost ........................... (163) (211)
Unrecognized initial asset ................................ (781) (1,171)
------- -------
Pension liability recognized in balance sheets at end
of year ................................................. $(1,319) $ (99)
======= =======
</TABLE>

The discount rate and rate of increase in future compensation levels
used in determining the actuarial present value of the projected
benefit obligation were 7.5% and 6.0%, respectively, in 1995, and 8.5%
and 6.0%, respectively, in 1994. The expected long-term rate of return
on plan assets was 9.5%.

As a result of the sale of the Company's specialty chemical division, a
charge of $662 was recognized for pension curtailment and settlement
expense. This expense is included in the gain on the sale of
discontinued operations for fiscal 1995. (Note 15)

The Company has a defined contribution plan covering substantially all
employees. Eligible participants can contribute up to 10% of their
annual compensation and receive a 25% matching employer contribution
up to 6% of their annual compensation. The defined contribution plan
expense was $141 for 1995, $141 for 1994 and $162 for 1993.

<PAGE>

(6) LONG-TERM DEBT
--------------------------------------------------------------------------

Long-term debt consisted of the following at November 30, 1995 and 1994:

<TABLE>
<CAPTION>
1995 1994
------ ------
<S> <C> <C>
Revolving line of credit payable to banks at
variable rates (8.49% weighted average at
November 30, 1995) ........................... $ 5,500 $ 4,500
Term loan payable to banks at variable rates
8.375% at November 30, 1995) ................. 8,850 19,375
12.75% Series B Senior Subordinated Notes,
due 2004, net of unamortized discount of
$1,581 for 1995 and $1,889 for 1994 .......... 65,339 73,111
------- -------
Total long-term debt ........................... 79,689 96,986
Less: current maturities ....................... 1,600 2,500
------- -------
Total long-term debt, net of current
maturities ................................... $78,089 $94,486
======= =======
</TABLE>

The Company entered into a new credit agreement with a syndicate of
banks (the New Credit Agreement) on June 17, 1994 and as amended on May
10, 1995 providing for maximum borrowings of up to $55,000. The New
Credit Agreement is divided into a $22,500 revolving line of credit for
working capital purposes, a $12,500 facility for product/brand
acquisitions and a six year $20,000 term loan facility.

The term loan is payable in remaining quarterly installments as
follows: from February 28, 1996 through November 30, 1996, in quarterly
installments of $400, from February 28, 1997 through November 30, 1997,
in quarterly installments of $500, from February 28, 1998 through
November 30, 1998, in quarterly installments of $600, from February 28,
1999 through May 31, 1999, in quarterly installments of $1,000 and a
final payment of $850 on August 31, 1999. The revolving line of credit
is available to the Company up to $22,500 or such lesser amount as is
determined to be available under the terms of the New Credit Agreement
and is due and payable on June 17, 2000, if the commitment is not
earlier terminated under the terms of the New Credit Agreement. The
acquisition facility provides for loans on a revolving credit basis
which shall be repaid at the option of the Company either in a single
installment on the renewal date of June 16th of each year or in 12
equal, consecutive quarterly installments payable on the last day of
each fiscal quarter, commencing at the end of the first fiscal quarter
following the date such acquisition loan is made and continuing
thereafter until the third anniversary of such acquisition loan, on
which date the final installment shall be payable.

The Company may elect either a floating rate or Eurodollar interest
rate option applicable to loans under the New Credit Agreement. The
floating rate and Eurodollar interest rate options are based on a base
rate plus a floating rate margin that fluctuates on the basis of the
Company's leverage ratio. The maximum floating rate margin under the
New Credit Agreement is 1.75% for the floating rate option and 3.0% for
the Eurodollar rate option.

<PAGE>

The New Credit Agreement is secured by substantially all of the
Company's accounts receivables, inventory and currently owned brand
trademarks and associated intellectual property held by the Company.
The New Credit Agreement contains (i) cross- collateralization and
cross-default provisions, (ii) a negative pledge on the brand
trademarks not pledged, (iii) restrictions on prepayment of the notes
without the lender's consent and (iv) a pledge of the outstanding
shares of various subsidiaries. The more restrictive financial
covenants require the maintenance of minimum amounts of consolidated
tangible net worth, cash flow coverage, fixed charges coverage and
leverage ratios.

Also on June 17, 1994, the Company issued $75,000 of 12.75% Series A
Senior Subordinated Notes due 2004 (the Series A Notes) with five year
warrants to purchase 417,182 shares of common stock at a price of $7.15
per share (the Warrants) to an investment banking firm (the Initial
Purchaser). The Series A Notes consisted of 75,000 units, each
consisting of $1,000 principal amount of the Series A Notes and a
warrant to purchase 5.56242 shares of the Company's common stock at a
price of $7.15 per share. The price to the Initial Purchaser of the
Series A Notes was $73,967, or 98.6% of the original principal amount
of the Series A Notes, resulting in a discount of $1,033. The value
assigned to the Warrants was $955 (Note 8), resulting in a total
original issue discount of $1,988. The proceeds of the Series A Notes
were used to repay the Old Credit Agreement (as defined below).

On September 19, 1994, the Company completed an exchange offer of
12.75% Series B Senior Subordinated Notes (the Notes) due 2004, which
were registered under the Securities Act of 1933, for all of the
outstanding Series A Notes. The form and terms of the Series A Notes
and the Notes are the same, except that the Notes are registered under
the Securities Act of 1933 and the holders of the Notes are not
entitled to the rights of the holders of Series A Notes following the
completion of the exchange offer.

The Notes mature on June 15, 2004, and interest is payable
semi-annually on June 15 and December 15 of each year. The 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 Notes may not be redeemed until 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
Notes may require the Company to repurchase the Notes at a purchase
price equal to 101% of the principal amount thereof, plus accrued and
unpaid interest. The Notes are guaranteed by one of the Company's
subsidiaries, Signal Investment & Management Co.

<PAGE>

The 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, with the exception
of indebtedness incurred under the New Credit Agreement up to an
aggregate of $50,000 outstanding at any time, (ii) pay dividends and
make other distributions, (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, (viii) incur indebtedness that would rank senior in
right of payment to the Notes and be subordinated to any other
indebtedness of the Company or (ix) create additional liens. The
Company is allowed to incur additional indebtedness over and above the
$50,000 allowable under the New Credit Agreement if after the incurrence
of the additional indebtedness, the Company's fixed charge coverage
ratio for the four full fiscal quarters preceding the date such
additional indebtedness is incurred, is at least 1.75:1 for fiscal year
1995, and 2.00:1 thereafter, is determined on a pro forma basis as if
the additional indebtedness had been incurred and applied at the
beginning of such four-quarter period.

In order to pay the Special Dividend (Note 8) and related fees and
expenses, the Company entered into a credit agreement in June 1993 with
a syndicate of banks (The Old Credit Agreement). During June 1994, the
Old Credit Agreement was repaid with funds from the New Credit
Agreement and the Notes. In connection with the prepayment of those
borrowings, the Company incurred an extraordinary loss of $1,556 (net
of income taxes) related to the write-off of debt issuance and other
deferred costs.

During June 1993, the Company entered into separate interest rate swap
and cap agreements in notional principal amounts of $30,000 each. The
Company entered into both of these agreements as hedges on its variable
rate debt and not for trading purposes. The term of each agreement was
for a three-year period ending May 31, 1996. The interest rate on the
swap was fixed at 4.95% LIBOR, and the rate on the cap was 5% LIBOR.
The differences paid or received on the swap and cap have been
included as interest expense as payments have been made or received. In
connection with the New Credit Agreement and the issuance of the Notes,
the swap was terminated in June 1994, resulting in a gain of
approximately $484 which is included in other income in the
accompanying statements of income. On January 12, 1995, the interest
rate cap was terminated resulting in a gain of approximately $729 to
the Company. The gain was deferred and is being amortized over the
remaining life of the original cap agreement as a reduction of
interest expense.

During May 1995, the Company prepaid previously outstanding long-term
debt, with funds received from the sale of the specialty chemicals
division. In connection with prepayment of those borrowings, the
Company incurred an extraordinary loss of $367 (net of income taxes),
or $.05 per share. The loss primarily related to the write-off of
debt issuance and other deferred costs.

During April 1993, the Company prepaid previously outstanding long-term
debt with available cash funds. In connection with the prepayment of
those borrowings, the Company incurred an extraordinary loss of $480
(net of income taxes), or $.08 per share. The loss primarily related to
the write-off of debt issuance and other deferred costs.

<PAGE>

Future maturities of long-term debt are as follows:

1996 ......................................... $ 1,600
1997 ......................................... 2,000
1998 ......................................... 2,400
1999 ......................................... 2,850
2000 ......................................... 5,500
Thereafter ................................... 66,920
-------
81,270
Less: unamortized discount ................... (1,581)
-------
$79,689
=======

Cash interest payments during 1995, 1994 and 1993 were $10,811, $7,114,
and $2,612, respectively.

<PAGE>

(7) INCOME TAXES
--------------------------------------------------------------------------

The provision for (benefit from) income taxes from continuing
operations includes the following components:

<TABLE>
<CAPTION>
1995 1994 1993
------ ------ ------
<S> <C> <C> <C>
Current:
Federal ....................... $ 470 $ 697 $ (884)
State ......................... 170 182 (148)
Deferred ........................ 645 303 393
------ ------ ------
$1,285 $1,182 $ (639)
====== ====== ======
</TABLE>

Deferred income tax assets and liabilities for 1995 and 1994 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, 1995 and 1994 are as follows:

1995 1994
------ ------
<S> <C> <C>
Deferred tax assets:
Operating loss carryforwards .............. $ 675 $1,175
Reserves and accruals ..................... 1,156 1,713
Deferred promotional expenses ............. 545 701
Accrued postretirement health care
benefits ................................ 511 490
Repriced stock option expense ............. 690 576
Accruals for discontinued operations ...... 472 -
Gain on sale of interest rate cap ......... 108 -
Nonrecurring and unusual charges .......... - 126
Other ..................................... 273 225
------ ------
Gross deferred tax assets ............... 4,430 5,006
------ ------
Deferred tax liabilities:
Excess tax depreciation and
amortization ............................ 2,359 2,133
Prepaid advertising ....................... 183 216
Inventory ................................. 190 -
Other ..................................... 207 157
------ ------
Gross deferred tax liabilities .......... 2,939 2,506
------ ------
Net deferred tax asset .................. $1,491 $2,500
====== ======
</TABLE>

The Company did not record a valuation allowance against the net
deferred income tax asset at November 30, 1995 or 1994 because it is
more likely than not, in management's opinion, that the income tax
asset will be realized in future years.

Included in "refundable and deferred income taxes" in current assets in
the accompanying consolidated balance sheets are income tax refunds
receivable of $7 and $113 at November 30, 1995 and 1994, respectively.

<PAGE>

The difference between the provision for (benefit from) income taxes
and the amount computed by multiplying income from continuing
operations before income taxes by the U.S. statutory rate is
summarized as follows:

<TABLE>
<CAPTION>
1995 1994 1993
------ ------ ------
<S> <C> <C> <C>
Expected tax provision (benefit) ...... $1,227 $1,119 $ (591)
Dividend exclusion benefit ............ (78) - (35)
State income taxes, net of federal
income tax benefit .................. 112 225 (28)
Other, net ............................ 24 (162) 15
------ ------ ------
$1,285 $1,182 $ (639)
====== ====== ======
</TABLE>

Income taxes paid in 1995, 1994 and 1993 were $5,026, $727 and $1,170,
respectively. The Company received income tax refunds of $163 and $790
during 1995 and 1994, respectively.

(8) SHAREHOLDERS' EQUITY (DEFICIT)
--------------------------------------------------------------------------

SPECIAL DIVIDEND AND 1993 STOCK ISSUANCE

On May 14, 1993, the board of directors declared a special cash
dividend (the Special Dividend) of $20 per common share to holders of
record on June 4, 1993. The Special Dividend was paid on June 11, 1993
and approximated $108,511. In order to pay the Special Dividend and
related fees and expenses, the Company entered into a $75,000 term loan
agreement and a $25,000 revolving credit facility with a group of
banks. In addition, the Company sold 1,866,667 common shares at $7.50
per share to an affiliate of one of the Company's lending banks. The
net proceeds to the Company, after offering expenses, were $12,405.
These shares did not qualify for the Special Dividend.

STOCK OPTIONS

The Company had stock option plans adopted in 1983 and 1988 which
provided for issuance of options during a five-year period to purchase
up to 600,000 and 375,000 common shares, respectively. There are no
more options available for grant under the 1983 and 1988 plans. All
options granted under the 1983 and 1988 plans had been exercised as of
November 30, 1993.

During 1993, the shareholders approved the 1993 Non-Statutory Stock
Option Plan (1993 Plan). The 1993 Plan provides for issuance of up to
350,000 shares of common stock to key employees. The Company granted
options to purchase 349,000 shares during 1993 at prices ranging from
$6.25 to $8.125 per share, as repriced as a result of the Special
Dividend. During 1994, the Company granted options to purchase 1,000
shares at $7.00 per share under the 1993 Plan. Options are exercisable
for a period of up to ten years from date of grant.

<PAGE>

During 1994, the shareholders approved the Company's 1994 Non-Statutory
Stock Option Plan which provides for the issuance to key employees of
up to 350,000 shares of common stock in accordance with the plan, of
which 294,750 shares were granted in 1994. In addition, during 1994,
the shareholders approved the 1994 Non-Statutory Stock Option Plan for
Non-Employee Directors, which provides for the issuance of up to
80,000 shares of common stock. The Company granted 30,000 options under
this plan during 1994. The per share exercise price for the options
granted under these 1994 plans ranged from $6.25 to $10.375. These
options are exercisable for a period of up to ten years from date of
grant.

During 1995, the Company cancelled 20,500 and 27,000 options previously
granted under the 1993 Plan and 1994 Plan, respectively. In addition,
the Company granted 16,250 options from the 1993 Plan and 2,000 options
from the 1994 Plans. The per share exercise price for the options
granted under these plans ranged from $4.75 to $5.25. These options are
exercisable for a period of up to ten years from date of grant.

A summary of stock option activity is as follows:

<TABLE>
<CAPTION>
SHARES PRICE RANGE
<S> <C> <C>
Outstanding at November 30, 1992 173,436 $5.67 - $7.750
Exercised ........................ (173,436) 5.67 - 7.750
Granted .......................... 349,000 7.50 - 8.125
--------
Outstanding at November 30, 1993 349,000 7.50 - 8.125
Granted .......................... 325,750 6.25 - 10.375
--------
Outstanding at November 30, 1994 674,750 6.25 - 10.375
Cancelled ........................ (47,500) 6.25 - 8.125
Granted .......................... 18,250 4.75 - 5.250
--------
Outstanding at November 30, 1995 645,500 4.75 - 10.375
========
</TABLE>

As a result of the Special Dividend paid in 1993, the Company reduced
the exercise price on stock options granted under the 1993 Plan and the
two 1994 plans. There were 634,250 options granted under these plans
which had original exercise prices ranging from $26.25 to $28.125 per
share. After the Special Dividend, the board of directors approved new
exercise prices in the range of $6.25 to $8.125 per share. As a result
of the new measurement date, the repricing of these options resulted in
unusual noncash charges of $302, $559 and $956 in 1995, 1994 and 1993,
respectively, and corresponding increases in paid-in surplus. These
expense amounts are included in "nonrecurring and unusual charges" in
the accompanying statements of income (Note 14).

During 1993, the Company recognized certain tax benefits related to the
exercise of stock options in the amount of $1,253. Such benefit was
recorded as an increase in paid-in surplus. No stock options were
exercised in 1995 or 1994.

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, 1995 and 1994, no shares of any series of preferred stock
were issued and outstanding.

<PAGE>

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, 1995, no contributions had
been made to the plan.

COMMON STOCK WARRANTS

As described in Note 6, the Company issued the Warrants at an assigned
value of $955. The Warrants are exercisable for five years. In the
aggregate there are 75,000 warrants which, when exercised, would
entitle the holders thereof to acquire an aggregate of 417,182 shares
of the Company's common stock at a price of $7.15 per share. The number
of shares of common stock and the price per share at which a warrant is
exercisable are subject to adjustment upon the occurrence of certain
events. A warrant does not entitle the holder to receive any cash
dividends paid on common stock or to exercise any other rights as a
shareholder of the Company.

(9) GEOGRAPHICAL SEGMENT INFORMATION
--------------------------------------------------------------------------

The Company operates exclusively in the consumer products industry.
Geographic data for 1995, 1994 and 1993 is included in the schedule of
geographical information on page 35, which is an integral part of these
financial statements.

(10) CONTINGENCIES
--------------------------------------------------------------------------

Claims, suits and complaints arise in the ordinary course of the
Company's business involving such matters as patents and trademarks,
product liability 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.

<PAGE>

(11) SUPPLEMENTAL FINANCIAL INFORMATION
--------------------------------------------------------------------------

A - Inventories consisted of the following at November 30, 1995 and
1994:

<TABLE>
<CAPTION>
1995 1994
------ ------
<S> <C> <C>
Raw materials .................................. $ 5,396 $ 3,451
Finished goods and work in process ............. 5,694 5,070
Excess of current cost over LIFO value ......... (2,412) (2,274)
------- -------
Total inventories ............................ $ 8,678 $ 6,247
======= =======
</TABLE>

International inventories included above, valued on a lower of FIFO
cost or market basis at November 30, 1995 and 1994, were $1,720 and
$1,780, respectively.

B - Property, plant and equipment consisted of the following at
November 30, 1995 and 1994:

<TABLE>
<CAPTION>
1995 1994
------ ------
<S> <C> <C>
Land ........................................... $ 150 $ 150
Buildings and improvements ..................... 2,957 2,900
Machinery and equipment ........................ 21,354 19,308
Less -- accumulated depreciation ............... (15,131) (13,867)
------- -------
Property, plant and equipment, net ........... $ 9,330 $ 8,491
======= =======
</TABLE>

C - Accrued liabilities consisted of the following at November 30, 1995
and 1994:

<TABLE>
<CAPTION>
1995 1994
------ ------
<S> <C> <C>
Accrued interest expense ....................... $ 3,942 $ 4,341
Salaries, wages and commissions ................ 1,317 1,377
Promotion expense .............................. 1,560 1,994
Accrued estimated specialty chemicals
divestiture costs ............................ 1,231 -
Other .......................................... 4,524 2,938
------- -------
Total accrued liabilities .................... $12,574 $10,650
======= =======
</TABLE>

(12) ACQUISITION OF BRANDS
--------------------------------------------------------------------------

On May 12, 1994, the Company acquired BENZODENT, a topical oral
analgesic, for approximately $3,500 from The Procter & Gamble Company.
The assets acquired consisted primarily of the trademark ($3,246) and
finished product inventories. The Company financed the purchase of
BENZODENT with bank borrowings.

<PAGE>

On June 17, 1994, the Company acquired a license to the PHISODERM
trademark in the United States, Canada and Puerto Rico (the Territory),
together with certain other assets from Sterling Winthrop Inc.
(Sterling). The purchase price for the license of PHISODERM in the
Territory and certain other assets approximated $17,276. The assets
acquired consisted primarily of the trademark ($16,826) and
inventories. If net sales of PHISODERM products in the United States
exceed $11,000 for either of the 12-month periods beginning July 1,
1995 and July 1, 1996 and ending June 30, 1996 and June 30, 1997 then
within 45 days after the end of the applicable 12-month period with
respect to which the applicable net sales threshold specified above has
been exceeded, the Company will pay Sterling an additional $1,000 per
year.

(13) ACCRUED POSTRETIREMENT HEALTH CARE BENEFITS
--------------------------------------------------------------------------

As discussed in Note 3, the Company adopted SFAS No. 106 as of December
1, 1992 and the cumulative effect of this change is reported in the
accompanying consolidated statement of income for fiscal 1993. 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, 1995 and 1994, included the following components:

<TABLE>
<CAPTION>
1995 1994 1993
------ ------ ------
<S> <C> <C> <C>
Service cost (benefits earned during
the period) .............................. $ 30 $ 35 $ 35
Interest cost on accumulated postretirement
benefits obligation ...................... 102 94 84
----- ----- -----
Net periodic postretirement benefits
cost ..................................... $ 132 $ 129 $ 119
===== ===== =====
</TABLE>

The following table sets forth the funded status of the plan, reconciled
to the accrued postretirement health care benefits recognized in the
Company's balance sheets at November 30, 1995 and 1994:

<TABLE>
<CAPTION>
1995 1994
------ ------
<S> <C> <C>
Accumulated postretirement benefits
obligation:
Retirees ................................... $ 883 $ 803
Fully eligible active plan participants .... 292 197
Other active participants .................. 170 114
------ ------
Accrued postretirement health care
benefits ................................... $1,345 $1,114
====== ======
</TABLE>

<PAGE>

For measurement purposes, a 6% annual rate of increase in the per
capita cost of covered health care benefits was assumed in 1995 and
1994. The weighted-average discount rate used in determining the
accumulated postretirement benefit obligation was 7.5% and 8.5% at
November 30, 1995 and 1994, respectively. The effect of a 1% increase
in the assumed health care cost trend rate would increase the
accumulated postretirement benefit obligation as of November 30, 1995
by approximately 4.8%, and the aggregate of the service and interest
cost components of the net annual postretirement benefit cost by
approximately 3.6% for November 30, 1995.

(14) NONRECURRING AND UNUSUAL CHARGES
--------------------------------------------------------------------------

During the fourth quarter of 1993, the Company recorded nonrecurring
and unusual charges of $5,527. The nonrecurring and unusual charges
consisted of the following: (A) International Restructuring Charges -
(1) Write-down of a product trademark to net realizable value in the
amount of $742. Based on management's best estimate of the net
realizable value of the brand, a write-down of the trademark was
recorded in the fourth quarter of 1993. During fiscal 1994, the Company
sold the brand and recorded an additional loss of $512. (2) Write-down
of accounts receivable in the amount of $1,775. During the fourth
quarter of fiscal 1993, the Company terminated its distribution
operations in Spain. As a result, the Company's U.K. subsidiary wrote
off uncollectible accounts receivable from its Spanish distributor in
the amount of $728. In addition, restructuring of the Company's German
distribution operations in connection with a change in distribution
methods resulted in a reserve for uncollectible accounts receivable in
the amount of $1,047. (3) Write-down of inventories in the amount of
$212 related to Spanish and discontinued brand inventories to their net
realizable values [see (1) and (2) above]. (4) Accrued severance
payments and lease and distributor termination fees in the amount of
$375 consisted of severance for terminated international employees,
accrual of fees for termination of the Spanish distributor and European
distributor and lease termination fees. (5) Other accrued international
restructuring charges of approximately $230 primarily related to the
shutdown of the Spanish operations and scaling back of the Canadian
operations. (B) Noncash compensation expense related to repricing of
stock options in the amount of $956 was recorded (Note 8). (C) Accrued
severance of approximately $1,237 for executives leaving the Company
was recorded during the fourth quarter of fiscal 1993.

The Company recorded nonrecurring and unusual charges of $302 for 1995
and $559 for 1994 related to the stock options which were repriced in
1993 (Note 8). There is no remaining accrual as of November 30, 1995
related to the nonrecurring and unusual charges.

<PAGE>

(15) DISCONTINUED OPERATIONS
--------------------------------------------------------------------------

On May 26, 1995, the Company completed the sale of its specialty
chemicals division to privately-held Elcat. The Company received $25,000
from the sale of the specialty chemicals division consisting of $20,000
in cash and $5,000 of 13.125% cumulative, convertible preferred stock of
Elcat. The net cash proceeds were used to repay long-term debt of
approximately $12,000. The Company recognized a gain of $9,334, (after
tax) from the sale and extraordinary charge (after tax) of $367 relating
to the early extinguishment of the debt.

The results of operations and the gain on disposal of the specialty
chemicals division have been separately classified as discontinued
operations in the accompanying consolidated statements of income. Net
sales of the specialty chemicals division were $6,739 through May 26,
1995, $13,586 for 1994 and $15,544 for 1993. Interest expense of $351,
$752 and $350 for 1995, 1994 and 1993, respectively, has been
allocated to discontinued operations based upon the ratio of net
assets discontinued to the total net assets of the consolidated entity.

<PAGE>

REPORT OF INDEPENDENT
PUBLIC ACCOUNTANTS

TO THE SHAREHOLDERS AND BOARD OF DIRECTORS OF
CHATTEM, INC.:

We have audited the accompanying consolidated balance sheets of Chattem, Inc.
(a Tennessee corporation) and subsidiaries as of November 30, 1995 and 1994
and the related consolidated statements of income, shareholders' equity
(deficit) and cash flows for each of the three years in the period ended
November 30, 1995. 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 generally accepted auditing
standards. 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, 1995 and 1994 and the results of their
operations and their cash flows for each of the three years in the period
ended November 30, 1995 in conformity with generally accepted accounting
principles.

As discussed in Note 3 to the consolidated financial statements, in 1993 the
Company changed its methods of accounting for income taxes and for
postretirement health care benefits.

Chattanooga, Tennessee
January 25, 1996

<PAGE>

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

QUARTER ENDED
-------------------------------------------------------
TOTAL FEBRUARY 28 MAY 31 AUGUST 31 NOVEMBER 30
----- ----------- ------ --------- -----------
<S> <C> <C> <C> <C> <C>
FISCAL 1995:
Continuing operations:
Net sales ...................... $ 100,598 19,372 27,114 28,990 25,122
Gross profit ................... $ 70,843 13,144 18,557 20,628 18,514
Income (loss)(1) ............... $ 2,325 (611) 670 1,673 593
Income (loss) per share (1) .... $ .32 (.08) .09 .23 .08
Total:
Net income (loss)............... $ 11,966 (250)(3) 10,480(3) 1,673 63(3)
Net income (loss) per
share (2) .................... $ 1.64 (.03)(3) 1.44(3) .23 .01(3)

FISCAL 1994:
Continuing operations:
Net Sales ...................... $ 94,370 17,714 23,642 25,954 27,060
Gross profit ................... $ 65,875 11,920 16,878 18,574 18,503
Income (loss) (1) .............. $ 2,110 (638) 1,198 1,212 338
Income (loss) per share (1) .... $ .29 (.09) .16 .17 .05
Total:
Net income (loss) .............. $ 2,054 (252)(4) 1,553(4) (105)(4) 858(4)
Net income (loss) per
share(2) ..................... $ .29 (.03)(4) .21(4) (.01)(4) .12(4)
</TABLE>

(1) BEFORE DISCONTINUED OPERATIONS AND EXTRAORDINARY LOSS ON EARLY
EXTINGUISHMENT OF DEBT.

(2) 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 COMMON SHARE
EQUIVALENTS USED (WHERE DILUTIVE) IN THE QUARTERLY AND ANNUAL
COMPUTATIONS.

(3) INCLUDES INCOME (LOSS) FROM DISCONTINUED OPERATIONS, NET OF TAX, OF
$361 OR $.05 PER SHARE, $10,177 OR $1.40 PER SHARE AND $(530) OR
$(.07) PER SHARE FOR THE QUARTERS ENDED FEBRUARY 28, MAY 31 AND
NOVEMBER 30, RESPECTIVELY.

(4) INCLUDES INCOME FROM DISCONTINUED OPERATIONS, NET OF TAX, OF $385
OR $.05 PER SHARE, $355 OR $.05 PER SHARE, $239 OR $.03 PER SHARE
AND $521 OR $.07 PER SHARE FOR THE QUARTERS ENDED FEBRUARY 28,
MAY 31, AUGUST 31 AND NOVEMBER 30, RESPECTIVELY.

<PAGE>

GEOGRAPHICAL SEGMENT INFORMATION
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER 30,
---------------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
NET SALES:
Domestic ................................ $ 87,250 $ 82,643 $ 76,592
International ........................... 13,348 11,727 13,269
-------- -------- --------
Consolidated ............................ $100,598 $ 94,370 $ 89,861
======== ======== ========

OPERATING INCOME:
Domestic ................................ $ 16,719 $ 16,981 $ 10,127
International ........................... 1,292 120 381
-------- -------- --------
Total ................................. 18,011 17,101 10,508
Other unallocated expenses, net (1) ..... (14,401) (13,809) (12,247)
-------- -------- --------
Income (loss) from continuing
operations before income taxes ...... $ 3,610 $ 3,292 $ (1,739)
======== ======== ========

IDENTIFIABLE ASSETS:
Domestic ................................ $ 66,911 $ 69,361 $ 47,792
International ........................... 7,535 8,032 12,768
-------- -------- --------
Total ................................. 74,446 77,393 60,560
Investment in Elcat, Inc. ............... 5,000 - -
Discontinued operations ................. - 5,015 4,512
Corporate ............................... 3,964 3,034 4,462
-------- -------- --------
Consolidated .......................... $ 83,410 $ 85,442 $ 69,534
======== ======== ========
</TABLE>

(1) PRINCIPALLY INTEREST EXPENSE, CORPORATE OVERHEAD NOT ALLOCATED AND
NONRECURRING AND UNUSUAL CHARGES.

<PAGE>

BOARD OF DIRECTORS OFFICERS CHATTEM, INC.
<S> <C> <C>
ZAN GUERRY ZAN GUERRY Chattanooga, Tennessee 37409
Chairman and President Chairman and President Corporate Office
Chattem, Inc.
Chattanooga, Tennessee ROBERT E. BOSWORTH SUBSIDIARIES AND AFFILIATED COMPANIES
Executive Vice President
SAMUEL E. ALLEN and Chief Financial Officer CHATTEM (U.K.) LIMITED
Chairman Guerry House
GLOBALT, Inc. HUGH F. SHARBER Ringway Centre
Atlanta, Georgia Secretary Edison Road
Basingstoke, Hampshire RG21 2YH
LOUIS H. BARNETT ADDITIONAL FINANCIAL England
Business Consultant INFORMATION
Fort Worth, Texas COMMENCING WITH THE 1996 CHATTEM (CANADA) INC.
FISCAL YEAR, THE COMPANY 2220 Argentia Road
ROBERT E. BOSWORTH WILL DISCONTINUE ISSUING Mississauga, Ontario L5N 2K7
Executive Vice President PRINTED QUARTERLY REPORTS
and Chief Financial Officer TO STOCKHOLDERS. IN PLACE HBA INSURANCE LTD.
Chattem, Inc. OF THESE REPORTS, THE P. O. Box HM 2062
Chattanooga, Tennessee COMPANY WILL FORWARD TO Hamilton 5, Bermuda
REQUESTING SHAREHOLDERS
ROBERT M. BOYD, JR. COPIES OF QUARTERLY PRESS SIGNAL INVESTMENT &
Business Consultant RELEASES AND/OR QUARTERLY MANAGEMENT CO.
Hilton Head, South Carolina REPORTS ON FORM 10-Q FILED 1100 North Market Street
WITH THE SECURITIES AND Suite 780, Wilmington Trust Center
RICHARD E. CHENEY EXCHANGE COMMISSION. Wilmington, Delaware 19801-1239
Former Chairman Emeritus BOTH THE QUARTERLY
Hill and Knowlton, Inc. INFORMATION AND THE COMMON STOCK LISTING
New York, New York COMPANY'S ANNUAL REPORT Over-the-Counter
ON FORM 10-K FILED WITH THE NASDAQ Symbol: CHTT
SCOTT L. PROBASCO, JR. COMMISSION MAY BE OBTAINED
Chairman of the Executive WITHOUT CHARGE BY WRITING TO TRANSFER AGENT AND
Committee THE DIRECTOR OF FINANCE, REGISTRAR
SunTrust Bank, Tennessee, N.A. CHATTEM, INC. OR BY CALLING SunTrust Bank, Atlanta, N.A.
Chattanooga, Tennesee 1-800-366-6077, EXT. 769 P. O. Box 4625
Atlanta, GA 30302

A. ALEXANDER TAYLOR II
Partner
Miller & Martin
Chattanooga, Tennessee

</TABLE>

<PAGE>

EXHIBIT 22

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

<PAGE>

EXHIBIT 24

CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS

As independent public accounts, we hereby consent to the incorporation of our
report included in this Form 10-K, into the Company's previously filed
Registration Statement on Form S-8 (No. 33-78524) and Registration Statement
on Form S-8 (No. 33-78522).

ARTHUR ANDERSEN LLP

Chattanooga, Tennessee
February 26, 1996

<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from Chattem,
Inc.'s audited financial statements and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000

<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> NOV-30-1995
<PERIOD-START> DEC-01-1994
<PERIOD-END> NOV-30-1995
<CASH> 3,636
<SECURITIES> 0
<RECEIVABLES> 16,534
<ALLOWANCES> 286
<INVENTORY> 8,678
<CURRENT-ASSETS> 31,074
<PP&E> 24,461
<DEPRECIATION> 15,131
<TOTAL-ASSETS> 83,410
<CURRENT-LIABILITIES> 20,820
<BONDS> 79,689
0
0
<COMMON> 1,519
<OTHER-SE> (18,940)
<TOTAL-LIABILITY-AND-EQUITY> 83,410
<SALES> 100,598
<TOTAL-REVENUES> 100,598
<CGS> 29,755
<TOTAL-COSTS> 86,130
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 11,075
<INCOME-PRETAX> 3,610
<INCOME-TAX> 1,285
<INCOME-CONTINUING> 2,325
<DISCONTINUED> 10,008
<EXTRAORDINARY> (367)
<CHANGES> 0
<NET-INCOME> 11,966
<EPS-PRIMARY> 1.64
<EPS-DILUTED> 1.64

</TABLE>