CHATTEM INC, 10-K, 2000-02-28

CHATTEM INC
10-K, 2000-02-28
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, 1999 COMMISSION FILE NUMBER 0-5905

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

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

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

NONE NONE

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

COMMON STOCK, WITHOUT PAR VALUE

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

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

AS OF FEBRUARY 25, 2000 THE AGGREGATE MARKET VALUE OF VOTING SHARES HELD BY
NON-AFFILIATES WAS $162,123,124
AS OF FEBRUARY 25, 2000 9,628,464 COMMON SHARES WERE OUTSTANDING.

DOCUMENTS INCORPORATED BY REFERENCE:

PORTIONS OF THE REGISTRANT'S ANNUAL REPORT TO STOCKHOLDERS FOR FISCAL YEAR ENDED
NOVEMBER 30, 1999 (THE "1999 ANNUAL REPORT TO STOCKHOLDERS") ARE INCORPORATED BY
REFERENCE IN PARTS I, II AND IV OF THIS REPORT. PORTIONS OF THE REGISTRANT'S
DEFINITIVE PROXY STATEMENT DATED MARCH 10, 2000 (THE "PROXY STATEMENT") ARE
INCORPORATED BY REFERENCE IN PART III OF THIS REPORT.

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PART I

ITEM 1. BUSINESS

GENERAL

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

Our portfolio of branded products includes:

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

- Toiletries and skin care products, including BAN
antiperspirants and deodorants, PHISODERM skin cleansers
and BULLFROG sunblock.

Several of these brands have the number one market share in their categories,
including GOLD BOND (medicated powders) and BAN (roll-on antiperspirant/
deodorant).

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

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

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DEVELOPMENTS DURING FISCAL 1999

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

On December 21, 1998 the Company also announced the filing of a shelf
registration with the Securities and Exchange Commission for $250,000,000 of
debt and equity securities. This shelf filing will allow the Company to access
the capital markets on a more immediate basis to fund internal growth and
acquisitions and strengthen its balance sheet.

On May 7, 1999 the Company issued an additional $75,000,000 of 8.875% (priced to
yield 8.8125%) senior subordinated notes under the indenture relating to the
issuance of its $200,000,000 of 8.875% notes on March 24, 1998. The additional
notes mature on April 1, 2008 and were issued under the Company's $250,000,000
shelf registration statement filed on December 21, 1998 with the Securities and
Exchange Commission. The net proceeds from the issuance of the additional notes
were used to retire long-term bank debt.

In fiscal 1999 the Company redeemed 172,500 shares of its common stock, without
par value, for $3,912,000 in accordance with the Company's announced stock
buyback program.

During fiscal 1999 the Company retired $15,106,000 face amount of its 12.75%
senior subordinated notes due 2004.

The Company will continue to seek sales increases through a combination of
acquisitions and internal growth while maintaining high operating income levels.
As previously high-growth brands mature, sales increases will become even more
dependent on acquisitions and the development of successful line extensions of
existing products. During fiscal 1999 the Company introduced the following line
extensions/new products: BAN Ultra Dry Roll-On, BAN Ultra Dry Solid Stick, GOLD
BOND Triple Antibiotic Ointment, REPOSE Stress Relief Formula, BULLFROG MAGIC
BLOCK, SUN-IN Super Streaks, FLEXALL QUIK GEL, MUDD Self-Heating Skin Cleanser
and PHISODERM 4-Way Daily Acne Cleanser. Also, new packaging for the entire BAN
brand was introduced in the second quarter of fiscal 1999.

GROWTH STRATEGY

The Company seeks to expand its business through:

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

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

The Thompson Medical brands in December 1998. With the topical analgesic
products acquired in this purchase, the Company currently is the leading
marketer in the U.S. of brands in this category. Also acquired in this purchase
was DEXATRIM, an appetite suppressant, which is a leading product in its market
group.

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BAN in March 1998. BAN, introduced in 1955, is a leading
antiperspirant/deodorant market brand with the number one U.S. market share in
the roll-on brand segment. The Company introduced two new line extensions and
new packaging for BAN in fiscal 1999.

GOLD BOND in April 1996. GOLD BOND is the leading medicated powder with a
rapidly growing presence in the anti-itch cream and lotion markets. Annual sales
of GOLD BOND have increased by approximately 50% from less than $30 million at
the time of the acquisition, while operating margins have increased during the
same period.

INTERNAL GROWTH. The Company seeks to increase its market share for its existing
brands by focusing on increased market penetration and brand awareness and
introducing product line extensions. Product line extensions allow the Company
to maximize the value of the base brand through an increased market presence and
new market entry. Recent examples of product line extensions include GOLD BOND
Triple Antibiotic Ointment, GOLD BOND Medicated Lotion, BULLFROG MAGIC BLOCK,
BAN Ultra Dry Roll-On, BAN Ultra Dry Solid Stick, PHISODERM 4-Way Daily Acne
Cleaner, MUDD Self-Heating Skin Cleanser and REPOSE Stress Relief Formula from
SUNSOURCE.

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PRODUCTS

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

The Company's product brands are:
OTC HEALTH CARE

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

TOILETRIES AND SKIN CARE

BAN - antiperspirant/deodorant
PHISODERM - facial and hand cleanser
MUDD - facial mask and cleanser
BULLFROG - sunscreen and sunblock
ULTRASWIM - chlorine removing shampoo
SUN-IN - spray-on hair lightener

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

<TABLE>
<CAPTION>
FISCAL YEAR ENDED NOVEMBER 30,
----------------------------------------------------------------------------
1999 1998 1997
--------------------- --------------------- ----------------------
SALES PERCENTAGE SALES PERCENTAGE SALES PERCENTAGE
----- ---------- ----- ---------- ----- ----------
<S> <C> <C> <C> <C> <C> <C>
Domestic:
OTC Health Care........... $ 167,718 56.2% $ 114,060 51.8% $ 92,223 64.4%
Toiletries and Skin Care.. 108,718 36.5 84,850 38.6 33,887 23.7
International:
OTC Health Care........... 4,538 1.5 3,249 2.7 3,053 2.1
Toiletries and Skin Care.. 16,932 5.7 17,004 6.5 12,154 8.5
Other Products............... 236 0.1 901 0.4 1,918 1.3
--------- ------- --------- ------- --------- -------

Total Products......... $ 298,142 100.0% $ 220,064 100.0% $ 143,235 100.0%
========= ======= ========= ======= ========= ========
</TABLE>

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OTC HEALTH CARE

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

The GOLD BOND brand, which is approximately 100 years old, competes in the adult
and baby medicated powder, foot powder, therapeutic lotion, anti-itch cream and
antibiotic ointment markets. GOLD BOND is the leading brand in the medicated
powder category and is a rapidly growing presence in the anti-itch cream market.
Total retail sales for the brand have grown from less than $28 million when the
brand was acquired in fiscal 1996 to over $48 million in fiscal 1999. In 1997
the Company added two line extensions, GOLD BOND foot powder and GOLD BOND
medicated body lotion. GOLD BOND antibiotic ointment was introduced during the
first quarter of 1999. The product line is heavily supported by national
television and radio advertising throughout the year, as well as with consumer
promotions. As evidenced by the success of the lotion, foot powder and ointment
extensions, GOLD BOND continues to represent a significant growth opportunity
both through growth among the existing products as well as with the introduction
of line extensions.

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

Uniquely positioned as the brand that goes on "icy to dull the pain and gets hot
to relax it away", ICY HOT is available in a cream, balm and stick. This dual
action extra strength product appeals to younger users just entering the
category as well as older consumers who want to remain active.

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

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

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

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

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

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DEXATRIM is a line of appetite suppressants which was acquired from Thompson
Medical Company, Inc. in December of 1998. DEXATRIM is available in four
different formulas including gelcaps, which were introduced in early 1999. The
brand is supported through strong television advertising focusing on the safety
and efficacy of DEXATRIM as a diet aid. In 2000 DEXATRIM will enter the herbal
diet aid category with DEXATRIM Natural. DEXATRIM Natural is a drug-free, all
natural diet aid with special dual action that curbs your appetite and helps
your body burn fat and calories. DEXATRIM and DEXATRIM Natural will be supported
through high levels of television advertising in 2000.

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

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

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

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

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

ECHINEX is a standardized herbal complex of echinacea, ginger and Siberian
ginseng. This effective combination supports one's natural resistance against
infection. ECHINEX is a seasonal product that provides adults with added
protection during times of high risk for cold and flu.

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

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TOILETRIES AND SKIN CARE

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

BAN antiperspirant and deodorant products provide advanced protection from odor
and wetness. Originally introduced in 1955, BAN is the number one roll-on brand
in the U.S. The proven maximum strength protection of BAN is available in five
advanced forms, Original Roll-On, Clear Roll-On, Solid Stick, Clear Stick, and
the revolutionary Clear Soft Solid. The product line is supported with
significant national television and radio advertising and consumer promotions.
Two new line extensions, BAN Ultra Dry Roll-on and BAN Ultra Dry Stick, and new
packaging were introduced in the 1999 fiscal year.

PHISODERM is a line of facial cleansers developed by dermatologists which
retains an ethical, skin smart halo. The line includes several formulas of
liquid cleansers including one for infants and a bar soap. In 1999 PHISODERM
added a 4-Way Daily Acne Cleanser to the line which has generated significant
incremental new business to the brand. Marketing support of the brand has been
in the form of radio advertising for the base products and print advertising in
teen magazines for the acne product in addition to extensive sampling of all
formulas. In 2000 the Company anticipates further expanding the acne portion of
the business with unique new line extensions.

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

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

ULTRASWIM is a line of chlorine removing shampoos, conditioners, and soaps.
ULTRASWIM has a unique formula that performs chlorine removal better than any
comparable haircare or skincare product on the market. The Company supports this
brand through targeted print advertising to competitive, recreational and
exercise swimmers and through event sponsorship with targeted sampling programs.

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

INTERNATIONAL

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

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

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

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

MANUFACTURING AND QUALITY CONTROL

The Company manufactures approximately one-half of the sales volume of its
products at its Chattanooga plant. BAN, GOLD BOND medicated powders, the
SUNSOURCE brands, the Thompson Medical brands and NORWICH Aspirin are
manufactured by third party contract manufacturers. With the addition of a newly
purchased facility and through third party manufacturers, the Company has
adequate capacity to meet anticipated demand for its products. New products that
are consistent with currently manufactured products can generally be
manufactured with the adaptation of existing equipment and facilities, the
addition of new equipment at relatively small cost or through readily available
contract manufacturers. For additional information about the extent of
utilization of the Company's manufacturing facilities, see "Properties", Item 2,
in this report.

The Company's third party manufacturers produce certain products including GOLD
BOND powders, the Thompson Medical brands and the SUNSOURCE line. Additionally,
we have a manufacturing agreement with Bristol-Myers Squibb Company ("BMS"),
where BMS will manufacture BAN for us until March 2001. In most cases, other
than with BAN, the manufacturer is not obligated under a contract that fixes
the term of its commitment. Manufacturers may experience problems with product
quality or timeliness of product delivery. Manufacturers may also discontinue
production of brands for us upon little or no advance notice. In each case, we
believe that other contract manufacturers could be quickly secured if any of our
current contractors cease to perform adequately. However, if this occurs and we
cannot find other contract manufacturers, we may be forced to shift production
to in-house facilities. This may cause manufacturing delays, which would cause
disruption in our ability to fill orders. This could adversely affect our
business.

To monitor the quality of its products, the Company maintains an internal
quality control system supported by an on-site microbiology laboratory. We have
quality control inspectors who regularly test our products and processes and
shepherd the products through the manufacturing cycle. Outside consultants also

<PAGE>

are employed from time to time to monitor product development and the
effectiveness of the Company's operations.

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

PRODUCT DEVELOPMENT

The Company's product development expenditures were $1,839,000, $1,369,000 and
$1,207,000 in the fiscal years ended November 30, 1999, 1998 and 1997,
respectively. No material customer-sponsored product development activities were
undertaken during these periods. The Company expects product development
expenditures to increase in fiscal 2000 due to greater emphasis on developing
line extension opportunities.

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

DISTRIBUTION

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

Wal-Mart Stores, Inc. accounts for more than 10% of the Company's consolidated
net sales. No other customer accounts for more than 10% of consolidated net
sales. Boots Plc, a U.K. retailer, 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 fiscals 1996-1999
largely as a result of product acquisitions and line extensions in those years.
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 39.5%, 39.3%
and 39.2%, respectively, as a percentage of net sales during each of the fiscal
years ended November 30, 1999, 1998 and 1997.

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

The Company develops for each of its major brands advertising strategies and
executions that sell the product by focusing on the particular strengths and
market position of the product rather than just entertaining the viewer. The
Company achieves cost-effective advertising by minimizing certain expenses, such
as production of commercials and payments to advertising agencies. New product
launches are supported with a substantial level of advertising and promotional
spending. We often use celebrity endorsements to increase awareness of our
products, such as Larry King's endorsement of GARLIQUE and Joe Montana's
endorsement of FLEXALL. Where appropriate, we use radio advertising and
15-second television advertisements. In our advertisements, we have successfully
used personal testimonials from individuals attesting to the effectiveness of
our products.

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

SEASONALITY

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 domestic and international consumer products and the relative
absence of promotional campaigns during this quarter. As a result of the
Company's acquisitions of BAN and the Thompson Medical brands, seasonality
should not be as pronounced as in years past; however, net sales and gross
profit during the first quarter will continue to trail the other fiscal
quarters.

COMPETITION

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

<PAGE>

TRADEMARKS AND PATENTS

Our trademarks are of material importance to our business and are among our most
important assets. In fiscal year 1999, substantially all of our net sales were
from products bearing proprietary brands names, including BAN, GOLD BOND,
FLEXALL, ICY HOT, PAMPRIN, GARLIQUE, PHISODERM, DEXATRIM and BULLFROG.
Accordingly, our future success may depend in part upon the goodwill associated
with our brand names, particularly BAN, GOLD BOND and DEXATRIM.

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

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

The Company also owns patents related to the ICY HOT stick topical analgesics,
which expire in 2007, and numerous patents related to the BAN antiperspirant and
deodorant products. 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.

GOVERNMENT REGULATION

The manufacturing, processing, formulation, packaging, labeling and advertising
of the Company's products are subject to regulation by federal agencies,
including:

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

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

<PAGE>

All of the Company's OTC drug products are regulated pursuant to the FDA's
monograph system for OTC drugs. The monographs set out the active ingredients
and labeling indications that are permitted for certain broad categories of OTC
drug products, such as topical analgesics. Compliance with the monograph
provisions means that the product is generally recognized as safe and effective
and is not misbranded. Future changes in the monographs could result in the
Company having to revise product labeling and formulations. The Company
responded to certain questions with respect to efficacy received from the FDA in
connection with clinical studies for pyrilamine maleate, one of the active
ingredients used in certain of the PAMPRIN and PREMSYN PMS products. While the
Company addressed all of the FDA questions in detail, the final monograph for
menstrual drug products will determine if the FDA considers pyrilamine maleate
safe and effective for menstrual relief products. The Company has been actively
monitoring the process and does not believe that either PAMPRIN or PREMSYN PMS
will be materially adversely affected by the FDA review. The Company believes
that any adverse finding by the FDA would likewise affect the Company's
principal competitor in the menstrual product category.

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

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

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

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

<PAGE>

In 1994 the Nonprescription Drug Manufacturers Association (now the Consumer
Healthcare Products Association) initiated a large scale study in conjunction
with the Yale University School of Medicine to investigate a possible
association, if any, of stroke in women aged 18 to 49 using
phenylpropanolamine ("PPA"), the active ingredient in DEXATRIM, for weight
loss (the "Yale Study"). PPA is also used in other over-the-counter
medications which are also part of the study. The Yale Study was designed in
collaboration with the FDA. Analysis of the study is currently in progress
and results are scheduled to be issued in mid-2000. Following a review of the
results by the FDA there is the possibility that the product would have to be
reformulated or discontinued. As a result, the DEXATRIM business would suffer,
which would adversely affect our business. The Company has launched DEXATRIM
Natural which does not include PPA.

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

ENVIRONMENTAL

The Company continuously assesses compliance of its operations with applicable
federal, state and local environmental laws and regulations. The Company's
policy is to record liabilities for environmental matters when loss amounts are
probable and reasonably determinable. The Company's manufacturing 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 government agencies, and has engaged
environmental consultants on a regular basis to assist its compliance efforts.
The Company 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.

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

In December 1998, the Company was named in a lawsuit with 37 other companies as
potentially responsible parties for the disposal of waste materials found at a
site in Birmingham, Alabama. Although the facts surrounding this case are
unclear, the Company believes a company it used periodically during 1986 and
1987 to treat, store and dispose of waste materials from its manufacturing
processes improperly disposed of these waste materials. The Company cannot
currently assess its potential liability resulting from this lawsuit, but if the
Company is found liable its business could be adversely affected.

<PAGE>

PRODUCT LIABILITY AND INSURANCE

An inherent risk of the Company's business is exposure to product liability
claims brought by users of the Company's products or by others. Except as set
forth in Item 3, "Legal Proceedings", of this Form 10-K, the Company 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 that if adversely
decided would negatively affect us. While the Company will continue to
attempt to take what it considers to be appropriate precautions, there can be
no assurance that it will avoid significant product liability exposure. The
Company maintains product liability insurance, principally through third
party insurers, that it believes to be adequate; however, there can be no
assurance that it will be able to retain its existing coverage or that such
coverage will be cost-justified or sufficient to satisfy future claims, if
any.

EMPLOYEES

The Company employs approximately 366 persons on a full-time basis in the U.S.
and 34 persons at its foreign subsidiaries' offices. The Company's employees are
not represented by any organized labor union, and management considers its labor
relations to be good.

<PAGE>

RISK FACTORS

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

RISKS RELATED TO POTENTIAL FUTURE ACQUISITIONS

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

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

PRODUCT DEVELOPMENT RISKS

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

<PAGE>

RELIANCE ON BRANDS; INTELLECTUAL PROPERTY CONCERNS

If the Company is unable to successfully protect its intellectual property,
the Company's business could be adversely affected. The Company's trademarks
are of material importance to its business and are among its most important
assets. In fiscal year 1999, substantially all of the Company's net sales
were from products bearing proprietary brand names, including BAN, GOLD BOND,
FLEXALL, ICY HOT, PAMPRIN, GARLIQUE, PHISODERM and DEXATRIM. Accordingly,
the Company's future success may depend in part upon the goodwill associated
with its brand names, particularly BAN, GOLD BOND and DEXATRIM.

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

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

RISK OF LOSS OF MATERIAL CUSTOMER

For the year ended November 30, 1999, sales to Wal-Mart Stores, Inc.
("Wal-Mart") accounted for approximately 19% of the Company's total sales.
Consistent with industry practice, the Company does not operate under a
long-term written supply contract with Wal-Mart or any of its other
customers. The Company's business would be adversely affected by the loss of
Wal-Mart as a continuing major customer. No other customer accounted for
more than 10% of the Company's sales in fiscal 1999.

PUBLIC PERCEPTION

The Company's dietary supplement and appetite suppressant business could be
adversely affected if any of its products or similar products distributed by
other companies prove to be harmful to consumers or if scientific studies
provide unfavorable findings regarding the safety or effectiveness of its
products or any similar products.

The Company's dietary supplements products contain vitamins, minerals, herbs
and other ingredients that the Company regards as safe when taken as directed
by the Company and that various scientific studies have suggested may offer
health benefits. While the Company conducts extensive quality control
testing on its products, the Company generally does not conduct or sponsor

<PAGE>

clinical studies relating to the benefits of its products, although the
Company did conduct a limited number of clinical studies in 1999. The
Company is highly dependent upon consumers' perception of the overall
integrity of the dietary supplements business, as well as the safety and
quality of products in that industry and similar products distributed by
other companies which may not adhere to the same quality standards as the
Company.

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

YALE STUDY

DEPENDENCE ON THIRD PARTY MANUFACTURERS

The Company's business could be adversely affected if its third party
manufacturers cease to perform adequately. The Company uses third party
manufacturers to make products representing approximately one-half of its
sales volume, including GOLD BOND powders, the SUNSOURCE line and DEXATRIM.
Additionally, the Company has entered into a manufacturing agreement with
Bristol-Myers Squibb Company ("BMS"), whereby BMS will manufacture BAN for
the Company until March 2001. In most other cases, the manufacturer is not
obligated under a contract that fixes that term of its commitment.
Manufacturers may experience problems with product quality or timeliness of
product delivery. Manufacturers may also discontinue production of products
for the Company or increase their manufacturing costs upon little or no
advance notice. In any case, the Company believes that it could find other
contract manufacturers quickly if any of its current contractors cease to
perform adequately. However, if this occurs and the Company cannot find
other contract manufacturers, the Company may be forced to shift production
to in-house facilities. This may cause manufacturing delays, which would
cause disruption in the Company's ability to fill orders. This could
adversely affect the Company's business.

18
<PAGE>

PRODUCT LIABILITY AND INSURANCE

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

LEVERAGE

As of November 30, 1999, the Company's long-term debt was $358,950,000. The
degree to which the Company is leveraged could have important consequences,
including, but not limited to, the following: (i) the Company's ability to
obtain additional financing in the future for working capital, capital
expenditures, acquisitions, general corporate purposes or other purposes may
be limited or become impaired; (ii) a portion of the Company's borrowings are
and will continue to be at variable rates of interest, which could result in
higher interest expenses in the event of increases in interest rates; and
(iii) such indebtedness contains and will contain financial and restrictive
covenants, the failure to comply with which may result in an event of default
which, if not cured or waived, could have a material adverse effect on the
Company.

DEPENDENCE ON SENIOR MANAGEMENT

The Company's future performance will depend to a significant degree upon the
efforts and abilities of certain members of senior management, in particular
those of Zan Guerry, Chairman of the Board and Chief Executive Officer, and
A. Alexander Taylor, II, President and Chief Operating Officer. The loss of
the services of either Messrs. Guerry or Taylor, neither of whom has an
employment agreement with the Company, could have an adverse effect on the
Company's business.

RISKS OF FOREIGN OPERATIONS

For the year ended November 30, 1999, 7.3% of the Company's net sales were
attributable to its international business. The Company is subject to the
risk of doing business internationally, including unexpected changes in, or
impositions of, legislative or regulatory requirements, fluctuations in the
United States dollar against foreign currencies, which could increase the
price of the Company's products in foreign markets or increase the cost of
certain raw materials purchased by the Company, delays resulting from
difficulty in obtaining export licenses, tariffs and other barriers and
restrictions, potentially longer payment cycles, greater difficulty in
accounts receivable collecting, potentially adverse tax treatment and the
burden of complying with a variety of foreign laws. In addition, the Company
is subject to general geopolitical risks, such as political and economic
instability and changes in diplomatic and trade relationships, which could

19
<PAGE>

affect, among other things, customers' inventory levels and consumer
purchasing. Although the Company has not to date experienced any material
adverse effect as a result of such factors, there can be no assurance that
such factors will not adversely affect the Company in the future. In
addition, the laws of certain foreign countries may not protect the Company's
intellectual property rights to the same extent as the laws of the United
States.

VOLATILITY OF STOCK PRICE

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

DIVIDEND POLICY

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

<PAGE>

ITEM 2. PROPERTIES

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

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

*Acquired in October 1998 and currently being renovated for production
to begin in early 2000.

NOTES:

(1) Leased under a five year lease ending January 31, 2001 for a monthly rental
of $34,547.
(2) Leased on a month-to-month basis for a monthly rental of $1,575.
(3) Leased under a two year lease ending January 31, 2001 for a monthly
rental of $33,750.
(4) Leased under a lease ending November 30, 2004 at a monthly rental,
including property taxes and other incidentals, of approximately $5,532.
(5) Leased under leases ending in 2014 and 2015 at a monthly rental,
including property taxes and other incidentals, of approximately
$23,106.

<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 the addition of a third
shift.

ITEM 3. LEGAL PROCEEDINGS

Note 10 of the Notes to Consolidated Financial Statements on page 43 of the
Company's 1999 Annual Report to Stockholders 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 26 and 41 to 43 of the Company's 1999 Annual
Report to Stockholders is incorporated herein by reference.

ITEM 6. SELECTED FINANCIAL DATA

The information found on page 26 of the Company's 1999 Annual Report to
Stockholders is incorporated herein by reference.

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

The information found on pages 16 to 25 of the Company's 1999 Annual Report
to Stockholders is incorporated herein by reference.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The information found on pages 27 to 56 of the Company's 1999 Annual Report
to Stockholders 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 AND EXECUTIVE OFFICERS OF THE REGISTRANT

(a) DIRECTORS

The information found in the Company's 2000 Proxy Statement under the
heading "Information about Nominees and Continuing Directors" is hereby
incorporated by reference.

(b) EXECUTIVE OFFICERS

The following table lists the names of the executive officers and other
key employees of the Company as of February, 2000, their ages, their positions
and offices with the Company and the year in which they were first elected or
appointed to these positions:

NAME AGE POSITION WITH REGISTRANT FIRST ELECTED
--------- --- ---------------------------- -------------
<S> <C> <C> <C>
Zan Guerry 51 Chairman of the Board and 1990
Chief Executive Officer; Director
A. Alexander Taylor II 46 President and Chief Operating Officer; 1998
Director
Andrea M. Crouch 41 Vice-President - Toiletries Marketing 1995

Gary M. Galante 52 Vice-President - Research and Development 1995

Ron Galante 55 Vice-President - New Business Development 1993

Robert S. Marshall 34 Vice-President - OTC Marketing 1996

B. Derrill Pitts 56 Vice-President - Operations 1984

Charles M. Stafford 49 Vice-President - Sales 1994

Stephen M. Powell 38 Controller 1995
</TABLE>

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

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

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

Mr. G. Galante was appointed to his present position in September 1995.
Previously he was Director of Research and Development. He joined the
Company in 1983 as Manager of New Product Development and was denoted an
executive officer in January 1999.

<PAGE>

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

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

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

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

Mr. Powell, a Certified Public Accountant, was appointed to his present
position with the Company in June 1995. Previously he was the Financial
Reporting Manager for Brock Candy Company. He worked for Joseph Decosimo and
Co., CPA's, from 1985 to 1993 where he was a manager in the audit department.

The information found in the Company's 2000 Proxy Statement under the heading
"Section 16(a) Beneficial Reporting Compliance" is hereby incorporated by
reference.

ITEM 11. EXECUTIVE COMPENSATION

The information found in the Company's 2000 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 2000 Proxy Statement under the heading
"Voting Securities and Principal Holders Thereof" is hereby incorporated by
reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Louis H. Barnett and Robert E. Bosworth, directors of the Company, received
$33,000 and $33,667, respectively, in consulting fees during fiscal 1999 for
services rendered to the Company in a capacity other than as a director.

<PAGE>

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS 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 27 to 56 of the
Company's 1999 Annual Report to Stockholders.

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

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT REFERENCES
------- --------------------------- ----------
<S> <C> <C>
3 Restated Charter of Chattem, Inc., as
amended

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

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

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

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

10 Material Contracts -

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

Credit Agreement dated April 29, 1996
among Chattem, Inc., as borrower, Signal
Investment & Management Co., as
Guarantor, NationsBank, N.A., as agent,
and the Lenders named therein (6)
</TABLE>

<PAGE>

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT REFERENCES
------- --------------------------- ----------
<S> <C> <C>
10 Credit Agreement dated April 29, 1996
(Secondary Working Capital Facility)
among Chattem, Inc., as borrower, Signal
Investment & Management Co., as
guarantor, NationsBank, N.A., as agent,
and the Lenders named therein (6)

Asset Purchase Agreement dated June 6,
1996 between Campbell Laboratories,
Inc., seller, and Chattem, Inc. and Signal
Investment & Management Co.,
purchasers, for the HERPECIN-L
business (6)

Amendment to the Credit Agreement (HERPECIN-L
Acquisition) dated June 6, 1996 among Chattem,
Inc., as borrower, Signal Investment & Management
Co., as guarantor, Nationsbank, N.A., as agent,
and the Lenders named therein (6)

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

Amended and Restated Credit Agreement
dated June 26, 1997 by and among Chattem,
Inc., Signal Investment & Management Co.
and the Lenders named therein
(7)
Amended and Restated Credit Agreement
(Supplemental Credit Agreement) dated
June 26, 1997 by and among Chattem,
Inc., Signal Investment & Management
Co. and the Lenders named therein (7)

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

Chattem, Inc. Non-Statutory Stock
Option Plan- 1998 (8)
</TABLE>

<PAGE>

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT REFERENCES
------- --------------------------- ----------
<S> <C> <C>
10 Asset Purchase Agreement dated
February 22, 1998 by and among
Bristol-Myers Squibb Company, Chattem,
Inc. and Signal Investment &
Management Co. for the BAN business (9)

Amended and Restated Credit Agreement
(New Credit Agreement) dated March 24,
1998 by and among Chattem, Inc., Signal
Investment & Management Co. and
NationsBank of Tennessee, N.A. (10)

Amended and Restated Credit Agreement
(Supplemental Credit Agreement) dated
March 24, 1998 by and among Chattem,
Inc., Signal Investment & Management Co.
and NationsBank of Tennessee, N.A. (10)

Asset Purchase and Sale Agreement dated
May 12, 1998 by and among Chattem,
Inc., Signal Investment & Management
Co. and Del Laboratories, Inc for the
sale of the CORNSILK business (11)

Commercial Lease dated April 1, 1998
between Chattem, Inc., lessee, and
Kenco Group, Inc., lessor, for warehouse
space Located at 4309 Distribution Avenue,
Chattanooga,Tennessee. (12)

Purchase and Sale Agreement dated
November 16, 1998 by and among Thompson
Medical Company, Inc., Chattem, Inc. and
Signal Investment & Management Co. for
certain products (13)

Amended and Restated Credit Agreement (New Credit
Agreement) dated December 21, 1998 among Chattem,
Inc., its domestic subsidiaries, identified
Lenders and NationsBank, N.A. as agent (13)

Amended and Restated Credit Agreement
(Supplemental Credit Agreement) dated December
21, 1998 among Chattem, Inc., its domestic
subsidiaries, identified Lenders and NationsBank,
N.A., as agent (13)
</TABLE>

<PAGE>

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT REFERENCES
------- --------------------------- ----------
<S> <C> <C>
10 First Amendment dated May 7, 1999 to Amended and
Restated Credit Agreement (New Credit Agreement)
dated December 21, 1998 among Chattem, Inc., its
domestic subsidiaries, identified Lenders and
NationsBank, N.A., as agent

First Amendment dated May 7, 1999 to Amended and
Restated Credit Agreement (Supplemental Credit
Agreement) dated December 21, 1998 among Chattem,
Inc., its domestic subsidiaries, identified
Lenders and NationsBank, N.A., as agent

Termination Agreement dated November 30, 1999 to
SUNSOURCE Asset Purchase and Sale Agreement dated
May 23, 1997

Chattem, Inc. Non-Statutory Stock Option
Plan - 2000

Non-Competition and Severance
Agreements as amended -
Zan Guerry
A. Alexander Taylor II
Robert E. Bosworth

Non-Competition and Severance
Agreements as amended -
Andrea M. Crouch
Gary M. Galante
Ron Galante
Christopher S. Keller
Robert S. Marshall
B. Derrill Pitts
Stephen M. Powell
Charles M. Stafford

11 Computation of Per Share Earnings

13 1999 Annual Report to Stockholders of
Chattem, Inc.

22 Subsidiaries of the Company

23 Consent of Independent Public
Accountants

27 Financial Data Schedule
</TABLE>

<PAGE>

REFERENCES:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

(b) No reports on Form 8-K were filed with the Securities and Exchange
Commission during the three months ended November 30, 1999.

(c) The Financial Statements and related report of independent public
accountants required to be filed with this report pursuant to Rule
3-10(a) of Article 3 of Regulation S-X are incorporated by reference from
pages 5 to 12 of Signal Investment & Management Co.'s Form 10-K for the
fiscal year ended November 30, 1999.

<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 24, 2000 CHATTEM, INC.
By: /s/ ZAN GUERRY
---------------------------------
Zan Guerry
Title: Chairman and Chief
Executive Officer

By: /s/ STEPHEN M. POWELL
---------------------------------
Stephen M. Powell
Title: Controller (Chief
Accounting Officer)

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

SIGNATURE TITLE DATE
- -------------------------- ------------------------- ---------
<S> <C> <C>
/s/ ZAN GUERRY Chairman of the Board 2-24-00
- -------------------------- and Director ----------
Zan Guerry (Chief Executive Officer)

/s/ A. ALEXANDER TAYLOR II President and Director 2-24-00
- -------------------------- (Chief Operating Officer) ----------
A. Alexander Taylor II

/s/ SAMUEL E. ALLEN Director 2-24-00
- -------------------------- ----------
Samuel E. Allen

/s/ LOUIS H. BARNETT Director 2-24-00
- -------------------------- ----------
Louis H. Barnett

/s/ ROBERT E. BOSWORTH Director 2-24-00
- -------------------------- ----------
Robert E. Bosworth

/s/ RICHARD E. CHENEY Director 2-24-00
- -------------------------- ----------
Richard E. Cheney

/s/ SCOTT L. PROBASCO, JR. Director 2-24-00
- -------------------------- ----------
Scott L. Probasco, Jr.

/s/ PHILIP H. SANFORD Director 2-24-00
- -------------------------- ----------
Philip H. Sanford
</TABLE>
31

<PAGE>

CHATTEM, INC. AND SUBSIDIARIES
EXHIBIT INDEX

EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
--------- -------------------------------------------------

3 Restated Charter of Chattem, Inc., as amended

10.1 First Amendment dated May 7, 1999 to Amended and
Restated Credit Agreement (New-Credit Agreement)
dated December 21, 1998 among Chattem, Inc., its
domestic subsidiaries, identified Lenders and
NationsBank, N.A., as agent

10.2 First Amendment dated May 7, 1999 to Amended and
Restated Credit Agreement (Supplemental Credit
Agreement) dated December 21, 1998 among Chattem,
Inc., its domestic subsidiaries, identified Lenders
and NationsBank, N.A., as agent

10.3 Termination Agreement dated November 30,1999 to
SUNSOURCE Asset Purchase and Sale Agreement dated
May 23, 1997

10.4 Chattem, Inc. Non-Statutory Stock Option Plan - 2000

10.5 Non-Competition and Severance Agreements as amended

10.6 Non-Competition and Severance Agreements as amended

11 Computation of per share earnings

13 1999 Annual Report to Stockholders of Chattem, Inc.

22 Subsidiaries of the Company

23 Consent of Independent Public Accountants

27 Financial Data Schedule

<PAGE>

EXHIBIT 3

ARTICLES OF AMENDMENT TO THE
RESTATED CHARTER
OF
CHATTEM, INC.

Pursuant to the provisions of Section 48-16-102 of the Tennessee Business
Corporation Act (the "Act"), the undersigned corporation adopts the following
Articles of Amendment to its Restated Charter:

1. The name of the corporation is Chattem, Inc.

1. The text of the amendment adopted is:

A new Section 7 as set forth below shall be added to the
Restated Charter and current Sections 7 through 14 shall be
renumbered as Sections 8 through 15:

7. A series of preferred shares of the corporation is hereby
given the distinctive designation of "Series A Junior
Participating Preferred Stock," said series to consist of two
hundred thousand (200,000) shares without par value, of which
the preference and relative, participating, optional and other
special rights of such series and the qualifications,
limitations or restrictions thereof shall be as follows:

(a) DIVIDENDS AND DISTRIBUTIONS.

(i) Subject to the prior and superior rights
of the holders of any shares of any series of Preferred Stock
ranking prior and superior to the shares of Series A Junior
Participating Preferred Stock with respect to dividends, the
holders of shares of Series A Junior Participating Preferred
Stock shall be entitled to receive, when, as and if declared
by the Board of Directors out of funds legally available for
the purpose, quarterly dividends payable in cash on the first
day of March, June, September and December in each year (each
such date being referred to herein as a "Quarterly Dividend
Payment Date"), commencing on the first Quarterly Dividend
Payment Date after the first issuance of a share or fraction
of a share of Series A Junior Participating Preferred Stock,
in an amount per share (rounded to the nearest cent) equal to
the greater of (A) $1.00 or (B) subject to the provision for
adjustment hereinafter set forth, 100 times the

<PAGE>
aggregate per share amount of all cash dividends, and 100 times
the aggregate per share amount (payable in kind) of all non-cash
dividends or other distributions other than a dividend payable in
shares of Common Stock or a subdivision of the outstanding shares
of Common Stock (by reclassification or otherwise), declared on
the Common Stock, without par value, of the corporation (the
"Common Stock") since the immediately preceding Quarterly
Dividend Payment Date, or, with respect to the first Quarterly
Dividend Payment Date, since the first issuance of any share or
fraction of a share of Series A Junior Participating Preferred
Stock. In the event the corporation shall at any time after
February 11, 2000 (the "Rights Dividend Declaration Date") (i)
declare any dividend on Common Stock payable in shares of Common
Stock, (ii) subdivide the outstanding Common Stock, or (iii)
combine the outstanding Common Stock into a smaller number of
shares, then in each such case the amount to which holders of
shares of Series A Junior Participating Preferred Stock were
entitled immediately prior to such event under clause (B) of the
preceding sentence shall be adjusted by multiplying such amount
by a fraction the numerator of which is the number of shares of
Common Stock outstanding immediately after such event and the
denominator of which is the number of shares of Common Stock that
were outstanding immediately prior to such event.

(ii) The corporation shall declare a
dividend or distribution on the Series A Junior Participating
Preferred Stock as provided in Paragraph (i) of this Section
(a) immediately after it declares a dividend or distribution
on the Common Stock (other than a dividend payable in shares
of Common Stock); provided that, in the event no dividend or
distribution shall have been declared on the Common Stock
during the period between any Quarterly Dividend Payment Date
and the next subsequent Quarterly Dividend Payment Date, a
dividend of $1.00 per share on the Series A Junior
Participating Preferred Stock shall nevertheless be payable on
such subsequent Quarterly Dividend Payment Date.

(iii) Dividends shall begin to accrue and be
cumulative on outstanding shares of Series A Junior
Participating Preferred Stock from the Quarterly Dividend
Payment Date next preceding the date of issue of such shares
of Series A Junior Participating Preferred Stock, unless the
date of issue of such shares is prior to the record date for
the first

<PAGE>

Quarterly Dividend Payment Date, in which case
dividends on such shares shall begin to accrue from the date
of issue of such shares, or unless the date of issue is a
Quarterly Dividend Payment Date or is a date after the record
date for the determination of holders of shares of Series A
Junior Participating Preferred Stock entitled to receive a
quarterly dividend and before such Quarterly Dividend Payment
Date, in either of which events such dividends shall begin to
accrue and be cumulative from such Quarterly Dividend Payment
Date. Accrued but unpaid dividends shall not bear interest.
Dividends paid on the shares of Series A Junior Participating
Preferred Stock in an amount less than the total amount of
such dividends at the time accrued and payable on such shares
shall be allocated pro rata on a share-by-share basis among
all such shares at the time outstanding. The Board of
Directors may fix a record date for the determination of
holders of shares of Series A Junior Participating Preferred
Stock entitled to receive payment of a dividend or
distribution declared thereon, which record date shall be no
more than 30 days prior to the date fixed for the payment
thereof.

(b) VOTING RIGHTS. The holders of shares of Series A
Junior Participating Preferred Stock shall have the following
voting rights:

(i) Subject to the provision for adjustment
hereinafter set forth, each share of Series A Junior
Participating Preferred Stock shall entitle the holder thereof
to 100 votes on all matters submitted to a vote of the
shareholders of the corporation. In the event the corporation
shall at any time after the Rights Dividend Declaration Date
(A) declare or pay any dividend on Common Stock payable in
shares of Common Stock, (B) subdivide the outstanding Common
Stock, or (C) combine the outstanding Common Stock into a
smaller number of shares, then in each such case the number of
votes per share to which holders of shares of Series A Junior
Participating Preferred Stock were entitled immediately prior
to such event shall be adjusted by multiplying such number by
a fraction the numerator of which is the number of shares of
Common Stock outstanding immediately after such event and the
denominator of which is the number of shares of Common Stock
that were outstanding immediately prior to such event.

3
<PAGE>

(ii) Except as otherwise provided herein or
by law, the holders of shares of Series A Junior Participating
Preferred Stock and the holders of shares of Common Stock
shall vote together as one class on all matters submitted to a
vote of shareholders of the corporation.

(iii) (A) If at any time dividends on any
Series A Junior Participating Preferred Stock shall be in
arrears in an amount equal to six (6) quarterly dividends
thereon, the occurrence of such contingency shall mark the
beginning of a period (herein called a "default period") which
shall extend until such time when all accrued and unpaid
dividends for all previous quarterly dividend periods and for
the current quarterly dividend period on all shares of Series
A Junior Participating Preferred Stock then outstanding shall
have been declared and paid or set apart for payment. During
each default period, all holders of Preferred Stock (including
holders of the Series A Junior Participating Preferred Stock)
with dividends in arrears in an amount equal to six (6)
quarterly dividends thereon, voting as a class, irrespective
of series, shall have the right to elect two (2) directors.

(B) During any default period, such
voting right of the holders of Series A Junior
Participating Preferred Stock may be exercised initially at a
special meeting called pursuant to subparagraph (C) of this
Section (b)(iii) or at any annual meeting of shareholders, and
thereafter at annual meetings of shareholders, provided that
neither such voting right nor the right of the holders of any
other series of Preferred Stock, if any, to increase, in
certain cases, the authorized number of directors shall be
exercised unless the holders of ten percent (10%) in number of
shares of Preferred Stock outstanding shall be present in
person or by proxy. The absence of a quorum of the holders of
Common Stock shall not affect the exercise by the holders of
Preferred Stock of such voting right. At any meeting at which
the holders of Preferred Stock shall exercise such voting
right initially during an existing default period, they shall
have the right, voting as a class, to elect directors to fill
such vacancies, if any, in the Board of Directors as may then
exist up to two (2) directors or, if such right is exercised
at an annual meeting, to elect two (2) directors. If the
number which may be so elected at any special meeting does not

4
<PAGE>

amount to the required number, the holders of the Preferred
Stock shall have the right to make such increase in the number
of directors as shall be necessary to permit the election by
them of the required number. After the holders of the
Preferred Stock shall have exercised their right to elect
directors in any default period and during the continuance of
such period, the number of directors shall not be increased or
decreased except by vote of the holders of Preferred Stock as
herein provided or pursuant to the rights of any equity
securities ranking senior to or PARI PASSU with the Series A
Junior Participating Preferred Stock.

(C) Unless the holders of Preferred
Stock shall, during an existing default period, have
previously exercised their right to elect directors, the Board
of Directors may order, or any shareholder or shareholders
owning in the aggregate not less than ten percent (10%) of the
total number of shares of Preferred Stock outstanding,
irrespective of series, may request, the calling of a special
meeting of the holders of Preferred Stock, which meeting shall
thereupon be called by the President, a Vice-President or the
Secretary of the corporation. Notice of such meeting and of
any annual meeting at which holders of Preferred Stock are
entitled to vote pursuant to this Paragraph (iii)(C) shall be
given to each holder of record of Preferred Stock by mailing a
copy of such notice to him at his last address as the same
appears on the books of the corporation. Such meeting shall be
called for a time not earlier than 20 days and not later than
60 days after such order or request or in default of the
calling of such meeting within 60 days after such order or
request, such meeting may be called on similar notice by any
shareholder or shareholders owning in the aggregate not less
than ten percent (10%) of the total number of shares of
Preferred Stock outstanding. Notwithstanding the provisions of
this Paragraph (iii)(C), no such special meeting shall be
called during the period within 60 days immediately preceding
the date fixed for the next annual meeting of the
shareholders.

(D) In any default period, the
holders of Common Stock, and other classes of stock of the
corporation if applicable, shall continue to be entitled to
elect the whole number of directors until the holders of
Preferred Stock shall have exercised their right to elect two
(2) directors voting as a

<PAGE>

class, after the exercise of which
right (i) the directors so elected by the holders of Preferred
Stock shall continue in office until their successors shall
have been elected by such holders or until the expiration of
the default period, and (ii) any vacancy in the Board of
Directors may (except as provided in Paragraph (iii)(B) of
this Section (b)) be filled by vote of a majority of the
remaining directors theretofore elected by the holders of the
class of stock which elected the director whose office shall
have become vacant. References in this Paragraph (iii) to
directors elected by the holders of a particular class of
stock shall include directors elected by such directors to
fill vacancies as provided in clause (ii) of the foregoing
sentence.

(E) Immediately upon the expiration
of a default period, (i) the right of the holders of
Preferred Stock as a class to elect directors shall cease,
(ii) the term of any directors elected by the holders of
Preferred Stock as a class shall terminate, and (iii) the
number of directors shall be such number as may be provided
for in the charter or by-laws irrespective of any increase
made pursuant to the provisions of Paragraph (iii)(B) of this
Section (b) (such number being subject, however, to change
thereafter in any manner provided by law or in the Restated
Charter or by-laws). Any vacancies in the Board of Directors
effected by the provisions of clauses (ii) and (iii) in the
preceding sentence may be filled by a majority of the
remaining directors.

(iv) Except as set forth herein, or as
otherwise provided by law, holders of Series A Junior
Participating Preferred Stock shall have no special voting
rights and their consent shall not be required (except to the
extent they are entitled to vote with holders of Common Stock
as set forth herein) for taking any corporate action.

(i) Whenever quarterly dividends or other
dividends or distributions payable on the Series A Junior
Participating Preferred Stock as provided in Section (a) are
in arrears, thereafter and until all accrued and unpaid
dividends and distributions, whether or not declared, on
shares of Series A Junior Participating Preferred Stock
outstanding shall have been paid in full, the corporation
shall not

<PAGE>

(A) declare or pay dividends on
or, make any other distributions on, any shares of
stock ranking junior (either as to dividends or upon
liquidation, dissolution or winding up) to the Series A Junior
Participating Preferred Stock;

(B) declare or pay dividends on or
make any other distributions on any shares of stock
ranking on a parity (either as to dividends or upon
liquidation, dissolution or winding up) with the Series A
Junior Participating Preferred Stock, except dividends paid
ratably on the Series A Junior Participating Preferred Stock
and all such parity stock on which dividends are payable or in
arrears in proportion to the total amounts to which the
holders of all such shares are then entitled;

(C) redeem or purchase or otherwise
acquire for consideration shares of any stock ranking
on a parity (either as to dividends or upon liquidation,
dissolution or winding up) with the Series A Junior
Participating Preferred Stock, provided that the corporation
may at any time redeem, purchase or otherwise acquire shares
of any such parity stock in exchange for shares of any stock
of the corporation ranking junior (either as to dividends or
upon dissolution, liquidation or winding up) to the Series A
Junior Participating Preferred Stock; or

(D) redeem or purchase or otherwise
acquire for consideration any shares of Series A
Junior Participating Preferred Stock, or any shares of stock
ranking on a parity with the Series A Junior Participating
Preferred Stock, except in accordance with a purchase offer
made in writing or by publication (as determined by the Board
of Directors) to all holders of such shares upon such terms as
the Board of Directors, after consideration of the respective
annual dividend rates and other relative rights and
preferences of the respective series and classes, shall
determine in good faith will result in fair and equitable
treatment among the respective series or classes.

(ii) The corporation shall not permit any
subsidiary of the corporation to purchase or otherwise acquire
for consideration any shares of stock of the corporation
unless the corporation could, under Paragraph (i) of this
Section (c), purchase or

<PAGE>

otherwise acquire such shares at such time and in such manner.

(d) REACQUIRED SHARES. Any shares of Series A Junior
Participating Preferred Stock purchased or otherwise acquired
by the corporation in any manner whatsoever shall be retired
and canceled promptly after the acquisition thereof. All such
shares shall upon their cancellation become authorized but
unissued shares of Preferred Stock without designation as to
series and may be reissued as part of a new series of
Preferred Stock to be created by resolution or resolutions of
the Board of Directors as permitted by the Restated Charter or
as otherwise permitted under Tennessee law.

<PAGE>

(e) LIQUIDATION, DISSOLUTION OR WINDING UP.

(i) Upon any liquidation (voluntary or
otherwise), dissolution or winding up of the corporation, no
distribution shall be made to the holders of shares of stock
ranking junior (either as to dividends or upon liquidation,
dissolution or winding up) to the Series A Junior
Participating Preferred Stock unless, prior thereto, the
holders of shares of Series A Junior Participating Preferred
Stock shall have received an amount equal to $100 per share of
Series A Participating Preferred Stock, plus an amount equal
to accrued and unpaid dividends and distributions thereon,
whether or not declared, to the date of such payment (the
"Series A Liquidation Preference"). Following the payment of
the full amount of the Series A Liquidation Preference, no
additional distributions shall be made to the holders of
shares of Series A Junior Participating Preferred Stock
unless, prior thereto, the holders of shares of Common Stock
shall have received an amount per share (the "Common
Adjustment") equal to the quotient obtained by dividing (x)
the Series A Liquidation Preference by (y) 100 (as
appropriately adjusted as set forth in Paragraph (iii) below
to reflect such events as stock splits, stock dividends and
recapitalizations with respect to the Common Stock) (such
number in clause (y), the "Adjustment Number"). Following the
payment of the full amount of the Series A Liquidation
Preference and the Common Adjustment in respect of all
outstanding shares of Series A Junior Participating Preferred
Stock and Common Stock, respectively, holders of Series A
Junior Participating Preferred Stock and holders of shares of
Common Stock shall receive their ratable and proportionate
share of the remaining assets to be distributed in the ratio
of the Adjustment Number to 1 with respect to such Preferred
Stock and Common Stock, on a per share basis, respectively.

(ii) In the event, however, that there are
not sufficient assets available to permit payment in full of
the Series A Liquidation Preference and the liquidation
preferences of all other series of preferred stock, if any,
which rank on a parity with the Series A Junior Participating
Preferred Stock, then such remaining assets shall be
distributed ratably to the holders of such parity shares in
proportion to their respective liquidation preferences. In the
event, however, that there are not sufficient assets available
to permit payment in full of the Common

<PAGE>

Adjustment, then such remaining assets shall be distributed
ratably to the holders of Common Stock.

(iii) In the event the corporation shall at
any time after the Rights Dividend Declaration Date (A)
declare or pay any dividend on Common Stock payable in shares
of Common Stock, (B) subdivide the outstanding Common Stock,
or (C) combine the outstanding Common Stock into a smaller
number of shares, then in each such case the Adjustment Number
in effect immediately prior to such event shall be adjusted by
multiplying such Adjustment Number by a fraction the numerator
of which is the number of shares of Common Stock outstanding
immediately after such event and the denominator of which is
the number of shares of Common Stock that were outstanding
immediately prior to such event.

(f) CONSOLIDATION, MERGER, ETC. In case the
corporation shall enter into any consolidation, merger,
combination or other transaction in which the shares of Common
Stock are exchanged for or changed into other stock or
securities, cash and/or any other property, then in any such
case the shares of Series A Junior Participating Preferred
Stock shall at the same time be similarly exchanged or changed
in an amount per share (subject to the provision for
adjustment hereinafter set forth) equal to 100 times the
aggregate amount of stock, securities, cash and/or any other
property (payable in kind), as the case may be, into which or
for which each share of Common Stock is changed or exchanged.
In the event the corporation shall at any time after the
Rights Dividend Declaration Date declare or pay any dividend
on Common Stock payable in shares of Common Stock, or effect a
subdivision or combination or consolidation of the outstanding
shares of Common Stock (by reclassification or otherwise than
by payment of a dividend in shares of Common Stock) into a
greater or lesser number of shares of Common Stock, then in
each such case the amount set forth in the preceding sentence
with respect to the exchange or change of shares of Series A
Junior Participating Preferred Stock shall be adjusted by
multiplying such amount by a fraction the numerator of which
is the number of shares of Common Stock outstanding
immediately after such event and the denominator of which is
the number of shares of Common Stock that were outstanding
immediately prior to such event.

(g) NO REDEMPTION. The shares of Series A Junior
Participating Preferred Stock shall not be redeemable.

10
<PAGE>

(h) RANKING. The Series A Junior Participating
Preferred Stock shall rank junior to all other series of the
corporation's Preferred Stock as to the payment of dividends
and the distribution of assets, unless the terms of any such
series shall provide otherwise.

(i) AMENDMENT. The Restated Charter shall not be
amended in any manner which would materially alter or change
the powers, preferences or special rights of the Series A
Junior Participating Preferred Stock so as to affect the
holders thereof adversely without the affirmative vote of the
holders of at least a majority of the outstanding shares of
Series A Junior Participating Preferred Stock, voting
separately as a class.

(j) FRACTIONAL SHARES. Series A Junior Participating
Preferred Stock may be issued in fractions of a share which
shall entitle the holder, in proportion to such holder's
fractional shares, to exercise voting rights, receive
dividends, participate in distributions and to have the
benefit of all other rights of holders of Series A Junior
Participating Preferred Stock.

1. The amendment was duly adopted on January 27, 2000 by the
Board of Directors of the Company without shareholder action
which, in accordance with Section 48-16-102 of the Act, was
not required.

Dated this _________ day of _______________ , 2000.

CHATTEM, INC.

By: ___________________________
A. Alexander Taylor II,
President
and Chief Operating Officer

<PAGE>

EXHIBIT 10.1

FIRST AMENDMENT TO AMENDED AND RESTATED CREDIT AGREEMENT
AND WAIVER
(New Credit Agreement)

This First Amendment to Amended and Restated Credit Agreement and Waiver
(this "FIRST AMENDMENT") is entered into as of May 7, 1999 by and among Chattem,
Inc., a Tennessee corporation (the "BORROWER"), each of the Borrower's Domestic
Subsidiaries (individually a "GUARANTOR" and collectively the "GUARANTORS"), the
Persons identified as "New Credit Agreement Lenders" on the signature pages
hereto (the "NEW CREDIT AGREEMENT LENDERS"), and NationsBank, N.A., as agent for
the New Credit Agreement Lenders (in such capacity, the "AGENT").

RECITALS

WHEREAS, the Borrower, the Guarantors, the Agent and the New Credit
Agreement Lenders entered into that certain Amended and Restated Credit
Agreement dated as of December 21, 1998 (as amended or modified from time to
time, the "CREDIT AGREEMENT") pursuant to which the New Credit Agreement Lenders
provided a $50 million credit facility to the Borrower to replace and refinance
that certain Amended and Restated Credit Agreement dated as of March 24, 1998
(as amended or modified from time to time, the "MARCH 1998 NEW CREDIT
AGREEMENT"). The March 1998 New Credit Agreement replaced and refinanced the
credit facilities provided by the lenders pursuant to that certain Amended and
Restated Credit Agreement dated as of June 26, 1997 (as amended or modified from
time to time, the "PRIOR NEW CREDIT AGREEMENT"). The Prior New Credit Agreement
replaced and refinanced the credit facilities provided by the lenders pursuant
to that certain Credit Agreement dated as of April 26, 1996 (as amended or
modified from time to time, the "ORIGINAL NEW CREDIT AGREEMENT"). The credit
facilities provided pursuant to the Original New Credit Agreement replaced and
refinanced the credit facilities provided to the Borrower by The First National
Bank of Chicago, as agent and certain other lenders under the credit agreements
dated as of June 17, 1994. All capitalized terms used herein and not otherwise
defined shall have the meanings ascribed to such terms in the Credit Agreement.

WHEREAS, the Borrower and the Guarantors are also party to an amended and
restated credit agreement dated as of December 21, 1998 (as amended or modified
from time to time, the "SUPPLEMENTAL CREDIT AGREEMENT");

WHEREAS, the Borrower acknowledges that Events of Default currently exist
under the Credit Agreement as a result of the failure of the Credit Parties to
comply with the terms of (a) Section 7.17(a) of the Credit Agreement (the
"ENVIRONMENTAL EVENT OF DEFAULT") and (b) Section 7.17(b) of the Credit
Agreement (the "FIELD EXAM EVENT OF DEFAULT") (the Environmental Event of
Default and Field Exam Event of Default may be referred to collectively herein
as the "EXISTING DEFAULTS");

<PAGE>

WHEREAS, the Borrower has requested that the New Credit Agreement Lenders
waive the Existing Defaults and continue to make available to the Borrower the
Loans provided under the Credit Agreement;

WHEREAS, the New Credit Agreement Lenders are willing to waive the Existing
Defaults subject to the terms and conditions specified in this First Amendment;
and

WHEREAS, the parties hereto have agreed to amend certain terms of the
Credit Agreement as set forth below.

NOW, THEREFORE, IN CONSIDERATION of the premises and other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto agree as follows:

1. WAIVERS. Subject to the terms and conditions of this First Amendment,
the New Credit Agreement Lenders agree to (a) waive the Environmental
Event of Default so long as the Credit Parties comply with the terms
of Section 7.17 of the Credit Agreement, as amended and restated in
this First Amendment and (b) waive the Field Exam Event of Default.
Except for the waivers continued herein, this First Amendment does not
modify or effect the obligations of the Credit Parties to comply fully
with all terms, conditions and covenants contained in the Credit
Documents. Nothing contained in this First Amendment shall be deemed
to constitute a waiver of any other rights or remedies the Agent or
any New Credit Agreement Lender may have under the Credit Agreement or
any other Credit Documents or under applicable law.

2. AMENDED DEFINITIONS.

(a) ADDITIONAL SUBORDINATED DEBT. The definition of "ADDITIONAL
SUBORDINATED DEBT" set forth in Section 1.1 of the Credit Agreement is
hereby amended and restated in its entirety to read as follows:

"ADDITIONAL SUBORDINATED DEBT" means the Indebtedness evidenced by the
Second Indenture or by the guarantees thereof in an aggregate amount not to
exceed $275,000,000.

(b) PERMITTED INVESTMENTS. Subclauses (f) and (g) of the definition of
"PERMITTED INVESTMENTS" set forth in Section 1.1 of the Credit Agreement
are hereby amended and restated in their entireties to read as follows:

(f) in addition to the acquisition of the Acquired Assets to be
consummated on the Closing Date, Investments in Permitted
Acquisitions, including any contingency payments associated therewith,
so long as the Borrower shall have provided the Agent with
satisfactory evidence demonstrating that after giving affect to any
such Permitted Acquisition on a pro forma basis, as if such Permitted
Acquisition had occurred on the first day of the twelve month period
ending on the last day of the Borrower's most recently completed
fiscal quarter, the Credit

2
<PAGE>

Parties and their Subsidiaries would have
been in compliance with all financial covenants set forth in Section
7.12, (g) the purchase, redemption, acquisition or retirement by the
Borrower of any shares of its capital stock of any class or any
warrants or options to purchase any such shares in an amount not to
exceed $10,000,000 in the aggregate in any fiscal year so long as the
Borrower shall have provided the Agent with satisfactory evidence
demonstrating that after giving effect to any such transaction on a
pro forma basis, as if such transaction had occurred on the first day
of the twelve month period ending on the last day of the Borrower's
most recently completed fiscal quarter, the Credit Parties and their
Subsidiaries would have been in compliance with all the financial
covenants set forth in Section 7.12,

(c) The following definitions appearing in Section 1.1 of the Credit
Agreement are hereby deleted: "BORROWING BASE", "BORROWING BASE
CERTIFICATE", "EBIT", "ELIGIBLE INVENTORY", "ELIGIBLE
RECEIVABLES" and "INTEREST COVERAGE RATIO".

3. REVOLVING COMMITTED AMOUNT. The phrase "the lesser of (x) the Revolving
Committed Amount and (y) the Borrowing Base" appearing in Sections 2.1(a),
2.2(a) and 3.3(b)(i) of the Credit Agreement is hereby replaced in each of
Section 2.1(a), 2.2(a) and 3.3(b)(i) with the phrase "the Revolving Committed
Amount".

4. EXCESS CASH FLOW. The following sentence is hereby added at the end of
Section 3.3(b)(ii) of the Credit Agreement and shall read as follows:

Notwithstanding the foregoing, the parties hereto agree that the
Borrower shall not have to make a prepayment of the Loans and Term Loans
with respect to Excess Cash Flow earned during fiscal year 1998.

5. BORROWING BASE. Section 7.1(f) of the Credit Agreement is hereby deleted
in its entirety.

6. USE OF PROCEEDS. Section 7.10 of the Credit Agreement is hereby amended
and restated in its entirety to read as follows:

7.10 USE OF PROCEEDS.

The Credit Parties will use the proceeds of the Loans solely (a) to
refinance the existing Indebtedness of the Borrower, (b) to finance the
acquisition of the Acquired Assets, (c) to provide working capital, (d) for
general corporate purposes, (e) to finance the redemption or repurchase of
Subordinated Debt permitted by Section 8.11(a) hereof, (f) to finance the
purchase of capital stock of the Borrower permitted hereunder and (g) to finance
Permitted Acquisitions.

7. INTEREST COVERAGE RATIO. Section 7.12(a) of the Credit Agreement is
hereby amended and restated in its entirety to read as follows:

3
<PAGE>

(a) [INTENTIONALLY OMITTED.]

8. LEVERAGE RATIO. Section 7.12(c) of the Credit Agreement is hereby
amended and restated in its entirety to read as follows:

(i) From April 30, 1999 to and including November 29, 1999, 5.25
to 1.0;

(ii) From November 30, 1999 to and including November 29, 2000,
4.5 to 1.0;

(iii) From November 30, 2000 to and including November 29, 2001,
4.0 to 1.0; and

(iv) From November 30, 2001 and thereafter, 3.75 to 1.0.

9. NET WORTH. Section 7.12(e) of the Credit Agreement is hereby amended and
restated in its entirety to read as follows:

(e) NET WORTH. At all times Net Worth shall be no less than
$29,853,000 increased on a cumulative basis, commencing with the fiscal
quarter ending May 31, 1999, by an amount equal to, (i) as of the last day
of each fiscal quarter, 50% of Net Income for the fiscal quarter then ended
(without deductions for any losses) plus (ii) 100% of the Net Cash Proceeds
from any Equity Issuance subsequent to May 7, 1999.

10. ENVIRONMENTAL REPORT. Section 7.17 of the Credit Agreement is hereby
amended and restated in its entirety to read as follows:

7.17 ENVIRONMENTAL REPORT.

On or before August 5, 1999, the Borrower shall furnish to the Agent
phase 1 environmental reports in form and substance reasonably satisfactory
to the Agent with respect to each of the Mortgaged Properties set forth on
SCHEDULE 6.23(A) (other than the Double Cola Property).

11. SUBORDINATED DEBT. The first sentence of Section 8.11 of the Credit
Agreement is hereby amended and restated in its entirety to read as follows:

4
<PAGE>

Subordinated Debt; PROVIDED, HOWEVER, the Borrower may redeem or
repurchase all or any portion of the Subordinated Debt PROVIDED that
after giving effect to such repurchase or redemption (including, without
limitation, any accrued interest, premiums or penalties associated
therewith) on a pro forma basis, as if such repurchase or redemption
had occurred on the first day of the twelve month period ending on the
last day of the Borrower's most recently completed fiscal quarter, the
Credit Parties and their Subsidiaries would have been in compliance with
all the financial covenants set forth in Section 7.12.

12. CONDITIONS. The obligation of the New Credit Agreement Lenders to enter
into this First Amendment is subject to satisfaction of the following conditions
(in form and substance acceptable to the New Credit Agreement Lenders in their
sole discretion):

(a) EXECUTED AMENDMENT. Receipt by the Agent of copies of this
Amendment duly executed by the Credit Parties, the Agent and the Required
Lenders.

(b) OPINION OF COUNSEL. Receipt by the Agent of an opinion, or
opinions (which shall cover, among other things, authority, legality,
validity, binding effect and enforceability), satisfactory to the Agent,
addressed to the Agent and the Lenders from legal counsel to the Credit
Parties.

(c) CERTAIN CONSENTS. Receipt by the Agent of evidence that all
governmental, shareholder and material third party consents and approvals
necessary or desirable in connection with the transactions contemplated
hereby have been received, and expiration of all applicable waiting periods
without any action being taken by any authority that could reasonably be
likely to restrain, prevent or impose any material adverse conditions on
the financings or that could reasonably be likely to seek or threaten any
of the foregoing, and no law or regulation shall be applicable which in the
judgment of the Agent could reasonably be likely to have such effect.

(d) MATERIAL ADVERSE EFFECT. There shall not have occurred any event
since November 30, 1998, that has had or could reasonably be expected to
have a Material Adverse Effect.

(e) LITIGATION. There shall not exist any pending or threatened
action, suit, investigation or proceeding which if adversely determined
against the Borrower or any of its Subsidiaries would have or would
reasonably be expected to have a Material Adverse Effect.

(f) OFFICER'S CERTIFICATE. The Agent shall have received a certificate
executed by the chief financial officer or chief operating officer of the
Borrower as of the date hereof stating that (A) the Borrower and each of
the Borrower's Subsidiaries are in compliance with all existing financial
obligations, (B) all governmental, shareholder and third party consents and
approvals, if any, with respect to this First Amendment, the Credit
Documents and Supplemental Credit Documents and the transactions
contemplated

5
<PAGE>

thereby have been obtained, (C) no action, suit, investigation
or proceeding is pending or threatened in any court or before any
arbitrator or governmental instrumentality that purports to effect the
Borrower, any of the Borrower's Subsidiaries or any transaction
contemplated by this First Amendment, the Credit Documents or the
Supplemental Credit Documents, or could have or might be reasonably
expected to have a Material Adverse Effect and (D) immediately after giving
effect to this First Amendment, (1) the Borrower and each of the Borrower's
Subsidiaries is Solvent, (2) no Default or Event of Default exists, (3) all
representations and warranties contained in the Credit Documents and the
Supplemental Credit Documents are true and correct in all material
respects, and (4) the Credit Parties are in compliance with each of the
financial covenants set forth in Section 7.12 of the Credit Agreement, as
amended hereby.

(g) ADDITIONAL SUBORDINATED DEBT. The Borrower shall have received
gross proceeds from the sale of Additional Subordinated Debt in an
aggregate principal amount of $75,000,000 and not less than $41,500,000 of
such proceeds shall have been applied to the prepayment of the Term Loans.
The Agent shall have received a copy, certified by an executive officer of
the Borrower as true and complete, of any amendments or modifications to
the Second Indenture or other documentation related to the Additional Notes
(as defined in the Second Indenture) requested by the Agent, as originally
executed and delivered, together with all exhibits and schedules thereto
(which shall be in form and substance reasonably satisfactory to the
Agent).

(h) CONSOLIDATED FINANCIAL STATEMENTS FOR FISCAL YEAR 1998. The Agent
and the New Credit Agreement Lenders shall have received the consolidated
financial statements described in Section 7.1(a) of the Credit Agreement
for the fiscal year ended 1998.

(i) OTHER. Receipt by the Lenders of such other documents,
instruments, agreements or information as reasonably requested by any
Lender, including, but not limited to, information regarding litigation,
tax, accounting, labor, insurance, pension liabilities (actual or
contingent), real estate leases, material contracts, debt agreements,
property ownership and contingent liabilities of the Borrower and its
Subsidiaries.

13. MISCELLANEOUS.

(a) Except as expressly modified and amended in this First Amendment,
all of the terms, provisions and conditions of the Credit Agreement are and
shall remain in full force and effect and are incorporated herein by
reference, and the obligations of the Credit Parties hereunder and under
the other Credit Documents are hereby ratified and confirmed and shall
remain in full force and effect. The Credit Agreement and any and all other
documents heretofore, now or hereafter executed and delivered pursuant to
the terms of the Credit Agreement are hereby amended so that any reference
to the Credit Agreement shall mean a reference to the Credit Agreement as
amended hereby.

6
<PAGE>

(b) The Borrower and the Guarantors, as applicable, affirm the liens
and security interests created and granted in the Credit Agreement and the
Credit Documents and agree that this First Amendment shall in no manner
adversely affect or impair such liens and security interests.

(i) Each Credit Party has taken all necessary action to authorize
the execution, delivery and performance of this First Amendment.

(ii) This First Amendment has been duly executed and delivered by
the Credit Parties and constitutes each of the Credit Parties' legal,
valid and binding obligations, enforceable in accordance with its
terms, except as such enforceability may be subject to (i) bankruptcy,
insolvency, reorganization, fraudulent conveyance or transfer,
moratorium or similar laws affecting creditors' rights generally and
(ii) general principles of equity (regardless of whether such
enforceability is considered in a proceeding at law or in equity).

(iii) No consent, approval, authorization or order of, or filing,
registration or qualification with, any court or governmental
authority or third party is required in connection with the execution,
delivery or performance by any Credit Party of this First Amendment.

(d) The Credit Parties represent and warrant to the Lenders that (i)
the representations and warranties of the Credit Parties set forth in
Section 6 of the Credit Agreement are true and correct as of the date
hereof, (ii) no event has occurred and is continuing which constitutes a
Default or an Event of Default and (iii) no Credit Party has any
counterclaims, offsets, credits or defenses to the Credit Documents and the
performance of its obligations thereunder, or if any Credit Party has any
such claims, counterclaims, offsets, credits or defenses to the Credit
Documents or any transaction related to the Credit Documents, same are
hereby waived, relinquished and released in consideration of the Lenders'
execution and delivery of this First Amendment.

(e) The Guarantors (i) acknowledge and consent to all of the terms and
conditions of this First Amendment, (ii) affirm all of their obligations
under the Credit Documents and (iii) agree that this First Amendment and
all documents executed in connection herewith do not operate to reduce or
discharge the Guarantors' obligations under the Credit Agreement or the
other Credit Documents.

(f) This First Amendment may be executed in any number of
counterparts, each of which when so executed and delivered shall be an
original, but all of which shall constitute one and the same instrument. It
shall not be necessary in making proof of this First Amendment to produce
or account for more than one such counterpart.

7
<PAGE>

(g) This First Amendment together with the other Credit Documents
represent the entire agreement of the parties and supersedes all prior
agreements and understandings, oral or written if any, relating to Credit
Documents or the transactions contemplated herein and therein.

(h) This First Amendment and the Credit Agreement, as amended hereby,
shall be governed by and construed in accordance with, the laws of the
State of Tennessee.

[The remainder of this page is intentionally left blank.]

8
<PAGE>

Each of the parties hereto has caused a counterpart of this First Amendment
to be duly executed and delivered as of the date first above written.

BORROWER:
- ---------
CHATTEM, INC.,
a Tennessee corporation

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

GUARANTORS: SIGNAL INVESTMENT & MANAGEMENT CO.,
- ----------- a Delaware corporation

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

NEW CREDIT
- ----------
AGREEMENT LENDERS: NATIONSBANK, N.A.,
- ------------------ individually in its capacity as a New
Credit Agreement Lender and in its
capacity as Agent

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

<PAGE>

EXHIBIT 10.2

FIRST AMENDMENT TO AMENDED AND RESTATED CREDIT AGREEMENT
AND WAIVER
(Supplemental Credit Agreement)

This First Amendment to Amended and Restated Credit Agreement and Waiver
(this "FIRST AMENDMENT") is entered into as of May 7, 1999 by and among Chattem,
Inc., a Tennessee corporation (the "BORROWER"), each of the Borrower's Domestic
Subsidiaries (individually a "GUARANTOR" and collectively the "GUARANTORS"), the
Persons identified as "Supplemental Credit Lenders" on the signature pages
hereto (the "SUPPLEMENTAL CREDIT LENDERS"), and NationsBank, N.A., as agent for
the Supplemental Credit Lenders (in such capacity, the "AGENT").

RECITALS

WHEREAS, the Borrower, the Guarantors, the Agent and the Supplemental
Credit Lenders entered into that certain Amended and Restated Credit Agreement
dated as of December 21, 1998 (the "CREDIT AGREEMENT");

WHEREAS, the Borrower and the Guarantors are also party to an amended and
restated credit agreement dated as of December 21, 1998 (the "NEW CREDIT
AGREEMENT") pursuant to which the lenders party thereto provided a $50 million
credit facility to the Borrower to replace and refinance that certain Amended
and Restated Credit Agreement dated as of March 24, 1998 (as amended or modified
from time to time, the "MARCH 1998 NEW CREDIT AGREEMENT"). The March 1998 New
Credit Agreement replaced and refinanced the credit facilities provided by the
lenders pursuant to that certain Amended and Restated Credit Agreement dated as
of June 26, 1997 (as amended or modified from time to time, the "PRIOR NEW
CREDIT AGREEMENT"). The Prior New Credit Agreement replaced and refinanced the
credit facilities provided by the lenders pursuant to that certain Credit
Agreement dated as of April 26, 1996 (as amended or modified from time to time,
the "ORIGINAL NEW CREDIT AGREEMENT"). The credit facilities provided pursuant to
the Original New Credit Agreement replaced and refinanced the credit facilities
provided to the Borrower by The First National Bank of Chicago, as agent and
certain other lenders under the credit agreements dated as of June 17, 1994. All
capitalized terms used herein and not otherwise defined shall have the meanings
ascribed to such terms in the Credit Agreement.

WHEREAS, the Borrower has requested that the Supplemental Credit Lenders
waive the Existing Defaults;

WHEREAS, the Supplemental Credit Lenders are willing to waive the Existing
Defaults subject to the terms and conditions specified in this First Amendment;
and

<PAGE>

WHEREAS, the parties hereto have agreed to amend certain terms of the
Credit Agreement as set forth below.

NOW, THEREFORE, IN CONSIDERATION of the premises and other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto agree as follows:

1. WAIVERS. Subject to the terms and conditions of this First
Amendment, the Supplemental Credit Lenders agree to (a) waive the Environmental
Event of Default so long as the Credit Parties comply with the terms of Section
7.17 of the Credit Agreement, as amended and restated in this First Amendment
and (b) waive the Field Exam Event of Default. Except for the waivers continued
herein, this First Amendment does not modify or effect the obligations of the
Credit Parties to comply fully with all terms, conditions and covenants
contained in the Supplemental Credit Documents. Nothing contained in this First
Amendment shall be deemed to constitute a waiver of any other rights or remedies
the Agent or any Supplemental Credit Lender may have under the Credit Agreement
or any other Supplemental Credit Documents or under applicable law.

2. TERM LOAN AMORTIZATION. Section 2.1(d) of the Credit Agreement is
hereby amended and restated in its entirety to read as follows:

(d) AMORTIZATION. The principal amount of the Term Loans shall be
repaid in quarterly payments in the amounts and on the dates set forth
below:
<TABLE>
<CAPTION>

Principal Term Loan Principal
Amortization Amortization
Payment Dates Payment
<S> <C>
June 30, 1999 $2,000,000
September 30, 1999 $2,000,000
December 31, 1999 $2,000,000
March 31, 2000 $3,000,000
June 30, 2000 $3,000,000
September 30, 2000 $3,000,000
December 31, 2000 $3,000,000
March 31, 2001 $3,750,000
June 30, 2001 $3,750,000
September 30, 2001 $3,750,000
December 31, 2001 $3,750,000
March 31, 2002 $4,500,000
June 30, 2002 $4,500,000
September 30, 2002 $4,500,000
December 31, 2002 $4,500,000

March 31, 2003 $4,750,000
June 30, 2003 $4,750,000
September 30, 2003 $4,750,000
December 21, 2003 $4,750,000
Total $70,000,000
</TABLE>

2
<PAGE>

3. EXCESS CASH FLOW. The following sentence is hereby added at the end of
Section 3.3(b)(i) of the Credit Agreement and shall read as follows:

4. INTEREST COVERAGE RATIO. Section 7.12(a) of the Credit Agreement is
hereby amended and restated in its entirety to read as follows:

(a) [INTENTIONALLY OMITTED.]

5. LEVERAGE RATIO. Section 7.12(c) of the Credit Agreement is hereby
amended and restated in its entirety to read as follows:

(i) From April 30, 1999 to and including November 29, 1999, 5.25 to
1.0;

(ii) From November 30, 1999 to and including November 29, 2000, 4.5 to
1.0;

(iii) From November 30, 2000 to and including November 29, 2001, 4.0
to 1.0; and

(iv) From November 30, 2001 and thereafter, 3.75 to 1.0.

6. NET WORTH. Section 7.12(e) of the Credit Agreement is hereby amended and
restated in its entirety to read as follows:

3
<PAGE>

7. Environmental Report. Section 7.17 of the Credit Agreement is hereby
amended and restated in its entirety to read as follows:

7.17 Environmental Report.

On or before August 5, 1999, the Borrower shall furnish to the Agent
phase 1 environmental reports in form and substance reasonably satisfactory
to the Agent with respect to each of the Mortgaged Properties set forth on
Schedule 6.23(a) (other than the Double Cola Property).

8. SUBORDINATED DEBT. The first sentence of Section 8.11 of the Credit
Agreement is hereby amended and restated in its entirety to read as follows:

(a) No Credit Party will (i) make or offer to make any principal
payments with respect to the Subordinated Debt, (ii) redeem or offer to
redeem any of the Subordinated Debt, or (iii) deposit any funds intended to
discharge or defease any or all of the Subordinated Debt; PROVIDED,
HOWEVER, the Borrower may redeem or repurchase all or any portion of the
Subordinated Debt PROVIDED that after giving effect to such repurchase or
redemption (including, without limitation, any accrued interest, premiums
or penalties associated therewith) on a pro forma basis, as if such
repurchase or redemption had occurred on the first day of the twelve month
period ending on the last day of the Borrower's most recently completed
fiscal quarter, the Credit Parties and their Subsidiaries would have been
in compliance with all the financial covenants set forth in Section 7.12.

9. CONDITIONS. The obligation of the Supplemental Credit Lenders to enter
into this First Amendment is subject to satisfaction of the conditions set forth
in Section 12 of the First Amendment to Amended and Restated Credit Agreement
(New Credit Agreement) dated as of the date hereof by and among the Borrower,
the Guarantors, the New Credit Agreement Lenders and NationsBank, N.A., as agent
(the "NEW CREDIT AGREEMENT Amendment").

10. MISCELLANEOUS.

(a) Except as expressly modified and amended in this First Amendment,
all of the terms, provisions and conditions of the Credit Agreement are and
shall remain in full force and effect and are incorporated herein by
reference, and the obligations of the Credit Parties hereunder and under
the other Supplemental Credit Documents are hereby ratified and confirmed
and shall remain in full force and effect. The Credit Agreement and any and
all other documents heretofore, now or hereafter executed and delivered
pursuant to the terms of the Credit Agreement are hereby amended so that
any reference to the Credit Agreement shall mean a reference to the Credit
Agreement as amended hereby.

(b) The Borrower and the Guarantors, as applicable, affirm the liens
and security interests created and granted in the Credit Agreement and the
Supplemental Credit Documents and agree that this First Amendment shall in
no manner adversely affect or impair such liens and security interests.

4
<PAGE>

(i) Each Credit Party has taken all necessary action to authorize
the execution, delivery and performance of this First Amendment.

(d) The Credit Parties represent and warrant to the Lenders that (i) the
representations and warranties of the Credit Parties set forth in Section 6 of
the Credit Agreement are true and correct as of the date hereof, (ii) no event
has occurred and is continuing which constitutes a Default or an Event of
Default and (iii) no Credit Party has any counterclaims, offsets, credits or
defenses to the Supplemental Credit Documents and the performance of its
obligations thereunder, or if any Credit Party has any such claims,
counterclaims, offsets, credits or defenses to the Supplemental Credit Documents
or any transaction related to the Supplemental Credit Documents, same are hereby
waived, relinquished and released in consideration of the Lenders' execution and
delivery of this First Amendment.

(e) The Guarantors (i) acknowledge and consent to all of the terms and
conditions of this First Amendment, (ii) affirm all of their obligations under
the Supplemental Credit Documents and (iii) agree that this First Amendment and
all documents executed in connection herewith do not operate to reduce or
discharge the Guarantors' obligations under the Credit Agreement or the other
Supplemental Credit Documents.

(f) This First Amendment may be executed in any number of counterparts,
each of which when so executed and delivered shall be an original, but all of
which shall constitute one and the same instrument. It shall not be necessary in
making proof of this First Amendment to produce or account for more than one
such counterpart.

(g) This First Amendment together with the other Supplemental Credit
Documents represent the entire agreement of the parties and supersedes all prior
agreements and understandings, oral or written if any, relating to the
Supplemental Credit Documents or the transactions contemplated herein and
therein.

5
<PAGE>

(h) This First Amendment and the Credit Agreement, as amended hereby, shall
be governed by and construed in accordance with, the laws of the State of
Tennessee.

[The remainder of this page is intentionally left blank.]

6
<PAGE>

(SUPPLEMENTAL CREDIT AGREEMENT)
CHATTEM

Each of the parties hereto has caused a counterpart of this First Amendment
to be duly executed and delivered as of the date first above written.

BORROWER:

CHATTEM, INC.,
a Tennessee corporation

By:
Name:
Title:

GUARANTORS: SIGNAL INVESTMENT & MANAGEMENT CO.,
a Delaware corporation

By:
Name:
Title:

SUPPLEMENTAL CREDIT
LENDERS: NATIONSBANK, N.A.,
individually in its capacity as a Supplemental
Credit Lender and in its
capacity as Agent

By:
Name:
Title:

<PAGE>
EXHIBIT 10.3

TERMINATION AGREEMENT

THIS AGREEMENT is made this 30th day of November, 1999, by and among
Sunsource International, Inc., a Hawaii corporation ("Sunsource"), Mindbody,
Inc., a Florida corporation ("Mindbody" and together with Sunsource, the
"Sellers"), Chattem, Inc., a Tennessee corporation ("Chattem"), and Signal
Investment & Management Co., a Delaware corporation ("Signal" and together with
Chattem, the "Purchasers"), under the following circumstances:

The Sellers and the Purchasers are parties to an Asset Purchase and Sale
Agreement dated May 23, 1997, as amended (the "Purchase Agreement"), pursuant to
which, among other things, the Purchaser has acquired certain assets used in the
Sellers' dietary supplement and homeopathic lines of business (the "Business").
The parties now desire to enter into this Agreement to provide a single payment
by the Purchasers in final settlement and termination of all royalty and
Additional Payments payable by the Purchasers to the Sellers pursuant to the
Purchase Agreement, in accordance with the terms set forth below.

NOW, THEREFORE, in consideration of the premises and the mutual covenants
and agreements contained herein, the parties hereby agree as follows:

DEFINED TERMS. Capitalized terms used herein that are not otherwise
defined shall have the meaning set forth in the Purchase Agreement.

TERMINATION OF ROYALTIES AND ADDITIONAL PAYMENTS. In full and final
settlement, compromise and accord, satisfaction and termination of the Sellers'
right to receive past, present or future royalties and/or Additional Payments
pursuant to Sections 1.5 and 4.3 of the Purchase Agreement (together, the
royalties and Additional Payments are referred to herein as the "Payments"), and
in consideration of Sellers' release and covenants in Section 3 below, upon the
execution of this Agreement, Chattem shall pay to Sunsource and/or its designees
(as Sunsource shall direct in writing to Chattem) the sum of $1,650,000 by wire
transfer, plus a total of 2,582 shares of Chattem stock.

SELLERS' RELEASE AND COVENANTS.

(a) In consideration of the payment received from Chattem as provided in
Section 2 above, the receipt and legal sufficiency of which is hereby expressly
acknowledged and

<PAGE>

accepted, Sellers, for themselves and their successors and assigns, hereby
and forever release and discharge Purchasers, their affiliates, subsidiaries,
employees, agents, attorneys, successors and assigns (the "Releasees")from
any and all claims or demands of any kind or nature, which Sellers or any of
their affiliates, subsidiaries, employees, agents, successors and assigns,
designees and attorneys had, have now or may have in the future arising out
of, or in any way related to, any right to receive Payments. Provided
Purchasers comply with their obligations in Section 2 above, without limiting
the generality of the foregoing, neither the Purchasers nor any acquiror of
the Business from Purchasers shall have any obligation hereafter to make
Payments, without regard to the terms of any subsequent sale of the Business.

(b) Provided Purchasers comply with their obligations in Section 2
above, Sellers, for themselves and their successors and assigns, hereby
covenant and agree never to commence, aid in any way, prosecute or cause or
permit to be commenced or prosecuted any action or other proceeding based
upon any of the subject matter released in Section 3(a) above.

(c) Provided Purchasers comply with their obligations in Section 2
above, Sellers shall indemnify and hold harmless the Releasees from and
against any claim, loss or damage with respect to the Payments resulting from
the assertion of any such claim or the prosecution of any such action by
Sellers or Sellers' designees or by any person or entity claiming through
Sellers or on Sellers' behalf.

ADDITIONAL PROVISIONS.

(a) This Agreement may be executed in two or more counterparts, all of
which shall be deemed an original and all of which together shall be deemed
one and the same instrument.

(b) This Agreement shall be binding upon and inure to the benefit of the
parties hereto, their legal representatives, successors and assigns.

2
<PAGE>

Duly executed by the parties hereto as of the date and year first above
written.

PURCHASERS:

CHATTEM, INC.

By:_____________________________
Title:__________________________

SIGNAL INVESTMENT & MANAGEMENT
CO.

By:_____________________________
Title:__________________________

SELLERS:

SUNSOURCE INTERNATIONAL, INC.

By:_____________________________
Title:__________________________

MINDBODY, INC.

By:_____________________________
Title:__________________________

<PAGE>

EXHIBIT 10.4

CHATTEM, INC.
NON-STATUTORY STOCK OPTION PLAN - 2000

1. PURPOSE

The Chattem, Inc. Non-Statutory Stock Option Plan - 2000 (the "2000
Plan") is designed to enable officers and key management employees of Chattem,
Inc. (the "Company") and its Subsidiaries to continue to acquire shares of the
Company's common stock and thus to share in the future success of the Company's
business. Accordingly, the 2000 Plan is intended as a further means not only of
attracting and retaining outstanding management personnel, but also of promoting
a closer identity of interest between key management employees and the Company
and its shareholders.

2. DEFINITIONS

Unless the context clearly indicates otherwise, the following terms,
when used in the 2000 Plan, shall have the meanings set forth in this Section 2.

(a) "BENEFICIARY" means the person or persons designated in writing
by the Optionee or, in the absence of such a designation or if
the designated person or persons predecease the Optionee, the
Optionee's Beneficiary shall be the person or persons who acquire
the right to exercise the Option by bequest or inheritance. In
order to be effective, an Optionee's designation of a Beneficiary
must be on file with the Committee before the Optionee's death.
Any such designation may be revoked in writing and a new written
designation substituted therefor at any time before the
Optionee's death.

(b) "BOARD OF DIRECTORS" or "BOARD" means the board of directors of
the Company.

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

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

(iii) Acquisition by any person of the ownership of or right to
vote 35% or more of the Company's outstanding voting stock.
For purposes of this

<PAGE>

paragraph (iii): (A) "person" shall mean any person,
corporation, partnership or other entity and any affiliate
or associate thereof and (B) "affiliate" and "associate"
shall have the meanings given to them in Rule 12b-2
promulgated under the Exchange Act.

(d) "CODE" means the Internal Revenue Code of 1986, as amended from
time to time.

(e) "COMMITTEE" means the Compensation Committee of the Board of
Directors or, in the event the Board of Directors terminates the
existence of the Compensation Committee, then Committee shall
refer to the Board as a whole.

(f) COMPANY means Chattem, Inc., a corporation incorporated under the
laws of the State of Tennessee, and its successors.

(g) "DISABILITY" means a disability that entitles the Optionee to
benefits under the Company's Long-Term Disability Plan, as
amended from time to time.

(h) "EXCHANGE ACT" means the Securities Exchange Act of 1934, as
amended.

(i) "FAIR MARKET VALUE" means the closing sale price on the last
business day prior to the date on which Fair Market Value needs
to be determined as reported in THE WALL STREET JOURNAL, or the
average of the high and low bids on such day if no sale exists.

(j) "OPTION" means an option to purchase a share or shares of the
Company's common stock.

(k) "OPTION AGREEMENT" means the written agreement to be entered into
by the Company and the Optionee, as provided in Section 7 hereof.

(1) "OPTIONEE" means a person to whom an Option has been granted
under the 2000 Plan.

(m) "RETIREMENT" means retirement from employment with the Company
and its Subsidiaries, as determined by the Committee in its sole
discretion.

2
<PAGE>

(n) "SHARES" means shares or the Company's common stock.

(o) "SUBSIDIARY" means a subsidiary corporation as defined in Section
425(f) of the Code (or a successor provision of similar import).

(p) "TERM" means the period during which a particular Option may be
exercised in accordance with Section 10 hereof.

3. EFFECTIVE DATE OF THE 2000 PLAN

The 2000 Plan shall become effective when adopted by the Board of
Directors; provided, however, that if the 2000 Plan is not approved by the
holders of a majority of the outstanding Shares present, or represented, and
entitled to vote at the meeting before the first anniversary of its adoption by
the Board, the 2000 Plan and all Options granted under the 2000 Plan prior to
such anniversary shall be null and void and shall be of no effect.

4. NUMBER AND SOURCE OF SHARES SUBJECT TO THE 2000 PLAN

(a) The Company may grant Options under the 2000 Plan for not more
than Seven Hundred Fifty Thousand(750,000) Shares (subject,
however, to adjustment as provided in Section 14 hereof) which
shall be provided by the issuance of Shares authorized but
unissued.

(b) In the event that an Option shall for any reason lapse or be
terminated without being exercised in whole or in part, the
Shares subject to the Option shall be restored to the total
number of Shares with respect to which Options may be granted
under the 2000 Plan, but only to the extent that the Option has
not been exercised previously.

3
<PAGE>

5. ADMINISTRATION OF THE 2000 PLAN

(a) The 2000 Plan shall be administered by the Committee.

(b) The Committee shall adopt such rules and regulations (including
amendments thereto) as it may deem proper; provided, however,
that it may take action only upon the agreement of a majority of
its members then in office. Any action that the Committee may
take through a written instrument signed by a majority of its
members then in office shall be as effective as though taken at a
meeting duly called and held.

(c) The powers of the Committee shall include plenary authority to
interpret the 2000 Plan, and, subject to the provisions hereof,
the Committee shall determine the persons to whom Options shall
be granted, the number of Shares subject to each Option, the Term
of each Option, the date on which each Option shall be granted,
and the provisions of each Option Agreement.

6. 2000 PLAN PARTICIPANTS ELIGIBLE TO RECEIVE OPTIONS

Options may be granted under the 2000 Plan to key management employees
of the Company or any Subsidiary, including officers who, in the judgment of the
Committee, have a substantial impact on the Company's attainment of corporate
goals. All determinations by the Committee as to the identity of the persons to
whom Options shall be granted hereunder shall be conclusive.

7. OPTION AGREEMENTS

(a) No Option shall be exercised by an Optionee unless the Optionee
shall have executed and delivered an Option Agreement.

(b) Appropriate officers of the Company are hereby authorized to
execute and deliver Option Agreements in the name of the Company
as directed from time to time by the Committee.

8. NON-STATUTORY OPTIONS

It is intended that the Options granted hereunder shall not be
"incentive stock options" within the meaning of the Code.

4
<PAGE>

9. OPTION PRICE

The Option price to be paid by the Optionee to the Company for each
Share purchased upon the exercise of the Option shall be determined by the
Committee and shall be not less than the Fair Market Value of the Share on the
date the option is granted but may exceed Fair Market Value in the sole
discretion of the Committee.

10. TERM OF OPTION; EXERCISE OF OPTION

(a) Each Option granted under the 2000 Plan shall be exercisable as
provided in this Section 10. In no event may an Option be
exercised before the approval of the 2000 Plan by the
shareholders of the Company at the meeting within the period
specified by Section 3 hereof. The Term of each Option shall end
(unless the Option shall have terminated earlier under any other
provisions of the 2000 Plan) on a date ten (10) years from the
date of grant of the Option.

(b) Each Option shall become exercisable and vested with respect to
twenty-five percent (25%) of the Shares purchasable thereunder on
the first anniversary of the date of the grant of the Option. The
option to purchase an additional twenty-five percent (25%) of
such Shares shall become exercisable and vested, on a cumulative
basis, on each of the three succeeding anniversaries of the date
of the grant of the Option, so that four years from the date of
such grant the option to purchase all such Shares shall have
become exercisable and vested. Notwithstanding the foregoing
vesting schedule (i) each Option shall become exercisable in full
immediately upon a Change in Control and (ii) upon the death,
disability or retirement of an Optionee or termination of an
Optionee's employment pursuant to Section 12(e), any Option held
by such Optionee shall be exercisable in full in accordance with
the provisions of Section 12. When exercising an Option, the
Optionee may purchase less than the full number of Shares then
available under the Option.

5
<PAGE>

(1) a notice, in the form and in the manner prescribed by the
Committee, specifying the number of Shares to be purchased,
and

(2) payment in full of the Option price for the Shares in cash
and/or by the tender of Shares (by delivering the
appropriate stock certificates) to the Committee; provided,
however, that (i) the Committee shall determine acceptable
methods for tendering shares to exercise an Option under the
2000 Plan, and may impose such limitations and prohibitions
on the use of Shares to exercise an Option as it deems
appropriate and (ii) the Committee may permit Optionees to
pay for any Shares subject to an option by delivering to the
Committee a properly executed exercise notice together with
a copy of irrevocable instructions to a broker to deliver
promptly to the Company the amount of sale or loan proceeds
to pay the purchase price.

The Company may enter into agreements for coordinated
procedures with one or more brokerage firms in connection
with exercises of Options. The value of any Shares tendered
in accordance with this Paragraph (c) shall be determined on
the basis of their Fair Market Value on the date of
exercise.

(d) Subject to the provisions of Section 11(a) hereof, upon receipt
of the notice of exercise and upon payment of the Option price,
the Company shall promptly deliver to the Optionee a certificate
or certificates for the Shares purchased, without charge to the
Optionee for issue or transfer tax.

6
<PAGE>

11. CONDITIONS ON EXERCISE

(a) The exercise of each Option granted under the 2000 Plan shall be
subject to the condition that if at any time the Company shall
determine in its discretion that the satisfaction of withholding
tax or other withholding liabilities, or that the listing,
registration or qualification of any Shares otherwise deliverable
upon such exercise upon any securities exchange or under any
State or Federal law, or the consent or approval of any
regulatory body, is necessary or desirable as a condition of, or
in connection with, such exercise or the delivery or purchase of
Shares, then in any such event such exercise or payment shall not
be effective or be made unless such withholding, listing,
registration, qualification, consent or approval shall have been
effected or obtained free of any conditions not acceptable to the
Company. Any such postponement shall not extend the time within
which the Option may be exercised; and neither the Company nor
its directors or officers shall have any obligation or liability
to the Optionee or to a Beneficiary with respect to any Shares as
to which the option shall lapse because of such postponement.

(b) Except with the prior written approval of the Committee, all
Options granted under the 2000 Plan shall be nontransferable
other than by will or by the laws of descent and distribution in
accordance with Section 12(a) hereof, and an Option may be
exercised during the lifetime of the Optionee only by the
Optionee.

(c) Subject to the provisions of Section 11(b), upon the purchase of
Shares under an option, the stock certificate or certificates
may, at the request of the Optionee (or the Optionee's
Beneficiary, where the Option is exercised by the Beneficiary),
be issued in the name of the Optionee (or Beneficiary) and the
name of another person as joint tenants with the right of
survivorship.

7
<PAGE>

12. EXERCISE OF OPTION AFTER DEATH, DISABILITY, RETIREMENT, OR OTHER
TERMINATION OF EMPLOYMENT

(a) DEATH. If an Optionee's employment with the Company or a
Subsidiary shall cease due to the Optionee's death, any Option
held by the Optionee on the date of the Optionee's death may be
exercised only within three (3) years after the Optionee's death
and only by the Optionee's Beneficiary. If an Optionee shall die
within three (3) years after cessation of employment while the
Option is exercisable pursuant to Paragraph (b) below, or if the
Optionee shall die within three (3) years after cessation of
employment while the Option is exercisable pursuant to Paragraph
(c) below, any Option held by the Optionee on the date of his
death may be exercised after the Optionee's death only within the
remainder of the period prescribed by Paragraph (b) or Paragraph
(c), as the case may be, and only by the Optionee's Beneficiary.
Notwithstanding the foregoing, in no event shall the Option be
exercisable after the expiration date thereof specified in the
Option Agreement.

(b) DISABILITY. If an Optionee's employment with the Company or a
Subsidiary ceases due to Disability, the Optionee may exercise
the Option at any time within three (3) years after the Optionee
shall so cease to be an employee; provided, however, that in no
event shall the Option be exercisable after the expiration date
thereof specified in the Option Agreement.

(c) RETIREMENT. If an Optionee's employment with the Company or a
Subsidiary ceases due to Retirement, the Optionee may exercise
the Option at any time within three (3) years after the Optionee
shall so cease to be an employee; provided, however, that in no
event shall the Option be exercisable after the expiration date
thereof specified in the Option Agreement.

(d) LEAVE OF ABSENCE. The Committee shall have the sole authority to
determine whether, in any particular case, a leave of absence
shall result in a termination of employment for purposes of this
Section 12.

(e) DIVESTITURE. If an Optionee's employment with the Company or a
Subsidiary ceases due to divestiture of a Subsidiary or other
distinct business unit of the Company, the Optionee may exercise
the Option at any

8
<PAGE>

time within ninety (90) days after the divestiture, provided that
the Optionee is an employee on the actual date of the
divestiture; and further provided, that in no event shall the
Option be exercisable after the expiration date thereof specified
in the Option Agreement.

(f) TERMINATION FOR OTHER REASONS. Upon termination of an Optionee's
employment with the Company or a Subsidiary for any reason other
than those specified in Paragraphs (a) through (e) above, the
Optionee may exercise the Option (to the extent vested) at any
time within thirty (30) days after such termination; provided,
however, that in no event shall the Option be exercisable after
the expiration date thereof specified in the Option Agreement.

13. SHAREHOLDER RIGHTS

No person shall have any rights of a shareholder by virtue of an Option
except with respect to Shares actually issued to him or her, and the issuance of
Shares shall confer no retroactive right to dividends.

14. ADJUSTMENTS FOR CHANGES IN CAPITALIZATION

In the event that there is any change in the Shares through merger,
consolidation, reorganization, recapitalization or otherwise, or if there shall
be any dividend on the Company's Shares, payable in such Shares, or if there
shall be a stock split or combination of Shares, the aggregate number of Shares
available for Options, the number of Shares subject to outstanding Options, and
the Option price per share of each outstanding Option shall be proportionately
adjusted by the Committee as it deems equitable in its absolute discretion, to
prevent dilution or enlargement of the rights of the Optionee; provided, that
any fractional Shares resulting from such adjustments shall be eliminated. The
Committee's determination with respect to any such adjustments shall be
conclusive.

9
<PAGE>

15. EFFECT OF MERGER OR OTHER REORGANIZATION

If the Company shall be the surviving corporation in a merger or other
reorganization, Options shall extend to stock and securities of the Company to
the same extent that a holder of that number of Shares immediately before the
merger or consolidation corresponding to the number of Shares covered by the
Option would be entitled to have or obtain stock and securities of the Company
under the terms of the merger or consolidation.

16. TERMINATION, SUSPENSION OR MODIFICATION OF 2000 PLAN

The Committee may at any time terminate, suspend, amend or modify the
2000 Plan, except that the Committee shall not, without the authorization of the
holders of a majority of the Company's Shares voting at a shareholders' meeting
duly called and held, change (other than through adjustment for changes in
capitalization as provided in Section 14 hereof): (a) the aggregate number of
Shares with respect to which Options may be granted; (b) the class of persons
eligible for Options; (c) the Option price; or (d) the maximum duration of the
2000 Plan. No termination, suspension or modification of the 2000 Plan shall
adversely affect any right acquired by an Optionee, or by any Beneficiary, under
the terms of an Option granted before the date of such termination, suspension
or modification, unless such Optionee or Beneficiary shall consent; but it shall
be presumed conclusively that any adjustment for changes in capitalization in
accordance with Section 14 hereof does not adversely affect any such right.

17. DURATION OF THE 2000 PLAN

Unless sooner terminated in accordance with Section 16 hereof, the 2000
Plan shall remain in effect for a period of five (5) years from the date of its
adoption by the Board of Directors. Expiration of such five (5) year period
shall not affect the vesting of previously granted Options pursuant to Section
10(b) hereof.

18. GOVERNING LAW

The 2000 Plan shall be construed and its provisions enforced and
administered in accordance with the laws of the State of Tennessee except to the
extent that such laws may be superseded by any Federal law.

<PAGE>

Exhibit 10.5

NON-COMPETITION AND SEVERANCE AGREEMENT

This Agreement is made and entered into as of this _____ day of
_______, ____ by and between Chattem, Inc., a Tennessee corporation (the
"Company") and _______________ (the "Executive").

WITNESSETH:

WHEREAS, the Company is desirous of assuring itself of continuity of
management through the hiring and retention of certain key executives, and to
foster their unbiased and analytical assessment of any offer to acquire control
of the Company; 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 three (3) years after the termination of the Executive's
employment with the Company.

2. CONFIDENTIALITY OBLIGATIONS. During the term of this
Agreement the Executive agrees to maintain all confidential information and
trade secrets obtained during the course of his employment with the Company as
confidential and to disclose the same to no one, other than in the furtherance
of the Company's

<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

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<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

-3-

<PAGE>

commensurate with those given other managers of the
Company), or so alters the style or philosophy of
the conduct of the Company's business, in the
opinion of the Executive, as to cause it to be
undesirable to the Executive to remain in the
employ of the Company.

D. "Severance Benefit": a payment equal to two hundred
ninety-nine (299%) percent of the Executive's
average annual includible compensation from the
Company during the five (5) most recently completed
taxable years before the date on which the Change in
Control occurs. Any partial taxable years shall be
annualized. 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.

Notwithstanding the foregoing Severance Benefit formula, any payments to
which the Executive is entitled upon Discharge or Constructive Discharge from
Company shall be adjusted so that the aggregate present value of all "parachute
payments" (as defined in Section 280G of the Internal Revenue Code of 1954, as
amended from time to time (the "Code")) to which the Executive is entitled is
less than 300% of the Executive's "annualized includible

-4-

<PAGE>

compensation for the base period" as defined in the Code. The determination as
to whether there is any adjustment (and the extent thereof) in the payments due
the Executive because of this paragraph shall be made in writing within thirty
(30) days after Discharge or Constructive Discharge, by the Company's
independent certified public accounts on the date of the change in control and
shall be final and binding on the Executive and the Company. The Company shall
furnish said independent certified public accountants with all data required to
make said determination within ten (10) days after Discharge or Constructive
Discharge. If there is any such adjustment, the Executive may elect in the
Executive's sole discretion which payments or distributions shall be reduced
and/or which payments or distributions shall be deferred and promptly notify the
Company in writing of such election.

5. PAYMENT. The Severance Benefit shall be paid to the
Executive in a lump sum or, at the Executive's election, in two (2) equal
installments with the first to be made not later than thirty (30) days after
Discharge or Constructive Discharge 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.

6. CONTINUATION OF BENEFITS. The Company shall continue to
provide to the Executive at its cost and expense

-5-

<PAGE>

health, medical and life insurance benefits at substantially the same level of
benefits as the Executive has at the date he becomes entitled to the Severance
Benefit in accordance with Section 4 hereof for a period of two (2) years
following the date the Executive becomes entitled to such Severance Benefit.

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

-6-

<PAGE>

circumstances recovery by the Executive of all or a part of any such fees and
costs and expenses would be unjust.

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

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

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

11. AMENDMENT. This Agreement may not be amended or 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.

-7-

<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.

---------------------------------
(Executive Name)

ATTEST: CHATTEM, INC.

______________________ By ______________________________
(Assistant) Secretary (CEO Name)
Chief Executive Officer and
Chairman of the Board
(SEAL)

-8-

<PAGE>

Exhibit 10.6

NON-COMPETITION AND SEVERANCE AGREEMENT

This Agreement is made and entered into as of this _____ day of
_____________, ____ by and between Chattem, Inc., a Tennessee corporation (the
"Company") and ____________ (the "Executive").

WITNESSETH:

WHEREAS, the Company is desirous of assuring itself of continuity of
management through the 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.

-1-
<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.

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

-3-

<PAGE>

managers of the Company), or so alters the
style or philosophy of the conduct of the
Company's business, in the opinion of the
Executive, as to cause it to be undesirable
to the Executive to remain in the employ of
the Company.

D. "Severance Benefit": a payment equal to two
hundred (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.

-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.

-5-

<PAGE>

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.

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.

---------------------------------
(Executive Name)

ATTEST: CHATTEM, INC.

- --------------------- By
(Assistant) Secretary --------------------------------------
(President's Name)
President

(SEAL)

<PAGE>

EXHIBIT 11

CHATTEM, INC. AND SUBSIDIARIES
STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS
FOR THE YEARS ENDED NOVEMBER 30, 1999, 1998 AND 1997
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

1999 1998 1997
---------- ---------- ------------
<S> <C> <C> <C>
NET INCOME:
Income before extraordinary loss . . . . . . $ 22,541 $ 18,128 $ 7,016
Extraordinary loss . . . . . . . . . . . . . (2,385) (2,859) (1,131)
---------- ---------- ---------
Net income . . . . . . . . . . . . . $ 20,156 $ 15,269 $ 5,885
========== ========== =========
COMMON SHARES:
Weighted average number outstanding . . . . 9,747 9,374 8,793
Number issued upon assumed exercise of
outstanding stock options and stock
warrants . . . . . . . . . . . . . . . . . 277 361 330
---------- ---------- ---------
Weighted average number of common and
common equivalent shares outstanding. . . 10,024 9,735 9,123
========== ========== =========

NET INCOME (LOSS) PER COMMON SHARE:
Basic:
Income before extraordinary loss . . . . . $ 2.31 $ 1.93 $ .80
Extraordinary loss . . . . . . . . . . . . (.24) (.30) (.13)
---------- ---------- ---------
Total basic . . . . . . . . . . . . . $ 2.07 $ 1.63 $ .67
========== ========== =========
Diluted:
Income before extraordinary loss . . . . . $ 2.25 $ 1.86 $ .77
Extraordinary loss . . . . . . . . . . . . (.24) (.29) (.12)
---------- ---------- ---------
Total diluted . . . . . . . . . . . . $ 2.01 $ 1.57 $ .65
========== ========== =========
</TABLE>

<PAGE>

Message from Zan Guerry
Chairman and CEO of Chattem

Lou Holtz said God put eyes in the front of our head so we would look
forward, not backward. Chattem certainly is a forward looking company, anxious
for more growth, and almost all of this annual report is focused on the future.
However, given the richness of our heritage, I think a brief look back at the
century and the last decade is appropriate.

HOW DOES A COMPANY SURVIVE A CENTURY

Very few CEO's can even address the issue of how their company lasted a
full century. In fact, Chattem has now existed for 120 years. In order to
survive and prosper for that long, clearly a company must have a sound business
strategy. Our strategy of leadership in the health and beauty markets in which
we compete, unique products and strong advertising support has stood the test of
time.

A company must also be blessed with an enthusiastic, hard working,
loyal workforce. I will put Chattem's employees against anyone based on these
criteria. Further, a company must have a little good fortune. Chattem's growth
has come almost exclusively from making acquisitions and then growing the
business through advertising and line extensions. We must have other companies
offer us brands to acquire at reasonable prices to be successful in executing
this strategy, and generally we have been fortunate in having good acquisition
candidates presented to us.

Finally, and most important, it occurs to me that the primary reason a
company thrives for over a century is about CHARACTER. Character is interesting
in that we can look at people and say they have character, for example, Colin
Powell, Arnold Palmer, Mother Teresa, among others, but we could spend this
whole report defining what character means. My definition of character for
Chattem, which its leaders, directors and employees have long demonstrated, is
as follows: Character means all for one and one for all. We work as a team and
large individual egos simply do not exist. We operate from a simple philosophy
of "Do what is right, do your best and treat others as you wish to be treated".
We live this not only in our lives at Chattem, but in our community. It is a
great pleasure to lead a company that has character.

THE MAGNIFICENT DECADE

Clearly Chattem has done many great things in its history, but in the
last decade is when Chattem moved to a whole new level. Interestingly, it
started with FLEXALL and Joe Namath. Although we have had many marketing
successes, FLEXALL put the confidence in us that we could compete with the
best. Led by FLEXALL, Chattem's earnings soared at a 37% compound rate for
three years in the early 90s and our stock price increased 400% during the
same period.

In 1993 and 1994 we were tested by strong competition, the loss of a
key chemicals customer and a lack of acquisitions. These were tough
rebuilding years. However, starting in 1995, we went on an unprecedented
growth streak in which sales tripled from $100 million to nearly $300 million
in 1999, a compound growth rate of 31%. Earnings per share before
extraordinary items and product divestitures grew even faster from $.32 in
1995 to $2.25 last year, a compound rate of 63%. These numbers clearly allow
me to call the 1990's Chattem's magnificent decade.

<PAGE>

1999 -- A REVIEW

1999 was an enigmatic year. For the last two years, I have written to
you that Chattem had the best years in our history. I easily could again make
that claim, as we had by far the largest increase in earnings per share in
history in both an absolute and a percentage basis. For the year, earnings per
share before extraordinary items and product divestiture increased by 80%, or
$1.00, from $1.25 to $2.25.

In addition, our results are based on the performance of our brands and
we had a number of significant successes. MUDD increased 40% led by updated
packaging and the new MUDD Self-Heating Skin Cleanser. PHISODERM increased 25%
due to a successful new acne cleanser. GOLD BOND continued its strong growth
increasing 27% led by the new antibiotic ointment, a full year of GOLD BOND
medicated lotion and growth in the powder, foot and cream products. HERPECIN-L
also had an outstanding year, increasing more than 25%. Also, many of our strong
profit brands, including our topical analgesics, menstrual products and BAN, had
solid years. Thus, 1999 had a great number of product successes.

There were two areas of disappointment, however, which diminished
the successes of the year. From a brand perspective, we encountered
significant competition against DEXATRIM and SUNSOURCE, which resulted in
both being about 25% below expectations. For DEXATRIM, the major new
competition came from Metabolife-Registered Trademark- and new prescription
products. For SUNSOURCE, there continued to be new competition in the herbal
markets from a number of sources including major pharmaceutical companies.

The other area of disappointment was our stock price. At the beginning
of the year we considered selling approximately $100 million of stock to
strengthen our balance sheet and provide growth capital. The U.S. capital
market's job is to allocate capital to successful companies. Given Chattem's
success it is amazing and extremely discouraging that we can produce a five
year 63% compound growth in earnings per share and be rewarded with a P/E of
less than 10, given the extremely high P/Es of many stocks. We can still make
acquisitions using the high yield and bank debt markets, but it may be
preferable in some circumstances to use proceeds from the sale of equity.

FISCAL 2000 OUTLOOK*

After five years of dynamic growth in earnings per share, 2000 appears
to be one of more modest growth, in the 7-10% range. This temporary slower
growth rate is due to the absence of any acquisitions in the last twelve
months, continued competition, as mentioned, for DEXATRIM and SUNSOURCE,
expected new competition in the deodorant market and the need to support with
investment spending a number of new products.

Our goal for 2000 and beyond is to return quickly to superior earnings
growth rates. To accomplish this, we will first aggressively return to an
acquisition mode. In 1999 we felt we needed to assimilate our recent
acquisitions. This has been accomplished and we are presently aggressively
looking for brands that fit our strategy.

Second, we have some very exciting new product launches. We have not
budgeted strong numbers for any of these, but if they prove successful, we could
add meaningful growth to earnings. The four most promising product launches
which will receive the bulk of our investment spending are BAN Naturals,
DEXATRIM Natural, PHISODERM Blemish Patch and GOLD BOND Sensitive

2
<PAGE>

Skin Lotion. Later in this report you can read in detail about these exciting
launches. I will simply say that all four have very high market research scores
which indicate each could be a multi-million dollar idea.

In addition to these four big launches, we have several other important
new products. SUNSOURCE is currently introducing OMNIGEST EZ, which is a seven
enzyme product to help digestion. America is currently hooked on antacids or
acid blockers to cover the symptoms of poor digestion. OMNIGEST EZ treats the
problem naturally. Also, SUNSOURCE is introducing NEW PHASE, a phytoestrogen
product for menopause.

BULLFROG is introducing Sports Spray, which is simply the best
sunblock product on the market, Sparkle Block for kids and AgeProof for
seniors. In addition, late year 1999 launches, FLEXALL QUIK GEL, MUDD
Self-Heating and PHISODERM Acne, will continue to receive support.

STRATEGIC PERSPECTIVE*

To follow a decade as outstanding as the 1990's is a daunting task.
However, led by our proven acquisition ability, the new products mentioned above
and our marketing skills, we are committed to becoming a $500 million plus
company in the coming decade.

Our managers, directors and employees are all enthusiastic about
opportunities for further growth. We are committed to bringing to you, our
shareholders, another outstanding decade of growth in sales and earnings which
we hope will also result in a higher stock price.

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

Metabolife-Registered Trademark-is a registered trademark of
Metabolife International, Inc.

3
<PAGE>

CHATTEM CONSUMER PRODUCTS

DOMESTIC PRODUCT OVERVIEW

OTC HEALTH CARE PRODUCTS

MEDICATED SKIN CARE PRODUCTS

GOLD BOND is America's number one brand of medicated powder in the $41 million
medicated powder category. With its unique positioning and strong brand equity,
GOLD BOND has successfully extended into other skin care segments. For example,
GOLD BOND cream continues to be one of the fastest growing brands in the $207
million anti-itch cream market. In addition, GOLD BOND Foot Powder and GOLD BOND
Cornstarch Plus Medicated Baby Powder have added incremental sales to the
franchise since their launch in 1997. In the summer of 1998, GOLD BOND entered
the $1 billion hand and body lotion category with GOLD BOND Medicated Body
Lotion which has quickly become a major product in the therapeutic anti-itch
segment. During 2000, GOLD BOND is expanding its presence in the lotion category
with the launch of GOLD BOND Fragrance Free Medicated Body Lotion, a product
uniquely formulated to soothe and protect itchy skin for consumers that desire a
fragrance free formula or have sensitive skin. GOLD BOND Triple Action
Antibiotic Ointment was launched in early 1999 in the $190 million antibiotic
ointment category. Looking to 2000, GOLD BOND will continue to benefit from
record levels of advertising and consumer promotion support.

TOPICAL ANALGESICS

With the acquisition of brands from Thompson Medical in late 1998, the Company
is the overwhelming leader in the $215 million topical analgesic category with
its FLEXALL, ICY HOT, ASPERCREME, SPORTSCREME, CAPZASIN and ARTHRITIS HOT
brands.

Positioned as "full speed relief for tough pain", FLEXALL is an aloe based
topical analgesic that provides fast relief for arthritis, joint and muscle
pain. The brand's current product line includes Original Vitamin E Enriched,
Maximum Strength, Ultra Plus and the recently launched QUIK GEL. FLEXALL QUIK
GEL is formulated to provide fast pain relief without the greasy mess inherent
in old-fashioned pain rubs. FLEXALL enjoys extensive advertising support
featuring NFL Hall of Famer, Joe Montana.

ICY HOT offers the most complete product form line-up in the category with a
cream, a balm and the unique CHILL STICK. Heavy television advertising
communicating the brand's distinctive "icy to dull the pain, hot to relax it
away" positioning continues to generate consistent retail sales growth.

ASPERCREME provides clinically proven relief for arthritis pain. The brand's
odor free formula has particularly strong appeal among women over fifty that are
suffering from arthritis.

SPORTSCREME is targeted at the serious athlete and "weekend warrior" and
provides relief from muscle aches and strains. The product has an appealing,
fresh scent. For the year 2000, SPORTSCREME will benefit from increased
advertising reach as the brand expands beyond the historical TV cable only media
source.

CAPZASIN-P and CAPZASIN-HP contain the active ingredient doctors recommend most.
During 2000 CAPZASIN will be supported by an unprecedented national radio
advertising plan.

The ARTHRITIS HOT brand provides pain relief for consumers looking for a value
price.

In addition, the Company competes in the $65 million internal irritation segment
of the topical oral analgesic category with BENZODENT. BENZODENT is the only
product specifically positioned to be applied directly to dentures to relieve
pain. The product contains the maximum amount of benzocaine allowed in the
category and is widely recommended by dentists. Marketing efforts are focused on

4
<PAGE>

providing samples to consumers when they are initially fitted for dentures, the
point of entry for the category.

INTERNAL ANALGESICS

The Company competes in the $67 million menstrual pain relief category with its
PAMPRIN and PREMSYN PMS brands. NORWICH Aspirin competes in the general
analgesic category.

PAMPRIN, the number two brand in the category, is a combination drug
specifically for relief of menstrual symptoms. Unlike ordinary pain relievers,
Multi-Symptom PAMPRIN contains three active ingredients to effectively relieve
multiple menstrual discomforts. Maximum Cramp Relief PAMPRIN contains two active
pain medications to relieve cramps, headaches and backaches. Maximum Strength
PREMSYN PMS, the third largest brand in the category, effectively relieves the
physical and emotional symptoms of PMS. PAMPRIN and PREMSYN PMS are supported
with a combination of television, radio and print advertising as well as point
of entry sampling to teens.

NORWICH, a high quality, reasonably priced aspirin, complements the other OTC
pharmaceuticals of the division. Sales and marketing support is principally
focused in the northeast, midwest and west coast.

LIP CARE

The Company competes in the $57 million cold sore market with HERPECIN-L. Retail
sales have increased by over 30% since 1997 as a result of a reformulation of
the stick, the introduction of the jar and the execution of a national radio
advertising campaign. For 2000, radio advertising has been increased to maximize
support for the brand during the critical cough/cold season.

APPETITE SUPPRESSANT

DEXATRIM is a line of appetite suppressants which was acquired in December 1998.
DEXATRIM is available in four different formulas including gelcaps, which were
introduced in early 1999. The brand is supported through strong television
advertising focusing on the safety and efficacy of DEXATRIM as a diet aid. In
2000 DEXATRIM will enter the explosive herbal diet aid category with DEXATRIM
Natural. DEXATRIM Natural is a drug-free, all natural diet aid with special dual
action that curbs appetite and helps the body burn fat and calories. DEXATRIM
and DEXATRIM Natural will be supported through high levels of television
advertising in 2000.

DIETARY SUPPLEMENTS

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

GARLIQUE holds a 16% share of the $80 million garlic category, and is the leader
among branded garlic extract products. Clinical research on the benefits of
garlic support the position of GARLIQUE as a dietary supplement for good
cardiovascular health. Scientists have identified allicin as an active
ingredient in garlic, and the garlic selected for GARLIQUE is the very highest
in allicin yield.

REJUVEX is uniquely positioned to support menopausal comfort and healthy bones
for women in the pre and post-menopausal age group. REJUVEX is a unique natural
formula containing a combination of magnesium, vitamins, anti-oxidants and other
important nutrients, which help meet the changing nutritional needs of women.

PROPALMEX is a leading branded product in the $43 million saw palmetto herbal
category. Positioned to support prostate health in men over 40, PROPALMEX is
backed by consumer promotion and extensive radio advertising. A new and improved
PROPALMEX formula will ship in the first quarter of 2000. This

5
<PAGE>

new product adds lycopene, a powerful anti-oxidant, to clinically tested
standardized saw palmetto, to provide an all natural, drug free approach to
maintaining a healthy prostate.

HARMONEX is a unique combination of two herbs: St. John's Wort for emotional
well-being and Siberian ginseng for physical well-being. HARMONEX competes in
the St. John's Wort category now selling at the rate of $130 million per year.

The Company competes in the $33 million dollar melatonin category with
MELATONEX. The brand is positioned to support a natural sleep cycle. The product
uses a unique time-release delivery system, releasing melatonin as the body
does, gradually, while you sleep.

REPOSE Stress Relief Formula blends kava and magnesium for relaxation with
revitalizing Siberian ginseng to help the body deal with stress effectively.
Vitamins B and C complete the formula by replenishing nutrients that are lost
due to stress.

ECHINEX is a standardized herbal complex of echinacea, ginger and Siberian
ginseng. This unique and effective combination is positioned to support a
healthy immune system.

TOILETRIES AND SKIN CARE PRODUCTS

ANTIPERSPIRANTS AND DEODORANTS

The Company competes in the $1.7 billion antiperspirant and deodorant
category with its BAN products which provide advanced protection from odor
and wetness. Originally introduced in 1955, BAN is the number one roll-on
brand in the U.S. The proven maximum strength protection of BAN is available
in five advanced forms -- Original Roll-On, Clear Roll-On, Solid Stick, Clear
Stick and Clear Soft Solid. The product line is supported with significant
national television and radio advertising and consumer promotions. Two
exciting new line extensions, BAN Ultra Dry Roll-on and BAN Ultra Dry Stick,
and new packaging were introduced in the 1999 fiscal year.

FACIAL CLEANSERS AND MASQUES

Within the skin care category, the Company competes in the $718 million facial
cleanser category with its PHISODERM brand and in the $30 million facial masque
sub-segment with MUDD Spa Treatment masque products.

PHISODERM is a line of facial cleansers developed by dermatologists which
retains an ethical, skin smart halo. The line includes a bar soap and several
formulas of liquid cleansers, including one for infants. In 1999 PHISODERM
added a 4-Way Daily Acne Cleanser to the line which has generated significant
incremental new business to the brand. Consumer support behind the brand has
been in the form of radio advertising for the base products and print
advertising in teen magazines for the acne product in addition to extensive
sampling of all formulas. In 2000 we anticipate further expanding the acne
portion of the business with unique new line extensions.

MUDD is a line of deep cleaning, clay-based products for the face. Target
consumers for MUDD are women between the ages of 18 and 49. MUDD Masque is
available in four formulas and is a strong market leader in the masque category.
In 1999 the masque products were repackaged in a new terra cotta design and
upsized from 4 oz. to 6 oz. tubes. Also in 1999 the Company introduced MUDD
Self-Heating Skin Cleanser which is a deep cleaning scrub product. MUDD
Self-Heating Skin Cleanser is unique because it generates heat upon contact with
water to open pores for maximum deep cleansing.

6
<PAGE>

SEASONALS

The Company competes in three seasonal product categories: sun care, spray-on
hair lighteners and chlorine removal haircare. The Company competes in the
$325 million sun care category among products with a sun protection factor
(SPF) of greater than 15 with the BULLFROG Sunblock line. SUN-IN competes in
the $12 million spray-on hair lightener category, while ULTRASWIM Shampoo,
Conditioner, Soap and Shower Gel dominate the small chlorine removal category.

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

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

ULTRASWIM is the gold standard of chlorine removing shampoos, conditioners,
and soaps. ULTRASWIM has a unique formula that performs chlorine removal
better than any comparable hair care or skin care product on the market. The
company supports this brand through targeted print advertising to
competitive, recreational and exercise swimmers and through event sponsorship
with targeted sampling programs.

INTERNATIONAL MARKET OVERVIEW

EUROPE

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

CANADA

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

7
<PAGE>

U.S. EXPORT

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

8
<PAGE>

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

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

GENERAL

Fiscal 1999 was highlighted by the acquisition of certain products from Thompson
Medical Company, Inc. ("Thompson") and related refinancing of senior debt, the
issuance of $75,000,000 of 8.875% senior subordinated notes, the repurchase of
172,500 shares of the Company's common stock, the retirement of $15,106,000 face
amount of 12.75% senior subordinated notes and, in addition to scheduled
principal payments, prepayments of $10,400,000 on long-term bank debt.

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

9
<PAGE>

The Company also announced on December 21, 1998, the filing of a shelf
registration with the Securities and Exchange Commission for $250,000,000 of
debt and equity securities. This shelf filing allows the Company to access the
capital markets on a more immediate basis to fund internal growth and
acquisitions and strengthen the balance sheet.

On May 7, 1999, the Company issued an additional $75,000,000 of its 8.875%
(priced to yield 8.8125%) senior subordinated notes under its indenture relating
to the issuance of its $200,000,000 of 8.875% notes on March 24, 1998. The
additional notes mature on April 1, 2008 and were issued under the Company's
$250,000,000 shelf registration statement filed on December 21, 1998 with the
Securities and Exchange Commission. The net proceeds from the issuance of the
additional notes were used to retire $41,500,000 of the then outstanding balance
of the Company's $115,000,000 term bank loan and the outstanding balance of
$25,500,000 under its revolving bank loan dated December 21, 1998.

Concurrent with the closing of the $75,000,000 note issue, the Company
amended its senior credit facility. The amended facility, provided by a
syndicate of banks, consists of a $70,000,000 term loan maturing in quarterly
installments ranging from $2,000,000 to $4,750,000 through June 30, 2003 and
a $50,000,000 revolving credit facility maturing on December 21, 2003. The
credit facility contains covenants, representations, warranties and other
agreements by the Company that are customary in loan agreements relating to
financing of this type.

10
<PAGE>

During the year ended November 30, 1999, the Company, in addition to
scheduled principal payments, prepaid $10,400,000 of its long-term bank debt
and $15,106,000 of its 12.75% senior subordinated notes. In connection with
the repayment of those borrowings, the Company recorded an extraordinary loss
of $2,385,000, net of income taxes, or $.24 per share. The loss primarily
related to the write-off of debt issuance costs connected with outstanding
long-term debt retired before maturity and the premium paid on the retirement
of the 12.75% notes.

During fiscal 1999, the Company redeemed 172,500 shares of its common stock,
without par value, for $3,912,000.

The results of operations for fiscal year 1999 reflect a full year of
operations of BAN, which was acquired in the second quarter of 1998, and
approximately eleven months' operations of the Thompson Medical brands, which
were purchased in December 1998.

The Company will continue to seek increases in sales through a combination of
acquisitions and internal growth while maintaining high operating income levels.
As previously high growth brands mature, sales increases will become more
dependent on acquisitions and the development of successful line extensions of
existing products. During fiscal 1999, the Company introduced the following line
extensions/new products: BAN Ultra Dry Roll-On, BAN Ultra Dry Solid Stick, GOLD
BOND Triple Antibiotic Ointment, REPOSE Stress Relief Formula from SUNSOURCE,

11
<PAGE>

BULLFROG MAGIC BLOCK, SUN-IN Super Streaks, FLEXALL QUIK GEL, MUDD
Self-Heating Skin Cleanser and PHISODERM 4-Way Daily Acne Cleanser. Also, new
packaging for BAN was introduced in the second quarter of fiscal 1999. Line
extensions, product introductions and acquisitions require a significant
amount of introductory advertising and promotional support. For a period of
time these products do not generate a commensurate amount of sales and/or
earnings. As a result, the Company may experience a short-term impact on its
profitability. Strategically, the Company continually evaluates its products
as part of its growth strategy and, in instances where the Company's
objectives are not realized, will dispose of these brands and redeploy the
assets to acquire other brands or reduce indebtedness.

12
<PAGE>

RESULTS OF OPERATIONS

The following table sets forth, for income before extraordinary loss and for
the periods indicated, certain items from the Company's Consolidated
Statements of Income expressed as a percentage of net sales. The fiscal 1997
results included a reclassification as described in Note 2 of the Company's
Notes to the Consolidated Financial Statements.

YEAR ENDED NOVEMBER 30
------------------------------------------
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
NET SALES .................................. 100.0% 100.0% 100.0%
----- ----- -----
COST AND EXPENSES:
Cost of sales ........................... 25.4 27.7 27.4
Advertising and promotion ............... 39.5 39.3 39.2
Selling, general and
administrative ........................ 10.9 12.4 15.6
----- ----- -----
Total costs and expenses .......... 75.8 79.4 82.2
----- ----- -----
INCOME FROM OPERATIONS ..................... 24.2 20.6 17.8
----- ----- -----
OTHER INCOME (EXPENSE):
Interest expense ........................ (12.3) (12.1) (11.4)
Investment and other income ............. .2 .4 1.2
Gain on product divestitures ............ -- 4.3 --
----- ----- -----
Total other income (expense) ..... (12.1) (7.4) (10.2)
----- ----- -----
INCOME BEFORE INCOME TAXES ................. 12.1 13.2 7.6

PROVISION FOR INCOME TAXES ................. 4.5 4.9 2.7
----- ----- -----
INCOME BEFORE EXTRAORDINARY
LOSS ..................................... 7.6% 8.3% 4.9%
===== ===== =====

</TABLE>

FISCAL 1999 COMPARED TO FISCAL 1998

Net sales for the year ended November 30, 1999 increased $78,078,000, or 35.5%,
to $298,142,000 from $220,064,000 for the previous fiscal year. The increase
consisted of a $76,821,000, or 38.4%, increase in domestic consumer products

13
<PAGE>

sales from $199,811,000 in 1998 to $276,632,000 in 1999 and an increase of
$1,257,000, or 6.2%, in international sales to $21,510,000 from $20,253,000.

For domestic consumer products, sales of BAN, the Thompson Medical brands and
GOLD BOND accounted for the majority of the sales increase in 1999. Sales
increases were also realized for the FLEXALL, HERPECIN-L, MUDD and PHISODERM
brands. Sales declines were recognized for the PREMSYN PMS, ULTRASWIM, NORWICH
Aspirin and SUNSOURCE product lines. Sales were also affected by the disposition
of the CORNSILK brand in May 1998. The remaining domestic brands were basically
flat or had modest declines over the prior fiscal year. All sales variances were
largely the result of changes in the volume of unit sales of the particular
brand.

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

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

14
<PAGE>

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

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

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

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

15
<PAGE>

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

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

Interest expense increased $9,896,000, or 37.1%, to $36,572,000 in 1999 from
$26,676,000 in 1998 primarily as a result of increased indebtedness associated
with the acquisitions of BAN and the Thompson Medical brands. Until the
Company's indebtedness is reduced substantially, interest expense will continue
to represent a significant percentage of the Company's net sales.

16
<PAGE>

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

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

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

Cash earnings (net income before extraordinary loss on early extinguishment
of debt plus non-cash amortization) is one of the key standards used by the
Company to measure operating performance. Cash earnings is used to supplement
operating income as an indicator of operating performance and not as an
alternative to measures defined and required by generally accepted accounting
principles.

Cash earnings (net income before extraordinary loss on early extinguishment
of debt plus non-cash amortization) for fiscal 1999 were $29,507,000, or $2.94
per share, as compared to $16,550,000, or $1.70 per share, for fiscal 1998, a
78.3% increase in cash earnings. The Company's earnings before interest,
taxes, depreciation and amortization (EBITDA) for fiscal 1999 was $85,383,000
as compared to $53,889,000 for fiscal 1998, a 58.4% increase. The EBITDA
margin increased from 24.5% of net sales in 1998 to 28.6% in 1999.

17
<PAGE>

FISCAL 1998 COMPARED TO FISCAL 1997

Net sales for the year ended November 30, 1998 increased $76,829,000, or 53.6%,
to $220,064,000 from $143,235,000 for the previous fiscal year. The increase
consisted of a $71,787,000, or 56.1%, increase in domestic consumer products
sales from $128,024,000 in 1997 to $199,811,000 in 1998 and an increase of
$5,042,000, or 33.1%, in international sales to $20,253,000 from $15,211,000.

For domestic consumer products, sales of the BAN, SUNSOURCE and GOLD BOND
products accounted for the majority of the sales increase in 1998. Sales
increases were also realized for the PAMPRIN, SUN-IN and BULLFROG brands.
Sales declines were recognized for FLEXALL, ICY HOT, NORWICH Aspirin, MUDD
and PHISODERM. The remaining domestic brands were basically flat or had
modest declines over the prior fiscal year. All sales variances were largely
the result of changes in the volume of unit sales of the particular brand.

The increase in sales of the GOLD BOND brand was due primarily to the
introduction of the lotion line extension in 1998 and also the growth of the
existing business. The sales increases for the PAMPRIN and BULLFROG product
lines were principally the result of increased marketing expenditures. Also for
BULLFROG, the introduction of two new products and a new major customer, both

18
<PAGE>

occurring in 1998, had a favorable impact on that product line's 1998 sales.
BAN was acquired in March 1998 and the SUNSOURCE product line was purchased
in June 1997.

The sales declines for the FLEXALL, ICY HOT, MUDD and PHISODERM brands were
principally the result of decreased advertising and promotional support. Sales
were also affected by disposition of CORNSILK in May 1998. The modest sales
declines experienced by certain of the other domestic products were essentially
due to increased competition in their respective categories, the maturation of
these brands and, in certain cases, reduced marketing expenditures.

In fiscal 1998, sales for the international consumer products segment increased
$447,000, or 9.2%, for the Canadian operation and $1,808,000, or 19.5%, for the
United Kingdom business. BAN accounted for the majority of the net sales
increase in Canada, while increases were also realized for the PAMPRIN, SUN-IN
and GOLD BOND brands. Sales increases were realized for all of the product lines
marketed by the United Kingdom operation. U.S. export sales increased
$2,787,000, or 264.8%, to $3,839,000 in 1998 from $1,052,000 in 1997, with
essentially all of the increase being associated with BAN. All sales variances
were largely the result of changes in the volume of unit sales of the particular
brand.

Cost of goods sold as a percentage of net sales in 1998 was essentially
unchanged at 27.7% versus 27.4% for 1997. Cost of sales was affected by the full

19
<PAGE>

year favorable impact of the SUNSOURCE line which was slightly more than
offset by the unfavorable impact of the BAN acquisition.

Advertising and promotion expenses increased $30,416,000, or 54.1%, to
$86,592,000 in 1998 from $56,176,000 in 1997 and were 39.3% of net sales
compared to 39.2% in 1997. This increase was principally associated with
advertising and promotional expenses incurred in connection with BAN, acquired
in March 1998, a full year of the SUNSOURCE brands and GOLD BOND. Increases in
advertising and promotion in 1998 were also recorded for the PAMPRIN and
BULLFROG brands.

Selling, general and administrative expenses increased $5,061,000, or 22.7%, to
$27,364,000 in 1998 from $22,303,000 in 1997, but decreased as a percentage of
net sales to 12.4% in 1998 as compared to 15.6% in 1997. This dollar increase
was largely associated with increases in direct selling costs, freight, bad
debts and field sales expenses as a result of increased sales from acquired
brands and associated increases in administrative, financial and legal services.

Interest expense increased $10,357,000, or 63.5%, to $26,676,000 in 1998 from
$16,319,000 in 1997 primarily as a result of increased indebtedness associated
with the BAN product acquisition in March 1998 and the SUNSOURCE brands'
purchase in mid-1997.

20
<PAGE>

Investment and other income decreased $798,000, or 47.5%, to $881,000 in 1998
from $1,679,000 in 1997. The decrease was due primarily to the Company's sale of
a portion of its investment in Elcat, Inc.

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

Income before extraordinary loss increased $11,112,000, or 158.4%, to
$18,128,000 in 1998 from $7,016,000 in 1997. This increase resulted primarily
from increased sales and the gain on the sale of the CORNSILK brand.

21
<PAGE>

LIQUIDITY AND CAPITAL RESOURCES

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

Cash provided by operating activities was $26,922,000 and $20,790,000 for 1999
and 1998, respectively. The increase in cash flows from operations from 1998 to
1999 was primarily the result of increases in net income, depreciation and
amortization, accounts payable and accrued liabilities. The operating activities
were favorably impacted by the acquisition of the SUNSOURCE product line in
1997, BAN in 1998 and the Thompson Medical brands in 1999.

Investing activities used cash of $100,504,000 and $161,595,000 in 1999 and
1998, respectively. The use of cash in 1999 reflected the expenditures required
for the purchase of the Thompson Medical brands, while the 1998 amount
represented the purchase of BAN in that year. In 1999, capital expenditures
totaled $9,830,000 compared to $9,050,000 in 1998. The increase was due
primarily to cost of the replacement of the Company's information technology
systems and the cost of the extensive renovation of the manufacturing and
warehouse facility purchased in fiscal 1998. Capital expenditures are expected
to be approximately $7,000,000 in fiscal 2000.

22
<PAGE>

Financing activities provided cash of $73,770,000 in 1999 and $138,090,000 in
1998. In December 1998 the Company financed the acquisition of the Thompson
Medical brands with the proceeds of a $90,000,000 bank credit agreement and
125,500 shares of common stock valued at approximately $39.84 per share. In 1998
the Company financed the acquisition of BAN and repaid all revolving bank
indebtedness with the proceeds from its issuance of $200,000,000 of 8.875%
Senior Subordinated Notes due 2008.

The potential future SUNSOURCE deferred payments were settled in their entirety
by the Company with a $1,650,000 cash payment and the issuance of 2,582 shares
of its common stock on November 30, 1999 to the former owners of SUNSOURCE.
Until June 30, 2003, the Company is obligated to pay an annual royalty on
HERPECIN-L for the greater of $214,000, or 5% of annual net sales.

23
<PAGE>

The following table presents certain working capital data at November 30, 1999
and 1998 or for the respective years then ended:

ITEM 1999 1998
-------------------------------- ---------- ----------
<S> <C> <C>
Working capital (current assets less
current liabilities) ............. $ 26,413,000 $ 684,000
Current ratio (current assets divided
by current liabilities) .......... 1.40 1.01
Quick ratio (cash and cash equivalents
and receivables divided by current
liabilities) ..................... .86 .63
Average accounts receivable turnover . 6.51 6.81
Average inventory turnover ........... 3.19 3.57
Working capital as a percentage of
total assets .................... 5.37% 0.19%

</TABLE>

The increase in the current and quick ratios at November 30, 1999 as compared to
November 30, 1998 was primarily due to increases in accounts receivables and
inventories offset in part by increases in accounts payable, payable to bank and
accrued liabilities. These increases were due in part to the acquisition of the
Thompson Medical brands in December 1998.

24
<PAGE>

Total debt outstanding at November 30, 1999 was $369,950,000 compared to
$291,357,000 at November 30, 1998. The net increase of $78,593,000 in 1999
reflected the financing of the acquisition of the Thompson Medical brands offset
by debt repayments. The Company had $5,000,000 of outstanding borrowings and
$45,000,000 available to borrow on its $50,000,000 working capital line of
credit as of November 30, 1999.

Management of the Company believes that cash generated by operations along
with available funds under its credit facility will be sufficient to fund the
Company's current commitments and proposed operations. As of November 30,
1999, the remaining amount authorized by the Company's board of directors
under the Stock Buyback plan was $6,088,000. Also on December 21, 1998, the
Company filed with the Securities and Exchange Commission a shelf
registration for $250,000,000 of debt and equity securities, of which
$75,000,000 was utilized in the sale of the 8.875% Notes in May 1999.

25
<PAGE>

YEAR 2000

The Company has successfully completed the replacement of its previous
information technology (IT) systems with those that are year 2000 compliant.
The cost of the new IT systems to date is approximately $3,230,000, which has
been capitalized.

To date the Company has experienced no major problems with its implementation,
nor has it encountered any unusual situations with its principal customers and
suppliers in connection with their year 2000 IT systems' compliance.

However, if unanticipated problems arise in the future with regard to year 2000
compliance with the Company's new IT systems or those of its principal
customers and suppliers, the Company's business could be adversely affected.

26
<PAGE>

FOREIGN OPERATIONS

The Company's primary foreign operations are conducted through its Canadian and
United Kingdom subsidiaries. The functional currencies of these subsidiaries are
Canadian dollars and British pounds, respectively. Fluctuations in exchange
rates can impact operating results, including total revenues and expenses, when
translations of the subsidiary financial statements are made in accordance with
SFAS No. 52, "Foreign Currency Translation." For the years ended November 30,
1999 and 1998, these subsidiaries accounted for 5.9% and 7.5% of total revenues,
respectively, and 2.0% and 2.4% of total assets, respectively. It has not been
the Company's practice to hedge its assets and liabilities in Canada and the
United Kingdom or its intercompany transactions due to the inherent risks
associated with foreign currency hedging transactions and the timing of payment
between the Company and its two foreign subsidiaries. Historically, gains or
losses from foreign currency transactions have not had a material impact on the
Company's operating results. Losses of $26,000 and $74,000 for the years ended
November 30, 1999 and 1998, respectively, resulted from foreign currency
transactions. See "Foreign Currency Translation" in Note 2 of Notes to
Consolidated Financial Statements.

27
<PAGE>

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

In April 1998, the AICPA issued Statement of Position (SOP) 98-5 "Reporting on
the Costs of Start-Up Activities". SOP 98-5 requires costs of start-up
activities and organization costs to be expensed as incurred. This SOP is
effective for financial statements for fiscal years beginning after December 15,
1998. The Company will record the initial application of this SOP in December
1999 as the cumulative effect of a change in accounting principle of
approximately $875,000.

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

28
<PAGE>

that were issued, acquired or substantively modified after December 31, 1997
(and, at the Company's election, before January 1, 1999). SFAS No. 133 could
increase volatility in earnings and other comprehensive income, however,
based on the Company's current and anticipated level of derivative
instruments and hedging activities, the Company does not believe the impact
would be material.

SEASONALITY

During recent fiscal years, the Company's first quarter's net sales and gross
profit have trailed the other fiscal quarters on average from 25% to 35% because
of slower sales of domestic and international consumer products and the relative
absence of promotional campaigns during this quarter. As a result of the
Company's acquisitions of BAN and the Thompson Medical brands and the new line
extensions, seasonality should not be as pronounced as in years past; however,
net sales and gross profit during the first fiscal quarter will continue to
trail the other fiscal quarters.

FORWARD LOOKING STATEMENTS

The Company may from time to time make written and oral forward looking
statements. Written forward looking statements may appear in documents filed
with the Securities and Exchange Commission, in press releases and in reports to
shareholders. The Private Securities Litigation Reform Act of 1995 contains a
safe harbor for forward looking statements. The Company relies on this safe

29
<PAGE>

harbor in making such disclosures. The forward looking statements are based
on managements's current beliefs and assumptions about expectations,
estimates, strategies and projections for the Company. These statements are
not guarantees of future performance and involve risks, uncertainties and
assumptions that are difficult to predict. Therefore, actual outcomes and
results may differ materially from what is expressed or forecasted in such
forward looking statements. The Company undertakes no obligation to update
publicly any forward looking statements whether as a result of new
information, future events or otherwise. The risks, uncertainties and
assumptions regarding forward looking statements include, but are not limited
to, product demand and market acceptance risks; product development risks,
such as delays or difficulties in developing, producing and marketing new
products or line extensions; the impact of competitive products, pricing and
advertising; constraints resulting from financial condition of the Company,
including the degree to which the Company is leveraged, debt service
requirements and restrictions under bank loan agreements and indentures;
government regulations; risks of loss of material customers; public
perception regarding the Company's products; dependence on third party
manufacturers; environmental matters; product liability and insurance; year
2000; and other risks described in the Company's Securities and Exchange
Commission filings.

30
<PAGE>

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

YEAR ENDED NOVEMBER 30,
------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA

NET SALES .............. $ 298,142 $ 220,064 $ 143,235 $ 118,903 $ 100,598

OPERATING COSTS AND
EXPENSES ............. 225,941 174,845 117,732 102,214 86,130
--------- --------- --------- --------- ---------
INCOME FROM OPERATIONS . 72,201 45,219 25,503 16,689 14,468

OTHER EXPENSE, NET ..... (35,993) (16,247) (14,640) (11,069) (10,858)
--------- --------- --------- --------- ---------
INCOME FROM CONTINUING
OPERATIONS BEFORE
INCOME TAXES AND
EXTRAORDINARY LOSS ... 36,208 28,972 10,863 5,620 3,610

PROVISION FOR INCOME
TAXES ................ 13,667 10,844 3,847 1,816 1,285
--------- --------- --------- --------- ---------
INCOME FROM CONTINUING
OPERATIONS BEFORE
EXTRAORDINARY LOSS ... $ 22,541 $ 18,128 $ 7,016 $ 3,804 $ 2,325
========= ========= ========= ========= =========
PER SHARE DATA

INCOME PER DILUTED SHARE
FROM CONTINUING
OPERATIONS BEFORE
EXTRAORDINARY LOSS ... $ 2.25 $ 1.86 $ .77 $ .47 $ .32
========= ========= ========= ========= =========
BALANCE SHEET DATA
(At End of Period)

TOTAL ASSETS.......... $ 491,624 $ 369,012 $ 178,744 $ 152,183 $ 83,410
========= ========= ========= ========= =========
LONG-TERM DEBT, less
current maturities . $ 358,950 $ 273,913 $ 133,475 $ 127,438 $ 78,089
========= ========= ========= ========= =========

</TABLE>

31
<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:

1999 1998
--------------------- -------------------
QUARTER ENDED: HIGH LOW HIGH LOW
---- --- ---- ---
<S> <C> <C> <C> <C>
February ..... 50 1/4 24 5/8 23 5/8 12 7/8
May .......... 41 11/16 29 3/4 30 1/2 19 3/8
August ....... 38 3/8 24 37 7/8 18 5/8
November ..... 28 1/8 17 5/8 43 1/8 18 5/8

</TABLE>

Based upon transfer agent records, the Company's common shares were held by
approximately 2,500 shareholders as of February 24, 2000.

32
<PAGE>

CONSOLIDATED BALANCE SHEETS
NOVEMBER 30, 1999 AND 1998
(IN THOUSANDS)

1999 1998
---- ----
<S> <C> <C>
ASSETS

CURRENT ASSETS:
Cash and cash equivalents ............................................... $ 2,308 $ 2,076
Accounts receivable, less allowance for doubtful accounts
of $900 in 1999 and $775 in 1998 ....................................... 55,032 36,581
Deferred income taxes ................................................... 6,951 3,049
Inventories ............................................................. 27,818 19,606
Prepaid expenses and other current assets ............................... 929 784
-------- --------
Total current assets ................................................. 93,038 62,096
-------- --------

PROPERTY, PLANT AND EQUIPMENT, NET ....................................... 25,752 18,146
-------- --------
OTHER NONCURRENT ASSETS:
Investment in Elcat, Inc. ............................................... -- 3,102
Patents, trademarks and other purchased
product rights, net .................................................... 356,295 272,226
Debt issuance costs, net ................................................ 11,469 10,091
Other ................................................................... 5,070 3,351
-------- --------
Total other noncurrent assets ........................................ 372,834 288,770
-------- --------
TOTAL ASSETS ........................................................ $491,624 $369,012
======== ========

</TABLE>

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

33
<PAGE>

CONSOLIDATED BALANCE SHEETS
NOVEMBER 30, 1999 AND 1998
(IN THOUSANDS)

1999 1998
---- ----
<S> <C> <C>

LIABILITIES AND SHAREHOLDERS' EQUITY

CURRENT LIABILITIES:
Current maturities of long-term debt ...................... $ 11,000 $ 17,444
Accounts payable .......................................... 18,573 12,733
Payable to bank ........................................... 4,905 1,026
Accrued liabilities ....................................... 32,147 30,209
--------- ---------
Total current liabilities ............................... 66,625 61,412
--------- ---------
LONG-TERM DEBT, less current maturities .................... 358,950 273,913
--------- ---------
DEFERRED INCOME TAXES ...................................... 15,326 6,826
--------- ---------
OTHER NONCURRENT LIABILITIES ............................... 2,022 2,110
--------- ---------
COMMITMENTS AND CONTINGENCIES (Notes 5, 10 and 12)

SHAREHOLDERS' EQUITY:
Preferred shares, without par value, authorized 1,000,
none issued .............................................. -- --
Common shares, without par value, authorized 50,000 in 1999
and 20,000 in 1998, issued 9,707 in 1999 and 9,574
in 1998 .................................................. 2,021 1,994
Paid-in surplus ........................................... 72,850 69,068
Accumulated deficit ....................................... (24,804) (44,960)
--------- ---------
50,067 26,102
Cumulative other comprehensive income--
Foreign currency translation adjustment ................. (1,366) (1,351)
--------- ---------
Total shareholders' equity .............................. 48,701 24,751
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY ............................................... $ 491,624 $ 369,012
========= =========

</TABLE>

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

34
<PAGE>

CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED NOVEMBER 30, 1999, 1998 AND 1997
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
NET SALES ........................................ $ 298,142 $ 220,064 $ 143,235
--------- --------- ---------
COSTS AND EXPENSES:
Cost of sales .................................. 75,612 60,889 39,253
Advertising and promotion ...................... 117,835 86,592 56,176
Selling, general and administrative ............ 32,494 27,364 22,303
--------- --------- ---------
Total costs and expenses ..................... 225,941 174,845 117,732
--------- --------- ---------
INCOME FROM OPERATIONS ........................... 72,201 45,219 25,503
--------- --------- ---------
OTHER INCOME (EXPENSE):
Interest expense ............................... (36,572) (26,676) (16,319)
Investment and other income, net ............... 579 881 1,679
Gain on product divestiture .................... -- 9,548 --
--------- --------- ---------
Total other income (expense) ................. (35,993) (16,247) (14,640)
--------- --------- ---------
INCOME BEFORE INCOME TAXES AND
EXTRAORDINARY LOSS ........................... 36,208 28,972 10,863

PROVISION FOR INCOME TAXES ....................... 13,667 10,844 3,847
--------- --------- ---------
INCOME BEFORE EXTRAORDINARY LOSS ................. 22,541 18,128 7,016

EXTRAORDINARY LOSS ON EARLY
EXTINGUISHMENT OF DEBT, NET OF INCOME
TAXES (Note 5) ............................... (2,385) (2,859) (1,131)
--------- --------- ---------
NET INCOME ....................................... $ 20,156 $ 15,269 $ 5,885
========= ========= =========

COMMON SHARES:
Weighted average number outstanding (basic) .. 9,747 9,374 8,793
========= ========= =========
Weighted average and dilutive potential number
outstanding ................................. 10,024 9,735 9,123
========= ========= =========

NET INCOME (LOSS) PER COMMON SHARE:
Basic:
Income before extraordinary loss ............ $ 2.31 $ 1.93 $ .80
Extraordinary loss .......................... (.24) (.30) (.13)
--------- --------- ---------
Total basic ............................ $ 2.07 $ 1.63 $ .67
========= ========= =========
Diluted:
Income before extraordinary loss ............ $ 2.25 $ 1.86 $ .77
Extraordinary loss .......................... (.24) (.29) (.12)
--------- --------- ---------
Total .................................. $ 2.01 $ 1.57 $ .65
========= ========= =========

</TABLE>

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

35
<PAGE>

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED NOVEMBER 30, 1999, 1998 AND 1997
(IN THOUSANDS, EXCEPT SHARE DATA)

Minimum Foreign
Pension Currency
Common Paid-in Accumulated Liability Translation
Shares Surplus Deficit Adjustment Adjustment Total
------ ------- ------- ---------- ---------- -----

<S> <C> <C> <C> <C> <C> <C>
Balance, November 30, 1996 ............ $ 1,843 $ 58,561 $(66,114) $(112) $(1,358) $ (7,180)
Net income .......................... -- -- 5,885 -- -- 5,885
Stock options exercised ............. 25 962 -- -- -- 987
Stock warrants exercised ............ 15 464 -- -- -- 479
Issuance of 300,000 common shares
in connection with product
acquisitions ...................... 62 3,988 -- -- -- 4,050
Foreign currency translation
adjustment ....................... -- -- -- -- 37 37
Minimum pension liability
adjustment ....................... -- -- -- 112 -- 112
------- -------- -------- ----- ------- --------
Balance, November 30, 1997 ............ 1,945 63,975 (60,229) -- (1,321) 4,370
Net income .......................... -- -- 15,269 -- -- 15,269
Stock options exercised ............. 28 3,699 -- -- -- 3,727
Stock warrants exercised ............ 21 1,394 -- -- -- 1,415
Foreign currency translation
adjustment ........................ -- -- -- -- (30) (30)
------- -------- -------- ----- ------- --------
Balance, November 30, 1998 ............ 1,994 69,068 (44,960) -- (1,351) 24,751
Net income .......................... -- -- 20,156 -- -- 20,156
Stock options exercised ............. 10 1,775 -- -- -- 1,785
Stock warrants exercised ............ 26 860 -- -- -- 886
Stock repurchases ................... (36) (3,876) -- -- -- (3,912)
Issuance of 128,082 common shares
in connection with product
acquisitions ...................... 27 5,023 -- -- -- 5,050
Foreign currency translation
adjustment ........................ -- -- -- -- (15) (15)
------- -------- -------- ----- ------- --------
Balance, November 30, 1999 ............ $ 2,021 $ 72,850 $(24,804) $ -- $(1,366) $ 48,701
======= ======== ======== ======= ======= ========

</TABLE>

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

36
<PAGE>

CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED NOVEMBER 30, 1999, 1998 AND 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
1999 1998 1997
--------- --------- --------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income ........................................... $ 20,156 $ 15,269 $ 5,885
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization ...................... 15,064 9,827 6,381
Deferred income tax provision ...................... 4,598 2,351 974
Gain on product divestiture ........................ -- (9,548) --
Extraordinary loss on early extinguishment of
debt, net ......................................... 2,385 2,859 1,131
Dividend receivable from Elcat, Inc. ............... (279) (462) (656)
Other, net ......................................... -- (28) (106)
Changes in operating assets and liabilities, net
of acquisitions:
Accounts receivable ........................... (17,428) (12,054) (5,140)
Inventories ................................... (4,683) 1,836 (2,401)
Prepaid expenses and other current assets ..... (159) (102) 3,034
Accounts payable and accrued liabilities ...... 7,268 10,842 1,014
-------- -------- -------
Net cash provided by operating activities .... 26,922 20,790 10,116
-------- -------- -------
INVESTING ACTIVITIES:
Purchases of property, plant and equipment ........... (9,830) (9,050) (2,758)
Proceeds from sale of investments .................... 3,381 4,000 --
Proceeds from product divestitures ................... -- 11,965 --
Proceeds from notes and sales of assets .............. 272 1,085 75
Purchases of patents, trademarks and other product
rights .............................................. (91,127) (168,402) (29,293)
Increase in other assets ............................. (3,200) (1,193) (746)
--------- --------- --------
Net cash used in investing activities ........ (100,504) (161,595) (32,722)
--------- --------- --------
FINANCING ACTIVITIES:
Repayment of long-term debt ........................ (165,481) (145,028) (76,636)
Proceeds from long-term debt ....................... 242,281 291,365 87,500
Change in payable to bank .......................... 3,879 (1,592) 908
Repurchase of common shares ........................ (3,912) -- --
Exercise of stock options and warrants ............. 2,104 3,316 1,274
Debt issuance costs ................................ (5,101) (9,971) (1,612)
--------- --------- --------
Net cash provided by financing activities .... 73,770 138,090 11,434
--------- --------- --------
EFFECT OF EXCHANGE RATE CHANGES ON CASH
AND CASH EQUIVALENTS .............................. 44 (67) (10)
--------- --------- --------
CASH AND CASH EQUIVALENTS:
Increase (decrease) for the year ................... 232 (2,782) (11,182)
At beginning of year ............................... 2,076 4,858 16,040
--------- --------- --------
At end of year ..................................... $ 2,308 $ 2,076 $ 4,858
========= ========= ========
SCHEDULE OF NON-CASH INVESTING AND FINANCING
ACTIVITIES:
Issuance of 125,500 shares of common stock at $39.84
per share to fund portion of Thompson Medical
brands' acquisition .............................. $ 5,000 $ -- $ --
Issuance of 2,582 shares of common stock at $19.365
per share as part of agreement to settle future
contingency payments to the former owners of
SUNSOURCE ........................................ $ 50 $ -- $ --
Issuance of 300,000 shares of common stock at $13.50
per share to fund portion of SUNSOURCE
acquisition ...................................... $ -- $ -- $ 4,050
Additions to trademarks and other product rights by
assumption of certain liabilities ................ $ 1,525 $ 8,000 $ --

</TABLE>

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

37
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

(1) NATURE OF OPERATIONS

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

(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

BASIS OF CONSOLIDATION

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

CASH AND CASH EQUIVALENTS

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

INVENTORIES

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

PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment are recorded at cost. The Company capitalized
interest of $255, $0 and $0 in 1999, 1998 and 1997, respectively. Depreciation
is computed using the straight-line method over the estimated useful lives of 10
to 40 years for buildings and improvements and 3 to 12 years for machinery and
equipment. Expenditures for maintenance and repairs are charged to expense as
incurred. Depreciation expense for 1999, 1998 and 1997 was $1,936, $1,597 and
$1,502, respectively.

38
<PAGE>

PATENTS, TRADEMARKS AND OTHER PURCHASED PRODUCT RIGHTS

The costs of acquired patents, trademarks and other purchased product
rights are capitalized and amortized over periods ranging from 5 to 40 years. At
November 30, 1999 the weighted average life of patents, trademarks and other
purchased product rights was 26.7 years. Total accumulated amortization of these
assets at November 30, 1999 and 1998 was $26,393 and $17,382, respectively.
Amortization expense for 1999, 1998 and 1997 was $9,874, $6,180 and $2,877,
respectively. Royalty expense related to other purchased product rights for
1999, 1998 and 1997 was $498, $523 and $522, respectively. Amortization and
royalty expense are included in advertising and promotion expense in the
accompanying consolidated statements of income.

The Company continually evaluates whether events and circumstances have
occurred that indicate the remaining useful life of long-lived assets might
warrant revision or that the remaining balance may not be recoverable. When
factors indicate that long-lived assets should be evaluated for possible
impairment, the Company uses an estimate of the future undiscounted net cash
flows of the related assets over the remaining lives of the assets in
measuring whether long-lived assets are recoverable.

DEBT ISSUANCE COSTS

The Company has incurred debt issuance costs in connection with its
long-term debt. These costs are capitalized and amortized over the term of the
debt. Amortization expense related to debt issuance costs was $1,556, $986 and
$490 in 1999, 1998 and 1997, respectively. Accumulated amortization of these
costs was $2,859 and $1,814 at November 30, 1999 and 1998, respectively.

PAYABLE TO BANK

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

REVENUE RECOGNITION

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

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

RESEARCH AND DEVELOPMENT

Research and development costs relate primarily to the development of new
products and are expensed as incurred. Such expenses were $1,839, $1,369 and
$1,207 in 1999, 1998 and 1997, respectively.

39
<PAGE>

ADVERTISING EXPENSES

The cost of advertising is expensed in the fiscal year in which the related
advertising takes place. Production and communication costs are expensed in the
period in which the related advertising begins running. Advertising expense for
1999, 1998 and 1997 was $54,764, $44,386 and $29,923, respectively. At November
30, 1999 and 1998, the Company reported $1,210 and $646, respectively, of
advertising paid for in 1999 and 1998 which will run or did run in the next
fiscal year. These amounts are included in other noncurrent assets in the
accompanying consolidated balance sheets.

40
<PAGE>

NET INCOME PER COMMON SHARE

For the years ended November 30, 1999, 1998 and 1997, the weighted average
and dilutive potential common shares outstanding consisted of the following:

1999 1998 1997
------ ----- -----
<S> <C> <C> <C>
Weighted average common shares
outstanding ................................. 9,747 9,374 8,793
Dilutive potential shares:
Stock options ............................. 277 332 207
Warrants .................................. -- 29 123
------ ----- -----
Weighted average and dilutive potential common
shares outstanding .......................... 10,024 9,735 9,123
====== ===== =====

</TABLE>

FOREIGN CURRENCY TRANSLATION

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

USE OF ESTIMATES

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

DERIVATIVE FINANCIAL INSTRUMENTS

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

41
<PAGE>

CONCENTRATIONS OF CREDIT RISK

Financial instruments which subject the Company to concentrations of credit
risk consist primarily of accounts receivable and short-term cash investments.
The Company's exposure to credit risk associated with nonpayment of accounts
receivable is affected by conditions or occurrences within the retail industry.
As a result, the Company performs ongoing credit evaluations of its customers'
financial position but generally requires no collateral from its customers. The
Company's largest customer accounted for 19%, 17% and 16% of sales in 1999, 1998
and 1997, respectively. No other customer exceeded 10% of the Company's sales in
1999, 1998 or 1997. Short-term cash investments are placed with high
credit-quality financial institutions or in low risk, liquid instruments. No
losses have been experienced on such investments.

RECENT ACCOUNTING PRONOUNCEMENTS

In April 1998, the AICPA issued Statement of Position (SOP) 98-5,
"Reporting on the Costs of Start-Up Activities". SOP 98-5 requires costs of
start-up activities and organization costs to be expensed as incurred. This SOP
is effective for financial statements for fiscal years beginning after December
15, 1998. The Company will record the initial application of this SOP in
December 1999 as the cumulative effect of a change in accounting principle of
approximately $875.

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

STOCK-BASED COMPENSATION

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

RECLASSIFICATIONS

In June 1997, the Company terminated certain interest rate swap agreements
and in connection therewith recorded a $239 loss, net of tax, or $.03 per share,

42
<PAGE>

as an extraordinary item. Subsequently, it was determined that the loss would
have been more appropriately classified as interest expense. The accompanying
consolidated income statement for fiscal 1997 has been revised to give effect
to this reclassification.

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

(3) INVESTMENT IN ELCAT, INC.

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

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

43
<PAGE>

(4) PENSION PLANS

The Company has a noncontributory defined benefit pension plan (the Plan)
which covers substantially all employees. The Plan provides benefits based upon
years of service and the employee's compensation. The Company's contributions
are based on computations by independent actuaries. Plan assets at November 30,
1999 and 1998 were invested primarily in United States government and agency
securities and corporate debt and equity securities.

Net periodic pension cost for the years ended November 30, 1999, 1998 and
1997 included the following components:

1999 1998 1997
------- ------- -----
<S> <C> <C> <C>
Service cost (benefits earned during the period) $ 834 $ 661 $ 545
Interest cost on projected benefit obligation .. 747 739 741
Actual return on plan assets ................... 1,528 (3,226) (845)
Net amortization and deferral .................. (2,558) 2,677 365
------- ------- -----
Net pension cost ............................... $ 551 $ 851 $ 806
======= ======= =====

</TABLE>

The change in the projected benefit obligation resulted from the following
components for the years ended November 30, 1999 and 1998:

1999 1998
-------- --------
<S> <C> <C>
Projected benefit obligation, beginning of year $ 11,275 $ 10,497
Service cost .................................. 834 661
Interest cost ................................. 747 739
Actuarial (gain) loss ......................... (1,636) 267
Benefits paid ................................. (1,157) (889)
-------- --------
Projected benefit obligation, end of year ..... $ 10,063 $ 11,275
======== ========

</TABLE>

The change in plan assets resulted from the following components for the
years ended November 30, 1999 and 1998:

1999 1998
--------- --------
<S> <C> <C>
Fair value of plan assets, beginning of year $ 9,879 $ 6,471
Actual return on plan assets ............... (1,528) 3,226
Employer contribution ...................... 465 1,071
Benefits paid .............................. (1,157) (889)
------- -------
Fair value of plan assets, end of year ..... $ 7,659 $ 9,879
======= =======

</TABLE>

44
<PAGE>

The following table sets forth the funded status of the Plan as of November
30, 1999 and 1998:

1999 1998
----------- -----------

<S> <C> <C>
Plan assets at fair market value .................... $ 7,659 $ 9,879
Projected benefit obligation ........................ (10,063) (11,275)
-------- --------
Plan assets less than projected benefit obligation .. (2,404) (1,396)
Unrecognized net loss ............................... 1,806 1,043
Unrecognized prior service cost ..................... (98) (115)
Unrecognized initial asset .......................... (85) (227)
-------- --------
Pension liability recognized in balance sheets
at end of year .................................... $ (781) $ (695)
======== ========

</TABLE>

The discount rates used in determining the actuarial present value of the
projected benefit obligation were 8.00% and 6.75% in 1999 and 1998,
respectively. The rates of increase in future compensation levels used were 4.5%
and 4.0% in 1999 and 1998, respectively. The expected long-term rate of return
on plan assets was 9.0% in 1999 and 1998.

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 $198, $148 and
$155 in 1999, 1998 and 1997, respectively.

(5) LONG-TERM DEBT

Long-term debt consisted of the following at November 30, 1999 and 1998:

1999 1998
-------- --------
<S> <C> <C>
Revolving line of credit payable to banks at variable
rates (7.59% at November 30, 1999) ...................................... $ 5,000 $ 2,000
Term loans payable to banks at variable rates
(7.58% weighted average at November 30,
1999) ................................................................... 55,600 40,514
8.875% Senior Subordinated Notes, due 2008, plus
unamortized premium of $265 for 1999 .................................... 275,265 200,000
12.75% Senior Subordinated Notes, due 2004, net of unamortized discount
of $460 for 1999 and $808 for 1998 ...................................... 34,085 48,843
-------- --------
Total long-term debt ...................................................... 369,950 291,357
Less: current maturities ................................................. 11,000 17,444
-------- --------
Total long-term debt, net of current maturities ........................... $358,950 $273,913
======== =======
</TABLE>

On December 21, 1998, the Company refinanced its existing credit facilities
with $165,000 in senior secured credit facilities (the "Credit Facilities"). The
Credit Facilities were provided by a syndicate of commercial banks. The Credit
Facilities included a $50,000 revolving credit facility and a $115,000 term
loan. The Credit Facilities were used to refinance existing senior debt, to

<PAGE>

finance the acquisition of the Thompson Medical brands (Note 12) and to
finance working capital and other general corporate needs.

Concurrent with the May 7, 1999 closing of a $75,000 note issuance
described below, the Company amended its Credit Facilities. The Credit
Facilities now consist of a $70,000 term loan maturing in quarterly
installments ranging from $2,000 to $4,750 through June 30, 2003 and a
$50,000 revolving credit facility maturing on December 21, 2003. The amended
Credit Facilities contain covenants, representations, warranties and other
agreements by the Company, including a maximum ratio of debt to EBITDA, as
defined, an annual limit on capital expenditures and a minimum level of net
worth, among other restrictions. For the year ended November 30, 1999, the
Company exceeded the allowed capital expenditures under the Credit
Facilities. The additional capital expenditures related primarily to the
implementation of the Company's new information technology system and
renovation of a new manufacturing facility. Subsequent to November 30, 1999,
the Company received a waiver from its lenders concerning this deficiency.

The Company has the option to pay interest based on either (i) the
greater of the prime rate or federal funds rate plus .5% or (ii) a floating
rate or Eurodollar interest rate option applicable to the term and revolving
line loans under the Credit Facilities. The prime rate and Eurodollar
interest rate options are based on a base rate plus a rate margin that
fluctuates on the basis of the Company's senior leverage ratio.

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

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

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

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

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

46
<PAGE>

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

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

During 1999, 1998 and 1997, the Company prepaid previously outstanding
long-term debt with funds received from refinancings, the sale of CORNSILK
(Note 12), cash from operations, the redemption of the Elcat Preferred Shares
and the issuance of the 8.875% Notes. In connection with the repayment of
those borrowings, the Company incurred extraordinary losses, net of income
taxes, in 1999, 1998 and 1997 of $2,385, $2,859 and $1,131, respectively, or
$.24, $.29 and $.12 per diluted share, respectively. These losses related to
the write-off of debt issuance and other deferred financing costs and the
premiums paid on the retirement of the 12.75% Notes.

Future maturities of long-term debt are as follows:

<TABLE>

<S> <C>
2000........................ $ 11,000
2001........................ 14,250
2002........................ 17,250
2003........................ 13,100
2004........................ 39,545
Thereafter................... 275,000
---------
370,145
Less: net unamortized discount (195)
---------
$ 369,950
---------
---------
</TABLE>

The 2004 maturities include the amount outstanding under the revolving
line of credit which was $5,000 as of November 30, 1999 and the remaining
balance of the 12.75% Notes.

Cash interest payments during 1999, 1998 and 1997 were $34,822, $23,669
and $15,259, respectively, net of $255 capitalized in 1999.

47
<PAGE>

(6) DERIVATIVE FINANCIAL INSTRUMENTS

On July 21, 1997, the Company entered into two interest rate swap
agreements with a financial institution in notional amounts of $40,000 and
$5,000. The Company entered into these agreements as hedges on its variable
rate debt and not for trading purposes. The swaps were scheduled to expire
July 22, 2002. In connection with the May 1999 refinancing of its long-term
debt, the Company terminated these agreements, which resulted in a $1,151
loss. This loss has been deferred by the Company and is being written off as
interest expense over the remaining life of the agreements. In fiscal 1999
$213 of this loss was charged to interest expense.

(7) FAIR VALUE OF FINANCIAL INSTRUMENTS

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

At November 30, 1999, the estimated fair values of the revolving line of
credit and the term loan payable to banks approximate the carrying amounts of
such debt because the interest rates change with market interest rates.

At November 30, 1999, the estimated fair value of the 12.75% Notes
exceeded their carrying value by approximately $2,500, while the carrying
value of the 8.875% Notes exceeded their estimated fair value by
approximately $26,100. The fair value was estimated based on quoted market
prices for the same or similar issues.

48
<PAGE>

(8) INCOME TAXES

The provision for income taxes from income before extraordinary loss
includes the following components for the years ending November 30, 1999,
1998 and 1997:

1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Current:
Federal .......................... $ 8,115 $ 8,034 $ 2,639
State ............................ 954 459 234
Deferred ........................... 4,598 2,351 974
------- ------- -------
$13,667 $10,844 $ 3,847
======= ======= =======

</TABLE>

Deferred income tax assets and liabilities reflect the impact of
temporary differences between the amounts of assets and liabilities for
financial reporting and income tax reporting purposes. Temporary differences
and carryforwards which give rise to deferred tax assets and liabilities at
November 30, 1999 and 1998 are as follows:

1999 1998
------- -------
<S> <C> <C>
Deferred tax assets:
Allowances and accruals .......... $ 1,930 $ 2,303
Accrued promotional expenses ..... 4,587 1,316
Accrued postretirement health care
benefits ....................... 583 558
Other ............................ 1,550 643
------- -------
Gross deferred tax assets ...... 8,650 4,820
------- -------

Deferred tax liabilities:
Depreciation and amortization .... 16,008 7,829
Prepaid advertising .............. 331 252
Inventory ........................ 196 196
Other ............................ 490 320
------- -------
Gross deferred tax liabilities . 17,025 8,597
------- -------
Net deferred liability ....... $ 8,375 $ 3,777
======= =======

</TABLE>

49
<PAGE>

The difference between the provision for income taxes and the amount
computed by multiplying income before income taxes and extraordinary loss by
the U.S. statutory rate for the years ended November 30, 1999, 1998 and 1997
is summarized as follows:

1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Expected tax provision ....................... $ 12,673 $ 10,140 $ 3,837
Dividend exclusion benefit ................... (69) (85) (178)
State income taxes, net of federal
income tax benefit ......................... 1,327 1,076 402
Other, net ................................... (264) (287) (214)
-------- -------- --------
$ 13,667 $ 10,844 $ 3,847
======== ======== ========

</TABLE>

Income taxes paid in 1999, 1998 and 1997 were $8,171, $1,980 and $2,162,
respectively. The Company received income tax refunds of $23, $350 and $2,719
during 1999, 1998 and 1997, respectively

(9) SHAREHOLDERS' EQUITY

STOCK OPTIONS

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

For SFAS No. 123 purposes, the fair value of each option grant has been
estimated as of the date of grant using the Black-Scholes option-pricing
model with the following weighted average assumptions for grants in 1999, 1998
and 1997: expected dividend yield of 0%, expected volatility of 58%, 51% and
49%, risk-free interest rates of 4.81%, 5.42% and 6.48% and expected lives of
6 years.

50
<PAGE>

Had compensation expense for stock option grants been determined based
on the fair value at the grant dates consistent with the method prescribed by
SFAS No. 123, the Company's net income and net income per share would have
been adjusted to the pro forma amounts for the years ended November 30, 1999,
1998 and 1997 as indicated below:

1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Net income:
As reported ............... $ 20,156 $ 15,269 $ 5,885
Pro forma ................. $ 18,980 $ 14,599 $ 5,683

Net income per share, basic:
As reported ............... $ 2.07 $ 1.63 $ 0.67
Pro forma ................. $ 1.95 $ 1.56 $ 0.65

Net income per share, diluted:
As reported ............... $ 2.01 $ 1.57 $ 0.65
Pro forma ................. $ 1.89 $ 1.50 $ 0.62

</TABLE>

51
<PAGE>

A summary of the activity of stock options during 1999, 1998, and 1997
is presented below (shares in thousands):

1999 1998 1997
-------------------- ------------------- --------------------
Weighted Weighted Weighted
Shares Average Shares Average Shares Average
Under Exercise Under Exercise Under Exercise
Option Price Option Price Option Price
------ --------- ------ -------- ------ ---------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of
year ....................... 762 $ 11.17 584 $ 6.75 613 $ 6.39
Granted .................. 136 39.38 470 13.89 91 9.01
Exercised ................ (46) 7.50 (292) 6.70 (120) 6.65
Cancelled ................ (3) 14.71 -- -- -- --
------- --------- -------- --------- -------- --------

Outstanding at end of year ... 849 $ 15.92 762 $ 11.17 584 $ 6.75
======= ========= ======== ========= ======== ========
Options exercisable at year-
end ........................ 239 $ 10.24 96 $ 7.48 262 $ 7.43
======= ========= ======== ========= ======== ========

Weighted average fair value of
options granted .............. $ 23.25 $ 7.69 $ 5.24
========= ========= ========
</TABLE>

Compensation expense for stock option grants with exercise prices below
the market price at the date of grant is recognized ratably over the vesting
period. In 1998, options were granted to purchase 419,000 shares, which were
at market price on the date of approval by the board of directors but at
prices below the market price on the date of shareholder approval.
Compensation expense recorded for this grant was $525 in 1999 and $350 in
1998.

A summary of the exercise prices for options outstanding under the
Company's stock-based compensation plans at November 30, 1999, is presented
below (shares in thousands):

Weighted Weighted
Weighted Average Average Exercise
Exercise Price Shares Under Average Exercise Remaining Life in Shares Price of Shares
Range Option Price Years Exercisable Exercisable
--------------- ------------ ----------------- ----------------- ----------- ------------------

<S> <C> <C> <C> <C> <C>
$ 4.63 - $ 5.25 120 $ 4.87 6.2 47 $ 4.86
$ 7.13 - $ 9.50 126 8.38 5.7 80 8.30
$13.50 - $18.00 461 13.77 8.2 111 13.78
$25.63 - $38.00 17 29.94 8.4 1 25.78
$39.81 125 39.81 9.2 -- --
----------- ----------- ----------- ------------ ---------

Total 849 $ 15.92 7.7 239 $ 10.24
=========== =========== =========== =========== ========

</TABLE>

52
<PAGE>

PREFERRED SHARES

The Company is authorized to issue up to 1,000,000 preferred shares in
series and with rights established by the board of directors. At November 30,
1999 and 1998, no shares of any series of preferred stock were issued and
outstanding.

EMPLOYEE STOCK OWNERSHIP PLAN

Effective June 1, 1989, the Company established an Employee Stock
Ownership Plan providing for the issuance of up to 360,000 shares of the
Company's common stock. At November 30, 1999, no contributions had been made
to the plan.

COMMON STOCK WARRANTS

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

STOCK BUYBACK

In 1999 the Company redeemed and returned to unissued 172,500 shares of
its common stock, without par value, for $3,912. As of November 30, 1999 the
remaining amount of repurchase authorization from the Company's board of
directors is $6,088. Under the authorization, purchases may be made from time
to time in either open market or privately negotiated transactions.

SHAREHOLDER RIGHTS PLAN

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

(10) CONTINGENCIES

GENERAL LITIGATION

The Company has been named as a defendant in a lawsuit brought by the
Center for Environment Health (CEH) contending that the Company violated the
California Safe Drinking Water and Toxic Enforcement Act of 1998 (Proposition
65) by selling to California consumers without a warning topical skin care
products containing zinc oxide which in turn contains lead. On December 30,
1999, Chattem was sent a notice of intent to sue letter from CEH alleging
that Chattem had violated Proposition 65 because zinc oxide allegedly also
contains cadmium. The lawsuit contends that the purported failure to comply
with Proposition 65 requirements also constitutes a violation of the
California Business & Profession Code Section 1700, et seq. Violations of
either Proposition 65 or Business & Profession Code Section 1700, et seq.
render a defendant liable for civil penalties of up to $2.5 per day per
violation.

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

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

53
<PAGE>

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

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

REGULATORY

The manufacturing, processing, formulation, packaging, labeling and
advertising of the Company's products are subject to regulation by federal
agencies, including the United States Food and Drug Administration (FDA). As
part of its regulatory authority, the FDA may periodically conduct audits of
the physical facilities, machinery, processes and procedures which the
Company uses to manufacture products. In December 1998, the FDA conducted an
audit of the Company's manufacturing facility in Chattanooga, Tennessee. The
FDA issued a report citing certain processes and procedures it requires the
Company to change or improve. The Company has responded to the FDA's report
and believes that it has complied with the requirements of the report. No
further contact by the FDA has been made to date, but the Company expects a
follow-up visit by FDA personnel in the future.

YEAR 2000 (unaudited)

To date the Company has experienced no major problems with its
implementation, nor has it encountered any unusual situations with its
principal customers and suppliers in connection with their year 2000 IT
systems' compliance.

However, if unanticipated problems arise in the future with regard to
year 2000 compliance with the Company's new IT systems or those of its
principal customers and suppliers, the Company's business could be adversely
affected.

54
<PAGE>

(11) SUPPLEMENTAL FINANCIAL INFORMATION

Inventories consisted of the following at November 30, 1999 and 1998:

<TABLE>
<CAPTION>
1999 1998
--------- --------
<S> <C> <C>
Raw materials and work in process ......................... $ 12,542 $ 7,903
Finished goods ............................................ 17,190 14,113
Excess of current cost over LIFO value .................... (1,914) (2,410)
--------- ---------
Total inventories ....................................... $ 27,818 $ 19,606
========= =========
</TABLE>

International inventories included above, valued on a lower of FIFO cost
or market at November 30, 1999 and 1998, were $2,611 and $3,004, respectively.

Property, plant and equipment consisted of the following at November 30,
1999 and 1998:

<TABLE>
<CAPTION>
1999 1998
--------- --------
<S> <C> <C>
Land ...................................................... $ 140 $ 140
Buildings and improvements ................................ 3,836 3,434
Machinery and equipment ................................... 34,894 29,678
Construction in progress................................... 6,813 2,900
Less -- accumulated depreciation .......................... (19,931) (18,006)
--------- --------
Property, plant and equipment, net ...................... $ 25,752 $ 18,146
========= ========
</TABLE>

Accrued liabilities consisted of the following at November 30, 1999 and
1998:

<TABLE>
<CAPTION>
1999 1998
--------- --------
<S> <C> <C>
Accrued interest expense .................................. $ 6,326 $ 5,969
Salaries, wages and commissions ........................... 2,098 2,850
Promotion expense ......................................... 15,880 8,896
Product acquisitions ...................................... 2,999 3,290
Accrued pension benefits .................................. 781 700
Accrued royalties.......................................... 56 2,889
Other...................................................... 4,007 5,615
-------- ---------
Total accrued liabilities................................ $ 32,147 $ 30,209
======== =========
</TABLE>

55
<PAGE>

(12) ACQUISITION AND SALE OF BRANDS

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

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

The following unaudited consolidated pro forma information assumes the
acquisition of BAN and the Thompson Medical brands and their related
long-term borrowings had occurred on December 1, 1997:

PRO FORMA CONSOLIDATED RESULTS OF OPERATIONS (UNAUDITED)

1999 1998
------------ ------------
<S> <C> <C>
Net Sales ......................... $ 302,631 $ 294,243

Income before extraordinary loss 23,131 22,768(1)

Net Income ........................ 20,746 19,909(1)

Earnings per share (basic):

Income before extraordinary loss 2.37 2.40

Net income ...................... 2.13 2.09

Earnings per share (diluted):

Income before extraordinary loss 2.31 2.31

Net income ...................... 2.07 2.02

</TABLE>

(1) Includes gain on the sale of CORNSILK.

The pro forma consolidated results of operations include adjustments to give
effect to amortization of intangible assets, interest expense on acquisition
debt and certain other adjustments, together with related income tax effects.
The pro forma information is for comparative purposes only and does not purport
to be indicative of the combined results that would have occurred had the
acquisition and borrowings occurred at the beginning of the periods presented,
or indicative of the results that may occur in the future.

56
<PAGE>

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

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

57
<PAGE>

(13) ACCRUED POSTRETIREMENT HEALTH CARE BENEFITS

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

Net periodic postretirement health care benefits cost for the years
ended November 30, 1999, 1998 and 1997, included the following components:

<TABLE>
<CAPTION>
1999 1998 1997
----- ----- -----
<S> <C> <C> <C>
Service cost (benefits earned during the period) $ 31 $ 19 $ 29
Interest cost on accumulated postretirement
benefits obligation .......................... 76 82 115
Amortization of net loss (gain) ................ (10) (18) 2
---- ---- ----
Net periodic postretirement benefits cost ...... $ 97 $ 83 $ 146
===== ===== =====
</TABLE>

The change in the accumulated benefit obligation resulted from the
following components for the years ended November 30, 1999 and 1998:

<TABLE>
<CAPTION>
1999 1998
--------- ----------
<S> <C> <C>
Accumulated benefit obligation, beginning of
year..................................................... $ 1,220 $ 1,114
Service cost............................................... 31 19
Interest cost.............................................. 76 82
Effect of plan amendment................................... 174 --
Actuarial (gain) loss...................................... (443) 92
Benefits paid.............................................. (35) (87)
---------- ----------
Accumulated benefit obligation, end of year................ $ 1,023 $ 1,220
========== =========
</TABLE>

The following table sets forth the funded status of the plan at November
30, 1999 and 1998:

<TABLE>
<CAPTION>
1999 1998
--------- ---------
<S> <C> <C>
Accumulated benefit obligation............................. $ 1,023 $ 1,220
Fair value of plan assets.................................. -- --
--------- ---------
Funded status............................................... (1,023) (1,220)
Unrecognized prior service cost............................ 159 --
Unrecognized actuarial gain ............................... (630) (210)
--------- ---------
Accrued postretirement benefits cost....................... $ (1,494) $ (1,430)
========= =========
</TABLE>

For measurement purposes, a 6.0% annual rate of increase in the per
capita cost of covered health care benefits was assumed in 1999 and 1998. The
weighted-average discount rate used in determining the accumulated
postretirement benefit obligation was 6.75% and 8.0% at November 30, 1999 and
1998, respectively. Due to premium caps in place which limit the Company's
expense, a 1% increase in the assumed health care cost trend rate would not
affect the accumulated postretirement benefit obligation as of November 30,
1999 or the aggregate of the service and interest cost components of the net
annual postretirement benefit cost for the year ended November 30, 1999.

58
<PAGE>

(14) COMPREHENSIVE INCOME

Comprehensive income consisted of the following components for the years
ended November 30, 1999, 1998 and 1997, respectively:

<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Net income ....................... $ 20,156 $ 15,269 $ 5,885
Other-foreign currency translation
adjustment ..................... (15) (30) 37
-------- -------- --------
Total ........................ $ 20,141 $ 15,239 $ 5,922
======== ======== ========
</TABLE>

(15) PRODUCT AND GEOGRAPHICAL SEGMENT INFORMATION

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

The Company's largest customer accounted for 11%, 7% and 11% of OTC
health care net sales and 8%, 10% and 5% of toiletries and skincare net sales
in 1999, 1998 and 1997, respectively.

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

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

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

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

<PAGE>

Product Classifications
-----------------------------------------------
OTC Toiletries
Health and Not
Total Care Skincare Classified
------ ------- ----------- ----------
<S> <C> <C> <C> <C>
1999:
Net sales ...................... $298,142 $172,256 $125,650 $ 236
Variable contribution margin ... 116,356 68,582 47,429 345
Depreciation and amortization .. 15,064 5,087 4,935 5,042
Identifiable assets/total assets 491,624 198,189 194,241 99,194

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

1997:
Net sales ...................... $143,235 $ 95,276 $ 46,041 $ 1,918
Variable contribution margin ... 55,061 40,972 13,710 379
Depreciation and amortization .. 6,381 2,227 780 3,374
Identifiable assets/total assets 178,744 94,743 32,184 51,817

</TABLE>

The reconcilement of variable contribution margin, as shown above, to
income before income taxes and extraordinary loss is as follows:

1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Variable contribution margin .......................... $ 116,356 $ 81,815 $ 55,061
Less divisional and corporate overhead not allocated to
product groups ...................................... 44,155 36,596 29,558
--------- --------- ---------
Income from operations ................................ 72,201 45,219 25,503
--------- --------- ---------
Other income (expense):
Interest expense .................................... (36,572) (26,676) (16,319)
Investment and other income, net .................... 579 881 1,679
Gain on product divestiture ......................... -- 9,548 --
--------- --------- ---------
Total other income (expense) ........................ (35,993) (16,247) (14,640)
--------- --------- ---------
Income before income taxes and extraordinary loss ..... $ 36,208 $ 28,972 $ 10,863
========= ========= =========

</TABLE>

<PAGE>

Geographical segment information is as follows for the years ended
November 30, 1999, 1998 and 1997:

<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Net Sales:
Domestic ......... $276,632 $199,811 $128,024
International(1).. 21,510 20,253 15,211
-------- -------- --------
Total .......... $298,142 $220,064 $143,235
======== ======== ========

Long-Lived Assets(2):
Domestic ......... $381,694 $289,972 $115,413
International .... 353 471 547
-------- -------- --------
Total .......... $382,047 $290,443 $115,960
======== ======== ========
</TABLE>

(1) International sales includes export sales from U.S. operations.

(2) Consists of book value of property, plant, equipment, trademarks and
other product rights.

(16) CONSOLIDATING FINANCIAL STATEMENTS

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

<PAGE>
Note 16
CHATTEM, INC. AND SUBSIDIARIES

CONSOLIDATING BALANCE SHEETS

NOVEMBER 30, 1999
(Unaudited and in thousands)
<TABLE>
<CAPTION>
NON-GUARANTOR
SUBSIDIARY ELIMINATIONS
CHATTEM SIGNAL COMPANIES DR, (CR.) CONSOLIDATED
------- ------ ------------- ------------- ------------
<S> <C> <C> <C> <C> <C>
ASSETS

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

LIABILITIES AND SHAREHOLDERS' EQUITY

CURRENT LIABILITIES:
Current maturities of long-term debt ..... $ 11,000 $ -- $ -- $ -- $ 11,000
Accounts payable ......................... 18,053 -- 520 -- 18,573
Payable to bank .......................... 4,905 -- -- -- 4,905
Accrued liabilities ...................... 30,630 -- 1,517 -- 32,147
--------- --------- --------- --------- ---------
Total current liabilities .............. 64,588 -- 2,037 -- 66,625
--------- --------- --------- --------- ---------
LONG-TERM DEBT, less current maturities .... 358,950 -- -- -- 358,950
--------- --------- --------- --------- ---------
DEFERRED INCOME TAXES ...................... 2,776 12,550 -- -- 15,326
--------- --------- --------- --------- ---------
OTHER NONCURRENT LIABILITIES ............... 2,022 -- -- -- 2,022
--------- --------- --------- --------- ---------
INTERCOMPANY ACCOUNTS ...................... (334,574) 336,612 (2,038) -- --
--------- --------- --------- --------- ---------
SHAREHOLDERS' EQUITY:
Preferred shares, without par value,
authorized 1,000, none issued .......... -- -- -- -- --
Common shares, without par value,
authorized 50,000, issued 9,707 ........ 2,021 2 9,928 9,930 2,021
Paid-in surplus .......................... 72,850 -- -- -- 72,850
Accumulated deficit ...................... (26,819) 1,614 401 -- (24,804)
--------- --------- --------- --------- ---------
Total .................................. 48,052 1,616 10,329 9,930 50,067
Cumulative other comprehensive income -
Foreign currency translation adjustment . (474) -- (892) -- (1,366)
--------- --------- --------- --------- ---------
Total shareholders' equity ............. 47,578 1,616 9,437 9,930 48,701
--------- --------- --------- --------- ---------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY .............. $ 141,340 $ 350,778 $ 9,436 $ 9,930 $ 491,624
========= ========= ========= ========= =========
</TABLE>
62

<PAGE>
Note 16
CHATTEM, INC. AND SUBSIDIARIES

CONSOLIDATING BALANCE SHEETS

NOVEMBER 30, 1998
(Unaudited and in thousands)
<TABLE>
<CAPTION>
NON-GUARANTOR
SUBSIDIARY ELIMINATIONS
CHATTEM SIGNAL COMPANIES DR, (CR.) CONSOLIDATED
------- ------ ------------- ------------- ------------
<S> <C> <C> <C> <C> <C>
ASSETS

CURRENT ASSETS:
Cash and cash equivalents ................ $ (95) $ 11 $ 2,160 $ -- $ 2,076
Accounts receivable, less allowance for
doubtful accounts of $775 .............. 32,920 -- 3,661 -- 36,581
Deferred income taxes .................... 3,049 -- -- -- 3,049
Inventories .............................. 16,607 -- 2,999 -- 19,606
Prepaid expenses and other current assets 93 415 276 -- 784
--------- --------- --------- --------- ---------
Total current assets ................... 52,574 426 9,096 -- 62,096
--------- --------- --------- --------- ---------
PROPERTY, PLANT AND EQUIPMENT, NET ......... 17,675 -- 471 -- 18,146
--------- --------- --------- --------- ---------
OTHER NONCURRENT ASSETS:
Investment in Elcat, Inc. ................ 3,102 -- -- -- 3,102
Patents, trademarks and other purchased
product rights, net .................... 4,409 267,817 -- -- 272,226
Debt issuance costs, net ................. 10,091 -- -- -- 10,091
Investment in subsidiaries ............... 9,930 -- -- (9,930) --
Other .................................... 2,979 -- 372 -- 3,351
--------- --------- --------- --------- ---------
Total other noncurrent assets .......... 30,511 267,817 372 (9,930) 288,770
--------- --------- --------- --------- ---------

TOTAL ASSETS ......................... $ 100,760 $ 268,243 $ 9,939 $ (9,930) $ 369,012
========= ========= ========= ========= =========

LIABILITIES AND SHAREHOLDERS' EQUITY

CURRENT LIABILITIES:
Current maturities of long-term debt ..... $ 17,444 $ -- $ -- $ -- $ 17,444
Accounts payable ......................... 12,090 -- 643 -- 12,733
Payable to bank .......................... 1,026 -- -- -- 1,026
Accrued liabilities ...................... 28,963 20 1,226 -- 30,209
--------- --------- --------- --------- ---------
Total current liabilities .............. 59,523 20 1,869 -- 61,412
--------- --------- --------- --------- ---------
LONG-TERM DEBT, less current maturities .... 273,913 -- -- -- 273,913
--------- --------- --------- --------- ---------
DEFERRED INCOME TAXES ...................... 1,085 5,741 -- -- 6,826
--------- --------- --------- --------- ---------
OTHER NONCURRENT LIABILITIES ............... 2,110 -- -- -- 2,110
--------- --------- --------- --------- ---------
INTERCOMPANY ACCOUNTS ...................... (259,582) 259,661 (79) -- --
--------- --------- --------- --------- ---------
SHAREHOLDERS' EQUITY:
Preferred shares, without par value,
authorized 1,000, none issued .......... -- -- -- -- --
Common shares, without par value,
authorized 20,000, issued 9,574 ........ 1,994 2 9,928 9,930 1,994
Paid-in surplus .......................... 69,068 -- -- -- 69,068
Accumulated deficit ...................... (46,846) 2,819 (933) -- (44,960)
--------- --------- --------- --------- ---------
24,216 2,821 8,995 9,930 26,102
Cumulative other comprehensive income -
Foreign currency translation adjustment . (505) -- (846) -- (1,351)
--------- --------- --------- --------- ---------
Total shareholders' equity ............. 23,711 2,821 8,149 9,930 24,751
--------- --------- --------- --------- ---------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY ............... $ 100,760 $ 268,243 $ 9,939 $ 9,930 $ 369,012
========= ========= ========= ========= =========
</TABLE>
63
<PAGE>

Note 16
CHATTEM, INC. AND SUBSIDIARIES

CONSOLIDATING STATEMENTS OF INCOME

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

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

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

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

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

<PAGE>

Note 16
CHATTEM, INC. AND SUBSIDIARIES

CONSOLIDATING STATEMENTS OF INCOME

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

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

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

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

</TABLE>

<PAGE>

Note 16

CHATTEM, INC. AND SUBSIDIARIES

CONSOLIDATING STATEMENTS OF INCOME

FOR THE YEAR ENDED NOVEMBER 30, 1997
(Unaudited and in thousands)

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

NET SALES ........................... $ 129,075 $ -- $ 14,160 $ -- $ 143,235
--------- --------- --------- ------- ---------
COSTS AND EXPENSES:
Cost of sales ..................... 35,057 -- 4,196 -- 39,253
Advertising and promotion ......... 48,037 2,627 5,512 -- 56,176
Selling, general and administrative 19,200 27 3,076 -- 22,303
--------- --------- --------- ------- ---------
Total costs and expenses ........ 102,294 2,654 12,784 -- 117,732
--------- --------- --------- ------- ---------
INCOME FROM OPERATIONS .............. 26,781 (2,654) 1,376 -- 25,503
--------- --------- --------- ------- ---------
OTHER INCOME (EXPENSE):
Interest expense .................. (16,319) -- -- -- (16,319)
Intercompany interest ............. 92 -- (92) -- --
Investment and other income, net .. 1,599 31 49 -- 1,679
Royalties ......................... (5,954) 6,181 (227) -- --
Premium revenue ................... (350) -- 350 -- --
Corporate allocations ............. 26 -- (26) -- --
--------- --------- --------- ------- ---------
Total other income (expense) ... (20,906) 6,212 54 -- (14,640)
--------- --------- --------- ------- ---------
INCOME BEFORE INCOME TAXES AND
EXTRAORDINARY LOSS ................ 5,875 3,558 1,430 -- 10,863

PROVISION FOR INCOME TAXES .......... 2,516 1,205 126 -- 3,847
--------- --------- --------- ------- ---------
INCOME BEFORE EXTRAORDINARY
LOSS .............................. 3,359 2,353 1,304 -- 7,016

EXTRAORDINARY LOSS ON EARLY
EXTINGUISHMENT OF DEBT, NET ....... (1,131) -- -- -- (1,131)
--------- --------- --------- ------- ---------
NET INCOME .......................... $ 2,228 $ 2,353 $ 1,304 $ -- $ 5,885
========= ========= ========= ======= =========
</TABLE>

<PAGE>
Note 16

CHATTEM, INC. AND SUBSIDIARIES

CONSOLIDATING STATEMENTS OF CASH FLOWS

FOR THE YEAR ENDED NOVEMBER 30, 1999
(UNAUDITED AND IN THOUSANDS)

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

</TABLE>

67
<PAGE>
Note 16

CHATTEM, INC. AND SUBSIDIARIES

CONSOLIDATING STATEMENTS OF CASH FLOWS

FOR THE YEAR ENDED NOVEMBER 30, 1998
(UNAUDITED AND IN THOUSANDS)

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

</TABLE>

68
<PAGE>

Note 16

CHATTEM, INC. AND SUBSIDIARIES

CONSOLIDATING STATEMENTS OF CASH FLOWS

FOR THE YEAR ENDED NOVEMBER 30, 1997
(UNAUDITED AND IN THOUSANDS)

NON-GUARANTOR
SUBSIDIARY ELIMINATIONS
CHATTEM SIGNAL COMPANIES DR, (CR.) CONSOLIDATED
------- ------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net income .......................................... $ 2,228 $ 2,353 $ 1,304 $ -- $ 5,885
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization ..................... 3,606 2,627 148 -- 6,381
Extraordinary loss on early extinguishment of
debt, net ....................................... 1,131 -- -- -- 1,131
Dividend receivable from Elcat, Inc. .............. (656) -- -- -- (656)
Deferred income tax provision ..................... (231) 1,205 -- -- 974
Other, net ........................................ (119) 10 3 -- (106)
Changes in operating assets and liabilities, net of
acquisitions:
Accounts receivable ............................. (5,296) -- 156 -- (5,140)
Inventories ..................................... (1,974) -- (427) -- (2,401)
Prepaid and other current assets ................ 2,962 -- 72 -- 3,034
Accounts payable and accrued liabilities ........ 1,096 -- (82) -- 1,014
-------- -------- -------- -------- --------
Net cash provided by operating activities ..... 2,747 6,195 1,174 -- 10,116
-------- -------- -------- -------- --------
INVESTING ACTIVITIES:
Purchases of property, plant and equipment .......... (2,441) -- (317) -- (2,758)
Purchases of trademarks and other related assets .... (29,293) -- -- -- (29,293)
Proceeds from notes and other assets ................ 75 -- -- -- 75
Increase in other assets ........................... (746) -- -- -- (746)
-------- -------- -------- -------- --------
Net cash used in investing activities ......... (32,405) -- (317) -- (32,722)
-------- -------- -------- -------- --------
FINANCING ACTIVITIES:
Repayment of long-term debt ......................... (76,636) -- -- -- (76,636)
Proceeds from long-term debt ........................ 87,500 -- -- -- 87,500
Proceeds from exercise of stock options and
warrants .......................................... 1,274 -- -- -- 1,274
Debt issuance costs ................................. (1,612) -- -- -- (1,612)
Increase in payable to bank ........................ 908 -- -- -- 908
Changes in intercompany accounts .................... 2,584 (3,551) 967 -- --
Dividends paid ...................................... 5,500 (5,500) -- -- --
Payment of intercompany notes ....................... 2,679 (2,679) --
-------- -------- -------- -------- --------
Net cash provided by (used in) financing
activities ................................. 22,197 (9,051) (1,712) -- 11,434
-------- -------- -------- -------- --------
EFFECT OF EXCHANGE RATE CHANGES ON CASH
AND CASH EQUIVALENTS .................................. -- -- (10) -- (10)
-------- -------- -------- -------- --------
CASH AND CASH EQUIVALENTS:
Increase (decrease) for the period .................. (7,461) (2,856) (865) -- (11,182)
At beginning of period .............................. 10,457 2,911 2,672 -- 16,040
-------- -------- -------- -------- --------
At end of period .................................... $ 2,996 $ 55 $ 1,807 $ -- $ 4,858
======== ======== ======== ======== ========

</TABLE>

<PAGE>

(17) 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 1999:
Net sales .......................... $ 298,142 62,728 83,441 78,661 73,312
Gross profit ....................... $ 222,530 45,848 61,647 57,616 57,419
Before extraordinary loss:
Income ........................... $ 22,541 3,577 6,921 5,957 6,086
Income per share,
diluted(2)....................... $ 2.25 .35 .69 .59 .61
Total:
Net income ....................... $ 20,156 3,150 5,764 5,424 5,818
Net income per share,
diluted(2) ..................... $ 2.01 .31 .57 .54 .58
FISCAL 1998:
Net sales .......................... $ 220,064 34,921 58,545 67,600 58,998
Gross profit ....................... $ 159,175 25,239 42,691 48,219 43,026
Before extraordinary loss:
Income (1) ....................... $ 18,128 609 10,069 4,391 3,059
Income per share, diluted (1), (2) $ 1.86 .06 1.02 .45 .31
Total:
Net income (1) ................... $ 15,269 609 8,168 3,433 3,059
Net income per share,
diluted (1),(2) ................ $ 1.57 .06 .83 .35 .31

</TABLE>

(1) INCLUDES THE EFFECT OF THE DIVESTITURE OF CORNSILK.

(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 DILUTIVE POTENTIAL
SHARES USED IN THE QUARTERLY AND ANNUAL COMPUTATIONS.

<PAGE>

REPORT OF INDEPENDENT
PUBLIC ACCOUNTANTS

TO CHATTEM, INC.:

We have audited the accompanying consolidated balance sheets of Chattem, Inc.
(a Tennessee corporation) and subsidiaries as of November 30, 1999 and 1998
and the related consolidated statements of income, shareholders' equity and
cash flows for the years ended November 30, 1999, 1998 and 1997 (as revised, -
see Note 2). These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Chattem, Inc. and subsidiaries
as of November 30, 1999 and 1998, and the results of their operations and their
cash flows for each of the three years in the period ended November 30, 1999 in
conformity with accounting principles generally accepted in the United States.

ARTHUR ANDERSEN LLP

Chattanooga, Tennessee
January 27, 2000

<PAGE>

EXHIBIT 22

CHATTEM, INC. AND SUBSIDIARIES
SUBSIDIARIES OF THE COMPANY

<TABLE>
<CAPTION>
NAME OF SUBSIDIARY STATE OR COUNTRY OF INCORPORATION
------------------ ---------------------------------
<S> <C>
Chattem (Canada) Inc. Canada
Chattem (U.K.) Limited England
HBA Insurance Ltd. Bermuda
Signal Investment & Management Co. Delaware
</TABLE>

<PAGE>

EXHIBIT 23

CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS

As independent public accountants, we hereby consent to the incorporation of
our report included in Chattem, Inc.'s 1999 annual report and incorporated by
reference in the Form 10-K into the Company's previously filed Registration
Statements on Form S-8 (Nos. 33-35386, 33-78524, 33-78922, and 33-61267),
Form S-3 (Nos. 33-69961, 33-69397, 33-31113, 33-03091 and 33-85348), Form S-2
(No. 33-80770) and Form S-4 (No. 33-53627).

ARTHUR ANDERSEN LLP

Chattanooga, Tennessee
February 24, 2000

<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-30-1999
<PERIOD-START> DEC-01-1998
<PERIOD-END> NOV-30-1999
<CASH> 2,308
<SECURITIES> 0
<RECEIVABLES> 55,932
<ALLOWANCES> 900
<INVENTORY> 27,818
<CURRENT-ASSETS> 93,038
<PP&E> 45,683
<DEPRECIATION> 19,931
<TOTAL-ASSETS> 491,624
<CURRENT-LIABILITIES> 66,625
<BONDS> 358,950
0
0
<COMMON> 2,021
<OTHER-SE> 46,680
<TOTAL-LIABILITY-AND-EQUITY> 491,624
<SALES> 298,142
<TOTAL-REVENUES> 298,142
<CGS> 75,612
<TOTAL-COSTS> 225,941
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 36,572
<INCOME-PRETAX> 36,208
<INCOME-TAX> 13,667
<INCOME-CONTINUING> 22,541
<DISCONTINUED> 0
<EXTRAORDINARY> 2,385
<CHANGES> 0
<NET-INCOME> 20,156
<EPS-BASIC> 2.07
<EPS-DILUTED> 2.01

</TABLE>