EXHIBIT 13

TO THE SHAREHOLDERS

FISCAL 2000 REVIEW

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

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

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

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

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

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

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

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

FISCAL 2001 OUTLOOK*

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

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

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

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

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

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

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

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

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

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

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

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

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

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

CHATTEM CONSUMER PRODUCTS

DOMESTIC PRODUCT OVERVIEW

OTC HEALTH CARE PRODUCTS

MEDICATED SKIN CARE PRODUCTS

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

TOPICAL ANALGESICS

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

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

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

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.

INTERNAL ANALGESICS

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.

LIP CARE

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.

APPETITE SUPPRESSANT

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

DIETARY SUPPLEMENTS

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

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

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

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

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

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

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

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

TOILETRIES AND SKIN CARE PRODUCTS

FACIAL CLEANSERS AND MASQUES

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

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

SEASONALS

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

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

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

INTERNATIONAL MARKET OVERVIEW

EUROPE

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

CANADA

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

U.S. EXPORT

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

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

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

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

GENERAL

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

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

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

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

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

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

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

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

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

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

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

RESULTS OF OPERATIONS

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

Year Ended November 30
-----------------------------------
2000 1999 1998
--------- -------- --------

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

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

FISCAL 2000 COMPARED TO FISCAL 1999

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

FISCAL 1999 COMPARED TO FISCAL 1998

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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.

LIQUIDITY AND CAPITAL RESOURCES

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

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

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

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

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

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

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

ITEM 2000 1999
- -------------------------------------------------- ------------- -----------

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

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

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

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

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

FOREIGN OPERATIONS

The Company's primary foreign operations are conducted through its Canadian and
United Kingdom subsidiaries. The functional currencies of these subsidiaries are
Canadian dollars and British pounds, respectively. Fluctuations in exchange
rates can impact operating results, including total revenues and expenses, when
translations of the subsidiary financial statements are made in accordance with
SFAS No. 52, "Foreign Currency Translation." For the years ended November 30,
2000 and 1999, these subsidiaries accounted for 6.7% and 5.9% of total revenues,
respectively, and 2.0% of total assets for both years. It has not been the
Company's practice to hedge its assets and liabilities in Canada and the United
Kingdom or its intercompany transactions due to the inherent risks associated
with foreign currency hedging transactions and the timing of payment between the
Company and its two foreign subsidiaries. Historically, gains or losses from
foreign currency transactions have not had a material impact on the Company's
operating results. Losses of $20,000 and $26,000 for the years ended November
30, 2000 and 1999, respectively, resulted from foreign currency transactions.
See "Foreign Currency Translation" in Note 2 of Notes to Consolidated Financial
Statements.

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

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

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

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

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

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

SEASONALITY

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

FORWARD LOOKING STATEMENTS

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

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

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

YEAR ENDED NOVEMBER 30,
----------------------------------------------------------------
2000 1999 1998 1997 1996
--------- --------- -------- --------- ---------

INCOME STATEMENT DATA

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

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

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

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

MARKET PRICES

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

2000 1999
------------------ -------------------
QUARTER ENDED: HIGH LOW HIGH LOW
------- ------ ------ ------

February......................... 23.438 16.250 50.250 24.625
May.............................. 18.875 11.813 41.688 29.750
August........................... 16.000 9.750 38.375 24.000
November......................... 12.313 4.500 28.125 17.625

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

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

2000 1999
-------- --------

ASSETS

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

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

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

2000 1999
--------- ---------

LIABILITIES AND SHAREHOLDERS' EQUITY

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

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

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

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

2000 1999 1998
--------- --------- ----------

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

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

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

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

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

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

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

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

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

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

2000 1999 1998
-------- -------- --------

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

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

(1) NATURE OF OPERATIONS

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

(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

BASIS OF CONSOLIDATION

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

CASH AND CASH EQUIVALENTS

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

INVENTORIES

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

PROPERTY, PLANT AND EQUIPMENT

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

PATENTS, TRADEMARKS AND OTHER PURCHASED PRODUCT RIGHTS

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

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

DEBT ISSUANCE COSTS

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

PAYABLE TO BANK

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

REVENUE RECOGNITION

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

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

RESEARCH AND DEVELOPMENT

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

ADVERTISING EXPENSES

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

NET INCOME PER COMMON SHARE

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

2000 1999 1998
------ ------ ------

Weighted average common shares
outstanding.......................................... 9,411 9,747 9,374
Dilutive potential shares:
Stock options........................................ -- 277 332
Warrants............................................. -- -- 29
------ ------ ------
Weighted average and dilutive potential common
shares outstanding................................... 9,411 10,024 9,735
====== ====== ======

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

FOREIGN CURRENCY TRANSLATION

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

USE OF ESTIMATES

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

DERIVATIVE FINANCIAL INSTRUMENTS

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

CONCENTRATIONS OF CREDIT RISK

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

RECENT ACCOUNTING PRONOUNCEMENTS

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

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

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

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

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

STOCK-BASED COMPENSATION

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

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

(3) INVESTMENT IN ELCAT, INC.

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

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

(4) PENSION PLANS

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

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

2000 1999 1998
-------- -------- --------

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

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

2000 1999
--------- ---------

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

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

2000 1999
--------- --------

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

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

2000 1999
-------- ---------

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

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

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

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

(5) LONG-TERM DEBT

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

2000 1999
---------- ----------

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

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

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

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

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

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

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

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

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

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

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

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

Future maturities of long-term debt are as follows:

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

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

(6) DERIVATIVE FINANCIAL INSTRUMENTS

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

(7) FAIR VALUE OF FINANCIAL INSTRUMENTS

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

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

(8) INCOME TAXES

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

2000 1999 1998
-------- -------- --------

Current:
Federal........................................ $ 5,053 $ 8,115 $ 8,034
State.......................................... 577 954 459
Deferred....................................... (5,734) 4,598 2,351
-------- -------- --------
$ (104) $13,667 $10,844
======== ======== ========

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

2000 1999
-------- -------

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

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

2000 1999 1998
------- --------- ---------

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

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

(9) SHAREHOLDERS' EQUITY

STOCK OPTIONS

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

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

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

2000 1999 1998
--------- -------- ---------

Net income (loss):
As reported ....................... $(1,659) $20,156 $15,269
Pro forma ......................... $(2,456) $18,980 $14,599

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

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

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

2000 1999 1998
--------------------------- --------------------------- ----------------------------

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

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

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

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

$ 4.63 - $ 5.25 110 $ 4.87 5.15 110 $ 4.87
$ 7.13 - $ 9.50 114 8.38 4.90 99 8.37
$12.75 - $18.81 525 14.09 7.49 263 14.31
$25.63 - $38.81 19 39.93 8.20 12 38.11
------------- -------------
Total 768 $ 12.50 6.79 484 $ 11.50
============= ================ ================= ============= ===================

PREFERRED SHARES

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

EMPLOYEE STOCK OWNERSHIP PLAN

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

COMMON STOCK WARRANTS

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

STOCK BUYBACK

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

SHAREHOLDER RIGHTS PLAN

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

(10) CONTINGENCIES

GENERAL LITIGATION

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

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

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

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

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

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

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

REGULATORY

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

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

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

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

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

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

(11) SUPPLEMENTAL FINANCIAL INFORMATION

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

2000 1999
-------- ---------

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

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

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

2000 1999
-------- --------

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

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

2000 1999
------- -------

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

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

(12) ACQUISITION AND SALE OF BRANDS

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

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

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

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

PRO FORMA CONSOLIDATED RESULTS OF OPERATIONS (UNAUDITED)

2000 1999
--------- ---------

Net sales.................................... $ 191,256 $ 215,945

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

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

Earnings (loss) per share - basic:

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

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

Earnings (loss) per share - diluted:

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

Net income (loss).......................... (.75) .72

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

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

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

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

(13) ACCRUED POSTRETIREMENT HEALTH CARE BENEFITS

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

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

2000 1999 1998
----- ----- -----

Service cost (benefits earned during the period)... $ 32 $ 31 $ 19
Interest cost on accumulated postretirement
benefit obligation............................... 80 76 82
Amortization of net gain........................... (22) (10) (18)
----- ----- -----
Net periodic postretirement benefits cost ......... $ 90 $ 97 $ 83
===== ===== =====

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

2000 1999
------- --------

Accumulated benefit obligation, beginning of
year.................................................... $ 1,023 $ 1,220

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

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

2000 1999
------- -------

Accumulated benefit obligation...................... $ 1,051 $ 1,023
Fair value of plan assets........................... -- --
------- -------
Funded status....................................... (1,051) (1,023)
Unrecognized prior service cost..................... 144 159
Unrecognized actuarial gain......................... (622) (630)
------- -------
Accrued postretirement benefits cost................ $ (1,529) $ (1,494)
======= =======

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

(14) COMPREHENSIVE INCOME

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

2000 1999 1998
--------- -------- ---------

Net income (loss)........................ $ (1,659) $ 20,156 $ 15,269
Other-foreign currency translation
adjustment............................. (806) (15) (30)
--------- -------- ---------
Total................................ $ (2,465) $ 20,141 $ 15,239
========= ======== =========

(15) PRODUCT AND GEOGRAPHICAL SEGMENT INFORMATION

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

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

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

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.

PRODUCT CLASSIFICATIONS
------------------------------------------------------------
OTC TOILETRIES
HEALTH AND NOT
TOTAL CARE SKINCARE CLASSIFIED
--------- --------- ---------- ----------

2000:
Net sales..................................... $ 252,699 $ 153,175 $ 99,069 $ 455
Variable contribution margin.................. 84,902 56,666 28,199 37
Depreciation and amortization................. 14,943 5,241 4,010 5,692
Identifiable assets/total assets.............. 402,076 186,449 26,233 189,394

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

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

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

2000 1999 1998
-------- --------- --------

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

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

2000 1999 1998
--------- --------- ---------

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

(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.

Note 16
CHATTEM, INC. AND SUBSIDIARIES

CONSOLIDATING BALANCE SHEETS

NOVEMBER 30, 2000
(Unaudited and in thousands)

NON-GUARANTOR
SUBSIDIARY ELIMINATIONS
CHATTEM SIGNAL COMPANIES DR, (CR.) CONSOLIDATED
------- -------- ------------- ------------- ------------

ASSETS

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

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

Note 16
CHATTEM, INC. AND SUBSIDIARIES

CONSOLIDATING BALANCE SHEETS

NOVEMBER 30, 1999
(Unaudited and in thousands)

NON-GUARANTOR
SUBSIDIARY ELIMINATIONS
CHATTEM SIGNAL COMPANIES DR, (CR.) CONSOLIDATED
------- -------- ------------- ------------- ------------

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
========= ========= ========= ========= =========

Note 16
CHATTEM, INC. AND SUBSIDIARIES

CONSOLIDATING STATEMENTS OF INCOME

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

NON-GUARANTOR
SUBSIDIARY ELIMINATIONS
CHATTEM SIGNAL COMPANIES DR, (CR.) CONSOLIDATED
------- -------- ------------- ------------- ------------

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

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

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

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

Note 16
CHATTEM, INC. AND SUBSIDIARIES

CONSOLIDATING STATEMENTS OF INCOME

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

NON-GUARANTOR
SUBSIDIARY ELIMINATIONS
CHATTEM SIGNAL COMPANIES DR, (CR.) CONSOLIDATED
------- -------- ------------- ------------- ------------

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

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

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

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

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

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

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

Note 16
CHATTEM, INC. AND SUBSIDIARIES

CONSOLIDATING STATEMENTS OF CASH FLOWS

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

NON-GUARANTOR
SUBSIDIARY ELIMINATIONS
CHATTEM SIGNAL COMPANIES DR, (CR.) CONSOLIDATED
------- -------- ------------- ------------- ------------

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

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

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

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

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

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

QUARTER ENDED
--------------------------------------------------------
TOTAL FEBRUARY 28 MAY 31 AUGUST 31 NOVEMBER 30
----- ----------- ------ --------- -----------

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

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

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

REPORT OF INDEPENDENT
PUBLIC ACCOUNTANTS

TO CHATTEM, INC.:

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

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

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

ARTHUR ANDERSEN LLP

Chattanooga, Tennessee
January 26, 2001