<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of
the Securities Exchange Act of 1934
(Amendment No. )
Filed by the Registrant /X/
Filed by a Party other than the Registrant / /
Check the appropriate box:
/ / Preliminary Proxy Statement
/X/ Definitive Proxy Statement
/ / Definitive Additional Materials
/ / Soliciting Material Pursuant to Section 240.14a-11(c) or Section
240.14a-12
CHATTEM, INC.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement)
Payment of Filing Fee (Check the appropriate box):
/X/ No fee required.
/ / Fee computed on table below per Exchange Act Rules 14a6(i)(4)
and 0-11.
1) Title of each class of securities to which transaction applies:
------------------------------------------------------------------------
2) Aggregate number of securities to which transaction applies:
------------------------------------------------------------------------
3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11:
------------------------------------------------------------------------
4) Proposed maximum aggregate value of transaction:
------------------------------------------------------------------------
/ / Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
1) Amount Previously Paid:
------------------------------------------------------------------------
2) Form, Schedule or Registration Statement No.:
------------------------------------------------------------------------
3) Filing Party:
------------------------------------------------------------------------
4) Date Filed:
------------------------------------------------------------------------
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[LOGO]
CHATTEM, INC.
1715 WEST 38TH STREET
CHATTANOOGA, TENNESSEE 37409
MARCH 7, 1997
Dear Shareholder:
You are cordially invited to attend the Annual Meeting of Shareholders of
Chattem, Inc., scheduled for Wednesday, April 9, 1997, at 1:00 p.m., in the
Company's executive offices located in Chattanooga, Tennessee. The matters
expected to be acted upon at the meeting are described in detail in the attached
Notice of Annual Meeting and Proxy Statement.
I hope that you will be able to attend the Annual Meeting on April 9, 1997.
A luncheon reservation card is also enclosed if you are able to attend the
Company's luncheon immediately preceding the meeting.
Sincerely,
/s/ Zan Guerry
Zan Guerry
CHAIRMAN OF THE BOARD AND PRESIDENT
<PAGE>
[LOGO]
CHATTEM, INC.
1715 WEST 38TH STREET
CHATTANOOGA, TENNESSEE 37409
---------------------
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
APRIL 9, 1997
To the Shareholders of Chattem, Inc.:
Notice is hereby given that the Annual Meeting of Shareholders (the "Annual
Meeting") of Chattem, Inc., a Tennessee corporation (the "Company"), will be
held on Wednesday, April 9, 1997, at 1:00 p.m. local time, at the Company's
executive offices, 1715 West 38th Street, Chattanooga, Tennessee 37409, for the
following purposes:
(1) To elect three members to the Board of Directors, each to serve for a
three year term;
(2) To ratify the appointment of Arthur Andersen LLP as independent
auditors; and
(3) To transact such other business as may properly come before the Annual
Meeting or any adjournment(s) thereof.
Information regarding the matters to be acted upon at the Annual Meeting is
contained in the Proxy Statement attached to this Notice.
Only shareholders of record at the close of business on February 27, 1997
are entitled to notice of, and to vote at, the Annual Meeting or any
adjournment(s) thereof.
You are encouraged to attend the Annual Meeting in person. IF YOU ARE UNABLE
TO ATTEND THE ANNUAL MEETING, THE BOARD OF DIRECTORS REQUESTS THAT, AT YOUR
EARLIEST CONVENIENCE, YOU PLEASE COMPLETE, DATE, SIGN AND RETURN THE
ACCOMPANYING PROXY IN THE ENCLOSED REPLY ENVELOPE, WHICH NEEDS NO POSTAGE IF
MAILED IN THE UNITED STATES.
/s/ Zan Guerry
Zan Guerry
CHAIRMAN OF THE BOARD AND PRESIDENT
Chattanooga, Tennessee
March 7, 1997
<PAGE>
CHATTEM, INC.
---------
PROXY STATEMENT
----------
ANNUAL MEETING OF SHAREHOLDERS
APRIL 9, 1997
SOLICITATION OF PROXIES
The accompanying proxy is solicited by the Board of Directors of Chattem,
Inc., a Tennessee corporation (the "Company"), for use at the Company's Annual
Meeting of Shareholders (the "Annual Meeting"), and at any adjournment(s)
thereof, to be held at the Company's executive offices, 1715 West 38th Street,
Chattanooga, Tennessee 37409, on Wednesday, April 9, 1997, at 1:00 p.m. local
time, for the purposes set forth in the accompanying Notice of Annual Meeting of
Shareholders. Solicitations of proxies may be made in person or by mail,
telephone or telegram by directors, officers and regular employees of the
Company. The Company will also request banking institutions, brokerage firms,
custodians, trustees, nominees and fiduciaries to forward solicitation material
to the beneficial owners of the Company's shares held of record by such persons,
will furnish at its expense the number of copies thereof necessary to supply
such material to all such beneficial owners and will reimburse the reasonable
forwarding expenses incurred by such record owners. All costs of preparing,
printing, assembling and mailing the form of proxy and the material used in the
solicitation will be paid by the Company. This Proxy Statement is first being
mailed to shareholders on or about March 7, 1997.
VOTING SECURITIES AND PRINCIPAL HOLDERS THEREOF
The Board of Directors has fixed the close of business on February 27, 1997
as the record date for the determination of shareholders entitled to notice of,
and to vote at, the Annual Meeting. Each share of the Company's common stock
without par value ("Common Stock") is entitled to one vote. As of February 27,
1997, there were issued and outstanding 8,612,641 shares of Common Stock.
Set forth below is information, as of February 27, 1997, with respect to
beneficial ownership by (a) each person who is known to the Company to be the
beneficial owner of more than 5% of the outstanding Common Stock, (b) each
director and nominee, (c) the chief executive officer and the other most highly
compensated executive officer for the previous fiscal year, and (d) all
directors and executive officers of the Company as a group:
<TABLE>
<CAPTION>
AMOUNT AND NATURE OF PERCENT
NAME OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP (1) OF CLASS (2)
- ------------------------------------ ---------------------------- ------------
<S> <C> <C>
First Union Capital Partners, Inc. 1,666,667 19.4%
One First Union Center
301 S. College Street
Charlotte, NC 28288
Zan Guerry 1,252,913(3)(4)(5)(6) 14.3
1715 W. 38th St.
Chattanooga, TN 37409
Robert E. Bosworth 962,276(6)(7)(8) 11.1
1715 W. 38th St.
Chattanooga, TN 37409
Hamico, Inc. 861,864(9) 10.0
1715 W. 38th Street
Chattanooga, TN 37409
Putnam Investments, Inc. 505,200(10) 5.9
One Post Office Square
Boston, MA 02109
Louis H. Barnett 119,469(11) 1.4
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
AMOUNT AND NATURE OF PERCENT
NAME OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP (1) OF CLASS (2)
- ------------------------------------ ---------------------------- ------------
<S> <C> <C>
Richard E. Cheney 12,710 *
Scott L. Probasco, Jr. 88,426(12) 1.0
Samuel E. Allen 11,500 *
A. Alexander Taylor, II 4,600 *
Directors and Executive Officers as 1,590,030 18.0
a Group (7 persons)
</TABLE>
- ------------
* Less than 1.0%.
(1) Except as otherwise indicated, refers to either shared or sole voting and
investment power. Includes the following numbers of shares subject to
purchase pursuant to options that are exercisable within 60 days of February
27, 1997 under the Company's Non-Statutory Stock Option Plan -- 1993 (the
"1993 Stock Option Plan"), the Company's Non-Statutory Stock Option Plan --
1994 (the "1994 Stock Option Plan") or the Company's Non-Statutory Stock
Option Plan for Non-Employee Directors (the "Director Plan"): Mr. Guerry --
126,875 shares, Mr. Bosworth -- 75,312 shares, Mr. Probasco -- 4,250 shares,
Messrs. Allen and Taylor -- 4,000 shares each, Messrs. Barnett and Cheney --
3,750 shares each, and all directors and executive officers as a group --
221,937 shares. Also includes the following numbers of shares subject to
purchase pursuant to the exercise of warrants issued in June, 1994 in
connection with the Company's 12.75% senior subordinated notes due 2004: Mr.
Guerry -- 1,464 shares, Mr. Barnett -- 1,581 shares, and all directors and
executive officers as a group -- 3,045 shares.
(2) For the purpose of computing the percentage of outstanding shares owned by
each beneficial owner, the shares issuable pursuant to presently exercisable
stock options or warrants held by such beneficial owner are deemed to be
outstanding. Such shares are not deemed to be outstanding for the purpose of
computing the percentage owned by any other person.
(3) Includes 37,081 shares held by a trust for the benefit of Mr. Guerry's
sister, of which he serves as a co-trustee. Mr. Guerry disclaims beneficial
ownership of the shares held by this trust.
(4) Includes 6,000 shares held in trust for Mr. Guerry pursuant to the terms of
the Company's Savings and Investment Plan.
(5) Includes 2,685 shares which Mr. Guerry holds as custodian for his children.
Mr. Guerry disclaims beneficial ownership of these custodial shares.
(6) Includes 848,100 shares and 13,764 shares subject to purchase pursuant to
the exercise of warrants owned by Hamico, Inc., a charitable foundation for
which Messrs. Guerry and Bosworth serve as directors and executive officers.
Messrs. Guerry and Bosworth disclaim beneficial ownership of all such
shares.
(7) Includes 23,000 shares held in trust for Mr. Bosworth pursuant to the terms
of the Company's Savings and Investment Plan.
(8) Includes 600 shares which Mr. Bosworth holds as custodian for his daughter.
Mr. Bosworth disclaims beneficial ownership of these custodial shares.
(9) Includes 13,764 shares subject to purchase pursuant to the exercise of
warrants issued June, 1994 in connection with the Company's 12.75% senior
subordinated notes due 2004.
(10) Consists solely of shares held by certain wholly-owned subsidiaries of
Putnam Investments, Inc., which are registered investment advisors, for the
benefit of clients of such investment advisors and for which shares Putnam
Investments, Inc. disclaims beneficial ownership. This information is based
solely upon a Schedule 13G filed by Putnam Investments, Inc. on or about
January 27, 1997.
(11) Includes 103,778 shares which are held in trust for the benefit of various
family members. Mr. Barnett disclaims beneficial ownership of these shares.
(12) Includes 1,500 shares which are held by Mr. Probasco's spouse. Mr. Probasco
disclaims beneficial ownership of these shares.
2
<PAGE>
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Under federal securities laws, the Company's directors, executive officers
and 10% or more shareholders are required to report, within specified monthly
and annual due dates, their initial ownership in the Company's Common Stock and
all subsequent acquisitions, dispositions or other transfers of beneficial
interests therein, if and to the extent reportable events occur which require
reporting by such due dates. Based solely on representations and information
provided to the Company by the persons required to make such filings, the
Company believes that all filing requirements were complied with during the last
fiscal year.
REVOCABILITY OF PROXY
Granting a proxy does not preclude the right of the person giving the proxy
to vote in person, and a person may revoke his or her proxy at any time before
it has been exercised, by giving written notice to the Secretary of the Company,
by delivering a later dated proxy or by voting in person at the Annual Meeting.
QUORUM; VOTING
The presence, in person or by proxy, of the holders of a majority of the
outstanding shares of Common Stock which are entitled to vote is necessary to
constitute a quorum at the Annual Meeting. If a quorum is not present or
represented at the Annual Meeting, the shareholders entitled to vote, whether
present in person or represented by proxy, have the power to adjourn the Annual
Meeting from time to time, without notice other than announcement at the Annual
Meeting, until a quorum is present or represented. At any such adjourned Annual
Meeting at which a quorum is present or represented, any business may be
transacted that might have been transacted at the Annual Meeting as originally
noticed.
On all matters submitted to a vote of the shareholders at the Annual Meeting
or any adjournment(s) thereof, each shareholder will be entitled to one vote for
each share of Common Stock owned of record at the close of business on February
27, 1997. There will be no cumulative voting.
ACTION TO BE TAKEN UNDER THE PROXY
Proxies in the accompanying form that are properly executed and returned
will be voted at the Annual Meeting and any adjournment(s) thereof in accordance
with the directions on such proxies. If no directions are specified, such
proxies will be voted (a) "FOR" the election of the three persons specified as
nominees for directors of the Company, each of whom will serve for a three year
term; (b) "FOR" the ratification of the appointment of Arthur Andersen LLP as
independent auditors; and (c) in the best judgment of the persons named in the
enclosed proxy in connection with the transaction of such other business as may
properly come before the Annual Meeting or any adjournment(s) thereof. Should
any director nominee named herein become unable or unwilling to serve if
elected, it is intended that the proxies will be voted for the election, in his
stead, of such other person as the management of the Company may recommend.
Management has no reason to believe that any of the nominees will be unable
or unwilling to serve if elected. Management knows of no other matters or
business to be presented for consideration at the Annual Meeting. If, however,
any other matters properly come before the Annual Meeting or any adjournment(s)
thereof, it is the intention of the persons named in the enclosed proxy to vote
such proxy in accordance with their best judgment on any such matters. The
persons named in the enclosed proxy may also, if they deem it advisable, vote
such proxy to adjourn the Annual Meeting from time to time.
3
<PAGE>
PROPOSAL 1: ELECTION OF DIRECTORS
The Company's Board of Directors is classified into three classes having
staggered terms of three years each. At present, two classes consist of two
directors each and one class consists of three directors. Each director elected
at the Annual Meeting will serve until the Annual Meeting of Shareholders in
2000 and until his successor has been elected and qualified or until his earlier
resignation or removal. Messrs. Louis H. Barnett, Robert E. Bosworth and Richard
E. Cheney are the Board of Directors' nominees for election. The Board of
Directors has no nominating committee, and all nominees are selected by the
Board of Directors at large. Directors will be elected by a plurality of the
votes cast.
The directors meet quarterly and may convene for special meetings when
necessary. During the fiscal year ended November 30, 1996, the Board of
Directors conducted a total of four regularly scheduled and two special
meetings. Each director attended 75% or more of the meetings of the Board of
Directors and of any committees on which he served during this period.
INFORMATION ABOUT NOMINEES AND CONTINUING DIRECTORS
The following information is furnished with respect to the nominees and
continuing directors:
<TABLE>
<CAPTION>
NAME AGE PRINCIPAL OCCUPATION
- ------------------------------ ---- --------------------------------------------------
<S> <C> <C>
NOMINEES FOR TERMS
OF OFFICE TO EXPIRE IN 2000
Louis H. Barnett 78 Consultant to the Company and others regarding
plastics, chemicals and oil investments and
operations. Director of Overton Bank and Trust and
A/F Protein, Inc. First elected a director of the
Company in 1970.
Robert E. Bosworth 49 Executive Vice President since June 1990 and Chief
Financial Officer of the Company since April 1985.
First elected a director of the Company in October
1986.
Richard E. Cheney 75 Former Chairman Emeritus, director and member of
the executive committee, Hill and Knowlton, Inc.
(international public relations and public affairs
consulting). Director of HoloPak Technologies,
Inc. and Rowe Furniture Corporation. Member of the
Company's Compensation Committee. First elected a
director of the Company in 1984.
DIRECTORS WHOSE TERMS
OF OFFICE EXPIRE IN 1998
Scott L. Probasco, Jr. 68 Chairman of the Executive Committees of SunTrust
Bank, Chattanooga, N.A., since March 1989 and
SunTrust Banks of Tennessee, Inc. since January
1990. Also a director of SunTrust Banks, Inc.,
Coca-Cola Enterprises Inc. and Provident Life and
Accident Insurance Company. Member of the
Company's Audit and Compensation Committees. First
elected a director of the Company in 1966.
Zan Guerry 48 Chairman of the Board and President of the Company
since June 1990. Previously served as Executive
Vice President of the Company from 1983 to 1990,
as President of Chattem Consumer Products from
1984 to 1989 and as Chief Operating Officer from
1989 to 1990. Director of SunTrust Bank,
Chattanooga, N.A. First elected a director of the
Company in 1981.
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
NAME AGE PRINCIPAL OCCUPATION
- ------------------------------ ---- --------------------------------------------------
<S> <C> <C>
DIRECTORS WHOSE TERMS
OF OFFICE EXPIRE IN 1999
Samuel E. Allen 60 Chairman of Globalt, Inc. (investments). Member of
the Company's Audit Committee. First elected a
director of the Company in 1993.
A. Alexander Taylor II 43 Partner with law firm of Miller & Martin, general
counsel to the Company, since 1983. Director of
U.S. Xpress Enterprises, Inc. Member of the
Company's Audit Committee. First elected a
director of the Company in 1993.
</TABLE>
In accordance with the Bylaws of the Company, the Board of Directors has
established an Audit Committee and a Compensation Committee.
The Audit Committee recommends to the Board of Directors the engagement of
the independent auditors of the Company and reviews with the independent
auditors the scope and results of the audits, the Company's internal accounting
controls and the professional services furnished by the independent auditors to
the Company. The Audit Committee met two times in fiscal 1996.
The Compensation Committee is composed of independent, non-employee
directors who have no interlocking relationships as defined by the Securities
and Exchange Commission. The Compensation Committee reviews and approves all
salary arrangements, including annual and long-term incentive awards and other
remuneration, for officers of the Company. It also is responsible for
administration of the Company's stock option plans (except for the Director
Plan), the annual incentive plan and certain other plans. The Compensation
Committee met two times in fiscal 1996.
5
<PAGE>
EXECUTIVE COMPENSATION AND OTHER INFORMATION
SUMMARY OF CASH AND CERTAIN OTHER COMPENSATION
The following table sets forth information for the past three fiscal years
concerning compensation paid or accrued by the Company to or on behalf of the
Company's chief executive officer and the other most highly compensated
executive officer, the only executive officers of the Company during the fiscal
year ended November 30, 1996:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
ANNUAL COMPENSATION ---------------------
FISCAL --------------------- SECURITIES UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS OPTIONS AWARDED (1) COMPENSATION (2)
- ------------------------------ ------ -------- ----------- --------------------- ----------------
<S> <C> <C> <C> <C> <C>
Zan Guerry 1996 $253,000 $133,650 40,000 $2,854
Chairman of the Board 1995 236,000 108,324 0 2,760
and President 1994 230,500 121,512 0 2,722
Robert E. Bosworth 1996 192,500 81,400 25,000 3,032
Executive Vice President and 1995 181,760 119,819(3) 0 2,663
Chief Financial Officer 1994 180,000 79,328 0 2,609
</TABLE>
- ------------
(1) Represents non-qualified stock options granted on January 31, 1996 under the
Company's 1994 Stock Option Plan at an exercise price of $4.875 per share.
(2) Represents premiums paid by the Company under life insurance policies with
respect to which the named executive is entitled to a death benefit of up to
$450,000 as follows for the 1996 fiscal year: Mr. Guerry - $479; Mr.
Bosworth - $657. Also represents the Company's contributions with respect to
the Company's Savings and Investment Plan for the named executive as follows
for the 1996 fiscal year: Mr. Guerry - $2,375; Mr. Bosworth - $2,375.
(3) Includes one-time incentive bonus of $50,000 for the 1995 fiscal year.
STOCK OPTION GRANTS
The stock option grants to the Company's chief executive officer and the
other most highly compensated executive officer during the fiscal year ended
November 30, 1996 are shown in the following table:
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIONAL
REALIZABLE VALUE
AT ASSUMED
ANNUAL RATES OF
NUMBER OF PERCENT OF STOCK PRICE
SECURITIES TOTAL OPTIONS APPRECIATION FOR
UNDERLYING GRANTED TO EXERCISE OR OPTION TERM
OPTIONS EMPLOYEES IN BASE PRICE EXPIRATION ----------------
NAME GRANTED (#) FISCAL YEAR ($/SH) DATE 5% ($) 10% ($)
- ------------------ ----------- -------------- ----------- ---------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Zan Guerry 40,000 12.58 4.875 1/31/06 122,612 310,756
Robert E. Bosworth 25,000 7.86 4.875 1/31/06 76,632 194,222
</TABLE>
6
<PAGE>
OPTION EXERCISES AND HOLDINGS
The option exercises by the Company's chief executive officer and the other
most highly compensated executive officer during the fiscal year ended November
30, 1996, as well as the number and total value of unexercised in-the-money
options at November 30, 1996, are shown in the following table:
AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR
AND OPTION VALUES AT NOVEMBER 30, 1996
<TABLE>
<CAPTION>
VALUE OF
NUMBER OF UNEXERCISED
UNEXERCISED IN-THE-MONEY
NUMBER OF OPTIONS AT OPTIONS AT
SHARES ACQUIRED VALUE NOV. 30, 1996 NOV. 30, 1996
NAME ON EXERCISE REALIZED EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
- ------------------- ---------------- --------- ------------------------- -------------------------
<S> <C> <C> <C> <C>
Zan Guerry 0 0 103,125/74,375 $161,134/231,211
Robert E. Bosworth 0 0 60,937/45,313 95,214/142,676
</TABLE>
PENSION PLAN
The following table shows for various years of service the estimated annual
benefits payable under the Chattem, Inc. Pension Plan (the "Pension Plan") upon
normal retirement, before deducting a specified percentage of applicable
estimated Social Security benefits, as provided in the Pension Plan:
PENSION PLAN TABLE
<TABLE>
<CAPTION>
YEARS OF SERVICE
---------------------------------------------------------------
REMUNERATION 15 YEARS 20 YEARS 25 YEARS 30 YEARS 35 YEARS
- ------------------------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
$100,000................. $ 37,500 $ 50,000 $ 50,000 $ 50,000 $ 50,000
150,000................. 56,250 75,000 75,000 75,000 75,000
200,000................. 75,000 100,000 100,000 100,000 100,000
275,000................. 103,125 137,500* 137,500* 137,500* 137,500*
325,000................. 121,875 162,500* 162,500* 162,500* 162,500*
350,000................. 131,250* 175,000* 175,000* 175,000* 175,000*
375,000................. 140,625* 187,500* 187,500* 187,500* 187,500*
400,000................. 150,000* 200,000* 200,000* 200,000* 200,000*
450,000................. 168,750* 225,000* 225,000* 225,000* 225,000*
500,000................. 187,500* 250,000* 250,000* 250,000* 250,000*
</TABLE>
- ------------
* Exceeds maximum Pension Plan benefit permissible under current federal law.
The basis for the compensation covered by the Pension Plan is W-2 earnings
as adjusted for certain extraordinary income items. Covered compensation for the
individuals listed in the summary compensation table as of November 30, 1996,
was: Mr. Guerry -- $382,324; Mr. Bosworth -- $280,319. The accrued years of
service to November 30, 1996, of the individuals listed in the summary
compensation table (assuming repayment of Pension Plan loans from funds
voluntarily contributed) are as follows: Mr. Guerry -- 18.75; Mr. Bosworth --
16.25.
Upon retirement at age 65 (or as otherwise permitted under the Pension
Plan), a participant in the Pension Plan receives an annual benefit which is
2.5% of the average of his highest five consecutive calendar years of
compensation (regular wages or salaries, annual bonuses, incentive or Christmas
gift payments, overtime pay, shift premium, director's fees and, up to the level
of regular wages or
7
<PAGE>
salaries, any payments for workers' compensation, civic duty pay, military pay,
sickness pay, temporary disability pay or vacation pay) paid during the 10
calendar years immediately preceding the earlier of actual or normal retirement
age, multiplied by his years of service not in excess of 20 years. The amount
determined in the preceding sentence is then reduced by 2.5% of the
participant's primary Social Security benefit, multiplied by the participant's
years of service not to exceed 20 years. For retirement before age 65, benefits
are further reduced actuarially and for years of service proration.
Upon retirement, benefits are calculated on the basis of a normal retirement
pension to be paid during the lifetime of the participant. Benefits will be paid
in the form of a Qualified Joint and Survivor Annuity or Qualified Preretirement
Survivor Annuity, unless one of the following options is appropriately elected:
(i) A reduced annuity benefit to be paid monthly over 5, 10 or 15 years
and thereafter for the participant's life;
(ii) A reduced annuity benefit to be paid during the participant's life
with one-half of the reduced benefit to be continued to the spouse for the
spouse's life;
(iii) A reduced annuity benefit to be paid during the participant's life
with either three-fourths of or the full reduced benefit to be continued to
the spouse for the spouse's life;
(iv) A single lump sum payment; or
(v) A single life annuity.
AGREEMENTS WITH EXECUTIVE OFFICERS
The Company has entered into severance agreements with the officers named in
the Summary Compensation Table. These severance agreements are operative only
upon the occurrence of a change in control of the Company and are intended to
encourage key executives to remain in the Company's employ by providing them
with greater security and imposing various restrictions on competitive
employment should an officer leave the Company's employment. Absent a change in
control of the Company, the severance agreements do not require the Company to
retain any executive or to pay him any specified level of compensation.
If the severance agreements become operative, and if the employment with the
Company of one of these officers is terminated or the officer is constructively
discharged within two years of the occurrence of a change in control of the
Company, the officer will be entitled to receive a termination payment equal to
three times his average annualized includible compensation from the Company
during the five most recently completed fiscal years and the continuation of
certain Company-provided benefits. Includible compensation for purposes of
calculating the severance benefit generally includes all compensation paid to
the officer by the Company and will be calculated in accordance with the
applicable provisions of the Internal Revenue Code.
A change of control of the Company will be deemed to occur if (i) there is a
change of one-third or more of the directors of the Company within any 12-month
period; (ii) there is a change of one-half or more of the directors of the
Company within any 24-month period; or (iii) any person acquires ownership or
the right to vote 35% or more of the Company's outstanding voting shares.
DIRECTOR COMPENSATION
All directors receive monthly compensation of $375 and supplemental life
insurance coverage in varying amounts. In addition, directors who are not
officers of the Company receive $400 for each meeting they attend if they reside
in the Chattanooga area and $700 plus expenses if they reside elsewhere.
Directors who are neither officers nor consultants to the Company also receive
$200 for
8
<PAGE>
each committee meeting they attend if held in conjunction with a Board of
Directors meeting and $400 for each committee meeting they attend if held
independently of a Board of Directors meeting. The outside directors of the
Company are also eligible for the grant of stock options under the terms of the
Director Plan. In January 1997, the Director Plan was amended to provide that
the non-employee members of the Board of Directors receive a one-time grant of
options to acquire 5,000 shares at the fair market value on the date preceding
the date of grant.
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
PRINCIPLES OF EXECUTIVE COMPENSATION
The Company's executive compensation program is designed to help the Company
attract, motivate and retain the executive talent that the Company needs in
order to maximize its return to shareholders. Toward that end, the Company's
executive compensation program attempts to provide strongly competitive
compensation levels and incentive pay that varies based on corporate, business
unit and individual performance.
The Company attempts to provide its executives with a total compensation
package that -- AT EXPECTED LEVELS OF PERFORMANCE -- is slightly above average
market rates for executives who hold comparable positions or have similar
qualifications in companies the Company's size. Total compensation is defined to
include base salary, annual incentives and long-term incentives. The Company
determines competitive levels of compensation for executive positions based on
information drawn from compensation surveys and compensation consultants. The
Company does not necessarily consider pay levels for the peer companies included
in the shareholder return graph, since these companies, in some cases, vary in
size significantly from the Company.
The reason the Company targets its total executive pay program at slightly
above competitive market norms is that the Company places more emphasis on
long-term incentive compensation than is common in the market for comparable
sized companies. Thus, the Company's executive salaries and annual incentive
target awards tend to be close to the market average while its long-term
incentive award opportunities are at or above average rates.
The Company's incentive plans are designed to ensure that incentive
compensation varies based upon the financial performance of the Company.
However, some of the Company's incentive payouts are based on annual performance
while other incentive values are based on long-term (i.e., multi-year)
performance. Also, the Company considers business unit and individual
performance in its incentive plan. As a result, the total compensation levels
for an executive in any given year may not reflect the Company's overall
bottom-line financial performance in that year.
BASE SALARY PROGRAM
The Company's base salary program is based on a philosophy of providing
salaries that are typically consistent with average market rates for companies
of similar size. The Company believes that offering competitive rates of base
pay plays an important role in its ability to attract and retain executive
talent. Base salary levels are also based on each individual employee's
performance over time. Consequently, employees with higher levels of sustained
performance over time will be paid correspondingly higher salaries. Salaries for
executives are reviewed and revised annually based on a variety of factors,
including individual performance (assessed in a qualitative fashion), general
levels of market salary increases and the Company's overall financial results.
All salary increases are granted within a pay-for-performance framework.
9
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ANNUAL INCENTIVE PLAN
The Company's annual incentive plan is intended to assist the Company in
rewarding and motivating key employees, focuses strongly on Company, business
unit and individual performance, and provides a fully competitive compensation
package to plan participants. As a pay-for-performance plan, incentive awards
are paid annually based on the achievement of performance objectives for the
year. Under the plan, each plan participant is provided a range of potential
annual incentive awards based on competitive award levels in the marketplace.
The incentive award ranges are consistent with those provided by other companies
similar in size to the Company. Actual awards paid under the plan are based on
the Company's corporate performance (and for business unit positions, business
unit performance). Individual performance is also considered in determining
actual award levels for each year, but is assessed in a non-formula fashion. The
corporate annual incentive plan objective usually is earnings per share
performance against plan. The specific objectives and standards under the plan
are reviewed annually by the Company in order to ensure consistency with the
Company's business strategy and prevailing market conditions.
An annual incentive funding pool is created to pay awards achieved under the
annual incentive plan. At targeted performance, the plan provides sufficient
funding to pay competitive annual incentives to all plan eligible positions.
However, the actual size of the annual incentive funding pool will vary based on
corporate earnings per share performance. Aggregate payments under the annual
incentive plan are limited by the size of the funding pool. Actual awards made
to participants under the annual incentive plan are based on a combination of
corporate, business unit and individual performance. Business unit performance
is assessed considering such factors as net sales and operating income.
Individual performance is assessed relative to various qualitative objectives
and criteria, such as overall contribution to the Company's success and
successful implementation of business strategy.
LONG-TERM INCENTIVES
The Company believes that its key employees should have an ongoing interest
in the long-term success of the business. To accomplish this objective, the
Company provides long-term incentives to executives in the form of non-qualified
stock options. The Company previously maintained a long-term performance plan
pursuant to which cash payments were made based upon improvements in corporate
earnings per share over a three-year performance cycle. The long-term
performance plan was terminated during the last fiscal year since the grant of
non-qualified stock options under the Company's stock option plans was deemed to
provide a better incentive on behalf of the Company's shareholders.
The Company's stock option plans are intended to reward participants for
generating appreciation in the Company's stock price. Stock options granted to
the executive officers named in the Summary Compensation Table and certain other
executives were awarded at 100% of the fair market value of the stock on the
date of grant. All stock options have a term of ten years. Generally, stock
option grants vest at a rate of 25% per year beginning one year after the date
of grant. The exercise price is payable in cash, shares of the Company stock or
some combination thereof. No option holder has any rights as a shareholder for
any shares subject to an option until the exercise price has been paid and the
shares are issued to the employee.
The Company's overall stock option grant levels are established by
considering market data for the Company's stock and the number of shares
reserved under the plan for option grants. Individual stock option grants are
based on the job level of each participant in the Company and individual
performance. The Committee also considers the size of past stock option grants
in determining the size of new option grants.
10
<PAGE>
The Company's compensation plans are periodically reviewed to ensure an
appropriate mix of base salary, annual incentive and long-term incentive within
the philosophy of providing strongly competitive total direct compensation
opportunities.
1996 CHIEF EXECUTIVE OFFICER COMPENSATION
As described above, the Company compensates all executives, including the
chief executive officer, based upon both a pay-for-performance philosophy and
consideration of market rates of compensation for each executive position.
Specific actions taken by the Compensation Committee regarding the chief
executive officer's compensation are summarized below.
BASE SALARY
After two years in which the base annual salary for the Company's chief
executive officer was unchanged, the base annual salary was increased to
$270,000 from $236,000 effective July 1, 1996.
ANNUAL INCENTIVE
The annual incentive earned by the chief executive officer for 1996
performance was $133,650. This annual incentive award was based on competitive
market annual incentive awards for chief executive officers in companies
comparable in size to the Company, and adjusted to reflect the Company's
performance in growth in earnings per share against plan.
LONG-TERM INCENTIVE
The chief executive officer received a stock option award of 40,000 options
in fiscal 1996.
The foregoing report is submitted by the Compensation Committee, consisting
of Richard E. Cheney and Scott L. Probasco, Jr.
11
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COMPARATIVE PERFORMANCE BY THE COMPANY
The following is a chart comparing the cumulative total return to
shareholders of the Company, assuming reinvestment of dividends, for the
five-year period ending at the end of the 1996 fiscal year with the return from:
(i) the S&P 500 Index and (ii) a group of public companies engaged in either the
functional toiletries, cosmetics or non-prescription drug business, for the same
period. The following companies are in the group of selected comparable
companies: Alberto-Culver Co. (Class B common stock), Carter-Wallace Inc., DEP
Corporation (Class B common stock), Helene Curtis Industries Inc., Menley &
James Inc., Neutrogena Corp., St. Ives Laboratories Inc. and Del Laboratories
Inc.
CHATTEM, INC.
RELATIVE MARKET PERFORMANCE
TOTAL RETURN FISCAL 1992-1996
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
VALUE OF INVESTMENT
($)
<S> <C> <C> <C>
Chattem Inc. S&P 500 Index Custom Peer Group
11/30/91 $100 $100 $100
11/30/92 $156 $118 $107
11/30/93 $126 $130 $78
11/30/94 $87 $132 $70
11/30/95 $73 $181 $75
11/30/96 $147 $231 $109
</TABLE>
* Assumes $100 invested on November 30, 1991 in the common stock of the
Company, S&P 500 Index and the custom peer group with dividends reinvested
and investment weighted on the basis of market capitalization.
12
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PROPOSAL 2: RATIFICATION OF APPOINTMENT OF AUDITORS
Samuel E. Allen, A. Alexander Taylor, II, and Scott L. Probasco, Jr. are the
current members of the Company's Audit Committee. The Audit Committee's
functions include review and monitoring of financial reports and accounting
practices.
Another of the Audit Committee's functions is the recommendation of auditors
to the Board of Directors. The Audit Committee has recommended and the Board of
Directors has selected Arthur Andersen LLP, the Company's auditors since 1963.
Arthur Andersen LLP is knowledgeable about the Company's operations and
accounting practices and is well qualified to act in this capacity. The
Company's Board of Directors believes that it is a good practice to submit the
appointment of auditors for the approval of the shareholders, although such
approval is not required. If shareholder approval for the appointment is not
obtained, the Audit Committee will investigate the reasons, and the Board of
Directors will reconsider the appointment. If the accompanying proxy is duly
executed and received in time for the Annual Meeting, and if no contrary
specification is made as provided therein, it is the intention of the persons
named in the proxy to vote the shares represented thereby FOR the ratification
of the appointment of Arthur Andersen LLP as auditors.
It is anticipated that a representative of Arthur Andersen LLP will be
present at the Annual Meeting to respond to appropriate questions. Such
representative will have an opportunity to make a statement at the Annual
Meeting if he desires.
SHAREHOLDERS' PROPOSALS
Proposals from the Company's eligible shareholders for presentation for
action at the 1998 Annual Meeting of Shareholders must be received by the
Company no later than November 7, 1997, in order to be considered for inclusion
in the Proxy Statement and Proxy for that Annual Meeting. Any such proposals, as
well as any questions relating thereto, should be directed to Hugh F. Sharber,
Secretary, Chattem, Inc., 1715 West 38th Street, Chattanooga, Tennessee 37409.
Zan Guerry
CHAIRMAN OF THE BOARD AND PRESIDENT
March 7, 1997
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[LOGO]
<PAGE>
CHATTEM, INC.
PROXY SOLICITED BY THE BOARD OF DIRECTORS
FOR THE ANNUAL MEETING OF SHAREHOLDERS
APRIL 9, 1997
The undersigned, having received the Notice of Annual Meeting and the Proxy
Statement dated March 7, 1997, appoints ZAN GUERRY and ROBERT E. BOSWORTH, and
each of them proxies, with full power of substitution and revocation, to
represent the undersigned and to vote all shares of Chattem, Inc. which the
undersigned is entitled to vote at the Annual Meeting of Shareholders to be held
on April 9, 1997, at the principal executive offices of the Company, 1715 West
38th Street, Chattanooga, Tennessee 37409, at 1:00 p.m. local time, and any
adjournment(s) as specified in this Proxy.
<TABLE>
<S> <C> <C> <C>
1. Election of Directors. FOR all nominees listed below WITHHOLD AUTHORITY
(EXCEPT AS MARKED TO THE CONTRARY) / / TO VOTE FOR ALL NOMINEES LISTED
BELOW / /
</TABLE>
INSTRUCTION: TO WITHHOLD AUTHORITY TO VOTE FOR ONE OR MORE OF THE NOMINEES,
STRIKE A LINE THROUGH HIS NAME IN THE LIST BELOW.
LOUIS H. BARNETT, ROBERT E. BOSWORTH and RICHARD E. CHENEY
<TABLE>
<S> <C> <C> <C>
2. Ratification of the Appointment of Arthur Andersen LLP as independent auditors.
</TABLE>
/ / FOR / / AGAINST / / ABSTAIN
<TABLE>
<S> <C> <C>
PLEASE MARK /X/
THE BOARD OF DIRECTORS RECOMMENDS AFFIRMATIVE VOTES FOR ITEMS 1 AND 2 AND IF NO CONTRARY YOUR VOTES AS
SPECIFICATION IS MADE, THIS PROXY WILL BE VOTED FOR ITEMS 1 AND 2. INDICATED IN
THIS EXAMPLE
</TABLE>
The Board of Directors knows of no other
matters that may properly be brought
before the meeting. However, if any
other matters are properly brought
before the meeting, the persons named in
this proxy or their substitutes will
vote in accordance with their best
judgement on such matters. THIS PROXY
SHOULD BE DATED, SIGNED BY THE
SHAREHOLDER AS THE NAME APPEARS HEREIN
AND RETURNED PROMPTLY IN THE ENCLOSED
ENVELOPE. JOINT OWNERS SHOULD EACH SIGN
PERSONALLY, AND TRUSTEES AND OTHERS
SIGNING IN A REPRESENTATIVE CAPACITY
SHOULD INDICATE THE CAPACITY IN WHICH
THEY SIGN.
Dated __________________________________
________________________________________
Signature of Shareholder
________________________________________
Signature of Shareholder
PLEASE SIGN, DATE AND PROMPTLY RETURN IN THE ACCOMPANYING ENVELOPE--NO POSTAGE
REQUIRED.
