<PAGE>
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
/ / Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
/X/ Definitive Proxy Statement
/ / Definitive Additional Materials
/ / Soliciting Material Pursuant to Section240.14a-11(c) or
Section240.14a-12
CHATTEM, INC.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
/X/ No fee required.
/ / Fee computed on table below per Exchange Act Rules 14a-6(i)(1)
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 (set forth the amount on which the
filing fee is calculated and state how it was determined):
-----------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
-----------------------------------------------------------------------
(5) Total fee paid:
-----------------------------------------------------------------------
/ / Fee paid previously with preliminary materials.
/ / 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.:
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(3) Filing Party:
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(4) Date Filed:
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<PAGE>
[LOGO]
CHATTEM, INC.
1715 WEST 38TH STREET
CHATTANOOGA, TENNESSEE 37409
MARCH 17, 2000
Dear Shareholder:
You are cordially invited to attend the Annual Meeting of Shareholders of
Chattem, Inc., scheduled for Wednesday, April 19, 2000, 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 19, 2000.
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
CHAIRMAN OF THE BOARD AND
CHIEF EXECUTIVE OFFICER
enclosures
<PAGE>
[LOGO]
CHATTEM, INC.
1715 WEST 38TH STREET
CHATTANOOGA, TENNESSEE 37409
------------------------
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
APRIL 19, 2000
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 19, 2000, 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 approve the Company's Non-Statutory Stock Option Plan--2000;
(3) To ratify the appointment of Arthur Andersen LLP as independent
auditors; and
(4) 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 25, 2000
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
CHAIRMAN OF THE BOARD AND
CHIEF EXECUTIVE OFFICER
Chattanooga, Tennessee
March 17, 2000
<PAGE>
CHATTEM, INC.
------------------------
PROXY STATEMENT
------------------------
ANNUAL MEETING OF SHAREHOLDERS
APRIL 19, 2000
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 19, 2000, 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 17, 2000.
VOTING SECURITIES AND PRINCIPAL HOLDERS THEREOF
The Board of Directors has fixed the close of business on February 25, 2000
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 25,
2000 there were issued and outstanding 9,628,464 shares of Common Stock.
Set forth below is information, as of February 25, 2000, 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 four other most
highly compensated executive officers 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>
Zan Guerry................................................. 923,055(3)(4)(5) 9.47%
1715 W. 38th St. Chattanooga, TN 37409
Piedmont Capital Management Corporation.................... 769,450(6) 7.99
One James Center
Suite 1500
Richmond, VA 23219
Palisade Capital Management, L.L.C......................... 716,000(7) 7.44
Suite 695
One Bridge Plaza
Fort Lee, NJ 07024
Robert E. Bosworth......................................... 688,728(5)(8) 7.15
800 Krystal Building
One Union Square
Chattanooga, TN 37402
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
AMOUNT AND NATURE OF PERCENT
NAME OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP (1) OF CLASS (2)
- ------------------------ ------------------------ ------------
<S> <C> <C>
Hamico, Inc................................................ 664,114 6.90
1715 W. 38th Street
Chattanooga, TN 37409
T. Rowe Price Associates, Inc.............................. 534,350(9) 5.55
100 E. Pratt Street
Baltimore, MD 21202
Barclays Global Investors, N.A............................. 503,807(10) 5.23
45 Fremont Street, 17th Floor
San Francisco, CA 94105
A. Alexander Taylor II..................................... 70,479(11) *
Samuel E. Allen............................................ 21,500 *
Louis H. Barnett........................................... 125,988(12) 1.31
Richard E. Cheney.......................................... 17,010 *
Scott L. Probasco, Jr...................................... 102,695(13) 1.07
Philip H. Sanford.......................................... 7,269 *
B. Derrill Pitts........................................... 37,552 *
Charles M. Stafford........................................ 24,062 *
Gary M. Galante............................................ 22,812 *
Directors and Executive Officers........................... 1,377,036 13.89
as a Group (11 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 25, 2000 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"), the Company's Non-Statutory Stock
Option Plan--1998 (the "1998 Stock Option Plan"), the Company's
Non-Statutory Stock Option Plan for Non-Employee Directors (the "Director
Plan") or the 1999 Stock Plan for Non-Employee Directors (the "1999 Director
Plan"): Mr. Guerry--116,850 shares, Mr. Taylor--61,750 shares,
Mr. Probasco--10,500 shares, Mr. Allen--1,750 shares, Mr. Barnett--9,750
shares, Mr. Cheney--9,750 shares, Mr. Sanford--1,250 shares, Mr. Bosworth--
250 shares, Mr. Pitts--28,937 shares, Mr. Stafford--22,312 shares,
Mr. Galante--22,312, and all directors and executive officers as a
group--285,411 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 5,998 shares held in trust for Mr. Guerry pursuant to the terms of
the Company's Savings and Investment Plan.
(4) Includes 2,685 shares which Mr. Guerry holds as custodian for his children.
Mr. Guerry disclaims beneficial ownership of these custodial shares.
2
<PAGE>
(5) Includes 664,114 shares 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.
(6) This information is based solely upon a Schedule 13G filed by Piedmont
Capital Management Corporation on February 14, 2000.
(7) This information is based solely upon a Schedule 13G filed by Palisade
Capital Management, L.L.C. on February 10, 2000.
(8) Includes 23,760 shares held in trust for Mr. Bosworth pursuant to the terms
of the Company's Savings and Investment Plan.
(9) This information is based solely upon a Schedule 13G filed by T. Rowe Price
Associates, Inc. on February 4, 2000.
(10) This information is based solely upon a Schedule 13G filed by Barclays
Global Investors, N.A. on February 14, 2000.
(11) Includes 304 shares held in trust for Mr. Taylor pursuant to the terms of
the Company's Savings and Investment Plan.
(12) Includes 115,359 shares which are held in trust for the benefit of various
family members. Mr. Barnett disclaims beneficial ownership of these shares.
(13) Includes 1,500 shares which are held in trust for the benefit of
Mr. Probasco's spouse. Mr. Probasco disclaims beneficial ownership of these
shares.
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 25, 2000. There will be no cumulative voting.
3
<PAGE>
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 approval of the Company's Non-Statutory Stock Option
Plan--2000; (c) "FOR" the ratification of the appointment of Arthur Andersen LLP
as independent auditors; and (d) 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.
4
<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 three
directors each and one class consists of two directors. Each director elected at
the Annual Meeting will serve until the Annual Meeting of Shareholders in 2003
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, 1999, the Board of
Directors conducted a total of four regularly scheduled 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
2003
Louis H. Barnett.......................... 81 Consultant to the Company and others.
Director of A/F Protein, Inc. First
elected a director of the Company in 1970.
Robert E. Bosworth........................ 52 Independent business consultant since
January 1998. Executive Vice President of
the Company from June 1990 to January 1998
and Chief Financial Officer from April
1985 to January 1998. Director of Covenant
Transport, Inc. (transportation). Member
of the Company's Audit Committee. First
elected a director of the Company in
October 1986.
Richard E. Cheney......................... 78 Former Chairman Emeritus, director and
member of the executive committee, Hill
and Knowlton, Inc. (international public
relations and public affairs consulting).
Director of Stoneridge, Inc. (engineered
electrical vehicle components) 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
2001
Scott L. Probasco, Jr..................... 71 Chairman of the Executive Committees of
SunTrust Bank, Chattanooga, N.A., and
SunTrust Banks of Tennessee, Inc. Also a
director of SunTrust Banks, Inc.,
Coca-Cola Enterprises Inc. and
UNUMProvident Corporation. Member of the
Company's Audit and Compensation
Committees. First elected a director of
the Company in 1966.
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
NAME AGE PRINCIPAL OCCUPATION
---- -------- ------------------------------------------
<S> <C> <C>
Zan Guerry................................ 51 Chairman of the Board of the Company since
June 1990 and Chief Executive Officer of
the Company since January 1998. Previously
served as President of the Company from
1990 to 1998. Director of SunTrust Bank,
Chattanooga, N.A. First elected a director
of the Company in 1981.
DIRECTORS WHOSE TERMS OF OFFICE EXPIRE IN
2002
Samuel E. Allen........................... 63 Chairman of Globalt, Inc. (investment
management). Member of the Company's Audit
Committee. First elected a director of the
Company in 1993.
Philip H. Sanford......................... 46 Chairman and Chief Executive Officer of
The Krystal Company (restaurants).
Previously, Senior Vice President, Finance
and Administration of Coca-Cola
Enterprises Inc. Director of SunTrust
Bank, Chattanooga, N.A., Member of the
Company's Compensation Committee. First
elected a director of the Company in 1999.
A. Alexander Taylor II.................... 46 President and Chief Operating Officer of
the Company since January 1998. Partner
with law firm of Miller & Martin, general
counsel to the Company, from 1983 to 1998.
Director of U.S. Xpress Enterprises, Inc
(transportation) and The Krystal Company
(restaurants). 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 1999.
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
and the 1999 Director Plan), the annual incentive plan and certain other plans.
The Compensation Committee met two times in fiscal 1999.
6
<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 four other most highly compensated
executive officers of the Company during the fiscal year ended November 30,
1999:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
------------------- LONG TERM COMPENSATION
FISCAL SECURITIES UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS OPTIONS AWARDED COMPENSATION(1)
- --------------------------- -------- -------- -------- ---------------------- ---------------
<S> <C> <C> <C> <C> <C>
Zan Guerry 1999 $334,467 $204,188 41,000 $3,183
Chairman of the Board 1998 306,900 248,738 130,000 3,442
and Chief Executive Officer 1997 285,750 202,500 0 2,895
A. Alexander Taylor II(2)
President and Chief 1999 283,333 171,875 28,000 2,703
Operating Officer 1998 225,694 209,375 90,000 1,878
B. Derrill Pitts 1999 143,910 52,650 12,000 1,544
Vice President-- 1998 137,700 82,838 25,000 1,669
Manufacturing Operations 1997 132,500 49,140 5,000 1,425
Charles M. Stafford 1999 128,720 47,093 8,000 1,538
Vice President-- 1998 123,165 60,677 20,000 1,651
Sales 1997 118,250 43,754 5,000 1,425
Gary M. Galante 1999 117,260 42,900 8,000 1,523
Vice President-- 1998 112,200 55,275 20,000 1,638
Research & Development 1997 107,500 39,690 5,000 1,425
</TABLE>
- ------------------------
(1) 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 1999 fiscal year: Mr. Guerry--$683;
Mr. Taylor--$396. Also represents the Company's contributions with respect
to the Company's Savings and Investment Plan for the named executive as
follows for the 1999 fiscal year: Mr. Guerry--$2,500; Mr. Taylor--$2,307;
Mr. Pitts--$1,544; Mr. Stafford--$1,538; and Mr. Galante--$1,523.
(2) Mr. Taylor was appointed President and Chief Operating Officer on
January 13, 1998.
STOCK OPTION GRANTS IN LAST FISCAL YEAR
The following table contains information concerning the grant of stock
options to the named executive officers during the fiscal year ended
November 30, 1999:
OPTIONS/GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
------------------------------------------------
PERCENTAGE POTENTIAL REALIZABLE
OF TOTAL VALUE AT ASSUMED
OPTIONS ANNUAL
GRANTED RATES OF STOCK PRICE
TO EXERCISE APPRECIATION FOR
EMPLOYEES OR BASE OPTION TERM
OPTIONS IN FISCAL PRICE EXPIRATION -----------------------
NAME GRANTED (#) YEAR ($/SH) DATE 5%($) 10%($)
- ---- ----------- ---------- -------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Zan Guerry........................... 41,000 32.16 39.813 1-26-09 $2,658,898 $4,233,851
A. Alexander Taylor II............... 28,000 21.96 39.813 1-26-09 1,815,833 2,891,411
B. Derrill Pitts..................... 12,000 9.41 39.813 1-26-09 778,214 1,239,176
Charles M. Stafford.................. 8,000 6.27 39.813 1-26-09 518,809 826,747
Gary M. Galante...................... 8,000 6.27 39.813 1-26-09 518,809 826,747
</TABLE>
7
<PAGE>
OPTION EXERCISES AND HOLDINGS
The option exercises by the Company's chief executive officer and the other
named executive officers during the fiscal year ended November 30, 1999, as well
as the number and total value of unexercised in-the-money options at
November 30, 1999, are shown in the following table:
AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR
AND OPTION VALUES AT NOVEMBER 30, 1999
<TABLE>
<CAPTION>
VALUE OF
NUMBER OF UNEXERCISED
UNEXERCISED IN-THE-MONEY
NUMBER OF OPTIONS AT OPTIONS AT
SHARES ACQUIRED VALUE NOV. 30, 1999 NOV. 30, 1999
NAME ON EXERCISE REALIZED EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
- ---- --------------- -------- ------------------------- -------------------------
<S> <C> <C> <C> <C>
Zan Guerry................. 5,000 $163,125 69,100/143,500 $638,994/$614,531
A. Alexander Taylor II..... -- -- 30,750/98,250 222,578/414,609
B. Derrill Pitts........... 6,563 269,888 12,812/38,563 124,979/208,026
Charles M. Stafford........ -- -- 10,000/29,250 95,467/164,608
Gary M. Galante............ -- -- 10,000/29,250 95,467/164,608
</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, 1999,
was: Mr. Guerry--$493,320; Mr. Taylor--$251,181; Mr. Pitts--$195,347;
Mr. Stafford--$170,058; and Mr. Galante--$154,662. The accrued years of service
to November 30, 1999, of the individuals listed in the summary compensation
table (assuming repayment of Pension Plan loans from funds voluntarily
contributed) are as follows: Mr. Guerry--21.75; Mr. Taylor--1.83;
Mr. Pitts--38.53; Mr. Stafford--16.32; and Mr. Galante--16.63.
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
8
<PAGE>
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 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 Messrs. Guerry,
Taylor, Pitts, Stafford and Galante. 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 three years, in the case of Messrs. Guerry and Taylor, and
within two years, in the case of Messrs. Pitts, Stafford and Galante, 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, in the case of Messrs. Guerry and
Taylor, and two times his average annualized includible compensation from the
Company, in the case of Messrs. Pitts, Stafford and Galante, 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 annual compensation of $9,000 and supplemental life
insurance coverage in varying amounts. In addition, directors who are not
officers of the Company receive $1,000 for each
9
<PAGE>
meeting attended. The outside directors of the Company are also eligible for the
grant of stock options under the terms of the Director Plan and for the grant of
stock options and the award of Common Stock in lieu of cash fees under the terms
of the 1999 Director Plan.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During fiscal 1999, three of the Company's independent directors,
Messrs. Cheney, Probasco and Sanford, served on the Compensation Committee.
Mr. Taylor, a Director, President and Chief Operating Officer of the Company,
serves on the compensation committee of The Krystal Company, the Chairman and
Chief Executive Officer of which, Mr. Sanford, is a Director of the Company.
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 competitive with 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 Company targets its base salary program at slightly below competitive
market norms while placing more emphasis on long-term incentive compensation
than is common in the market for comparable sized companies. Thus, the Company's
executive salaries tend to be slightly below 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 competitive with, but slightly below, 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.
10
<PAGE>
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 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 and individual performance. 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'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.
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.
1999 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
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<PAGE>
each executive position. Specific actions taken by the Compensation Committee
regarding the chief executive officer's compensation are summarized below.
BASE SALARY
The base annual salary for the Company's chief executive officer was
increased to $350,000 from $326,700 effective June 1, 1999.
ANNUAL INCENTIVE
The annual incentive earned by the chief executive officer for 1999
performance was $204,188. 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 an award in fiscal 1999 of options to
acquire 41,000 shares at an exercise price of $39.813.
The foregoing report is submitted by the Compensation Committee, consisting
of Richard E. Cheney, Scott L. Probasco, Jr. and Philip H. Sanford.
12
<PAGE>
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 1999 fiscal year with the return from:
(i) the S&P 500 Index and (ii) two peer groups of public companies engaged in
either the functional toiletries, cosmetics or non-prescription drug business,
for the same period. The new peer group consists of the following selected
comparable companies: Block Drug Company (Class A common stock), Church &
Dwight, Inc., Columbia Laboratories, Inc., Del Laboratories, Inc. and Alberto
Culver Co. (Class B common stock). The old peer group consisted of the following
selected comparable companies: Block Drug Company (Class A common stock), Church
& Dwight, Inc., Columbia Laboratories, Inc., Del Laboratories, Inc. and Menley &
James, Inc. Menley & James, Inc. ceased business operations in November 1998 and
has been replaced in the new peer group with Alberto Culver Co.
CHATTEM, INC.
RELATIVE MARKET PERFORMANCE
TOTAL RETURN FISCAL 1995-1999
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
DOLLARS CHATTEM INC. S&P 500 INDEX NEW PEER GROUP OLD PEER GROUP
<S> <C> <C> <C> <C>
Nov-94 100.00 100.00 100.00 100.00
Nov-95 84.09 136.98 118.24 113.32
Nov-96 169.31 175.14 162.61 148.08
Nov-97 272.73 225.09 201.82 175.17
Nov-98 777.27 278.34 170.95 151.50
Nov-99 351.13 336.5 188.07 174.04
YEAR ENDING
</TABLE>
13
<PAGE>
PROPOSAL 2: CHATTEM, INC. NON-STATUTORY STOCK OPTION PLAN--2000
The following summary of the material provisions of the Non-Statutory Stock
Option Plan--2000 (the "2000 Stock Option Plan") does not purport to be complete
and is qualified in its entirety by reference to the 2000 Stock Option Plan, a
copy of which is attached as APPENDIX I.
GENERAL
The 2000 Stock Option Plan was unanimously adopted and recommended to the
shareholders for approval by the Board of Directors on October 26, 1999. In
addition, certain grants of options described below were made under the 2000
Stock Option Plan, subject to shareholder approval. The 2000 Stock Option Plan
is designed to enable officers and key management employees of the Company and
its subsidiaries to continue to acquire shares of the Company's Common Stock and
thus to share in the future success of the Company's business. Accordingly, the
2000 Stock Option Plan is intended as a further means not only of attracting and
retaining outstanding management personnel, but also of promoting a closer
identity of interest between key management employees and the Company and its
shareholders.
The 2000 Stock Option Plan is administered by the Compensation Committee of
the Board of Directors, or in the absence of the Compensation Committee, by the
Board of Directors as a whole.
The Compensation Committee has the authority to interpret the 2000 Stock
Option Plan and, subject to the provisions of the 2000 Stock Option Plan, to
determine the persons to whom options shall be granted, the number of shares of
Common Stock subject to each option, the term of each option, the date on which
each option shall be granted and the provisions of each option agreement.
Options granted under the 2000 Stock Option Plan entitle the optionee to
purchase from the Company a stated number of shares of Common Stock at a price
established by the Compensation Committee.
The Compensation Committee may at any time terminate, suspend, amend or
modify the 2000 Stock Option Plan, except that the Compensation Committee may
not, without the authorization of the shareholders at a shareholders' meeting
duly called and held, change (other than through adjustment for changes in
capitalization): (a) the aggregate number of shares of Common Stock with respect
to which options may be granted; (b) the class of persons eligible for options;
(c) the option price; or (d) the maximum duration of the 2000 Stock Option Plan.
No termination, suspension, amendment or modification of the 2000 Stock Option
Plan may adversely affect any right acquired by an optionee, or by any
beneficiary, under the terms of an option granted before the date of such
termination, suspension, amendment or modification, unless such optionee or
beneficiary shall consent.
Unless sooner terminated as described above, the 2000 Stock Option Plan will
remain in effect until October 26, 2004. Termination will not affect the vesting
of previously granted options. The 2000 Stock Option Plan is not subject to any
provisions of the Employee Retirement Income Security Act of 1974 and is not
intended to be qualified under Section 401(a) of the Internal Revenue Code.
SECURITIES TO BE OFFERED
The 2000 Stock Option Plan provides that eligible participants may be
granted options which, upon exercise, will entitle the optionee to purchase
shares of Common Stock. The maximum aggregate number of shares of Common Stock
that may be issued under the 2000 Stock Option Plan is 750,000, subject to
increases and adjustments as provided in the 2000 Stock Option Plan.
EMPLOYEES WHO MAY PARTICIPATE IN THE 2000 STOCK OPTION PLAN
Options may be granted under the 2000 Stock Option Plan to key management
employees of the Company or any subsidiary, including officers and directors
who, in the judgment of the Compensation Committee, have a substantial impact on
the Company's attainment of corporate goals. All determinations
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<PAGE>
by the Compensation Committee as to the identity of the persons to whom options
shall be granted under the 2000 Stock Option Plan are conclusive.
The grant of an option in any year will not give the optionee any right to
options in future years or any right to be retained in the employ of the Company
or its subsidiaries.
ISSUANCE AND EXERCISE OF OPTIONS
The Compensation Committee designates individuals to whom options are to be
granted and specifies the number of shares of Common Stock subject to each
grant. The price per share for Common Stock purchased on the exercise of an
option is determined by the Compensation Committee but will not be less than the
fair market value of the Common Stock on the date of grant of the option. The
price may exceed fair market value in the sole discretion of the Compensation
Committee. Fair market value of the Common Stock means the closing sale price on
the business day preceding the date on which fair market value is being
determined, as reported in The Wall Street Journal, or the average of the high
and low bids on such day if no sale exists.
In no event may an option be exercised before approval of the 2000 Stock
Option Plan by the holders of a majority of the outstanding shares of Common
Stock present, or represented and entitled to vote, at the Annual Meeting. The
term of each option will end on a date ten years from the date of grant of the
option.
Each option will become exercisable and vested with respect to 25% of the
shares of Common Stock purchasable thereunder on the first anniversary of the
date of the grant of the option. The option to purchase an additional 25% of
such shares will become exercisable and vested, on a cumulative basis, on each
of the three succeeding anniversaries of the date of the grant of the option, so
that four years from the date of such grant, the option to purchase all such
shares will have become exercisable and vested. Notwithstanding the foregoing
vesting schedule, each option will become exercisable in full immediately
(i)upon certain changes in control of the Company or (ii) upon the death,
disability or retirement of an optionee or termination of an optionee's
employment pursuant to the divestiture of a subsidiary of the Company. When
exercising an option, the optionee may purchase less than the full number of
shares of Common Stock then available under the option.
Options may be exercised by delivering or mailing to the Compensation
Committee: (1) a notice, in the form and in the manner prescribed by the
Compensation Committee, specifying the number of shares of Common Stock to be
purchased and (2) payment in full of the option price for the shares of Common
Stock in cash and/or by the tender of shares of Common Stock (by delivering the
appropriate stock certificates) to the Compensation Committee; provided,
however, that (i) the Compensation Committee will determine acceptable methods
for tendering shares to exercise an option under the 2000 Stock Option Plan and
may impose such limitations and prohibitions on the use of shares of Common
Stock to exercise an option as it deems appropriate, and (ii) the Compensation
Committee may permit optionees to pay for any shares subject to an option by
delivering to the Compensation Committee a properly executed exercise notice
together with a copy of irrevocable instructions to a broker to deliver promptly
to the Company the amount of sale or loan proceeds to pay the purchase price.
The Company may enter into agreements for coordinated procedures with one or
more brokerage firms in connection with exercises of options. The value of any
shares tendered to exercise an option will be determined on the basis of their
fair market value on the date of exercise.
Upon receipt of the notice of exercise and upon payment of the option price,
the Company will promptly deliver to the optionee a certificate or certificates
for the shares of Common Stock purchased, without charge to the optionee for
issue or transfer tax.
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<PAGE>
OPTIONS GRANTED UNDER THE 2000 STOCK OPTION PLAN SUBJECT TO SHAREHOLDERS'
APPROVAL
On December 6, 1999, the Compensation Committee granted options under the
2000 Stock Option Plan to acquire 460,000 shares of Common Stock. These options
will not become effective unless the grants are approved by the shareholders of
the Company. These options will become exercisable, as described above, at
$18.813 per share.
The fair market value of the Common Stock on March 10, 2000 was $15.3125 per
share.
The number of shares of Common Stock that are currently available under the
2000 Stock Option Plan for the future grant of options is 290,000.
The following table sets forth the options granted under the 2000 Stock
Option Plan to: (a) the Company's chief executive officer and the four other
most highly compensated executive officers of the Company during the fiscal year
ended November 30, 1999, (b) all current executive officers as a group (8
persons) and (c) all employees of the Company as a group.
<TABLE>
<CAPTION>
OPTIONS
NAME AND POSITION (SHARES)
- ----------------- --------
<S> <C>
Zan Guerry.................................................. 55,000
Chairman of the Board and Chief Executive Officer
A. Alexander Taylor II...................................... 34,000
President and Chief Operating Officer
B. Derrill Pitts............................................ 40,000
Vice President--Manufacturing Operations
Charles M. Stafford......................................... 25,000
Vice President--Sales
Gary M. Galante............................................. 25,000
Vice President--Research & Development
Executive Officers as a group............................... 269,000
All Other Employees as a group.............................. 191,000
</TABLE>
TRANSFER RESTRICTIONS
An option granted under the 2000 Stock Option Plan is not transferable,
except with the written consent of the Compensation Committee or by will or by
the laws of descent and distribution, and an option may be exercised during the
lifetime of the optionee only by the optionee.
FEDERAL INCOME TAX CONSEQUENCES
The 2000 Stock Option Plan is not intended to qualify as an "incentive stock
option plan" within the meaning of the Internal Revenue Code. The federal income
tax consequences arising out of the above-described options and the purchase of
shares pursuant thereto will be generally as follows. Upon the grant of a
non-qualified stock option, no taxable income is realized by the participant and
no deduction is available to the Company. Upon exercise of the option, the
excess of the fair market value of the shares on the date of exercise over the
option price will be taxable as ordinary income to the participant and
deductible by the Company as compensation expense. The tax basis of shares
acquired will be the fair market value on the date of exercise. For shares held
more than one year, the participant will realize a long-term capital gain or
loss upon disposition with any capital gain generally taxed at a maximum 20%
rate under the current provisions of the Internal Revenue Code.
16
<PAGE>
If the participant exercises an option by tendering other shares he owns, no
gain or loss will be recognized by the participant with respect to the shares
delivered to the Company. If the participant receives an equal number of shares,
the participant will realize taxable income to the extent the fair market value
of the shares received is greater than the value of the shares surrendered. The
participant's basis and holding period will be the same as the participant's
basis and holding period in the tendered shares. If the participant receives
more shares than tendered in the exchange, the fair market value of the excess
shares will also constitute taxable income of the participant. The excess shares
will have a basis equal to the income recognized, plus the cash, if any, paid on
the exercise of the option. The holding period for the excess shares begins on
the date of exercise of the option.
REQUIRED AFFIRMATIVE VOTE
The approval of the 2000 Stock Option Plan requires the affirmative vote by
holders of a majority of the shares of Common Stock represented at the Annual
Meeting and entitled to vote.
The Board of Directors believes that the proposal is in the best interests
of the Company and its shareholders and recommends that the shareholders vote
FOR the approval of the 2000 Stock Option Plan.
PROPOSAL 3: RATIFICATION OF APPOINTMENT OF AUDITORS
Samuel E. Allen, Robert E. Bosworth 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 2001 Annual Meeting of Shareholders must be received by the
Company no later than November 17, 2000, 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
CHIEF EXECUTIVE OFFICER
March 17, 2000
17
<PAGE>
APPENDIX I
CHATTEM, INC.
2000 NON-STATUTORY STOCK OPTION PLAN
1. PURPOSE
The Chattem, Inc. Non-Statutory Stock Option Plan--2000 (the "2000 Plan") is
designed to enable officers and key management employees of Chattem, Inc. (the
"Company") and its Subsidiaries to continue to acquire shares of the Company's
common stock and thus to share in the future success of the Company's business.
Accordingly, the 2000 Plan is intended as a further means not only of attracting
and retaining outstanding management personnel, but also of promoting a closer
identity of interest between key management employees and the Company and its
shareholders.
2. DEFINITIONS
Unless the context clearly indicates otherwise, the following terms, when
used in the 2000 Plan, shall have the meanings set forth in this Section 2.
(a) "BENEFICIARY" means the person or persons designated in writing by the
Optionee or, in the absence of such a designation or if the designated
person or persons predecease the Optionee, the Optionee's Beneficiary
shall be the person or persons who acquire the right to exercise the
Option by bequest or inheritance. In order to be effective, an Optionee's
designation of a Beneficiary must be on file with the Committee before
the Optionee's death. Any such designation may be revoked in writing and
a new written designation substituted therefor at any time before the
Optionee's death.
(b) "BOARD OF DIRECTORS" or "BOARD" means the board of directors of the
Company.
(c) "CHANGE IN CONTROL" means:
(i) Change of 1/3 or more of the directors of the Company within any
12-month period; or
(ii) Change of 1/2 or more of the directors of the Company within any
24-month period; or
(iii) Acquisition by any person of the ownership of or right to vote 35%
or more of the Company's outstanding voting stock. For purposes of
this paragraph (iii): (A) "person" shall mean any person,
corporation, partnership or other entity and any affiliate or
associate thereof and (B) "affiliate" and "associate" shall have
the meanings given to them in Rule 12b-2 promulgated under the
Exchange Act.
(d) "CODE" means the Internal Revenue Code of 1986, as amended from time to
time.
(e) "COMMITTEE" means the Compensation Committee of the Board of Directors
or, in the event the Board of Directors terminates the existence of the
Compensation Committee, then Committee shall refer to the Board as a
whole.
(f) COMPANY means Chattem, Inc., a corporation incorporated under the laws
of the State of Tennessee, and its successors.
(g) "DISABILITY" means a disability that entitles the Optionee to benefits
under the Company's Long-Term Disability Plan, as amended from time to
time.
(h) "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended.
(i) "FAIR MARKET VALUE" means the closing sale price on the last business
day prior to the date on which Fair Market Value needs to be determined
as reported in THE WALL STREET JOURNAL, or the average of the high and
low bids on such day if no sale exists.
(j) "OPTION" means an option to purchase a share or shares of the Company's
common stock.
(k) "OPTION AGREEMENT" means the written agreement to be entered into by the
Company and the Optionee, as provided in Section 7 hereof.
<PAGE>
(1) "OPTIONEE" means a person to whom an Option has been granted under the
2000 Plan.
(m) "RETIREMENT" means retirement from employment with the Company and its
Subsidiaries, as determined by the Committee in its sole discretion.
(n) "SHARES" means shares or the Company's common stock.
(o) "SUBSIDIARY" means a subsidiary corporation as defined in
Section 425(f) of the Code (or a successor provision of similar import).
(p) "TERM" means the period during which a particular Option may be
exercised in accordance with Section 10 hereof.
3. EFFECTIVE DATE OF THE 2000 PLAN
The 2000 Plan shall become effective when adopted by the Board of Directors;
provided, however, that if the 2000 Plan is not approved by the holders of a
majority of the outstanding Shares present, or represented, and entitled to vote
at the meeting before the first anniversary of its adoption by the Board, the
2000 Plan and all Options granted under the 2000 Plan prior to such anniversary
shall be null and void and shall be of no effect.
4. NUMBER AND SOURCE OF SHARES SUBJECT TO THE 2000 PLAN
(a) The Company may grant Options under the 2000 Plan for not more than
Seven Hundred Fifty Thousand(750,000) Shares (subject, however, to
adjustment as provided in Section 14 hereof) which shall be provided by
the issuance of Shares authorized but unissued.
(b) In the event that an Option shall for any reason lapse or be terminated
without being exercised in whole or in part, the Shares subject to the
Option shall be restored to the total number of Shares with respect to
which Options may be granted under the 2000 Plan, but only to the extent
that the Option has not been exercised previously.
5. ADMINISTRATION OF THE 2000 PLAN
(a) The 2000 Plan shall be administered by the Committee.
(b) The Committee shall adopt such rules and regulations (including
amendments thereto) as it may deem proper; provided, however, that it may
take action only upon the agreement of a majority of its members then in
office. Any action that the Committee may take through a written
instrument signed by a majority of its members then in office shall be as
effective as though taken at a meeting duly called and held.
(c) The powers of the Committee shall include plenary authority to interpret
the 2000 Plan, and, subject to the provisions hereof, the Committee shall
determine the persons to whom Options shall be granted, the number of
Shares subject to each Option, the Term of each Option, the date on which
each Option shall be granted, and the provisions of each Option
Agreement.
6. 2000 PLAN PARTICIPANTS ELIGIBLE TO RECEIVE OPTIONS
Options may be granted under the 2000 Plan to key management employees of
the Company or any Subsidiary, including officers who, in the judgment of the
Committee, have a substantial impact on the Company's attainment of corporate
goals. All determinations by the Committee as to the identity of the persons to
whom Options shall be granted hereunder shall be conclusive.
2
<PAGE>
7. OPTION AGREEMENTS
(a) No Option shall be exercised by an Optionee unless the Optionee shall
have executed and delivered an Option Agreement.
(b) Appropriate officers of the Company are hereby authorized to execute and
deliver Option Agreements in the name of the Company as directed from
time to time by the Committee.
8. NON-STATUTORY OPTIONS
It is intended that the Options granted hereunder shall not be "incentive
stock options" within the meaning of the Code.
9. OPTION PRICE
The Option price to be paid by the Optionee to the Company for each Share
purchased upon the exercise of the Option shall be determined by the Committee
and shall be not less than the Fair Market Value of the Share on the date the
option is granted but may exceed Fair Market Value in the sole discretion of the
Committee.
10. TERM OF OPTION; EXERCISE OF OPTION
(a) Each Option granted under the 2000 Plan shall be exercisable as provided
in this Section 10. In no event may an Option be exercised before the
approval of the 2000 Plan by the shareholders of the Company at the
meeting within the period specified by Section 3 hereof. The Term of each
Option shall end (unless the Option shall have terminated earlier under
any other provisions of the 2000 Plan) on a date ten (10) years from the
date of grant of the Option.
(b) Each Option shall become exercisable and vested with respect to
twenty-five percent (25%) of the Shares purchasable thereunder on the
first anniversary of the date of the grant of the Option. The option to
purchase an additional twenty-five percent (25%) of such Shares shall
become exercisable and vested, on a cumulative basis, on each of the
three succeeding anniversaries of the date of the grant of the Option, so
that four years from the date of such grant the option to purchase all
such Shares shall have become exercisable and vested. Notwithstanding the
foregoing vesting schedule (i) each Option shall become exercisable in
full immediately upon a Change in Control and (ii) upon the death,
disability or retirement of an Optionee or termination of an Optionee's
employment pursuant to Section 12(e), any Option held by such Optionee
shall be exercisable in full in accordance with the provisions of
Section 12. When exercising an Option, the Optionee may purchase less
than the full number of Shares then available under the Option.
(c) Options shall be exercised by delivering or mailing to the Committee:
(1) a notice, in the form and in the manner prescribed by the Committee,
specifying the number of Shares to be purchased, and
(2) payment in full of the Option price for the Shares in cash and/or by
the tender of Shares (by delivering the appropriate stock
certificates) to the Committee; provided, however, that (i) the
Committee shall determine acceptable methods for tendering shares to
exercise an Option under the 2000 Plan, and may impose such
limitations and prohibitions on the use of Shares to exercise an
Option as it deems appropriate and (ii) the Committee may permit
Optionees to pay for any Shares subject to an option by delivering to
the Committee a properly executed exercise notice together with a
copy of irrevocable instructions to a broker to deliver promptly to
the Company the amount of sale or loan proceeds to pay the purchase
price.
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The Company may enter into agreements for coordinated procedures with one
or more brokerage firms in connection with exercises of Options. The
value of any Shares tendered in accordance with this Paragraph (c) shall
be determined on the basis of their Fair Market Value on the date of
exercise.
(d) Subject to the provisions of Section 11(a) hereof, upon receipt of the
notice of exercise and upon payment of the Option price, the Company
shall promptly deliver to the Optionee a certificate or certificates for
the Shares purchased, without charge to the Optionee for issue or
transfer tax.
11. CONDITIONS ON EXERCISE
(a) The exercise of each Option granted under the 2000 Plan shall be subject
to the condition that if at any time the Company shall determine in its
discretion that the satisfaction of withholding tax or other withholding
liabilities, or that the listing, registration or qualification of any
Shares otherwise deliverable upon such exercise upon any securities
exchange or under any State or Federal law, or the consent or approval of
any regulatory body, is necessary or desirable as a condition of, or in
connection with, such exercise or the delivery or purchase of Shares,
then in any such event such exercise or payment shall not be effective or
be made unless such withholding, listing, registration, qualification,
consent or approval shall have been effected or obtained free of any
conditions not acceptable to the Company. Any such postponement shall not
extend the time within which the Option may be exercised; and neither the
Company nor its directors or officers shall have any obligation or
liability to the Optionee or to a Beneficiary with respect to any Shares
as to which the option shall lapse because of such postponement.
(b) Except with the prior written approval of the Committee, all Options
granted under the 2000 Plan shall be nontransferable other than by will
or by the laws of descent and distribution in accordance with
Section 12(a) hereof, and an Option may be exercised during the lifetime
of the Optionee only by the Optionee.
(c) Subject to the provisions of Section 11(b), upon the purchase of Shares
under an option, the stock certificate or certificates may, at the
request of the Optionee (or the Optionee's Beneficiary, where the Option
is exercised by the Beneficiary), be issued in the name of the Optionee
(or Beneficiary) and the name of another person as joint tenants with the
right of survivorship.
12. EXERCISE OF OPTION AFTER DEATH, DISABILITY, RETIREMENT, OR OTHER TERMINATION
OF EMPLOYMENT
(a) DEATH. If an Optionee's employment with the Company or a Subsidiary
shall cease due to the Optionee's death, any Option held by the Optionee
on the date of the Optionee's death may be exercised only within three
(3) years after the Optionee's death and only by the Optionee's
Beneficiary. If an Optionee shall die within three (3) years after
cessation of employment while the Option is exercisable pursuant to
Paragraph (b) below, or if the Optionee shall die within three (3) years
after cessation of employment while the Option is exercisable pursuant to
Paragraph (c) below, any Option held by the Optionee on the date of his
death may be exercised after the Optionee's death only within the
remainder of the period prescribed by Paragraph (b) or Paragraph (c), as
the case may be, and only by the Optionee's Beneficiary. Notwithstanding
the foregoing, in no event shall the Option be exercisable after the
expiration date thereof specified in the Option Agreement.
(b) DISABILITY. If an Optionee's employment with the Company or a Subsidiary
ceases due to Disability, the Optionee may exercise the Option at any
time within three (3) years after the Optionee shall so cease to be an
employee; provided, however, that in no event shall the Option be
exercisable after the expiration date thereof specified in the Option
Agreement.
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(c) RETIREMENT. If an Optionee's employment with the Company or a Subsidiary
ceases due to Retirement, the Optionee may exercise the Option at any
time within three (3) years after the Optionee shall so cease to be an
employee; provided, however, that in no event shall the Option be
exercisable after the expiration date thereof specified in the Option
Agreement.
(d) LEAVE OF ABSENCE. The Committee shall have the sole authority to
determine whether, in any particular case, a leave of absence shall
result in a termination of employment for purposes of this Section 12.
(e) DIVESTITURE. If an Optionee's employment with the Company or a
Subsidiary ceases due to divestiture of a Subsidiary or other distinct
business unit of the Company, the Optionee may exercise the Option at any
time within ninety (90) days after the divestiture, provided that the
Optionee is an employee on the actual date of the divestiture; and
further provided, that in no event shall the Option be exercisable after
the expiration date thereof specified in the Option Agreement.
(f) TERMINATION FOR OTHER REASONS. Upon termination of an Optionee's
employment with the Company or a Subsidiary for any reason other than
those specified in Paragraphs (a) through (e) above, the Optionee may
exercise the Option (to the extent vested) at any time within thirty
(30) days after such termination; provided, however, that in no event
shall the Option be exercisable after the expiration date thereof
specified in the Option Agreement.
13. SHAREHOLDER RIGHTS
No person shall have any rights of a shareholder by virtue of an Option
except with respect to Shares actually issued to him or her, and the issuance of
Shares shall confer no retroactive right to dividends.
14. ADJUSTMENTS FOR CHANGES IN CAPITALIZATION
In the event that there is any change in the Shares through merger,
consolidation, reorganization, recapitalization or otherwise, or if there shall
be any dividend on the Company's Shares, payable in such Shares, or if there
shall be a stock split or combination of Shares, the aggregate number of Shares
available for Options, the number of Shares subject to outstanding Options, and
the Option price per share of each outstanding Option shall be proportionately
adjusted by the Committee as it deems equitable in its absolute discretion, to
prevent dilution or enlargement of the rights of the Optionee; provided, that
any fractional Shares resulting from such adjustments shall be eliminated. The
Committee's determination with respect to any such adjustments shall be
conclusive.
15. EFFECT OF MERGER OR OTHER REORGANIZATION
If the Company shall be the surviving corporation in a merger or other
reorganization, Options shall extend to stock and securities of the Company to
the same extent that a holder of that number of Shares immediately before the
merger or consolidation corresponding to the number of Shares covered by the
Option would be entitled to have or obtain stock and securities of the Company
under the terms of the merger or consolidation.
16. TERMINATION, SUSPENSION OR MODIFICATION OF 2000 PLAN
The Committee may at any time terminate, suspend, amend or modify the 2000
Plan, except that the Committee shall not, without the authorization of the
holders of a majority of the Company's Shares voting at a shareholders' meeting
duly called and held, change (other than through adjustment for changes in
capitalization as provided in Section 14 hereof): (a) the aggregate number of
Shares with respect to which Options may be granted; (b) the class of persons
eligible for Options; (c) the Option price; or (d) the maximum duration of the
2000 Plan. No termination, suspension or modification of the 2000 Plan shall
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adversely affect any right acquired by an Optionee, or by any Beneficiary, under
the terms of an Option granted before the date of such termination, suspension
or modification, unless such Optionee or Beneficiary shall consent; but it shall
be presumed conclusively that any adjustment for changes in capitalization in
accordance with Section 14 hereof does not adversely affect any such right.
17. DURATION OF THE 2000 PLAN
Unless sooner terminated in accordance with Section 16 hereof, the 2000 Plan
shall remain in effect for a period of five (5) years from the date of its
adoption by the Board of Directors. Expiration of such five (5) year period
shall not affect the vesting of previously granted Options pursuant to
Section 10(b) hereof.
18. GOVERNING LAW
The 2000 Plan shall be construed and its provisions enforced and
administered in accordance with the laws of the State of Tennessee except to the
extent that such laws may be superseded by any Federal law.
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CHATTEM, INC.
PROXY SOLICITED BY THE BOARD OF DIRECTORS
FOR THE ANNUAL MEETING OF SHAREHOLDERS
APRIL 19, 2000
The undersigned, having received the Notice of Annual Meeting and the Proxy
Statement dated March 17, 2000, appoints ZAN GUERRY and A. ALEXANDER TAYLOR II,
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 19, 2000, at the principal executive offices, 1715 West 38th Street,
Chattanooga, Tennessee 37409, at one o'clock p.m. local time, and any
adjournment(s) thereof, as specified in this Proxy:
<TABLE>
<S> <C> <C> <C>
1. ELECTION OF DIRECTORS
FOR / / AGAINST / / ABSTAIN / /
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
2. Approve the 2000 Non-Statutory Stock Option Plan for Non-Employee Directors
FOR / / AGAINST / / ABSTAIN / /
3. Appointment of Arthur Andersen LLP as independent auditors
FOR / / AGAINST / / ABSTAIN / /
4. In their discretion the proxies are authorized to vote upon such other matters as may properly come before the meeting.
</TABLE>
<PAGE>
The Board of Directors recommends affirmative votes for Items 1, 2 and 3,
and IF NO CONTRARY SPECIFICATION IS MADE, THIS PROXY WILL BE VOTED FOR ITEMS 1,
2 AND 3.
The Board of Directors knows of no other matters that may properly be or
which are likely to come or 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 judgment on such
matters. THIS PROXY SHOULD BE DATED, SIGNED BY THE SHAREHOLDER AS THE NAME
APPEARS BELOW 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.
Date: ____________________________
__________________________________
Signature of Shareholder
__________________________________
Signature of Shareholder
PLEASE SIGN, DATE AND PROMPTLY
RETURN IN THE ACCOMPANYING
ENVELOPE--NO POSTAGE REQUIRED
