I could stand corrected in the future, but CHM was made by Microsoft.
It's basically and OLD HTML-based format. I think it stands for "Compiled HTML". It was THE thing back in the day (I even downloaded some CHM makers and made some stuff myself).
There are a lot of Windows applications that would use CHM as the help format of choice.
Think of it as an HTML website with links to the left. I think I used to love it because I could just grab stuff and read offline (back in the time when computers where slow, phones were NOT smart, internet was expensive and PDF was a pain in the butt to render).
But the PDF format (along with ePub and others) stands as THE thing nowadays.
Annotation? Forget CHM, it's barebones and static. There are tons of ways to annotate on a (non encrypted) PDF and it's likely gonna be though to find a CHM reader for say, iOS and the like. Plus it was never really super cross-platform friendly (I remember having to do tricks to read it on Linux distros).
So yeah, CHM is cool but it was out-phased (in my opinion) by PDF now.
PDF Expert is an example of an iPad app that annotates. I'm out of credit now, so I'll buy it next month but I've heard and seen good things about it.
It's just an example of course.
Edit:
I just saw CHMAte on the Store, there is even a light version.
My advice would be to get something similar to check your existent CHMs (the app says it can highlight for instance), but then If possible get the stuff you need on PDF.
Some anti-monopolism people will kill me for saying this but I think there is a reason most online versions of magazines are in PDF (sure, you could say it's the monopoly of Adobe and bla bla yadda yadda, but conspiracy theories aside...) since it's SO much better format for making great stuff, lots of tools and things that can be done.
CHM as far as I know can only do what static HTML does (unless I missed a big memo from the internet), so that's pretty restricted.