ARBOR DRUGS INC, DEF 14A, 1994-11-02

ARBOR DRUGS INC
DEF 14A, 1994-11-02
DRUG STORES AND PROPRIETARY STORES

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

SCHEDULE 14A
(RULE 14A-101)
INFORMATION REQUIRED IN
PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF
THE SECURITIES EXCHANGE ACT OF 1934

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
ARBOR DRUGS, INC.
(Name of Registrant as Specified In Its Charter)

ARBOR DRUGS, INC.
(Name of Person(s) Filing Proxy Statement)

Payment of Filing Fee (Check the appropriate box):

/X/ $125 per Exchange Act Rules 0-11(c)(1)(ii), 14a-6(i)(1), or
14a-6(j)(2).

/ / $500 per each party to the controversy pursuant to Exchange Act Rule
14a-6(i)(3).

/ / Fee computed on table below per Exchange Act Rules 14a-6(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:

Set forth the amount on which the filing fee is calculated and state how it
was determined.

/ / 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]
3331 WEST BIG BEAVER
TROY, MICHIGAN 48084

NOTICE OF ANNUAL MEETING OF SHAREHOLDERS

TO BE HELD DECEMBER 6, 1994

To Our Shareholders:

You are cordially invited to attend the Annual Meeting of Shareholders of
Arbor Drugs, Inc. (the "Company"), to be held on December 6, 1994, at 11:00
a.m., Eastern Standard Time, at the Troy Marriott, 200 W. Big Beaver Road, Troy,
Michigan or any adjournment thereof (the "Meeting") for the following purposes:

1. To elect seven directors.

2. To approve the Company's Employee Stock Purchase Plan; and

3. To transact such other business as may properly come before the
Meeting.

Only holders of record of Common Stock at the close of business on October
13, 1994 will be entitled to notice of and to vote at the Meeting. Please sign,
date and mail the enclosed proxy so that your shares may be represented at the
Meeting if you are unable to attend and vote in person. If you attend the
Meeting, you may withdraw your proxy and vote your shares.

A copy of the Annual Report of the Company for the fiscal year ended July
31, 1994 accompanies this notice.

By Order of the Board of Directors,

TODD A. WYETT, Secretary

Troy, Michigan
November 3, 1994
<PAGE> 3

ARBOR DRUGS, INC.
3331 WEST BIG BEAVER
TROY, MICHIGAN 48084

PROXY STATEMENT

ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD DECEMBER 6, 1994

This Proxy Statement is furnished to the holders of Common Stock, par value
$.01 (the "Common Stock"), of Arbor Drugs, Inc., a Michigan corporation ("the
Company"), in connection with the solicitation of proxies by the Board of
Directors of the Company for use at the Annual Meeting of Shareholders to be
held on December 6, 1994 and at any adjournments thereof (the "Meeting").

At the Meeting, holders of Common Stock ("Shareholders") will be asked:

1. To elect seven directors.

2. To approve the Company's Employee Stock Purchase Plan (the "Plan");
and

3. To transact such other business as may properly come before the
Meeting.

This Proxy Statement and the accompanying form of proxy are first being
sent to Shareholders on or about November 3, 1994.

In this Proxy Statement, references to "fiscal 1992" are to the Company's
fiscal year ended July 31, 1992, references to "fiscal 1993" are to the
Company's fiscal year ended July 31, 1993, references to "fiscal 1994" are to
the Company's fiscal year ended July 31, 1994, and references to "fiscal 1995"
are to the Company's fiscal year ending July 31, 1995.

THE MEETING

DATE, TIME AND PLACE

The Meeting will be held on December 6, 1994, at 11:00 a.m., Eastern
Standard Time, at the Troy Marriott, 200 W. Big Beaver Road, Troy, Michigan.

MATTERS TO BE CONSIDERED

At the Meeting, Shareholders will be asked to consider and vote to elect
seven directors (Proposal No. 1) and to approve the Plan (Proposal No. 2). See
"ELECTION OF DIRECTORS" and "EMPLOYEE STOCK PURCHASE PLAN." The Board of
Directors knows of no matters that are to be brought before the Meeting other
than as set forth in the Notice of Meeting. If any other matters properly come
before the Meeting, the persons named in the enclosed form of proxy or their
substitutes will vote in accordance with their best judgment on such matters.

RECORD DATE; SHARES OUTSTANDING AND ENTITLED TO VOTE

Shareholders as of the close of business on October 13, 1994 (the "Record
Date"), are entitled to notice of and to vote at the Meeting. As of the Record
Date, there were 16,344,443 shares of Common Stock outstanding and entitled to
vote, with each share entitled to one vote.

VOTING AND REVOCATION OF PROXIES

Shareholders are requested to complete, date, sign and promptly return the
accompanying form of proxy in the enclosed envelope. Common Stock represented by
properly executed proxies received by the Company and not revoked will be voted
at the Meeting in accordance with the instructions contained therein. If

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instructions are not given, proxies will be voted FOR election of each nominee
for election as a director named herein and FOR the approval of the Plan.

Any proxy signed and returned by a Shareholder may be revoked at any time
before it is voted by filing with the Secretary of the Company, at the address
of the Company set forth herein, written notice of such revocation or a duly
executed proxy bearing a later date or by attending the Meeting and voting in
person. Attendance at the Meeting will not in and of itself constitute
revocation of a proxy.

REQUIRED VOTES

Votes cast by proxy or in person at the Meeting will be counted in
determining the presence of a quorum. Abstentions, withheld votes and broker
non-votes (where a broker indicates on its proxy that it does not have
discretionary authority to vote certain shares on a particular matter) will be
counted in determining the presence of a quorum but will be treated as unvoted
in determining the approval of any matter submitted for a shareholder vote.

With regard to the election of directors, the seven nominees receiving the
greatest number of votes cast at the Meeting will be elected. Abstentions,
withheld votes and broker non-votes will not be deemed votes cast in determining
which nominees receive the greatest number of votes cast. With regard to the
approval of the Plan, the affirmative vote of the holders of a majority of the
shares of Common Stock present in person or represented by proxy at the Meeting
is required. Because an affirmative vote is required, abstentions, withheld
votes and broker non-votes will have the same effect as a no vote on this
proposal.

All of the directors and officers of the Company have indicated that they
will cause all shares of Common Stock beneficially owned by them to be voted in
favor of the election as a director of each nominee named herein and in favor of
the approval of the Plan. Such persons beneficially own, in the aggregate, 39.2%
of the shares eligible to vote at the Meeting.

PROXY SOLICITATION

The Company will bear the costs of solicitation of proxies for the Meeting.
In addition to solicitation by mail, directors, officers and regular employees
of the Company may solicit proxies from Shareholders by telephone, telegram,
personal interview or otherwise. Such directors, officers and employees will not
receive additional compensation, but may be reimbursed for out-of-pocket
expenses in connection with such solicitation. Brokers, nominees, fiduciaries
and other custodians have been requested to forward soliciting material to the
beneficial owners of Common Stock held of record by them, and such custodians
will be reimbursed for their reasonable expenses.

BENEFICIAL OWNERSHIP OF COMMON STOCK

The following table sets forth, as of the Record Date, the number of shares
of Common Stock, the Company's only class of voting securities, owned
beneficially by each person known by the Company to own beneficially more than
5% of the outstanding shares of Common Stock. The information set forth in the
table and accompanying footnotes has been furnished by the named beneficial
owners.

<TABLE>
<CAPTION>
NAME OF AMOUNT AND NATURE OF PERCENT OF
BENEFICIAL OWNER BENEFICIAL OWNERSHIP CLASS
-------------------------------------------------- -------------------- ----------
<S> <C> <C>
Eugene Applebaum.................................. 4,987,775(1) 30.5%
Markus M. Ernst................................... 915,855(2) 5.6%
</TABLE>

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(1) See footnote (1) to the following table. Mr. Applebaum's business address is
c/o Arbor Drugs, Inc., 3331 W. Big Beaver Road, Troy, Michigan 48084.

(2) See footnote (2) to the following table. Mr. Ernst's business address is c/o
Arbor Drugs, Inc., 3331 W. Big Beaver Road, Troy, Michigan 48084.

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By virtue of Mr. Applebaum's relationship to the Company, his stockholding
interest and certain shareholder agreements described in footnote (1) to the
following table, Mr. Applebaum may be deemed to be in "control" of the Company
within the meaning of Rule 405 of the Securities Act of 1933, as amended.

PROPOSAL NO. 1

ELECTION OF DIRECTORS

At the Meeting, seven directors are to be elected to serve until the next
annual meeting or until their successors are elected and qualified. The persons
named in the enclosed form of proxy have advised that, unless contrary
instructions are received, they intend to vote FOR the election of the seven
individuals named under "Directors" in the following table, all of whom
currently are directors of the Company. The Board of Directors does not expect
that any of the nominees will be unavailable for election as a director. If by
reason of an unexpected occurrence one or more of the nominees is not available
for election, however, the persons named in the form of proxy have advised that
they will vote for such substitute nominees as the Board of Directors of the
Company may propose. The following information is as of the Record Date.

Markus M. Ernst................... Director, Executive Vice President 915,855(2) 5.6%
Director since 1974, Executive and Chief Operating Officer of the
Vice President and Chief Company and its predecessors since
Operating Officer 1968. Age 57.

Gilbert C. Gerhard................ Senior Vice President -- Finance 44,680(3) *
Director since 1986, Senior Vice and Administration since February
President -- Finance and 1994. Chief Financial Officer and
Administration, Chief Financial Treasurer of the Company since
Officer and Treasurer 1983. Vice President -- Finance
and Administration from 1983 to
February 1994. Age 52.

David B. Hermelin................. Private investor principally 173,500 1.1%
Director since 1986 involved in real estate investment
and development. Chairman of the
Board of Directors of Federal
Enterprises, Inc. (the parent of
Federal Broadcasting, Inc.) from
1986 to January 1990. Director of
First of America Bank-Detroit,
N.A. Age 57.
</TABLE>

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<TABLE>
<CAPTION>
SHARES OF
PRINCIPAL BUSINESS COMMON
OCCUPATIONS DURING PAST STOCK
NAME AND POSITION, FIVE YEARS, OTHER OWNED PERCENT OF
IF ANY, WITH THE COMPANY DIRECTORSHIPS AND AGE BENEFICIALLY CLASS
- - ---------------------------------- ---------------------------------- ------------ ----------
<S> <C> <C> <C>
Spencer M. Partrich............... A private investor principally 10,500 *
Director since 1988 involved in real estate investment
and development. Co-owner and
principal of Lautrec, Ltd. and
Lautrec Acquisition Co. since
1976. Age 54.
Laurie M. Shahon.................. President and founder of Wilton 4,250 *
Director since 1988 Capital Group since January 1994.
Managing Director of '21'
International Holdings, Inc. from
April 1988 to December 1993.
Director of One Price Clothing
Stores, Inc. Age 42.
Samuel Valenti III................ President of Masco Capital 10,000 *
Director since 1992 Corporation since 1988. Vice
President -- Investments of Masco
Corporation since 1974. Vice
Chairman of the State of
Michigan's Investment Advisory
Board since 1992. Age 48.
OTHER EXECUTIVE OFFICERS
Donald M. Stutrud................. Senior Vice President -- Store 57,775(4) *
Senior Vice President -- Store Operations of the Company since
Operations 1991. Vice President -- Store
Operations from 1986 to 1991. Age
46.
Robert R. Beale................... Vice President -- Real Estate of 24,362(5) *
Vice President -- Real Estate the Company since 1986. Age 56.
All Directors and Officers as a (6) %
Group (16 persons).............. 6,379,767 39.2
</TABLE>

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* Less than 1.0%.

(1) Includes 100,000 shares of Common Stock subject to stock options granted
pursuant to the Company's Amended and Restated Stock Option Plan (the "Stock
Option Plan") that are exercisable within 60 days of the Record Date.
Includes 78,750 shares of Common Stock owned by Marcia Applebaum, Mr.
Applebaum's wife, pursuant to a shareholder's agreement, dated April 21,
1986, which grants to Mr. Applebaum certain rights of first refusal. Also
includes 5,600 shares owned by Mrs. Applebaum without restriction and
194,400 shares of Common Stock held in trust (the trustees of which are Mr.
and Mrs. Applebaum) for the children of Mr. and Mrs. Applebaum. Excludes
292,500 shares of Common Stock held in Mrs. Applebaum's name as trustee for
the children of Mr. and Mrs. Applebaum, as to which Mr. Applebaum disclaims
beneficial ownership. Excludes 883,725 shares owned of record by Markus M.
Ernst, a director and executive officer of the Company, pursuant to a
certain agreement, dated April 8, 1986 (the "Shareholders' Agreement"),
which grants to Mr. Applebaum certain rights of first refusal. Includes
24,607 shares of Common Stock owned of record by Smith Barney, Inc., as
trustee under the Arbor Drugs, Inc. 401(k) Plan, on behalf of Mr. Applebaum.

(2) 883,725 of the shares owned of record by Mr. Ernst are also beneficially
owned by Mr. Applebaum pursuant to the Shareholders' Agreement described in
footnote (1) of this table. Includes 32,000 shares of Common Stock subject
to stock options granted pursuant to the Stock Option Plan that are
exercisable

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within 60 days of the Record Date. Includes 130 shares of Common Stock owned of
record by Smith Barney, Inc., as trustee under the Arbor Drugs, Inc. 401(k)
Plan, on behalf of Mr. Ernst.

(3) Includes 43,425 shares of Common Stock subject to stock options granted
pursuant to the Stock Option Plan that are exercisable within 60 days of the
Record Date. Includes 130 shares of Common Stock owned of record by Smith
Barney, Inc., as trustee under the Arbor Drugs, Inc. 401(k) Plan, on behalf
of Mr. Gerhard.

(4) Includes 45,300 shares of Common Stock subject to stock options granted
pursuant to the Stock Option Plan that are exercisable within 60 days of the
Record Date. Includes 4,600 shares of Common Stock owned of record by Smith
Barney, Inc., as trustee under the Arbor Drugs, Inc. 401(k) Plan, on behalf
of Mr. Stutrud.

(5) Includes 18,150 shares of Common Stock subject to stock options granted
pursuant to the Stock Option Plan that are exercisable within 60 days of the
Record Date. Includes 4,799 shares of Common Stock owned of record by Smith
Barney, Inc., as trustee under the Arbor Drugs, Inc. 401(k) Plan, on behalf
of Mr. Beale. Excludes 1,413 shares of Common Stock held by Mr. Beale's
wife, as to which Mr. Beale disclaims beneficial ownership.

(6) Includes 372,750 shares of Common Stock subject to stock options that are
exercisable within 60 days of the Record Date granted either pursuant to the
Stock Option Plan or by the Company. Includes 44,136 shares of Common Stock
owned of record by Smith Barney, Inc., as trustee under the Arbor Drugs,
Inc. 401(k) Plan, on behalf of several of the executive officers.

All information contained in this table with respect to ownership of shares of
Common Stock by the named officers pursuant to the Arbor Drugs, Inc. 401(k) Plan
is as of June 30, 1994, the latest available date such information was provided
by Smith Barney, Inc., as trustee under the Arbor Drugs, Inc. 401(k) Plan.

The Board of Directors recommends a vote FOR each of the above-named
nominees.

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<PAGE> 8

INFORMATION CONCERNING MEETINGS OF THE BOARD OF
DIRECTORS AND BOARD COMMITTEES AND DIRECTOR COMPENSATION

The Board of Directors held six meetings during fiscal 1994, and took other
action by unanimous written consent. All directors attended 100% of the meetings
of the Board of Directors, and attended at least 75% of the aggregate meetings
of the Board of Directors and the committees of the Board of Directors on which
they serve.

The Board of Directors of the Company currently has an Audit Committee and
a Compensation Committee. The Board of Directors has not established a separate
committee of its members to nominate candidates for election as directors.

The Audit Committee recommends engagement of the Company's independent
certified public accountants, reviews the scope and cost of the audit, considers
comments made by the independent certified public accountants with respect to
accounting procedures and internal controls and the consideration given thereto
by management, and reviews internal accounting procedures and controls with the
Company's financial and accounting staff. The committee, which currently
consists of Ms. Shahon and Messrs. Hermelin, Partrich and Valenti, held two
meetings during fiscal 1994.

The Compensation Committee (i) provides guidance and commentary to
management and the entire Board of Directors with respect to all corporate
compensation, benefits and employee equity programs and (ii) administers the
Company's Amended and Restated Stock Option Plan and the Employee Stock Purchase
Plan. This committee, which currently consists of Messrs. Valenti, Hermelin and
Partrich and Ms. Shahon, met three times during fiscal 1994.

Each of the non-employee directors receives an annual fee of $10,000 for
serving as a director. In addition, each non-employee director received $500 for
each meeting of the Board of Directors that such director attended. Non-employee
directors are not eligible to receive grants of Common Stock pursuant to the
Company's Amended and Restated Stock Option Plan nor to participate under the
Employee Stock Purchase Plan.

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<PAGE> 9

EXECUTIVE COMPENSATION

SUMMARY COMPENSATION TABLE

The following table sets forth all compensation awarded to, earned by, or
paid to the Company's Chief Executive Officer and each of the four other most
highly compensated executive officers of the Company for all services rendered
in all capacities to the Company and its subsidiaries for the fiscal years ended
July 31, 1994, 1993 and 1992.

<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
---------------------
ANNUAL COMPENSATION AWARDS
------------------------ --------------------- ALL OTHER
NAME AND PRINCIPAL POSITIONS FISCAL YEAR SALARY($) OPTIONS (# OF SHARES) COMPENSATION(1)($)
- - ------------------------------------ ----------- --------- --------------------- ------------------
<S> <C> <C> <C> <C>
Eugene Applebaum.................... 1994 $ 450,000 200,000 $ 10,187
President and CEO 1993 450,000 200,000 7,652
1992 450,000 150,000 *

Markus M. Ernst..................... 1994 $ 250,000 60,000 $ 12,027
Executive Vice President and COO 1993 250,000 60,000 1,440
1992 250,000 50,000 *

Gilbert C. Gerhard.................. 1994 $ 146,750 12,000 $ 12,260
Senior Vice President -- Finance 1993 140,000 8,000 4,310
and Administration, CFO and 1992 133,250 8,000 *
Treasurer

Donald M. Stutrud................... 1994 $ 128,500 12,000 $ 4,014
Senior Vice President -- 1993 122,500 8,000 1,332
Store Operations 1992 117,500 8,000 *

Robert R. Beale..................... 1993 $ 119,500 4,000 $ 6,380
Vice President -- Real Estate 1992 116,500 2,500 692
1991 113,750 2,500 *
</TABLE>

- - -------------------------
* In accordance with the transitional provisions applicable to the rules on
executive officer compensation disclosure adopted by the Securities and
Exchange Commission, no amounts are required to be shown under "All Other
Compensation" for the fiscal year ended July 31, 1992.

(1) Represents (i) the Company's contribution of $200 to each executive
officer's account under the Company's 401(k) Plan for salaried employees
for the applicable year and (ii) insurance premiums paid by the Company
during the applicable year with respect to term life and disability
insurance for the benefit of each named executive. All present and future
contributions to the Company's 401(k) Plan are immediately vested.

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<PAGE> 10

OPTION GRANTS IN FISCAL 1994

The following table sets forth certain information concerning individual
grants of stock options made to each of the executive officers of the Company
named in the above Summary Compensation Table during fiscal 1994 pursuant to the
Stock Option Plan.

<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
INDIVIDUAL GRANTS VALUE AT ASSUMED ANNUAL
------------------------------------------------------------ RATES OF STOCK PRICE
% OF TOTAL APPRECIATION FOR OPTION
OPTIONS GRANTED OPTIONS GRANTED EXERCISE TERM($)
(# OF TO EMPLOYEES IN PRICE EXPIRATION ------------------------
NAME SHARES) (1) FISCAL 1994 ($/SH) DATE 5%(2) 10%(2)
- - ---------------------- --------------- --------------- -------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Eugene Applebaum...... 200,000 48.08% $18.75 2/10/2000 $1,275,359 $2,893,354
Markus M. Ernst....... 60,000 14.42 18.75 2/10/2000 382,608 868,006
Gilbert C. Gerhard.... 12,000 3.88 18.75 2/10/2000 76,522 173,601
Donald M. Stutrud..... 12,000 3.88 18.75 2/10/2000 76,522 173,601
Robert R. Beale....... 4,000 0.96 18.75 2/10/2000 25,507 57,867
</TABLE>

- - -------------------------
(1) The indicated stock options vest at a rate of 20% per year, beginning on the
one-year anniversary date of such a grant, have a term of six years and are
non-transferable; provided, however, that the stock options fully vest upon
certain change in control events. All rights to exercise such stock options
terminate upon the resignation, retirement or voluntary or involuntary
termination of the optionee, except the Compensation Committee may, in its
sole discretion, grant such optionee the right for a period not to exceed
three months to exercise that portion of the stock option that is
exercisable by the optionee on the date of such resignation, retirement or
termination. In addition, stock options may be exercised within (i) twelve
months after an optionee's employment is terminated by death or (ii) three
months after an optionee's employment is terminated owing to permanent
disability, but in no event subsequent to the expiration of the stock
option. The stock options are intended to qualify as non-qualified stock
options; accordingly, the amount of ordinary income recognized by an
optionee upon exercise of such stock option is deductible by the Company in
the year that income is recognized by the optionee.

(2) The potential realizable value amounts shown illustrate the values that
might be realized upon exercise of the stock options immediately prior to
the expiration of their term using 5% and 10% appreciation rates (as
specified by the Securities and Exchange Commission), compounded annually,
and therefore, are not intended to forecast possible future appreciation,
if any, of the Company's stock price. Additionally, these values do not
take into consideration the provisions of the options providing for
nontransferability, vesting over a period of six years or termination of
the options following termination of employment.

In order to achieve the potential realizable values set forth in the 5% and
10% columns, the price per share of Common Stock for the stock options
granted on February 11, 1994 would need to appreciate to approximately
$25.13 and $33.22, respectively, from the date of grant through the
six-year option term. On July 29, 1994, the last day of trading in fiscal
1994, the closing price of the Common Stock as reported by the National
Association of Securities Dealers Automated Quotation System ("NASDAQ") was
$20 1/4 per share.

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<PAGE> 11

AGGREGATE OPTION EXERCISES IN FISCAL 1994 AND OPTION VALUES AT JULY 31, 1994

The following table provides information concerning the exercise of stock
options during fiscal 1994 by each of the executive officers of the Company
named in the above Summary Compensation Table and the value of unexercised
options held by such persons as of July 31, 1994.

<TABLE>
<CAPTION>
VALUE OF
NUMBER OF UNEXERCISED
UNEXERCISED IN-THE-MONEY
OPTIONS AT OPTIONS AT
SHARES 7/31/94 7/31/94
ACQUIRED ON VALUE($) EXERCISABLE/ EXERCISABLE/
NAME EXERCISE (#) REALIZED(1) UNEXERCISABLE UNEXERCISABLE(2)
- - ---------------------------------- ------------ ------------ --------------- -----------------
<S> <C> <C> <C> <C>
Eugene Applebaum.................. 0 -- 100,000/450,000 $245,000/$942,500
Markus M. Ernst................... 0 -- 32,000/138,000 $ 78,000/$289,500
Gilbert C. Gerhard................ 0 -- 41,925/ 28,450 $459,256/$ 89,463
Donald M. Stutrud................. 6,750 $ 88,125 43,800/ 29,200 $464,975/$ 94,900
Robert R. Beale................... 0 -- 18,150/ 11,250 $161,013/$ 15,750
</TABLE>

- - -------------------------
(1) Value realized is calculated based on the difference between the option
exercise price and the closing market price of the Common Stock on the date
of exercise multiplied by the number of shares to which the exercise
relates.

(2) On July 29, 1994, the last day of trading in fiscal 1994, the closing price
of the Common Stock as reported by NASDAQ was $20 1/4 per share.

COMPENSATION COMMITTEE INTERLOCKS
AND INSIDER PARTICIPATION

During fiscal 1994, the members of the Compensation Committee of the Board
of Directors were Messrs. Valenti, Hermelin and Partrich and Ms. Shahon. None of
these individuals has served as an officer or employee of the Company or any of
its subsidiaries. The fiscal 1994 stock option grant to Mr. Applebaum was
recommended to the Compensation Committee by the entire Board of Directors other
than Mr. Applebaum. All fiscal 1994 compensation packages for executive officers
were initially established by Mr. Applebaum and, with respect to stock option
grants, reviewed and approved by the Compensation Committee.

The Company leases a drugstore from a partnership in which Mr. Partrich
owns a minority interest. During the fiscal year ended July 31, 1994, payments
by the Company under such lease aggregated $93,335. The Company also leases a
drugstore located in a shopping center owned by a limited partnership in which
Mr. Partrich is a limited partner and Mr. Partrich's son is the general partner.
During the fiscal year ended July 31, 1994, payments made by the Company to the
partnership were $82,136.

The Company believes that all real estate transactions between it and
entities in which Messrs. Partrich, Applebaum or Ernst have an interest have
been at rents and upon terms that are no less favorable to the Company than
would have been available from third parties.

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<PAGE> 12

REPORT OF THE COMPENSATION COMMITTEE
WITH RESPECT TO EXECUTIVE COMPENSATION*

All cash compensation for named executive officers for fiscal 1994 was
determined by Mr. Applebaum prior to and effective as of February 1, 1994.
Grants of stock options to named executive officers occurred in February 1994,
and were reviewed and approved by the Compensation Committee.

EXECUTIVE COMPENSATION PRINCIPLES

The Company's executive compensation program is based on principles, set
forth in the Compensation Committee charter, which are intended to align
compensation with achievement of Company objectives in business strategy,
management initiatives and financial results. The executive compensation
principles set forth in the Compensation Committee's charter are designed to:

-- Attract and retain the highly qualified, experienced and motivated
executives needed for the success of the Company.

-- Provide compensation opportunity that is competitive with companies in
the chain drugstore industry and/or companies of comparable complexity,
risk and size.

-- Reward executives for performance.

-- Align management's interests with the long-term success of the Company.

The Company's fiscal 1994 compensation program consists of cash
compensation and compensation pursuant to the Company's Amended and Restated
Stock Option Plan and 401(k) Plan. Options are granted at the then current
market price and generally vest at a rate of 20% a year, beginning on the one
year anniversary date of such a grant, over a six-year period, with an
expiration date on the sixth anniversary of grant; provided, however, that
options granted on or after February 11, 1994, will generally vest upon the
occurrence of certain change in control events with respect to the Company.

On May 25, 1994, the Board of Directors adopted the Arbor Drugs, Inc.
Employee Stock Purchase Plan, subject to shareholder approval. The Plan permits
employees of the Company to purchase up to $25,000 of Common Stock per annum at
85% of the lesser of the fair market value of Common Stock on the first day or
last day of a purchase period. The Company adopted the Plan in order to
recognize the contributions of its employees to the success of the Company and,
in part, because of similar plans enacted by members of the Peer Group (as such
term is hereinafter defined) with whom the Company primarily competes for the
services of officers, pharmacists and corporate managers.

New Section 162(m) of the Internal Revenue Code imposes an annual
individual limit of $1 million on the deductibility of compensation payments to
the Company's Chief Executive Officer (the "CEO") and the four other mostly
highly compensated executive officers for whom proxy statement disclosure is
required and who are employed at the end of the Company's taxable year.
"Performance-based" compensation, as defined in Section 162(m) of the Internal
Revenue Code, is excluded from this limit.

The Compensation Committee believes that for the time being it can avail
itself of the transitional relief granted to stock option plans that were
approved under specific circumstances before December 20, 1993, and, therefore,
has concluded that no further action with respect to qualifying the Company's
Amended and Restated Stock Option Plan is necessary at this time. No executive
officer of the Company currently makes more than $461,000 a year in
nonperformance-based compensation. The Compensation Committee intends to qualify
executives' compensation for deductibility under the new tax law and reserves
the right to act at a later date to effect this purpose, if necessary.

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

* The disclosure contained in this section is not incorporated by reference into
any prior filings by the Company under the Securities Act of 1933 or the
Securities Exchange Act of 1934 that incorporated future filings or portions
thereof (including this Proxy Statement or this section).

10
<PAGE> 13

The Company does not have any other long-term incentive, restricted stock
purchase or profit-sharing programs and does not have or contribute to any
retirement programs on behalf of its employees, including its executive
officers.

COMPENSATION OF THE CHIEF EXECUTIVE OFFICER

The fiscal 1994 cash compensation for the CEO was $450,000, which amount
has remained unchanged since 1987. In February 1994, the CEO was granted an
option covering 200,000 shares of Common Stock. The members of the Compensation
Committee determined the size of the grant of stock options for the CEO.

The factors considered by the Compensation Committee in determining the
amount of such equity-based compensation of the CEO for fiscal 1994 include
their subjective evaluations of the Company's general operating and financial
performance and expansion, as well as the CEO's leadership and establishment and
implementation of strategic direction for the Company. For instance, during
fiscal 1994 the Company opened nineteen new drugstores, versus fifteen new
drugstores in fiscal 1993, and surpassed the $600 million mark in annual sales.
The Company also increased its market share in its primary market, maintaining
its position as the drugstore marketshare leader in the greater metropolitan
Detroit area, and advanced to become the eighteenth largest drugstore chain in
the nation based on gross sales. The amounts of options previously granted under
the Stock Option Plan to all employees in the aggregate and to the CEO were also
considered in determining the size of the options awarded to the CEO. No
particular weighting was given to any factor by the Compensation Committee.

Currently, the CEO is not eligible to participate in the Employee Stock
Purchase Plan, if approved by the Shareholders, owing to his ownership of more
than 5% of the Common Stock.

COMPENSATION OF OTHER EXECUTIVE OFFICERS

Each of the named executive officers, other than Markus Ernst, received an
increase in cash compensation, as determined by the CEO, of approximately 3-5%.
Mr. Ernst's 1994 cash compensation of $250,000 has remained unchanged since
1987. Currently, Mr. Ernst is not eligible to participate in the Employee Stock
Purchase Plan, if approved by the Shareholders, owing to his ownership of more
than 5% of the Common Stock. Options were granted by the Compensation Committee
to executive officers based upon the recommendation of the CEO. In making his
recommendations, the CEO subjectively considered certain factors, such as the
his perception of individual performance, the individual's contribution to the
overall performance of the Company and the anticipated value of the executive's
contribution to the Company's future performance, as well as to retain
executives. The Compensation Committee reviewed with the CEO his recommendations
and, for certain officers, granted more options than recommended by the CEO to
reflect the Compensation Committee's subjective consideration of such factors.
The determination was not based on specific objectives. No specific weight was
given to any of the factors considered. The amounts of options previously
granted under the Stock Option Plan to all employees in the aggregate and to
each executive officer were also considered in determining the size of the
options awarded to each executive.

THE COMPENSATION COMMITTEE

Samuel Valenti III, Chairman
David B. Hermelin
Spencer M. Partrich
Laurie M. Shahon

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<PAGE> 14

PERFORMANCE GRAPH**

Set forth below is a line graph comparing the cumulative total shareholder
return on the Company's Common Stock, based on the market price of the Common
Stock, with the cumulative total return of (i) companies included in the S&P 500
Index and (ii) certain companies, identified below (the "Peer Group"). The graph
points set forth below are as of July 31 of each year indicated.

<TABLE>
<CAPTION>
Measurement Period Arbor Drugs, NACDS Peer
(Fiscal Year Covered) Inc. S & P 500 Group
<S> <C> <C> <C>
1989 100.00 100.00 100.00
1990 083.27 106.50 96.22
1991 124.31 120.09 93.43
1992 128.52 135.45 121.16
1993 114.49 147.27 125.15
1994 138.12 154.26 128.81
</TABLE>

The Peer Group consists of the following companies, all of which are
primarily engaged in the chain drugstore retail business: Big B, Inc.; Drug
Emporium, Inc.; F&M Distributors, Inc., Fay's Incorporated; Genovese Drug
Stores, Inc.; Longs Drug Stores Corporation; Perry Drug Stores, Inc.; Revco
D.S., Inc.; Rite Aid Corp. and Walgreen Co. Data for the Peer Group index was
provided to the Company by the National Association of Chain Drug Stores.

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

REAL ESTATE TRANSACTIONS

In addition, three of the Company's drugstores are leased from a
partnership consisting of Messrs. Applebaum and Ernst, in which Mr. Applebaum is
the majority partner. During the fiscal year ended July 31, 1994, payments made
by the Company to the partnership were $393,172. The Company also leases a
drugstore from a limited partnership involving Mr. Applebaum. During the fiscal
year ended July 31, 1994, payments by the Company under such lease were $95,037.
- - -------------------------
** The graph and related disclosure contained in this section are not
incorporated by reference into any prior filings by the Company under the
Securities Act of 1933 or the Securities Exchange Act of 1934 that
incorporated future filings or portions thereof (including this Proxy
Statement or this section).

12
<PAGE> 15

PROPOSAL NO. 2

EMPLOYEE STOCK PURCHASE PLAN

At the Meeting, Shareholders will be asked to consider and act upon a
proposal to approve the Plan. The Plan was adopted by the Company's Board of
Directors on May 25, 1994. Employee payroll deductions began August 1, 1994,
and, if the Plan is approved by the Shareholders at the Meeting, initial
purchases for the benefit of participants (the "Participants") under the Plan
will occur on December 30, 1994.

Under the Plan, the Company will sell shares to Participants at a price
equal to 85% of the lesser of the fair market value of Common Stock on (i) the
first trading day of a three-month offering period (a "Purchase Period") or (ii)
the last trading day of the Purchase Period. The first Purchase Period will be
in effect for five months, and commenced on August 1, 1994, and will end on
December 30, 1994. On August 1, 1994, the closing price of the Common Stock as
reported by NASDAQ was $20-5/8 per share. If this Proposal No. 2 is approved by
the Shareholders at the Meeting, the first purchases of Common Stock will occur
on December 30, 1994. On August 1, 1994, 325 employees of the Company had filed
enrollment forms with the plan administrator (the "Plan Administrator"). As of
July 15, 1994, the last date of enrollment during the Purchase Period currently
in effect, 5,088 employees of the Company were eligible to participate in the
Plan. The Plan is intended to qualify as an "employee stock purchase plan" as
defined in Section 423 of the Internal Revenue Code of 1986, as amended (the
"Code").

The Board of Directors believes that the Plan will further encourage
broader ownership by employees of the Company, and thereby provides an incentive
for employees to contribute to the profitability and success of the Company. In
particular, the Board of Directors believes that the Plan offers a convenient
means for such employees who might not otherwise own Common Stock in the Company
to purchase and hold Common Stock, and that the discounted sale feature of the
Plan provides a meaningful inducement to participate. The Board of Directors
believes that the employees' continuing economic interests as shareholders in
the performance and success of the Company will further enhance the
entrepreneurial spirit of the Company, which can greatly contribute to the
long-term growth and profitability of the Company.

DESCRIPTION OF THE PLAN

The Plan covers an aggregate of 300,000 shares of Common Stock, subject to
appropriate adjustment in the case of any stock dividend, stock split,
combination of shares, exchange of shares, merger, reorganization,
consolidation, or other similar corporate transaction affecting the Common
Stock. Shares issued pursuant to the terms of the Plan may be authorized but
unissued shares, reacquired shares or shares bought on the market. Such shares
may be acquired by Plan Participants at any time on the last day of the
applicable Purchase Period, subject to availability of such shares.

The Plan is administered by the Compensation Committee of the Board of
Directors. No member of the Board of Directors will be eligible to participate
in the Plan during his or her period of Compensation Committee service. The
Compensation Committee determines the commencement and termination date of the
offering of Common Stock under the Plan and is authorized, among other things,
to interpret the terms of the Plan, establish and revoke rules for the
administration of the Plan and correct or reconcile any defect or inconsistency
in the Plan.

The Compensation Committee may delegate all or part of its authority to
administer the Plan to the Plan Administrator, who may in turn delegate the
day-to-day operations of the Plan to a brokerage firm. Such brokerage firm will
establish and maintain, as agent for the Participants, accounts for the purpose
of holding shares of Common Stock and/or cash contributions as may be necessary
or desirable for the administration of the Plan.

13
<PAGE> 16

All employees of the Company, and its majority-owned subsidiaries,
including officers and directors who are full-time employees, who are at least
eighteen years old are eligible to participate in the Plan, except that no
employee may participate in the Plan (i) if, following a grant of purchase
rights under the Plan, the employee would own, directly or by attribution,
stock, purchase rights or other stock options to purchase stock representing 5%
or more of the total combined voting power or value of all classes of the
Company's stock, or (ii) to the extent a grant of purchase rights under the Plan
would permit the employee's rights to purchase stock under all the Company's
Code Section 423 employee stock purchase plans to accrue at a rate exceeding
$25,000.00, based on the fair market value of the stock (at the time of grant),
for each calendar year in which such purchase right is outstanding.

The first Purchase Period commenced on August 1, 1994, and will end on
December 30, 1994. Thereafter, in each year that the Plan is in effect, there
will be four three-month Purchase Periods each calendar year, beginning January
1, April 1, July 1 and October 1. After initial enrollment in the Plan, the
Participant will be automatically re-enrolled in the Plan for subsequent
Purchase Periods unless he or she files a notice of withdrawal 15 days prior to
the end of the current Purchase Period, terminates employment or otherwise
becomes ineligible to participate in the Plan. Participants' payroll deductions
will be returned to them if Shareholder approval of the Plan is not obtained
prior to December 30, 1994.

When enrolling in the Plan, the employee must elect either (i) a fixed
payroll deduction or (i) a percentage rate at which he or she will make payroll
contributions for the purchase of Common Stock pursuant to the Plan, ranging
from 1% to 25% of their regular gross salary for the applicable payroll period,
with a minimum deduction of $10.00 per pay period and a maximum aggregate
deduction of $25,000.00 per year. The contribution rate elected by a Participant
will continue in effect until modified by the Participant, except that a
Participant may not increase a previously elected contribution rate during a
given Purchase Period. Eligible employees may participate in the Plan and
purchase shares only by means of payroll deductions, except for employees on
approved leaves of absence.

On the first day of each Purchase Period, a Participant is deemed to have
been granted a purchase right to purchase on the last day of the Purchase Period
as many full shares of Common Stock as such Participant will be able to purchase
with the payroll deductions credited to such Participant's account during such
period. A Participant, however, may not purchase more than 1,000 shares of
Common Stock for any particular Purchase Period.

The amounts deducted will be credited to the Participant's account under
the Plan, but no actual separate account will be established by the Company to
hold such amounts. There will be no interest paid on the balance outstanding in
a Participant's account.

A Participant may withdraw from the Plan, by providing written notice to
the Plan Administrator at any time prior to 15 days before the end of the
current Purchase Period. The Participant may elect to immediately terminate his
or her outstanding purchase rights, and such withdrawal will become effective by
the tenth day following the Plan Administrator's receipt of the Participant's
notice of withdrawal, at which time all outstanding purchase rights will be
terminated and all accumulated payroll deductions will be refunded without
penalty. Alternatively, the Participant may elect to continue his or her
participation in the Plan through the end of the current Purchase Period, and
thus exercise such Participant's outstanding purchase rights at the end of the
current Purchase Period, but terminate his or her participation in the Plan for
subsequent Purchase Periods. Payroll deductions for such a Participant will
continue until the end of the current Purchase Period. After the end of the
current Purchase Period, no further purchase rights will be granted to the
Participant, and no further payroll deductions will be made.

A Participant will not be eligible to rejoin the Plan for the Purchase
Period underway at the time of withdrawal, and will have to re-enroll in the
Plan should such individual wish to resume participation in a subsequent
Purchase Period; provided, however, that such Participant may not re-enroll in
the Plan earlier than 90 days after the effective date of such withdrawal.

14
<PAGE> 17

If a Participant ceases to be an employee of the Company for any reason
during a Purchase Period, his or her outstanding purchase right will immediately
terminate, and all sums previously collected from such Participant during such
Purchase Period under the terminated purchase right will be refunded.

Neither payroll deductions credited to a Participant's account nor any
purchase rights or other rights to acquire Common Stock under the Plan may be
assigned, transferred, pledged or otherwise disposed of by Participants other
than by will or the laws of descent and distribution and, during the lifetime of
a Participant, purchase rights may be exercised only by the Participant.

Any brokerage fees and commissions for the purchase of Common Stock under
the Plan (including shares of Common Stock purchased upon reinvestment of
dividends and distributions) will be paid by the Company, but any brokerage fees
and commission for the sale of shares of Common Stock acquired under the Plan by
a Participant will be borne by such Participant.

The Compensation Committee may terminate or amend the Plan at any time;
provided, however, such termination or amendment may not affect or change
purchase rights previously granted under the Plan without the consent of the
affected Participant, and any amendment that materially increases the benefits
or number of shares under the Plan (except for certain allowable adjustments in
the event of changes to the Company's capital structure or for changes
authorized by the Plan to be made by the Compensation Committee or the Plan
Administrator) or materially modifies the eligibility requirements of the Plan
is subject to shareholder approval. If not sooner terminated by the Compensation
Committee, the Plan will terminate at the time purchase rights have been
exercised with respect to all shares of Common Stock reserved for grant under
the Plan.

On October 13, 1994, the last reported sale price of the Common Stock on
the NASDAQ National Market System was $21 per share.

FEDERAL TAX CONSEQUENCES

The Plan is intended to be an "employee stock purchase plan" as defined in
Section 423 of the Code. This Section provides that a Participant in the Plan
need not pay any federal income tax upon joining the Plan or upon receipt of
shares of Common Stock under the Plan. At the time the Participant sells shares,
however, he or she is required to pay federal income tax on the difference, if
any, between the price at which the Participant sells the shares and the price
the Participant paid for them, determined as follows. If the shares are sold by
the Participant more than twenty-four (24) months after the grant of the
purchase right and the market price of the shares on the date they are sold is
equal to or less than the price paid for the shares under the Plan, no taxable
income results. If the shares are sold more than 24 months after the grant of
the purchase rights and if the market price of the shares on the date that they
are sold is higher than the price paid under the Plan, the Participant must pay
federal income tax at ordinary income rates calculated on the lesser amount of
(i) the excess of the market price of the shares on the date the purchase right
is granted over the exercise price or (ii) the excess of the amount actually
received for the shares over the price paid for them. If the Participant sells
the shares within such 24-month period, the Participant must pay federal income
tax at ordinary income rates on the amount of the difference between the actual
purchase price and the market price of the shares on the date of purchase (i.e.,
the Exercise Date). Any gain realized, in addition to that on which taxes at
ordinary income rates is paid, will be taxed at capital gain rates.

Only if the Participant sells the stock within twenty-four (24) months
following the grant of a purchase right will the Company be entitled to a
deduction for federal income tax purposes and, in such event, the deduction will
equal the difference between the actual purchase price and the fair market value
of the shares on the date of purchase (i.e., the Exercise Date). Availability of
such deduction will be subject to the Company satisfying any applicable
withholding requirements. In the case of a Participant who is one of the five
most highly compensated employees of the Company, however, no deduction will be
available to the Company to the extent the ordinary compensation income
recognized by the Participant during a year on account of a sale of shares
acquired under the Plan, plus the other ordinary compensation recognized by the
Participant during the year, exceeds $1 million.

15
<PAGE> 18

Contributions deducted from Participants' paychecks and applied to the
purchase of shares under the Plan will be taxable to the Participants, and no
offsetting deduction will be available to them.

The Plan is not intended to be a qualified pension, profit sharing, or
stock bonus plan under Section 401(a) of the Internal Revenue Code of 1986, as
amended, and accordingly is not subject to any provisions of the Employee
Retirement Income Security Act of 1974.

The Board of Directors recommends a vote FOR this proposal.

COMPLIANCE WITH SECTION 16(A) OF THE
SECURITIES EXCHANGE ACT OF 1934

Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
the Company's directors and executive officers, and persons who own more than
10% of the Common Stock, to file with the Securities and Exchange Commission and
the National Association of Securities Dealers initial reports of ownership and
reports of changes in ownership of stock of the Company.

To the Company's knowledge, based solely on a review of copies of reports
provided by such individuals to the Company and written representations of such
individuals that no other reports were required, during the fiscal year ended
July 31, 1994, all Section 16(a) filing requirements applicable to its
directors, officers and greater than 10% beneficial owners were complied with;
except that two reports, covering one transaction, were filed late by trusts in
which Eugene Applebaum retained a beneficial interest as co-trustee.

INDEPENDENT ACCOUNTANTS

Coopers & Lybrand is the independent accountant for the Company for fiscal
1994 and has reported on the Company's consolidated financial statements
included in the Annual Report of the Company that accompanies this proxy
statement. The Company's independent accountant is appointed by the Board of
Directors. The Company anticipates that Coopers & Lybrand will be reappointed
for fiscal 1995.

The Company has been advised that representatives of Coopers & Lybrand will
attend the Meeting, will have an opportunity to make a statement if they desire
to do so, and will be available to respond to appropriate questions.

PROPOSALS BY SHAREHOLDERS

Any proposal of a Shareholder intended to be presented at the Annual
Meeting of Shareholders to be held in 1995, must be received by the Company by
July 6, 1995, to be eligible for inclusion in the Proxy Statement for the
Meeting. Proposals must comply with Rule 14a-8 promulgated by the Securities and
Exchange Commission pursuant to the Securities Exchange Act of 1934.

By Order of the Board of Directors,

TODD A. WYETT, Secretary

Troy, Michigan
November 3, 1994

16
<PAGE> 19

/X/ PLEASE MARK VOTES AS IN
THIS EXAMPLE

With- For All
For hold Except
1. Election of Directors / / / / / /
EUGENE APPLEBAUM MARKUS M. ERNST
GILBERT C. GERHARD DAVID B. HERMELIN
SPENCER M. PARTRICH LAURIE M. SHAHON
SAMUEL VALENTI III

If you do not wish your shares voted "FOR" a particular nominee,
mark the "For All Except" box and strike a line through the nominee(s)
name. Your shares will be voted for the remaining nominee(s).

RECORD DATE SHARES:

Please be sure to sign and date this Proxy. Date
--------------

- - ---------------------- ----------------------
Shareholder sign here Co-owner sign here

DETACH AND
RETURN CARD

For Against Abstain
2. Approval of the Arbor Drugs, Inc.
Employee Stock Purchase Plan. / / / / / /

3. In their discretion with respect to any
other matters that may properly
come before the meeting.

Mark box at right if comments or address change
have been noted on the reverse side of this card. / /

The undersigned hereby acknowledges receipt of the Annual Report of Arbor
Drugs, Inc. for the fiscal year ended July 31, 1994 and the Proxy Statement
dated November 3, 1994, enclosed herewith.

ARBOR DRUGS, INC.

The undersigned hereby appoints Eugene Applebaum and Markus M. Ernst, and each
of them, the proxies of the undersigned, with full power of substitution, to
vote all shares of $.01 par value Common Stock of Arbor Drugs, Inc. (the
"Company") which the undersigned is entitled to vote at the Annual Meeting of
Shareholders of the Company to be held at the Troy Marriott, 200 W. Big Beaver
Road, Troy, Michigan on December 6, 1994, and at any and all adjournments
thereof.

The shares represented by this proxy will be voted in accordance with the
specifications made herein. If no specifications are made, this proxy will be
voted for the election of directors and for the approval of the Arbor Drugs,
Inc. Employee Stock Purchase Plan.

Comments/Address Change: