<PAGE> 1
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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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<PAGE> 2
[ARBOR DRUGS LOGO]
3331 WEST BIG BEAVER ROAD
TROY, MICHIGAN 48084
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD DECEMBER 5, 1995
To Our Shareholders:
You are cordially invited to attend the Annual Meeting of Shareholders (the
"Meeting") of Arbor Drugs, Inc. (the "Company"), to be held on December 5, 1995,
at 11:00 a.m., Eastern Standard Time, at the Somerset Inn, 2601 W. Big Beaver
Road, Troy, Michigan, or any adjournment thereof, for the following purposes:
1. To elect seven directors;
2. To approve the Company's 1996 Stock Option Plan; and
3. To transact such other business as may properly come before the
Meeting.
Only holders of record of shares of Common Stock, par value $.01 per share,
at the close of business on October 13, 1995 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, 1995 accompanies this notice.
By Order of the Board of Directors,
Gilbert C. Gerhard, Secretary
Troy, Michigan
November 2, 1995
<PAGE> 3
ARBOR DRUGS, INC.
3331 WEST BIG BEAVER ROAD
TROY, MICHIGAN 48084
PROXY STATEMENT
ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD DECEMBER 5, 1995
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 (the
"Meeting") of the Company to be held on December 5, 1995 and at any adjournment
thereof.
At the Meeting, holders of shares of Common Stock ("Shareholders") will be
asked:
1. To elect seven directors;
2. To approve the Company's 1996 Stock Option Plan (the "1996 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 2, 1995.
All references in this Proxy Statement to numbers or prices of shares of
Common Stock reflect a three-for-two stock split effective on May 15, 1995. All
references in this Proxy Statement to a fiscal year are to the Company's fiscal
year ended July 31.
THE MEETING
DATE, TIME AND PLACE
The Meeting will be held on December 5, 1995, at 11:00 a.m., Eastern
Standard Time, at the Somerset Inn, 2601 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 1996 Plan (Proposal No. 2).
See "ELECTION OF DIRECTORS" and "APPROVAL OF THE 1996 STOCK OPTION 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, 1995 (the "Record
Date") are entitled to notice of and to vote at the Meeting. As of the Record
Date, there were 24,782,853 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. Shares of 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 instructions are not given, proxies will be voted FOR election of
each nominee for director named herein and FOR the approval of the 1996 Plan.
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<PAGE> 4
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 not voted
in determining the approval of any matter submitted for a shareholder vote.
Under Michigan law, the affirmative vote of the holders of a plurality of
the shares of Common Stock voted at the Meeting is required to elect each
director. As such, 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 1996 Plan,
Michigan law requires 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.
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 (excluding
Common Stock which they have the right to acquire upon the exercise of currently
exercisable stock options) to be voted in favor of the election as a director of
each nominee named herein and in favor of the approval of the 1996 Plan. Such
persons beneficially own, in the aggregate, 33.4% of the shares of Common Stock
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 shares of Common Stock held of record by them, and such
custodians will be reimbursed for their reasonable expenses.
INDEPENDENT AUDITORS
The Company has been advised that representatives of Coopers & Lybrand
L.L.C., the Company's independent auditors in fiscal 1995, 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.
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 (i) each person known by the Company to own beneficially more
than 5% of the outstanding shares of Common Stock, (ii) each director and
nominee for director, (iii) each executive officer named in the Summary
Compensation Table appearing under "EXECUTIVE COMPENSATION" below and (iv) all
directors and executive officers of the Company as a group. The information set
forth in the table and accompanying footnotes has been furnished by the
respective
2
<PAGE> 5
beneficial owners. Unless otherwise indicated, each person has sole voting and
investment power over the reported shares.
<TABLE>
<CAPTION>
NAME OF AMOUNT AND NATURE OF PERCENT OF
BENEFICIAL OWNER BENEFICIAL OWNERSHIP CLASS
-------------------------------------------------- -------------------- ----------
<S> <C> <C>
Eugene Applebaum.................................. 7,167,738(1) 28.6%
Markus M. Ernst................................... 1,139,622(2) 4.6%
Gilbert C. Gerhard................................ 57,908(3) *
David B. Hermelin................................. 260,250 1.1%
Spencer M. Partrich............................... 27,250 *
Laurie M. Shahon.................................. 6,375 *
Samuel Valenti III................................ 15,000 *
Donald M. Stutrud................................. 80,153(4) *
Eric Bolokofsky................................... 54,921(5) *
All directors and executive officers as a group
(11 persons, including the foregoing)........... 8,907,939(6) 35.1%
</TABLE>
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* Less than 1.0%.
(1) Includes 315,000 shares of Common Stock subject to stock options granted
pursuant to the Company's Amended and Restated Stock Option Plan (the "1986
Plan") that are exercisable within 60 days of the Record Date. Includes
118,125 shares of Common Stock owned by Marcia Applebaum, Mr. Applebaum's
wife, as to which a shareholder's agreement, dated April 21, 1986, grants
Mr. Applebaum certain rights of first refusal. Includes 138,000 shares owned
by Mrs. Applebaum without restriction and 162,000 shares of Common Stock
held in trust of which Mr. and Mrs. Applebaum are trustees for the benefit
of their children. Includes 37,986 shares of Common Stock owned of record by
Smith Barney, Inc., as trustee (the "401(k) Trustee") under the Arbor Drugs,
Inc. 401(k) Plan (the "401(k) Plan"), on behalf of Mr. Applebaum as of June
30, 1995, the latest date as of which such information is available from the
401(k) Trustee. Excludes 438,750 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 1,040,387
shares owned of record by Markus M. Ernst, a director and executive officer
of the Company, as to which an agreement, dated April 8, 1986 (the
"Shareholders' Agreement"), grants Mr. Applebaum certain rights of first
refusal. Mr. Applebaum's business address is c/o Arbor Drugs, Inc., 3331 W.
Big Beaver Road, Troy, Michigan 48084.
(2) Investment power as to 1,040,387 of the shares of Common Stock owned of
record by Mr. Ernst is shared with Mr. Applebaum pursuant to the
Shareholders' Agreement referred to in footnote (1) above. Includes 99,000
shares of Common Stock subject to stock options granted pursuant to the 1986
Plan that are exercisable within 60 days of the Record Date. Includes 235
shares of Common Stock owned of record by the 401(k) Trustee on behalf of
Mr. Ernst as of June 30, 1995.
(3) Includes 44,625 shares of Common Stock subject to stock options granted
pursuant to the 1986 Plan that are exercisable within 60 days of the Record
Date. Includes 3,087 shares of Common Stock owned of record by the 401(k)
Trustee on behalf of Mr. Gerhard as of June 30, 1995.
(4) Includes 50,250 shares of Common Stock subject to stock options granted
pursuant to the 1986 Plan that are exercisable within 60 days of the Record
Date. Includes 7,611 shares of Common Stock owned of record by the 401(k)
Trustee on behalf of Mr. Stutrud as of June 30, 1995.
(5) Includes 49,950 shares of Common Stock subject to stock options granted
pursuant to the 1986 Plan that are exercisable within 60 days of the Record
Date. Includes 2,463 shares of Common Stock owned of record by the 401(k)
Trustee on behalf of Mr. Bolokofsky as of June 30, 1995.
(6) Includes, in addition to the 558,825 such shares referred to in the
preceding footnotes, a total of 70,650 shares of Common Stock subject to
stock options granted to the Company's other executive officers pursuant to
the 1986 Plan that are exercisable within 60 days of the Record Date.
Includes 9,973 shares of Common Stock owned of record by the 401(k) Trustee
on behalf of such other executive officers as of June 30, 1995.
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<PAGE> 6
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 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.
<TABLE>
<CAPTION>
PRINCIPAL BUSINESS
OCCUPATIONS DURING PAST
FIVE YEARS, OTHER
NAME DIRECTORSHIPS AND AGE
- --------------------------------------------- ---------------------------------------------
<S> <C>
Eugene Applebaum............................. President of the Company and its predecessors
Director since 1963 since 1963. Chairman of the Board of
Directors and Chief Executive Officer since
1985. Mr. Applebaum has been a registered
pharmacist in the State of Michigan since
1960. Age 58.
Markus M. Ernst.............................. Executive Vice President and Chief Operating
Director since 1974 Officer of the Company and its predecessors
since 1968. Age 58.
Gilbert C. Gerhard........................... Senior Vice President -- Finance and
Director since 1986 Administration since February 1994. Chief
Financial Officer and Treasurer of the
Company since 1983. Secretary since 1995.
Vice President -- Finance and Administration
from 1983 to February 1994. Age 53.
David B. Hermelin............................ Private investor principally involved in real
Director since 1986 estate investment and development. Director
of First of America Bank-Detroit, N.A. Age
58.
Spencer M. Partrich.......................... Private investor principally involved in real
Director since 1988 estate investment and development. Co-owner
and principal of Lautrec, Ltd. and Lautrec
Acquisition Co. since 1976. Age 55.
Laurie M. Shahon............................. Founder and President of Wilton Capital Group
Director since 1988 since January 1994. Managing Director of '21'
International Holdings, Inc. from April 1988
to December 1993. Director of One Price
Clothing Stores, Inc. and Ames Department
Stores, Inc. Age 43.
Samuel Valenti III........................... President of Masco Capital Corporation since
Director since 1992 1988. Vice President -- Investments of Masco
Corporation since 1974. Vice Chairman of the
State of Michigan's Investment Advisory Board
since 1992. Age 49.
</TABLE>
The Board of Directors recommends a vote FOR each of the above-named
nominees.
4
<PAGE> 7
INFORMATION CONCERNING MEETINGS OF THE BOARD OF
DIRECTORS AND BOARD COMMITTEES AND DIRECTOR COMPENSATION
The Board of Directors held six meetings during fiscal 1995. All directors
attended 100% of the 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 does not have a separate
nominating committee.
The Audit Committee recommends the engagement of the Company's independent
auditors, reviews the scope and cost of the audit, considers comments made by
the independent auditors 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 Mr. Hermelin, Mr. Partrich,
Ms. Shahon (Chair) and Mr. Valenti, held two meetings during fiscal 1995.
The Compensation Committee provides guidance and commentary to management
and the entire Board of Directors with respect to all corporate compensation,
benefits and employee equity programs and administers the 1986 Plan and the
Employee Stock Purchase Plan. If the 1996 Plan is approved at the Meeting, it
will be administered by the Compensation Committee as well. The committee, which
currently consists of Mr. Hermelin, Mr. Partrich, Ms. Shahon and Mr. Valenti
(Chair), held six meetings during fiscal 1995.
Directors who are also employees of the Company receive no remuneration for
services as a member of the Board or any committee of the Board. In fiscal 1995,
each non-employee director received an annual fee of $10,000 for serving as a
director plus $500 for each meeting of the Board that such director attended. No
additional fees were paid for service on any of the Board committees.
Non-employee directors are not eligible to receive options to purchase shares of
Common Stock pursuant to the 1986 Plan or to participate in the Company's
Employee Stock Purchase Plan; they have, however, received formula grants of
options to purchase shares of Common Stock pursuant to the 1996 Plan subject to
the approval of the 1996 Plan by Shareholders at the Meeting. See "APPROVAL OF
THE 1996 STOCK OPTION PLAN."
5
<PAGE> 8
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth all compensation awarded to, earned by, or
paid to the Company's Chief Executive Officer (the "CEO") and each of the other
four most highly compensated executive officers of the Company for all services
rendered in all capacities to the Company and its subsidiaries in fiscal 1995,
1994 and 1993.
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
------------
AWARDS
ANNUAL ------------
COMPENSATION SECURITIES
------------ UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITIONS FISCAL YEAR SALARY($) OPTIONS (#) COMPENSATION(1)($)
- ---------------------------------------- ----------- ------------ ------------ ------------------
<S> <C> <C> <C> <C>
Eugene Applebaum........................ 1995 $450,000 450,000 $ 10,487
President and CEO 1994 $450,000 300,000 $ 10,187
1993 $450,000 300,000 $ 7,652
Markus M. Ernst......................... 1995 $250,000 150,000 $ 12,606
Executive Vice President and Chief 1994 $250,000 90,000 $ 12,027
Operating Officer 1993 $250,000 90,000 $ 1,440
Gilbert C. Gerhard...................... 1995 $155,000 34,500 $ 12,952
Senior Vice President -- Finance and 1994 $146,750 18,000 $ 12,260
Administration, Chief Financial 1993 $140,000 12,000 $ 4,310
Officer, Treasurer and Secretary
Donald M. Stutrud....................... 1995 $133,500 34,500 $ 4,480
Senior Vice President -- Store 1994 $128,500 18,000 $ 4,014
Operations 1993 $122,500 12,000 $ 1,332
Eric Bolokofsky......................... 1995 $125,000 36,000 $ 3,739
Senior Vice President -- Merchandising 1994 $116,250 18,000 $ 3,324
1993 $108,750 12,000 $ 3,217
</TABLE>
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(1) Represents (i) the Company's contribution of $500 in fiscal 1995 and $200 in
each of fiscal 1994 and fiscal 1993 to each named executive officer's
account under the 401(k) Plan and (ii) insurance premiums paid by the
Company with respect to term life and disability insurance for the benefit
of each named executive officer. All contributions to the 401(k) Plan are
immediately vested.
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<PAGE> 9
OPTION GRANTS IN FISCAL 1995
The following table sets forth certain information concerning individual
grants of stock options made to each of the executive officers of the Company
named in the Summary Compensation Table during fiscal 1995. All such grants were
made pursuant to the 1986 Plan.
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
INDIVIDUAL GRANTS VALUE AT
------------------------------------------------------------ ASSUMED ANNUAL RATES OF
NUMBER OF STOCK PRICE APPRECIATION
SECURITIES % OF TOTAL FOR
UNDERLYING OPTIONS GRANTED EXERCISE OPTION TERM(2)
OPTIONS GRANTED TO EMPLOYEES IN PRICE EXPIRATION ------------------------
NAME (#)(1) FISCAL 1995 ($/SH) DATE 5%($) 10%($)
- ---------------------- --------------- --------------- -------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Eugene Applebaum...... 450,000 48.08% $15.17 1/29/2001 $2,321,153 $5,265,904
Markus M. Ernst....... 150,000 16.03 15.17 1/29/2001 773,718 1,755,301
Gilbert C. Gerhard.... 4,500 10.42 13.50 8/3/2000 20,661 46,872
30,000 3.21 15.17 1/29/2001 154,744 351,060
Donald M. Stutrud..... 4,500 10.42 13.50 8/3/2000 20,661 46,872
30,000 3.21 15.17 1/29/2001 154,744 351,060
Eric Bolokofsky....... 4,000 6.94 13.50 8/3/2000 13,774 31,248
33,000 3.53 15.17 1/29/2001 170,218 386,166
</TABLE>
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(1) The indicated stock options vest at a rate of 20% per year, beginning on the
first anniversary of the date of grant and have a term of six years
(subject to full accelerated vesting 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 that the Compensation Committee may, in its sole
discretion, grant an 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 due to permanent disability, but in no
event subsequent to the expiration of the stock option.
(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, in the Company's stock price. Actual gains, if any, upon future
exercise of any of these options will depend upon the actual performance of
the Common Stock.
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<PAGE> 10
AGGREGATE OPTION EXERCISES IN FISCAL 1995 AND 1995 FISCAL YEAR-END OPTION VALUES
The following table provides information concerning the exercise of stock
options during fiscal 1995 by each of the executive officers of the Company
named in the Summary Compensation Table and the value of unexercised options
held by such persons as of July 31, 1995 measured in terms of the closing price
of the shares of Common Stock on that date as reported by NASDAQ ($16.75 per
share).
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES VALUE OF
UNDERLYING UNEXERCISED
UNEXERCISED IN-THE-MONEY
OPTIONS AT OPTIONS AT
SHARES 7/31/95 (#) 7/31/95 (#)
ACQUIRED ON VALUE ($) EXERCISABLE/ EXERCISABLE/
NAME EXERCISE (#) REALIZED(1) UNEXERCISABLE UNEXERCISABLE
- -------------------------------- ------------ ----------- --------------- ---------------------
<S> <C> <C> <C> <C>
Eugene Applebaum................ -- -- 315,000/960,000 $1,506,250/$3,075,000
Markus M. Ernst................. -- -- 99,000/306,000 $ 473,250/$ 960,500
Gilbert C. Gerhard.............. 23,625 $ 324,844 41,475/ 63,150 $ 289,306/$ 195,288
Donald M. Stutrud............... 22,500 $ 309,375 47,100/ 63,150 $ 334,775/$ 195,288
Eric Bolokofsky................. -- -- 47,100/ 64,650 $ 334,775/$ 195,163
</TABLE>
- -------------------------
(1) Value realized is calculated based on the difference between the option
exercise price and the closing market price of the shares of Common Stock on
the date of exercise multiplied by the number of shares to which the
exercise relates.
COMPENSATION COMMITTEE INTERLOCKS
AND INSIDER PARTICIPATION
During fiscal 1995, the members of the Compensation Committee were Mr.
Hermelin, Mr. Partrich, Ms. Shahon and Mr. Valenti. None of these individuals
has served as an officer or employee of the Company or any of its subsidiaries.
All fiscal 1995 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 general partnership in which Mr.
Partrich owns a minority interest. During fiscal 1995, the Company's payments to
the partnership aggregated $90,065. The Company also leases a drugstore located
in a shopping center owned by a limited partnership of which Mr. Partrich is a
limited partner and Mr. Partrich's son is the general partner. During fiscal
1995, the Company's payments to the partnership aggregated $86,934.
The Company leases three drugstores from a general partnership formed by
Messrs. Applebaum and Ernst, of which Mr. Applebaum is the majority partner.
During fiscal 1995, the Company's payments to the partnership aggregated
$401,806. The Company also leases a drugstore from a limited partnership, of
which Mr. Applebaum is a limited partner. During fiscal 1995, the Company's
payments to the partnership aggregated $90,962.
The Company believes that each of the leases described above is no less
favorable to the Company than would have been available from unaffiliated
parties.
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<PAGE> 11
REPORT OF THE COMPENSATION COMMITTEE
WITH RESPECT TO EXECUTIVE COMPENSATION*
All cash compensation for the executive officers named in the Summary
Compensation Table for fiscal 1995 was determined by Mr. Applebaum prior to and
effective as of February 1, 1995. Grants of stock options to the named executive
officers were made in August 1994 and January 1995 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; and
-- Align management's interests with the interests of Shareholders for the
long-term success of the Company.
The Company's fiscal 1995 compensation program consisted of cash
compensation and equity-based compensation pursuant to the 1986 Plan and the
Company's Employee Stock Purchase Plan.
Options under the 1986 Plan were granted at the then current market price,
and generally vest at a rate of 20% a year beginning on the first anniversary of
grant (subject to acceleration upon certain change in control events). The
options are scheduled to expire on the sixth anniversary of grant.
The Employee Stock Purchase Plan permits each employee 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 Employee Stock Purchase Plan in order to
recognize the contributions of its employees to the success of the Company and,
in part, because of similar plans adopted 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.
Because options covering only a limited number of shares of Common Stock
remain available for grant under the 1986 Plan and the 1986 Plan will expire by
its terms in fiscal 1996, the Board of Directors, upon the recommendation of the
Compensation Committee, has adopted the 1996 Plan, subject to shareholder
approval.
With certain exceptions, Section 162(m) of the Internal Revenue Code of
1986, as amended (the "Code") imposes an annual individual limitation of $1
million on the deductibility of compensation payments to the Company's Chief
Executive Officer (the "CEO") and the other four most 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 Code, is excluded from this
limitation. The Company believes that options granted under the 1986 Plan should
qualify for a special transition rule that grandfathers compensation paid
pursuant to certain previously-approved plans
- ---------------
* The disclosure contained in this section is not incorporated by reference into
any filings by the Company under the Securities Act of 1933, as amended (the
"Securities Act"), or the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), that incorporated future filings or portions thereof (including
this Proxy Statement or this section).
9
<PAGE> 12
from such limitation. The Company is seeking Shareholder approval of the 1996
Plan in part to satisfy the requirements for the performance-based compensation
exemption to Section 162(m) of the Code. See "Certain Federal Income Tax
Consequences" below.
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 CEO
The present philosophy of the Compensation Committee is to maintain the
CEO's cash compensation at the level in place since 1987 and to grant increases
to reward performance in a particular year using equity-based compensation,
which strengthens the mutuality of interests between the CEO and the Company's
shareholders. In accordance with this, the fiscal 1995 cash compensation for Mr.
Applebaum, the Company's CEO, remained at $450,000 and, in January 1995, Mr.
Applebaum was granted an option under the 1986 Plan covering 450,000 shares of
Common Stock.
The factors considered by the Compensation Committee in determining the
amount of equity-based compensation for Mr. Applebaum for fiscal 1995 included
its subjective evaluation of the Company's general operating and financial
performance and expansion, as well as Mr. Applebaum's leadership and
establishment and implementation of strategic direction for the Company. For
instance, during fiscal 1995 the Company opened fifteen new drugstores and
surpassed the $700 million mark in annual sales. The Company also increased its
market share in its primary market, maintaining its position as the drugstore
market share leader in the greater metropolitan Detroit area, and advanced to
become the fifteenth largest drugstore chain in the nation based on gross sales.
The number of options previously granted under the 1986 Plan to all employees in
the aggregate and to Mr. Applebaum, individually, were also considered in
determining the size of Mr. Applebaum's fiscal 1995 award of options. No
particular weight was given to any factor by the Compensation Committee.
Currently, the CEO is not eligible to participate in the Employee Stock
Purchase Plan due to his ownership of more than 5% of the outstanding Common
Stock.
COMPENSATION OF OTHER EXECUTIVE OFFICERS
Each of the other 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 fiscal 1995 cash compensation of $250,000 has
remained unchanged since 1987. 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,
including 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
the need 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
numbers of options previously granted under the 1986 Plan to all employees in
the aggregate and to each executive officer, individually, were also considered
in determining the fiscal 1995 awards of options to each executive officer.
THE COMPENSATION COMMITTEE
Samuel Valenti III, Chair
David B. Hermelin
Spencer M. Partrich
Laurie M. Shahon
10
<PAGE> 13
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>
1990 100.00 100.00 100.00
1991 149.29 112.73 129.25
1992 154.34 127.13 133.36
1993 137.50 138.20 134.86
1994 165.87 145.32 148.24
1995 208.47 183.20 205.97
</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; 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 (which omitted from the index one
company included last year: Perry Drug Stores, Inc., which was acquired by Rite
Aid Corp.). Data for the S&P 500 Index was provided by Bloomberg, LP.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
REAL ESTATE TRANSACTIONS
For information concerning these transactions, see "COMPENSATION COMMITTEE
INTERLOCKS AND INSIDER PARTICIPATION."
- -------------------------
** The graph and related disclosure contained in this section are not
incorporated by reference into any filings by the Company under the
Securities Act or the Exchange Act that incorporated future filings or
portions thereof (including this Proxy Statement or this section).
11
<PAGE> 14
LOANS TO EXECUTIVE OFFICERS
On December 15, 1994, the Company made non-recourse loans to each of
Gilbert C. Gerhard, a director and executive officer of the Company, and Donald
M. Stutrud, an executive officer of the Company, in the respective amounts of
$205,960 and $239,723 in order to enable each executive officer to exercise
certain stock options. Each loan was made at an interest rate of 6.66% per
annum, which rate represented the average market yield of outstanding marketable
U.S. government obligations of comparable maturities on such date and, as such,
was more favorable than the rates available to such executive officers from
commercial lenders. Each loan was secured by a pledge of all of the shares of
Common Stock issued to such executive officer upon his exercise of the options.
Each loan has been repaid in full.
In addition, on May 17, 1994, the Company made a non-recourse loan to Mr.
Stutrud in the amount of $21,189 in order to enable him to exercise certain
stock options. The loan was made at an interest rate of 4.94% per annum, which
rate represented the average market yield of outstanding marketable U.S.
government obligations of comparable maturities on such date and, as such, was
more favorable than the rate available to Mr. Stutrud from commercial lenders.
The loan was secured by a pledge of all of the shares of Common Stock issued to
him upon exercise of the options. The loan has been repaid in full.
PROPOSAL NO. 2
APPROVAL OF THE 1996 STOCK OPTION PLAN
On October 5, 1995, the Board of Directors approved the 1996 Plan, subject
to shareholder approval. The Company is seeking shareholder approval of the 1996
Plan in order to comply with the requirements of Rule 16b-3 under the Exchange
Act and the requirements of Section 162(m) and Section 422 of the Code.
The following summary of the 1996 Plan is not intended to be complete and
is qualified in its entirety by reference to the 1996 Plan, a copy of which is
attached as Annex 1 to this Proxy Statement.
GENERAL
The purpose of the 1996 Plan is to enhance the profitability and value of
the Company for the benefit of the Shareholders by enabling the Company to
provide key employees and non-employee directors of the Company and key
employees of its subsidiaries an opportunity to acquire an ownership interest in
the Company, or increase their existing ownership interests, and thereby
attract, retain and reward such key employees and non-employee directors, and
strengthen the mutuality of interests between such key employees and
non-employee directors and the Shareholders. Pursuant to the 1996 Plan, during
the ten year period ending October 4, 2005, the Company may grant options with
respect to an aggregate of up to 2,000,000 shares of Common Stock with no
individual to be granted options with respect to greater than 1,000,000 shares
of Common Stock. Options granted pursuant to the 1996 Plan may be either options
intended to satisfy the requirements of incentive stock options within the
meaning of Section 422 of the Code ("ISOs") or non-qualified stock options not
intended to satisfy the requirements for ISOs ("NQSOs"). Shares of Common Stock
subject to options may be either authorized and unissued shares, or previously
issued shares acquired or to be acquired by the Company and held in its
treasury.
ADMINISTRATION
The 1996 Plan will initially be administered by the Compensation Committee
of the Board of Directors of the Company, which is comprised of "disinterested
persons" within the meaning of Rule 16b-3 under Section 16(b) of the Exchange
Act and, under a transition rule that will be applicable until the Company's
first meeting of shareholders at which directors are to be elected that occurs
on or after January 1, 1996, "outside directors" within the meaning of Section
162(m) of the Code. Any or all powers and functions of the Compensation
Committee may be exercised at any time and from time to time by the Board of
Directors or, at the direction of the Board of Directors, another committee of
the Board of Directors, provided all of the members of the Board or such
committee are "disinterested persons" within the meaning of Rule 16b-3 and,
unless otherwise determined by the Board of Directors, "outside directors"
within the meaning of
12
<PAGE> 15
Section 162(m) of the Code (references below to the Committee shall be deemed to
include references to the Board of Directors and such other Committee to the
extent any of the foregoing administers the 1996 Plan.) Subject to the express
provisions of the 1996 Plan, including those relating to non-employee directors,
the authority of the Committee includes, among other things, determining the
persons to whom options are granted, the timing of any grants, the number of
shares subject to each option, the period of exercisability, the designation of
options as ISOs or NQSOs and the other terms and provisions thereof.
Non-employee directors and officers subject to Section 16(a) of the
Exchange Act may not, and the Committee also has the authority to require, as a
condition to any grant, that any other grantee also may not, sell or otherwise
dispose of shares acquired pursuant to the exercise of an option within six
months of the date an option is granted.
ELIGIBILITY
ISOs may be granted only to salaried key employees of the Company or any
subsidiary or parent corporation of the Company now existing or subsequently
formed or acquired. NQSOs may be granted to salaried key employees and
non-employee directors of the Company and key employees of any subsidiary or
parent corporation of the Company now existing or subsequently formed or
acquired.
GRANT, TERMS AND CONDITIONS OF OPTIONS
The Company will not receive any monetary consideration for granting
options.
The exercise price for each share subject to an option will be an amount
that the Committee determines, in its good faith judgment, to be not less than
100%, in the case of an ISO or an NQSO granted to a Director Participant (as
defined below), or 85%, in the case of any other NQSO, of the fair market value
of the Common Stock on the date the option is granted. In the case of ISOs,
however, the exercise price per share of ISOs granted to any holder of capital
stock of the Company (or any subsidiary or parent corporation) representing 10%
or more of the voting power of the Company (or any subsidiary or parent
corporation) will be in an amount that the Committee determines, in its good
faith judgment, to be not less than 110% of the fair market value of the Common
Stock on the date the ISO is granted.
Under the 1996 Plan, fair market value per share means:
(1) if the shares are listed on a national securities exchange or
reported on the NASDAQ Stock Market -- National Market ("NASDAQ-NMS"), the
last reported sale price per share on such exchange or such system on the
date the option is granted or, if the shares are not traded or reported on
such date, then on the closest preceding date on which such shares were
traded or reported; or
(2) if the shares are not listed on a national securities exchange or
reported on NASDAQ-NMS but are quoted in the over-the-counter market, the
average of the closing bid and ask quotations in such market for such
shares on the date the option is granted or, if there are no such
quotations on such date, then on the closest preceding date on which such
quotations are available; provided, however, that if, in the judgment of
the Committee, there is not a regular, active public market for the shares,
fair market value per share shall be determined by the Committee in its
good faith judgment. The determination by the Committee of fair market
value will be conclusive and binding.
Payment for shares purchased upon the exercise of options may be in cash
or, if the terms of an option so provide, with other shares of Common Stock or
an executed promissory note on such terms and conditions as the Committee shall
determine.
Except for NQSOs granted to Director Participants, which are discussed
below, options granted under the 1996 Plan are exercisable at such times, in
such amounts and during such period or periods as the Committee may determine at
the date the option is granted. ISOs, however, are not exercisable after ten
years from the date of grant and, in the case of a person who at the date of
grant owns capital stock of the Company (or any subsidiary or parent
corporation) representing 10% or more of the voting power of the Company (or any
subsidiary or parent corporation), are not exercisable after five years from the
date of grant. Except as
13
<PAGE> 16
otherwise provided under the Code, if the aggregate fair market value of shares
subject to ISOs (under any plan of the Company or any subsidiary or parent
corporation of the Company) exercisable for the first time in any calendar year
exceeds $100,000, such options will be treated as NQSOs.
In addition, the Committee has the right to accelerate, in whole or in
part, from time to time, conditionally or unconditionally, the right to exercise
any option granted under the 1996 Plan (other than an NQSO granted to a Director
Participant).
In the event of retirement, termination by the Company of employment with
or without cause, termination of employment by an optionee with or without good
reason or upon death or disability, special rules will apply regarding the
exercisability of options.
Options may not be transferred except by will or the laws of descent or
distribution (except, in the case of NQSOs, to the extent that the restrictions
on transferability currently imposed by Rule 16b-3 under the Exchange Act are
modified or eliminated). Options are only exercisable during the lifetime of a
holder by such holder (or, in the case of NQSOs, to the extent transferability
may be permitted in the future, by such holder's permitted transferee).
In the event of a "change in control" of the Company, all then outstanding
options shall immediately become exercisable. The Committee, in its sole
discretion, may determine that, upon the occurrence of a "change in control",
each option outstanding under the 1996 Plan shall terminate within a specified
number of days after notice to the holder, and such holder shall receive, with
respect to each share subject to such option, an amount in cash or other
property, or any combination thereof, equal to the excess of the aggregate fair
market value at the time of such transaction of the shares subject to such
option over the aggregate exercise price therefor. The foregoing provision does
not apply to options granted to directors or officers subject to Section 16(a)
of the Exchange Act within six months prior to a "change in control", unless an
exemption from liability under Section 16(b) of the Exchange Act is otherwise
available.
SPECIAL PROVISIONS RELATING TO DIRECTOR PARTICIPANTS
Commencing with the effective date of the 1996 Plan, each current
non-employee director of the Company (a "Director Participant") shall
automatically be granted NQSOs to purchase 10,000 shares of Common Stock and
will automatically be granted NQSOs to purchase 1,000 shares at the time of each
annual meeting of the Company's shareholders at which such director is elected
to the Board of Directors (commencing with the annual meeting to be held in
calendar year 1996). Future Director Participants shall automatically be granted
NQSOs to purchase 10,000 shares of Common Stock upon their initial appointment
or election to the Board of Directors and will automatically be granted NQSOs to
purchase 1,000 shares of Common Stock at the time of each subsequent annual
meeting of the Company's shareholders at which such director is elected to the
Board of Directors (but not earlier than the annual meeting to be held in
calendar year 1996). The purchase price of the shares of Common Stock covered by
the NQSOs to be granted to a Director Participant shall be the fair market value
of such shares of Common Stock on the date such option is granted.
NQSOs granted to Director Participants may not be exercised for one year
immediately following the date of grant. Thereafter, such NQSOs will be
exercisable for the period ending five years from the date of grant, subject to
limitations or restrictions pursuant to the terms of the 1996 Plan. Upon
termination of a Director Participant's directorship, any NQSO granted to such
Director Participant will, to the extent not theretofore exercised, terminate
and be null and void; provided, however, that in the case of termination under
certain circumstances, such NQSO shall (if not then exercisable) become
immediately exercisable and may be exercised for certain periods of time
thereafter as set forth in the 1996 Plan.
EFFECT OF CHANGE IN COMMON STOCK
In the event of any change in the Common Stock through merger,
consolidation, reorganization, recapitalization, stock dividend, stock split,
split-up, split-off, spin-off, combination of shares, exchange of shares, or
other like change in capital structure of the Company, an adjustment will be
made to each
14
<PAGE> 17
outstanding option so that such option thereafter is exercisable for such
securities, cash and/or property as would have been received had such option
been exercised in full immediately prior to such transaction and been exchanged
in such transaction. An adjustment will be made successively each time any such
change occurs.
AMENDMENT OR TERMINATION
The Board of Directors of the Company may at any time amend or terminate
the 1996 Plan, provided that no such action affects or impairs the rights of an
optionee under any previously granted option and that (subject to certain
exceptions) the special provisions relating to Director Participants may not be
amended more frequently than once every six months. Notwithstanding the
foregoing, without the approval of the Shareholders, no amendment or change may
be made (a) increasing the total number of shares of Common Stock reserved for
options under the plan or the maximum number of shares for which options may be
granted to any one individual (other than an increase resulting from an
adjustment), (b) reducing the exercise price of any ISO, (c) modifying the
provisions of the 1996 Plan relating to eligibility or (d) materially increasing
the benefits accruing to participants under the 1996 Plan.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The statements in the following paragraphs of the principal federal income
tax consequences of options under the 1996 Plan are based on statutory authority
and judicial and administrative interpretations, as of the date of this Proxy
Statement, which are subject to change at any time (possibly with retroactive
effect). The law is technical and complex and the discussion below represents
only a general summary.
INCENTIVE STOCK OPTIONS. ISOs granted under the 1996 Plan are intended to
meet the definitional requirements of Section 422(b) of the Code for "incentive
stock options."
An employee who receives an ISO does not recognize any taxable income upon
the grant of such ISO. Similarly, the exercise of an ISO generally does not give
rise to federal income tax to the employee, provided that (i) the federal
"alternative minimum tax", which depends on the employee's particular tax
situation, does not apply and (ii) the employee is employed by the Company from
the date of grant of the option until three months prior to the exercise
thereof, except where such employment terminates by reason of disability (where
the three month period is extended to one year) or death (where this requirement
does not apply). If an employee exercises an ISO after these requisite periods,
the ISO will be treated as an NQSO and will be subject to the rules set forth
below under the caption "NQSOs".
Further, if after exercising an ISO, an employee disposes of the Common
Stock so acquired more than two years from the date of grant and more than one
year from the date of transfer of the Common Stock pursuant to the exercise of
such ISO (the "applicable holding period"), the employee will normally recognize
a long-term capital gain or loss equal to the difference, if any, between the
amount received for the shares and the exercise price. If, however, an employee
does not hold the shares so acquired for the applicable holding
period -- thereby making a "disqualifying disposition" -- the employee would
realize ordinary income on the excess of the fair market value of the shares at
the time the ISO was exercised over the exercise price and the balance, if any,
would be long-term capital gain (provided the holding period for the shares
exceeded one year and the employee held such shares as a capital asset at such
time).
An employee who exercises an ISO by delivering Common Stock previously
acquired pursuant to the exercise of another ISO is treated as making a
"disqualifying disposition" of such Common Stock if such shares are delivered
before the expiration of their applicable holding period. Upon the exercise of
an ISO with previously acquired shares as to which no disqualifying disposition
occurs, despite some uncertainty, it appears that the employee would not
recognize gain or loss with respect to such previously acquired shares.
The Company will not be allowed a federal income tax deduction upon the
grant or exercise of an ISO or the disposition, after the applicable holding
period, of the Common Stock acquired upon exercise of an ISO. In the event of a
disqualifying disposition, the Company generally will be entitled to a deduction
in an amount equal to the ordinary income included by the employee, provided
that such amount constitutes an ordinary and
15
<PAGE> 18
necessary business expense to the Company and is reasonable and the limitations
of Sections 280G and 162(m) of the Code (as discussed below) do not apply.
NON-QUALIFIED OPTIONS. NQSOs granted under the 1996 Plan are options that
do not qualify as ISOs. An optionee who receives an NQSO will not recognize any
taxable income upon the grant of such NQSO. However, the optionee generally will
recognize ordinary income upon exercise of an NQSO in an amount equal to the
excess of (i) the fair market value of the shares of Common Stock at the time of
exercise over (ii) the exercise price.
As a result of Section 16(b) of the Exchange Act, the timing of income
recognition may be deferred (generally for up to six months following the
exercise of an NQSO (i.e., the "Deferral Period")) for any employee who is an
officer or director of the Company or a beneficial owner of more than ten
percent (10%) of any class of equity securities of the Company. Absent a written
election (pursuant to Section 83(b) of the Code) filed with the Internal Revenue
Service within 30 days after the date of transfer of the shares pursuant to the
exercise of the option to include in income, as of the transfer date, the excess
(on such date) of the fair market value of the shares over their exercise price,
recognition of income by the optionee will be deferred until the expiration of
the Deferral Period, if any.
The ordinary income recognized with respect to the receipt of shares or
cash upon exercise of an NQSO will be subject to both wage withholding and
employment taxes (if any). In addition to the customary methods of satisfying
the withholding tax liabilities that arise upon the exercise of an NQSO, the
Company may satisfy the liability in whole or in part by withholding shares of
Common Stock from those that otherwise would be issuable to the optionee or by
the optionee tendering other shares owned by him or her, valued at their fair
market value as of the date that the tax withholding obligation arises. A
federal income tax deduction generally will be allowed to the Company in an
amount equal to the ordinary income included by the optionee with respect to his
or her NQSO, provided that such amount constitutes an ordinary and necessary
business expense to the Company and is reasonable and the limitations of
Sections 280G and 162(m) of the Code (as described below) do not apply.
If an optionee exercises an NQSO by delivering shares of Common Stock to
the Company, other than shares previously acquired pursuant to the exercise of
an ISO which is treated as a "disqualifying disposition" as described above, the
optionee will not recognize gain or loss with respect to the exchange of such
shares, even if their then fair market value is different from the optionee's
tax basis. The optionee, however, will be taxed as described above with respect
to the exercise of the NQSO as if he or she had paid the exercise price in cash,
and the Company likewise generally will be entitled to an equivalent tax
deduction.
CHANGE IN CONTROL. As described above, upon a "change in control" of the
Company, all the then outstanding options will immediately become exercisable.
In general, if the total amount of payments to an employee that are contingent
upon a "change of control" of the Company (as defined in Section 280G of the
Code), including certain payments under the 1996 Plan that vest upon a "change
in control", equals or exceeds three times the employee's "base amount"
(generally, such employee's average annual compensation for the five years
preceding the "change in control"), then, subject to certain exceptions, the
payments may be treated as "parachute payments" under the Code, in which case a
portion of such payments would be non-deductible to the Company and the employee
would be subject to a 20% excise tax on such portion of the payments.
CERTAIN LIMITATIONS ON DEDUCTIBILITY OF EXECUTIVE COMPENSATION. With
certain exceptions, Section 162(m) of the Code denies a deduction to publicly
held corporations for compensation paid to certain executive officers in excess
of $1 million per executive per taxable year (including any deduction with
respect to the exercise of an NQSO or the disqualifying disposition of stock
purchased pursuant to an ISO). Options granted under the 1996 Plan should, under
certain circumstances, qualify for the performance-based compensation exemption
to Section 162(m) of the Code. In order to qualify for such exemption, among
other requirements, (i) the option must be granted with an exercise price not
less than the fair market value of the shares of Common Stock at the time of
grant and (ii) the Committee must, at the time it grants the option, consist
solely of two or more "outside directors" within the meaning of Section 162(m)
of the Code (which requirement the presently constituted Committee will satisfy
until the Company's first meeting of shareholders
16
<PAGE> 19
at which directors are to be elected that occurs on or after January 1, 1996).
The options described under "1996 Plan Benefits" below should qualify for the
performance-based compensation exemption provided that Shareholder approval of
the 1996 Plan is obtained.
1996 PLAN BENEFITS
On October 5, 1995, grants of options covering a total of 735,000 shares of
Common Stock (each having an exercise price of $17.50 per share) were made by
the Compensation Committee, upon recommendation of the CEO, pursuant to the 1996
Plan, subject to Shareholder approval of the 1996 Plan. If the 1996 Plan is not
approved by Shareholders at the Meeting, such grants will become null and void.
Certain information about the grants is set forth in the following table.
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES
UNDERLYING
NAME AND POSITION OPTIONS
OF GRANTEE/GROUP GRANTED(#)
------------------------------------------------------------------- ----------
<S> <C>
Eugene Applebaum................................................... 300,000
President and CEO
Markus M. Ernst.................................................... 100,000
Executive Vice President and Chief Operating Officer
Gilbert C. Gerhard................................................. 30,000
Senior Vice President -- Finance and Administration,
Chief Financial Officer, Treasurer and Secretary
Donald H. Stutrud.................................................. 30,000
Senior Vice President -- Store Operations
Eric Bolokofsky.................................................... 30,000
Senior Vice President -- Merchandising
All executive officers as a group.................................. 520,000
All directors who are not officers as a group...................... 40,000
All employees as a group........................................... 695,000
</TABLE>
The Board of Directors recommends a vote FOR this proposal.
PROPOSALS BY SHAREHOLDERS
Any proposal of a Shareholder intended to be presented at the Annual
Meeting of Shareholders to be held in 1996, must be received by the Company by
July 2, 1996, 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 Exchange Act.
By Order of the Board of Directors,
Gilbert C. Gerhard, Secretary
Troy, Michigan
November 2, 1995
17
<PAGE> 20
ANNEX 1
ARBOR DRUGS, INC.
1996 STOCK OPTION PLAN
<PAGE> 21
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<C> <S> <C>
1. Purposes.......................................................................... 1
2. Stock Subject to the Plan......................................................... 1
3. Administration.................................................................... 1
4. Eligibility....................................................................... 2
5. Option Price and Payment.......................................................... 2
6. Terms of Options and Limitations on the Right of Exercise......................... 3
7. Termination of Employment......................................................... 4
8. Exercise of Options............................................................... 5
9. Special Provisions Relating to Director Participants.............................. 6
10. Use of Proceeds................................................................... 7
11. Non-Transferability of Options.................................................... 7
12. Adjustment of Shares; Effect of Certain Transactions.............................. 7
13. Right to Terminate Employment..................................................... 8
14. Purchase for Investment........................................................... 8
15. Issuance of Stock Certificates; Legends; Payment of Expenses...................... 8
16. Withholding Taxes................................................................. 9
17. Listing of Shares and Related Matters............................................. 9
18. Amendment of the Plan............................................................. 10
19. Termination or Suspension of the Plan............................................. 10
20. Savings Provision................................................................. 10
21. Governing Law..................................................................... 10
22. Partial Invalidity................................................................ 10
23. Effective Date.................................................................... 10
</TABLE>
<PAGE> 22
ARBOR DRUGS, INC.
1996 STOCK OPTION PLAN
1. PURPOSES
Arbor Drugs, Inc., a Michigan corporation (the "Company"), wishes to
enhance the profitability and value of the Company for the benefit of the
Company's stockholders by enabling the Company to provide key employees and
non-employee directors of the Company and key employees of any subsidiary
corporation or parent corporation of the Company now existing or hereafter
formed or acquired an opportunity to acquire ownership interests in the Company,
or increase their existing ownership interests, and thereby attract, retain and
reward such key employees and non-employee directors and strengthen the
mutuality of interests between such key employees and non-employee directors and
the Company's stockholders.
The stock options ("Options") offered pursuant to this 1996 Stock Option
Plan (the "Plan") are a matter of separate inducement and are not in lieu of any
salary or other compensation for the services of any key employee or
non-employee director.
The Options granted under the Plan are intended to be either incentive
stock options ("Incentive Options") within the meaning of Section 422 of the
Internal Revenue Code of 1986, as amended (the "Code"), or options that do not
meet the requirements for Incentive Options ("Non-Qualified Options"). The
Company makes no warranty, however, as to the qualification of any Option as an
Incentive Option.
Except as provided in Articles 9, 19 and 23 hereof, Options may be granted
from time to time during the period beginning on October 5, 1995 (the "Effective
Date") and ending on October 4, 2005 (the "Termination Date").
As used in the Plan, the term "parent corporation" and "subsidiary
corporation" shall mean a corporation within the definitions of such terms
contained in Sections 424(e) and 424(f) of the Code, respectively.
2. STOCK SUBJECT TO THE PLAN
Options granted under the Plan shall be exercisable for shares of common
stock, $.01 par value per share, of the Company ("Common Stock"). The total
number of shares of Common Stock of the Company authorized for issuance upon the
exercise of Options under the Plan (the "Shares") shall not exceed, in the
aggregate, 2,000,000 shares, with no individual optionee to receive in excess of
1,000,000 Shares upon exercise of Options granted under the Plan, subject to
adjustment in accordance with Section 12 of the Plan.
Shares available for issuance under the Plan may be either authorized but
unissued Shares, Shares of issued stock held in the Company's treasury, or both,
at the discretion of the Company. If and to the extent that Options granted
under the Plan expire or terminate without having been exercised, the Shares
covered by such expired or terminated Options may again be subject to an Option
under the Plan.
3. ADMINISTRATION
The Compensation Committee (the "Committee") of the Company's board of
directors (the "Board of Directors") shall initially administer the Plan. The
Committee shall consist of no fewer than two (2) members of the Board of
Directors, each of whom shall be (i) a "disinterested person" within the meaning
of Rule 16b-3 (or any successor rule or regulation) promulgated under the
Securities Exchange Act of 1934, as amended (the "Exchange Act") and (ii) unless
otherwise determined by the Board of Directors, an "outside director" within the
meaning of Section 162(m) of the Code. A majority of the members of the
Committee shall constitute a quorum and the act of a majority of the members of
the Committee shall be the act of the Committee. Any member of the Committee may
be removed at any time either with or without cause by resolution adopted by the
Board of Directors and any vacancy on the Committee at any time may be filled by
resolution adopted by the Board of Directors.
Any and all powers and functions of the Committee may be exercised at any
time and from time to time by the Board of Directors or, at the direction of the
Board of Directors, another committee of the Board of Directors (references
below to the Committee shall be deemed to include references to the Board of
Directors and such other committee, except as the context otherwise requires);
provided, however, that all of the
<PAGE> 23
members of the Board of Directors or such other committee, as the case may be,
shall be (i) "disinterested persons" within the meaning of Rule 16b-3 (or any
successor rule or regulation) promulgated under the Exchange Act and (ii) unless
otherwise determined by the Board of Directors, "outside directors" within the
meaning of Section 162(m) of the Code.
Subject to the express provisions of the Plan, the Committee shall have the
authority, in its sole discretion, to determine the key employees to whom
Options shall be granted, the time when such persons shall be granted Options,
the number of Shares which shall be subject to each Option, the purchase price
of each Share which shall be subject to each Option, the period(s) during which
such Options shall be exercisable (whether in whole or part), and the other
terms and provisions thereof (which need not be identical). In determining the
key employees to whom Options shall be granted and the number of Shares for
which Options are to be granted to each key employee, the Committee shall give
due consideration to the length of service, performance, the amount of earnings
and the responsibilities and duties of such person.
Subject to the express provisions of the Plan, the Committee also shall
have the authority to construe the Plan and the Options granted hereunder, to
prescribe, amend and rescind rules and regulations relating to the Plan, to
determine the terms and provisions of the Options (which need not be identical)
and to make all other determinations necessary or advisable for administering
the Plan. The Committee also shall have the authority to require, in its
discretion, as a condition of the granting of any such Option, that the employee
agree (a) not to sell or otherwise dispose of Shares acquired pursuant to the
exercise of such Option for a period of six (6) months following the date of the
acquisition of such Option and (b) that in the event of termination of
employment of such employee, other than as a result of dismissal without cause
or Termination For Good Reason (as defined in Section 7 herein), such employee
will not, for a period to be fixed at the time of the grant of the Option, enter
into any other employment or participate directly or indirectly in any other
business or enterprise which is competitive with the business of the Company or
any subsidiary corporation or parent corporation of the Company, or enter into
any employment in which such employee will be called upon to utilize special
knowledge obtained through employment with the Company or any subsidiary
corporation or parent corporation thereof. Any director or officer of the
Company or any subsidiary corporation or parent corporation who is subject to
the reporting requirements of Section 16(a) of the Exchange Act (or any
successor provision) shall not be entitled to sell or otherwise dispose of any
Shares acquired upon the exercise of any Option for a period of six (6) months
from the date such Option was granted.
Any determination of the Committee on the matters referred to in this
Section 3 shall be conclusive.
The Committee may employ such legal or other counsel, consultants and
agents as it may deem desirable for the administration of the Plan and may rely
upon any opinion or computation received from any such counsel, consultant or
agent. Expenses incurred by the Committee in the engagement of such counsel,
consultant or agent shall be paid by the Company or such subsidiary corporation
or parent corporation of the Company whose employees have benefitted from the
Plan, as determined by the Committee. No member or former member of the Board of
Directors, the Executive Committee or the Committee shall be liable for any
action or determination made in good faith with respect to the Plan or any
Options granted hereunder.
4. ELIGIBILITY
Incentive Options may be granted only to salaried key employees of the
Company or any subsidiary corporation or parent corporation of the Company now
existing or hereafter formed or acquired, and Non-Qualified Options may be
granted to salaried key employees and non-employee directors of the Company and
key employees of any subsidiary or parent corporation of the Company now
existing or hereafter formed or acquired, provided, however, that the Plan does
not create a right in any person (other than Director Participants as defined
in, and to the extent provided in, Article 9 of the Plan) to participate in, or
be granted Options under, the Plan.
5. OPTION PRICE AND PAYMENT
The price for each Share purchasable under any Option granted hereunder
shall be determined by the Committee in its good faith judgment, but shall not
be less than one hundred percent (100%), in the case of
2
<PAGE> 24
an Incentive Option or a Non-Qualified Option granted to a Director Participant,
or eighty-five percent (85%), in the case of any other Non-Qualified Option, of
the "fair market value" (as defined below) per Share at the date the Option is
granted; provided, however, that in the case of an Incentive Option granted to a
key employee who, at the time such Option is granted, owns shares of the Company
or any subsidiary corporation or parent corporation representing more than ten
percent (10%) of the total combined voting power of all classes of stock of the
Company or any subsidiary corporation or parent corporation, the purchase price
for each Share shall be not less than one hundred ten percent (110%) of the fair
market value per Share at the date the Option is granted. In determining the
stock ownership of a key employee for any purpose under the Plan, the rules of
Section 424(d) of the Code shall be applied, and the Committee may rely on
representations of fact made to it by the key employee and believed by it to be
true.
For purposes of the Plan, "fair market value," with respect to any date of
determination, means:
(i) if the Shares are listed or admitted to trading on a national
securities exchange in the United States or reported through the National
Association of Securities Dealers Automated Quotation System -- National
Market System ("NASDAQ-NMS"), then the closing sale price on such exchange
or NASDAQ-NMS on such date or, if no trading occurred or quotations were
available on such date, then on the closest preceding date on which the
Shares were traded or quoted; or
(ii) if not so listed or reported but a regular, active public market
for the Shares exists (as determined in the sole discretion of the
Committee, whose decision shall be conclusive and binding), then the
average of the closing bid and ask quotations per Share in the
over-the-counter market for such Shares in the United States on such date
or, if no such quotations are available on such date, then on the closest
date preceding such date. For purposes of the foregoing, a market in which
trading is sporadic and the ask quotations generally exceed the bid
quotations by more than 15% shall not be deemed to be a "regular, active
public market."
If the Committee determines that a regular, active public market does not
exist for the Shares, the Committee shall determine the fair market value of the
Shares in its good faith judgment based on the total number of shares of Common
Stock then outstanding, taking into account all outstanding options, warrants,
rights or other securities exercisable or exchangeable for, or convertible into,
shares of Common Stock.
Upon the exercise of an Option granted hereunder, the Company shall cause
the purchased Shares to be issued only when it shall have received the full
purchase price therefor in cash; provided, however, that in lieu of cash, the
holder of an Option may, if the terms of such Option so provide and to the
extent permitted by applicable law, exercise an Option (a) in whole or in part,
by delivering to the Company shares of Common Stock of the Company (in proper
form for transfer and accompanied by all requisite stock transfer tax stamps or
cash in lieu thereof) owned by such holder having a fair market value equal to
the cash exercise price applicable to that portion of the Option being
exercised, the fair market value of the shares of Common Stock so delivered to
be determined as of the date immediately preceding the date of exercise, or as
otherwise may be required to comply with or conform to the requirements of any
applicable law or regulations, or (b) in part, by delivering to the Company an
executed promissory note on such terms and conditions as the Committee shall
determine at the time of grant, in its sole discretion; provided, however, that
the principal amount of such note shall not exceed ninety percent (90%) (or such
lesser percentage as would be permitted by applicable margin regulations) of the
aggregate purchase price of the Shares then being purchased pursuant to the
exercise of such Option.
6. TERMS OF OPTIONS AND LIMITATIONS ON THE RIGHT OF EXERCISE
Except as otherwise provided in Article 9 below, any Option granted
hereunder shall be exercisable at such times, in such amounts and during such
period or periods as the Committee shall determine at the date of the grant of
such Option; provided, however, that an Incentive Option shall not be
exercisable after the expiration of ten (10) years from the date such Option is
granted; provided, further, that in the case of an Incentive Option granted to a
person who, at the time such Incentive Option is granted, owns stock of the
Company or any subsidiary corporation or parent corporation of the Company
representing more than ten percent (10%) of the total combined voting power of
all classes of stock of the Company or of any subsidiary
3
<PAGE> 25
corporation or parent corporation of the Company, such Incentive Option shall
not be exercisable after the expiration of five (5) years from the date such
Incentive Option is granted.
Except as otherwise provided in Article 9 below, the Committee shall have
the right to accelerate, in whole or in part, from time to time, conditionally
or unconditionally, rights to exercise any Option granted hereunder.
To the extent that an Option is not exercised within the period of
exercisability specified therein, it shall expire as to the then unexercised
part.
Except as otherwise provided under the Code, to the extent that the
aggregate fair market value of stock for which Incentive Options (under all
stock option plans of the Company and of any parent corporation or subsidiary
corporation of the Company) are exercisable for the first time by an employee
during any calendar year exceeds one hundred thousand dollars ($100,000), such
Options shall be treated as Non-Qualified Options. For purposes of this
limitation, (a) the fair market value of stock is determined as of the time the
Option is granted, (b) the limitation will be applied by taking into account
Options in the order in which they were granted, and (c) Incentive Options
granted before 1987 shall not be taken into account.
In no event shall an Option granted hereunder be exercised for a fraction
of a Share or for less than one hundred (100) Shares (unless the number
purchased is the total balance for which the Option is then exercisable).
A person entitled to receive Shares upon the exercise of an Option shall
not have the rights of a shareholder with respect to such Shares until the date
of issuance of a stock certificate to him or her for such Shares; provided,
however, that until such stock certificate is issued, any holder of an Option
using previously acquired shares of Common Stock in payment of an option
exercise price shall continue to have the rights of a shareholder with respect
to such previously acquired shares of Common Stock.
7. TERMINATION OF EMPLOYMENT
Upon termination of employment of any key employee with the Company and all
subsidiary corporations and parent corporations of the Company, any Option
previously granted to such employee, unless otherwise specified by the Committee
in the Option shall, to the extent not theretofore exercised, terminate and
become null and void; provided, however, that:
A. if any key employee shall die while in the employ of such corporation or
during either the one (1) year or three (3) month period, whichever is
applicable, specified in clauses (B) and (C) below, any Option granted
hereunder, unless otherwise specified by the Committee in the Option, shall be
exercisable for any or all of such number of Shares that such employee is
entitled to exercise at the time of death, by the legal representative of such
employee or such person who acquired such Option by bequest or inheritance or by
reason of the death of such employee, at any time up to and including one (1)
year after the date of death (subject to extension in the discretion of the
Committee);
B. if the employment of any key employee shall terminate by reason of such
employee's disability (as described in Section 22(e)(3) of the Code), any Option
granted hereunder, unless otherwise specified by the Committee in the Option,
shall be exercisable for any or all of such number of Shares that such employee
is entitled to exercise at the effective date of termination of employment by
reason of disability, at any time up to and including one (1) year after the
effective date of such termination of employment (subject to extension in the
discretion of the Committee);
C. if the employment of any key employee shall terminate (i) by reason of
the employee's retirement (at such age or upon such conditions as shall be
specified by the Committee), (ii) by the key employee for "good reason" (only if
such employee is party to a written employment agreement with the Company or any
subsidiary corporation or parent corporation which expressly provides for
termination by the key employee for "good reason," (or words of like import) and
such employee validly terminates his or her employment for "good reason," (or
words of like import) as such term is defined in the agreement ("Termination For
Good Reason")), or (iii) by the employer other than for cause (as defined
below), any Option granted hereunder,
4
<PAGE> 26
unless otherwise specified by the Committee in the Option, shall be exercisable
for any or all of such number of Shares that such employee is entitled to
exercise at the effective date of termination of employment, at any time up to
and including three (3) months after the effective date of such termination of
employment (subject to extension in the discretion of the Committee); and
D. if the employment of any employee shall terminate by any reason other
than that provided for in clauses (A), (B) or (C) above, such Option, unless
otherwise specified by the Committee in such Option shall, to the extent not
theretofore exercised, become null and void.
None of the events described above shall extend the period of
exercisability of the Option beyond the expiration date thereof.
If an Option granted hereunder shall be exercised by the legal
representative of a deceased grantee or by a person who acquired an Option
granted hereunder by bequest or inheritance or by reason of the death of any
employee or former employee, written notice of such exercise shall be
accompanied by a certified copy of letters testamentary or equivalent proof of
the right of such legal representative or other person to exercise such Option.
For purposes of the Plan, the term "for cause" shall mean (a) with respect
to an employee who is a party to a written employment agreement with, or,
alternatively, participates in a compensation or benefit plan (other than the
Plan) of, the Company or a subsidiary corporation or parent corporation of the
Company, which agreement or plan contains a definition of "for cause" or "cause"
(or words of like import) for purposes of termination of employment or services
thereunder by the Company or such subsidiary corporation or parent corporation
of the Company, "for cause" or "cause" as defined therein (if an employee is
both party to an employment agreement and participates in such a plan, the
definition contained in such employment agreement shall control); or (b) in all
other cases, as determined by the Committee or the Board of Directors, in its
sole discretion, (i) the willful commission by an employee of an act that causes
or may cause substantial damage to the Company or a subsidiary corporation or
parent corporation of the Company; (ii) the commission by an employee of an act
of fraud in the performance of such employee's duties on behalf of the Company
or a subsidiary corporation or parent corporation of the Company; (iii)
conviction of the employee for commission of a felony in connection with the
performance of his duties on behalf of the Company or a subsidiary corporation
or parent corporation of the Company; or (iv) the continuing failure of an
employee to perform the duties of such employee to the Company or a subsidiary
corporation or parent corporation of the Company that has not been cured within
15 days after written notice thereof has been given to the employee by the
Committee.
For purposes of the Plan, an employment relationship shall be deemed to
exist between an individual and a corporation if, at the time of determination,
the individual was an "employee" of such corporation for purposes of Section
422(a) of the Code. If an individual is on leave of absence taken with the
consent of the corporation by which such individual was employed, or is on
active military service, and is determined to be an "employee" for purposes of
the exercise of an Option, such individual shall not be entitled to exercise
such Option during such period and while the employment is treated as continuing
intact unless such individual shall have obtained the prior written consent of
such corporation, which consent shall be signed by the chairman of the board of
directors, the president, a senior vice-president or other duly authorized
officer of such corporation.
A termination of employment shall not be deemed to occur by reason of (i)
the transfer of an employee from employment by the Company to employment by a
subsidiary corporation or a parent corporation of the Company or (ii) the
transfer of an employee from employment by a subsidiary corporation or a parent
corporation of the Company to employment by the Company or by another subsidiary
corporation or parent corporation of the Company.
8. EXERCISE OF OPTIONS
Subject to the limitations on exercise referred to in Sections 6, 7 and 9
hereof, unless otherwise agreed by the Company, Options granted under the Plan
shall be exercised by the optionee as to all or part of the Shares
5
<PAGE> 27
covered thereby by giving written notice of exercise to the Corporate Secretary
of the Company at the principal business office of the Company, specifying the
number of Shares to be purchased and specifying a business day not more than ten
(10) days from the date such notice is given for the payment of the purchase
price against delivery of the Shares being purchased. Subject to the terms of
Sections 13, 14 and 15 hereof, the Company shall cause certificates for the
Shares so purchased to be delivered at the principal business office of the
Company, against payment of the full purchase price, on the date specified in
the notice of exercise.
9. SPECIAL PROVISIONS RELATING TO DIRECTOR PARTICIPANTS
Subject to the terms and conditions of this Article 9, commencing on the
Effective Date each current non-employee director of the Company ("Director
Participant") shall automatically be granted a Non-Qualified Option to purchase
10,000 Shares and will automatically be granted a Non-Qualified Option to
purchase 1,000 shares at the time of each annual meeting of the Company's
shareholders at which such director is elected to the Board of Directors
(commencing with the annual meeting to be held in calendar year 1996). Future
Director Participants shall automatically be granted Non-Qualified Options to
purchase 10,000 Shares upon their initial appointment or election to the Board
of Directors and will automatically be granted a Non-Qualified Option to
purchase 1,000 Shares at the time of each subsequent annual meeting of the
Company's shareholders at which such director is elected to the Board of
Directors (commencing with the annual meeting to be held in calendar year 1996).
The purchase price of the Shares covered by the Non-Qualified Options granted
pursuant to this Article 9 shall be the fair market value of such Shares on the
date of grant.
A Non-Qualified Option granted to any Director Participant of the Company
shall not be exercisable for one year following the grant of such Non-Qualified
Option. Thereafter, the Non-Qualified Option shall be exercisable in whole or in
part for the period ending five years from the date of grant of such
Non-Qualified Option, except to the extent such exercise is further limited or
restricted pursuant to the provisions hereof.
If a Director Participant's service as a director of the Company is
terminated, any Non-Qualified Option previously granted to such Director
Participant shall, to the extent not theretofore exercised, terminate and become
null and void; provided, however, that:
A. if a Director Participant holding an outstanding Non-Qualified
Option dies, such Non-Qualified Option shall (if not then exercisable)
become immediately exercisable in respect of all shares subject to such
Option, and such Option shall remain exercisable for one (1) year after
such Director Participant's death, by such Director Participant's legal
representative or such person who acquired such Option by bequest or
inheritance or by reason of the death of such Director Participant; and
B. if the service of a Director Participant to whom such Non-Qualified
Option shall have been granted shall terminate by reason of (i) such
Director Participant's disability (as described in Section 22(e)(3) of the
Code), (ii) voluntary retirement from service as a director of the Company,
or (iii) failure of the Company to retain or nominate for re-election such
Director Participant who is otherwise eligible, unless due to any act of
(A) fraud or intentional misrepresentation, or (B) embezzlement,
misappropriation or conversion of assets or opportunities of the Company or
any direct or indirect subsidiary of the Company, such Non-Qualified Option
shall (if not then exercisable) become immediately exercisable in respect
of all Shares subject to such Option, and such Option shall remain
exercisable at any time up to and including (X) three (3) months after the
date of such termination of service in the case of termination by reason of
voluntary retirement or failure of the Company to retain or nominate for
re-election such Director Participant who is otherwise eligible, unless due
to any act of (1) fraud or intentional misrepresentation, or (2)
embezzlement, misappropriation or conversion of assets or opportunities of
the Company or any direct or indirect subsidiary of the Company, and (Y)
one (1) year after the date of termination of service in the case of
termination by reason of disability; and
C. if the Director Participant shall die during either the three (3)
month or one (1) year period, whichever is applicable, specified in clause
(b) above, such Non-Qualified Option shall (if not then exercisable) become
immediately exercisable in respect of all Shares subject to such Option,
and such Option shall remain exercisable by the legal representative of
such Director Participant, or such
6
<PAGE> 28
person who acquired such Non-Qualified Option by bequest or inheritance or
by reason of the death of the Director Participant, for one (1) year after
such Director Participant's date of death.
In no event, however, shall a Director Participant be entitled to exercise
any Option after the expiration of the period of exercisability of such Option,
as specified therein.
Any Director Participant eligible to receive an Option pursuant to Article
9 hereof shall be ineligible to receive any other grant or award under any other
Article of this Plan.
10. USE OF PROCEEDS
The cash proceeds of the sale of Shares subject to the Options granted
hereunder are to be added to the general funds of the Company and used for its
general corporate purposes as the Board of Directors shall determine.
11. NON-TRANSFERABILITY OF OPTIONS
An Option granted hereunder shall not be transferable, whether by operation
of law or otherwise, other than by will or the laws of descent and distribution
(except, in the case of Non-Qualified Options, to the extent that the
restrictions upon transferability currently imposed by Rule 16b-3 under the
Exchange Act are modified or eliminated). Any Option granted hereunder shall be
exercisable, during the lifetime of the holder, only by such holder (or, in the
case of Non-Qualified Options, to the extent transferability may be permitted in
the future, by such holder's permitted transferee). Except to the extent
provided above, Options may not be assigned, transferred, pledged, hypothecated
or disposed of in any way (whether by operation of law or otherwise) and shall
not be subject to execution, attachment or similar process.
12. ADJUSTMENT OF SHARES; EFFECT OF CERTAIN TRANSACTIONS
Notwithstanding any other provision contained herein, in the event of any
change in the Shares subject to the Plan or to any Option granted under the Plan
(through merger, consolidation, reorganization, recapitalization, stock
dividend, stock split, split-up, split-off, spin-off, combination of shares,
exchange of shares, or other like change in the capital structure of the
Company), an adjustment shall be made to each outstanding Option such that each
such Option shall thereafter be exercisable for such securities, cash and/or
other property as would have been received in respect of the Shares subject to
such Option had such Option been exercised in full immediately prior to such
change, and such an adjustment shall be made successively each time any such
change shall occur. The term "Shares" after any such change shall refer to the
securities, cash and/or property then receivable upon exercise of an Option. In
addition, in the event of any such change, the Committee shall make any further
adjustment to the maximum number of Shares which may be acquired under the Plan
pursuant to the exercise of Options, the maximum number of Shares for which
Options may be granted to any one employee and the number of Shares and price
per Share subject to outstanding Options as shall be equitable to prevent
dilution or enlargement of rights under such Options, and the determination of
the Committee as to these matters shall be conclusive and binding on the
optionee; provided, however, that (a) each such adjustment with respect to an
Incentive Option shall comply with the rules of Section 424(a) of the Code (or
any successor provision) and (b) in no event shall any adjustment be made which
would render any Incentive Option granted hereunder other than an "incentive
stock option" as defined in Section 422 of the Code.
In the event of a "change in control" of the Company, all then outstanding
Options shall immediately become exercisable. For purposes of the Plan, a
"change in control" of the Company shall occur if (a) any person or other entity
(other than any of the Company's subsidiaries), including any person as defined
in Section 13(d)(3) of the Exchange Act, becomes the beneficial owner, as
defined in Rule 13d-3 of the Exchange Act, directly or indirectly, of more than
fifty percent (50%) of the total combined voting power of all classes of capital
stock of the Company normally entitled to vote for the election of directors of
the Company (the "Voting Stock"), (b) the Board of Directors approves the sale
of all or substantially all of the property or assets of the Company, (c) the
Board of Directors approves a consolidation or merger of the Company with
another corporation (other than with any of the Company's subsidiaries), the
consummation of
7
<PAGE> 29
which would result in the shareholders of the Company immediately before the
occurrence of the consolidation or merger owning, in the aggregate, less than
50% of the Voting Stock of the surviving entity, or (d) a change in the Board of
Directors occurs with the result that the members of the Board of Directors on
the date hereof (the "Incumbent Directors") no longer constitute a majority of
such Board of Directors, provided that any person becoming a director whose
election or nomination for election was supported by a majority of the then
Incumbent Directors shall be considered an Incumbent Director for purposes
hereof.
The Committee, in its sole discretion, may determine that, upon the
occurrence of a transaction described in the preceding paragraph, each Option
outstanding hereunder shall terminate within a specified number of days after
notice to the holder, and such holder shall receive, with respect to each Share
subject to such Option, an amount equal to the excess of the fair market value
of such Shares immediately prior to the occurrence of such transaction over the
exercise price per Share of such Option; such amount shall be payable in cash,
in one or more of the kinds of property payable in such transaction, or in a
combination thereof, as the Committee in its discretion shall determine. The
provisions contained in the preceding sentence shall be inapplicable to an
Option granted within six (6) months before the occurrence of a change in
control if the holder of such Option is subject to the reporting requirements of
Section 16(a) of the Exchange Act and no exemption from liability under Section
16(b) is otherwise available to such holder.
13. RIGHT TO TERMINATE EMPLOYMENT
The Plan shall not impose any obligation on the Company or on any
subsidiary corporation or parent corporation thereof to continue the employment
of any holder of an Option and it shall not impose any obligation on the part of
any holder of an Option to remain in the employ of the Company or of any
subsidiary corporation or parent corporation thereof.
14. PURCHASE FOR INVESTMENT
Except as hereinafter provided, the Committee may require the holder of an
Option granted hereunder, as a condition of exercise of such Option in the event
the Shares subject to such Option are not registered pursuant to an effective
registration statement under the Securities Act of 1933, as amended (the
"Securities Act"), and applicable state securities laws, to execute and deliver
to the Company a written statement, in form satisfactory to the Committee, in
which such holder (1) represents and warrants that such holder is purchasing or
acquiring the Shares acquired thereunder for such holder's own account, for
investment only and not with a view to the resale or distribution thereof in
violation of any federal or state securities laws, and (2) agrees that any
subsequent resale or distribution of any of such Shares shall be made only
pursuant to either (i) an effective registration statement under the Securities
Act covering such Shares and under applicable state securities laws or (ii)
specific exemptions from the registration requirements of the Securities Act and
any applicable state securities laws, based on a written opinion of counsel, in
form and substance satisfactory to counsel for the Company, as to the
application thereto of any such exemptions.
Nothing herein shall be construed as requiring the Company to register
Shares subject to any Option under the Securities Act or any state securities
law and, to the extent deemed necessary by the Company, Shares issued upon
exercise of an Option may contain a legend to the effect that registration
rights had not been granted with respect to such Shares.
15. ISSUANCE OF STOCK CERTIFICATES; LEGENDS; PAYMENT OF EXPENSES
Upon any exercise of an Option granted hereunder and payment of the
purchase price therefor, a certificate or certificates representing the Shares
shall be issued by the Company in the name of the person exercising the Option
(or his or her nominee) and shall be delivered to or upon the order of such
person.
The Company may endorse such legend or legends upon the certificates for
Shares issued pursuant to the Plan and may issue such "stop transfer"
instructions to its transfer agent in respect of such Shares as the Committee,
in its sole discretion, determines to be necessary or appropriate to (a) prevent
a violation of, or to comply with the procedures for an exemption from, the
registration requirements of the Securities Act, (b) implement the provisions of
the Plan and any agreement between the Company and the optionee or
8
<PAGE> 30
grantee with respect to such Shares or (c) permit the Company to determine the
occurrence of a disqualifying disposition, as described in Section 421(b) of the
Code, of Shares transferred upon exercise of an Incentive Option granted under
the Plan.
The Company shall pay all issue or transfer taxes with respect to the
issuance or transfer of Shares, as well as all fees and expenses necessarily
incurred by the Company in connection with such issuance or transfer, except
fees and expenses which may be necessitated by the filing or amending of a
registration statement under the Securities Act, which fees and expenses shall
be borne by the recipient of the Shares unless such registration statement has
been filed by the Company for its own corporate purposes (and the Company so
states) in which event the recipient of the Shares shall bear only such fees and
expenses as are attributable solely to the inclusion of the Shares an optionee
receives in the registration statement.
All Shares issued as provided herein shall be fully paid and nonassessable
to the extent permitted by law.
16. WITHHOLDING TAXES
The Company may require an employee exercising a Non-Qualified Option
granted hereunder, or disposing of Shares acquired pursuant to the exercise of
an Incentive Option in a disqualifying disposition (within the meaning of
Section 421(b) of the Code), to reimburse the corporation which employs such
employee for any taxes required by any governmental regulatory authority to be
withheld or otherwise deducted and paid by such corporation in respect of the
issuance or disposition of such Shares. In lieu thereof, the corporation which
employs such employee shall have the right to withhold the amount of such taxes
from any other sums due or to become due from such corporation to the employee
upon such terms and conditions as the Committee shall prescribe. The corporation
that employs such employee may, in its discretion, hold the stock certificate to
which such employee is entitled upon the exercise of an Option as security for
the payment of such withholding tax liability, until cash sufficient to pay that
liability has been accumulated. In addition, at any time that the Company
becomes subject to a withholding obligation under applicable law with respect to
the exercise of a Non-Qualified Option (the "Tax Date"), except as set forth
below, a holder of a Non-Qualified Option may elect to satisfy, in whole or in
part, the holder's related personal tax liabilities (an "Election") by (a)
directing the Company to withhold from Shares issuable in the related exercise
either a specified number of Shares or Shares having a specified value (in each
case not in excess of the related personal tax liabilities), (b) tendering
Shares previously issued pursuant to the exercise of an Option or other shares
of the Company's Common Stock owned by the holder or (c) combining any or all of
the foregoing Elections in any fashion. An Election shall be irrevocable. The
withheld Shares and other shares of Common Stock tendered in payment shall be
valued at their fair market value (as determined under Section 5) on the Tax
Date. The Committee may disapprove of any Election, suspend or terminate the
right to make Elections or provide that the right to make Elections shall not
apply to particular Shares or exercises. The Committee may impose any additional
conditions or restrictions on the right to make an Election as it shall deem
appropriate. In addition, the Company shall be authorized, without the prior
written consent of the employee, to effect any such withholding upon exercise of
a Non-Qualified Option by retention of Shares issuable upon such exercise having
a fair market value at the date of exercise (as determined under Section 5)
which is equal to the amount to be withheld; provided, however, that the Company
shall not be authorized to effect such withholding without the prior written
consent of the employee if such withholding would subject such employee to
liability under Section 16(b) of the Exchange Act. The Committee may prescribe
such rules as it determines with respect to employees subject to the reporting
requirements of Section 16(a) of the Exchange Act to effect such tax withholding
in compliance with the Rules established by the Securities and Exchange
Commission (the "Commission") under Section 16 of the Exchange Act and the
positions of the staff of the Commission thereunder expressed in no-action
letters exempting such tax withholding from liability under Section 16(b) of the
Exchange Act.
17. LISTING OF SHARES AND RELATED MATTERS
If at any time the Committee shall determine that the listing, registration
or qualification of the Shares subject to such Option on any securities exchange
or under any applicable law, or the consent or approval of any governmental
regulatory authority, is necessary or desirable as a condition of, or in
connection with, the granting of an Option, or the issuance of Shares
thereunder, such Option may not be exercised in whole or in
9
<PAGE> 31
part unless such listing, registration, qualification, consent or approval shall
have been effected or obtained free of any conditions not acceptable to the
Committee.
18. AMENDMENT OF THE PLAN
The Board of Directors may, from time to time, amend the Plan, provided
that no amendment shall be made, without the approval of the shareholders of the
Company, that will (a) increase the total number of Shares reserved for Options
under the Plan or the maximum number of Shares for which Options may be granted
to any one individual (other than an increase resulting from an adjustment
provided for in Section 12 hereof), (b) reduce the exercise price of any
Incentive Option granted hereunder, (c) modify the provisions of the Plan
relating to eligibility, or (d) materially increase the benefits accruing to
participants under the Plan. The Committee shall be authorized to amend the Plan
and the Options granted thereunder to permit the Incentive Options granted
thereunder to qualify as "incentive stock options" within the meaning of Section
422 of the Code and the Treasury Regulations promulgated thereunder. The rights
and obligations under any Option granted before amendment of the Plan or any
unexercised portion of such Option shall not be adversely affected by amendment
of the Plan or the Option without the consent of the holder of such Option.
Notwithstanding anything to the contrary contained in this Article 18,
Article 9 of the Plan shall not be amended more frequently than one time in any
six month period, other than to comport with changes in the Code, the Employee
Retirement Income Security Act of 1974, as amended, or the rules promulgated
thereunder.
19. TERMINATION OR SUSPENSION OF THE PLAN
The Board of Directors may at any time suspend or terminate the Plan. The
Plan, unless sooner terminated under Section 23 or by action of the Board of
Directors, shall terminate at the close of business on the Termination Date.
Options may not be granted while the Plan is suspended or after it is
terminated. Rights and obligations under any Option granted while the Plan is in
effect shall not be altered or impaired by suspension or termination of the
Plan, except upon the consent of the person to whom the Option was granted. The
power of the Committee to construe and administer any Options under Section 3
that are granted prior to the termination or suspension of the Plan shall
continue after such termination or during such suspension.
20. SAVINGS PROVISION
With respect to persons subject to Section 16 of the Exchange Act,
transactions under the Plan are intended to comply with all applicable
conditions of Rule 16b-3 (or any successor provision) under the Exchange Act. To
the extent any provision of the Plan or action by the Committee fails to so
comply, it shall be deemed null and void to the extent permitted by law and
deemed advisable by the Committee.
21. GOVERNING LAW
The Plan, the Options granted hereunder and all related matters shall be
governed by, and construed and enforced in accordance with, the laws of the
State of Michigan from time to time obtaining.
22. PARTIAL INVALIDITY
The invalidity or illegality of any provision herein shall not be deemed to
affect the validity of any other provision.
23. EFFECTIVE DATE
The Plan shall become effective at 5:00 P.M., Troy, Michigan time, on the
Effective Date; provided, however, that if the Plan is not approved by a vote of
the shareholders of the Company at an annual meeting or any special meeting
within twelve (12) months after the Effective Date, the Plan and any Options
granted thereunder shall terminate.
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<PAGE> 32
<TABLE>
<S><C>
/X/ PLEASE MARK VOTES AS
IN THIS EXAMPLE
With- For All
For hold Except For Against Abstain
1. Election of Directors / / / / / / 2. Approval of the Arbor Drugs, Inc. 1996 / / / / / /
Stock Option Plan.
EUGENE APPLEBAUM MARKUS M. ERNST
GILBERT C. GERHARD DAVID B. HERMELIN 3. In their discretion with respect to any other
SPENCER M. PARTRICH LAURIE M. SHAHON matters that may properly come before the
SAMUEL VALENTI III meeting.
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:
Mark box at right if comments or address change / /
have been noted on the reverse side of this card.
Please be sure to sign and date this Proxy. Date__________
The undersigned hereby acknowledges receipt of the Annual
_____________________________________________________________ Report of Arbor Durgs, Inc. for the fiscal year ended
Shareholder sign here Co-owner sign here July 31, 1995 and the Proxy Statement dated November 2, 1995,
enclosed herewith.
- ----------------------------------------------------------------------------------------------------------------------------------
DETACH AND
RETURN CARD
</TABLE>
<PAGE> 33
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 Somerset Inn, 2601 W. Big Beaver
Road, Troy, Michigan on December 5, 1995, 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. 1996 Stock Option Plan.
COMMENTS/ADDRESS CHANGE: _______________________________________________________
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
