<PAGE> 1
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 (AMENDMENT NO. )
Filed by the registrant [X]
Filed by a party other than the registrant [ ]
Check the appropriate box:
[ ] Preliminary proxy statement [ ] Confidential, for Use of the
Commission Only (as permitted by
Rule 14a-6(e)(2))
[X] Definitive proxy statement
[ ] Definitive additional materials
[ ] Soliciting material pursuant to Rule 14a-11(c) or Rule 14a-12
Arbor Drugs, Inc.
- -------------------------------------------------------------------------------
(Name of Registrant as Specified in Its Charter)
Arbor Drugs, Inc.
- -------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of filing fee (Check the appropriate box):
[ ] $125 per Exchange Act Rule 0-11(c)(1)(ii), 14a-6(i)(1), or 14a-6(i)(2)
or Item 22(a)(2) of Schedule 14A.
[ ] $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 (Set forth the amount on which the filing
fee is calculated and state how it was determined):
- --------------------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
- --------------------------------------------------------------------------------
(5) Total fee paid:
- --------------------------------------------------------------------------------
[ ] Fee paid previously with preliminary materials.
- --------------------------------------------------------------------------------
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement
number, or the form or schedule and the date of its filing.
(1) Amount previously paid:
- --------------------------------------------------------------------------------
(2) Form, schedule or registration statement no.:
- --------------------------------------------------------------------------------
(3) Filing party:
- --------------------------------------------------------------------------------
(4) Date filed:
- --------------------------------------------------------------------------------
<PAGE> 2
ARBOR DRUG LOGO
3331 WEST BIG BEAVER ROAD
TROY, MICHIGAN 48084
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD DECEMBER 3, 1996
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 3, 1996,
at 11:00 a.m., Eastern Standard Time, at the Troy Marriott, 200 W. Big Beaver
Road, Troy, Michigan, or any adjournment thereof, for the following purposes:
1. To elect seven directors; and
2. 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 11, 1996 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, 1996 accompanies this notice.
By Order of the Board of Directors,
Gilbert C. Gerhard, Secretary
Troy, Michigan
October 31, 1996
<PAGE> 3
ARBOR DRUGS, INC.
3331 WEST BIG BEAVER ROAD
TROY, MICHIGAN 48084
PROXY STATEMENT
ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD DECEMBER 3, 1996
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 3, 1996 and at any adjournment
thereof.
At the Meeting, holders of shares of Common Stock ("Shareholders") will be
asked:
1. To elect seven directors; and
2. 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 October 31, 1996.
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 3, 1996, at 11:00 a.m., Eastern
Standard Time, at the Troy Marriott, 200 W. Big Beaver Road, Troy, Michigan.
MATTERS TO BE CONSIDERED
At the Meeting, Shareholders will be asked to consider and vote to elect
seven directors (Proposal No. 1). See "ELECTION OF DIRECTORS". 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 11, 1996 (the "Record
Date") are entitled to notice of and to vote at the Meeting. As of the Record
Date, there were 25,271,329 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.
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.
1
<PAGE> 4
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.
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. Such persons beneficially own, in the aggregate,
32.6% 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.P., the Company's independent auditors in fiscal 1996, 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>
AMOUNT AND NATURE OF PERCENT OF
NAME OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP CLASS
-------------------------------------------------- -------------------- ----------
<S> <C> <C>
Eugene Applebaum.................................. 7,343,792(1) 28.1%
Wellington Management Co., L.L.P. ................ 1,318,990(2) 5.2%
Nicholas Co. ..................................... 1,290,500(3) 5.1%
Markus M. Ernst................................... 1,238,697(4) 4.7%
Gilbert C. Gerhard................................ 67,437(5) *
David B. Hermelin................................. 258,250(6) 1.0%
Spencer M. Partrich............................... 51,750(6) *
Laurie M. Shahon.................................. 16,375(6) *
Samuel Valenti III................................ 25,000(6) *
Donald M. Stutrud................................. 81,208(7) *
Eric Bolokofsky................................... 58,399(8) *
All directors and executive officers as a group
(11 persons, including the foregoing)........... 9,258,359(9) 36.4%
</TABLE>
- -------------------------
* Less than 1.0%
(1) Includes 630,000 shares of Common Stock subject to stock options granted
pursuant to the Company's Amended and Restated Stock Option Plan (the "1986
Plan") and the Company's 1996 Stock Option Plan (the "1996 Plan") that are
exercisable within 60 days of the Record Date. Includes 308,125 shares
owned by Mrs. Applebaum. Includes 39,040 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, 1996, 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.
Mr. Applebaum's business address is c/o Arbor Drugs, Inc., 3331 W. Big
Beaver Road, Troy, Michigan 48084.
(2) The beneficial owner's address is 75 State Street, Boston, MA 02109.
(3) The beneficial owner's address is 700 North Water Street, Suite 1010,
Milwaukee, WI 53202.
(4) Includes 200,000 shares of Common Stock subject to stock options granted
pursuant to the 1986 Plan and the 1996 Plan that are exercisable within 60
days of the Record Date. Includes 260 shares of Common Stock owned of
record by the 401(k) Trustee on behalf of Mr. Ernst as of June 30, 1996.
Includes 7,000 shares owned by Mrs. Ernst, as to which Mr. Ernst disclaims
beneficial ownership.
(5) Includes 49,050 shares of Common Stock subject to stock options granted
pursuant to the 1986 Plan and the 1996 Plan that are exercisable within 60
days of the Record Date. Includes 3,551 shares of Common Stock owned of
record by the 401(k) Trustee on behalf of Mr. Gerhard as of June 30, 1996.
(6) Includes 10,000 shares of Common Stock subject to stock options
automatically granted pursuant to the 1996 Plan that are exercisable within
60 days of the Record Date.
(7) Includes 49,050 shares of Common Stock subject to stock options granted
pursuant to the 1986 Plan and the 1996 Plan that are exercisable within 60
days of the Record Date. Includes 8,238 shares of Common Stock owned of
record by the 401(k) Trustee on behalf of Mr. Stutrud as of June 30, 1996.
(8) Includes 49,050 shares of Common Stock subject to stock options granted
pursuant to the 1986 Plan and the 1996 Plan that are exercisable within 60
days of the Record Date. Includes 5,312 shares of Common Stock owned of
record by the 401(k) Trustee on behalf of Mr. Bolokofsky as of June 30,
1996.
(9) Includes, in addition to the 977,150 such shares referred to in the
preceding footnotes, a total of 69,000 shares of Common Stock subject to
stock options granted to the Company's other executive officers pursuant to
the 1986 Plan and the 1996 Plan that are exercisable within 60 days of the
Record Date. Includes 11,830 shares of Common Stock owned of record by the
401(k) Trustee on behalf of such other executive officers as of June 30,
1996.
3
<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 59.
Markus M. Ernst.............................. Executive Vice President and Chief Operating
Director since 1974 Officer of the Company and its predecessors
since 1968. Age 59.
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 54.
David B. Hermelin............................ Private investor principally involved in real
Director since 1986 estate and development. Director of First of
America Bank -- Detroit, N.A. Age 59.
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 A
& D, L.L.C. since 1976. Age 56.
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., Ames Department
Stores, Inc. and Homeland Stores, Inc. Age
44.
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 50.
</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 five meetings during fiscal 1996. 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 1996.
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, the 1996
Plan and the Employee Stock Purchase Plan. The committee, which currently
consists of Mr. Hermelin, Ms. Shahon and Mr. Valenti (Chair), held two meetings
during fiscal 1996.
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 1996,
each non-employee director received an annual fee of $10,000 for serving as a
director plus $500 for each meeting of the Board that such director attended. No
additional fees were paid for service on any of the Board committees.
Non-employee directors are not eligible to receive options to purchase shares of
Common Stock pursuant to the 1986 Plan or to participate in the Company's
Employee Stock Purchase Plan; however, pursuant to the 1996 Plan each
non-employee director was automatically granted options to purchase 10,000
shares of Common Stock, at the time of adoption of the 1996 Plan, and will be
automatically granted options to purchase 1,000 shares of Common Stock at the
time of each annual meeting.
5
<PAGE> 8
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth all compensation awarded to, earned by, or
paid to the Company's Chief Executive Officer (the "CEO") and each of the other
four most highly compensated executive officers of the Company for all services
rendered in all capacities to the Company and its subsidiaries in fiscal 1996,
1995 and 1994.
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
------------
AWARDS
ANNUAL ------------
COMPENSATION SECURITIES
------------ UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITIONS FISCAL YEAR SALARY($) OPTIONS (#) COMPENSATION(1)($)
- ---------------------------------------- ----------- ------------ ------------ ------------------
<S> <C> <C> <C> <C>
Eugene Applebaum........................ 1996 $450,000 300,000 $26,550
President and CEO 1995 $450,000 450,000 $10,487
1994 $450,000 300,000 $10,187
Markus M. Ernst......................... 1996 $250,000 100,000 $12,894
Executive Vice President and Chief 1995 $250,000 150,000 $12,606
Operating Officer 1994 $250,000 90,000 $12,027
Gilbert C. Gerhard...................... 1996 $162,500 30,000 $13,369
Senior Vice President -- Finance and 1995 $155,000 34,500 $12,952
Administration, Chief Financial 1994 $146,750 18,000 $12,260
Officer, Treasurer and Secretary
Donald M. Stutrud....................... 1996 $137,500 30,000 $ 4,657
Senior Vice President -- Store 1995 $133,500 34,500 $ 4,480
Operations 1994 $128,500 18,000 $ 4,014
Eric Bolokofsky......................... 1996 $135,000 30,000 $ 3,861
Senior Vice President -- Merchandising 1995 $125,000 36,000 $ 3,739
1994 $116,250 18,000 $ 3,324
</TABLE>
- -------------------------
(1) Represents (i) the Company's contribution of $500 in fiscal 1996 and 1995
and $200 in fiscal 1994 to each named executive officer's account under the
401(k) Plan and (ii) insurance premiums paid by the Company with respect to
term life and disability insurance for the benefit of each named executive
officer. All contributions to the 401(k) Plan are immediately vested.
6
<PAGE> 9
OPTION GRANTS IN FISCAL 1996
The following table sets forth certain information concerning individual
grants of stock options made to each of the executive officers of the Company
named in the Summary Compensation Table during fiscal 1996. All such grants were
made pursuant to the 1996 Plan.
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
INDIVIDUAL GRANTS VALUE AT
------------------------------------------------------------ ASSUMED ANNUAL RATES OF
NUMBER OF STOCK PRICE APPRECIATION
SECURITIES % OF TOTAL FOR
UNDERLYING OPTIONS GRANTED EXERCISE OPTION TERM(2)
OPTIONS GRANTED TO EMPLOYEES IN PRICE EXPIRATION ------------------------
NAME (#)(1) FISCAL 1996 ($/SH) DATE 5%($) 10%($)
- --------------------- --------------- --------------- -------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Eugene Applebaum..... 300,000 43.17% $17.50 10/05/2001 $1,785,502 $4,050,695
Markus M. Ernst...... 100,000 14.39 17.50 10/05/2001 595,167 1,350,232
Gilbert C. Gerhard... 30,000 4.32 17.50 10/05/2001 178,550 405,070
Donald M. Stutrud.... 30,000 4.32 17.50 10/05/2001 178,550 405,070
Eric Bolokofsky...... 30,000 4.32 17.50 10/05/2001 178,550 405,070
</TABLE>
- -------------------------
(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.
7
<PAGE> 10
AGGREGATE OPTION EXERCISES IN FISCAL 1996 AND 1996 FISCAL YEAR-END OPTION VALUES
The following table provides information concerning the exercise of stock
options during fiscal 1996 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, 1996 measured in terms of the closing price
of the shares of Common Stock on that date as reported by NASDAQ ($18.125 per
share).
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES VALUE OF
UNDERLYING UNEXERCISED
UNEXERCISED IN-THE-MONEY
OPTIONS AT OPTIONS AT
SHARES 7/31/96(#) 7/31/96($)
ACQUIRED ON VALUE($) EXERCISABLE/ EXERCISABLE/
NAME EXERCISE REALIZED(1) UNEXERCISABLE UNEXERCISABLE
- ------------------------------- ----------- ----------- ----------------- ---------------------
<S> <C> <C> <C> <C>
Eugene Applebaum............... -- -- 570,000/1,005,000 $3,206,250/$3,315,625
Markus M. Ernst................ -- -- 180,000/ 325,000 1,007,500/ 1,045,625
Gilbert C. Gerhard............. 16,875 $ 220,776 42,150/ 75,600 280,494/ 207,100
Donald M. Stutrud.............. 22,500 299,993 42,150/ 75,600 280,494/ 207,100
Eric Bolokofsky................ 22,500 309,918 42,450/ 76,800 280,881/ 208,650
</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 1996, the members of the Compensation Committee were Mr.
Hermelin, 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 1996
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 1996, the Company's payments to
the partnership aggregated $86,849. 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
1996, the Company's payments to the partnership aggregated $82,089.
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 1996, the Company's payments to the partnership aggregated
$405,304. The Company also leases a drugstore from a limited partnership, of
which Mr. Applebaum is a limited partner. During fiscal 1996, the Company's
payments to the partnership aggregated $94,105.
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.
8
<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 1996 was determined by Mr. Applebaum prior to and
effective as of February 1, 1996. Grants of stock options to the named executive
officers were made in October 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 1996 compensation program consisted of cash
compensation and equity-based compensation pursuant to the 1996 Plan and the
Company's Employee Stock Purchase Plan.
Options under the 1996 Plan were granted at the then current market price,
and 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.
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 1996 Plan should
qualify as "performance-based" compensation provided that (as was the case for
grants made during fiscal 1996) the exercise price of such options is not less
than the fair market value of the Common Stock at the date of grant.
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 reward and
further encourage performance in a particular year using
- -------------------------
* 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
the Proxy Statement or this section).
9
<PAGE> 12
equity-based compensation, which strengthens the mutuality of interests between
the CEO and the Company's shareholders. In accordance with this, the fiscal 1996
cash compensation for Mr. Applebaum, the Company's CEO, remained at $450,000
and, during fiscal 1996, Mr. Applebaum was granted an option under the 1996 Plan
covering 300,000 shares of Common Stock.
The factors considered by the Compensation Committee in determining the
amount of equity-based compensation awarded to Mr. Applebaum in fiscal 1996
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. During
fiscal 1996 the Company opened fifteen new drugstores and surpassed the $800
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 fourteenth
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 1996 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, averaging
5%. Mr. Ernst's fiscal 1996 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
1996 awards of options to each executive officer.
THE COMPENSATION COMMITTEE
Samuel Valenti III, Chair
David B. Hermelin
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>
1991 100.00 100.00 100.00
1992 103.39 112.79 102.27
1993 92.10 122.64 102.90
1994 111.11 128.95 112.00
1995 139.64 162.63 152.74
1996 153.04 189.57 177.53
</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.; 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 and the S&P 500 was provided to the Company by the National
Association of Chain Drug Stores (which omitted from the index one company
included last year: F&M Distributors, Inc., which was acquired by Drug Emporium,
Inc.).
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
PROPOSALS BY SHAREHOLDERS
Any proposal of a Shareholder intended to be presented at the Annual
Meeting of Shareholders to be held in 1997, must be received by the Company by
July 2, 1997, 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
October 31, 1996
12
<PAGE> 15
<TABLE>
<S><C>
ARBOR DRUGS, INC.
The undersigned hereby appoints Eugene Applebaum and Markus M. Ernst, and each of them, the proxies of the undersigned, with full
power of substitution, to vote all shares of $.01 par value Common Stock of Arbor Drugs, Inc. (the "Company") which the undersigned
is entitled to vote at the Annual Meeting of Shareholders of the Company to be held at the Troy Marriott, 200 W. Big Beaver Road,
Troy, Michigan on December 3, 1996, 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.
COMMENTS/ADDRESS CHANGE: ___________________________________________________________________________________________________________
____________________________________________________________________________________________________________________________________
____________________________________________________________________________________________________________________________________
____________________________________________________________________________________________________________________________________
____________________________________________________________________________________________________________________________________
- ------- --------
/X/ PLEASE MARK VOTES
AS IN THIS EXAMPLE With- For All
For hold Except
1. Election of Directors / / / / / / 2. In their discretion with respect to any other
matters that may properly come before the
EUGENE APPLEBAUM MARKUS M. ERNST meeting.
GILBERT C. GERHARD DAVID B. HERMELIN
SPENCER M. PARTRICH LAURIE M. SHAHON
SAMUEL VALENTI III
If you do not wish your shares voted "FOR" a particular nominee,
mark the "For All Except" box and strike a line through the nominee(s)
name. Your shares will be voted for the remaining nominee(s).
RECORD DATE SHARES:
Mark box at right if comments or address change
have been noted on the reverse side of this card. / /
The undersigned hereby acknowledges receipt of the
Annual Report of Arbor Drugs, Inc. for the fiscal year
ended July 31, 1996 and the Proxy Statement dated
---------------- October 31, 1996 enclosed herewith.
Please be sure to sign and date this Proxy. |Date |
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----- Shareholder sign here -------------- Co-owner sign here ------
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DETACH CARD
</TABLE>
