<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
20549
FORM 10-K
- ---
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- --- EXCHANGE ACT OF 1934
For the fiscal year ended July 31, 1997
- ---
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
- --- SECURITIES EXCHANGE ACT OF 1934
Commission file number 0-14491
ARBOR DRUGS, INC.
- ----------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Michigan 38-2054345
------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
3331 West Big Beaver, Troy, Michigan 48084
---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (248) 643-9420
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
----------------------------
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. (X) Yes ( ) No
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. ( )
The aggregate market value of the voting stock held by non-affiliates
of the registrant as of October 24, 1997, was $1,059,052,539.
The number of outstanding shares of the registrant's common stock as of
October 24, 1997 was 39,498,463.
Documents Incorporated by Reference
Certain portions of the registrant's definitive proxy statement
pursuant to Regulation 14A of the Securities Exchange Act of 1934 for the 1997
Annual Meeting of Shareholders are incorporated by reference in Part III of
this Form 10-K.
<PAGE> 2
PART I
Item 1. Business
General
Arbor Drugs, Inc. (the "Company") is the largest Michigan-based
drugstore chain and the second largest drugstore chain operating in Michigan in
terms of total Michigan revenues. As of July 31, 1997, the Company had 199
stores located primarily in southeastern Michigan.
Unless the context otherwise requires, references to the "Company"
include the Company's consolidated subsidiaries. References to a fiscal year
are to the twelve months ended July 31.
Products
The Company's drugstores sell four principal categories of products:
prescription drugs, health and beauty aids (including proprietary drugs and
cosmetics), photofinishing and film and general merchandise. General
merchandise includes seasonal and promotional goods, greeting cards,
convenience foods and alcoholic and nonalcoholic beverages. In fiscal 1997,
prescription drugs accounted for approximately 53.5 percent, health and beauty
aids for approximately 19.8 percent, photofinishing and film for approximately
5.0 percent and general merchandise for approximately 21.7 percent of the
Company's net sales. Contributions to net sales are not indicative of
contributions to income from operations because gross margins vary among
product categories and products within each category.
The Company's business normally generates somewhat higher revenues
during its second and fourth fiscal quarters (the Christmas and summer
seasons). The Company believes that these higher revenues, in combination
with the fixed nature of certain administrative and store operating costs and
seasonal changes in product mix, result in higher operating income for these
periods.
Merchandising and Marketing
The Company's merchandising strategy is to offer a broad selection
of traditional drugstore items, including both nationally advertised and
private label brand products. Substantially all products are offered at
competitive prices. The Company emphasizes value and customer service in
attractive, conveniently located drugstores. It uses color, signs, packaging
and other merchandising aids to reinforce its name and low prices, and to
showcase its products.
The pharmacy department in each drugstore carries a complete line of
both brand name and generic drugs. The Company has been expanding its
prescription drug business by promoting the use of less costly generic drugs,
whenever possible, and by entering into arrangements with insurance companies,
health maintenance organizations ("HMOs") and other health care groups for the
sale of prescription drugs under third-party reimbursement programs. See
"Significant Customers" below.
As part of the Company's merchandising of pharmaceutical products, each
pharmacy department utilizes Arbortech Plus SM, a computerized pharmacy system.
Arbortech PlusSM enables the Company's pharmacists to recall a customer's
pharmacy history, with a view to identifying possible allergies, drug
interactions or therapeutic duplication, and to provide customers with a
complete record of medication dispensed. This system affords each of the
Company's drugstores access to this information, thus enabling customers to be
served by any store in the chain. Arbortech PlusSM also enables the Company to
identify generic equivalents of brand name drugs, centrally control
prescription prices, increase the speed of processing
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prescriptions and reduce the paperwork normally involved in, and thus expedite
the collection of amounts due the Company under, third-party reimbursement
programs.
The Company promotes its private label Arbor(R) brand products and
presently offers approximately 1,000 such products, including a wide variety of
vitamins, products for skin, hair and personal care, health products and
proprietary drugs for colds, allergies and other ailments. Offering private
label products enables the Company to sell products, comparable in quality to
name brand products, at substantially lower prices to its customers, but at
higher gross margins for the Company.
The primary photo processing marketing program used by the Company is
Picture! Picture!(R), which offers a "two for the price of one" photo
processing service, with guaranteed overnight processing. Additional programs
are Picture! Plus!SM and the Picture! Picture! Club(R), which offer customers
one print plus a free roll of film and prizes for volume photofinishing.
Picture Pronto(R), is a one-hour photo processing service offered in all stores
as of July 31, 1997. The Company intends to offer this service in all new
locations. All photo processing services are provided by an independent
contractor.
The Company advertises extensively, principally through the use of
television, radio, direct mail and advertising circulars.
Expansion Program
As of July 31, 1997, the Company operated 199 drugstores, a net
increase of 17 drugstores from the end of fiscal 1996. During fiscal 1997, the
Company opened 20 drugstores, including 3 relocations, and purchased the
prescription files of a number of independent drugstores. Assuming no
significant construction delays, the Company anticipates adding approximately
20 drugstore locations in Michigan during fiscal 1998. The Company may also
continue to purchase the prescription files of various independent drugstores,
as opportunities arise.
In addition to adding drugstores in southeastern Michigan, the Company
has expanded, and plans to continue to expand, in other areas of Michigan. The
Company may also expand into contiguous states. The Company's 470,000 square
foot distribution center is expected to serve the Company's distribution needs
for the next several years. The Company expects that this expanded facility
will accommodate approximately 400 stores.
Purchasing and Distribution
The Company centrally purchases most of its merchandise directly from
manufacturers, enabling it to benefit from promotional programs and volume
discounts that certain manufacturers offer to retailers. Approximately 83
percent of the merchandise purchased by the Company is received at its
distribution center for redistribution to its drugstores. The balance of
store merchandise is shipped directly to the Company's drugstores by
manufacturers and distributors at prices negotiated at the corporate level.
Significant Customers
In fiscal 1997, 45.5 percent of the Company's net sales (approximately
85% of pharmacy net sales) were attributable to payments by third-party
providers under prescription drug plans. Six of such third-party providers
accounted for approximately one-third of fiscal 1997 net sales and one, Blue
Cross Blue Shield of Michigan, accounted for more than 10 percent of fiscal
1997 net sales (11.8 percent).
The Company participates in the majority of third-party plans offered
to employer groups in its primary marketplace, the greater metropolitan Detroit
area.
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Accordingly, if any employer group were to change its third-party plan, the
Company believes it is likely that it would continue to fill prescriptions for
such group under a different third-party plan. In the event the Company were
unable to service one or more of its principal third-party provider plans,
however, the Company's revenues would be adversely affected.
Competition
The Company's primary competitors are other drugstore chains,
independent drugstore operators, mail order distributors, hospitals, HMOs,
department stores (including discount stores) and supermarkets. Many of the
businesses with which the Company competes are larger and have been in business
longer or have substantially greater financial resources than the Company.
Competition remained keen during fiscal 1997 with the Company competing
on the basis of price, convenience, store design, product selection, quality
and variety. See "Merchandising and Marketing" above.
Significant Proprietary Rights
The Arbor(R) trade name is considered to be of material importance to
the business of the Company. The Company also holds servicemarks for some of
its photo finishing products and pharmacy systems.
Regulatory Matters and Insurance
All of the Company's pharmacy departments and all pharmacists employed
by the Company are licensed by the Michigan Board of Pharmacy. The Company's
drugstores and its warehouse facility are also registered with the United
States Drug Enforcement Administration and are subject to various licensing and
regulatory requirements. Beer and wine are sold in substantially all of the
Company's drugstores, and liquor is sold in approximately half of the
drugstores. The sale of alcoholic beverages is regulated by the Michigan
Liquor Control Commission. By virtue of these various license and registration
requirements, the Company is obligated to observe certain rules and
regulations. A violation of these rules and regulations could result in a
suspension or revocation of such licenses or registrations with respect to one
or more of the Company's drugstores or the distribution center.
The Company carries general liability insurance, subject to
self-insured retentions, with respect to druggist, product, premises and
"dram-shop" claims.
Employees
As of July 31, 1997, the Company had approximately 7,000 employees. A
majority of the drugstore employees work on a part-time basis (fewer than 35
hours per week).
The Company's employees are not represented by unions. The Company
believes that its relations with its employees are good.
Item 2. Properties
As of July 31, 1997, approximately 90 percent of the Company's 199
drugstores were leased. The leases are for various terms and periods. For
information regarding rental expense and lease commitments, see Note 4 of Notes
to Consolidated Financial Statements set forth in Item 14 below. In addition to
base rentals, the majority of the Company's store leases require additional
rentals based on a percentage of sales. In most instances, the leases obligate
the Company to pay its pro rata share of common area maintenance charges, taxes
and insurance.
The Company owns its 470,000 square foot distribution center, which is
located
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in Novi, Michigan. The Company leases its 54,000 square foot executive
offices, which are located in Troy, Michigan.
Item 3. Legal Proceedings
In November 1993 the Securities and Exchange Commission (the "SEC")
issued a formal Order of Private Investigation relating to the Company's
reporting of certain third-party reimbursement practices and a contractual
dispute over these practices with Blue Cross of Michigan (which has been
settled). The Company has complied with the SEC's requests for information
made in November 1993 and October 1994.
The Company is also involved in various routine litigation incidental
to its business, none of which, in the opinion of management, is deemed to be
material.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 10. Directors and Executive Officers of the Registrant
Set forth below is certain information with respect to the executive
officers of the Company.
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Eugene Applebaum 60 Chairman of the Board, President and Chief Executive Officer
Markus M. Ernst 60 Executive Vice President, Chief Operating Officer and Director
Gilbert C. Gerhard 55 Senior Vice President-Finance and Administration, Chief Financial
Officer, Secretary, Treasurer and Director
Donald M. Stutrud 49 Senior Vice President-Store Operations
Eric Bolokofsky 45 Senior Vice President-Merchandising
Dennis J. Wozniak 41 Senior Vice President-Purchasing and Marketing
John Enokian 64 Senior Vice President - Health Services
</TABLE>
Mr. Applebaum is a founder of the Company and has been the President and
a Director of the Company and its predecessors since 1963. In January 1985, Mr.
Applebaum was elected Chairman of the Board and Chief Executive Officer. Mr.
Applebaum has been a licensed pharmacist in the State of Michigan since 1960.
Mr. Ernst has been Executive Vice President and a Director of the
Company since 1974, having served as a director and executive officer of one of
the Company's predecessors since 1968. Mr. Ernst has also served as Chief
Operating Officer since 1985. Mr. Ernst joined the Company in 1968.
Mr. Gerhard has been Senior Vice President - Finance and Administration
since February 1994. Mr. Gerhard has also served as Chief Financial Officer,
Secretary and Treasurer since 1983 when he joined the Company. Mr. Gerhard was
Vice President-Finance and Administration from 1983 until February 1994.
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Mr. Stutrud has been Senior Vice President - Store Operations since
February 1991. Mr. Stutrud served as Vice President - Store Operations from
March 1986 until January 1991. Mr. Stutrud joined the Company in 1971.
Mr. Bolokofsky has been Senior Vice President - Merchandising since
February 1994. Mr. Bolokofsky served as Vice President - Merchandising from
October 1987 until February 1994. Mr. Bolokofsky joined the Company in 1976.
Mr. Wozniak has been Senior Vice President - Purchasing and Marketing
since February 1994. Mr. Wozniak served as Vice President - Purchasing from
October 1987 until February 1994. Mr. Wozniak joined the Company in 1978.
Mr. Enokian has been Senior Vice President - Health Services since April
1996. Mr. Enokian served as Vice President - Health Services from February 1991
until April 1996. Mr. Enokian joined the Company in 1965 as a licensed
pharmacist.
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PART II
Item 5. Market for the Registrant's Common
Equity and Related Stockholder Matters
The Company's Common Stock is regularly quoted on the National
Association of Securities Dealers Automated Quotation System (NASDAQ) National
Market System under the symbol ARBR. The following table sets forth, for the
periods indicated, the high and low closing sale prices for the Company's Common
Stock and cash dividends paid.
<TABLE>
<CAPTION>
Common Stock Prices
------------------- Dividends
Quarter Ended High Low Per Share
---- --- ---------
<S> <C> <C> <C>
Fiscal 1996*
-----------
October 31 $13.25 $10.83 $.033
January 31 15.50 12.00 .047
April 30 15.00 12.92 .047
July 31 14.50 11.92 .047
Fiscal 1997*
-----------
October 31 $17.33 $12.08 $.047
January 31 19.75 14.92 .060
April 30 19.75 16.38 .060
July 31 25.19 17.75 .060
Fiscal 1998
-----------
October 31 (through
October 24) $27.63 $21.50 $.060
</TABLE>
*All data has been restated to give effect to the December 1996 3-for-2 stock
split.
The Company intends to continue to declare quarterly cash dividends on
its Common Stock, subject to the Company's earnings, financial condition,
capital requirements and other such factors as are deemed relevant by the Board
of Directors.
On October 24, 1997, there were approximately 12,900 shareholders of
record of the Company (including individual participants in security position
listings).
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Item 6. Six Year Summary of Selected Financial Data
The following tables set forth selected consolidated financial data for each of
the fiscal years shown.
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993 1992
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
RESULTS OF OPERATIONS
(In thousands, except per share
data)
Net sales $962,773 $826,130 $707,150 $618,562 $534,966 $476,848
Operating costs and expenses:
Cost of sales 715,435 611,924 521,707 454,207 390,896 346,140
Selling, general and
administrative 195,284 172,969 149,829 132,759 117,337 105,783
Provision for third-party
settlement and related
expenses - - - 7,000 16,000 -
-------- -------- -------- -------- -------- --------
Income from operations 52,054 41,237 35,614 24,596 10,733 24,925
Interest expense (1,609) (1,654) (2,035) (1,667) (1,738) (2,763)
Interest income 1,472 1,453 1,359 995 961 1,399
-------- -------- -------- -------- -------- --------
Income before income tax 51,917 41,036 34,938 23,924 9,956 23,561
Provision for income tax 17,487 14,012 11,871 9,846 3,047 7,787
-------- -------- -------- -------- -------- --------
Net income $ 34,430 $ 27,024 $ 23,067 $ 14,078 $ 6,909 $ 15,774
======== ======== ======== ======== ======== ========
Earnings per common
share (a) (b) :
Primary $0.87 $0.70 $0.62 $0.38 $0.19 $0.43
Fully diluted $0.86 $0.70 $0.61 $0.38 $0.19 $0.43
FINANCIAL POSITION
(at fiscal year end, in thousands)
Current assets $204,490 $163,449 $148,445 $140,597 $133,827 $126,340
Current liabilities 83,574 70,515 67,059 72,443 71,220 66,477
Total assets 329,677 273,705 246,594 233,660 215,579 200,423
Notes payable, net of current
portion 16,301 20,802 22,260 23,679 18,151 12,986
Shareholders' equity 223,011 176,169 150,716 129,964 118,473 113,874
Shareholders' equity
per share (a) $5.66 $4.68 $4.06 $3.53 $3.24 $3.13
Dividends per share (a) $0.227 $0.173 $0.127 $0.102 $0.082 $0.062
</TABLE>
(a) Reflects 3-for-2 stock splits effected December 1996 and May 1995.
(b) 1994 and 1993 per share amounts include charges for the settlement of
third-party providers' reimbursement claims and related expenses and the
disposition of a lease dispute. Excluding these charges, 1994 and 1993
earnings per common share would have been $ .55 and $ .49, respectively.
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Item 7. Management's Discussion and Analysis of
Results of Operations and Financial Condition
Results of Operations: Fiscal 1997 vs. Fiscal 1996
<TABLE>
<CAPTION>
Components of earnings: Percentage
Percentage Increase
of Fiscal (Decrease)
Fiscal 1997 1997 Net Compared to
(In Millions) Sales Fiscal 1996
------------- ---------- -----------
<S> <C> <C> <C>
Net sales $962.8 100.0% 16.5%
Cost of sales 715.4 74.3 16.9
Selling, general and
administrative expense 195.3 20.3 12.9
------ ----- -----
Income from operations 52.1 5.4 26.2
Interest expense, net of
interest income 0.2 -- (31.8)
Income tax 17.5 1.8 24.8
------ ----- -----
Net income $ 34.4 3.6% 27.4%
====== ====== =====
</TABLE>
Net sales reached $962.8 million in fiscal 1997, an increase of 16.5
percent over fiscal 1996 net sales of $826.1 million. The increase reflected an
increase in comparable store sales (sales by stores in operation for at least 12
months) of 10.0 percent and the sales made by the drugstores opened in fiscal
1997.
Prescription drug sales accounted for 53.5 percent of net sales in
fiscal 1997, an increase from 51.3 percent in fiscal 1996. The increases in
both absolute amount and relative contribution were primarily attributable to
the larger store base, a greater number of prescriptions filled on a
comparable-store basis and an increase in the average prescription price. The
latter reflected price increases for certain existing brand name drugs and the
introduction of new brand name drugs, offset in part by the lower prices of
generic drugs, which are marketed as the corresponding brand name drugs lose
patent protection.
The net sales attributable to each of the Company's three other
principal product categories increased in absolute terms as a result of the
larger store base and increased comparable store sales. The percentage of net
sales attributable to the general merchandise and health and beauty aids
categories declined slightly (from 23.3% and 20.5%, respectively, in fiscal 1996
to 21.7% and 19.8%, respectively, in fiscal 1997). The photofinishing and film
category increased its contribution to net sales (from 4.9% in fiscal 1996 to
5.0% in fiscal 1997).
While net sales attributable to the general merchandise and health and
beauty aids categories continues to increase in absolute terms, as a percentage
of total sales, these categories declined slightly owing to greater growth in
the prescription drug sales category.
The Company's gross margin declined from 25.9 percent in fiscal 1996 to
25.7 percent in fiscal 1997 primarily due to the effect of rising pharmaceutical
product costs and gross margin percentage pressure due to the reimbursement
practices of the Company's third-party providers. Third-party providers, which
accounted for approximately 85 percent of the Company's prescription drug sales
in fiscal 1997, generally pay the Company an amount determined by formula to
reimburse it for the cost of the prescription drugs dispensed, plus a fixed
dispensing fee to compensate it for the services rendered. As pharmaceutical
costs increase, the gross margin percentage on such sales decreases because the
dispensing fee remains the same pursuant to the applicable third-party program.
Changes in the reimbursement
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formulas of the various third-party providers with which the Company has
contracts may also affect the Company's gross margin and operating income.
Selling, general and administrative ("SG&A") expenses decreased as a
percentage of net sales to 20.3 percent in fiscal 1997 from 20.9 percent in
fiscal 1996. The decrease was primarily attributable to the Company's efforts
to control expenses and by the higher level of net sales.
The Company's effective tax rate (the provision for income tax as a
percentage of income before income tax) decreased to 33.7 percent in fiscal 1997
from 34.1 percent in fiscal 1996.
Results of Operations: Fiscal 1996 vs. Fiscal 1995
<TABLE>
<CAPTION>
Components of earnings: Percentage Increase
of Fiscal (Decrease)
Fiscal 1996 1996 Net Compared to
(In Millions) Sales Fiscal 1995
------------- ---------- -----------
<S> <C> <C> <C>
Net sales $826.1 100.0% 16.8%
Cost of sales 611.9 74.1 17.3
Selling, general and
administrative expense 173.0 20.9 15.4
------ ----- -----
Income from operations 41.2 5.0 15.8
Interest expense, net of
interest income .2 -- (70.3)
Income tax 14.0 1.7 18.0
------ ----- -----
Net income $ 27.0 3.3% 17.2%
====== ===== =====
</TABLE>
Net sales reached $826.1 million in fiscal 1996, an increase of 16.8
percent over fiscal 1995 net sales of $707.2 million. The increase reflected an
increase in comparable store sales (sales by stores in operation for at least 12
months) of 10.0 percent and the sales made by the drugstores opened in fiscal
1996.
Prescription drug sales accounted for 51.3 percent of net sales in
fiscal 1996, an increase from 49.8 percent in fiscal 1995. The increases in
both absolute amount and relative contribution were primarily attributable to
the larger store base, a greater number of prescriptions filled on a
comparable-store basis and an increase in the average prescription price. The
latter reflected price increases for certain existing brand name drugs and the
introduction of new brand name drugs, offset in part by the lower prices of
generic drugs, which are marketed as the corresponding brand name drugs lose
patent protection.
The net sales attributable to each of the Company's three other
principal product categories increased in absolute terms as a result of the
larger store base and increased comparable store sales. The percentage of net
sales attributable to the general merchandise and health and beauty aids
categories declined slightly (from 24.4% and 21.1%, respectively, in fiscal 1995
to 23.3% and 20.5%, respectively, in fiscal 1996). The photofinishing and film
category increased its contribution to net sales (from 4.7% in fiscal 1995 to
4.9% in fiscal 1996).
While net sales attributable to the general merchandise and health and
beauty aids categories continues to increase in absolute terms, as a percentage
of total sales, these categories declined slightly owing to greater growth in
the prescription drug sales category.
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The Company's gross margin declined from 26.2 percent in fiscal 1995 to
25.9 percent in fiscal 1996 primarily due to the effect of rising pharmaceutical
product costs and gross margin percentage pressure due to the reimbursement
practices of the Company's third-party providers. Third-party providers, which
accounted for approximately 83 percent of the Company's prescription drug sales
in fiscal 1996, generally pay the Company an amount determined by formula to
reimburse it for the cost of the prescription drugs dispensed, plus a fixed
dispensing fee to compensate it for the services rendered. As pharmaceutical
costs increase, the gross margin percentage on such sales decreases because the
dispensing fee remains the same pursuant to the applicable third-party program.
Changes in the reimbursement formulas of the various third-party providers with
which the Company has contracts may also affect the Company's gross margin and
operating income.
Selling, general and administrative ("SG&A") expenses decreased as a
percentage of net sales to 20.9 percent in fiscal 1996 from 21.2 percent in
fiscal 1995. The decrease was primarily attributable to the Company's efforts
to control expenses and by the higher level of net sales.
The Company's effective tax rate (the provision for income tax as a
percentage of income before income tax) increased to 34.1 percent in fiscal
1996 from 34.0 percent in fiscal 1995.
Liquidity and Capital Resources
During fiscal 1997, net cash was provided by operations ($32.5 million)
and through the exercise of stock options and employee stock purchase plan
purchases ($21.2 million). Cash was principally used for capital expenditures
and acquisitions ($31.4 million), cash dividends ($8.8 million) and principal
payments on debt ($5.5 million). These activities resulted in a net cash
increase of $8.6 million.
The Company's capital expenditures in fiscal 1997 were made primarily to
expand the Company's store base and remodel existing stores. In addition, the
Company continued to invest in various retailing systems, such as its pharmacy
(Arbortech PlusSM) and point-of-sale computer systems. The Company anticipates
fiscal 1998 capital expenditures of approximately $30 million for these
purposes.
During fiscal 1997, the Company added 17 drugstores through opening new
locations. The Company also acquired the prescription files of various
independent drugstores. The Company's current expansion plan contemplates
adding approximately 20 new Arbor drugstores in fiscal 1998 through leasing new
sites, developing new sites and, if suitable opportunities arise, acquisitions.
Four drugstores have been opened in fiscal 1998 to date.
The Company believes that existing cash, cash equivalents and short-term
investments, cash provided from future operations and funds available under a
$50 million line of credit will support anticipated expansion and working
capital needs arising in the ordinary course of business during fiscal 1998. As
of July 31, 1997, the Company had no outstanding borrowings against its line of
credit.
Item 8. Financial Statements and Supplementary Data
The financial statements and supplementary data required by this Item
are included in the Consolidated Financial Statements set forth on pages F-1
through F-10, attached hereto and found immediately following the signature page
of this Report.
Item 9. Disagreements on Accounting and Financial Disclosures
None.
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PART III
Item 10. Directors and Executive Officers of the Registrant
Information required by this Item, which is not included in Part I
hereof, will be contained in the Proxy Statement for the Annual Meeting of
Shareholders (the "1997 Proxy Statement"), to be held on December 2, 1997,
under the caption "Election of Directors", and is incorporated herein by
reference.
Item 11. Executive Compensation
Information required by this Item will be contained in the 1997 Proxy
Statement under the captions, "Executive Compensation," "Compensation
Committee Interlocks and Insider Participation" and "Information Concerning
Meetings of the Board of Directors and Board Committees and Director
Compensation," and is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Information required by this Item will be contained in the 1997 Proxy
Statement, under the caption "Beneficial Ownership of Common Stock," and is
incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions
Information required by this Item will be contained in the 1997 Proxy
Statement under the captions, "Compensation Committee Interlocks and Insider
Participation" and "Certain Relationships and Related Transactions," and is
incorporated herein by reference.
PART IV
Item 14. Exhibits, Financial Statements and Reports on Form 8-K
(a) The following financial statements and financial statement
schedules are filed as part of this Report:
(1) Financial Statements:
Report of Independent Accountants
Consolidated Financial Statements:
Consolidated Balance Sheets -- July 31, 1997 and 1996
Consolidated Statements of Income -- Fiscal Years ended
July 31, 1997, 1996 and 1995
Consolidated Statements of Shareholders' Equity -- Fiscal
Years ended July 31, 1997, 1996 and 1995
Consolidated Statements of Cash Flows -- Fiscal Years
ended July 31, 1997, 1996 and 1995
Notes to Consolidated Financial Statements
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All financial statement schedules are omitted because they are not
applicable, not required or because the information is included in the
consolidated financial statements or notes thereto.
(2) Executive Compensation Plans and Arrangements
- 1986 Stock Option Plan
- 1996 Stock Option Plan
- Change in Control Agreements
(b) Reports on Form 8-K. No Reports on Form 8-K were filed by
the Company during the last quarter of the fiscal year ended
July 31, 1997.
(c) Exhibits
3.1 Restated Articles of Incorporation, as amended, filed
as Exhibit 3.1 to the Registrant's Annual Report on
Form 10-K for the year ended July 31, 1988, are
incorporated herein by reference.
3.2 Bylaws, filed as Exhibit 3.2 to the Registrant's Form
S-1 Registration Statement (Registration No. 33-4378),
are incorporated herein by reference.
4.0 Credit Agreement (the "Credit Agreement") dated as of
May 14, 1992 among Arbor Drugs, Inc., NBD Bank, N.A.,
Manufacturers Bank, N.A., Continental Bank N.A., and
NBD Bank, N.A., as Agent, filed as Exhibit 10.5
to the Registrant's Annual Report on Form 10-K for the
year ended July 31, 1992, is incorporated herein by
reference.
4.0A Letter, dated June 2, 1994, from NBD Bank, N.A. (in its
capacity as a Bank and as Agent), Continental Bank,
N.A. and Comerica Bank to Arbor Drugs, Inc.,
filed as Exhibit 10.3 to the Registrant's Annual Report
on Form 10-K for the year ended July 31, 1994, is
incorporated herein by reference.
4.0B First Amendment to Credit Agreement, dated as of
August 29, 1994, among Arbor Drugs, Inc., NBD Bank,
N.A. (in its capacity as a Bank and as Agent),
Continental Bank, N.A. and Comerica Bank, filed as
Exhibit 10.4 to the Registrant's Annual Report on Form
10-K for the year ended July 31, 1994, is incorporated
herein by reference.
The Registrant undertakes to furnish to the Securities
and Exchange Commission, upon request, a copy of all
long-term debt instruments not filed herewith.
10.1 Amended and Restated Arbor Drugs, Inc. Stock Option
Plan, dated June 4, 1993, filed as Exhibit 10.1 to the
Registrant's Annual Report on Form 10-K for the year
ended July 31, 1993, is incorporated herein by
reference.
10.2 Arbor Drugs, Inc. 1996 Stock Option Plan, filed as
Annex 1 to the Registrant's Proxy Statement for its
1995 Annual Meeting of Shareholders, is incorporated
herein by reference.
10.3 Change in Control Agreements, dated as of December 9,
1996, with each of Eugene Applebaum, Markus M. Ernst,
Gilbert C. Gerhard, Donald M. Stutrud and Eric
Bolokofsky.
11. Computation of Earnings Per Share.
21. Subsidiaries of the Registrant.
13
<PAGE> 14
23.1 Consent of Coopers & Lybrand L.L.P., independent
accountants.
27. Financial Data Schedule.
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, on October 24, 1997.
ARBOR DRUGS, INC.
By: /s/ Eugene Applebaum
-----------------------------------------
Eugene Applebaum,
Chairman of the Board, Chief Executive
Officer and President
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated on October 24, 1997.
<TABLE>
<CAPTION>
Signature Capacity
- --------- --------
<S> <C>
/s/ Eugene Applebaum
- ------------------------------
Eugene Applebaum Chairman of the Board, Chief Executive Officer and President
(Principal Executive Officer)
/s/ Markus M. Ernst
- ------------------------------
Markus M. Ernst Executive Vice President, Chief Operating Officer and Director
/s/ Gilbert C. Gerhard
- ------------------------------
Gilbert C. Gerhard Senior Vice President-Finance and Administration, Chief Financial
Officer, Secretary, Treasurer and Director (Principal Financial and
Accounting Officer)
/s/ David B. Hermelin
- ------------------------------
David B. Hermelin Director
/s/ Spencer M. Partrich
- ------------------------------
Spencer M. Partrich Director
/s/ Laurie M. Shahon
- ------------------------------
Laurie M. Shahon Director
/s/ Samuel Valenti III
- ------------------------------
Samuel Valenti III Director
</TABLE>
14
<PAGE> 15
ARBOR DRUGS, INC. AND SUBSIDIARIES
_____________
REPORT ON AUDITS OF CONSOLIDATED FINANCIAL STATEMENTS
AS OF JULY 31, 1997 AND 1996
FOR THE YEARS ENDED JULY 31, 1997, 1996 AND 1995
15
<PAGE> 16
ARBOR DRUGS, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
_____________
<TABLE>
<CAPTION>
Pages
-----
<S> <C>
Report of Independent Accountants F-2
Financial Statements:
Consolidated Balance Sheets -- July 31, 1997 and 1996 F-3
Consolidated Statements of Income -- Fiscal Years ended
July 31, 1997, 1996 and 1995 F-4
Consolidated Statements of Shareholders' Equity --
Fiscal Years ended July 31, 1997, 1996 and 1995 F-4
Consolidated Statements of Cash Flows -- Fiscal Years
ended July 31, 1997, 1996 and 1995 F-5
Notes to Consolidated Financial Statements F-6 - F-10
</TABLE>
All financial statement schedules are omitted because they are not
applicable, not required or because the information is included in the
consolidated financial statements or notes thereto.
16
<PAGE> 17
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of
Directors of Arbor Drugs, Inc.:
We have audited the accompanying consolidated balance sheets of Arbor
Drugs, Inc. and Subsidiaries as of July 31, 1997 and 1996, and the related
consolidated statements of income, shareholders' equity, and cash flows for each
of the three years in the period ended July 31, 1997. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Arbor
Drugs, Inc. and Subsidiaries as of July 31, 1997 and 1996, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended July 31, 1997, in conformity with generally accepted accounting
principles.
/s/ Coopers & Lybrand L.L.P.
- ------------------------------
Detroit, Michigan
September 26, 1997
F-2
<PAGE> 18
CONSOLIDATED BALANCE SHEETS
ARBOR DRUGS, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
July 31, 1997 1996
- -------------------------------------------------------------------------------------
<S> <C> <C>
(Dollars in thousands)
ASSETS
Current assets:
Cash and cash equivalents $ 43,537 $ 34,955
Short-term investments 335 855
Accounts receivable 25,565 17,507
Inventory 131,700 106,283
Prepaid expenses 3,353 3,849
- -------------------------------------------------------------------------------------
Total current assets 204,490 163,449
- -------------------------------------------------------------------------------------
Property and equipment:
Land and land improvements 23,124 16,928
Buildings 27,795 23,879
Furniture, fixtures and equipment 71,700 65,874
Leasehold improvements 45,075 40,036
Less accumulated depreciation (63,745) (57,598)
- -------------------------------------------------------------------------------------
103,949 89,119
- -------------------------------------------------------------------------------------
Intangible assets 21,238 21,137
- -------------------------------------------------------------------------------------
Total assets $329,677 $273,705
=====================================================================================
LIABILITIES
Current liabilities:
Notes payable, current portion $ 611 $ 1,568
Accounts payable 60,422 51,014
Accrued rent and other 10,639 9,285
Accrued compensation and benefits 8,466 6,687
Income tax payable 3,436 1,961
- -------------------------------------------------------------------------------------
Total current liabilities 83,574 70,515
- -------------------------------------------------------------------------------------
Notes payable, net of current portion 16,301 20,802
Deferred income tax 6,023 5,538
Minority interest in subsidiaries 768 681
- -------------------------------------------------------------------------------------
23,092 27,021
- -------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY
Preferred stock: $.01 par value;
2,000,000 shares authorized;
none issued -- --
Common stock: $.01 par value;
40,000,000 shares authorized;
39,416,331 and 37,624,749 issued
and outstanding, respectively 394 251
Additional paid-in capital 74,870 53,812
Retained earnings 147,747 122,106
- -------------------------------------------------------------------------------------
223,011 176,169
- -------------------------------------------------------------------------------------
Total liabilities & shareholders' equity $329,677 $273,705
=====================================================================================
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-3
<PAGE> 19
CONSOLIDATED STATEMENTS OF INCOME
ARBOR DRUGS, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
Fiscal Years Ended July 31, 1997 1996 1995
- -------------------------------------------------------------------------------
(Dollars in thousands, except per share data)
<S> <C> <C> <C>
Net sales $962,773 $826,130 $707,150
Costs and expenses:
Cost of sales 715,435 611,924 521,707
Selling, general and administrative 195,284 172,969 149,829
- -------------------------------------------------------------------------------
Income from operations 52,054 41,237 35,614
Interest expense (1,609) (1,654) (2,035)
Interest income 1,472 1,453 1,359
- -------------------------------------------------------------------------------
Income before income tax 51,917 41,036 34,938
Provision for income tax 17,487 14,012 11,871
- -------------------------------------------------------------------------------
Net income $34,430 $27,024 $23,067
===============================================================================
Weighted average number of common
shares outstanding (in thousands):
Primary 39,481 38,376 37,467
Fully diluted 40,027 38,376 37,634
===============================================================================
Earnings per common share:
Primary $.87 $.70 $.62
Fully diluted $.86 $.70 $.61
===============================================================================
Cash dividend per common share $.227 $.173 $.127
===============================================================================
</TABLE>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Stock Additional
-------------- Paid-In Retained
(In thousands) Shares Amount Capital Earnings TOTAL
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance, July 31, 1994 16,340 $163 $46,621 $ 83,180 $129,964
Net income -- -- -- 23,067 23,067
Cash dividends of $.127
per share -- -- -- (4,681) (4,681)
Exercise of options and
stock purchase plan 179 2 2,364 -- 2,366
Three-for-two stock split 8,247 83 (83) -- --
- -----------------------------------------------------------------------------------------
Balance, July 31, 1995 24,766 248 48,902 101,566 150,716
Net income -- -- -- 27,024 27,024
Cash dividends of $.173
per share -- -- -- (6,484) (6,484)
Exercise of options and
stock purchase plan 317 3 4,910 -- 4,913
- -----------------------------------------------------------------------------------------
Balance, July 31, 1996 25,083 251 53,812 122,106 176,169
Net income -- -- -- 34,430 34,430
Cash dividends of $.227
per share -- -- -- (8,789) (8,789)
Exercise of options and
stock purchase plan 1,342 13 21,188 -- 21,201
Three-for-two stock split 12,991 130 (130) -- --
- -----------------------------------------------------------------------------------------
Balance, July 31, 1997 39,416 $394 $74,870 $147,747 $223,011
=========================================================================================
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-4
<PAGE> 20
CONSOLIDATED STATEMENTS OF CASH FLOWS
ARBOR DRUGS, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
Fiscal Years Ended July 31, 1997 1996 1995
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
(Dollars in thousands)
Operating activities:
Net income $34,430 $27,024 $23,067
Adjustments to reconcile to net
cash provided by operations:
Depreciation 12,368 11,971 10,886
Amortization 4,113 4,471 4,601
Deferred income tax 310 304 (1,053)
Changes in operating assets
and liabilities:
Accounts receivable (8,058) (3,487) (1,238)
Inventory (25,417) (16,730) (6,155)
Prepaid expenses 758 351 1,829
Accounts payable 9,408 673 (2,577)
Third-party settlement
and related expenses -- -- (5,000)
Accrued expenses 3,133 3,176 1,049
Income tax payable 1,475 (372) 1,136
- --------------------------------------------------------------------------------------
Net cash provided
by operations 32,520 27,381 26,545
- --------------------------------------------------------------------------------------
Investing activities:
Purchase of property and equipment, net (27,198) (24,707) (16,700)
Purchase of intangible assets (4,214) (3,842) (3,873)
Sale, (purchase) or maturity of
short-term investments 520 (685) 1,094
- --------------------------------------------------------------------------------------
Net cash used in
investing activities (30,892) (29,234) (19,479)
- --------------------------------------------------------------------------------------
Financing activities:
Principal payments on debt (5,458) (1,419) (1,373)
Dividends paid (8,789) (6,484) (4,681)
Proceeds from exercise of stock options
and stock purchase plan 21,201 4,913 2,366
- --------------------------------------------------------------------------------------
Net cash provided by
(used in) financing activities 6,954 (2,990) (3,688)
- --------------------------------------------------------------------------------------
Net increase (decrease) in cash
and cash equivalents 8,582 (4,843) 3,378
Cash and cash equivalents at
beginning of year 34,955 39,798 36,420
- --------------------------------------------------------------------------------------
Cash and cash equivalents at
end of year $43,537 $34,955 $39,798
======================================================================================
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-5
<PAGE> 21
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ARBOR DRUGS, INC. AND SUBSIDIARIES
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
The preparation of these consolidated financial statements, in order to be
presented in conformity with generally accepted accounting principles, requires
that management use estimates and assumptions regarding events anticipated and
transpired, together with their potential effects upon the reported amounts of
assets and liabilities, as well as the disclosures and assessments of contingent
assets and liabilities, at the date of the financial statements, and in
determining the reported amounts of revenues, costs and expenses of the
reporting periods. Actual results could differ from those estimates.
STOCK REPURCHASE PLAN
On July 25, 1996, the Board of Directors authorized management to repurchase up
to 1,500,000 shares of the Company's common stock in the open market, at prices
acceptable to management. Shares purchased under the program will be retired.
No shares have been purchased to date.
BASIS OF OPERATION
The consolidated financial statements include Arbor Drugs, Inc. ("Company") and
its subsidiaries, whose primary business activity is the operation of
drugstores, principally in southeastern Michigan. All significant intercompany
transactions have been eliminated in consolidation.
CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
The Company considers all highly liquid investments with a maturity of three
months or less to be cash equivalents. Short-term investments include all
liquid investments with a maturity greater than three months and are stated at
cost, which approximates market.
RECEIVABLES
The Company has contractual arrangements with third-party providers of
insurance, enabling the Company to obtain reimbursement from these carriers for
prescription services performed by the Company for benefit of its customers.
Consequently, significant revenue and accounts receivable result from these
arrangements.
INVENTORY VALUATION
Inventories are stated at the lower of cost or market assuming a last-in,
first-out cost flow. Had the first-in, first-out method for determining cost
been used, inventories would have been increased by approximately $27,973,000
and $25,607,000 at July 31, 1997 and 1996, respectively.
PROPERTY AND EQUIPMENT
All property and equipment are recorded at cost. Maintenance and repair costs
are charged to expense as incurred. Upon retirement or disposal, the asset cost
and related accumulated depreciation are eliminated from the respective
accounts and the resulting gain or loss is included in the results of
operations for the period.
DEPRECIATION
Depreciation is computed using primarily the straight-line method based on the
following range of estimated useful lives:
<TABLE>
<S> <C>
Buildings ................................................. 40 years
Furniture, fixtures and equipment and land improvements.... 5 to 20 years
Leasehold improvements..................................... Lesser of lease term
or useful lives,
ranging from 5 to
20 years
</TABLE>
INCOME TAX
Deferred tax assets and liabilities are recognized for temporary differences at
the tax rate expected to be in effect when the related asset is recovered or
the related liability is settled.
PREOPENING EXPENSES
Preopening expenses of retail drugstores are charged to income as incurred.
ADVERTISING
Advertising production costs are expensed the first time the related
advertising takes place. Advertising expense for the years ended July 31, 1997,
1996 and 1995 was approximately $14,400,000, $15,146,000 and $14,774,000,
respectively.
CONTINGENCIES
The Company is a defendant in claims and lawsuits arising in the ordinary
course of business. In the opinion of management and the Company's outside
counsel, although the outcome of such litigation cannot be forecast with
certainty, the ultimate disposition should not have a material adverse effect
on the Company's consolidated financial condition or results of operations.
F-6
<PAGE> 22
EARNINGS PER SHARE
Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings per
Share," was issued in February 1997 and is effective for interim and annual
periods beginning after December 15, 1997. Earlier adoption is not permitted.
If earnings per share were calculated using SFAS No. 128, "earnings per share"
would have been $.89, $.72 and $.62 for fiscal 1997, 1996 and 1995,
respectively, and "earnings per share--assuming dilution" would have been $.87,
$.70 and $.62 for fiscal 1997, 1996 and 1995, respectively.
2. INTANGIBLE ASSETS:
Intangible assets consist of the following:
July 31, 1997 1996
------------------------------------------------------------
(Dollars in thousands)
Prescription customer files $16,536 $19,026
Leaseholds 2,954 3,091
Developed software 4,860 5,067
Other 13,687 12,274
------------------------------------------------------------
38,037 39,458
Less accumulated amortization 16,799 18,321
------------------------------------------------------------
$21,238 $21,137
============================================================
Prescription customer files and other intangible assets consist primarily of
amounts, other than leaseholds, allocated upon the purchase of assets of
existing retail operations and are generally amortized over a period not to
exceed 15 years.
Leaseholds represent the amounts paid for, or allocated to, beneficial lease
agreements assumed by the Company upon purchase of assets of existing retail
operations or leases. Amortization is recorded using the straight-line method
over the term of the related lease agreement.
All intangible assets are evaluated for potential impairment of value on an
on-going basis. Such evaluations consider current, as well as anticipated,
operating results, measured on the basis of undiscounted cash flows, of the
operation relative to the asset. Usefulness of the underlying asset in the
operation of the Company is also a basis of evaluation. Additionally, trends
and other circumstances are used in such evaluations and estimates.
3. NOTES PAYABLE:
Approximate fair market values are as follows:
<TABLE>
<CAPTION>
July 31, 1997 1996
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
(Dollars in thousands)
Mortgage note payable, interest at 8.75 percent, monthly interest
and principal installments of $60,976 through July 1, 2014 $ 6,477 $ 6,634
Mortgage note payable, interest at 9.68 percent, monthly interest
and principal installments of $62,298 through July 1, 2012 5,904 6,071
Mortgage note payable, interest at 8.49 percent, monthly interest
and principal installments of $42,926 through December 1, 2012 4,421 4,554
Other borrowings 110 111
Senior note, interest at 9.93 percent -- 3,500
Line of credit term loan, interest at 7.16 percent -- 1,500
- -----------------------------------------------------------------------------------------------
16,912 22,370
Less current portion 611 1,568
- -----------------------------------------------------------------------------------------------
$16,301 $20,802
===============================================================================================
</TABLE>
As of July 31, 1997, the Company had a $50 million line of credit with no
outstanding balance. This credit facility expires November 30, 2002.
F-7
<PAGE> 23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
Maturities of notes payable for the next five fiscal years are approximately as
follows:
1998... $501,000 1999... $548,000 2000... $600,000
2001... $656,000 2002... $718,000
The line of credit agreement contains certain covenants, the most restrictive
of which require the Company to maintain minimum current, debt service and
equity ratios and maintain a minimum amount of net worth. Certain property has
been pledged as collateral under terms of the mortgage notes payable.
Interest costs capitalized for the years ended July 31, 1997, 1996 and 1995 were
approximately $346,000, $552,000 and $328,000, respectively.
Cash paid for interest, net of capitalized interest, was approximately
$2,035,000, $1,646,000 and $2,232,000 for the years ended July 31, 1997, 1996
and 1995, respectively.
4. RENTAL EXPENSE AND LEASE COMMITMENTS:
The Company leases certain facilities, transportation, data processing and photo
development equipment under operating lease agreements expiring on various dates
through the year 2020. In addition to minimum rentals, certain lease agreements
provide for contingent rental payments based upon attainment of specified sales
volume or increases in the consumer price index. Most leases contain renewal
options for periods ranging from 5 to 30 years. The following are summaries of
rental expense and the future minimum annual rental payments required under all
operating leases:
Year Ended July 31, 1997 1996
- ----------------------------------------------------
(Dollars in thousands)
Rental expense:
Minimum rentals $19,670 $16,974
Contingent rentals 2,057 1,846
- ----------------------------------------------------
$21,727 $18,820
====================================================
Minimum annual rentals:
Year ending July 31:
1998 $24,646
1999 25,839
2000 23,779
2001 22,068
2002 20,434
Remaining lease term 232,641
- ----------------------------------------------------
$349,407
====================================================
Accrued rent of $7,753,000 and $6,835,000 is included in accrued expenses as of
July 31, 1997 and 1996, respectively.
5. EMPLOYEE RETIREMENT PLANS:
The Company maintains an employee savings plan, pursuant to section 401(k) of
the Internal Revenue Code. Eligible participating employees may contribute up to
15 percent of their salaries, subject to certain limitations, for investment in
either the common stock of the Company or various other investment options.
Contributions by the Company are discretionary.
6. INCOME TAX:
The provision for federal income tax consists of the following:
Year Ended July 31, 1997 1996 1995
- --------------------------------------------------------------
(Dollars in thousands)
Currently payable $17,177 $13,708 $10,745
Deferred 310 304 1,126
- --------------------------------------------------------------
$17,487 $14,012 $11,871
==============================================================
F-8
<PAGE> 24
The provision for deferred income tax is attributed to the tax effect of
differences caused by the timing of expense and revenue recognition, between
financial statement and tax accounting, for certain transactions, at the tax
rates expected to be in effect when the related asset is recovered or liability
is settled. These differences are primarily attributed to the following:
<TABLE>
<CAPTION>
July 31, 1997 1996
- --------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C>
Vendor agreement discounts $(375) $832
Depreciation and amortization (496) (251)
- --------------------------------------------------------------
</TABLE>
The provision for income tax, as a percentage of income before tax, was 33.7
percent, 34.1 percent and 34.0 percent in 1997, 1996 and 1995, respectively.
These rates differ from the statutory rate due to income earned on tax-exempt
investments.
Prepaid expenses include the current portion of deferred income taxes of
$1,965,000 and $1,790,000 in 1997 and 1996, respectively.
Cash paid for income taxes was approximately $10,431,000, $12,738,000 and
$8,800,000 in 1997, 1996 and 1995, respectively.
7. STOCK OPTION AND STOCK PURCHASE PLANS:
In fiscal 1997, the Company adopted SFAS No. 123, "Accounting for Stock-Based
Compensation." While SFAS No. 123 established financial accounting and
reporting standards for stock-based employee compensation plans using a fair
value method of accounting, it allows companies to continue to measure
compensation using the intrinsic value method of accounting as prescribed in
APB No. 25, "Accounting for Stock Issued to Employees." The Company will
continue to use its present APB No. 25 accounting treatment for stock-based
employee compensation. Accordingly, no compensation cost has been recognized
for its stock-based compensation plans.
Under the Company's 1986 and 1996 Stock Option Plans, certain of the Company's
key employees have been granted nonqualified stock options which allow the
employee to purchase shares of common stock at prices equal to market value at
the date of grant, become exercisable 12 months after grant, on a pro rata
basis, over a five-year period and expire six years after the date of grant.
The Company is currently authorized to grant options to purchase up to an
aggregate of 8,430,976 shares of its common stock, of which 7,642,352 shares
have been granted as of July 31, 1997.
Stock option transactions are summarized as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---------------------------- ------------------------- ---------------------------
WEIGHTED-AVERAGE Weighted-average Weighted-average
SHARES EXERCISE PRICE Shares Exercise Price Shares Exercise Price
- -------------------------------------------------------------------------------------------------------------------------
Outstanding at beginning of year 5,010,704 $ 9.35 4,298,018 $ 8.53 3,140,585 $7.34
Granted 1,119,150 14.83 1,107,000 11.67 1,478,027 10.11
Terminated (25,801) 9.08 (70,725) 9.54 (26,168) 8.50
Exercised (1,614,572) 8.20 (323,589) 6.11 (294,426) 3.35
- -------------------------------------------------------------------------------------------------------------------------
Outstanding at end of year 4,489,481 $11.14 5,010,704 $ 9.35 4,298,018 $ 8.53
- -------------------------------------------------------------------------------------------------------------------------
Options exercisable at year-end 1,196,983 1,797,333 1,302,120
=========================================================================================================================
<CAPTION>
Options Outstanding Options Exercisable
- ------------------------------------------------------------------------------- ----------------------------------------
Weighted-average
Number Remaining Years Weighted-average Number Weighted-average
Range of Exercise Prices Outstanding of Contractual Life Exercise Price Exercisable Exercise Price
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$7.78 to $9.00 1,155,172 2.08 $8.15 911,158 $8.76
$10.11 to $14.83 3,334,309 4.23 12.18 285,825 11.45
- -------------------------------------------------------------------------------------------------------------------------
$7.78 to $14.83 4,489,481 3.67 $11.14 1,196,983 $9.40
=========================================================================================================================
</TABLE>
F-9
<PAGE> 25
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
The Company has an Employee Stock Purchase Plan where employees may subscribe,
through payroll withholdings, to purchase shares of the Company's common stock
at the lower of 85% of market value at the beginning or end of each calendar
quarter. Employees may not purchase in excess of 15% of gross pay under the
plan, or 25% of gross pay in combination with withholdings under the 401(k)
plan. The plan covers an aggregate of 675,000 shares.
Transactions under the Employee Stock Purchase Plan are summarized as follows:
<TABLE>
<CAPTION>
Weighted-average
Weighted-average Fair Value of Shares Issued
Number of Shares Issue Price at Purchase Date
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Shares issued during the year ended July 31,
1997 177,152 $13.33 $17.36
1996 152,742 10.79 13.60
1995 88,727 8.20 N/A
====================================================================================================================
</TABLE>
Had the compensation cost of the Company's stock-based compensation plans been
determined based on the fair value at the grant dates for awards under those
plans consistent with the method of SFAS No. 123, the Company's net income would
have been reduced by $1,546,000 and $718,000 for 1997 and 1996, respectively,
and earnings per share would have been reduced by $.04 and $.02 for 1997 and
1996, respectively. To determine these amounts, the fair value of each stock
option and stock purchase plan purchase has been estimated on the date of grant
using a Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in 1997 and 1996: risk-free interest rates of 6.39%
and 5.77%, expected volatility of 29.04% and 29.96% and dividend yield of 1.4%.
The expected weighted-average life of the stock options is 4.7 years. The
weighted-average fair value of stock options granted in 1997 and 1996 was equal
to the weighted-average exercised price. The effects of applying SFAS No. 123 in
this pro forma disclosure are not indicative of future amounts. SFAS No. 123
does not apply to awards prior to 1996.
8. QUARTERLY FINANCIAL SUMMARY (UNAUDITED):
<TABLE>
<CAPTION>
(Dollars in thousands, except per share data)
For the Three Months Ended
- ----------------------------------------------------------------------------------------------------------
Fiscal Year OCT. 31, JAN. 31, APRIL 30, JULY 31,
1997 1996 1997 1997 1997
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $224,973 $250,318 $238,420 $249,062
Gross profit 57,658 64,869 60,578 64,233
Net income 6,393 10,728 7,540 9,769
Earnings per share, primary and fully diluted $.16 $.27 $.19 $.24
==========================================================================================================
<CAPTION>
For the Three Months Ended
- ----------------------------------------------------------------------------------------------------------
Fiscal Year Oct. 31, Jan. 31, April 30, July 31,
1996 1995 1996 1996 1996
- ----------------------------------------------------------------------------------------------------------
Net sales $190,704 $214,501 $208,242 $212,683
Gross profit 49,449 56,232 53,560 54,965
Net income 5,125 8,711 6,057 7,131
Earnings per share, primary and fully diluted $.13 $.23 $.16 $.19
==========================================================================================================
</TABLE>
Amounts may not total due to rounding.
F-10
<PAGE> 26
<TABLE>
<CAPTION>
INDEX TO EXHIBITS Page #
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<S> <C> <C>
3.1 Restated Articles of Incorporation, as amended, filed as
Exhibit 3.1 to the Registrant's Annual Report on
Form 10-K for the year ended July 31, 1988, are incorporated
herein by reference.
3.2 Bylaws, filed as Exhibit 3.2 to the Registrant's Form S-1
Registration Statement (Registration No. 33-4378), are
incorporated herein by reference.
4.0 Credit Agreement (the "Credit Agreement") dated as of May 14,
1992 among Arbor Drugs, Inc., NBD Bank, N.A., Manufacturers Bank,
N.A., Continental Bank N.A., and NBD Bank, N.A., as Agent, filed
as Exhibit 10.5 to the Registrant's Annual Report on Form 10-K
for the year ended July 31, 1992, is incorporated herein by reference.
4.0A Letter, dated June 2, 1994, from NBD Bank, N.A. (in its capacity
as a Bank and as Agent), Continental Bank, N.A. and Comerica Bank
to Arbor Drugs, Inc., filed as Exhibit 10.3 to the Registrant's
Annual Report on Form 10-K for the year ended July 31, 1994,
is incorporated herein by Reference.
4.0B First Amendment to Credit Agreement, dated as of August 29, 1994,
among Arbor Drugs, Inc., NBD Bank, N.A. (in its capacity as a
Bank and as Agent), Continental Bank, N.A. and Comerica Bank,
filed as Exhibit 10.4 to the Registrant's Annual Report on Form
10-K for the year ended July 31, 1994, is incorporated herein
by reference.
The Registrant undertakes to furnish to the Securities and Exchange
Commission, upon request, a copy of all long-term
debt instruments not filed herewith.
10.1 Amended and Restated Arbor Drugs, Inc. Stock Option Plan, dated
June 4, 1993, filed as Exhibit 10.1 to the Registrant's Annual
Report on Form 10-K for the year ended July 31, 1993, is
incorporated herein by reference.
10.2 Arbor Drugs, Inc. 1996 Stock Option Plan, filed as Annex 1
to the Registrant's Proxy Statement for its 1995 Annual
Meeting of Shareholders, is incorporated herein
by reference.
10.3 Change in Control Agreements, dated as of December 9, 1996,
with each of Eugene Applebaum, Markus M. Ernst, Gilbert C.
Gerhard, Donald M. Stutrud and Eric Bolokofsky. 27
11. Computation of Earnings Per Share. 57
21. Subsidiaries of the Registrant. 58
23.1 Consent of Coopers & Lybrand L.L.P., independent accountants 59
27. Financial Data Schedule. 60
</TABLE>
26
<PAGE> 1
CHANGE IN CONTROL AGREEMENT EXHIBIT 10.3
Dated as of December 9, 1996
The Board of Directors of Arbor Drugs, Inc. (the "Company") has
determined that, in light of the uncertainties affecting the industry in which
the Company operates, it would be in the best interests of the Company and its
shareholders to induce key employees, including the undersigned (the
"Employee"), to remain with the Company and to reinforce and encourage their
continued attention and dedication to the Company. Accordingly, the Company
desires to enter into this agreement (the "Agreement") with the Employee
providing for the continuation of certain of the Employee's welfare benefits if
the Employee is terminated by the Company or a successor or, for Good Reason
(as hereinafter defined) the Employee terminates his or her employment with the
Company or a successor, within 180 days preceding, or within two years
following, a Change in Control (as hereinafter defined), subject to the terms
and conditions specified herein. This Agreement is in addition to any other
entitlement the Employee might have under any other plan or individual
employment arrangement or agreement with the Company or any of its
subsidiaries.
CONTINUATION OF CERTAIN EMPLOYEE WELFARE BENEFITS
If the Employee is terminated by the Company or a successor without
Cause (as hereinafter defined), or terminates his or her employment with the
Company or a successor for Good Reason (as hereinafter defined), within 180
days preceding, or within two years following, a Change in Control, the Company
or any of its subsidiaries or successor shall continue his participation, as if
he were still an employee, in the medical, dental, hospitalization, disability
and life insurance plans, programs and/or arrangements of the Company or any of
its subsidiaries in which he was participating on the date of the termination
of his employment on the same terms and conditions as other executives under
such plans, programs and/or arrangements until the earlier of (i) the end of
the 24-month period commencing with the month immediately following the month
in which the date of the termination of his employment occurred or (ii) the
date, or dates, he receives equivalent coverage and benefits under the plans,
programs and/or arrangements of a subsequent employer (such coverage and
benefits to be determined on a coverage-by-coverage or benefit-by-benefit
basis) (the "Continuation of Benefits"); provided, however, that the Employee
shall not be entitled to the Continuation of Benefits if any of the
Circumstances of Ineligibility (as hereinafter defined) apply to the Employee.
CIRCUMSTANCES OF INELIGIBILITY
The Employee will not be eligible to receive the Continuation of
Benefits under this Agreement in any one or more of the following
circumstances:
1. VOLUNTARY TERMINATION: If the Employee elects to voluntarily
terminate the Employee's employment, including termination due to retirement,
with the Company or a successor, the Employee will not be eligible to receive
the Payment; provided, however, that termination by the Employee for Good
Reason shall not constitute a Circumstance of Ineligibility.
2. TERMINATION FOR CAUSE: If the Employee's employment with the
Company or a successor is terminated for Cause at any time preceding or
following a Change in Control, the Employee will not be eligible to receive the
Payment.
27
<PAGE> 2
DEFINITIONS
For purposes of this Agreement:
1. CHANGE IN CONTROL means that any of the following has
occurred: (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
Securities Exchange Act of 1934, 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
(the "Voting Stock") of the Company, (b) the Board of Directors approves the
sale of all or substantially all of the assets of the Company (other than to
one or more wholly-owned direct or indirect subsidiaries of the Company) or a
plan of complete liquidation 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 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) during any period of
not more than two consecutive years, 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 (x) whose election or
nomination for election was supported by a majority of the then Incumbent
Directors and (y) whose initial assumption of his or her directorship did not
occur as a result of an actual or threatened solicitation of proxies or
consents or as a result of a designation by a person who has entered into an
agreement with the Company to effect a transaction described in clause (a), (b)
or (c) above shall be considered an Incumbent Director for purposes hereof.
2. CAUSE means (a) if the Employee is a party to a written
employment agreement with the Company or a subsidiary 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, "for cause" or "cause" as defined therein;
or (b) if the Employee is not a party to such a written employment agreement,
(i) the commission by the Employee of an act of fraud in the performance of
such Employee's duties on behalf of the Company or a subsidiary of the Company;
(ii) conviction of the Employee for commission of a felony in connection with
the performance of his or her duties on behalf of the Company or a subsidiary
of the Company; or (iii) the continuing failure of the Employee to perform his
or her material duties to the Company or a subsidiary of the Company that has
not been cured within 15 days after written notice thereof has been given to
the Employee by the Board of Directors of the Company.
3. GOOD REASON means, without the written consent of the Employee,
(i) assignment of duties or responsibilities materially inconsistent with those
customarily associated with the highest position held by the Employee within
the 181 days prior to the Change in Control (alternatively, the "Measuring
Position"), or any other action by the Company or a successor that results in a
diminution of the Employee's position, authority, duties or responsibilities
compared to the Measuring Position, other than an isolated action that is not
taken in bad faith and is remedied by the Company or a successor promptly after
receipt of notice thereof from the Employee; (ii) reduction in (x) the
Employee's total compensation reportable on Form W-2 in any calendar year from
the average of the total compensation
28
<PAGE> 3
of the Employee reported on the Forms W-2 issued by the Company for the
two most recent calendar years ended prior to the calendar year in which
the Change in Control occurs or (y) in any welfare benefits from the
highest levels in effect within the 181 days prior to the Change in
Control; or (iii) relocation of the Employee's principal place of
employment to a location more than 35 miles from the Executive's principal
place of employment on the 181st day prior to the Change in Control.
CERTAIN TAX PROVISIONS
1. In the event that any payment or benefit received or to be
received by you pursuant to the terms of this Agreement (the "Contract
Payment") or of any other plan, arrangement or agreement of the Company (or any
subsidiary) ("Other Payments" and, together with the Contract Payments, the
"Payments") would, in the opinion of independent tax counsel selected by the
Company and reasonably acceptable to you ("Tax Counsel"), be subject to the
excise tax (the "Excise Tax") imposed by section 4999 of the Internal Revenue
Code of 1986, as amended (the "Code") (in whole or in part), as determined as
provided below, the Company shall pay to you, at the time specified in
Paragraph 2 below, an additional amount (the "Gross-Up Payment") such that the
net amount retained by you, after deduction of the Excise Tax on Contract
Payments and Other Payments and any federal, state and local income or other
tax and Excise Tax upon the payment provided for by this Paragraph 1, and any
interest, penalties or additions to tax payable by you with respect thereto,
shall be equal to the total present value of the Contract Payments and Other
Payments at the time such Payments are to be made. For purposes of determining
whether any of the Payments will be subject to the Excise Tax and the amounts
of such Excise Tax, (1) the total amount of the Payments shall be treated as
"parachute payments" within the meaning of section 280G(b)(2) of the Code, and
all "excess parachute payments" within the meaning of section 280G(b)(1) of the
Code shall be treated as subject to the Excise Tax, except to the extent that,
in the opinion of Tax Counsel, a Payment (in whole or in part) does not
constitute a "parachute payment" within the meaning of section 280G(b)(2) of
the Code, or such "excess parachute payments" (in whole or in part) are not
subject to the Excise Tax, (2) the amount of the Payments that shall be treated
as subject to the Excise Tax shall be equal to the lesser of (A) the total
amount of the Payments or (B) the amount of "excess parachute payments" within
the meaning of section 280G(b)(1) of the Code (after applying clause (1)
hereof), and (3) the value of any noncash benefits or any deferred payment or
benefit shall be determined by Tax Counsel in accordance with the principles of
sections 280G(d)(3) and (4) of the Code. For purposes of determining the
amount of the Gross-Up Payment, you shall be deemed to pay federal income taxes
at the highest marginal rates of federal income taxation applicable to the
individuals in the calendar year in which the Gross-Up Payment is to be made
and state and local income taxes at the highest marginal rates of taxation
applicable to individuals as are in effect in the state and locality of your
residence in the calendar year in which the Gross-Up Payment is to be made, net
of the maximum reduction in federal income taxes that can be obtained from
deduction of such state and local taxes, taking into account any limitations
applicable to individuals subject to federal income tax at the highest marginal
rates.
2. The Gross-Up Payments provided for in Paragraph 1 above hereof
shall be made upon the earlier of (i) the payment to you of any Contract
Payment or Other Payment or (ii) the imposition upon you or payment by you of
any Excise Tax.
3. If it is established pursuant to a final determination of a
court or an Internal Revenue Service proceeding or the opinion of Tax Counsel
that the Excise Tax is less than the amount taken into account under Paragraph
29
<PAGE> 4
1 above, you shall repay to the Company within five days of your receipt of
notice of such final determination or opinion the portion of the Gross-Up
Payment attributable to such reduction (plus the portion of the Gross-Up
Payment attributable to the Excise Tax and federal, state and local income tax
imposed on the Gross-Up Payment being repaid by you if such repayment results
in a reduction in Excise Tax or a federal, state and local income tax
deduction) plus any interest received by you on the amount of such repayment.
If it is established pursuant to a final determination of a court or an
Internal Revenue Service proceeding or the opinion of Tax Counsel that the
Excise Tax exceeds the amount taken into account hereunder (including by reason
of any payment the existence or amount of which cannot be determined at the
time of the Gross-Up Payment), the Company shall make an additional Gross-Up
Payment in respect of such excess within five days of the Company's receipt of
notice of such final determination or opinion.
4. In the event of any change in, or further interpretation of,
sections 280G or 4999 of the Code and the regulations promulgated thereunder,
you shall be entitled, by written notice to the Company, to request an opinion
of Tax Counsel regarding the application of such change to any of the
foregoing, and the Company shall use its best efforts to cause such opinion to
be rendered as promptly as practicable. All fees and expenses of Tax Counsel
incurred in connection with this agreement shall be borne by the Company.
MISCELLANEOUS
Term. This Agreement shall terminate and be of no further force or
effect if a Change in Control has not occurred on or before the fifth
anniversary of the date first written above.
No Employment Agreement. This Agreement does not constitute a contract
of employment or impose on the Company any obligation to retain the Employee as
an employee.
Deductions and Withholding. The Employee agrees that the Company
shall withhold from any and all compensation required to be paid to the
Employee pursuant to this Agreement all federal, state, local and/or other
taxes which the Company determines are required to be withheld in accordance
with applicable statutes and/or regulations from time to time in effect.
Arbitration. Any dispute or controversy arising under or in
connection with this Agreement shall be settled exclusively by arbitration
conducted in the City of Detroit in the State of Michigan under the Commercial
Arbitration Rules then prevailing of the American Arbitration Association and
such submission shall request the American Arbitration Association to: (i)
appoint an arbitrator experienced and knowledgeable concerning the matter then
in dispute; (ii) require the testimony to be transcribed; (iii) require the
award to be accompanied by findings of fact and a statement of reasons for the
decision; and (iv) request the matter to be handled by and in accordance with
the expedited procedures provided for in the Commercial Arbitration Rules. The
determination of the arbitrators, which shall be based upon a de novo
interpretation of this Agreement, shall be final and binding and judgment may
be entered on the arbitrators' award in any court having jurisdiction. All
costs of the American Arbitration Association and the arbitrator shall be borne
as determined by the arbitrator.
Legal Fees. In the event the Company or the successor does not make
the Change in Control Payment or Gross-Up Payment due hereunder on a timely
basis and the Employee collects any part or all of the Change in Control
Payment or Gross-Up Payment or otherwise successfully enforces the terms of
this Agreement
30
<PAGE> 5
by or through a lawyer or lawyers, the Company or the successor shall pay all
costs of such collection or enforcement, including reasonable legal fees and
other reasonable fees and expenses which the Employee may incur. The Company
or the successor shall pay to the Employee interest at the "prime" lending rate
as announced from time to time by Citibank, N.A. on all or any part of the
Payment that is not paid when due. The applicable rate for each calendar
quarter shall be the "prime" rate in effect on the first day of the calendar
quarter.
No Duty to Mitigate/Set-off. The Company agrees that if the Employee's
employment with the Company or a successor is terminated within the six months
preceding or two years following a Change in Control covered by this Agreement,
the Employee shall not be required to seek other employment. Further, the
amount of the Change in Control Payment shall not be reduced by any
compensation earned by the Employee or any benefit provided to the Employee as
the result of employment by another employer or otherwise. The Company's
obligations to make the Change in Control Payment shall not be affected by any
circumstances, including, without limitation, any set-off, counterclaim,
recoupment, defense or other right which the Company or a successor may have
against the Employee.
Entire Agreement. This Agreement embodies the entire agreement of the
parties with respect to any payment due the Employee in the event of a Change
in Control and supersedes any other prior oral or written agreements between
the Employee and the Company with respect thereto. No party may amend, modify
or terminate this Agreement without the express written consent of the other
party.
Successors; Binding Agreement. In addition to any obligations imposed
by law upon any successor to the Company, the Company will require any
successor (whether direct or indirect, by purchase, merger, consolidation or
otherwise) to all or substantially all of the business and/or assets of the
Company to expressly assume and agree in writing to perform this Agreement in
the same manner and to the same extent that the Company would be required to
perform it if no such succession had taken place and this Agreement shall inure
to the benefit of such successor. Any such assignment shall not relieve the
Company from liability hereunder. This Agreement shall inure to the benefit of
and be enforceable by the Employee's personal or legal representatives,
executors, administrators, successors, heirs, distributees, devises and
legatees.
Governing Law. This Agreement shall be governed and construed in
accordance with the laws of the State of Michigan without regard to the
conflicts of law principles of such state.
Counterparts. This Agreement may be executed and delivered in
separate counterparts, each of which when so executed and delivered shall be
deemed an original and all of which taken together shall constitute one and the
same agreement.
31
<PAGE> 6
IN WITNESS WHEREOF, the parties hereto have duly executed this
Agreement as of the date first written above.
ARBOR DRUGS, INC.
By: /s/ Gilbert C. Gerhard
-----------------------
Gilbert C. Gerhard
Senior Vice President-
Finance & Administration
ACCEPTED AND AGREED TO
BY THE UNDERSIGNED EMPLOYEE
as of the date first written above
By: /s/ Eugene Applebaum
----------------------
Name: Eugene Applebaum
32
<PAGE> 7
CHANGE IN CONTROL AGREEMENT
Dated as of December 9, 1996
The Board of Directors of Arbor Drugs, Inc. (the "Company") has
determined that, in light of the uncertainties affecting the industry in which
the Company operates, it would be in the best interests of the Company and its
shareholders to induce key employees, including the undersigned (the
"Employee"), to remain with the Company and to reinforce and encourage their
continued attention and dedication to the Company. Accordingly, the Company
desires to enter into this agreement (the "Agreement") with the Employee
providing for the continuation of certain of the Employee's welfare benefits if
the Employee is terminated by the Company or a successor or, for Good Reason
(as hereinafter defined) the Employee terminates his or her employment with the
Company or a successor, within 180 days preceding, or within two years
following, a Change in Control (as hereinafter defined), subject to the terms
and conditions specified herein. This Agreement is in addition to any other
entitlement the Employee might have under any other plan or individual
employment arrangement or agreement with the Company or any of its
subsidiaries.
CONTINUATION OF CERTAIN EMPLOYEE WELFARE BENEFITS
If the Employee is terminated by the Company or a successor without
Cause (as hereinafter defined), or terminates his or her employment with the
Company or a successor for Good Reason (as hereinafter defined), within 180
days preceding, or within two years following, a Change in Control, the Company
or any of its subsidiaries or successor shall continue his participation, as if
he were still an employee, in the medical, dental, hospitalization, disability
and life insurance plans, programs and/or arrangements of the Company or any of
its subsidiaries in which he was participating on the date of the termination
of his employment on the same terms and conditions as other executives under
such plans, programs and/or arrangements until the earlier of (i) the end of
the 24-month period commencing with the month immediately following the month
in which the date of the termination of his employment occurred or (ii) the
date, or dates, he receives equivalent coverage and benefits under the plans,
programs and/or arrangements of a subsequent employer (such coverage and
benefits to be determined on a coverage-by-coverage or benefit-by-benefit
basis) (the "Continuation of Benefits"); provided, however, that the Employee
shall not be entitled to the Continuation of Benefits if any of the
Circumstances of Ineligibility (as hereinafter defined) apply to the Employee.
CIRCUMSTANCES OF INELIGIBILITY
The Employee will not be eligible to receive the Continuation of
Benefits under this Agreement in any one or more of the following
circumstances:
1. VOLUNTARY TERMINATION: If the Employee elects to voluntarily
terminate the Employee's employment, including termination due to
retirement, with the Company or a successor, the Employee will not be
eligible to receive the Payment; provided, however, that termination by
the Employee for Good Reason shall not constitute a Circumstance of
Ineligibility.
2. TERMINATION FOR CAUSE: If the Employee's employment with the
Company or a successor is terminated for Cause at any time preceding or
following a Change in Control, the Employee will not be eligible to receive
the Payment.
33
<PAGE> 8
DEFINITIONS
For purposes of this Agreement:
1. CHANGE IN CONTROL means that any of the following has occurred:
(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 Securities Exchange
Act of 1934, 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 (the "Voting Stock") of
the Company, (b) the Board of Directors approves the sale of all or
substantially all of the assets of the Company (other than to one or more
wholly-owned direct or indirect subsidiaries of the Company) or a plan of
complete liquidation 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 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) during any period of not more than two
consecutive years, 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 (x) whose election or nomination
for election was supported by a majority of the then Incumbent Directors and
(y) whose initial assumption of his or her directorship did not occur as a
result of an actual or threatened solicitation of proxies or consents or as a
result of a designation by a person who has entered into an agreement with the
Company to effect a transaction described in clause (a), (b) or (c) above shall
be considered an Incumbent Director for purposes hereof.
2. CAUSE means (a) if the Employee is a party to a written
employment agreement with the Company or a subsidiary 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, "for cause" or "cause" as defined therein;
or (b) if the Employee is not a party to such a written employment agreement,
(i) the commission by the Employee of an act of fraud in the performance of
such Employee's duties on behalf of the Company or a subsidiary of the Company;
(ii) conviction of the Employee for commission of a felony in connection with
the performance of his or her duties on behalf of the Company or a subsidiary
of the Company; or (iii) the continuing failure of the Employee to perform his
or her material duties to the Company or a subsidiary of the Company that has
not been cured within 15 days after written notice thereof has been given to
the Employee by the Board of Directors of the Company.
3. GOOD REASON means, without the written consent of the Employee,
(i) assignment of duties or responsibilities materially inconsistent with those
customarily associated with the highest position held by the Employee within
the 181 days prior to the Change in Control (alternatively, the "Measuring
Position"), or any other action by the Company or a successor that results in a
diminution of the Employee's position, authority, duties or responsibilities
compared to the Measuring Position, other than an isolated action that is not
taken in bad faith and is remedied by the Company or a successor promptly after
receipt of notice thereof from the Employee; (ii) reduction in (x) the
Employee's total compensation reportable on Form W-2 in any calendar year from
the average of the total compensation
34
<PAGE> 9
of the Employee reported on the Forms W-2 issued by the Company for the
two most recent calendar years ended prior to the calendar year in which the
Change in Control occurs or (y) in any welfare benefits from the highest
levels in effect within the 181 days prior to the Change in Control; or
(iii) relocation of the Employee's principal place of employment to a
location more than 35 miles from the Executive's principal place of
employment on the 181st day prior to the Change in Control.
CERTAIN TAX PROVISIONS
1. In the event that any payment or benefit received or to be
received by you pursuant to the terms of this Agreement (the "Contract
Payment") or of any other plan, arrangement or agreement of the Company (or any
subsidiary) ("Other Payments" and, together with the Contract Payments, the
"Payments") would, in the opinion of independent tax counsel selected by the
Company and reasonably acceptable to you ("Tax Counsel"), be subject to the
excise tax (the "Excise Tax") imposed by section 4999 of the Internal Revenue
Code of 1986, as amended (the "Code") (in whole or in part), as determined as
provided below, the Company shall pay to you, at the time specified in
Paragraph 2 below, an additional amount (the "Gross-Up Payment") such that the
net amount retained by you, after deduction of the Excise Tax on Contract
Payments and Other Payments and any federal, state and local income or other
tax and Excise Tax upon the payment provided for by this Paragraph 1, and any
interest, penalties or additions to tax payable by you with respect thereto,
shall be equal to the total present value of the Contract Payments and Other
Payments at the time such Payments are to be made. For purposes of determining
whether any of the Payments will be subject to the Excise Tax and the amounts
of such Excise Tax, (1) the total amount of the Payments shall be treated as
"parachute payments" within the meaning of section 280G(b)(2) of the Code, and
all "excess parachute payments" within the meaning of section 280G(b)(1) of the
Code shall be treated as subject to the Excise Tax, except to the extent that,
in the opinion of Tax Counsel, a Payment (in whole or in part) does not
constitute a "parachute payment" within the meaning of section 280G(b)(2) of
the Code, or such "excess parachute payments" (in whole or in part) are not
subject to the Excise Tax, (2) the amount of the Payments that shall be treated
as subject to the Excise Tax shall be equal to the lesser of (A) the total
amount of the Payments or (B) the amount of "excess parachute payments" within
the meaning of section 280G(b)(1) of the Code (after applying clause (1)
hereof), and (3) the value of any noncash benefits or any deferred payment or
benefit shall be determined by Tax Counsel in accordance with the principles of
sections 280G(d)(3) and (4) of the Code. For purposes of determining the
amount of the Gross-Up Payment, you shall be deemed to pay federal income taxes
at the highest marginal rates of federal income taxation applicable to the
individuals in the calendar year in which the Gross-Up Payment is to be made
and state and local income taxes at the highest marginal rates of taxation
applicable to individuals as are in effect in the state and locality of your
residence in the calendar year in which the Gross-Up Payment is to be made, net
of the maximum reduction in federal income taxes that can be obtained from
deduction of such state and local taxes, taking into account any limitations
applicable to individuals subject to federal income tax at the highest marginal
rates.
2. The Gross-Up Payments provided for in Paragraph 1 above hereof
shall be made upon the earlier of (i) the payment to you of any Contract
Payment or Other Payment or (ii) the imposition upon you or payment by you of
any Excise Tax.
3. If it is established pursuant to a final determination of a
court or an Internal Revenue Service proceeding or the opinion of Tax Counsel
that the Excise Tax is less than the amount taken into account under Paragraph
35
<PAGE> 10
1 above, you shall repay to the Company within five days of your receipt of
notice of such final determination or opinion the portion of the Gross-Up
Payment attributable to such reduction (plus the portion of the Gross-Up
Payment attributable to the Excise Tax and federal, state and local income tax
imposed on the Gross-Up Payment being repaid by you if such repayment results
in a reduction in Excise Tax or a federal, state and local income tax
deduction) plus any interest received by you on the amount of such repayment.
If it is established pursuant to a final determination of a court or an
Internal Revenue Service proceeding or the opinion of Tax Counsel that the
Excise Tax exceeds the amount taken into account hereunder (including by reason
of any payment the existence or amount of which cannot be determined at the
time of the Gross-Up Payment), the Company shall make an additional Gross-Up
Payment in respect of such excess within five days of the Company's receipt of
notice of such final determination or opinion.
4. In the event of any change in, or further interpretation of,
sections 280G or 4999 of the Code and the regulations promulgated thereunder,
you shall be entitled, by written notice to the Company, to request an opinion
of Tax Counsel regarding the application of such change to any of the
foregoing, and the Company shall use its best efforts to cause such opinion to
be rendered as promptly as practicable. All fees and expenses of Tax Counsel
incurred in connection with this agreement shall be borne by the Company.
MISCELLANEOUS
Term. This Agreement shall terminate and be of no further force or
effect if a Change in Control has not occurred on or before the fifth
anniversary of the date first written above.
No Employment Agreement. This Agreement does not constitute a contract
of employment or impose on the Company any obligation to retain the Employee as
an employee.
Deductions and Withholding. The Employee agrees that the Company shall
withhold from any and all compensation required to be paid to the Employee
pursuant to this Agreement all federal, state, local and/or other taxes which
the Company determines are required to be withheld in accordance with
applicable statutes and/or regulations from time to time in effect.
Arbitration. Any dispute or controversy arising under or in connection
with this Agreement shall be settled exclusively by arbitration conducted in
the City of Detroit in the State of Michigan under the Commercial Arbitration
Rules then prevailing of the American Arbitration Association and such
submission shall request the American Arbitration Association to: (i) appoint
an arbitrator experienced and knowledgeable concerning the matter then in
dispute; (ii) require the testimony to be transcribed; (iii) require the award
to be accompanied by findings of fact and a statement of reasons for the
decision; and (iv) request the matter to be handled by and in accordance with
the expedited procedures provided for in the Commercial Arbitration Rules. The
determination of the arbitrators, which shall be based upon a de novo
interpretation of this Agreement, shall be final and binding and judgment may
be entered on the arbitrators' award in any court having jurisdiction. All
costs of the American Arbitration Association and the arbitrator shall be borne
as determined by the arbitrator.
Legal Fees. In the event the Company or the successor does not make
the Change in Control Payment or Gross-Up Payment due hereunder on a timely
basis and the Employee collects any part or all of the Change in Control
Payment or Gross-Up Payment or otherwise successfully enforces the terms of
this Agreement
36
<PAGE> 11
by or through a lawyer or lawyers, the Company or the successor shall pay all
costs of such collection or enforcement, including reasonable legal fees and
other reasonable fees and expenses which the Employee may incur. The Company
or the successor shall pay to the Employee interest at the "prime" lending rate
as announced from time to time by Citibank, N.A. on all or any part of the
Payment that is not paid when due. The applicable rate for each calendar
quarter shall be the "prime" rate in effect on the first day of the calendar
quarter.
No Duty to Mitigate/Set-off. The Company agrees that if the Employee's
employment with the Company or a successor is terminated within the six months
preceding or two years following a Change in Control covered by this Agreement,
the Employee shall not be required to seek other employment. Further, the
amount of the Change in Control Payment shall not be reduced by any
compensation earned by the Employee or any benefit provided to the Employee as
the result of employment by another employer or otherwise. The Company's
obligations to make the Change in Control Payment shall not be affected by any
circumstances, including, without limitation, any set-off, counterclaim,
recoupment, defense or other right which the Company or a successor may have
against the Employee.
Entire Agreement. This Agreement embodies the entire agreement of the
parties with respect to any payment due the Employee in the event of a Change
in Control and supersedes any other prior oral or written agreements between
the Employee and the Company with respect thereto. No party may amend, modify
or terminate this Agreement without the express written consent of the other
party.
Successors; Binding Agreement. In addition to any obligations imposed
by law upon any successor to the Company, the Company will require any
successor (whether direct or indirect, by purchase, merger, consolidation or
otherwise) to all or substantially all of the business and/or assets of the
Company to expressly assume and agree in writing to perform this Agreement in
the same manner and to the same extent that the Company would be required to
perform it if no such succession had taken place and this Agreement shall inure
to the benefit of such successor. Any such assignment shall not relieve the
Company from liability hereunder. This Agreement shall inure to the benefit of
and be enforceable by the Employee's personal or legal representatives,
executors, administrators, successors, heirs, distributees, devises and
legatees.
Governing Law. This Agreement shall be governed and construed in
accordance with the laws of the State of Michigan without regard to the
conflicts of law principles of such state.
Counterparts. This Agreement may be executed and delivered in separate
counterparts, each of which when so executed and delivered shall be deemed an
original and all of which taken together shall constitute one and the same
agreement.
37
<PAGE> 12
IN WITNESS WHEREOF, the parties hereto have duly executed this
Agreement as of the date first written above.
ARBOR DRUGS, INC.
By: /s/ Gilbert C. Gerhard
-----------------------
Gilbert C. Gerhard
Senior Vice President-
Finance & Administration
ACCEPTED AND AGREED TO
BY THE UNDERSIGNED EMPLOYEE
as of the date first written above
By: /s/ Markus M. Ernst
---------------------
Name: Markus M. Ernst
38
<PAGE> 13
CHANGE IN CONTROL AGREEMENT
Dated as of December 9, 1996
The Board of Directors of Arbor Drugs, Inc. (the "Company") has
determined that, in light of the uncertainties affecting the industry in which
the Company operates, it would be in the best interests of the Company and its
shareholders to induce key employees, including the undersigned (the
"Employee"), to remain with the Company and to reinforce and encourage their
continued attention and dedication to the Company. Accordingly, the Company
desires to enter into this agreement (the "Agreement") with the Employee
providing for a payment to the Employee and the continuation of certain of the
Employee's welfare benefits if the Employee is terminated by the Company or a
successor or, for Good Reason (as hereinafter defined), the Employee terminates
his or her employment with the Company or a successor, within 180 days
preceding, or within two years following, a Change in Control (as hereinafter
defined), subject to the terms and conditions specified herein. This Agreement
is in addition to any other entitlement the Employee might have under any other
plan or individual employment arrangement or agreement with the Company or any
of its subsidiaries.
CHANGE IN CONTROL PAYMENT
If the Employee is terminated by the Company or a successor without
Cause (as hereinafter defined), or terminates his or her employment with the
Company or a successor for Good Reason (as hereinafter defined), within 180
days preceding, or within two years following, a Change in Control, the
Employee will be entitled to receive a payment in an amount equal to two times
the Employee's annual base salary on the date of termination of the Employee's
employment (or in the case of a termination of employment for Good Reason based
on a reduction in the Employee's annual base salary, the annual base salary in
effect immediately prior to such reduction) (the "Change in Control Payment");
provided, however, that the Employee shall not be entitled to receive the
Change in Control Payment if any of the Circumstances of Ineligibility (as
hereinafter defined) apply to the Employee. The Change in Control Payment will
be paid to the Employee in cash in a lump sum within five (5) days following
the termination of the Employee's employment with the Company or the successor
corporation.
CIRCUMSTANCES OF INELIGIBILITY
The Employee will not be eligible to receive the Change in Control
Payment under this Agreement in any one or more of the following circumstances:
1. VOLUNTARY TERMINATION: If the Employee elects to voluntarily
terminate the Employee's employment, including termination due to retirement,
with the Company or a successor, the Employee will not be eligible to receive
the Payment; provided, however, that termination by the Employee for Good
Reason shall not constitute a Circumstance of Ineligibility.
2. TERMINATION FOR CAUSE: If the Employee's employment with the
Company or a successor is terminated for Cause at any time preceding or
following a Change in Control, the Employee will not be eligible to receive the
Payment.
39
<PAGE> 14
DEFINITIONS
For purposes of this Agreement:
1. CHANGE IN CONTROL means that any of the following has
occurred: (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 Securities Exchange Act of 1934, 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 (the "Voting Stock") of the Company, (b) the Board of Directors
approves the sale of all or substantially all of the assets of the Company
(other than to one or more wholly-owned direct or indirect subsidiaries of
the Company) or a plan of complete liquidation 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 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) during any period of not more than two consecutive years, 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 (x) whose election or nomination for election was
supported by a majority of the then Incumbent Directors and (y) whose
initial assumption of his or her directorship did not occur as a result of
an actual or threatened solicitation of proxies or consents or as a result
of a designation by a person who has entered into an agreement with the
Company to effect a transaction described in clause (a), (b) or (c) above
shall be considered an Incumbent Director for purposes hereof.
2. CAUSE means (a) if the Employee is a party to a written
employment agreement with the Company or a subsidiary 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, "for cause" or "cause" as
defined therein; or (b) if the Employee is not a party to such a written
employment agreement, (i) the commission by the Employee of an act of fraud
in the performance of such Employee's duties on behalf of the Company or a
subsidiary of the Company; (ii) conviction of the Employee for commission of
a felony in connection with the performance of his or her duties on behalf
of the Company or a subsidiary of the Company; or (iii) the continuing
failure of the Employee to perform his or her material duties to the Company
or a subsidiary of the Company that has not been cured within 15 days after
written notice thereof has been given to the Employee by the Board of
Directors of the Company.
3. GOOD REASON means, without the written consent of the
Employee, (i) assignment of duties or responsibilities materially
inconsistent with those customarily associated with the highest position
held by the Employee within the 181 days prior to the Change in Control
(alternatively, the "Measuring Position"), or any other action by the
Company or a successor that results in a diminution of the Employee's
position, authority, duties or responsibilities compared to the Measuring
Position, other than an isolated action that is not taken in bad faith and
is remedied by the
40
<PAGE> 15
Company or a successor promptly after receipt of notice thereof from
the Employee; (ii) reduction in (x) the Employee's total compensation
reportable on Form W-2 in any calendar year from the average of the total
compensation of the Employee reported on the Forms W-2 issued by the
Company for the two most recent calendar years ended prior to the calendar
year in which the Change in Control occurs or (y) in any welfare benefits
from the highest levels in effect within the 181 days prior to the Change
in Control; or (iii) relocation of the Employee's principal place of
employment to a location more than 35 miles from the Executive's principal
place of employment on the 181st day prior to the Change in Control.
CONTINUATION OF CERTAIN EMPLOYEE WELFARE BENEFITS
Notwithstanding anything contained herein to the contrary, if the
Employee is entitled to receive the Change in Control Payment, the Company or
any of its subsidiaries or successor shall continue his participation, as if he
were still an employee, in the medical, dental, hospitalization, disability and
life insurance plans, programs and/or arrangements of the Company or any of its
subsidiaries in which he was participating on the date of the termination of
his employment on the same terms and conditions as other executives under such
plans, programs and/or arrangements until the earlier of (i) the end of the
24-month period commencing with the month immediately following the month in
which the date of the termination of his employment occurred or (ii) the date,
or dates, he receives equivalent coverage and benefits under the plans,
programs and/or arrangements of a subsequent employer (such coverage and
benefits to be determined on a coverage-by-coverage or benefit-by-benefit
basis).
CERTAIN TAX PROVISIONS
1. In the event that the Change in Control Payment or any other
payment or benefit received or to be received by you pursuant to the terms of
this Agreement (the "Contract Payment") or of any other plan, arrangement or
agreement of the Company (or any subsidiary) ("Other Payments" and, together
with the Contract Payments, the "Payments") would, in the opinion of
independent tax counsel selected by the Company and reasonably acceptable to
you ("Tax Counsel"), be subject to the excise tax (the "Excise Tax") imposed by
section 4999 of the Internal Revenue Code of 1986, as amended (the "Code") (in
whole or in part), as determined as provided below, the Company shall pay to
you, at the time specified in Paragraph 2 below, an additional amount (the
"Gross-Up Payment") such that the net amount retained by you, after deduction
of the Excise Tax on Contract Payments and Other Payments and any federal,
state and local income or other tax and Excise Tax upon the payment provided
for by this Paragraph 1, and any interest, penalties or additions to tax
payable by you with respect thereto, shall be equal to the total present value
of the Contract Payments and Other Payments at the time such Payments are to be
made. For purposes of determining whether any of the Payments will be subject
to the Excise Tax and the amounts of such Excise Tax, (1) the total amount of
the Payments shall be treated as "parachute payments" within the meaning of
section 280G(b)(2) of the Code, and all "excess parachute payments" within the
meaning of section 280G(b)(1) of the Code shall be treated as subject to the
Excise Tax, except to the extent that, in the opinion of Tax Counsel, a Payment
(in whole or in part) does not constitute a "parachute payment" within the
meaning of section 280G(b)(2) of the Code, or such "excess parachute payments"
(in whole or in part) are not subject to the Excise Tax, (2) the amount of the
Payments that shall be treated as subject to the Excise Tax shall be equal to
the lesser of (A) the total amount of the Payments or (B) the amount of "excess
parachute payments" within the
41
<PAGE> 16
meaning of section 280G(b)(1) of the Code (after applying clause (1) hereof),
and (3) the value of any noncash benefits or any deferred payment or benefit
shall be determined by Tax Counsel in accordance with the principles of
sections 280G(d)(3) and (4) of the Code. For purposes of determining the
amount of the Gross-Up Payment, you shall be deemed to pay federal income taxes
at the highest marginal rates of federal income taxation applicable to the
individuals in the calendar year in which the Gross-Up Payment is to be made
and state and local income taxes at the highest marginal rates of taxation
applicable to individuals as are in effect in the state and locality of your
residence in the calendar year in which the Gross-Up Payment is to be made, net
of the maximum reduction in federal income taxes that can be obtained from
deduction of such state and local taxes, taking into account any limitations
applicable to individuals subject to federal income tax at the highest marginal
rates.
2. The Gross-Up Payments provided for in Paragraph 1 above hereof
shall be made upon the earlier of (i) the payment to you of any Contract
Payment or Other Payment or (ii) the imposition upon you or payment by you of
any Excise Tax.
3. If it is established pursuant to a final determination of a
court or an Internal Revenue Service proceeding or the opinion of Tax Counsel
that the Excise Tax is less than the amount taken into account under Paragraph
1 above, you shall repay to the Company within five days of your receipt of
notice of such final determination or opinion the portion of the Gross-Up
Payment attributable to such reduction (plus the portion of the Gross-Up
Payment attributable to the Excise Tax and federal, state and local income tax
imposed on the Gross-Up Payment being repaid by you if such repayment results
in a reduction in Excise Tax or a federal, state and local income tax
deduction) plus any interest received by you on the amount of such repayment.
If it is established pursuant to a final determination of a court or an
Internal Revenue Service proceeding or the opinion of Tax Counsel that the
Excise Tax exceeds the amount taken into account hereunder (including by reason
of any payment the existence or amount of which cannot be determined at the
time of the Gross-Up Payment), the Company shall make an additional Gross-Up
Payment in respect of such excess within five days of the Company's receipt of
notice of such final determination or opinion.
4. In the event of any change in, or further interpretation of,
sections 280G or 4999 of the Code and the regulations promulgated thereunder,
you shall be entitled, by written notice to the Company, to request an opinion
of Tax Counsel regarding the application of such change to any of the
foregoing, and the Company shall use its best efforts to cause such opinion to
be rendered as promptly as practicable. All fees and expenses of Tax Counsel
incurred in connection with this agreement shall be borne by the Company.
MISCELLANEOUS
Term. This Agreement shall terminate and be of no further force or
effect if a Change in Control has not occurred on or before the fifth
anniversary of the date first written above.
No Employment Agreement. This Agreement does not constitute a
contract of employment or impose on the Company any obligation to retain the
Employee as an employee.
Deductions and Withholding. The Employee agrees that the Company shall
withhold from any and all compensation required to be paid to the Employee
pursuant to this Agreement all federal, state, local and/or other taxes which
the
42
<PAGE> 17
Company determines are required to be withheld in accordance with applicable
statutes and/or regulations from time to time in effect.
Arbitration. Any dispute or controversy arising under or in
connection with this Agreement shall be settled exclusively by arbitration
conducted in the City of Detroit in the State of Michigan under the Commercial
Arbitration Rules then prevailing of the American Arbitration Association and
such submission shall request the American Arbitration Association to: (i)
appoint an arbitrator experienced and knowledgeable concerning the matter then
in dispute; (ii) require the testimony to be transcribed; (iii) require the
award to be accompanied by findings of fact and a statement of reasons for the
decision; and (iv) request the matter to be handled by and in accordance with
the expedited procedures provided for in the Commercial Arbitration Rules. The
determination of the arbitrators, which shall be based upon a de novo
interpretation of this Agreement, shall be final and binding and judgment may
be entered on the arbitrators' award in any court having jurisdiction. All
costs of the American Arbitration Association and the arbitrator shall be borne
as determined by the arbitrator.
Legal Fees. In the event the Company or the successor does not make
the Change in Control Payment or Gross-Up Payment due hereunder on a timely
basis and the Employee collects any part or all of the Change in Control
Payment or Gross-Up Payment or otherwise successfully enforces the terms of
this Agreement by or through a lawyer or lawyers, the Company or the successor
shall pay all costs of such collection or enforcement, including reasonable
legal fees and other reasonable fees and expenses which the Employee may incur.
The Company or the successor shall pay to the Employee interest at the "prime"
lending rate as announced from time to time by Citibank, N.A. on all or any
part of the Payment that is not paid when due. The applicable rate for each
calendar quarter shall be the "prime" rate in effect on the first day of the
calendar quarter.
No Duty to Mitigate/Set-off. The Company agrees that if the Employee's
employment with the Company or a successor is terminated within the six months
preceding or two years following a Change in Control covered by this Agreement,
the Employee shall not be required to seek other employment. Further, the
amount of the Change in Control Payment shall not be reduced by any
compensation earned by the Employee or any benefit provided to the Employee as
the result of employment by another employer or otherwise. The Company's
obligations to make the Change in Control Payment shall not be affected by any
circumstances, including, without limitation, any set-off, counterclaim,
recoupment, defense or other right which the Company or a successor may have
against the Employee.
Entire Agreement. This Agreement embodies the entire agreement of the
parties with respect to any payment due the Employee in the event of a Change
in Control and supersedes any other prior oral or written agreements between
the Employee and the Company with respect thereto. No party may amend, modify
or terminate this Agreement without the express written consent of the other
party.
Successors; Binding Agreement. In addition to any obligations
imposed by law upon any successor to the Company, the Company will require any
successor (whether direct or indirect, by purchase, merger, consolidation or
otherwise) to all or substantially all of the business and/or assets of the
Company to expressly assume and agree in writing to perform this Agreement in
the same manner and to the same extent that the Company would be required to
perform it if no such succession had taken place and this Agreement shall inure
to the benefit of such successor. Any such assignment shall not relieve the
Company
43
<PAGE> 18
from liability hereunder. This Agreement shall inure to the benefit of and be
enforceable by the Employee's personal or legal representatives, executors,
administrators, successors, heirs, distributees, devises and legatees.
Governing Law. This Agreement shall be governed and construed in
accordance with the laws of the State of Michigan without regard to the
conflicts of law principles of such state.
Counterparts. This Agreement may be executed and delivered in separate
counterparts, each of which when so executed and delivered shall be deemed an
original and all of which taken together shall constitute one and the same
agreement.
IN WITNESS WHEREOF, the parties hereto have duly executed this
Agreement as of the date first written above.
ARBOR DRUGS, INC.
By: /s/ Eugene Applebaum
------------------------------------
Eugene Applebaum
Chairman of the Board
& President
ACCEPTED AND AGREED TO
BY THE UNDERSIGNED EMPLOYEE
as of the date first written above
By: /s/ Gilbert C. Gerhard
-------------------------
Name: Gilbert C. Gerhard
44
<PAGE> 19
CHANGE IN CONTROL AGREEMENT
Dated as of December 9, 1996
The Board of Directors of Arbor Drugs, Inc. (the "Company") has determined
that, in light of the uncertainties affecting the industry in which the Company
operates, it would be in the best interests of the Company and its shareholders
to induce key employees, including the undersigned (the "Employee"), to remain
with the Company and to reinforce and encourage their continued attention and
dedication to the Company. Accordingly, the Company desires to enter into this
agreement (the "Agreement") with the Employee providing for a payment to the
Employee and the continuation of certain of the Employee's welfare benefits if
the Employee is terminated by the Company or a successor or, for Good Reason
(as hereinafter defined), the Employee terminates his or her employment with
the Company or a successor, within 180 days preceding, or within two years
following, a Change in Control (as hereinafter defined), subject to the terms
and conditions specified herein. This Agreement is in addition to any other
entitlement the Employee might have under any other plan or individual
employment arrangement or agreement with the Company or any of its
subsidiaries.
CHANGE IN CONTROL PAYMENT
If the Employee is terminated by the Company or a successor without
Cause (as hereinafter defined), or terminates his or her employment with the
Company or a successor for Good Reason (as hereinafter defined), within 180
days preceding, or within two years following, a Change in Control, the
Employee will be entitled to receive a payment in an amount equal to two times
the Employee's annual base salary on the date of termination of the Employee's
employment (or in the case of a termination of employment for Good Reason based
on a reduction in the Employee's annual base salary, the annual base salary in
effect immediately prior to such reduction) (the "Change in Control Payment");
provided, however, that the Employee shall not be entitled to receive the
Change in Control Payment if any of the Circumstances of Ineligibility (as
hereinafter defined) apply to the Employee. The Change in Control Payment will
be paid to the Employee in cash in a lump sum within five (5) days following
the termination of the Employee's employment with the Company or the successor
corporation.
CIRCUMSTANCES OF INELIGIBILITY
The Employee will not be eligible to receive the Change in Control
Payment under this Agreement in any one or more of the following circumstances:
1. VOLUNTARY TERMINATION: If the Employee elects to voluntarily
terminate the Employee's employment, including termination due to retirement,
with the Company or a successor, the Employee will not be eligible to receive
the Payment; provided, however, that termination by the Employee for Good
Reason shall not constitute a Circumstance of Ineligibility.
2. TERMINATION FOR CAUSE: If the Employee's employment with the
Company or a successor is terminated for Cause at any time preceding or
following a Change in Control, the Employee will not be eligible to receive the
Payment.
45
<PAGE> 20
DEFINITIONS
For purposes of this Agreement:
1. CHANGE IN CONTROL means that any of the following has
occurred: (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
Securities Exchange Act of 1934, 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
(the "Voting Stock") of the Company, (b) the Board of Directors approves the
sale of all or substantially all of the assets of the Company (other than to
one or more wholly-owned direct or indirect subsidiaries of the Company) or a
plan of complete liquidation 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 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) during any period of
not more than two consecutive years, 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 (x) whose election or
nomination for election was supported by a majority of the then Incumbent
Directors and (y) whose initial assumption of his or her directorship did not
occur as a result of an actual or threatened solicitation of proxies or
consents or as a result of a designation by a person who has entered into an
agreement with the Company to effect a transaction described in clause (a), (b)
or (c) above shall be considered an Incumbent Director for purposes hereof.
2. CAUSE means (a) if the Employee is a party to a written
employment agreement with the Company or a subsidiary 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, "for cause" or "cause" as defined therein;
or (b) if the Employee is not a party to such a written employment agreement,
(i) the commission by the Employee of an act of fraud in the performance of
such Employee's duties on behalf of the Company or a subsidiary of the Company;
(ii) conviction of the Employee for commission of a felony in connection with
the performance of his or her duties on behalf of the Company or a subsidiary
of the Company; or (iii) the continuing failure of the Employee to perform his
or her material duties to the Company or a subsidiary of the Company that has
not been cured within 15 days after written notice thereof has been given to
the Employee by the Board of Directors of the Company.
3. GOOD REASON means, without the written consent of the
Employee, (i) assignment of duties or responsibilities materially inconsistent
with those customarily associated with the highest position held by the
Employee within the 181 days prior to the Change in Control (alternatively, the
"Measuring Position"), or any other action by the Company or a successor that
results in a diminution of the Employee's position, authority, duties or
responsibilities compared to the Measuring Position, other than an isolated
action that is not taken in bad faith and is remedied by the Company or a
successor promptly after receipt of notice thereof from the
46
<PAGE> 21
Employee; (ii) reduction in (x) the Employee's total compensation reportable on
Form W-2 in any calendar year from the average of the total compensation of the
Employee reported on the Forms W-2 issued by the Company for the two most
recent calendar years ended prior to the calendar year in which the Change in
Control occurs or (y) in any welfare benefits from the highest levels in effect
within the 181 days prior to the Change in Control; or (iii) relocation of the
Employee's principal place of employment to a location more than 35 miles from
the Executive's principal place of employment on the 181st day prior to the
Change in Control.
CONTINUATION OF CERTAIN EMPLOYEE WELFARE BENEFITS
Notwithstanding anything contained herein to the contrary, if the
Employee is entitled to receive the Change in Control Payment, the Company or
any of its subsidiaries or successor shall continue his participation, as if he
were still an employee, in the medical, dental, hospitalization, disability and
life insurance plans, programs and/or arrangements of the Company or any of its
subsidiaries in which he was participating on the date of the termination of
his employment on the same terms and conditions as other executives under such
plans, programs and/or arrangements until the earlier of (i) the end of the
24-month period commencing with the month immediately following the month in
which the date of the termination of his employment occurred or (ii) the date,
or dates, he receives equivalent coverage and benefits under the plans,
programs and/or arrangements of a subsequent employer (such coverage and
benefits to be determined on a coverage-by-coverage or benefit-by-benefit
basis).
CERTAIN TAX PROVISIONS
1. In the event that the Change in Control Payment or any other
payment or benefit received or to be received by you pursuant to the terms of
this Agreement (the "Contract Payment") or of any other plan, arrangement or
agreement of the Company (or any subsidiary) ("Other Payments" and, together
with the Contract Payments, the "Payments") would, in the opinion of
independent tax counsel selected by the Company and reasonably acceptable to
you ("Tax Counsel"), be subject to the excise tax (the "Excise Tax") imposed by
section 4999 of the Internal Revenue Code of 1986, as amended (the "Code") (in
whole or in part), as determined as provided below, the Company shall pay to
you, at the time specified in Paragraph 2 below, an additional amount (the
"Gross-Up Payment") such that the net amount retained by you, after deduction
of the Excise Tax on Contract Payments and Other Payments and any federal,
state and local income or other tax and Excise Tax upon the payment provided
for by this Paragraph 1, and any interest, penalties or additions to tax
payable by you with respect thereto, shall be equal to the total present value
of the Contract Payments and Other Payments at the time such Payments are to be
made. For purposes of determining whether any of the Payments will be subject
to the Excise Tax and the amounts of such Excise Tax, (1) the total amount of
the Payments shall be treated as "parachute payments" within the meaning of
section 280G(b)(2) of the Code, and all "excess parachute payments" within the
meaning of section 280G(b)(1) of the Code shall be treated as subject to the
Excise Tax, except to the extent that, in the opinion of Tax Counsel, a Payment
(in whole or in part) does not constitute a "parachute payment" within the
meaning of section 280G(b)(2) of the Code, or such "excess parachute payments"
(in whole or in part) are not subject to the Excise Tax, (2) the amount of the
Payments that shall be treated as subject to the Excise Tax shall be equal to
the lesser of (A) the total amount of the Payments or (B) the amount of "excess
parachute payments" within the meaning of section 280G(b)(1) of the Code (after
applying clause (1) hereof), and (3) the value of any noncash benefits or any
deferred payment or benefit shall
47
<PAGE> 22
be determined by Tax Counsel in accordance with the principles of sections
280G(d)(3) and (4) of the Code. For purposes of determining the amount of the
Gross-Up Payment, you shall be deemed to pay federal income taxes at the
highest marginal rates of federal income taxation applicable to the individuals
in the calendar year in which the Gross-Up Payment is to be made and state and
local income taxes at the highest marginal rates of taxation applicable to
individuals as are in effect in the state and locality of your residence in the
calendar year in which the Gross-Up Payment is to be made, net of the maximum
reduction in federal income taxes that can be obtained from deduction of such
state and local taxes, taking into account any limitations applicable
to individuals subject to federal income tax at the highest marginal rates.
2. The Gross-Up Payments provided for in Paragraph 1 above hereof
shall be made upon the earlier of (i) the payment to you of any Contract
Payment or Other Payment or (ii) the imposition upon you or payment by you of
any Excise Tax.
3. If it is established pursuant to a final determination of a
court or an Internal Revenue Service proceeding or the opinion of Tax Counsel
that the Excise Tax is less than the amount taken into account under Paragraph
1 above, you shall repay to the Company within five days of your receipt of
notice of such final determination or opinion the portion of the Gross-Up
Payment attributable to such reduction (plus the portion of the Gross-Up
Payment attributable to the Excise Tax and federal, state and local income tax
imposed on the Gross-Up Payment being repaid by you if such repayment results
in a reduction in Excise Tax or a federal, state and local income tax
deduction) plus any interest received by you on the amount of such repayment.
If it is established pursuant to a final determination of a court or an
Internal Revenue Service proceeding or the opinion of Tax Counsel that the
Excise Tax exceeds the amount taken into account hereunder (including by reason
of any payment the existence or amount of which cannot be determined at the
time of the Gross-Up Payment), the Company shall make an additional Gross-Up
Payment in respect of such excess within five days of the Company's receipt of
notice of such final determination or opinion.
4. In the event of any change in, or further interpretation of,
sections 280G or 4999 of the Code and the regulations promulgated thereunder,
you shall be entitled, by written notice to the Company, to request an opinion
of Tax Counsel regarding the application of such change to any of the
foregoing, and the Company shall use its best efforts to cause such opinion to
be rendered as promptly as practicable. All fees and expenses of Tax Counsel
incurred in connection with this agreement shall be borne by the Company.
MISCELLANEOUS
Term. This Agreement shall terminate and be of no further force or
effect if a Change in Control has not occurred on or before the fifth
anniversary of the date first written above.
No Employment Agreement. This Agreement does not constitute a
contract of employment or impose on the Company any obligation to retain the
Employee as an employee.
Deductions and Withholding. The Employee agrees that the Company shall
withhold from any and all compensation required to be paid to the Employee
pursuant to this Agreement all federal, state, local and/or other taxes which
the Company determines are required to be withheld in accordance with
applicable statutes and/or regulations from time to time in effect.
48
<PAGE> 23
Arbitration. Any dispute or controversy arising under or in
connection with this Agreement shall be settled exclusively by arbitration
conducted in the City of Detroit in the State of Michigan under the Commercial
Arbitration Rules then prevailing of the American Arbitration Association and
such submission shall request the American Arbitration Association to: (i)
appoint an arbitrator experienced and knowledgeable concerning the matter then
in dispute; (ii) require the testimony to be transcribed; (iii) require the
award to be accompanied by findings of fact and a statement of reasons for the
decision; and (iv) request the matter to be handled by and in accordance with
the expedited procedures provided for in the Commercial Arbitration Rules. The
determination of the arbitrators, which shall be based upon a de novo
interpretation of this Agreement, shall be final and binding and judgment may
be entered on the arbitrators' award in any court having jurisdiction. All
costs of the American Arbitration Association and the arbitrator shall be borne
as determined by the arbitrator.
Legal Fees. In the event the Company or the successor does not make
the Change in Control Payment or Gross-Up Payment due hereunder on a timely
basis and the Employee collects any part or all of the Change in Control
Payment or Gross-Up Payment or otherwise successfully enforces the terms of
this Agreement by or through a lawyer or lawyers, the Company or the successor
shall pay all costs of such collection or enforcement, including reasonable
legal fees and other reasonable fees and expenses which the Employee may incur.
The Company or the successor shall pay to the Employee interest at the "prime"
lending rate as announced from time to time by Citibank, N.A. on all or any
part of the Payment that is not paid when due. The applicable rate for each
calendar quarter shall be the "prime" rate in effect on the first day of the
calendar quarter.
No Duty to Mitigate/Set-off. The Company agrees that if the Employee's
employment with the Company or a successor is terminated within the six months
preceding or two years following a Change in Control covered by this Agreement,
the Employee shall not be required to seek other employment. Further, the
amount of the Change in Control Payment shall not be reduced by any
compensation earned by the Employee or any benefit provided to the Employee as
the result of employment by another employer or otherwise. The Company's
obligations to make the Change in Control Payment shall not be affected by any
circumstances, including, without limitation, any set-off, counterclaim,
recoupment, defense or other right which the Company or a successor may have
against the Employee.
Entire Agreement. This Agreement embodies the entire agreement of the
parties with respect to any payment due the Employee in the event of a Change
in Control and supersedes any other prior oral or written agreements between
the Employee and the Company with respect thereto. No party may amend, modify
or terminate this Agreement without the express written consent of the other
party.
Successors; Binding Agreement. In addition to any obligations
imposed by law upon any successor to the Company, the Company will require any
successor (whether direct or indirect, by purchase, merger, consolidation or
otherwise) to all or substantially all of the business and/or assets of the
Company to expressly assume and agree in writing to perform this Agreement in
the same manner and to the same extent that the Company would be required to
perform it if no such succession had taken place and this Agreement shall inure
to the benefit of such successor. Any such assignment shall not relieve the
Company from liability hereunder. This Agreement shall inure to the benefit of
and be enforceable by the Employee's personal or legal representatives,
executors, administrators, successors, heirs, distributees, devises and
legatees.
49
<PAGE> 24
Governing Law. This Agreement shall be governed and construed in
accordance with the laws of the State of Michigan without regard to the
conflicts of law principles of such state.
Counterparts. This Agreement may be executed and delivered in separate
counterparts, each of which when so executed and delivered shall be deemed an
original and all of which taken together shall constitute one and the same
agreement.
IN WITNESS WHEREOF, the parties hereto have duly executed this
Agreement as of the date first written above.
ARBOR DRUGS, INC.
By: /s/ Gilbert C. Gerhard
----------------------------
Gilbert C. Gerhard
Senior Vice President-
Finance & Administration
ACCEPTED AND AGREED TO
BY THE UNDERSIGNED EMPLOYEE
as of the date first written above
By: /s/ Donald M. Stutrud
---------------------
Name: Donald M. Stutrud
50
<PAGE> 25
CHANGE IN CONTROL AGREEMENT
Dated as of December 9, 1996
The Board of Directors of Arbor Drugs, Inc. (the "Company") has
determined that, in light of the uncertainties affecting the industry in which
the Company operates, it would be in the best interests of the Company and its
shareholders to induce key employees, including the undersigned (the
"Employee"), to remain with the Company and to reinforce and encourage their
continued attention and dedication to the Company. Accordingly, the Company
desires to enter into this agreement (the "Agreement") with the Employee
providing for a payment to the Employee and the continuation of certain of the
Employee's welfare benefits if the Employee is terminated by the Company or a
successor or, for Good Reason (as hereinafter defined), the Employee terminates
his or her employment with the Company or a successor, within 180 days
preceding, or within two years following, a Change in Control (as hereinafter
defined), subject to the terms and conditions specified herein. This Agreement
is in addition to any other entitlement the Employee might have under any other
plan or individual employment arrangement or agreement with the Company or any
of its subsidiaries.
CHANGE IN CONTROL PAYMENT
If the Employee is terminated by the Company or a successor without
Cause (as hereinafter defined), or terminates his or her employment with the
Company or a successor for Good Reason (as hereinafter defined), within 180
days preceding, or within two years following, a Change in Control, the
Employee will be entitled to receive a payment in an amount equal to two times
the Employee's annual base salary on the date of termination of the Employee's
employment (or in the case of a termination of employment for Good Reason based
on a reduction in the Employee's annual base salary, the annual base salary in
effect immediately prior to such reduction) (the "Change in Control Payment");
provided, however, that the Employee shall not be entitled to receive the
Change in Control Payment if any of the Circumstances of Ineligibility (as
hereinafter defined) apply to the Employee. The Change in Control Payment will
be paid to the Employee in cash in a lump sum within five (5) days following
the termination of the Employee's employment with the Company or the successor
corporation.
CIRCUMSTANCES OF INELIGIBILITY
The Employee will not be eligible to receive the Change in Control
Payment under this Agreement in any one or more of the following circumstances:
1. VOLUNTARY TERMINATION: If the Employee elects to voluntarily
terminate the Employee's employment, including termination due to retirement,
with the Company or a successor, the Employee will not be eligible to receive
the Payment; provided, however, that termination by the Employee for Good
Reason shall not constitute a Circumstance of Ineligibility.
2. TERMINATION FOR CAUSE: If the Employee's employment with the
Company or a successor is terminated for Cause at any time preceding or
following a Change in Control, the Employee will not be eligible to receive the
Payment.
51
<PAGE> 26
DEFINITIONS
For purposes of this Agreement:
1. CHANGE IN CONTROL means that any of the following has occurred:
(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 Securities Exchange
Act of 1934, 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 (the "Voting Stock") of
the Company, (b) the Board of Directors approves the sale of all or
substantially all of the assets of the Company (other than to one or more
wholly-owned direct or indirect subsidiaries of the Company) or a plan of
complete liquidation 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 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) during any period of not more than two
consecutive years, 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 (x) whose election or nomination
for election was supported by a majority of the then Incumbent Directors and
(y) whose initial assumption of his or her directorship did not occur as a
result of an actual or threatened solicitation of proxies or consents or as a
result of a designation by a person who has entered into an agreement with the
Company to effect a transaction described in clause (a), (b) or (c) above shall
be considered an Incumbent Director for purposes hereof.
2. CAUSE means (a) if the Employee is a party to a written
employment agreement with the Company or a subsidiary 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, "for cause" or "cause" as defined therein;
or (b) if the Employee is not a party to such a written employment agreement,
(i) the commission by the Employee of an act of fraud in the performance of
such Employee's duties on behalf of the Company or a subsidiary of the Company;
(ii) conviction of the Employee for commission of a felony in connection with
the performance of his or her duties on behalf of the Company or a subsidiary
of the Company; or (iii) the continuing failure of the Employee to perform his
or her material duties to the Company or a subsidiary of the Company that has
not been cured within 15 days after written notice thereof has been given to
the Employee by the Board of Directors of the Company.
3. GOOD REASON means, without the written consent of the Employee,
(i) assignment of duties or responsibilities materially inconsistent with those
customarily associated with the highest position held by the Employee within
the 181 days prior to the Change in Control (alternatively, the "Measuring
Position"), or any other action by the Company or a successor that results in a
diminution of the Employee's position, authority, duties or responsibilities
compared to the Measuring Position, other than an isolated action that is not
taken in bad faith and is remedied by the Company or a successor promptly after
receipt of notice thereof from the
52
<PAGE> 27
Employee; (ii) reduction in (x) the Employee's total compensation
reportable on Form W-2 in any calendar year from the average of the total
compensation of the Employee reported on the Forms W-2 issued by the Company
for the two most recent calendar years ended prior to the calendar year in
which the Change in Control occurs or (y) in any welfare benefits from the
highest levels in effect within the 181 days prior to the Change in Control; or
(iii) relocation of the Employee's principal place of employment to a location
more than 35 miles from the Executive's principal place of employment on the
181st day prior to the Change in Control.5
CONTINUATION OF CERTAIN EMPLOYEE WELFARE BENEFITS
Notwithstanding anything contained herein to the contrary, if the
Employee is entitled to receive the Change in Control Payment, the Company or
any of its subsidiaries or successor shall continue his participation, as if he
were still an employee, in the medical, dental, hospitalization, disability and
life insurance plans, programs and/or arrangements of the Company or any of its
subsidiaries in which he was participating on the date of the termination of
his employment on the same terms and conditions as other executives under such
plans, programs and/or arrangements until the earlier of (i) the end of the
24-month period commencing with the month immediately following the month in
which the date of the termination of his employment occurred or (ii) the date,
or dates, he receives equivalent coverage and benefits under the plans,
programs and/or arrangements of a subsequent employer (such coverage and
benefits to be determined on a coverage-by-coverage or benefit-by-benefit
basis).
CERTAIN TAX PROVISIONS
1. In the event that the Change in Control Payment or any other
payment or benefit received or to be received by you pursuant to the terms of
this Agreement (the "Contract Payment") or of any other plan, arrangement or
agreement of the Company (or any subsidiary) ("Other Payments" and, together
with the Contract Payments, the "Payments") would, in the opinion of
independent tax counsel selected by the Company and reasonably acceptable to
you ("Tax Counsel"), be subject to the excise tax (the "Excise Tax") imposed by
section 4999 of the Internal Revenue Code of 1986, as amended (the "Code") (in
whole or in part), as determined as provided below, the Company shall pay to
you, at the time specified in Paragraph 2 below, an additional amount (the
"Gross-Up Payment") such that the net amount retained by you, after deduction
of the Excise Tax on Contract Payments and Other Payments and any federal,
state and local income or other tax and Excise Tax upon the payment provided
for by this Paragraph 1, and any interest, penalties or additions to tax
payable by you with respect thereto, shall be equal to the total present value
of the Contract Payments and Other Payments at the time such Payments are to be
made. For purposes of determining whether any of the Payments will be subject
to the Excise Tax and the amounts of such Excise Tax, (1) the total amount of
the Payments shall be treated as "parachute payments" within the meaning of
section 280G(b)(2) of the Code, and all "excess parachute payments" within the
meaning of section 280G(b)(1) of the Code shall be treated as subject to the
Excise Tax, except to the extent that, in the opinion of Tax Counsel, a Payment
(in whole or in part) does not constitute a "parachute payment" within the
meaning of section 280G(b)(2) of the Code, or such "excess parachute payments"
(in whole or in part) are not subject to the Excise Tax, (2) the amount of the
Payments that shall be treated as subject to the Excise Tax shall be equal to
the lesser of (A) the total amount of the Payments or (B) the amount of "excess
parachute payments" within the meaning of section 280G(b)(1) of the Code (after
applying clause (1) hereof), and (3) the value of any noncash benefits or any
deferred payment or benefit shall
53
<PAGE> 28
be determined by Tax Counsel in accordance with the principles of sections
280G(d)(3) and (4) of the Code. For purposes of determining the amount of the
Gross-Up Payment, you shall be deemed to pay federal income taxes at the
highest marginal rates of federal income taxation applicable to the individuals
in the calendar year in which the Gross-Up Payment is to be made and state and
local income taxes at the highest marginal rates of taxation applicable to
individuals as are in effect in the state and locality of your residence in the
calendar year in which the Gross-Up Payment is to be made, net of the maximum
reduction in federal income taxes that can be obtained from deduction of such
state and local taxes, taking into account any limitations applicable to
individuals subject to federal income tax at the highest marginal rates.
2. The Gross-Up Payments provided for in Paragraph 1 above hereof
shall be made upon the earlier of (i) the payment to you of any Contract
Payment or Other Payment or (ii) the imposition upon you or payment by you of
any Excise Tax.
3. If it is established pursuant to a final determination of a
court or an Internal Revenue Service proceeding or the opinion of Tax Counsel
that the Excise Tax is less than the amount taken into account under Paragraph
1 above, you shall repay to the Company within five days of your receipt of
notice of such final determination or opinion the portion of the Gross-Up
Payment attributable to such reduction (plus the portion of the Gross-Up
Payment attributable to the Excise Tax and federal, state and local income tax
imposed on the Gross-Up Payment being repaid by you if such repayment results
in a reduction in Excise Tax or a federal, state and local income tax
deduction) plus any interest received by you on the amount of such repayment.
If it is established pursuant to a final determination of a court or an
Internal Revenue Service proceeding or the opinion of Tax Counsel that the
Excise Tax exceeds the amount taken into account hereunder (including by reason
of any payment the existence or amount of which cannot be determined at the
time of the Gross-Up Payment), the Company shall make an additional Gross-Up
Payment in respect of such excess within five days of the Company's receipt of
notice of such final determination or opinion.
4. In the event of any change in, or further interpretation of,
sections 280G or 4999 of the Code and the regulations promulgated thereunder,
you shall be entitled, by written notice to the Company, to request an opinion
of Tax Counsel regarding the application of such change to any of the
foregoing, and the Company shall use its best efforts to cause such opinion to
be rendered as promptly as practicable. All fees and expenses of Tax Counsel
incurred in connection with this agreement shall be borne by the Company.
MISCELLANEOUS
Term. This Agreement shall terminate and be of no further force or
effect if a Change in Control has not occurred on or before the fifth
anniversary of the date first written above.
No Employment Agreement. This Agreement does not constitute a
contract of employment or impose on the Company any obligation to retain the
Employee as an employee.
Deductions and Withholding. The Employee agrees that the Company shall
withhold from any and all compensation required to be paid to the Employee
pursuant to this Agreement all federal, state, local and/or other taxes which
the Company determines are required to be withheld in accordance with
applicable statutes and/or regulations from time to time in effect.
54
<PAGE> 29
Arbitration. Any dispute or controversy arising under or in
connection with this Agreement shall be settled exclusively by arbitration
conducted in the City of Detroit in the State of Michigan under the Commercial
Arbitration Rules then prevailing of the American Arbitration Association and
such submission shall request the American Arbitration Association to: (i)
appoint an arbitrator experienced and knowledgeable concerning the matter then
in dispute; (ii) require the testimony to be transcribed; (iii) require the
award to be accompanied by findings of fact and a statement of reasons for the
decision; and (iv) request the matter to be handled by and in accordance with
the expedited procedures provided for in the Commercial Arbitration Rules. The
determination of the arbitrators, which shall be based upon a de novo
interpretation of this Agreement, shall be final and binding and judgment may
be entered on the arbitrators' award in any court having jurisdiction. All
costs of the American Arbitration Association and the arbitrator shall be borne
as determined by the arbitrator.
Legal Fees. In the event the Company or the successor does not make
the Change in Control Payment or Gross-Up Payment due hereunder on a timely
basis and the Employee collects any part or all of the Change in Control
Payment or Gross-Up Payment or otherwise successfully enforces the terms of
this Agreement by or through a lawyer or lawyers, the Company or the successor
shall pay all costs of such collection or enforcement, including reasonable
legal fees and other reasonable fees and expenses which the Employee may incur.
The Company or the successor shall pay to the Employee interest at the "prime"
lending rate as announced from time to time by Citibank, N.A. on all or any
part of the Payment that is not paid when due. The applicable rate for each
calendar quarter shall be the "prime" rate in effect on the first day of the
calendar quarter.
No Duty to Mitigate/Set-off. The Company agrees that if the Employee's
employment with the Company or a successor is terminated within the six months
preceding or two years following a Change in Control covered by this Agreement,
the Employee shall not be required to seek other employment. Further, the
amount of the Change in Control Payment shall not be reduced by any
compensation earned by the Employee or any benefit provided to the Employee as
the result of employment by another employer or otherwise. The Company's
obligations to make the Change in Control Payment shall not be affected by any
circumstances, including, without limitation, any set-off, counterclaim,
recoupment, defense or other right which the Company or a successor may have
against the Employee.
Entire Agreement. This Agreement embodies the entire agreement of the
parties with respect to any payment due the Employee in the event of a Change
in Control and supersedes any other prior oral or written agreements between
the Employee and the Company with respect thereto. No party may amend, modify
or terminate this Agreement without the express written consent of the other
party.
Successors; Binding Agreement. In addition to any obligations
imposed by law upon any successor to the Company, the Company will require any
successor (whether direct or indirect, by purchase, merger, consolidation or
otherwise) to all or substantially all of the business and/or assets of the
Company to expressly assume and agree in writing to perform this Agreement in
the same manner and to the same extent that the Company would be required to
perform it if no such succession had taken place and this Agreement shall inure
to the benefit of such successor. Any such assignment shall not relieve the
Company from liability hereunder. This Agreement shall inure to the benefit of
and be enforceable by the Employee's personal or legal representatives,
executors, administrators, successors, heirs, distributees, devises and
legatees.
55
<PAGE> 30
Governing Law. This Agreement shall be governed and construed in
accordance with the laws of the State of Michigan without regard to the
conflicts of law principles of such state.
Counterparts. This Agreement may be executed and delivered in separate
counterparts, each of which when so executed and delivered shall be deemed an
original and all of which taken together shall constitute one and the same
agreement.
IN WITNESS WHEREOF, the parties hereto have duly executed this
Agreement as of the date first written above.
ARBOR DRUGS, INC.
By: /s/ Gilbert C. Gerhard
Gilbert C. Gerhard
Senior Vice President-
Finance & Administration
ACCEPTED AND AGREED TO
BY THE UNDERSIGNED EMPLOYEE
as of the date first written above
By: /s/ Eric Bolokofsky
----------------------
Name: Eric Bolokofsky
56
<PAGE> 1
Exhibit 11
ARBOR DRUGS, INC. AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
Three Months Ended Year Ended
(In thousands, except per share data) July 31, July 31,
------------------------ -----------------------
1997 1996 1997 1996
------- ------- -------- ---------
<S> <C> <C> <C> <C>
A. Net Income $ 9,769 $ 7,131 $ 34,430 (a) $ 27,024 (a)
======= ======= ======== ========
Weighted average number of
common shares outstanding 39,198 37,596 38,730 37,417
Effect of the issuance of
stock options and assumed
exercise of stock options
at prices which are lower
than the average market
price of the common shares
during the period, using the
treasury stock method 1,370 886 751 959
------ ------ ----- ------
B. Average number of common
shares and common
equivalent shares for
primary earnings per share 40,568 38,482 39,481 (a) 38,376 (a)
======= ======= ======== ========
Weighted average number of common
shares outstanding 39,198 37,596 38,730 37,417
Effect of the issuance of stock
options and assumed exercise of
options at prices which are lower
than the market price of common
stock at end of the period when
such price is higher than average
market price of the common shares
during the period, using the treasury
stock method 1,637 886 1,297 959
------ ------ ----- ------
C. Average number of common shares
and common equivalent shares
for fully diluted earnings per share 40,835 38,482 40,027 (a) 38,376 (a)
======= ======= ======== ========
Primary earnings
per share: A / B $0.24 $0.19 $0.87 (a) $0.70 (a)
======= ======= ======== ========
Fully diluted earnings
per share: A / C $0.24 $0.19 $0.86 (a) $0.70 (a)
======= ======= ======== ========
(a) These amounts agree with the related amounts in the Consolidated Statements of Income.
All share amounts have been restated to give effect to the stock split declared on November 19, 1996 and
distributed on December 17, 1996.
</TABLE>
57
<PAGE> 1
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
<TABLE>
<CAPTION>
List of Subsidiary Corporations State Of Incorporation
- ------------------------------- ----------------------
<S> <C>
Arbor Drugs - Civic Incorporated Michigan
A.D.I. Realty, Incorporated Michigan
Children's Hospital of Michigan
Outpatient Pharmacy, Inc.(51% owned) Michigan
Medical Center Pharmacies, Inc.(51% owned) Michigan
Richard Investment Company Michigan
E.F. Mile Corporation Michigan
Pharmacy Advisory Company Michigan
</TABLE>
All subsidiaries conduct business using the names above.
58
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the Registration Statements of
Arbor Drugs, Inc. on Form S-8 (File Nos. 33-11830, 33-54141, 33-56109,
33-39259, 33-13102 and 33-13433) of our report dated September 26, 1997, on our
audits of the consolidated financial statements of Arbor Drugs, Inc. and
Subsidiaries as of July 31, 1997 and 1996, and for the years ended July 31,
1997, 1996 and 1995, which report is included in this Annual Report on Form
10-K.
/s/ Coopers & Lybrand L.L.P.
- -----------------------------
Detroit, Michigan
October 24, 1997
59
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUL-31-1997
<PERIOD-END> JUL-31-1997
<CASH> 43,537
<SECURITIES> 335
<RECEIVABLES> 25,565
<ALLOWANCES> 0
<INVENTORY> 131,700
<CURRENT-ASSETS> 204,490
<PP&E> 167,694
<DEPRECIATION> 63,745
<TOTAL-ASSETS> 329,677
<CURRENT-LIABILITIES> 83,574
<BONDS> 16,301
0
0
<COMMON> 394
<OTHER-SE> 222,617
<TOTAL-LIABILITY-AND-EQUITY> 329,677
<SALES> 962,773
<TOTAL-REVENUES> 962,773
<CGS> 715,435
<TOTAL-COSTS> 715,435
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,609
<INCOME-PRETAX> 51,917
<INCOME-TAX> 17,487
<INCOME-CONTINUING> 34,430
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 34,430
<EPS-PRIMARY> .87
<EPS-DILUTED> .86
</TABLE>
