<PAGE> 1
SCHEDULE 14A
(RULE 14a-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES
EXCHANGE ACT OF 1934 (AMENDMENT NO. )
Filed by the registrant [X]
Filed by a party other than the registrant [ ]
Check the appropriate box:
[ ] Preliminary proxy statement [ ] Confidential, for Use of the
Commission Only (as permitted by
Rule 14a-6(e)(2))
[X] Definitive proxy statement
[ ] Definitive additional materials
[ ] Soliciting material pursuant to Rule 14a-11(c) or Rule 14a-12
ARBOR DRUGS, INC.
- -------------------------------------------------------------------------------
(Name of Registrant as Specified in Its Charter)
ARBOR DRUGS, INC.
- -------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of filing fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies:
- --------------------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
- --------------------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the filing
fee is calculated and state how it was determined):
- --------------------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
- --------------------------------------------------------------------------------
(5) Total fee paid:
- --------------------------------------------------------------------------------
[ ] Fee paid previously with preliminary materials.
- --------------------------------------------------------------------------------
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement
number, or the form or schedule and the date of its filing.
(1) Amount previously paid:
- --------------------------------------------------------------------------------
(2) Form, schedule or registration statement no.:
- --------------------------------------------------------------------------------
(3) Filing party:
- --------------------------------------------------------------------------------
(4) Date filed:
- --------------------------------------------------------------------------------
<PAGE> 2
ARBOR DRUG LOGO
3331 WEST BIG BEAVER ROAD
TROY, MICHIGAN 48084
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD DECEMBER 2, 1997
To Our Shareholders:
You are cordially invited to attend the Annual Meeting of Shareholders (the
"Meeting") of Arbor Drugs, Inc. (the "Company"), to be held on December 2, 1997,
at 11:00 a.m., Eastern Standard Time, at the Troy Marriott, 200 W. Big Beaver
Road, Troy, Michigan, or any adjournment thereof, for the following purposes:
1. To elect seven directors; and
2. To consider and act upon a proposal to amend the Company's Restated
Articles of Incorporation to increase the number of authorized shares of
the Company's Common Stock, par value $.01 (the "Common Stock"), from
40,000,000 shares to 100,000,000 shares.
3. To consider and act upon a proposal to amend the Company's 1996
Stock Option Plan to increase by 3,000,000 shares the number of shares of
the Company's Common Stock issuable upon exercise of options available for
grant under the Company's 1996 Stock Option Plan and to increase by
1,500,000 the number of shares of the Company's Common Stock issuable upon
exercise of options granted to an individual optionee under the Company's
1996 Stock Option Plan.
4. To consider and act upon a proposal to amend the Company's Employee
Stock Purchase Plan to increase by 500,000 shares the number of shares of
the Company's Common Stock available under the Company's Employee Stock
Purchase Plan.
5. To transact such other business as may properly come before the
Meeting.
Only holders of record of shares of Common Stock, par value $.01 per share,
at the close of business on October 10, 1997 will be entitled to notice of and
to vote at the Meeting. Please sign, date and mail the enclosed proxy so that
your shares may be represented at the Meeting if you are unable to attend and
vote in person. If you attend the Meeting, you may withdraw your proxy and vote
your shares.
A copy of the Annual Report of the Company for the fiscal year ended July
31, 1997 accompanies this notice.
By Order of the Board of Directors,
Gilbert C. Gerhard, Secretary
Troy, Michigan
October 30, 1997
<PAGE> 3
ARBOR DRUGS, INC.
3331 WEST BIG BEAVER ROAD
TROY, MICHIGAN 48084
PROXY STATEMENT
ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD DECEMBER 2, 1997
This Proxy Statement is furnished to the holders of Common Stock, par value
$.01 (the "Common Stock"), of Arbor Drugs, Inc., a Michigan corporation ("the
Company"), in connection with the solicitation of proxies by the Board of
Directors of the Company for use at the Annual Meeting of Shareholders (the
"Meeting") of the Company to be held on December 2, 1997 and at any adjournment
thereof.
At the Meeting, holders of shares of Common Stock ("Shareholders") will be
asked:
1. To elect seven directors; and
2. To consider and act upon a proposal to amend the Company's Restated
Articles of Incorporation to increase the number of authorized shares of
the Company's Common Stock from 40,000,000 shares to 100,000,000 shares.
3. To consider and act upon a proposal to amend the Company's 1996
Stock Option Plan (the 1996 Plan) to increase by 3,000,000 shares the
number of shares of the Company's Common Stock issuable upon exercise of
options available for grant under the Company's 1996 Stock Option Plan and
to increase by 1,500,000 the number of shares of the Company's Common Stock
issuable upon exercise of options granted to an individual optionee under
the Company's 1996 Stock Option Plan.
4. To consider and act upon a proposal to amend the Company's Employee
Stock Purchase Plan to increase by 500,000 shares the number of shares of
the Company's Common Stock available under the Company's Employee Stock
Purchase Plan.
5. To transact such other business as may properly come before the
Meeting.
This Proxy Statement and the accompanying form of proxy are first being
sent to Shareholders on or about October 30, 1997.
All references in this Proxy Statement to a fiscal year are to the
Company's fiscal year ended July 31.
All references to outstanding shares of Common Stock (or outstanding
options for such shares) have been adjusted to give effect to the three-for-two
stock dividend effected December 17, 1996.
THE MEETING
DATE, TIME AND PLACE
The Meeting will be held on December 2, 1997, at 11:00 a.m., Eastern
Standard Time, at the Troy Marriott, 200 W. Big Beaver Road, Troy, Michigan.
MATTERS TO BE CONSIDERED
At the Meeting, Shareholders will be asked to consider and vote to elect
seven directors (Proposal No. 1), to amend the Company's Restated Articles of
Incorporation (Proposal No. 2), to amend the Company's 1996 Stock Option Plan
(Proposal No. 3), and to amend the Company's Employee Stock Purchase Plan
(Proposal No. 4). See "ELECTION OF DIRECTORS", "APPROVAL OF THE AMENDMENT TO THE
RESTATED ARTICLES OF INCORPORATION TO INCREASE AUTHORIZED COMMON STOCK",
"APPROVAL OF THE AMENDMENT TO THE 1996 STOCK OPTION PLAN", and "APPROVAL OF THE
AMENDMENT TO THE EMPLOYEE STOCK PURCHASE PLAN". The Board of Directors knows of
no matters that are to be brought before the Meeting other than as
1
<PAGE> 4
set forth in the Notice of Meeting. If any other matters properly come before
the Meeting, the persons named in the enclosed form of proxy or their
substitutes will vote in accordance with their best judgment on such matters.
RECORD DATE; SHARES OUTSTANDING AND ENTITLED TO VOTE
Shareholders as of the close of business on October 10, 1997 (the "Record
Date") are entitled to notice of and to vote at the Meeting. As of the Record
Date, there were 39,474,415 shares of Common Stock outstanding and entitled to
vote, with each share entitled to one vote.
VOTING AND REVOCATION OF PROXIES
Shareholders are requested to complete, date, sign and promptly return the
accompanying form of proxy in the enclosed envelope. Shares of Common Stock
represented by properly executed proxies received by the Company and not revoked
will be voted at the Meeting in accordance with the instructions contained
therein. If instructions are not given, proxies will be voted FOR election of
each nominee for director named herein, FOR the proposed increase in the number
authorized shares of the Company's Common Stock, FOR the proposed increase in
the number of shares of Common Stock available for grant under the 1996 Stock
Option Plan and FOR the proposed increase in the number of Shares of Common
Stock available under the Company's Employee Stock Purchase Plan.
Any proxy signed and returned by a Shareholder may be revoked at any time
before it is voted by filing with the Secretary of the Company, at the address
of the Company set forth herein, written notice of such revocation or a duly
executed proxy bearing a later date or by attending the Meeting and voting in
person. Attendance at the Meeting will not in and of itself constitute
revocation of a proxy.
REQUIRED VOTES
Votes cast by proxy or in person at the Meeting will be counted in
determining the presence of a quorum. Abstentions, withheld votes and broker
non-votes (where a broker indicates on its proxy that it does not have
discretionary authority to vote certain shares on a particular matter) will be
counted in determining the presence of a quorum but will be treated as not voted
in determining the approval of any matter submitted for a shareholder vote.
Under Michigan law, the affirmative vote of the holders of a plurality of
the shares of Common Stock voted at the Meeting is required to elect each
director. As such, the seven nominees receiving the greatest number of votes
cast at the Meeting will be elected. Abstentions, withheld votes and broker
non-votes will not be deemed votes cast in determining which nominees receive
the greatest number of votes cast.
With regard to approval of the amendment to the Restated Articles of
Incorporation, Michigan law requires the affirmative vote of the holders, as of
the Record Date, of the majority of the outstanding shares of Common Stock. With
regard to approval of the amendment to the 1996 Stock Option Plan and the
amendment to the Employee Stock Purchase Plan, Michigan law requires the
affirmative vote of the holders of a majority of the shares of Common Stock
present in person or represented by proxy at the Meeting. Because an affirmative
vote is required, abstentions, withheld votes and broker non-votes will have the
same effect as a no vote on these proposals.
All of the directors and officers of the Company have indicated that they
will cause all shares of Common Stock beneficially owned by them (excluding
Common Stock which they have the right to acquire upon the exercise of currently
exercisable stock options) to be voted in favor of the election as a director of
each nominee named herein, in favor of the amendment to the Restated Articles of
Incorporation, in favor of the amendment to the 1996 Stock Option Plan, and in
favor of the amendment to the Employee Stock Purchase Plan. Such persons
beneficially own, in the aggregate, 28.5% of the shares of Common Stock eligible
to vote at the Meeting.
2
<PAGE> 5
PROXY SOLICITATION
The Company will bear the costs of solicitation of proxies for the Meeting.
In addition to solicitation by mail, directors, officers and regular employees
of the Company may solicit proxies from Shareholders by telephone, telegram,
personal interview or otherwise. Such directors, officers and employees will not
receive additional compensation, but may be reimbursed for out-of-pocket
expenses in connection with such solicitation. Brokers, nominees, fiduciaries
and other custodians have been requested to forward soliciting material to the
beneficial owners of shares of Common Stock held of record by them, and such
custodians will be reimbursed for their reasonable expenses.
INDEPENDENT AUDITORS
The Company has been advised that representatives of Coopers & Lybrand
L.L.P., the Company's independent auditors in fiscal 1997, will attend the
Meeting, will have an opportunity to make a statement if they desire to do so,
and will be available to respond to appropriate questions.
BENEFICIAL OWNERSHIP OF COMMON STOCK
The following table sets forth, as of the Record Date, the number of shares
of Common Stock, the Company's only class of voting securities, owned
beneficially by (i) each person known by the Company to own beneficially more
than 5% of the outstanding shares of Common Stock, (ii) each director and
nominee for director, (iii) each executive officer named in the Summary
Compensation Table appearing under "EXECUTIVE COMPENSATION" below and (iv) all
directors and executive officers of the Company as a group. The information set
forth in the table and accompanying footnotes has been furnished by the
respective beneficial owners. Unless otherwise indicated, each person has sole
voting and investment power over the reported shares.
<TABLE>
<CAPTION>
AMOUNT AND NATURE OF PERCENT OF
NAME OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP CLASS
------------------------ -------------------- ----------
<S> <C> <C>
Eugene Applebaum.................................. 9,679,544(1) 24.2%
Wellington Management Co., L.L.P.................. 2,196,000(2) 5.4%
Markus M. Ernst................................... 1,605,978(3) 4.1%
Gilbert C. Gerhard................................ 122,119(4) *
David B. Hermelin................................. 388,875(5) 1.0%
Spencer M. Partrich............................... 79,125(5) *
Laurie M. Shahon.................................. 26,062(5) *
Samuel Valenti III................................ 39,000(5) *
Donald M. Stutrud................................. 137,338(6) *
Eric Bolokofsky................................... 103,504(7) *
All directors and executive officers as a group
(11 persons, including the foregoing)........... 12,378,984(8) 30.5%
</TABLE>
- -------------------------
* Less than 1.0%
(1) Includes 652,500 shares of Common Stock subject to Stock options granted
pursuant to the Company's Amended and Restated Stock Option Plan (the "1986
Plan") and the Company's 1996 Stock Option Plan (the "1996 Plan") that are
exercisable within 60 days of the Record Date. Includes 177,187 shares owned
by Mrs. Applebaum, as to which Mr. Applebaum disclaims beneficial ownership.
Includes 59,917 shares of Common Stock owned of record by Smith Barney,
Inc., as trustee (the "401(k) Trustee") under the Arbor Drugs, Inc. 401(k)
Plan (the "401(k) Plan"), on behalf of Mr. Applebaum as of June 30, 1997,
the latest date as of which such information is available from the 401(k)
Trustee. Excludes 658,124 shares of Common Stock held in Mrs. Applebaum's
name as trustee for the children of Mr. and Mrs. Applebaum, as to which Mr.
Applebaum disclaims beneficial ownership. Mr. Applebaum's business address
is c/o Arbor Drugs, Inc., 3331 W. Big Beaver Road, Troy, Michigan 48084.
3
<PAGE> 6
(2) The beneficial owner's address is 75 State Street, Boston, MA 02109.
(3) Includes 60,000 shares of Common Stock subject to stock options granted
pursuant to the 1986 Plan and the 1996 Plan that are exercisable within 60
days of the Record Date. Includes 423 shares of Common Stock owned of record
by the 401(k) Trustee on behalf of Mr. Ernst as of June 30, 1997. Includes
10,500 shares owned by Mrs. Ernst, as to which Mr. Ernst disclaims
beneficial ownership.
(4) Includes 92,650 shares of Common Stock subject to stock options granted
pursuant to the 1986 Plan and the 1996 Plan that are exercisable within 60
days of the Record Date. Includes 5,418 shares of Common Stock owned of
record by the 401(k) Trustee on behalf of Mr. Gerhard as of June 30, 1997.
(5) Includes 16,500 shares of Common Stock subject to stock options
automatically granted pursuant to the 1996 Plan that are exercisable within
60 days of the Record Date.
(6) Includes 86,400 shares of Common Stock subject to stock options granted
pursuant to the 1986 Plan and the 1996 Plan that are exercisable within 60
days of the Record Date. Includes 13,131 shares of Common Stock owned of
record by the 401(k) Trustee on behalf of Mr. Stutrud as of June 30, 1997.
(7) Includes 86,850 shares of Common Stock subject to stock options granted
pursuant to the 1986 Plan and the 1996 Plan that are exercisable within 60
days of the Record Date. Includes 8,687 shares of Common Stock owned of
record by the 401(k) Trustee on behalf of Mr. Bolokofsky as of June 30,
1997.
(8) Includes, in addition to the 978,400 such shares referred to in the
preceding footnotes, a total of 116,350 shares of Common Stock subject to
stock options granted to the Company's other executive officers pursuant to
the 1986 Plan and the 1996 Plan that are exercisable within 60 days of the
Record Date. Includes 18,412 shares of Common Stock owned of record by the
401(k) Trustee on behalf of such other executive officers as of June 30,
1997.
4
<PAGE> 7
PROPOSAL NO. 1
ELECTION OF DIRECTORS
At the Meeting, seven directors are to be elected to serve until the next
annual meeting or until their successors are elected and qualified. The persons
named in the enclosed form of proxy have advised that, unless contrary
instructions are received, they intend to vote FOR the election of the seven
individuals named in the following table, all of whom currently are directors of
the Company. The Board of Directors does not expect that any of the nominees
will be unavailable for election as a director. If by reason of an unexpected
occurrence one or more of the nominees is not available for election, however,
the persons named in the form of proxy have advised that they will vote for such
substitute nominees as the Board of Directors of the Company may propose. The
following information is as of the Record Date.
<TABLE>
<CAPTION>
PRINCIPAL BUSINESS
OCCUPATIONS DURING PAST
FIVE YEARS, OTHER
NAME DIRECTORSHIPS AND AGE
---- -----------------------
<S> <C>
Eugene Applebaum............................. President of the Company and its predecessors
Director since 1963 since 1963. Chairman of the Board of
Directors and Chief Executive Officer since
1985. Mr. Applebaum has been a registered
pharmacist in the State of Michigan since
1960. Age 60.
Markus M. Ernst.............................. Executive Vice President and Chief Operating
Director since 1974 Officer of the Company and its predecessors
since 1968. Age 60.
Gilbert C. Gerhard........................... Senior Vice President -- Finance and
Director since 1986 Administration since February 1994. Chief
Financial Officer and Treasurer of the
Company since 1983. Secretary since 1995.
Vice President -- Finance and Administration
from 1983 to February 1994. Age 55.
David B. Hermelin............................ Private investor principally involved in real
Director since 1986 estate investment and development. Director
of First of America Bank -- Detroit, N.A. and
HA-LO Industries, Inc. Age 60.
Spencer M. Partrich.......................... Private investor principally involved in real
Director since 1988 estate investment and development. Co-owner
and principal of Lautrec, Ltd. and Lautrec
A&D, L.L.C., since 1976. Age 57.
Laurie M. Shahon............................. Founder and President of Wilton Capital Group
Director since 1988 since January 1994. Managing Director of '21'
International Holdings, Inc. from April 1988
to December 1993. Director of One Price
Clothing Stores, Inc., Ames Department
Stores, Inc. and Homeland Stores, Inc. Age
45.
Samuel Valenti III........................... President of Masco Capital Corporation since
Director since 1992 1988. Vice President -- Investments of Masco
Corporation since 1974. Vice Chairman of the
State of Michigan's Investment Advisory Board
since 1992. Age 51.
</TABLE>
The Board of Directors recommends a vote FOR each of the above-named
nominees.
5
<PAGE> 8
INFORMATION CONCERNING MEETINGS OF THE BOARD OF
DIRECTORS AND BOARD COMMITTEES AND DIRECTOR COMPENSATION
The Board of Directors held five meetings during fiscal 1997. All
directors, with the exception of Mr. Valenti, attended 100% of the meetings of
the Board of Directors and the committees of the Board of Directors on which
they serve. Mr. Valenti was unable to attend two of the Board of Directors
meetings and one of the Compensation Committee meetings.
The Board of Directors of the Company currently has an Audit Committee and
a Compensation Committee. The Board of Directors does not have a separate
nominating committee.
The Audit Committee recommends the engagement of the Company's independent
auditors, reviews the scope and cost of the audit, considers comments made by
the independent auditors with respect to accounting procedures and internal
controls and the consideration given thereto by management, and reviews internal
accounting procedures and controls with the Company's financial and accounting
staff. The committee, which currently consists of Mr. Hermelin, Mr Partrich, Ms.
Shahon (Chair) and Mr. Valenti, held two meetings during fiscal 1997.
The Compensation Committee provides guidance and commentary to management
and the entire Board of Directors with respect to all corporate compensation,
benefits and employee equity programs and administers the 1986 Plan, the 1996
Plan and the Employee Stock Purchase Plan. The committee, which currently
consists of Mr. Hermelin, Ms. Shahon and Mr. Valenti (Chair), held two meetings
during fiscal 1997.
Directors who are also employees of the Company receive no remuneration for
services as a member of the Board or any committee of the Board. In fiscal 1997,
each non-employee director received an annual fee of $10,000 for serving as a
director plus $500 for each meeting of the Board that such director attended. No
additional fees were paid for service on any of the Board committees.
Non-employee directors are not eligible to receive options to purchase shares of
Common Stock pursuant to the 1986 Plan or to participate in the Company's
Employee Stock Purchase Plan; however, pursuant to the 1996 Plan each
non-employee director was automatically granted options to purchase 15,000
shares of Common Stock, at the time of adoption of the 1996 Plan, and will be
automatically granted options to purchase 1,500 shares of Common Stock at the
time of each annual meeting.
6
<PAGE> 9
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth all compensation awarded to, earned by, or
paid to the Company's Chief Executive Officer (the "CEO") and each of the other
four most highly compensated executive officers of the Company for all services
rendered in all capacities to the Company and its subsidiaries in fiscal 1997,
1996 and 1995.
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
------------
AWARDS
ANNUAL ------------
COMPENSATION SECURITIES
------------ UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITIONS FISCAL YEAR SALARY($) OPTIONS(#) COMPENSATION(1)($)
---------------------------- ----------- --------- ---------- ------------------
<S> <C> <C> <C> <C>
Eugene Applebaum........................ 1997 $450,000 450,000 $26,550
President and CEO 1996 $450,000 450,000 $26,550
1995 $450,000 675,000 $10,487
Markus M. Ernst......................... 1997 $250,000 150,000 $11,831
Executive Vice President and 1996 $250,000 150,000 $12,894
Chief Operating Officer 1995 $250,000 225,000 $12,606
Gilbert C. Gerhard...................... 1997 $167,500 45,000 $13,624
Senior Vice President -- Finance 1996 $162,500 45,000 $13,369
and Administration, Chief Financial 1995 $155,000 51,750 $12,952
Officer, Treasurer and Secretary
Donald M. Stutrud....................... 1997 $142,500 45,000 $ 4,846
Senior Vice President -- Store 1996 $137,500 45,000 $ 4,657
Operations 1995 $133,500 51,750 $ 4,480
Eric Bolokofsky......................... 1997 $142,500 45,000 $ 3,992
Senior Vice President -- Merchandising 1996 $135,000 45,000 $ 3,861
1995 $125,000 54,000 $ 3,739
</TABLE>
- -------------------------
(1) Represents (i) the Company's contribution of $500 in fiscal 1997, 1996 and
1995 to each named executive officer's account under the 401(k) Plan and
(ii) insurance premiums paid by the Company with respect to term life and
disability insurance for the benefit of each named executive officer. All
contributions to the 401(k) Plan are immediately vested.
7
<PAGE> 10
OPTION GRANTS IN FISCAL 1997
The following table sets forth certain information concerning individual
grants of stock options made to each of the executive officers of the Company
named in the Summary Compensation Table during fiscal 1997. All such grants were
made pursuant to the 1996 Plan.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
------------------------------------------------------------ POTENTIAL REALIZABLE VALUE AT
NUMBER OF ASSUMED ANNUAL RATES OF
SECURITIES % OF TOTAL STOCK PRICE APPRECIATION FOR
UNDERLYING OPTIONS GRANTED EXERCISE OPTION TERM(2)
OPTIONS GRANTED TO EMPLOYEES IN PRICE EXPIRATION ------------------------------
NAME (#)(1) FISCAL 1997 ($/SH) DATE 5%($) 10%($)
---- --------------- --------------- -------- ---------- ----- ------
<S> <C> <C> <C> <C> <C> <C>
Eugene Applebaum..... 450,000 40.48% $14.83 10/03/2002 $2,270,133 $5,150,158
Markus M. Ernst...... 150,000 13.49 14.83 10/03/2002 756,711 1,716,719
Gilbert C. Gerhard... 45,000 4.05 14.83 10/03/2002 227,013 515,016
Donald M. Stutrud.... 45,000 4.05 14.83 10/03/2002 227,013 515,016
Eric Bolokofsky...... 45,000 4.05 14.83 10/03/2002 227,013 515,016
</TABLE>
- -------------------------
(1) The indicated stock options vest at a rate of 20% per year, beginning on the
first anniversary of the date of grant and have a term of six years (subject
to full accelerated vesting upon certain change in control events). All
rights to exercise such stock options terminate upon the resignation,
retirement or voluntary or involuntary termination of the optionee, except
that the Compensation Committee may, in its sole discretion, grant an
optionee the right for a period not to exceed three months to exercise that
portion of the stock option that is exercisable by the optionee on the date
of such resignation, retirement or termination. In addition, stock options
may be exercised within (i) twelve months after an optionee's employment is
terminated by death or (ii) three months after an optionee's employment is
terminated due to permanent disability, but in no event subsequent to the
expiration of the stock option.
(2) The potential realizable value amounts shown illustrate the values that
might be realized upon exercise of the stock options immediately prior to
the expiration of their term using 5% and 10% appreciation rates (as
specified by the Securities and Exchange Commission), compounded annually
and, therefore, are not intended to forecast possible future appreciation,
if any, in the Company's stock price. Actual gains, if any, upon future
exercise of any of these options will depend upon the actual performance of
the Common Stock.
8
<PAGE> 11
AGGREGATE OPTION EXERCISES IN FISCAL 1997 AND 1997 FISCAL YEAR-END OPTION VALUES
The following table provides information concerning the exercise of stock
options during fiscal 1997 by each of the executive officers of the Company
named in the Summary Compensation Table and the value of unexercised options
held by such persons as of July 31, 1997, measured in terms of the closing price
of the shares of Common Stock on that date as reported by NASDAQ ($24.625 per
share).
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES VALUE OF
UNDERLYING UNEXERCISED
UNEXERCISED IN-THE-MONEY
OPTIONS AT OPTIONS AT
SHARES 7/31/97(#) 7/31/97($)
ACQUIRED ON VALUE($) EXERCISABLE/ EXERCISABLE/
NAME EXERCISE REALIZED(1) UNEXERCISABLE UNEXERCISABLE
---- ----------- ----------- ------------- -------------
<S> <C> <C> <C> <C>
Eugene Applebaum............. 855,000 $6,859,328 472,500/1,485,000 $7,230,313/$19,398,125
Markus M. Ernst.............. 421,500 3,946,587 -- / 486,000 -- / 6,317,750
Gilbert C. Gerhard........... 21,875 280,597 73,300/ 126,450 1,126,740/ 1,598,881
Donald M. Stutrud............ 28,125 358,749 67,050/ 126,450 1,038,806/ 1,598,881
Eric Bolokofsky.............. 28,125 352,031 67,950/ 127,800 1,050,869/ 1,616,975
</TABLE>
- -------------------------
(1) Value realized is calculated based on the difference between the option
exercise price and the closing market price of the shares of Common Stock on
the date of exercise multiplied by the number of shares to which the
exercise relates.
CHANGE IN CONTROL AGREEMENTS
As of December 9, 1996, the Board of Directors of the Company approved
Change in Control Agreements with certain key employees of the Company,
including each of the executive officers named in the Summary Compensation
Table. The Board of Directors determined that, given the uncertainties affecting
the drug store business and the growing number of consolidations in the
industry, it would be in the best interests of the Company and its shareholders
to induce these key employees to remain with the Company and to reinforce and
encourage their continued attention and dedication to the Company.
The agreements provide each executive officer named in the Summary
Compensation Table with certain benefits if he or she is terminated by the
Company or a successor of the Company, other than for cause, or if the executive
officer terminates his or her employment with the Company or such successor for
"Good Reason" within 180 days before, or within two years following, a "Change
in Control" of the Company. "Good Reason" is defined to include the assignment
of duties or responsibilities materially inconsistent with those assigned to the
officer prior to the Change in Control, a reduction in the officer's total
compensation below the average of the two most recent calendar year compensation
amounts or of welfare benefits available to the officer prior to the Change in
Control, or relocation of the officer's principal place of business to a
location more than 35 miles from the officer's principal place of business prior
to the Change in Control. A "Change in Control" is defined to include the
acquisition by a person or group of persons of more than 50% of the Common Stock
or the approval by the Board of a sale of all or substantially all of the assets
of the Company or of certain consolidations or mergers of the Company.
Upon any of the above-described events, the Company would be obligated to
continue the executive officer's participation in the Company's medical, dental,
hospitalization, disability and life insurance plans, programs or arrangements,
as if he or she remained an employee, until the earlier of the two-year period
following the date of termination of employment or the date or dates he or she
receives equivalent coverage and benefits under the plans, programs and/or
arrangements of a subsequent employer. In addition, each of the executive
officers, other than Eugene Applebaum and Markus M. Ernst, would be entitled to
receive a lump sum payment, within five days following termination of such
officer's employment, equal to two times such officer's annual base salary as of
the date of termination of employment. Finally, each officer would also receive
an additional amount of compensation equal to any excise tax payable by the
officer as a result of his or
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<PAGE> 12
her receipt of "excess parachute payments" relating to the Change in Control
within the meaning of Section 280G of the Internal Revenue Code of 1986, as
amended.
COMPENSATION COMMITTEE INTERLOCKS
AND INSIDER PARTICIPATION
During fiscal 1997, the members of the Compensation Committee were Mr.
Hermelin, Ms. Shahon and Mr. Valenti. None of these individuals has served as an
officer or employee of the Company or any of its subsidiaries. All fiscal 1997
compensation packages for executive officers were initially established by Mr.
Applebaum and, with respect to stock option grants, reviewed and approved by the
Compensation Committee.
The Company leases a drugstore from a general partnership in which Mr.
Partrich owns a minority interest. During fiscal 1997, the Company's payments to
the partnership aggregated $158,355.
The Company leases three drugstores from a general partnership formed by
Messrs. Applebaum and Ernst, of which Mr. Applebaum is the majority partner.
During fiscal 1997, the Company's payments to the partnership aggregated
$406,413. The Company also leases a drugstore from a limited partnership, of
which Mr. Applebaum is a limited partner. During fiscal 1997, the Company's
payments to the partnership aggregated $92,691.
The Company believes that each of the leases described above is no less
favorable to the Company than would have been available from unaffiliated
parties.
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<PAGE> 13
REPORT OF THE COMPENSATION COMMITTEE
WITH RESPECT TO EXECUTIVE COMPENSATION*
All cash compensation for the executive officers named in the Summary
Compensation Table for fiscal 1997 was determined by Mr. Applebaum prior to and
effective as of February 1, 1997. Grants of stock options to the named executive
officers were made in October 1996 by the Compensation Committee.
EXECUTIVE COMPENSATION PRINCIPLES
The Company's executive compensation program is based on principles, set
forth in the Compensation Committee charter, which are intended to align
compensation with achievement of Company objectives in business strategy,
management initiatives and financial results. The executive compensation
principles set forth in the Compensation Committee's charter are designed to:
-- Attract and retain the highly qualified, experienced and motivated
executives needed for the success of the Company;
-- Provide compensation opportunity that is competitive with companies in
the chain drugstore industry and/or companies of comparable complexity,
risk and size;
-- Reward executives for performance; and
-- Align management's interests with the interests of Shareholders for the
long-term success of the Company.
The Company's fiscal 1997 compensation program consisted of cash
compensation and equity-based compensation pursuant to the 1996 Plan and the
Company's Employee Stock Purchase Plan. In addition, during fiscal 1997, the
Board of Directors of the Company approved Change in Control Agreements with
certain key employees of the Company, including each of the executive officers
named in the Summary Compensation Table (see "EXECUTIVE COMPENSATION -- Change
in Control Agreements" above). Such agreements were entered into based on the
determination of the Board of Directors that, given the uncertainties affecting
the drug store business and the growing number of consolidations in the
industry, it would be in the best interests of the Company and its shareholders
to induce each of such executive officers to remain with the Company and to
reinforce and encourage their continued attention and dedication to the Company.
Options under the 1996 Plan were granted at the then current market price,
and vest at a rate of 20% a year beginning on the first anniversary of grant
(subject to acceleration upon certain change in control events). The options are
scheduled to expire on the sixth anniversary of grant.
The Employee Stock Purchase Plan permits each employee of the Company to
purchase up to $25,000 of Common Stock per annum at 85% of the lesser of the
fair market value of Common Stock on the first day or last day of a purchase
period. The Company adopted the Employee Stock Purchase Plan in order to
recognize the contributions of its employees to the success of the Company and,
in part, because of similar plans adopted by members of the Peer Group (as such
term is hereinafter defined) with whom the Company primarily competes for the
services of officers, pharmacists and corporate managers.
With certain exceptions, Section 162(m) of the Internal Revenue Code of
1986, as amended (the "Code") imposes an annual individual limitation of $1
million on the deductibility of compensation payments to the Company's Chief
Executive Officer (the "CEO") and the other four most highly compensated
executive officers for whom proxy statement disclosure is required and who are
employed at the end of the Company's taxable year. "Performance-based"
compensation, as defined in Section 162(m) of the Code, is
- -------------------------
* The disclosure contained in this section is not incorporated by reference into
any filings by the Company under the Securities Act of 1933, as amended (the
"Securities Act"), or the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), that incorporated future filings or portions thereof (including
this Proxy Statement or this section).
11
<PAGE> 14
excluded from this limitation. The Company believes that options granted under
the 1996 Plan should qualify as "performance-based" compensation provided that
(as was the case for grants made during fiscal 1997) the exercise price of such
options is not less than the fair market value of the Common Stock at the date
of grant.
The Company does not have any other long-term incentive, restricted stock
purchase or profit-sharing programs and does not have or contribute to any
retirement programs on behalf of its employees, including its executive
officers.
COMPENSATION OF THE CEO
The present philosophy of the Compensation Committee is to maintain the
CEO's cash compensation at the level in place since 1987 and to reward and
further encourage performance in a particular year using equity-based
compensation, which strengthens the mutuality of interests between the CEO and
the Company's shareholders. In accordance with this, the fiscal 1997 cash
compensation for Mr. Applebaum, the Company's CEO, remained at $450,000 and, in
October 1996, Mr. Applebaum was granted an option under the 1996 Plan covering
450,000 shares of Common Stock.
The factors considered by the Compensation Committee in determining the
amount of equity-based compensation awarded to Mr. Applebaum in fiscal 1997
included its subjective evaluation of the Company's general operating and
financial performance and expansion, as well as Mr. Applebaum's leadership and
establishment and implementation of strategic direction for the Company. During
fiscal 1997, the Company opened 17 new drugstores and surpassed the $950 million
mark in annual sales. The Company also increased its market share in its primary
market, maintaining its position as the drugstore market share leader in the
greater metropolitan Detroit area, and advanced to become the eighth largest
drugstore chain in the nation based on gross sales. The number of options
previously granted under the 1986 Plan and 1996 Plan to all employees in the
aggregate and to Mr. Applebaum, individually, were also considered in
determining the size of Mr. Applebaum's fiscal 1997 award of options. No
particular weight was given to any factor by the Compensation Committee.
Currently, the CEO is not eligible to participate in the Employee Stock
Purchase Plan due to his ownership of more than 5% of the outstanding Common
Stock.
COMPENSATION OF OTHER EXECUTIVE OFFICERS
Each of the other named executive officers, other than Markus Ernst,
received an increase in cash compensation, as determined by the CEO, of
approximately 3-5%. Mr. Ernst's fiscal 1997 cash compensation of $250,000 has
remained unchanged since 1987. Options were granted by the Compensation
Committee to executive officers based upon the recommendation of the CEO. In
making his recommendations, the CEO subjectively considered certain factors,
including his perception of individual performance, the individual's
contribution to the overall performance of the Company and the anticipated value
of the executive's contribution to the Company's future performance, as well as
the need to retain executives. The Compensation Committee reviewed with the CEO
his recommendations and, for certain officers, granted more options than
recommended by the CEO to reflect the Compensation Committee's subjective
consideration of such factors. The determination was not based on specific
objectives. No specific weight was given to any of the factors considered. The
numbers of options previously granted under the 1986 Plan and 1996 Plan to all
employees in the aggregate and to each executive officer, individually, were
also considered in determining the fiscal 1997 awards of options to each
executive officer.
THE COMPENSATION COMMITTEE
Samuel Valenti III, Chair
David B. Hermelin
Laurie M. Shahon
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<PAGE> 15
PERFORMANCE GRAPH**
Set forth below is a line graph comparing the cumulative total shareholder
return on the Company's Common Stock, based on the market price of the Common
Stock, with the cumulative total return of (i) companies included in the S&P 500
Index and (ii) certain companies identified below (the "Peer Group"). The graph
points set forth below are as of July 31 of each year indicated.
<TABLE>
<CAPTION>
Measurement Period NACDS Peer
(Fiscal Year Covered) Arbor Drugs, Inc. S&P 500 Group
<S> <C> <C> <C>
1992 100.00 100.00 100.00
1993 89.09 108.73 98.97
1994 107.47 114.34 103.67
1995 135.07 144.19 144.50
1996 148.03 168.08 171.18
1997 304.46 255.48 303.10
</TABLE>
The Peer Group consists of the following companies, all of which are
primarily engaged in the chain drugstore retail business: Drug Emporium, Inc.;
Genovese Drug Stores, Inc.; Longs Drug Stores Corporation; Rite Aid Corp.; and
Walgreen Co. Data for the Peer Group Index and the S&P 500 was provided to the
Company by the National Association of Chain Drug Stores (which omitted from the
index three companies included last year: Big B, Inc., which was acquired by
Revco D. S., Inc.; Fay's Incorporated, which was acquired by J.C. Penney's
Thrift Drug subsidiary and Revco D.S., Inc. which was acquired by CVS
Corporation).
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
CERTAIN TRANSACTIONS
In August 1997, the Company signed a lease for a drugstore with a limited
liability company in which Mr. Applebaum's son-in-law is a minority partner.
Monthly lease payments of $13,600 are scheduled to begin when the store opens,
which is anticipated to be in the summer of 1998.
The Company believes that the transaction described above is no less
favorable to the Company than would have been available from unaffiliated
parties.
For information concerning additional related party transactions, see
"COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION."
- -------------------------
** The graph and related disclosure contained in this section are not
incorporated by reference into any filings by the Company under the Securities
Act or the Exchange Act that incorporated future filings or portions thereof
(including this Proxy Statement or this section).
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<PAGE> 16
PROPOSAL NO. 2
APPROVAL OF THE AMENDMENT TO RESTATED ARTICLES OF INCORPORATION TO
INCREASE AUTHORIZED COMMON STOCK
Article III of the Company's Restated Articles of Incorporation presently
provides for an authorized capitalization of the Company of 40,000,000 shares of
Common Stock, $.01 par value per share, and 2,000,000 shares of Preferred Stock,
$.01 par value per share. As of October 10, 1997, none of the shares of
Preferred Stock had been issued and 39,474,415 shares of Common Stock were
issued and outstanding.
The Board of Directors of the Company has proposed an amendment to Article
III of the Company's Restated Articles of Incorporation to increase, from
40,000,000 to 100,000,000, the number of authorized shares of Common Stock.
The approval of this proposed amendment to the Company's Restated Articles
of Incorporation increasing the number of authorized shares of Common Stock
requires the affirmative vote of the holders, as of the Record Date, of the
majority of the outstanding shares of Common Stock.
If the proposal is approved by the shareholders of the Company, the
additional 60,000,000 shares of Common Stock so authorized will be available for
issuance by the Board of Directors of the Company for stock splits or stock
dividends, acquisitions, raising additional capital, stock options or other
corporate purposes. There are no present arrangements, understandings or plans
for the issuance of any such additional shares. If the proposed amendment is not
approved, the Company would not have sufficient shares to grant options to key
employees, to permit the Company to issue additional shares to meet purchase
requests under the Employee Stock Purchase Plan, or to declare future stock
dividends, in a manner consistent with the Company's past practices. The Company
does not anticipate that it would seek authorization from the shareholders for
issuance of such additional shares unless required by applicable law or
regulation. Any additional shares, when issued, would have the same rights and
preferences as the shares of Common Stock presently outstanding. There are no
preemptive rights available to shareholders in connection with the issuance of
any such shares.
One of the effects of the amendment, if adopted, however, may also be to
enable the Board of Directors to render it more difficult to, or discourage an
attempt to, obtain control of the Company by means of a merger, tender offer,
proxy contest or otherwise, and thereby protect the continuity of present
management. The Board of Directors would, unless prohibited by applicable law,
have additional shares of Common Stock available to effect transactions
(including private placements) in which the number of the Company's outstanding
shares would be increased and would thereby dilute the interest of any party
attempting to gain control of the Company. Such action, however, could
discourage an acquisition of the Company which shareholders might view as
desirable. In addition, since the Company's shareholders have no preemptive
rights to purchase additional shares of Common Stock issued, the issuance of
such shares could dilute the interests of current shareholders of the Company.
The Board of directors recommends a vote FOR this proposal.
PROPOSAL NO. 3
APPROVAL OF THE AMENDMENT TO THE 1996 STOCK OPTION PLAN
The 1996 Plan was established by the Company to provide the Company with an
effective means to attract, retain and motivate key personnel of the Company.
The 1996 Plan currently authorizes the granting of up to 3,000,000 shares of
Common Stock with no individual to be granted options greater than 1,500,000 in
the aggregate. This proposal increases the maximum number of shares of Common
Stock that may be allocated pursuant to grants of options under the 1996 Plan to
6,000,000 shares of Common Stock and increases the maximum number of shares of
Common Stock, in the aggregate, that may be allocated to an individual optionee
pursuant to grants of options under the 1996 Plan to 3,000,000 shares of Common
Stock. Prior to the date of this proposed amendment to the 1996 Plan by the
Board of Directors, 2,211,376 shares of Common Stock had been granted to
executive officers and employees pursuant to awards under the 1996 Plan
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<PAGE> 17
with an additional 1,150,000 awarded on October 6, 1997, pending approval of
this Proposal No. 3. See "APPROVAL OF THE AMENDMENT TO THE 1996 STOCK OPTION
PLAN -- Fiscal 1998 Grants." The Board of Directors believes that the best
interests of the Company will be served by increasing the number of shares
available for awards granted under the 1996 Plan. The Board of Directors
believes that the existing awards have enhanced the Company's position in the
highly competitive market for managerial and executive talent and have enabled
the Company to appropriately align executives' long-term interests with those of
shareholders through stock ownership by the executive. To remain competitive, it
is the judgment of the Board of Directors that an amendment permitting the
allocation of additional shares to awards under the 1996 Plan should be adopted.
The essential features of the 1996 Plan are outlined below.
Because the Company currently has 39,474,415 shares outstanding, no
additional shares can be authorized for grant under the 1996 Stock Option Plan
unless Proposal No. 2 is approved. Accordingly, approval of this Proposal No. 3
is contingent upon approval of Proposal No. 2. See "APPROVAL OF THE AMENDMENT TO
RESTATED ARTICLES OF INCORPORATION TO INCREASE AUTHORIZED COMMON STOCK."
GENERAL
The purpose of the 1996 Plan is to enhance the profitability and value of
the Company for the benefit of the Shareholders by enabling the Company to
provide key employees and non-employee directors of the Company and key
employees of its subsidiaries an opportunity to acquire an ownership interest in
the Company, or increase their existing ownership interests, and thereby
attract, retain and reward such key employees and non-employee directors, and
strengthen the mutuality of interests between such key employees and
non-employee directors and the Shareholders. Pursuant to the 1996 Plan, during
the ten year period ending October 4, 2005, the Company may grant options with
respect to an aggregate of up to 3,000,000 shares of Common Stock with no
individual to be granted options with respect to greater than 1,500,000 shares
of Common Stock. Options granted pursuant to the 1996 Plan may be either options
intended to satisfy the requirements of incentive stock options within the
meaning of Section 422 of the Code ("ISOs") or non-qualified stock options not
intended to satisfy the requirements for ISOs ("NQSOs"). Shares of Common Stock
subject to options may be either authorized and unissued shares, or previously
issued shares acquired or to be acquired by the Company and held in its
treasury.
ADMINISTRATION
The 1996 Plan is administered by the Compensation Committee of the Board of
Directors of the Company, which is comprised of "non-employee directors" within
the meaning of Rule 16b-3 under Section 16(b) of the Exchange Act and "outside
directors" within the meaning of Section 162(m) of the Code. Any or all powers
and functions of the Compensation Committee may be exercised at any time and
from time to time by the Board of Directors or, at the direction of the Board of
Directors, another committee of the Board of Directors, provided all of the
members of the Board or such committee are "non-employee directors" and "outside
directors", as described above (references below to the Committee shall be
deemed to include references to the Board of Directors and such other Committee
to the extent any of the foregoing administers the 1996 Plan). Subject to the
express provisions of the 1996 Plan, including those relating to non-employee
directors, the authority of the Committee includes, among other things,
determining the persons to whom options are granted, the timing of any grants,
the number of shares subject to each option, the period of exercisability, the
designation of options as ISOs or NQSOs and the other terms and provisions
thereof.
Non-employee directors and officers subject to Section 16(a) of the
Exchange Act may not, and the Committee also has the authority to require, as a
condition to any grant, that any other grantee also may not, sell or otherwise
dispose of shares acquired pursuant to the exercise of an option within six
months of the date an option is granted.
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<PAGE> 18
ELIGIBILITY
ISOs may be granted only to salaried key employees of the Company or any
subsidiary or parent corporation of the Company now existing or subsequently
formed or acquired. NQSOs may be granted to salaried key employees and
non-employee directors of the Company and key employees of any subsidiary or
parent corporation of the Company now existing or subsequently formed or
acquired.
GRANT, TERMS AND CONDITIONS OF OPTIONS
The Company will not receive any monetary consideration for granting
options.
The exercise price for each share subject to an option will be an amount
that the Committee determines, in its good faith judgment, to be not less than
100%, in the case of an ISO or an NQSO granted to a Director Participant (as
defined below), or 85%, in the case of any other NQSO, of the fair market value
of the Common Stock on the date the option is granted. In the case of ISOs,
however, the exercise price per share of ISOs granted to any holder of capital
stock of the Company (or any subsidiary or parent corporation) representing 10%
or more of the voting power of the Company (or any subsidiary or parent
corporation) will be in an amount that the Committee determines, in its good
faith judgment, to be not less than 110% of the fair market value of the Common
Stock on the date the ISO is granted.
Under the 1996 Plan, fair market value per share means:
(1) if the shares are listed on a national securities exchange or
reported on the NASDAQ Stock Market -- National Market ("NASDAQ-NMS"), the
last reported sale price per share on such exchange or such system on the
date the option is granted or, if the shares are not traded or reported on
such date, then on the closest preceding date on which such shares were
traded or reported; or
(2) if the shares are not listed on a national securities exchange or
reported on NASDAQ-NMS but are quoted in the over-the-counter market, the
average of the closing bid and ask quotations in such market for such
shares on the date the option is granted or, if there are no such
quotations on such date, then on the closest preceding date on which such
quotations are available; provided, however, that if, in the judgment of
the Committee, there is not a regular, active public market for the shares,
fair market value per share shall be determined by the Committee in its
good faith judgment. The determination by the Committee of fair market
value will be conclusive and binding.
Payment for shares purchased upon the exercise of options may be in cash
or, if the terms of an option so provide, with other shares of Common Stock or
an executed promissory note on such terms and conditions as the Committee shall
determine.
Except for NQSOs granted to Director Participants, which are discussed
below, options granted under the 1996 Plan are exercisable at such times, in
such amounts and during such period or periods as the Committee may determine at
the date the option is granted. ISOs, however, are not exercisable after ten
years from the date of grant and, in the case of a person who at the date of
grant owns capital stock of the Company (or any subsidiary or parent
corporation) representing 10% or more of the voting power of the Company (or any
subsidiary or parent corporation), are not exercisable after five years from the
date of grant. Except as otherwise provided under the Code, if the aggregate
fair market value of shares subject to ISOs (under any plan of the Company or
any subsidiary or parent corporation of the Company) exercisable for the first
time in any calendar year exceeds $100,000, such options will be treated as
NQSOs.
In addition, the Committee has the right to accelerate, in whole or in
part, from time to time, conditionally or unconditionally, the right to exercise
any option granted under the 1996 Plan (other than an NQSO granted to a Director
Participant).
In the event of retirement, termination by the Company of employment with
or without cause, termination of employment by an optionee with or without good
reason or upon death or disability, special rules will apply regarding the
exercisability of options.
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Options may not be transferred except by will or the laws of descent or
distribution (except, in the case of NQSOs, to the extent that the restrictions
on transferability currently imposed by Rule 16b-3 under the Exchange Act are
modified or eliminated). Options are only exercisable during the lifetime of a
holder by such holder (or, in the case of NQSOs, to the extent transferability
may be permitted in the future, by such holder's permitted transferee).
In the event of a "change in control" of the Company, all then outstanding
options shall immediately become exercisable. The Committee, in its sole
discretion, may determine that, upon the occurrence of a "change in control",
each option outstanding under the 1996 Plan shall terminate within a specified
number of days after notice to the holder, and such holder shall receive, with
respect to each share subject to such option, an amount in cash or other
property, or any combination thereof, equal to the excess of the aggregate fair
market value at the time of such transaction of the shares subject to such
option over the aggregate exercise price therefor. The foregoing provision does
not apply to options granted to directors or officers subject to Section 16(a)
of the Exchange Act within six months prior to a "change in control", unless an
exemption from liability under Section 16(b) of the Exchange Act is otherwise
available.
At October 10, 1997, exclusive of options granted on October 6, 1997,
subject to approval of this Proposal No. 3 (see "Fiscal 1998 Grants" below),
options to purchase an aggregate of 4,489,481 shares of the Company's Common
Stock, at an exercise price in the range of $7.78 to $14.83, were outstanding
under the 1996 Plan. As of October 10, 1997, the average fair market value of
each share of Common Stock was $24.625. As of October 10, 1997, an aggregate of
788,624 shares of Common Stock were available for grant under the 1996 Plan. The
maximum number of shares of Common Stock that may be allocated pursuant to
grants of options under the 1996 Plan is proposed to be increased from 3,000,000
shares to 6,000,000 shares of Common Stock, which amount is subject to
adjustment in the event of a change in the Company's capitalization. For a
summary description of stock option grants awarded pursuant to the 1996 Plan
during fiscal 1997, as well as stock option exercises and stock option values
during fiscal 1997, see "EXECUTIVE COMPENSATION -- Option Grants in Fiscal 1997"
and "EXECUTIVE COMPENSATION -- Aggregate Option Exercises in Fiscal 1997 and
1997 Fiscal Year-End Option Values."
SPECIAL PROVISIONS RELATING TO DIRECTOR PARTICIPANTS
Commencing with the effective date of the 1996 Plan, each then current
non-employee director of the Company (a "Director Participant") was
automatically granted NQSOs to purchase 15,000 shares of Common Stock and will
automatically be granted NQSOs to purchase 1,500 shares at the time of each
annual meeting of the Company's shareholders at which such director is elected
to the Board of Directors (commencing with the annual meeting held in calendar
year 1996). Future Director Participants will automatically be granted NQSOs to
purchase 15,000 shares of Common Stock upon their initial appointment or
election to the Board of Directors and will automatically be granted NQSOs to
purchase 1,500 shares of Common Stock at the time of each subsequent annual
meeting of the Company's shareholders at which such director is elected to the
Board of Directors. The purchase price of the shares of Common Stock covered by
the NQSOs to be granted to a Director Participant will be the fair market value
of such shares of Common Stock on the date such option is granted.
NQSOs granted to Director Participants may not be exercised for one year
immediately following the date of grant. Thereafter, such NQSOs will be
exercisable for the period ending five years from the date of grant, subject to
limitations or restrictions pursuant to the terms of the 1996 Plan. Upon
termination of a Director Participant's directorship, any NQSO granted to such
Director Participant will, to the extent not theretofore exercised, terminate
and be null and void; provided, however, that in the case of termination under
certain circumstances, such NQSO shall (if not then exercisable) become
immediately exercisable and may be exercised for certain periods of time
thereafter as set forth in the 1996 Plan.
EFFECT OF CHANGE IN COMMON STOCK
In the event of any change in the Common Stock through merger,
consolidation, reorganization, recapitalization, stock dividend, stock split,
split-up, split-off, spin-off, combination of shares, exchange of
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<PAGE> 20
shares, or other like change in capital structure of the Company, an adjustment
will be made to each outstanding option so that such option thereafter is
exercisable for such securities, cash and/or property as would have been
received had such option been exercised in full immediately prior to such
transaction and been exchanged in such transaction. An adjustment will be made
successively each time any such change occurs.
AMENDMENT OR TERMINATION
The Board of Directors of the Company may at any time amend or terminate
the 1996 Plan, provided that no such action affects or impairs the rights of an
optionee under any previously granted option and that (subject to certain
exceptions) the special provisions relating to Director Participants may not be
amended more frequently than once every six months. Notwithstanding the
foregoing, without the approval of the Shareholders, no amendment or change may
be made (i) increasing the total number of shares of Common Stock reserved for
options under the plan or the maximum number of shares for which options may be
granted to any one individual (other than an increase resulting from an
adjustment), (ii) reducing the exercise price of any ISO, (iii) modifying the
provisions of the 1996 Plan relating to eligibility or (iv) materially
increasing the benefits accruing to participants under the 1996 Plan.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The statements in the following paragraphs of the principal federal income
tax consequences of options under the 1996 Plan are based on statutory authority
and judicial and administrative interpretations, as of the date of this Proxy
Statement, which are subject to change at any time (possibly with retroactive
effect). The law is technical and complex and the discussion below represents
only a general summary.
INCENTIVE STOCK OPTIONS. ISOs granted under the 1996 Plan are intended to
meet the definitional requirements of Section 422(b) of the Code for "incentive
stock options."
An employee who receives an ISO does not recognize any taxable income upon
the grant of such ISO. Similarly, the exercise of an ISO generally does not give
rise to federal income tax to the employee, provided that (i) the federal
"alternative minimum tax", which depends on the employee's particular tax
situation, does not apply and (ii) the employee is employed by the Company from
the date of grant of the option until three months prior to the exercise
thereof, except where such employment terminates by reason of disability (where
the three month period is extended to one year) or death (where this requirement
does not apply). If an employee exercises an ISO after these requisite periods,
the ISO will be treated as an NQSO and will be subject to the rules set forth
below under the caption "Non-Qualified Options".
Further, if after exercising an ISO, an employee disposes of the Common
Stock so acquired more than two years from the date of grant and more than one
year from the date of transfer of the Common Stock pursuant to the exercise of
such ISO (the "applicable holding period"), the employee will normally recognize
a long-term capital gain or loss equal to the difference, if any, between the
amount received for the shares and the exercise price. If, however, an employee
does not hold the shares so acquired for the applicable holding period --
thereby making a "disqualifying disposition" -- the employee would realize
ordinary income on the excess of the fair market value of the shares at the time
the ISO was exercised over the exercise price and the balance, if any, would be
long-term capital gain (provided the holding period for the shares exceeded one
year and the employee held such shares as a capital asset at such time).
An employee who exercises an ISO by delivering Common Stock previously
acquired pursuant to the exercise of another ISO is treated as making a
"disqualifying disposition" of such Common Stock if such shares are delivered
before the expiration of their applicable holding period. Upon the exercise of
an ISO with previously acquired shares as to which no disqualifying disposition
occurs, despite some uncertainty, it appears that the employee would not
recognize gain or loss with respect to such previously acquired shares.
The Company will not be allowed a federal income tax deduction upon the
grant or exercise of an ISO or the disposition, after the applicable holding
period, of the Common Stock acquired upon exercise of an ISO. In the event of a
disqualifying disposition, the Company generally will be entitled to a deduction
in an amount
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equal to the ordinary income included by the employee, provided that such amount
constitutes an ordinary and necessary business expense to the Company and is
reasonable and the limitations of Sections 280G and 162(m) of the Code (as
discussed below) do not apply.
NON-QUALIFIED OPTIONS. NQSOs granted under the 1996 Plan are options that
do not qualify as ISOs. An optionee who receives an NQSO will not recognize any
taxable income upon the grant of such NQSO. However, the optionee generally will
recognize ordinary income upon exercise of an NQSO in an amount equal to the
excess of (i) the fair market value of the shares of Common Stock at the time of
exercise over (ii) the exercise price.
The ordinary income recognized with respect to the receipt of shares or
cash upon exercise of an NQSO will be subject to both wage withholding and
employment taxes (if any). In addition to the customary methods of satisfying
the withholding tax liabilities that arise upon the exercise of an NQSO, the
Company may satisfy the liability in whole or in part by withholding shares of
Common Stock from those that otherwise would be issuable to the optionee or by
the optionee tendering other shares owned by him or her, valued at their fair
market value as of the date that the tax withholding obligation arises. A
federal income tax deduction generally will be allowed to the Company in an
amount equal to the ordinary income included by the optionee with respect to his
or her NQSO, provided that such amount constitutes an ordinary and necessary
business expense to the Company and is reasonable and the limitations of
Sections 280G and 162(m) of the Code (as described below) do not apply.
If an optionee exercises an NQSO by delivering shares of Common Stock to
the Company, other than shares previously acquired pursuant to the exercise of
an ISO which is treated as a "disqualifying disposition" as described above, the
optionee will not recognize gain or loss with respect to the exchange of such
shares, even if their then fair market value is different from the optionee's
tax basis. The optionee, however, will be taxed as described above with respect
to the exercise of the NQSO as if he or she had paid the exercise price in cash,
and the Company likewise generally will be entitled to an equivalent tax
deduction.
CHANGE IN CONTROL. As described above, upon a "change in control" of the
Company, all the then outstanding options granted under the 1996 Plan will
immediately become exercisable. In general, if the total amount of payments to
an employee that are contingent upon a "change of control" of the Company (as
defined in Section 280G of the Code), including certain payments under the 1996
Plan that vest upon a "change in control", equals or exceeds three times the
employee's "base amount" (generally, such employee's average annual compensation
for the five years preceding the "change in control"), then, subject to certain
exceptions, the payments may be treated as "parachute payments" under the Code,
in which case a portion of such payments would be non-deductible to the Company
and the employee would be subject to a 20% excise tax on such portion of the
payments.
CERTAIN LIMITATIONS ON DEDUCTIBILITY OF EXECUTIVE COMPENSATION. With
certain exceptions, Section 162(m) of the Code denies a deduction to publicly
held corporations for compensation paid to certain executive officers in excess
of $1 million per executive per taxable year (including any deduction with
respect to the exercise of an NQSO or the disqualifying disposition of stock
purchased pursuant to an ISO). Options granted under the 1996 Plan should, under
certain circumstances, qualify for the performance-based compensation exemption
to Section 162(m) of the Code. In order to qualify for such exemption, among
other requirements, (i) the option must be granted with an exercise price not
less than the fair market value of the shares of Common Stock at the time of
grant and (ii) the Committee must, at the time it grants the option, consist
solely of two or more "outside directors" within the meaning of Section 162(m)
of the Code (which requirement the presently constituted Committee satisfies).
The options described under "Fiscal 1998 Grants" below should qualify for the
performance-based compensation exemption provided that Shareholder approval of
the proposed amendment of the 1996 Plan is obtained.
FISCAL 1998 GRANTS
On October 6, 1997, grants of options covering a total of 1,150,000 shares
of Common Stock (each having an exercise price of $23.125 per share which is
equal to the fair market value of the Common Stock at the date of grant) were
made by the Compensation Committee, upon recommendation of the CEO, pursuant
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<PAGE> 22
to the 1996 Plan, subject to Shareholder approval of this Proposal No. 3. If
this Proposal No. 3 is not approved by Shareholders at the Meeting, such grants
will become null and void.
Certain information about the grants is set forth in the following table.
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES UNDERLYING
NAME AND POSITION OF GRANTEE/GROUP OPTIONS GRANTED(#)
---------------------------------- ---------------------
<S> <C>
Eugene Applebaum............................................ 450,000
President and CEO
Markus M. Ernst............................................. 150,000
Executive Vice President and Chief Operation Officer
Gilbert C. Gerhard.......................................... 45,000
Senior Vice President -- Finance and Administration, Chief
Financial Officer, Treasurer and Secretary
Donald H. Stutrud........................................... 45,000
Senior Vice President -- Store Operations
Eric Bolokofsky............................................. 45,000
Senior Vice President -- Merchandising
All executive officers as a group........................... 795,000
All employees as a group.................................... 1,150,000
</TABLE>
Each option described above has the same general terms as are described in
"EXECUTIVE COMPENSATION -- Option Grants in Fiscal 1997" and will expire October
5, 2003. Because the value of the options depends upon the market value, from
time to time, of the underlying shares of Common Stock, the Company is unable to
readily determine the value of such option grants.
The Board of Directors recommends a vote FOR this proposal.
PROPOSAL NO. 4
APPROVAL OF THE AMENDMENT TO THE EMPLOYEE STOCK PURCHASE PLAN
The Employee Stock Purchase Plan (the "Plan) was established by the Company
in 1994 to further encourage broader ownership by employees of the Company, and
thereby provide an incentive for employees to contribute to the profitability
and success of the Company. In particular, the Board of Directors believes that
the Plan offers a convenient means for such employees who might not otherwise
own Common Stock in the Company to purchase and hold Common Stock, and that the
discounted sale feature of the Plan provides a meaningful inducement to
participate. The Board of Directors believes that the employees' continuing
economic interests as shareholders in the performance and success of the Company
will further enhance the entrepreneurial spirit of the Company, which can
greatly contribute to the long-term growth and profitability of the Company.
Under the Plan, the Company sells shares to Participants at a price equal
to 85% of the lesser of the fair market value of Common Stock on (i) the first
trading day of a three-month offering period (a "Purchase Period") or (ii) the
last trading day of the Purchase Period. As of September 15, 1997, the last date
of enrollment during the Purchase Period currently in effect, 1,714 employees of
the Company were participating in the Plan. The Plan is intended to qualify as
an "employee stock purchase plan" as defined in Section 423 of the Internal
Revenue Code of 1986, as amended (the "Code").
The Plan currently covers an aggregate of 675,000 shares of Common Stock,
subject to appropriate adjustment in the case of any stock dividend, stock
split, combination of shares, exchange of shares, merger, reorganization,
consolidation, or other similar corporate transaction affecting the Common
Stock. Through September 30, 1997, 462,789 shares have been issued pursuant to
the terms of the Plan. This proposal would
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<PAGE> 23
amend the Plan to increase the number of aggregate shares from 675,000 to
1,175,000, or a 500,000 share increase.
GENERAL
Shares issued pursuant to the terms of the Plan may be authorized but
unissued shares, reacquired shares or shares bought on the market. Such shares
may be acquired by Plan Participants at any time on the last day of the
applicable Purchase Period, subject to availability of such shares.
The Plan is administered by the Compensation Committee of the Board of
Directors. No member of the Board of Directors will be eligible to participate
in the Plan during his or her period of Compensation Committee service. The
Compensation Committee determines the commencement and termination date of the
offering of Common Stock under the Plan and is authorized, among other things,
to interpret the terms of the Plan, establish and revoke rules for the
administration of the Plan and correct or reconcile any defect or inconsistency
in the Plan.
The Compensation Committee may delegate all or part of its authority to
administer the Plan to the Plan Administrator, who may in turn delegate the
day-to-day operations of the Plan to a brokerage firm. Such brokerage firm will
establish and maintain, as agent for the Participants, accounts for the purpose
of holding shares of Common Stock and/or cash contributions as may be necessary
or desirable for the administration of the Plan.
All employees of the Company, and its majority-owned subsidiaries,
including officers and directors who are full-time employees, who are at least
eighteen years old are eligible to participate in the Plan, except that no
employee may participate in the Plan (i) if, following a grant of purchase
rights under the Plan, the employee would own, directly or by attribution,
stock, purchase rights or other stock options to purchase stock representing 5%
or more of the total combined voting power or value of all classes of the
Company's stock, or (ii) to the extent a grant of purchase rights under the Plan
would permit the employee's rights to purchase stock under all the Company's
Code Section 423 employee stock purchase plans to accrue at a rate exceeding
$25,000.00, based on the fair market value of the stock (at the time of grant),
for each calendar year in which such purchase right is outstanding.
In each year that the Plan is in effect, there will be four three-month
Purchase Periods each calendar year, beginning January 1, April 1, July 1 and
October 1. After initial enrollment in the Plan, the Participant will be
automatically re-enrolled in the Plan for subsequent Purchase Periods unless he
or she files a notice of withdrawal 15 days prior to the end of the current
Purchase Period, terminates employment or otherwise becomes ineligible to
participate in the Plan.
When enrolling in the Plan, the employee must elect either (i) a fixed
payroll deduction or (i) a percentage rate at which he or she will make payroll
contributions for the purchase of Common Stock pursuant to the Plan, ranging
from 1% to 25% of their regular gross salary for the applicable payroll period,
with a minimum deduction of $10.00 per pay period and a maximum aggregate
deduction of $25,000.00 per year. The contribution rate elected by a Participant
will continue in effect until modified by the Participant, except that a
Participant may not increase a previously elected contribution rate during a
given Purchase Period. Eligible employees may participate in the Plan and
purchase shares only by means of payroll deductions, except for employees on
approved leaves of absence.
On the first day of each Purchase Period, a Participant is deemed to have
been granted a purchase right to purchase on the last day of the Purchase Period
as many full shares of Common Stock as such Participant will be able to purchase
with the payroll deductions credited to such Participant's account during such
period. A Participant, however, may not purchase more than 1,000 shares of
Common Stock for any particular Purchase Period.
The amounts deducted will be credited to the Participant's account under
the Plan, but no actual separate account will be established by the Company to
hold such amounts. There will be no interest paid on the balance outstanding in
a Participant's account.
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<PAGE> 24
A Participant may withdraw from the Plan, by providing written notice to
the Plan Administrator at any time prior to 15 days before the end of the
current Purchase Period. The Participant may elect to immediately terminate his
or her outstanding purchase rights, and such withdrawal will become effective by
the tenth day following the Plan Administrator's receipt of the Participant's
notice of withdrawal, at which time all outstanding purchase rights will be
terminated and all accumulated payroll deductions will be refunded without
penalty. Alternatively, the Participant may elect to continue his or her
participation in the Plan through the end of the current Purchase Period, and
thus exercise such Participant's outstanding purchase rights at the end of the
current Purchase Period, but terminate his or her participation in the Plan for
subsequent Purchase Periods. Payroll deductions for such a Participant will
continue until the end of the current Purchase Period. After the end of the
current Purchase Period, no further purchase rights will be granted to the
Participant, and no further payroll deductions will be made.
A Participant will not be eligible to rejoin the Plan for the Purchase
Period underway at the time of withdrawal, and will have to re-enroll in the
Plan should such individual wish to resume participation in a subsequent
Purchase Period; provided, however, that such Participant may not re-enroll in
the Plan earlier than 90 days after the effective date of such withdrawal.
If a Participant ceases to be an employee of the Company for any reason
during a Purchase Period, his or her outstanding purchase right will immediately
terminate, and all sums previously collected from such Participant during such
Purchase Period under the terminated purchase right will be refunded.
Neither payroll deductions credited to a Participant's account nor any
purchase rights or other rights to acquire Common Stock under the Plan may be
assigned, transferred, pledged or otherwise disposed of by Participants other
than by will or the laws of descent and distribution and, during the lifetime of
a Participant, purchase rights may be exercised only by the Participant.
Any brokerage fees and commissions for the purchase of Common Stock under
the Plan (including shares of Common Stock purchased upon reinvestment of
dividends and distributions) will be paid by the Company, but any brokerage fees
and commission for the sale of shares of Common Stock acquired under the Plan by
a Participant will be borne by such Participant.
The Compensation Committee may terminate or amend the Plan at any time;
provided, however, such termination or amendment may not affect or change
purchase rights previously granted under the Plan without the consent of the
affected Participant, and any amendment that materially increases the benefits
or number of shares under the Plan (except for certain allowable adjustments in
the event of changes to the Company's capital structure or for changes
authorized by the Plan to be made by the Compensation Committee or the Plan
Administrator) or materially modifies the eligibility requirements of the Plan
is subject to shareholder approval. If not sooner terminated by the Compensation
Committee, the Plan will terminate at the time purchase rights have been
exercised with respect to all shares of Common Stock reserved for grant under
the Plan.
On October 10, 1997, the last reported sale price of the Common Stock on
the NASDAQ National Market System was $24.625 per share.
FEDERAL TAX CONSEQUENCES
The Plan is intended to be an "employee stock purchase plan" as defined in
Section 423 of the Code. This Section provides that a Participant in the Plan
need not pay any federal income tax upon joining the Plan or upon receipt of
shares of Common Stock under the Plan. At the time the Participant sells shares,
however, he or she is required to pay federal income tax on the difference, if
any, between the price at which the Participant sells the shares and the price
the Participant paid for them, determined as follows. If the shares are sold by
the Participant more than twenty-four (24) months after the grant of the
purchase right and the market price of the shares on the date they are sold is
equal to or less than the price paid for the shares under the Plan, no taxable
income results. If the shares are sold more than 24 months after the grant of
the purchase rights and if the market price of the shares on the date that they
are sold is higher than the price paid under the Plan, the Participant must pay
federal income tax at ordinary income rates calculated on the lesser amount
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<PAGE> 25
of (i) the excess of the market price of the shares on the date the purchase
right is granted over the exercise price or (ii) the excess of the amount
actually received for the shares over the price paid for them. If the
Participant sells the shares within such 24-month period, the Participant must
pay federal income tax at ordinary income rates on the amount of the difference
between the actual purchase price and the market price of the shares on the date
of purchase (i.e., the Exercise Date). Any gain realized, in addition to that on
which taxes at ordinary income rates is paid, will be taxed at capital gain
rates.
Only if the Participant sells the stock within twenty-four (24) months
following the grant of a purchase right will the Company be entitled to a
deduction for federal income tax purposes and, in such event, the deduction will
equal the difference between the actual purchase price and the fair market value
of the shares on the date of purchase (i.e., the Exercise Date). Availability of
such deduction will be subject to the Company satisfying any applicable
withholding requirements. In the case of a Participant who is one of the five
most highly compensated employees of the Company, however, no deduction will be
available to the Company to the extent the ordinary compensation income
recognized by the Participant during a year on account of a sale of shares
acquired under the Plan, plus the other ordinary compensation recognized by the
Participant during the year, exceeds $1 million.
Contributions deducted from Participants' paychecks and applied to the
purchase of shares under the Plan will be taxable to the Participants, and no
offsetting deduction will be available to them.
The Plan is not intended to be a qualified pension, profit sharing, or
stock bonus plan under Section 401(a) of the Internal Revenue Code of 1986, as
amended, and accordingly is not subject to any provisions of the Employee
Retirement Income Security Act of 1974.
The Board of Directors recommends a vote FOR this proposal.
COMPLIANCE WITH SECTION 16(A) OF THE
SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
the Company's directors and executive officers, and persons who own more than
10% of the Common Stock, to file with the Securities and Exchange Commission and
the National Association of Securities Dealers initial reports of ownership and
reports of changes in ownership of stock of the Company.
To the Company's knowledge, based solely on a review of copies of reports
provided by such individuals to the Company and written representations of such
individuals that no other reports were required, during the fiscal year ended
July 31, 1997, all Section 16(a) filing requirements applicable to its
directors, officers and greater than 10% beneficial owners were complied with;
except that one report, covering one transaction made by Mrs. Marcia Applebaum,
spouse of Eugene Applebaum, was filed late by Eugene Applebaum.
PROPOSALS BY SHAREHOLDERS
Any proposal of a Shareholder intended to be presented at the Annual
Meeting of Shareholders to be held in 1998,must be received by the Company by
July 2, 1998, to be eligible for inclusion in the Proxy Statement for the
Meeting. Proposals must comply with Rule 14a-8 promulgated by the Securities and
Exchange Commission pursuant to the Exchange Act.
By Order of the Board of Directors,
Gilbert C. Gerhard, Secretary
Troy, Michigan
October 30, 1997
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<PAGE> 26
<TABLE>
<S><C>
[X] PLEASE MARK VOTES
AS IN THIS EXAMPLE With- For All
For hold Except For Against Abstain
1. Election of Directors / / / / / / 2. Approval of the amendment to / / / / / /
the Restated Articles of
EUGENE APPLEBAUM MARKUS M. ERNST Incorporation to increase
GILBERT C. GERHARD DAVID B. HERMELIN authorized shares from
SPENCER M. PARTRICH LAURIE M. SHAHON 40,000,000 to 100,000,000.
SAMUEL VALENTI III
3. Approval of the amendment to / / / / / /
the 1996 Stock Option Plan to
increase by 3,000,000 shares
If you do not wish your shares voted "FOR" a particular nominee, the number of shares issuable
mark the "For All Except" box and strike a line through the upon exercise of options
nominee(s) name. Your shares will be voted for the remaining available for grant and to
nominee(s). increase by 1,500,000 the
number of shares of the
Company's Common Stock
issuable upon exercise of
options granted to an
individual optionee.
4. Approval of the amendment to / / / / / /
the Employee Stock Purchase Plan
RECORD DATE SHARES: to increase by 500,000 shares
the number of shares available
for purchase.
5. In their discretion with respect
to any other matters that may
properly come before the meeting.
Mark box at right if comments or / /
address change have been noted
on the reverse side of this card.
The undersigned hereby acknowledges
receipt of the Annual Report of Arbor
Drugs, Inc. for the fiscal year ended
July 31, 1997 and the Proxy Statement
dated October 30, 1997 enclosed herewith.
-----------------
Please be sure to sign and date this Proxy. | Date |
----------------------------------------------------------------|
| |
| |
----Shareholder sign here------------------Co-owner sign here---
- ------------------------------------------------------------------------------------------------------------------------------------
DETACH CARD
</TABLE>
<PAGE> 27
ARBOR DRUGS, INC.
The undersigned hereby appoints Eugene Applebaum and Markus M. Ernst, and
each of them, the proxies of the undersigned, with full power of
substitution, to vote all shares of $.01 par value Common Stock of Arbor
Drugs, Inc. (the "Company") which the undersigned is entitled to vote at the
Annual Meeting of Shareholders of the Company to be held at the Troy
Marriott, 200 W. Big Beaver Road, Troy, Michigan on December 2, 1997, and at
any and all adjournments thereof.
The shares represented by this proxy will be voted in accordance with the
specifications made herein. If no specifications are made, this proxy will be
voted for the election of directors.
Comments/Address Change:_____________________________________________________
_____________________________________________________________________________
_____________________________________________________________________________
_____________________________________________________________________________
_____________________________________________________________________________
