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UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549
 FORM 10-K
 (Mark One)þ
    
    ANNUAL REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended January 1, 2005
 OR o
    
    TRANSITION REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the transition period from  to
 Commission file number 0-9904 ARDEN GROUP, INC.  Delaware
    
    95-3163136(State or other jurisdiction of
    
    (I.R.S. Employer Identification No.)incorporation or organization)2020 South Central Avenue,
Compton,
California
    

90220(Address of principal executive offices)
    
    (Zip Code)
 Registrants telephone number, including area code (310) 638-2842 Securities registered pursuant to Section 12(b) of the Act: Title of each
class
    
    Name of each exchange on which registeredNone
    
    None
 Securities registered pursuant to Section 12(g) of the Act: Class A Common Stock   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. Yes þ No o Indicate by a 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. þ Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of
the Securities Exchange Act of 1934). Yes þ No o The aggregate market value of the voting and non-voting common equity held by non-affiliates of the
registrant based on the price at which the Class A Common Stock last sold on July 3, 2004, the last
business day of the registrants most recently completed second fiscal quarter was $105,826,661. The number of shares outstanding of the registrants classes of common stock as of March 8, 2005
was: 3,383,252 of Class A Common Stock




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TABLE OF CONTENTS PagePART I1
    
    
    
    
    Item 1. Business4
    
    
    
    
    Item 2. Properties5
    
    
    
    
    Item 3. Legal Proceedings5
    
    
    
    
    Item 4. Submission of Matters to a Vote of Security HoldersPART II6
    
    
    
    
    Item 5. Market for the Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities7
    
    
    
    
    Item 6. Selected Financial Data9
    
    
    
    
    Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations22
    
    
    
    
    Item 7A. Quantitative and Qualitative Disclosures about Market Risks22
    
    
    
    
    Item 8. Financial Statements and Supplementary Data22
    
    
    
    
    Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure23
    
    
    
    
    Item 9A. Controls and Procedures24
    
    
    
    
    Item 9B. Other InformationPART III25
    
    
    
    
    Item 10. Directors and Executive Officers of the Registrant28
    
    
    
    
    Item 11. Executive Compensation31
    
    
    
    
    Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters33
    
    
    
    
    Item 13. Certain Relationships and Related TransactionsPART IV34
    
    
    
    
    Item 14. Principal Accountant Fees and Services35
    
    
    
    
    Item 15. Exhibits and Financial Statement Schedules36
    
    
    SignaturesEXHIBIT 10.11EXHIBIT 23.1EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2




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PART I 
 Item 1.       Business General The Registrant, Arden Group, Inc. (Company), is a holding company with certain real estate holdings
which conducts other operations through its wholly-owned subsidiary, Arden-Mayfair, Inc.
(Arden-Mayfair). Arden-Mayfairs wholly-owned subsidiary, Gelsons Markets (Gelsons), operates
supermarkets in Southern California. Arden Group, Inc. is headquartered at 2020 South Central Avenue, Compton, California 90220 and its
telephone number is (310) 638-2842. Market Operations As of January 1, 2005, Gelsons operated 18 full-service supermarkets in Southern California, which carry both perishable and grocery products, 17
under the name Gelsons and one under the name Mayfair. Gelsons and Mayfair are self-service
cash-and-carry markets which offer a broad selection of local and national brands as well as a
limited number of private label items. Gelsons targets the consumer who values superior customer
service, merchandise presentation, selection and quality products. Store Formats and Business Strategy Gelsons business strategy is to offer a comfortable upscale shopping experience which is superior
to its competitors in terms of customer service and merchandise selection and presentation. The
goal of this strategy is to continue to develop and maintain Gelsons loyal base of customers and
appeal to potential new customers. Central elements of this strategy are as follows: Merchandise The merchandise offerings in the markets are tailored in response to Gelsons
customer profile. Gelsons stores, which range in size from approximately 18,000 to 40,000 square
feet, typically carry a wide range of items, including traditional grocery categories such as dry
groceries, produce, meat, seafood, bakery, dairy, wine and liquor, floral, sushi, vitamins, health
and natural food products, health and beauty aids and a selection of organic products. Gelsons
perishables are premium products, which are rigorously maintained and culled as appropriate to
assure quality and freshness. Gelsons merchandising emphasizes specialty items such as imported
foods and unusual delicatessen items, and items found in service departments such as seafood,
sit-down coffee areas, bakeries and service deli. The Mayfair store offers a merchandise selection
equal in quality to a Gelsons but generally less broad. Service Gelsons emphasizes customer service by offering a variety of service departments
including seafood, delicatessen, floral, sushi and bakery departments. All sushi and most bakery
departments are operated by third parties. Some Gelsons stores include additional service
departments such as meat, fresh pizza, coffee bars and carving carts offering cooked turkey and
other meats. Additionally, selected stores offer banking and pharmacy services through third
parties. Stores are staffed so that, even at peak times, customer checkout time is minimized. In 1




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addition to checkers, there are personnel assigned to bagging and carrying out purchases. All
employees are encouraged to know customers by name and assist them whenever possible. All stores
offer a Company credit card to qualified customers in addition to the option of paying for their
purchases with cash, checks or credit and debit cards. Stores are typically open 14 to 17 hours
per day, with hours of operation determined by local code or lease provisions, or as appropriate
for the business characteristics of each community. Presentation All stores are maintained in accordance with extremely high standards.
Personnel continually fill and face shelves with product. Produce and other perishables are
trimmed and culled to maintain quality and appearance. Pricing The pricing strategy at the stores is to be competitive within their market
niches, ranging from the more traditional to the more exotic, specialty or high-end retailers. Expansion and Store Development Management regularly evaluates the feasibility of opening
new stores in and outside its existing trade area and remodeling existing stores in order to
maximize the existing stores appeal to consumers and their profit potential. In 2004, capital
expenditures totaled $12,641,000, which included costs related to the remodeling of the Marina del
Rey and Santa Barbara locations, as well as the acquisition of point-of-sale equipment. Advertising and Promotion Gelsons advertises in newspapers on a limited basis. Direct
advertising is very limited (primarily newsletters and direct mail) and is typically event rather
than price oriented, emphasizing, for example, special holiday selections, specialty items and
services, recipes and new products. The Company reevaluates its strategy regularly in an effort to
identify the most effective means of attracting and retaining customers. Competition The retail grocery business is very competitive. Competition in the supermarket business is based
upon price, merchandise variety and quality, service and location. The number of stores, market
share and brand awareness are also important competitive factors. Gelsons is in direct
competition with numerous local outlets of regional and national supermarket chains (most of which
have greater resources and a larger market share than Gelsons), independent grocery stores,
convenience stores, specialty and gourmet markets and food departments in mass merchandise and club
stores. Competition also exists from other types of retailers with respect to particular products.
Gelsons operates full-service supermarkets carrying both perishable and grocery products and competes primarily by offering a combination of
high-quality products and superior customer service. The Company also believes that Gelsons prime
store locations and long-standing reputation add to its competitive strength. Certain competitors of the Company offer home delivery, on-line ordering, in-store banks and
pharmacies as an addition to their existing retail store operations. The Company continues to
monitor and evaluate opportunities for home delivery and internet sales, but has elected not to do
so at this time. A few of the Companys stores offer in-store banks and pharmacies; most of the
Companys stores are not large enough for such additional facilities. 2




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Seasonality Gelsons business is somewhat seasonal with sales tending to increase during the last quarter of
the year due to the holiday season. Support and Other Services Each store has an on-site stockroom, the size of which varies for each store. In addition, Gelsons
operates a 127,000 square foot warehouse and an adjacent 4,000 square foot truck service facility
in the City of Commerce, California. The central warehouse distributes fresh produce, liquor,
wine, floral and certain grocery items to the stores. On a limited basis, the stores also receive
meat, delicatessen, paper goods, health and beauty aids, hardware and supply items from the
warehouse. The bulk of all merchandise purchasing takes place at Gelsons office in Encino, California.
Approximately 44% of the purchases for 2004 were distributed through the central warehouse; the
remainder was delivered directly to the stores from manufacturers, distributors or wholesalers.
The central purchasing and distribution operations are conducted based on electronic in-store
ordering systems. Stores can place and receive orders up to six days per week. Perishables are
ordered more frequently than other goods. The largest supplier for the stores is Unified Western Grocers, Inc. (Unified) (formerly Certified
Grocers), a cooperative wholesaler which has been a supplier to the Company for approximately
thirty years and which accounted for approximately 20% of Gelsons purchases in fiscal 2004. No
other supplier accounts for more than 3% of Gelsons purchases. The Company believes that there
would be a negative short-term impact if the Company were to lose Unified as a supplier for
Gelsons, but that such impact would likely be mitigated by a combination of events, which could
include: (i) purchasing certain items for direct store delivery, thereby freeing warehouse
capacity to allow other items to be purchased through the warehouse and (ii) purchasing certain
products through other wholesalers. However, such a loss could have an adverse effect on the
performance of Gelsons. Employees Gelsons had approximately 1,302 full-time and 1,216 part-time store, warehouse and office
employees at January 1, 2005. The total number of employees decreased from 2,887 at the end of the
prior year as sales decreased following the end of a labor dispute involving other supermarkets in
the Companys trade area. Most Gelsons employees are covered by union collective bargaining
agreements that establish working conditions, benefits, hours, rates of pay and procedures for the
orderly settlement of disputes. In general, these agreements have been negotiated on an area-wide
and industry-wide basis. On October 5, 2003, the union contract covering most of the Companys Gelsons employees expired.
Prior to the contract expiration, the Company had agreed with the union to continue operating under
contract extensions and to be bound by all modifications or by new contract, as applicable,
regarding trust funds and hourly wage rates as negotiated between the union and three major grocery
retailers. On February 29, 2004, employees of the three major retailers ratified a new union labor
contract. The new contract provides for, among other things, a new two-tier 3




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employment structure,
elimination of health care maintenance of benefits provided for under the prior agreement and bonus
payments in lieu of wage increases. In a vote held on March 24-25, 2004, employees of the Company
who are members of the United Food and Commercial Workers (UFCW) ratified a new labor contract on
terms similar to those reached by the three major grocery retailers. The new labor contract
expires in March 2007. In addition to employees at Gelsons, Arden-Mayfair had approximately 69 full-time and 2 part-time
employees at its executive and headquarters offices at January 1, 2005, some of whom are covered by
a collective bargaining agreement. Governmental Regulation Gelsons is subject to regulation by a variety of governmental agencies, including the U.S. Food
and Drug Administration, the California Department of Alcoholic Beverage Control, and state and
local health departments. The Company believes that Gelsons and Mayfair store operations comply
with federal, state and local health, environmental and other laws and regulations. Although the
Company cannot predict the effect of future laws or regulations on its operations, expenditures for
continued compliance with current laws are not expected to have a material adverse effect on
Gelsons competitive position or the Companys consolidated financial position, results of
operations or cash flows. 
 Item 2.       Properties The Company currently owns two of its freestanding supermarket properties and a shopping center in
which a Gelsons Market is located. The shopping center owned by the Company, located in
Calabasas, California, consists of approximately 58,000 leasable square feet, approximately 18,000
square feet of which is leased to multiple tenants and approximately 40,000 square feet of which is
leased to Gelsons. Fifteen supermarkets and the warehouse and distribution facilities which
service the markets are leased from third parties. Gelsons corporate offices in Encino,
California are also leased. Typically, supermarkets have initial 20-year lease terms and may
include options for up to an additional 20 years. These leases often require the payment of
percentage rent on sales in excess of certain levels in addition to minimum rent. The average term
remaining on the supermarket leases, including renewal options, is approximately 19 years. The 18
markets range in size from approximately 18,000 to 40,000 square feet. Gelsons warehouse,
distribution and truck service facilities in the City of Commerce, California are leased and
contain approximately 131,000 square feet. The term of the lease, including renewal options,
expires in January 2021. The Company has exercised its right to terminate the lease for its
Pasadena store in the Spring of 2005, but has had discussions with the landlord concerning the
possibility of renewing the lease on different terms. The Company owns its 30,000 square foot corporate headquarters office building in Compton,
California. The Company also owns or leases several parcels adjacent to, or near, four of its
stores which are used for additional parking. In addition, AMG Holdings, Inc. (AMG Holdings), a
wholly-owned subsidiary of Arden-Mayfair, leases a 64,000 square foot building in Los Angeles
consisting of office and warehouse space, which is entirely subleased until the lease on the
property expires in 2012. 4




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Item 3.       Legal Proceedings The Company and certain of its subsidiaries are involved in a number of pending legal and/or
administrative proceedings. Such proceedings are not expected individually or in the aggregate to
have a material adverse impact upon either the Companys consolidated financial position, results
of operations or cash flows. See the discussion of Commitments and Contingent Liabilities in the
Notes to Consolidated Financial Statements. 
 Item 4.      Submission of Matters to a Vote of Security Holders There was no matter submitted during the fourth quarter of fiscal year 2004 to a vote of the
security holders of the Registrant. 5




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PART II 
 Item 5.       Market for the Registrants Common Equity, Related Stockholder Matters and
Issuer Purchases of Equity Securities  (a)
    The Companys Class A Common Stock (Class A) is traded over-the-counter in the NASDAQ
National Market System. During the past two years, the range of high and low sales prices
(not including markups, markdowns or commissions) for each quarterly period was, according to
NASDAQ, the following: 2004
    
    
    2003High
    
    
    Low
    
    
    High
    
    
    Low1st Quarter
    
    
    79.80
    
    
    
    70.20
    
    
    
    61.86
    
    
    
    50.952nd Quarter
    
    
    90.00
    
    
    
    71.01
    
    
    
    62.00
    
    
    
    53.223rd Quarter
    
    
    90.45
    
    
    
    76.07
    
    
    
    64.75
    
    
    
    57.154th Quarter
    
    
    114.86
    
    
    
    77.67
    
    
    
    80.98
    
    
    
    61.25
 There was no established public trading market for the Companys Class B Common Stock (Class
B), which was subject to various restrictions on transfer. On November 10, 2004, Bernard
Briskin, Chairman of the Board and Chief Executive Officer of the Company, elected to
convert Class B shares beneficially owned by him, including shares beneficially owned with
his wife, into Class A shares. The conversion of these shares triggered the automatic and
simultaneous conversion of all remaining Class B shares as provided under the Companys
Restated Certificate of Incorporation. As a result of the conversion, the Company has only
Class A outstanding and all shareholders participate equally in the undistributed earnings
of the Company.  (b)
    As of January 1, 2005, there were 1,059 holders of record of the Companys Class A, with
aggregate holdings of 3,383,252 shares of Class A. This does not include 1,357,200 shares of
the Companys Class A owned by AMG Holdings, a wholly-owned second-tier subsidiary of the
Company.(c)
    In August 2003, the Company established a regular quarterly dividend of 25 cents per share of
Class A and 22.5 cents per share of Class B. No dividends were paid on either Class A or
Class B during any period presented prior to August 2003. Cash or property dividends on Class
B were restricted to an amount equal to 90% of any dividend paid on Class A. For the fourth
quarter ended January 1, 2005, the regular quarterly dividend was paid only to Class A, as all
Class B had been converted as discussed above. The Company anticipates payment of comparable
Class A quarterly dividends in future quarters. On October 25, 2004, the Board of Directors of the Company declared a special dividend in
the amount of $20 per share on its outstanding Class A and $18 per share on its outstanding
Class B payable on December 16, 2004 to shareholders of record on November 15, 2004. As a
result of the conversion by Mr. Briskin and his spouse of Class B to Class A and the
resulting automatic and simultaneous conversion of all remaining Class B, the dividend was
paid to Class A only. The aggregate amount of the special dividend was approximately
$67,665,000. 6




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Item 6.      Selected Financial Data ARDEN GROUP, INC. AND CONSOLIDATED SUBSIDIARIES (In Thousands, Except Share and Per Share Data)2004
    
    
    2003
    
    
    2002
    
    
    2001
    
    
    2000Operations For The Year:Sales (1)
    
    $
    502,898
    
    
    $
    486,378
    
    
    $
    398,231
    
    
    $
    388,505
    
    
    $
    356,873Gross profit (1)
    
    
    225,413
    
    
    
    215,720
    
    
    
    176,725
    
    
    
    167,636
    
    
    
    151,084Operating income (2)
    
    
    34,579
    
    
    
    25,458
    
    
    
    21,644
    
    
    
    19,377
    
    
    
    19,205Other income (expense), net
    
    
    3,591
    
    
    
    2,446
    
    
    
    1,644
    
    
    
    1,926
    
    
    
    1,019Income tax provision
    
    
    15,498
    
    
    
    11,323
    
    
    
    9,356
    
    
    
    8,432
    
    
    
    8,240Net income
    
    $
    22,672
    
    
    $
    16,581
    
    
    $
    13,932
    
    
    $
    12,871
    
    
    $
    11,984Net income per common share(4):Basic  Class A
    
    $
    7.00
    
    
    $
    5.11
    
    
    $
    4.33
    
    
    $
    3.96
    
    
    $
    3.55Basic  Class B
    
    
    6.13
    
    
    
    4.60
    
    
    
    3.90
    
    
    
    3.56
    
    
    
    3.19Diluted
    
    
    6.70
    
    
    
    4.90
    
    
    
    4.14
    
    
    
    3.79
    
    
    
    3.41Financial Position At Year-End:Total assets
    
    $
    122,135
    
    
    $
    186,972
    
    
    $
    138,971
    
    
    $
    122,834
    
    
    $
    118,279Working capital
    
    
    23,883
    
    
    
    75,185
    
    
    
    48,892
    
    
    
    27,975
    
    
    
    27,504Long-term debt
    
    
    1,764
    
    
    
    2,038
    
    
    
    2,283
    
    
    
    3,134
    
    
    
    6,735Stockholders equity
    
    
    66,576
    
    
    
    115,000
    
    
    
    99,027
    
    
    
    83,389
    
    
    
    75,953Capital expenditures
    
    
    12,641
    
    
    
    5,752
    
    
    
    4,023
    
    
    
    10,066
    
    
    
    9,882Other Operating and Financial Data:Number of stores at end of fiscal year
    
    
    18
    
    
    
    18
    
    
    
    18
    
    
    
    18
    
    
    
    16Sales increases (3):Total stores
    
    
    3.4
    %
    
    
    22.3
    %
    
    
    2.5
    %
    
    
    8.9
    %
    
    
    11.1
    %Same stores
    
    
    3.4
    %
    
    
    22.3
    %
    
    
    0.8
    %
    
    
    2.2
    %
    
    
    2.8
    %Depreciation and amortization
    
    $
    6,990
    
    
    $
    8,126
    
    
    $
    8,139
    
    
    $
    7,872
    
    
    $
    6,719Dividends declared per common share:Class A
    
    $
    1.00
    
    
    $
    .50Class B
    
    $
    .675
    
    $
    .45Special dividend declared per Class ACommon Stock share
    
    $
    20.00Weighted
average common shares outstanding (4):Basic  Class A
    
    
    2,217,675
    
    
    
    2,015,859
    
    
    
    1,991,230
    
    
    
    2,022,320
    
    
    
    2,144,044Basic  Class B
    
    
    1,164,977
    
    
    
    1,363,584
    
    
    
    1,363,790
    
    
    
    1,366,914
    
    
    
    1,368,984Diluted
    
    
    3,382,652
    
    
    
    3,380,524
    
    
    
    3,365,961
    
    
    
    3,398,671
    
    
    
    3,515,117
  All years are
52 weeks except 2003 which is 53 weeks.
 7




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(1)
    Sales and gross profit amounts for prior years have been adjusted to reflect the change
in classification of net rental, license and other income as discussed in Item 7.
 Managements Discussion and Analysis of Financial Condition and Results of Operations.(2)
    Fiscal 2003 operating income includes a $4,311 charge for impairment on long-lived assets
related to leasehold improvements and equipment at the Pasadena store. See Item 7.
 Managements Discussion and Analysis of Financial Condition and Results of Operations for
additional information.(3)
    Same store sales increases are calculated by comparing year-over-year sales for stores that
were open in both years. If a store was not open for the entire year in both years being
compared, then the store is not included in the same store analysis. No stores were closed
during any of the periods presented. Fiscal 2003 was a 53-week year. No adjustment was made
to remove the additional week for comparison purposes. Store sales used to calculate sales
increases, above, do not include revenue from leases, subleases, licensing arrangements and
finance charges, and therefore, will not agree to total year-over-year sales increases as
disclosed in Item 7.  Managements Discussion and Analysis of Financial Condition and Results
of Operations.(4)
    Effective in the second quarter of 2004, the Company adopted Emerging Issues Task Force
(EITF) No. 03-6, Participating Securities and the Two-Class method under Financial Accounting
Standards Board Statement No. 128 which requires the use of the Two-Class method to calculate
basic net income per share when a company has convertible participating securities. The
presentation of prior years basic net income per share has been restated to reflect the
current year presentation in accordance with the requirements of EITF No. 03-6. See Notes to
Consolidated Financial Statements for additional information. 8




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Item 7.      Managements Discussion and Analysis of Financial Condition and Results of
Operations The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking
statements made by or on behalf of the Company. Certain statements contained in Managements
Discussion and Analysis (MD&A), in other parts of this report and in other Company filings are
forward-looking statements. These statements discuss, among other things, future sales growth,
operating results and financial condition. Forward-looking statements reflect the Companys
current plans and expectations regarding important risk factors and are based on information
currently available to us. The Company cautions readers that any forward-looking statements contained in this report or made
by the management of the Company involve risks and uncertainties, and are subject to change based
on various important factors. The Company does not undertake any obligation to update
forward-looking statements. The factors listed below, among others, could affect the Companys
financial results and could cause the Companys financial performance to differ materially from the
expectations expressed in any forward-looking statement made by or on behalf of the Company:  
    the strength of the U.S. economy and, in particular, the economic conditions in Southern
California;
    the effects of and changes in fiscal policies and laws, as well as, changes in
accounting policies and practices;
    inflation or deflation;
    potential business disruptions from acts of terrorism, national emergencies or natural disasters;
    the impact of fluctuations in the Companys stock price on compensation expense;
    the ability of vendors, including Unified Western Grocers, Inc., to continue providing
products and services in a timely manner;
    consolidations in the supermarket industry and competition from other supermarkets and
food retailers, some of which are non-union;
    the ability to renew current leases and at favorable rates;
    the ability to locate and obtain suitable locations for growth;
    whether the lease for the Pasadena store is terminated or renewed on different terms;
    the impact on the Century City store of major construction on Santa Monica Boulevard in
West Los Angeles, California and at the Century City Shopping Center;
    the amount of future premium increases incurred by the Company in order to maintain
current levels of insurance coverage;
    the financial impact of the Companys termination of its guaranteed cost workers
compensation policy and the resulting change to self-insurance with stop-loss coverage for
workers compensation claims;
    the impact of the Companys workers compensation safety records and claims experience
and any changes to the insurance industrys rating process and premium schedules on
workers compensation stop-loss coverage;
    the impact of new workers compensation legislation;
    the adequacy of self-insurance reserves for reported claims and incurred but not
reported claims; 9




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
    the impact of uninsured losses;
    the impact of new labor contracts;
    the impact of any violation of environmental laws, regulations or lease provisions;
    the outcome of current and future legal proceedings;
    the retirement of existing senior management;
    the impact of information systems upgrades on operations or financial reporting;
    changes in the Companys health care costs;
    any changes in assumptions or market conditions that could affect managements estimate
of future cash flows when evaluating assets for impairment. Results of Operations The results of operations for fiscal 2003 and 2004 reflect the pervasive impact of a labor dispute
in the Companys trade area that commenced October 11, 2003 and concluded February 29, 2004. The
collective bargaining agreement covering the majority of the Companys employees, as well as other
participating employers in Southern California, expired on October 5, 2003. On October 11, 2003,
the UFCW declared a strike against Vons and in turn, Albertsons and Ralphs locked out their UFCW
employees. On February 29, 2004, the UFCW announced that employees of these three major grocery
retailers ratified a new contract thereby ending the labor dispute. Prior to the labor dispute,
the Company had agreed with the UFCW to continue operating under a contract extension and to be
bound by all modifications regarding trust funds and hourly wage rates as negotiated between the
UFCW and the three major grocery retailers. In return, the UFCW agreed not to strike the Company
and Gelsons remained open. In a vote held on March 24-25, 2004, employees of the Company who are
members of the UFCW, ratified a new labor contract on terms similar to those reached by the three
major grocery retailers. The new labor contract expires in March 2007. The labor dispute resulted in a temporary shift in consumer shopping patterns and a significant
increase in the Companys sales and operating income during the fourth quarter of 2003 and the
first quarter of 2004. Since the labor dispute, customers have returned to their previous shopping
patterns. However, the Company has successfully retained some of the incremental sales from new
shoppers that experienced the Gelsons format and service during the labor dispute. During the third quarter of 2004, the Company revised the way it classifies income from licensed
operations within its supermarkets, subleases, leases and finance charges. The net rental, license
and other income is now recorded as a component of sales on the Consolidated Statements of
Operations and Comprehensive Income. Previously, the revenue for these items had been classified
as a reduction of delivery, selling, general and administrative (DSG&A) expense. Additionally,
sales and cost of sales for one licensed department in the Companys stores were recorded on the
gross basis rather than reporting the net licensed revenue received. Income from all licensing
arrangements, rental income and finance charges represents less than 1% of sales for all periods
presented, and therefore is not disclosed separately on the Consolidated Statements of Operations
and Comprehensive Income. The Company has revised these amounts as previously reported for each of
the periods presented. None of the classification changes has an impact on operating income, net
income, net cash flow or any element of the Companys Consolidated Balance Sheets. The Company
does not consider the effect of these revisions in classification in 2004 or in prior periods,
individually or in the aggregate, to be material. 10




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2004 Compared to 2003 Net income in 2004 increased 36.7% to $22,672,000 compared to $16,581,000 during 2003. Operating
income increased 35.8% to $34,579,000 in 2004 compared to $25,458,000 in 2003. Sales from the Companys 18 supermarkets (all of which are located in Southern California) were
$502,898,000 in 2004. This represents a comparable store sales increase, as well as an overall
increase of 3.4% over 2003, when sales were $486,378,000. The majority of the sales increase from
2003 to 2004 resulted from the ability to retain some customers from the labor dispute. The
Company does not believe that inflation or changing prices contributed significantly to the sales
increase. Sales were negatively impacted during the second half of 2004 as the Century City store
was closed for three weeks due to construction at the Century City Shopping Center. The store
reopened on October 18, 2004. The Companys gross profit as a percent of sales was 44.8% in 2004 compared to 44.4% in 2003. The
Company includes product costs, net of discounts and allowances, and inbound freight charges in
cost of goods sold, thereby reducing gross profit by these amounts. Purchasing and receiving
costs, inspection costs, internal transfer costs, warehousing costs and other costs of the
Companys distribution network are recorded as DSG&A expense. Gross profit as a percent of sales
for the Company may not be comparable to those of other companies in the grocery industry since
other entities may record purchasing, warehousing and distribution costs in cost of goods sold. DSG&A expense as a percent of sales was 37.9% in 2004 compared to 39.1% in 2003. The higher costs
in 2003 reflect a $5,797,000 charge to pay union health care claims and restore trust fund reserves
to the required levels, as well as a $4,311,000 impairment charge related to the Pasadena store.
The higher 2003 expense was partially offset by higher average union health and welfare and pension
rates per hour in 2004 compared to the prior year, as well as the suspension of UFCW pension plan
contributions for two months during 2003. In addition, the Company incurred fees of approximately
$884,000 in 2004 in connection with Sarbanes-Oxley Section 404 compliance. The new collective bargaining agreement ratified by employees of Vons, Ralphs and Albertsons
eliminated the health care maintenance of benefits obligation included in the prior agreement. The
same agreement was ratified by Gelsons employees. The expired agreement provided that if health
care maintenance of benefits is eliminated in a successor collective bargaining agreement,
employers are required to contribute an amount sufficient to restore the total cash reserves to an
amount equal to the unpaid health care claims liability. The labor dispute resulted in a depletion
of funds in the multi-employer health and welfare trust fund. The Company was assessed $5,797,000
to pay union health care claims and restore trust fund reserves to the required levels. This
$5,797,000 was reflected as a charge to income in 2003 as noted above. The Company contributes to several multi-employer union pension and health care plans. Pension and
health care payments are determined based on straight-time hours worked and the rate per hour as
stipulated in the Companys various collective bargaining agreements. 11




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Contributions to the
multi-employer pension plan covering a majority of the Companys employees have been
periodically suspended and reinstated. The Company recognized union pension expense of $6,064,000
in 2004 compared to $4,787,000 in 2003. The increase in union pension expense was the result of
pension plan contributions being suspended for two months in 2003, a rate increase in the union
contract and an increase in the hours worked on account of the increased sales volume in 2004.
Union health care expense ran $16,977,000 in 2004 compared to $21,019,000 in 2003 which includes
the additional $5,797,000 union assessment discussed above. The Company reviews the carrying values of its property, plant and equipment on a quarterly basis
to determine if any of those assets have become impaired. During the fourth quarter of 2003, the
Company recorded a $4,311,000 impairment on long-lived assets including leasehold improvements and
equipment at its Pasadena store, which opened in September 2001 and is performing below
managements expectations. The Company has exercised its right to terminate its lease in the
Spring of 2005, but has had discussions with the landlord of the Pasadena store concerning the
possibility of renewing the lease on different terms. Termination of the lease by Gelsons may
result in an additional write-off of fixed assets and other costs. As of January 1, 2005, the
remaining net book value of fixed assets related to the Pasadena store was $479,000. In June 2003, in an effort to control substantially increasing workers compensation rates, the
Company terminated its guaranteed cost workers compensation insurance coverage and purchased a
high deductible workers compensation policy. The Company has stop-loss coverage to limit its
exposure on a per claim basis and is insured for covered costs in excess of per claim limits.
Self-insurance accruals for losses up to the purchased stop-loss coverage are based on reported
claims and an estimate of claims incurred but not reported. No assurance can be given that this
change will ultimately result in a reduction in workers compensation expense or limit future
increases. The Company devotes substantial time and commitment to maintaining a safe work
environment. The ultimate cost of workers compensation is highly dependent upon legal and
legislative trends, the inflation rate of health care costs and the Companys ability to manage
claims. In April 2004, California passed legislation aimed at reforming the workers compensation
insurance system in the state. At this point in time, the Company is unable to predict how this
legislation will impact overall costs. The Company is also primarily self-insured for losses related to general and auto liability claims
for up to $250,000 per claim. Accruals are based on reported claims and an estimate of claims
incurred but not reported. While the ultimate amount of claims incurred is dependent on future
developments, in managements opinion, recorded reserves are adequate to cover the future payment
of claims. The Company carries property, business interruption, fiduciary, directors and officers, crime,
earthquake, special event and employee practices liability insurance. Management believes, based
on recent and past experience, that current insurance coverage meets the reasonable requirements of
the Company. Stock-based compensation, under the stock appreciation rights (SARs) program, is subject to
variable accounting in accordance with Financial Accounting Standards Board Interpretation No.
(FIN) 28, Accounting for Stock Appreciation Rights and Other Variable Stock Option or Award
Plans. For the fiscal year ended January 1, 2005, SARs compensation expense was $3,658,000
compared to $740,000 in fiscal 2003. The increase in compensation expense was primarily due to an 12




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increase in the Companys stock price during the fourth quarter and additional vesting of SARs. Assuming the Companys stock price
remains at the December 31, 2004 closing price of $98.80, the Company anticipates
fiscal 2005 SARs compensation expense of approximately $1,675,000 related to the additional vesting
of SARs based on the present method of accruing expense as required by FIN 28. The estimate
assumes that no additional SARs are granted and no existing SARs are terminated or exercised.
Changes in the Companys stock price, exercise or termination of outstanding SARs or additional
grants could cause this estimate to vary. Beginning in the third quarter of 2005, the Company will
be subject to the requirements of Statement of Financial Accounting Standards No. (SFAS) 123R
(revised 2004), Share-Based Payment which may change the amount the Company records for SARs
compensation expense. During 2004, the Company procured approximately 20% of its product through Unified, a grocery
cooperative. As a member-patron, the Company is required to provide Unified with certain minimum
deposits and credit in order to purchase product from the cooperative. As of January 1, 2005, the
Company had approximately $2,321,000 on deposit with Unified. The minimum deposit requirement is
satisfied through a combination of cash, credit and ownership of equity shares in Unified. In
2004, the Company recorded approximately $569,000 in patronage dividend income received in the form
of Unified equity shares as compared to $169,000 in 2003. Interest and dividend income was $1,986,000 in 2004 compared to $1,768,000 for 2003 primarily due
to increased cash levels in 2004. The Company expects that future interest and dividend income
will be substantially lower in fiscal 2005 as a result of the special dividend paid on December 16,
2004 which reduced funds available for investment. Other income includes gains realized on investments of $1,787,000 and $950,000 in 2004 and 2003,
respectively. SFAS 115, Accounting for Certain Investments in Debt and Equity Securities, requires that
unrealized holding gains and losses from available-for-sale securities be included as a component
of stockholders equity. Unrealized losses on investments were $247,000 (net of income tax benefit
of $169,000) in 2004 compared to unrealized gains of $114,000 (net of income tax expense of
$78,000) in 2003. A major road improvement project which has been under construction along Santa Monica Boulevard in
West Los Angeles, California since March 2003, is presently estimated to be completed in March
2006. At times during the project, construction has, and will continue to occur directly in front
of, or very close to, the Century City Shopping Center where Gelsons has its Century City store.
It can be expected that the sales of the Century City store will continue to be negatively impacted
during the period when the construction is at or near the Century City Shopping Center, but that
access to the shopping center is expected to improve once the roadway project has been completed.
In addition, the landlord of the Century City Shopping Center has commenced a major construction
project which will result in the relocation of the movie theaters, food court and other tenants to
newly constructed areas immediately adjacent to the Gelsons store. Construction in the shopping
center began in March 2004. The Company does not know how long this project will take. The
project plans also include the expansion of the Gelsons store. In addition, the Company plans to
remodel the store during the construction period. Sales at the Century City store have been, and
the Company expects will continue to be, negatively affected during this construction. The store
was closed for a three-week period beginning 13




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September 27, 2004 as construction took place
immediately above the store. Since the store reopened on October 18, 2004, sales have returned to
levels consistent with those immediately
preceding the closure; however, they continue to be negatively impacted by the construction at the
Center and on Santa Monica Boulevard. It is not presently anticipated that any future store
closures will be required. The Company also expects that the parking in the Century City Shopping
Center for Gelsons customers will be adversely affected by the relocation of the theaters, food
court and other tenants to the immediate vicinity of the Gelsons store. However, it also
anticipates that the relocation will increase foot traffic in the vicinity of the store which,
along with the expanded facilities and services within the store, could increase customer count. 2003 Compared to 2002 Net income in 2003 increased 19.0% to $16,581,000 compared to $13,932,000 during 2002 reflecting
the benefit of higher fourth quarter sales attributable primarily to the labor dispute in the
Companys trade area and an additional week in the 2003 fiscal year. Operating income increased
17.6% to $25,458,000 in 2003 compared to $21,644,000 in 2002. Sales from the Companys 18 supermarkets (all of which are located in Southern California) were
$486,378,000 in 2003. This represents a total and comparable store sales increase of 22.1% over
2002 sales of $398,231,000. For the first thirty-nine weeks of 2003, prior to the labor dispute,
same stores sales increased 2.0% over the same period of 2002. This increase resulted primarily
from changing prices and product mix. The Company does not believe that inflation contributed
significantly to the sales increase. During the first quarter of 2003, the Silverlake/Los Feliz
Mayfair store was converted to the Gelsons name and format as part of a major remodel. Sales at
the store were negatively affected during a ten-day closure. However, on a third quarter year to
date basis, the Silverlake/Los Feliz store experienced a 0.3% sales increase as the loss of revenue
during the ten-day closure was offset by increased sales at the store after completion of the
remodel. Fourth quarter 2004 sales increased significantly over the same period of 2003 as a
result of the labor dispute. The Companys gross profit as a percent of sales was 44.4% in 2003 and 2002. The Company includes
product costs, net of discounts and allowances, and inbound freight charges in cost of goods sold,
thereby reducing gross profit by these amounts. Purchasing and receiving costs, inspection costs,
internal transfer costs, warehousing costs and other costs of the Companys distribution network
are recorded as DSG&A expense. Gross profit as a percent of sales for the Company may not be
comparable to those of other companies in the grocery industry since other entities may record
purchasing, warehousing and distribution costs in cost of goods sold. DSG&A expense as a percent of sales was 39.1% in 2003 compared to 38.9% in 2002. During the labor
dispute, the Company achieved significant economies of scale from incremental sales. These
economies were offset in 2003 by the $4,311,000 Pasadena impairment charge and by the $5,797,000
in health care contributions arising from the labor dispute as previously discussed. In addition,
multi-employer union health care and pension plan contributions were higher in 2003 compared to
2002. The Company recognized union health care expense of $21,019,000 in 2003, which includes the
$5,797,000 noted above, compared to $11,927,000 in 2002. Union pension expense in 2003 ran
$4,787,000 in 2003 compared to $3,086,000 in 2002. 14




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##### Table of Contents



The Company contributes to several multi-employer union pension plans. Contributions to the union
pension plan covering the majority of the Companys employees have been periodically suspended and
reinstated in recent years. Pension plan contributions were suspended for two
months in 2003 and six months in 2002. Pension payments are dependent upon straight-time hours
worked and the required rate of contribution. For a discussion of workers compensation, general and auto liability and other types of insurance
coverage, see MD&A 2004 Compared to 2003 presented above.
Stock-based compensation, under the SARs program, is subject to variable accounting in accordance
with FIN 28, Accounting for Stock Appreciation Rights and Other Variable Stock Option or Award
Plans. For the fiscal year ended January 3, 2004, SARs compensation expense was $740,000 compared
to $481,000 in fiscal 2002. During 2003, the Company procured approximately 21% of its product through Unified, a grocery
cooperative. As a member-patron, the Company is required to provide Unified with certain minimum
deposits and credit in order to purchase product from the cooperative. As of January 3, 2004, the
Company had approximately $2,223,000 on deposit with Unified. The minimum deposit requirement is
satisfied through a combination of cash, credit and ownership of equity shares in Unified. In
2003, the Company recorded $169,000 in patronage dividend income received in the form of Unified
equity shares. Interest and dividend income was $1,768,000 in 2003 compared to $1,867,000 for 2002 primarily due
to lower interest rates in 2003 partially offset by higher levels of investments. Interest expense decreased to $272,000 in 2003 from $321,000 in 2002 primarily due to the
termination of a capital lease obligation in June 2002. Other income includes gains realized on investments of $950,000 and $98,000, in 2003 and 2002,
respectively. Unrealized gains on investments were $114,000 (net of income tax expense of $78,000) in 2003
compared to unrealized gains of $885,000 (net of income tax expense of $608,000) in 2002. During 2003, the Company repurchased and retired 4,942 shares of Class A for an aggregate purchase
price of approximately $296,000. Liquidity and Capital Resources The Companys current cash position, including investments, and net cash provided by operating
activities are the primary sources of funds available to meet the Companys capital expenditure and
liquidity requirements. The Companys cash position, including investments, at January 1, 2005 was
$34,741,000. Cash not required for the immediate needs of the Company is temporarily invested in
commercial paper and marketable securities. Currently, all temporary investments are highly
liquid. The Company is continually investigating opportunities for the use of these funds
including new locations and the expansion and remodel of existing stores. The Company also has two revolving lines of credit totaling $15,000,000 available for standby
letters of credit, funding operations and expansion. There were no outstanding borrowings 15




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against either of the revolving lines as of January 1, 2005. The Company currently maintains four standby
letters of credit aggregating $10,844,000 pursuant to the Companys general liability and
workers compensation self-insurance programs. The standby letters of credit reduce the available
borrowings under its revolving lines. The Companys working capital was $23,883,000 at January 1, 2005 compared to $75,185,000 at January
3, 2004. The decrease in working capital resulted from the payment of a special dividend totaling
approximately $67,665,000 on December 16, 2004. Net cash provided by operating activities of
$10,608,000 partially offset the decline in working capital during 2004. Cash flows from operating
activities resulted primarily from net income plus non-cash expenses and changes in working
capital. Net cash used in investing activities was $3,254,000 in 2004. Investing activities included
primarily the purchase and sale of investments which resulted in a net cash inflow of $9,333,000
offset by capital expenditures of $12,641,000. Net cash used in financing activities was
$70,288,000 in 2004. Financing activities included primarily cash dividend payments of $70,100,000
and principal payments of $246,000 on capital lease obligations. The Companys total liabilities to equity ratio increased to .83 at January 1, 2005 from .63 at
January 3, 2004 reflecting the payment of the special dividend in 2004 partially offset by a
reduction in current liabilities since the conclusion of the labor dispute. Current liabilities decreased $19,513,000 during the year ended January 1, 2005 primarily due to
the settlement of the labor dispute on February 29, 2004. Income taxes payable, accounts payable
and accrued union pension and health care costs decreased by $11,434,000, $5,237,000 and
$6,260,000, respectively. The Company recorded additional income taxes payable at the end of
fiscal 2003 as a result of the increase in earnings that the Company achieved during the labor
dispute. These taxes were remitted to the appropriate taxing authorities during the first quarter
of 2004. Accounts payable decreased significantly after the conclusion of the labor dispute as
customers returned to their previous shopping patterns and the Companys product orders decreased.
The labor dispute also resulted in a depletion of funds in the multi-employer health and welfare
trust fund maintained for the benefit of UFCW employees. As a result, the Company was assessed
approximately $5,797,000 to pay union health care claims and restore trust fund reserves to the
required levels. This assessment was accrued at the end of fiscal 2003 and paid during the first
quarter of 2004. 16




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##### Table of Contents



The following table sets forth the Companys contractual cash obligations and commercial
commitments as of January 1, 2005: Contractual Cash Obligations (In Thousands)Less Than
    
    
    
    
    
    
    
    
    
    
    AfterTotal
    
    
    1 Year
    
    
    1-3 Years
    
    
    4-5 Years
    
    
    5 Years7% Subordinated Income Debentures
Due September 2014 Including Interest
    
    $
    2,088
    
    
    $
    86
    
    
    $
    172
    
    
    $
    172
    
    
    $
    1,658Capital Lease Obligations Including
Interest
    
    
    940
    
    
    
    347
    
    
    
    593Operating Leases
    
    
    115,718
    
    
    
    7,537
    
    
    
    16,230
    
    
    
    15,418
    
    
    
    76,533Total Contractual Cash Obligations (1)
    
    $
    118,746
    
    
    $
    7,970
    
    
    $
    16,995
    
    
    $
    15,590
    
    
    $
    78,191
 Other Commercial Commitments (In Thousands)Less Than
    
    
    
    
    
    
    
    
    
    
    AfterTotal
    
    
    1 Year
    
    
    1-3 Years
    
    
    4-5 Years
    
    
    5 YearsStandby Letters of Credit (2)
    
    $
    10,844
    
    
    $
    10,844
    The Company had the following other contractual cash obligations at January 1, 2005. The
Company is unable to include these liabilities in the tabular disclosure of contractual cash
obligations as the exact timing and amount of payments is unknown. Self-Insurance Reserves The Company is primarily self-insured for losses related to workers compensation and
general and auto liability claims. The Company maintains stop-loss coverage to limit its
loss exposure on a per claim basis. Liabilities associated with the risks that are retained
by the Company are estimated, in part, by considering historical claims experience and
regression analysis. Accruals are based on reported claims and an estimate of claims
incurred but not reported. While the ultimate amount of claims incurred are dependent on
future developments, in managements opinion, recorded reserves are adequate to cover the
future payment of claims. The Companys liability reserve for unpaid and incurred but not
reported claims at January 1, 2005 was approximately $6,868,000. Employment Agreement The Company has an employment agreement with a key executive officer that provides for
annual retirement compensation equal to 25% of his average base salary and bonus earned in
the last three years prior to his retirement. The Company had accrued $2,402,000 under the
terms of the employment agreement as of January 1, 2005. Property, Plant and Equipment Purchases As of January 1, 2005, management had authorized expenditures on incomplete projects for the
purchase of property, plant and equipment which totaled approximately $2,086,000. The 17




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##### Table of Contents



Company has an ongoing program to remodel existing supermarkets and to add new stores. During 2004,
total capital expenditures were $12,641,000. (2) Standby Letters of Credit All of the Companys letters of credit renew automatically each year unless the issuer
notifies the Company otherwise. The amount of each letter of credit will be adjusted
annually based upon the outstanding claim reserves as of the renewal date. Each letter of
credit obligation will cease when all claims for the particular policy year are closed or
the Company negotiates a release. In April 2003, the Company announced a stock repurchase program, authorized by the Board of
Directors, to purchase from time to time up to 100,000 shares of its Class A in the open market or
in private transactions. The timing, volume and price of purchases are at the discretion of the
management of the Company. During 2003, the Company purchased and retired 4,942 shares of its
Class A for an aggregate purchase price of approximately $296,000. No shares were purchased during
the year ended January 1, 2005. During 2004, the Company paid quarterly dividends of 25 cents per share of Class A and 22.5 cents
per share of Class B, aggregating approximately $3,280,000. On October 25, 2004, the Companys
Board of Directors declared a special dividend of $20 per share on its Class A and $18 per share on
its Class B. The dividend aggregating $67,665,000 was paid on December 16, 2004 to holders of
record on November 15, 2004. As of October 25, 2004, the dividend declaration date of the special dividend, Bernard Briskin,
Chairman of the Board and Chief Executive Officer of the Company, was the beneficial owner of
1,362,496 shares of the Companys Class B (a portion of which was beneficially owned with his
spouse), representing over 99% of the then outstanding Class B of the Company. On November 10,
2004, Mr. Briskin and his spouse elected to convert shares of Class B owned by them into an equal
number of the Companys Class A shares. The conversion of these shares triggered the automatic and
simultaneous conversion of all remaining Class B shares as provided under the Companys Restated
Certificate of Incorporation. As a result, all owners of the Companys Class B became owners of
Class A prior to the special dividend record date and were entitled to receive the dividend payable
on Class A issued upon such conversion. The aggregate amount of the special dividend was
approximately $67,665,000 taking into account the conversion of all Class B shares prior to the
dividend record date. Critical Accounting Policies The preparation of financial statements in conformity with generally accepted accounting
principles (GAAP) requires management to make estimates and assumptions about future events that
may affect the reported amounts of assets, liabilities, revenues and expenses, as well as the
disclosure of contingent assets and liabilities. Management has established accounting policies
that they believe are appropriate in order to reflect the accurate reporting of the Companys
operating results, financial position and cash flows. The Company applies these accounting
policies in a consistent manner. Management bases their estimates on historical experience,
current and expected economic conditions and various other factors that management believes to be
reasonable under the circumstances. These estimates and assumptions form the basis for 18




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making judgments about the carrying values of assets and liabilities that are not readily
apparent from other sources. The Company reevaluates these significant factors and makes
adjustments where facts and circumstances dictate. Future events and their effects cannot be
determined with absolute certainty, and therefore actual results may differ from estimates. Management believes that the following accounting policies are the most critical in the preparation
of the Companys financial statements because they involve the most difficult, subjective or
complex judgments about the effect of matters that are inherently uncertain. Investments Investments are accounted for under the provisions of SFAS 115, Accounting for Certain
Investments in Debt and Equity Securities. Management determines the appropriate
classification of its investments in marketable securities at the time of purchase and
reevaluates such determination at each balance sheet date. Debt securities for which
the Company does not have the intent or ability to hold to maturity and equity
securities are classified as available-for-sale investments and any unrealized gains
and losses are included as a separate component of stockholders equity. The Company reviews its investment portfolio on a quarterly basis to determine if
market declines below book value may be other-than-temporary. Any decline that is
determined to be other-than-temporary is recorded as a loss on the Consolidated
Statements of Operations and Comprehensive Income in accordance with EITF No. 03-1,
The Meaning of Other Than Temporary Impairment and its Application to Certain Issues. Inventories Supermarket nonperishable inventories are stated at the lower of cost or market, with cost
determined using the last-in, first-out (LIFO) method. Perishable inventories are valued at
the lower of cost on a first-in, first-out (FIFO) method or market. Inventory reserves are maintained for dry goods at historical run rates that are adjusted
annually, and trued up at each physical count (three times per year) to ensure adequacy of
the reserve. Inventories of perishable items are taken at the end of every month, and
balances are adjusted accordingly and flowed through cost of sales. Impairment of Long-Lived Assets The Company monitors the carrying value of long-lived assets for potential impairment each
quarter whenever events or changes in circumstances indicate the carrying value of an asset
may not be recoverable. Impairment is recognized when estimated future cash flows
(undiscounted and before interest charges) are less than carrying value. The estimation of
expected future net cash flows is inherently uncertain and relies on assumptions regarding
current and future economic and market conditions and the availability of capital. If
impairment analysis assumptions change, then an adjustment to the carrying value of the
Companys long-lived assets could occur. To the extent that an asset is impaired, the
excess of the carrying amount of the asset over its estimated fair value is charged against
earnings. 19




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##### Table of Contents



Workers Compensation and General and Auto Liability Insurance

The Company is primarily self-insured for losses related to workers compensation and
general and auto liability claims. The Company purchases stop-loss coverage to limit its
loss exposure on a per claim basis. Accruals are based on reported claims and an estimate
of claims incurred but not reported. While the ultimate amount of claims incurred are
dependent on future developments, in managements opinion recorded reserves are adequate to
cover the future payment of claims. Revenue Recognition The Company recognizes revenue at the time of sale. Discounts given to customers are
recorded at the point of sale as a reduction of revenues. The Company maintains a bad
debt allowance for receivables from vendors and Gelsons credit card sales. Valuation
reserves are adjusted periodically based on historical recovery rates. The Company
records income from licensing arrangements, subleases, leases and finance charges as
they are earned. Merchandise Costs Cost of goods sold and inventory includes product costs, net of discounts and allowances,
and inbound freight charges. Purchasing and receiving costs, inspection costs, internal
transfer costs, warehousing costs and other costs of the Companys distribution network are
recorded as DSG&A expense. Warehousing and transportation costs include labor, building
rent, utilities, depreciation, repairs and maintenance and fuel for the Companys
distribution center and distribution system. Vendor Allowances Promotional and rebate allowances make up the majority of all allowances. With promotional
allowances, vendors pay the Company to promote their product. The promotion may be a
temporary price reduction, a feature in a print advertisement or newsletter, or placement of
the vendors product in a preferred location in a store. The promotions are typically two to
three weeks long and are recognized when the commitment has been fulfilled. Promotional and
vendor rebate allowances are recorded as a reduction of cost of goods sold except
advertising reimbursements which are recorded as a reduction of advertising expense which is
included in DSG&A expense. The Company also receives other allowances which are recognized
as a reduction of cost of goods sold when they are earned. Occasionally, the Company receives rebate allowances in the form of upfront lump-sum
payments from vendors. Under the terms of these long-term agreements, the Company earns the
rebates as it purchases product from the vendor. The upfront payments are recorded as a
liability when they are received and are recorded as a reduction of inventory cost as the
product is purchased. In the event that the Company does not purchase the amount of product
specified in the agreement, the upfront payments must be returned on a prorata basis to the
vendor. If the contract does not specify that the rebate is earned as 20




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product is purchased,
then the upfront payments are recorded as a liability when received and recognized as a
reduction of cost of goods sold on a prorata basis as the product is sold. Stock Options and Stock Appreciation Rights The Company accounts for its Non-Officer and Non-Director Stock Option Plan (Stock Option
Plan) using the Intrinsic Value Based method prescribed in Accounting Principles Board
Opinion No. (APB) 25, Accounting for Stock Issued to Employees. Under this method, no
compensation cost was recognized in the Companys Consolidated Statements of Operations and
Comprehensive Income for fiscal years 2004, 2003 or 2002. SFAS 123, Accounting for
Stock-Based Compensation, (as amended by SFAS 148, Accounting for Stock-Based
Compensation-Transition and Disclosure) encourages adoption of a Fair Value Based method
for valuing the cost of stock-based compensation. However, it allows companies to use the
Intrinsic Value Based method prescribed by APB 25 and disclose pro forma net earnings and
earnings per share in accordance with SFAS 123. Stock-based compensation under the SARs program is subject to variable accounting in
accordance with FIN 28, Accounting for Stock Appreciation Rights and Other Variable Stock
Option or Award Plans. As a result, changes in the market price of the Companys Class A
impacts compensation expense. Effective beginning the third quarter of 2005, the Company will account for the Stock Option
Plan and the SARs program in accordance with SFAS 123R as discussed below. Recent Accounting Standards In March 2004, the EITF amended and ratified previous consensus on EITF No. 03-1, The Meaning of
Other Than Temporary Impairment and its Application to Certain Issues. EITF No. 03-1 establishes
guidance to be used in determining when an investment is considered impaired, whether that
impairment is other than temporary and the measurement of an impairment loss. The effective date
was originally the Companys third quarter of 2004. In September 2004, the Financial Accounting
Standards Board (FASB) issued EITF No. 03-1-1, Effective Date of Paragraphs 10-20 of EITF 03-1 to
delay the effective date pending further discussions by the EITF. During the period of delay, the
Company will continue to apply applicable pronouncements to determine any other than temporary
impairments of its investments. In June 2004, the EITF issued EITF No. 03-6 Participating Securities and the Two-Class method
under Financial Accounting Standards Board Statement No. 128 which requires the use of the
Two-Class method to calculate basic net income per share when a company has convertible
participating securities. EITF No. 03-6 was effective for the Companys second quarter of 2004.
Adoption of the provisions of EITF No. 03-6 resulted in separate net income per share disclosures
for the Companys Class A and B. In November 2003, the EITF reached a consensus on Issue No. 03-10, Application of EITF 02-16 by
Resellers to Sales Incentives Offered to Consumers by Manufacturers. EITF No. 03-10 addresses the
accounting for manufacturer sales incentives offered directly to consumers, 21




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##### Table of Contents



including manufacturer
coupons. EITF No. 03-10 was effective for the Companys first quarter of 2004. Adoption of the
provisions of EITF No. 03-10 did not have an impact on the Companys consolidated financial
statements. In November 2004, the FASB issued SFAS 151, Inventory Costs  an amendment of ARB No. 43, Chapter
4. SFAS 151 clarifies that inventory costs that are abnormal are required to be
charged to expense as incurred as opposed to being capitalized into inventory as a product cost.
SFAS 151 provides examples of abnormal costs including costs of idle facilities, excess freight
and handling costs and spoilage. SFAS 151 is effective for the Companys fiscal year beginning
January 1, 2006. Adoption of this standard will not have an impact on the Companys consolidated
financial statements. In December 2004, the FASB issued SFAS 123R (revised 2004), Share-Based Payment, which will be
effective in the third quarter of fiscal 2005. This statement will eliminate the ability to
account for share-based compensation transactions using APB 25, Accounting for Stock Issued to
Employees and will require instead that compensation expense be recognized based on the fair value
on the date of the grant. Additional footnote disclosures will be required. The Company is in the
process of evaluating the impact on the Companys consolidated financial statements. 
  Item 7A. Quantitative and Qualitative Disclosures about Market Risks The Company currently has no outstanding bank debt or fixture financing. If the Company should
obtain financing or draw on its existing lines of credit, which bear interest at the banks
reference rate or the banks adjusted London Interbank Offer Rate (LIBOR) plus an index up to 1.2%,
the Company could then be exposed to market risk related to interest fluctuations. A change in market prices exposes the Company to market risk related to its investments. As of
January 1, 2005, all investments were classified as available-for-sale securities and totaled
$26,078,000. A hypothetical 10% drop in the market value of these investments would result in a
$2,608,000 unrealized loss and a corresponding decrease in the fair value of these instruments.
This hypothetical drop would not affect cash flow and would not have an impact on earnings until
the Company sold the investments. 
 Item 8. Financial Statements and Supplementary Data See Index to Consolidated Financial Statements. 
 Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure None. 22




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##### Table of Contents



Item 9A. Controls and Procedures Evaluation of Disclosure Controls and Procedures An evaluation was carried out by the Companys Chief Executive Officer and Chief Financial Officer
of the effectiveness of the Companys disclosure controls and procedures (as defined in Rules
13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) as of January 1, 2005. Based
upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that these
disclosure controls and procedures were effective. Changes in Internal Control over Financial Reporting During the fourth quarter of fiscal 2004, the Company became aware that EITF No. 03-6, Participating
Securities and the Two-Class Method under Financial Accounting Standards Board Statement No. 128,
which requires the use of the Two-Class method to calculate basic net income per share when a
company has convertible participating securities, became effective for the Companys quarter ended
July 3, 2004. The Company had not utilized the Two-Class method in calculating basic net income
per share in its financial statements for the quarter ended July 3, 2004 as required by EITF No.
03-6. As a result, the Company restated its second quarter results to give effect to EITF No.
03-6. In connection with the preparation of the Companys third quarter 2004 Form 10-Q, the
Company enhanced procedures designed to ensure for each fiscal quarter, including the fourth
quarter, that prior to the preparation of the financial statements for such quarter or year,
management is apprised of all new accounting procedures, pronouncements and changes that became
effective during such fiscal quarter. During the quarter ended January 1, 2005, there were no changes in the Companys internal control
over financial reporting that have materially affected or are reasonably likely to materially
affect the Companys internal control over financial reporting. Managements Report on Internal Control over Financial Reporting The management of the Company is responsible for establishing and maintaining adequate internal
control over financial reporting. The Companys internal control over financial reporting is a
process designed to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance with GAAP. Internal control over financial reporting
cannot provide absolute assurance of achieving financial reporting objectives because of its inherent limitations. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become inadequate because
of changes in conditions or that the degree of compliance with the policies or procedures may
deteriorate. The Companys management assessed the effectiveness of the Companys internal control over
financial reporting as of January 1, 2005. In making the assessment, it used the criteria set
forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal
Control-Integrated Framework. Based on that assessment, management concluded that, as of January
1, 2005, the Companys internal control over financial reporting is effective based on those
criteria. 23




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##### Table of Contents



Managements assessment of the effectiveness of the Companys internal control over financial
reporting as of January 1, 2005 has been audited by PricewaterhouseCoopers LLP, an independent
registered public accounting firm, as stated in their report which appears on page 65. 
 Item 9B. Other Information None. 24




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##### Table of Contents



PART III 
 Item 10. Directors and Executive Officers of the Registrant Identification and Information Concerning Directors Below is set forth certain information about each of the Companys directors as of February
28, 2005. Certain of this information has been supplied by the persons shown. Principal Occupation (1)
    
    Director
    
    TermName
    
    Age
    
    and Other Directorships
    
    Since (2)
    
    ExpiresBernard Briskin
    
    
    80
    
    
    Chairman of the Board of Directors, President
and Chief Executive Officer of the Company and
Arden-Mayfair, a subsidiary of the Company,
and Chairman of the Board, President, Chief
Executive Officer and Chief Operating Officer
of AMG Holdings and Chairman of the Board and
Chief Executive Officer of Gelsons, both
subsidiaries of Arden-Mayfair.
    
    
    1970
    
    
    
    2007John G. Danhakl
    
    
    48
    
    
    Partner, Leonard Green & Partners since March
1995. Managing Director of Donaldson Lufkin
Jenrette Securities Corporation from March
1990 to February 1995. Director of Big 5
Sporting Goods Corporation, Diamond Triumph
Auto Glass, Inc., Liberty Group Publishing,
Inc., Leslies Poolmart, Inc., AsianMedia
Group LLC, MEMC Electronic Materials, Inc.,
VCA Antech, Inc., Petco Animal Supplies, Inc.,
Phoenix Scientific, Inc. and Rite Aid
Corporation.
    
    
    1995
    
    
    
    2007Robert A. Davidow
    
    
    62
    
    
    Director of WHX Corporation; private investor.
    
    
    1993
    
    
    
    2005Kenneth A. Goldman
    
    
    62
    
    
    Attorney and Partner with Reed Smith LLP since
January 2003, Attorney and Director with
Crosby, Heafey, Roach & May, A Professional
Corporation from September 2000 to December
2002. For more than five years prior thereto,
Attorney and Principal of Sanders, Barnet,
Goldman, Simons & Mosk, A Professional
Corporation.
    
    
    2001
    
    
    
    2007Steven Romick
    
    
    41
    
    
    Investment Advisor, Senior Vice President of
First Pacific Advisors, Inc.
    
    
    2003
    
    
    
    2006
 Ben Winters served as a valued director of the Company from 1978 until his passing February 2,
2005. Mr. Winters also served as Chairman of the Audit and Nominating Committees. He also was a
member of the Compensation and Investment Committees.   (1)
    Unless otherwise indicated, principal occupation or occupations shown have been such for
a period of at least five years in the aggregate.  (2)
    Date shown for term of service indicates commencement of service as a director of the
Company or Arden-Mayfair. 25




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##### Table of Contents



Identification of Executive Officers Below is set forth certain information about each of the executive officers of the Company as of
February 28, 2005: Name
    
    Age
    
    Position(s)Bernard Briskin
    
    
    80
    
    
    Chairman of the
Board of Directors,
President and Chief
Executive Officer
of the Company and
Arden-Mayfair, and
Chairman of the
Board, President,
Chief Executive
Officer and Chief
Operating Officer
of AMG Holdings and
Chairman of the
Board and Chief
Executive Officer
of Gelsons.Debra L. Jensen
    
    
    51
    
    
    Chief Financial
Officer of the
Company and
Arden-Mayfair,
Chief Financial
Officer and
Secretary of AMG
Holdings and
Gelsons.
 Mr. Briskin served as Chairman of the Executive Committee of the Board of Directors of
Arden-Mayfair until August 1978, when he was elected President and Chief Executive Officer of
Arden-Mayfair. In November 1978, Mr. Briskin was elected President and Chief Executive Officer of
the Company, and in June 1994 he was elected Chairman of the Board of the Company. Mr. Briskin
serves as Chairman of the Board, President and Chief Executive Officer of the Company and
Arden-Mayfair, and Chairman of the Board, President, Chief Executive Officer and Chief Operating
Officer of AMG Holdings and Chairman of the Board and Chief Executive Officer of Gelsons, pursuant
to an employment agreement which expires on January 1, 2007, although the term will be
automatically extended for successive one year periods unless certain termination notices are given
by either Mr. Briskin or the employers fifteen to eighteen months prior to the current expiration
date. See Item 11. Executive Compensation. Ms. Jensen was elected Chief Financial Officer of the Company in September 2004. Ms. Jensen also
serves as Chief Financial Officer of Arden-Mayfair, and Chief Financial Officer and Secretary of
AMG Holdings and Gelsons. From November 2001 until she joined the Company, she worked as National
Operations Controller for Wild Oats Markets, Inc. She served as the Controller for the Northern
Pacific Region of Whole Foods Markets California, Inc. from 1997 to 2001. Both Wild Oats Markets,
Inc. and Whole Foods Markets California, Inc. are supermarket operators. Except for Mr. Briskin, who has an employment agreement, all officers serve at the pleasure of the
Board of Directors. 26




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##### Table of Contents



Audit Committee and Financial Expert The Board of Directors has an Audit Committee comprised of three outside directors. During 2004,
the following individuals served as members of the Audit Committee: Ben Winters, Chairman
Robert A. Davidow
Steven Romick As a result of the death of Ben Winters on February 2, 2005, a vacancy was created on the Audit
Committee, and the Company is not in compliance with NASDAQ Rule 4350 requiring at least three
independent members on the Audit Committee. Pursuant to Rule 4350, the Company has until the earlier of its next annual
shareholders meeting or February 2, 2006 in order to regain compliance with this audit committee
composition requirement. The Company is in the process of undergoing a search for a new director
to fill the vacancy on the Audit Committee with an independent member within the required time
period. The Companys Board of Directors has determined that at least one person serving on the Audit
Committee is an audit committee financial expert as defined under Item 401(h) of Regulation S-K.
Ben Winters, formerly the Chairman of the Audit Committee, was independent as defined under
applicable Securities and Exchange Commission (SEC) and NASDAQ rules and the Board of Directors
determined he was an audit committee financial expert. The Board of Directors also determined that
Steven Romick is an audit committee financial expert and he is independent as defined under
applicable SEC and NASDAQ rules. Code of Ethics and Business Conduct The Company has adopted a Code of Ethics and Business Conduct applicable to all officers,
management and employees. The Code of Ethics and Business Conduct includes a Supplementary Code of
Ethics for Financial Professionals which is applicable to the chief executive officer, chief
financial officer, principal accounting officer or controller and individuals performing similar
functions. A copy of the Code of Ethics and Business Conduct may be obtained, without charge, upon
written request to the Assistant Secretary, Arden Group, Inc., P.O. Box 512256, Los Angeles,
California 90051-0256. Section 16(a) Beneficial Ownership Reporting Compliance Section 16(a) of the Securities Exchange Act of 1934 requires that directors and executive officers
of the Company, as well as persons holding more than ten percent (10%) of a registered class of the
Companys equity securities, file with the SEC initial reports of the ownership and reports of
changes of ownership of Class A and other equity securities of the Company. Based solely on review
of copies of such reports furnished to the Company and written representations that no other
reports were required to be filed during the fiscal year ended January 1, 2005, all Section 16(a)
filing requirements applicable to the Companys executive officers, directors and greater than ten
percent (10%) beneficial owners were complied with. 27




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##### Table of Contents



Item 11. Executive Compensation General The following table sets forth the total annual and long-term compensation paid or accrued by the
Company and its subsidiaries in connection with all businesses of the Company and its subsidiaries
to or for the account of the Chief Executive Officer of the Company and each other executive
officer of the Company whose total annual salary and bonus for the fiscal year ended January 1,
2005 exceeded $100,000 in the aggregate. Long TermCompensationAwardsSecuritiesUnderlying
    
    
    All OtherName and
    
    
    
    
    
    
    
    
    
    
    
    Options/
    
    
    Compen-Principal
    
    Annual Compensation
    
    
    SARs
    
    
    sationPosition (1)
    
    Year
    
    Salary ($)
    
    
    Bonus ($)
    
    
    (#)(3)
    
    
    ($)(4)(5)Bernard Briskin,
    
    2004
    
    
    588,716
    
    
    
    1,363,699
    
    
    
    
    
    
    
    16,400Chief Executive
    
    2003
    
    
    573,239
    
    
    
    991,334
    
    
    
    
    
    
    
    16,000Officer
    
    2002
    
    
    556,003
    
    
    
    823,390
    
    
    
    
    
    
    
    70,600David M. Oliver (2),
    
    2004
    
    
    118,388
    
    
    
    
    
    
    
    
    
    
    
    Chief Financial
    
    2003
    
    
    170,940
    
    
    
    25,000
    
    
    
    
    
    
    
    16,000Officer
    
    2002
    
    
    165,428
    
    
    
    25,000
    
    
    
    
    
    
    
    16,000
   (1)
    Ms. Jensen, Chief Financial Officer, joined the Company in September 2004 at an annual
salary of $175,000.  (2)
    Mr. Oliver resigned as an officer of the Company and terminated his employment in April 2004.
Mr. Olivers salary of $118,388 in 2004 includes severance pay of $53,584.  (3)
    The Company did not grant to Mr. Briskin, Mr. Oliver or Ms. Jensen any restricted stock, stock
options or SARs and made no payout to them on any long-term incentive plan in any of the fiscal
years presented.  (4)
    Includes the Companys contributions to the Arden Group, Inc. 401(k) Retirement Savings Plan.
In 2004, the Company allocated $16,400 to Mr. Briskins 401(k) account. Ms. Jensen is not
yet eligible to participate in the plan.  (5)
    Perquisites and other personal benefits did not exceed the lesser of $50,000 or 10% of the
compensation received by Mr. Briskin in 2004 and 2003 or by Mr. Oliver in any of the years for
which compensation information is reported. In accordance with his employment agreement, Mr.
Briskin received approximately $50,000 in medical reimbursements in 2002. Other compensation also
includes $4,600 for use of a Company-owned automobile by Mr. Briskin in 2002. 28




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##### Table of Contents



Stock Appreciation Rights The Company has granted SARs covering shares of the Companys Class A to non-employee directors and
certain officers and employees of the Company. Each SAR entitles the holder to receive upon
exercise thereof the excess of the fair market value of a share of Class A on the date of exercise
over the fair market value of such share on the date granted. The SARs vest 25% each year
beginning at the end of the first year and expire five years from the date of grant. No SARs were granted to executive officers during the 2004 fiscal year. The following table
provides information on the exercise of SARs by the named executive officer in 2004 and the number
of that officers SARs that were unexercised at January 1, 2005: Aggregated SAR Exercises in Last Fiscal Year and FiscalYear-End Unexercised SARs Number of Securities
    
    
    Value of UnexercisedUnderlying Unexercised
    
    
    In-the-MoneySARs at
    
    
    SARs atFiscal Year-End
    
    
    Fiscal Year-End(#)
    
    
    ($)Shares Acquired
    
    
    Value Realized
    
    
    Exercisable/
    
    
    Exercisable/Name
    
    
    
    
    on Exercise (#)
    
    
    ($)
    
    
    Unexercisable
    
    
    UnexercisableDavid M. Oliver
    
    
    
    
    
    
    625
    
    
    
    28,780
    
    
    
    0/0
    
    
    
    0/0
 Employment Agreement The compensation of Mr. Briskin, the Chief Executive Officer of the Company, is established under
an Employment Agreement, as amended (Employment Agreement) which expires on January 1, 2007. The
Employment Agreement provides that, upon the expiration of the initial term on January 1, 2004, the
term thereof is automatically extended for successive periods of one fiscal year unless either the
employers or Mr. Briskin gives notice of termination not less than fifteen months and no more than
eighteen months prior to the date upon which the term of the Employment Agreement will expire.
Pursuant to the terms of the Employment Agreement, Mr. Briskins base salary increases on January 1
of each year based upon increases in the Consumer Price Index subject to a maximum annual increase
of 4%. His annual bonus is equal to 2-1/2% of the Companys first $2,000,000 of pre-tax profits
(as defined in the Employment Agreement) plus 3-1/2% of pre-tax profits in excess of $2,000,000.
The Employment Agreement provides for an annual medical expense reimbursement up to $200,000 for
Mr. Briskin and his immediate family, as well as annual retirement compensation equal to
twenty-five percent of Mr. Briskins average base salary and bonus earned in the last three fiscal
years prior to his retirement and continuation of health insurance benefits and automobile
allowance. The Employment Agreement provides that its terms were subject to review during the 2003
fiscal year by the Compensation Committee of the Board of Directors. Pursuant to this provision,
discussions took place between Mr. Briskin and the Committee concerning amendments to certain
provisions of the Employment Agreement, but no amendments have yet been effected. 29




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##### Table of Contents



Remuneration of Directors Non-employee directors are compensated for their services as directors at an annual rate of
$24,000, plus $1,000 for each Board meeting attended and $1,000 for attendance at each committee
meeting. Non-employee directors who serve as committee chairmen are entitled to an additional
$6,000 per year. Directors serving on the Audit Committee receive an additional
$12,000 per year and the Chairman of the Audit Committee receives an additional $6,000 per year.
Mr. Briskin is an employee of the Company and does not receive the compensation otherwise payable
to directors. On January 20, 2004 the Company issued SARs covering 10,000 shares of the Companys Class A to each
of the Companys then non-employee directors, with a base price of $77.50 per share, representing
the fair market value on the date of grant. On October 25, 2004, the Companys Board of Directors
declared a special dividend of $20 per share on its Class A and $18 per share on its Class B.
Consequently, the base price of the SARs was reduced to $57.50 as a result of an antidilution
adjustment in connection with the anticipated effect of the special dividend on the Companys Class
A share price. When the SARs are exercised, each unit entitles the holder to receive the excess of
the fair market value of a share of Class A on the date of exercise over the base price. Units
vest 25% each year beginning at the end of the first year and expire five years from the date of
grant. Compensation Committee Interlocks and Insider Participation The Board of Directors has a Compensation Committee. In 2004, the Compensation Committee was
comprised of the following directors, none of whom are or have been officers of the Company: John G. Danhakl, Chairman
Robert A. Davidow
Ben Winters 30




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##### Table of Contents



Item 12. Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters Security Ownership of Certain Beneficial Owners The following table sets forth information as of February 28, 2005 relating to the stockholdings of
persons known to the Company to be the beneficial owner of more than 5% of the Class A of the
Company, its only outstanding class of equity securities: Amount andName and Address of
    
    Nature of BeneficialBeneficial Owner
    
    Ownership (1)
    
    
    Percent of ClassCity National Bank, as Trustee of the Companys
    
    

203,250
    
    
    6.0%Stock Bonus Plan and Trust1950 Avenue of the Stars, 2nd FloorLos Angeles, CA 90067Bernard Briskin
    
    
    1,931,895(2)(4)
    
    
    57.1%Arden Group, Inc.9595 Wilshire Blvd., Suite 411Beverly Hills, CA 90212Royce & Associates, LLC
    
    
    169,600(3)
    
    
    5.0%1414 Avenue of the AmericasNew York, NY 10019
   (1)
    Unless otherwise indicated to the contrary, all beneficial owners have sole investment and
voting power. For purposes of this table, 1,357,200 treasury shares of Class A are not deemed to
be outstanding.  (2)
    This amount includes the following shares: (i) 186,096 shares held in trust (of which Mr.
Briskin is the trustee) for the benefit of Mr. Briskin and his children and (ii) 103,012 shares
held in Individual Retirement Accounts for Mr. Briskins wife. Mr. Briskin disclaims any
beneficial ownership of the shares set forth in clause (ii) hereof and has no voting or investment
power with respect to these shares. Nothing herein should be construed as an admission that Mr.
Briskin is in fact the beneficial owner of these shares.  (3)
    Based upon Schedule 13-G filed on January 20, 2005 with the SEC.  (4)
    This amount excludes 33,004 shares of Class A held by The Judy and Bernard Briskin Foundation
of which Mr. Briskin serves as a co-trustee. Mr. Briskin disclaims any beneficial ownership with
respect to these shares. 31




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##### Table of Contents



Security Ownership of Management The following table shows the beneficial ownership of the Companys Class A, its only outstanding
class of equity securities, by each director, executive officer and by all directors and executive
officers as a group as of February 28, 2005: Amount andNature of BeneficialName of Beneficial Owner
    
    Ownership (1)
    
    
    Percent of ClassBernard Briskin
    
    
    1,931,895
    (2)
    
    
    57.1
    %John G. Danhakl
    
    
    0Robert A. Davidow
    
    
    0Kenneth A. Goldman
    
    
    121,600
    (3)
    
    
    3.6
    %Debra L. Jensen
    
    
    0Steven Romick
    
    
    0All directors and executive officers as a group (6 persons)
    
    
    2,053,495
    (2)
    
    
    60.7
    %
   (1)
    Unless otherwise indicated to the contrary, all beneficial owners have sole investment and
voting power. The number of outstanding shares of Class A, on which the percentages shown in this
table are based, does not include 1,357,200 treasury shares of the Companys Class A.  (2)
    See notes (2) and (4) to the table under Security Ownership of Certain Beneficial Owners set
forth above.  (3)
    Of these shares, 33,600 are held in trust by Mr. Goldman, as trustee, for the grandchildren
of Mr. and Mrs. Briskin and 88,000 are held by limited partnerships, one of the general
partners of which is Mr. Goldman and the limited partners of which are members of Mr. and Mrs.
Briskins family. 32




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##### Table of Contents



Equity Compensation Plan Information The following table provides information related to the Companys equity compensation plans as of
January 1, 2005. (c)Number ofsecurities(a)
    
    
    (b)
    
    
    remaining availableNumber of securities
    
    
    Weighted-
    
    
    for future issuanceto
    
    
    average
    
    
    under equitybe issued upon
    
    
    exercise price of
    
    
    compensation plansexercise
    
    
    outstanding
    
    
    (excludingof outstanding
    
    
    options,
    
    
    securitiesoptions,
    
    
    warrants and
    
    
    reflected in columnPlan category
    
    warrants and rights
    
    
    rights
    
    
    (a))Equity compensation plansapproved by security holders
    
    
    0
    
    
    
    0
    
    
    
    0Equity compensation plans notapproved by security
holders (1)Non-Officer and Non-DirectorStock Option Plan
    
    
    0
    
    
    
    0
    
    
    
    28,500
   (1)
    Does not include SARs which provide for cash only compensation. In 1998, the Company adopted a Stock Option Plan which was not submitted to security holders for
approval and initially provided for the granting of stock options to key employees to purchase up
to 35,000 shares of the Companys Class A. The Stock Option Plan was amended in fiscal 2000 to
increase the number of shares available thereunder to an aggregate of 70,000 shares. The objective
of the Stock Option Plan is to attract and retain quality personnel and to promote the success of
the Company by providing employees the opportunity to share in its growth. These options vest at
25% per year beginning at the end of the first year and expire five years from the date of grant.
The exercise price of stock options granted under the Stock Option Plan is equal to the fair market
value of the Companys Class A on the date of grant. As of January 1, 2005, there were no stock
options issued and outstanding. 
 Item 13. Certain Relationships and Related Transactions A director of the Company, Mr. Goldman, is a partner of a law firm which performs legal services
for the Company. 33




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##### Table of Contents



PART IV 
 Item 14. Principal Accountant Fees and Services Audit Fees Audit fees include the aggregate fees billed for the audit of the Companys annual consolidated
financial statements and the reviews of each of the quarterly consolidated financial statements
included in the Companys Forms 10-Q. The aggregate audit fees billed to the Company by
PricewaterhouseCoopers LLP (PwC) were approximately $586,000 for fiscal 2004 and $143,000 for
fiscal 2003. In November 2004, the Company responded to a comment letter from the SEC. As a result, PwC billed
the Company approximately $25,000 in fees related to researching issues raised in the letter and
reviewing the Companys response. In September 2003, the Company restated its previously issued
financial statements for fiscal years 2002, 2001 and 2000 to reflect rental expense and income on a
straight-line basis for leases having scheduled fixed rent increases. The aggregate fees billed to
the Company by PwC for audit services rendered related to this restatement aggregated $75,000. Audit-Related Fees Audit-related fees incurred in connection with the audit of the Companys employee benefit plans
totaled $17,000 in each of 2004 and 2003. In addition, the Company was billed approximately
$12,000 in 2003 related to Sarbanes-Oxley Section 404 compliance. Tax Fees Fees billed by PwC for tax services in 2004 aggregated approximately $102,000, including $32,000
for tax return and compliance work, and $70,000 for other projects. Fees billed by PwC for tax
services in 2003 aggregated approximately $118,000, including $31,000 for tax return and compliance
work, $53,000 for LIFO tax consulting services and $34,000 for other projects. All Other Fees Other than the fees for services described above, there were no additional fees billed by PwC in
2004 or 2003. It is the policy of the Audit Committee to pre-approve all audit and non-audit services provided by
PwC. The Audit Committee reviewed the above-described fees for non-audit services and considered
whether the provision of those services is compatible with maintaining the independence of PwC and
concluded that PwC has maintained its independence. 34




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##### Table of Contents



Item 15. Exhibits and Financial Statement Schedules  (a)
    Exhibits and Financial Statements and Schedules  (1)
    Financial Statements
See Index to Consolidated Financial Statements(2)
    Financial Statement Schedules - None(3)
    Exhibits
See Index to Exhibits  (b)
    Exhibits   (c)
    Other Financial Schedules - None 35




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##### Table of Contents



SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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. ARDEN GROUP, INC.DateBy
    
    /s/BERNARD BRISKIN
    
    03/14/05Bernard Briskin, Chairman of the Board,President and Chief Executive Officer
 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 and on the date
indicated. Date/s/BERNARD BRISKIN
    
    03/14/05Bernard Briskin, Director, Chairman of the Board, Presidentand Chief Executive Officer(Principal Executive Officer)/s/DEBRA L. JENSEN
    
    03/14/05Debra L. Jensen, Chief Financial Officer(Principal Financial and Principal Accounting Officer)/s/JOHN G. DANHAKL
    
    03/14/05John G. Danhakl, Director/s/ROBERT A. DAVIDOW
    
    03/14/05Robert A. Davidow, Director/s/KENNETH A. GOLDMAN
    
    03/14/05Kenneth A. Goldman, Director/s/STEVEN ROMICK
    
    03/14/05Steven Romick, Director
 36




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##### Table of Contents



ARDEN GROUP, INC. AND CONSOLIDATED SUBSIDIARIES    INDEX TO CONSOLIDATED FINANCIAL STATEMENTS    PageFinancial Statements:Consolidated Balance Sheets, January 1, 2005 and January 3, 2004
    
    
    38Consolidated Statements of Operations and Comprehensive Income for
fiscal years 2004, 2003 and 2002
    
    
    39Consolidated Statements of Stockholders Equity for fiscal years 2004,
2003 and 2002
    
    
    40Consolidated Statements of Cash Flows for fiscal years 2004, 2003 and 2002
    
    
    41Notes to Consolidated Financial Statements
    
    
    43Report of Independent Registered Public Accounting Firm
    
    
    65
 The financial statements include the Companys subsidiary
(Arden-Mayfair, Inc.) and the subsidiaries of Arden-Mayfair, Inc. Schedules are omitted because of the absence of the conditions under which they are required. 37




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ARDEN GROUP, INC. AND CONSOLIDATED SUBSIDIARIES    
 CONSOLIDATED BALANCE
SHEETS (In Thousands, Except Share and Per Share Data)  January 1, 2005
    
    
    January 3, 2004AssetsCurrent assets:Cash and cash equivalents
    
    $
    8,663
    
    
    $
    71,597Investments
    
    
    26,078
    
    
    
    33,844Accounts and notes receivable, net of allowance for doubtful
accounts of $181 and $180 as of January 1, 2005
and January 3, 2004, respectively
    
    
    6,033
    
    
    
    6,761Inventories, net
    
    
    18,765
    
    
    
    16,997Deferred income taxes
    
    
    3,647
    
    
    
    5,038Other current assets
    
    
    2,019
    
    
    
    1,783Total current assets
    
    
    65,205
    
    
    
    136,020Property held for resale
    
    
    51
    
    
    
    51Property, plant and equipment, net
    
    
    51,211
    
    
    
    45,637Deferred income taxes
    
    
    2,683
    
    
    
    1,972Other assets
    
    
    2,985
    
    
    
    3,292Total assets
    
    $
    122,135
    
    
    $
    186,972Liabilities and Stockholders EquityCurrent liabilities:Accounts payable, trade
    
    $
    17,560
    
    
    $
    22,797Federal and state income taxes payable
    
    
    408
    
    
    
    11,842Current portion of long-term debt
    
    
    273
    
    
    
    245Other current liabilities
    
    
    23,081
    
    
    
    25,951Total current liabilities
    
    
    41,322
    
    
    
    60,835Long-term debt
    
    
    1,764
    
    
    
    2,038Deferred rent
    
    
    4,872
    
    
    
    4,473Other liabilities
    
    
    7,601
    
    
    
    4,626Total liabilities
    
    
    55,559
    
    
    
    71,972Commitments and contingent liabilities (Note 16)Stockholders equity:Common Stock, Class A, $.25 par value; authorized 10,000,000 shares;
4,740,452 and 3,374,868 shares issued and outstanding as of
January 1, 2005 and January 3, 2004, respectively, including
1,357,200 treasury shares
    
    
    1,185
    
    
    
    844Common Stock, Class B, $.25 par value; convertible participating;
authorized 1,500,000 shares; 0 and 1,363,584 shares issued and
outstanding as of January 1, 2005 and January 3, 2004, respectively
    
    
    
    
    
    
    341Capital surplus
    
    
    5,643
    
    
    
    5,547Unrealized gain on investments
    
    
    99
    
    
    
    346Retained earnings
    
    
    63,402
    
    
    
    111,67570,329
    
    
    
    118,753Treasury stock, 1,357,200 shares at cost
    
    
    (3,753
    )
    
    
    (3,753
    )Total stockholders equity
    
    
    66,576
    
    
    
    115,000Total liabilities and stockholders equity
    
    $
    122,135
    
    
    $
    186,972
 The accompanying notes are an integral part of these consolidated financial statements. 38




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ARDEN GROUP, INC. AND CONSOLIDATED SUBSIDIARIES  
 
 CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME (In Thousands, Except Share and Per Share Data)2004
    
    
    2003
    
    
    2002Sales
    
    $
    502,898
    
    
    $
    486,378
    
    
    $
    398,231Cost of sales
    
    
    277,485
    
    
    
    270,658
    
    
    
    221,506Gross profit
    
    
    225,413
    
    
    
    215,720
    
    
    
    176,725Delivery, selling, general and administrative expenses
    
    
    190,834
    
    
    
    190,262
    
    
    
    155,081Operating income
    
    
    34,579
    
    
    
    25,458
    
    
    
    21,644Interest and dividend income
    
    
    1,986
    
    
    
    1,768
    
    
    
    1,867Other income (expense), net
    
    
    1,787
    
    
    
    950
    
    
    
    98Interest expense
    
    
    (182
    )
    
    
    (272
    )
    
    
    (321
    )Income before income taxes
    
    
    38,170
    
    
    
    27,904
    
    
    
    23,288Income tax provision
    
    
    15,498
    
    
    
    11,323
    
    
    
    9,356Net income
    
    $
    22,672
    
    
    $
    16,581
    
    
    $
    13,932Other comprehensive income (loss), net of tax:Unrealized gain (loss) from available-for-sale securities:Unrealized holding gain (loss) arising during the period
    
    
    (161
    )
    
    
    568
    
    
    
    732Reclassification adjustment for realized (gain) loss
included in net income
    
    
    (86
    )
    
    
    (454
    )
    
    
    153Net unrealized gain (loss), net of income tax expense
(benefit) of ($169) for 2004, $78 for 2003
and $608 for 2002
    
    
    (247
    )
    
    
    114
    
    
    
    885Comprehensive income
    
    $
    22,425
    
    
    $
    16,695
    
    
    $
    14,817Net income per common share:Basic  Class A
    
    $
    7.00
    
    
    $
    5.11
    
    
    $
    4.33Basic  Class B
    
    $
    6.13
    
    
    $
    4.60
    
    
    $
    3.90Diluted
    
    $
    6.70
    
    
    $
    4.90
    
    
    $
    4.14Weighted average common shares outstanding:Basic  Class A
    
    
    2,217,675
    
    
    
    2,015,859
    
    
    
    1,991,230Basic  Class B
    
    
    1,164,977
    
    
    
    1,363,584
    
    
    
    1,363,790Diluted
    
    
    3,382,652
    
    
    
    3,380,524
    
    
    
    3,365,961
 The accompanying notes are
an integral part of these consolidated financial statements. 39




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##### Table of Contents



ARDEN GROUP, INC. AND CONSOLIDATED SUBSIDIARIES  
 CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
 (In Thousands, Except Share Data)2004
    
    
    2003
    
    
    2002Common Stock, Class A:Balance, beginning of year
    
    $
    844
    
    
    $
    839
    
    
    $
    835Purchase and retirement of common stock (4,942
shares in 2003)
    
    
    
    
    
    
    (1
    )Shares issued under Stock Option Plan (2,000,
23,875 and 14,750 shares in 2004, 2003 and
2002, respectively)
    
    
    
    
    
    
    6
    
    
    
    4Conversion of Class B to Class A
    
    
    341Balance, end of year
    
    
    1,185
    
    
    
    844
    
    
    
    839Common Stock, Class B:Balance, beginning of year
    
    
    341
    
    
    
    341
    
    
    
    341Conversion of Class B to Class A
    
    
    (341
    )Balance, end of year
    
    
    0
    
    
    
    341
    
    
    
    341Capital surplus:Balance, beginning of year
    
    
    5,547
    
    
    
    4,362
    
    
    
    3,680Purchase and retirement of common stock
    
    
    
    
    
    
    (5
    )Shares issued under Stock Option Plan
    
    
    96
    
    
    
    1,190
    
    
    
    682Balance, end of year
    
    
    5,643
    
    
    
    5,547
    
    
    
    4,362Notes receivable from officer/director:Balance, beginning of year
    
    
    0
    
    
    
    0
    
    
    
    (135
    )Principal received
    
    
    
    
    
    
    
    
    
    
    135Balance, end of year
    
    
    0
    
    
    
    0
    
    
    
    0Unrealized gain (loss) on investments:Balance, beginning of year
    
    
    346
    
    
    
    232
    
    
    
    (653
    )Net unrealized gain (loss)
    
    
    (247
    )
    
    
    114
    
    
    
    885Balance, end of year
    
    
    99
    
    
    
    346
    
    
    
    232Retained earnings:Balance, beginning of year
    
    
    111,675
    
    
    
    97,006
    
    
    
    83,074Net income
    
    
    22,672
    
    
    
    16,581
    
    
    
    13,932Dividends declared to common stockholders
    
    
    (70,945
    )
    
    
    (1,622
    )Purchase and retirement of common stock
    
    
    
    
    
    
    (290
    )Balance, end of year
    
    
    63,402
    
    
    
    111,675
    
    
    
    97,006Stockholders equity before treasury stock
    
    
    70,329
    
    
    
    118,753
    
    
    
    102,780Treasury stock, at cost
    
    
    (3,753
    )
    
    
    (3,753
    )
    
    
    (3,753
    )Total stockholders equity
    
    $
    66,576
    
    
    $
    115,000
    
    
    $
    99,027
 The accompanying notes are an integral part of these consolidated financial
statements. 40




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##### Table of Contents



ARDEN GROUP, INC. AND CONSOLIDATED SUBSIDIARIES  
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 (In Thousands)2004
    
    
    2003
    
    
    2002Cash flows from operating activities:Cash received from customers
    
    $
    503,553
    
    
    $
    488,562
    
    
    $
    402,847Cash paid to suppliers and employees
    
    
    (468,528
    )
    
    
    (430,982
    )
    
    
    (369,881
    )Interest and dividends received
    
    
    1,813
    
    
    
    1,472
    
    
    
    1,604Interest paid
    
    
    (184
    )
    
    
    (258
    )
    
    
    (331
    )Income taxes paid
    
    
    (26,046
    )
    
    
    (6,244
    )
    
    
    (8,706
    )Net cash provided by operating activities
    
    
    10,608
    
    
    
    52,550
    
    
    
    25,533Cash flows from investing activities:Capital expenditures
    
    
    (12,641
    )
    
    
    (5,752
    )
    
    
    (4,023
    )Purchases of investments
    
    
    (15,737
    )
    
    
    (11,836
    )
    
    
    (21,667
    )Sales of investments
    
    
    25,070
    
    
    
    6,828
    
    
    
    14,686Proceeds from the sale of property, plant and
equipment
    
    
    54
    
    
    
    99
    
    
    
    68Net cash used in investing activities
    
    
    (3,254
    )
    
    
    (10,661
    )
    
    
    (10,936
    )Cash flows from financing activities:Purchase and retirement of Company stock

    
    
    
    
    
    
    (296
    )Principal payments under capital lease obligations
    
    
    (246
    )
    
    
    (220
    )
    
    
    (250
    )Loan payments received from officer/director
    
    
    
    
    
    
    
    
    
    
    135Proceeds from exercise of stock options
    
    
    58
    
    
    
    874
    
    
    
    576Cash dividends paid
    
    
    (70,100
    )
    
    
    (811
    )Net cash provided by (used in) financing activities
    
    
    (70,288
    )
    
    
    (453
    )
    
    
    461Net increase (decrease) in cash and cash equivalents
    
    
    (62,934
    )
    
    
    41,436
    
    
    
    15,058Cash and cash equivalents at beginning of year
    
    
    71,597
    
    
    
    30,161
    
    
    
    15,103Cash and cash equivalents at end of year
    
    $
    8,663
    
    
    $
    71,597
    
    
    $
    30,161
 The accompanying notes are an integral part of these consolidated financial
statements. 41




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##### Table of Contents



CONSOLIDATED STATEMENTS OF CASH FLOWS, Continued 2004
    
    
    2003
    
    
    2002Reconciliation of Net Income to Net Cash Provided
by Operating Activities:Net income
    
    $
    22,672
    
    
    $
    16,581
    
    
    $
    13,932Adjustments to reconcile net income to net cash provided by operating
activities:Depreciation and amortization
    
    
    6,990
    
    
    
    8,126
    
    
    
    8,139Provision for losses on accounts and
notes receivable
    
    
    15
    
    
    
    
    
    
    
    (20
    )Provision for deferred income taxes
    
    
    849
    
    
    
    (5,022
    )
    
    
    (698
    )Loss on impairment of long-lived assets
    
    
    
    
    
    
    4,311Net loss (gain) from the disposal of property,
plant and equipment
    
    
    23
    
    
    
    33
    
    
    
    (19
    )Realized gain on investments, net
    
    
    (1,787
    )
    
    
    (950
    )
    
    
    (98
    )Amortization of discount on investments
    
    
    (196
    )
    
    
    (128
    )
    
    
    (143
    )Tax benefit of stock option transactions
    
    
    38
    
    
    
    232
    
    
    
    110Stock compensation expense
    
    
    
    
    
    
    90Changes in assets and liabilities net of effects from noncash investing and
financing activities:(Increase) decrease in assets:Accounts and notes receivable
    
    
    713
    
    
    
    (1,217
    )
    
    
    1,450Inventories
    
    
    (1,768
    )
    
    
    (2,455
    )
    
    
    206Other current assets
    
    
    (236
    )
    
    
    690
    
    
    
    1,071Other assets
    
    
    307
    
    
    
    822
    
    
    
    178Increase (decrease) in liabilities:Accounts payable and other accrued expenses
    
    
    (20,386
    )
    
    
    28,605
    
    
    
    572Deferred rent
    
    
    399
    
    
    
    691
    
    
    
    724Other liabilities
    
    
    2,975
    
    
    
    2,141
    
    
    
    129Net cash provided by operating activities
    
    $
    10,608
    
    
    $
    52,550
    
    
    $
    25,533
 The accompanying notes are an integral part of these consolidated financial
statements. 42




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ARDEN GROUP, INC. AND CONSOLIDATED SUBSIDIARIES  
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
  1.
    Summary of Significant Accounting PoliciesBasis of Presentation and Business DescriptionThe consolidated financial statements of Arden Group, Inc. (Company) include the accounts of
the Company and its direct and indirect subsidiaries. All intercompany accounts and
transactions are eliminated in consolidation. The Company operates 18 supermarkets in Southern
California.ReclassificationsCertain amounts in prior periods have been reclassified to conform to the current period
financial statement presentation, including reclassifying $5,038,000
of current deferred tax assets that were previously reported as
long-term assets at January 3, 2004.Fiscal YearThe Company operates on a fiscal year ending on the Saturday closest to December 31. Fiscal
years for the consolidated financial statements included herein ended on January 1, 2005 (52
weeks), January 3, 2004 (53 weeks) and December 28, 2002 (52 weeks).The following is a summary of significant accounting policies followed in the preparation of
these consolidated financial statements.Cash and Cash EquivalentsThe Consolidated Statements of Cash Flows classify changes in cash and cash equivalents
(short-term, highly liquid investments readily convertible into cash with an original maturity
at date of purchase of three months or less) according to operating, investing or financing
activities. At times, cash balances held at financial institutions are in excess of federally
insured limits. The Company places its temporary cash investments with high credit, quality
financial institutions and limits the amount of credit exposure to any one financial
institution. The Company believes no significant concentration of credit risk exists with
respect to these cash investments.InvestmentsThe Company invests in marketable securities including mutual funds and debt and equity
securities. Marketable securities are stated at market value as determined by the most recently
traded price of each security at the balance sheet date. The Company reviews its investment
portfolio on a quarterly basis to determine if market declines below book value may be
other-than-temporary. Any decline that is determined to be other-than-temporary is 43




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recorded as a loss on the Consolidated Statements of Operations and Comprehensive Income in accordance
with Emerging Issues Task Force (EITF) No. 03-1, The Meaning of Other Than Temporary
Impairment and its Application to Certain Issues. All marketable securities are defined as
available-for-sale investments under the provisions of Statement of Financial Accounting
Standards No. (SFAS) 115, Accounting for Certain Investments in Debt and Equity Securities.Management determines the appropriate classification of its investments in marketable
securities at the time of purchase and reevaluates such determination at each balance sheet
date. Debt securities for which the Company does not have the intent or ability to hold to
maturity and equity securities are classified as available-for-sale. Investments are carried
at fair value, with the unrealized gains and losses, net of tax, reported as a separate
component of stockholders equity. The cost of investments sold is determined based on the
specific identification method.In January 2001, the Company invested $2,500,000 in a limited partnership that invests
primarily in publicly traded, high yield bonds. This investment was sold in May 2004. The
holding represented less than a 3% interest and the Company did not have the ability to
exercise significant influence over the operating and financial policies of the partnership.
Consequently, the investment was accounted for under the cost method. A gain of approximately
$1,570,000 was recognized in 2004 equal to the difference between the sales price and the
original cost and is included in Other Income (Expense) on the Consolidated Statements of
Operations and Comprehensive Income.Accounts and Notes ReceivableThe Company monitors vendor receivables and extensions of credit on an ongoing basis and has
not experienced significant losses related to its receivables. At January 1, 2005, the Company
did not have significant credit risk concentrations. No single group or customer represented
greater than 2% of total accounts and notes receivable. Issuance costs related to Gelsons
Markets (Gelsons) charge cards are not significant and are expensed as incurred.InventoriesSupermarket nonperishable inventories are stated at the lower of cost or market, with cost
determined using the last-in, first-out (LIFO) method. Perishable inventories are valued at
the lower of cost on a first-in, first-out (FIFO) method or market.Inventory reserves are maintained for dry goods at historical run rates that are adjusted
annually and trued up at each physical count (three times per year) to ensure adequacy of the
reserve. Inventories of perishable items are taken at the end of every month, and balances are
adjusted accordingly and flowed through cost of sales.Property Held for ResaleIt is the Companys policy to hold for sale property considered by management as excess and no
longer necessary for the operations of the Company. The aggregate carrying values of such
owned property is periodically reviewed for impairment and adjusted when appropriate. 44




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Property, Plant and EquipmentProperty, plant and equipment is recorded at cost. Depreciation is provided on the
straight-line method over the estimated useful lives of individual assets or classes of assets
as follows: Buildings and improvements
    
    5 to 15 yearsStore fixtures and office equipment
    
    3 to 8 yearsTransportation equipment
    
    2 to 5 yearsMachinery and equipment
    
    3 to 10 years
  Improvements to leased properties are amortized over their estimated useful lives or lease
period, whichever is shorter. Leasehold interests are amortized over the initial lease term.Leased property meeting certain capital lease criteria is capitalized and the present value of
the related lease payments is recorded as a liability. Amortization of capitalized leased
assets is computed on the straight-line method over the shorter of the estimated useful life or
the initial lease term.Normal repairs and maintenance are expensed as incurred. Expenditures which materially
increase values, change capacities or extend useful lives are capitalized. Replacements are
capitalized and the property, plant and equipment accounts are relieved of the items being
replaced. The related costs and accumulated depreciation of disposed assets are eliminated and
any gain or loss on disposition is included in delivery, selling, general and administrative
(DSG&A) expense on the Consolidated Statements of Operations and Comprehensive Income.Impairment of Long-Lived AssetsThe Company monitors the carrying value of long-lived assets for potential impairment whenever
events or changes in circumstances indicate the carrying value of an asset may not be
recoverable. Impairment is recognized when estimated future cash flows (undiscounted and
before interest charges) are less than carrying value. The estimation of expected future net
cash flows is inherently uncertain and relies on assumptions regarding current and future
economic and market conditions and the availability of capital. If impairment analysis
assumptions change, then an adjustment to the carrying value of the Companys long-lived assets
could occur. To the extent that an asset is impaired, the excess of the carrying amount of the
asset over its estimated fair value is charged against earnings.Fair Value of Financial InstrumentsThe carrying values of cash and cash equivalents, accounts receivable, accounts payable and
accrued liabilities approximate fair values because of the short-term maturity of these
instruments. The fair value of long-term debt closely approximates its carrying value. The 45




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Company uses quoted market prices, when available, or discounted cash flows to calculate these
fair values.Workers Compensation and General and Auto Liability CostsIn June 2003, the Company terminated its guaranteed cost workers compensation policy and
purchased a high deductible workers compensation policy. Accordingly, the Company is
primarily self-insured for losses related to workers compensation, as well as general and auto
liability claims. The Company maintains stop-loss coverage to limit its loss exposure on a per
claim basis. Accruals are based on reported claims and an estimate of claims incurred but not
reported. The Companys liability reserve for unpaid and incurred but not reported claims at
January 1, 2005 and January 3, 2004 was approximately $6,868,000 and $3,763,000, respectively.
While the ultimate amount of claims incurred are dependent on future developments, in
managements opinion, recorded reserves are adequate to cover the future payment of claims.Revenue RecognitionThe Company recognizes revenue at the time of sale. Discounts given to customers are recorded
at the point of sale as a reduction of revenues. The Company maintains a bad debt allowance
for receivables from vendors and Gelsons credit card sales. Valuation
reserves are adjusted periodically based on historical recovery rates. The Company records
income from licensing arrangements, subleases, leases and finance charges as they are earned.During the third quarter of 2004, the Company revised the way it classifies income from
licensed operations within its supermarkets, subleases, leases and finance charges. The net
rental, license and other income is now recorded as a component of sales on the Consolidated
Statements of Operations and Comprehensive Income. Previously, the revenue for these items had
been classified as a reduction to DSG&A expense. Additionally, sales and cost of sales for one
licensed department in the Companys stores were recorded on the gross basis rather than
reporting the net licensed revenue received. Income from all licensing arrangements, rental
income and finance charges represents less than 1% of sales for all periods presented, and
therefore is not disclosed separately on the Consolidated Statements of Operations and
Comprehensive Income.The Company has revised amounts previously reported for the years presented to conform to the
revised classification. None of the classification changes has an impact on operating income,
net income, net cash flow or any element of the Companys Consolidated Balance Sheets for all
periods presented. The Company does not consider the effect of these revisions in
classifications in 2004 or in prior periods, individually or in the aggregate, to be material.Merchandise CostsCost of goods sold and inventory includes product costs, net of discounts and allowances, and
inbound freight charges. Purchasing and receiving costs, inspection costs, internal transfer
costs, warehousing costs and other costs of the Companys distribution network are recorded as
DSG&A expense. These costs totaled approximately $6,203,000, $6,211,000 and $5,266,000 for
2004, 2003 and 2002, respectively. Warehousing and transportation 46




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##### Table of Contents



costs include labor, building rent, utilities, depreciation, repairs and maintenance and fuel
for the Companys distribution center and distribution system.Vendor AllowancesPromotional and rebate allowances make up the majority of all allowances. With promotional
allowances, vendors pay the Company to promote their product. The promotion may be a temporary
price reduction, a feature in a print advertisement or newsletter, or placement of the vendors
product in a preferred location in a store. The promotions are typically two to three weeks
long and are recognized when the commitment has been fulfilled. Promotional and vendor rebate
allowances are recorded as a reduction of cost of goods sold except advertising reimbursements
which are recorded as a reduction of advertising expense which is included in DSG&A expense.
The Company also receives other allowances which are recognized as a reduction of cost of goods
sold when they are earned.Occasionally, the Company receives rebate allowances in the form of upfront lump-sum payments
from vendors. Under the terms of these long-term agreements, the Company earns the rebates as
it purchases product from the vendor. The upfront payments are recorded as a liability when
they are received and are recorded as a reduction of inventory cost as the product is
purchased. In the event that the Company does not purchase the amount of product specified in
the agreement, the upfront payments must be returned on a prorata basis to the vendor. If the
contract does not specify that the rebate is earned as product is purchased, then the upfront
payments are recorded as a liability when received and recognized as a reduction of cost of
goods sold on a prorata basis as the product is sold.Stock Options and Stock Appreciation RightsAs allowed by SFAS 123, Accounting for Stock-Based Compensation (as amended by SFAS 148,
Accounting for Stock-Based Compensation Transition and Disclosure), the Company follows the
disclosure requirements of SFAS 123, but continues to account for its Non-Officer and
Non-Director Stock Option Plan (Stock Option Plan) in accordance with Accounting Principles
Board Opinion No. (APB) 25, Accounting for Stock Issued to Employees, which results in no
charge to earnings when options are issued at fair market value. 47




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##### Table of Contents



The following table illustrates the effect on net income and net income per share as if the
Fair Value Based method had been applied to all outstanding stock option awards in each period
presented: (In Thousands, Except Per Share Data)
    
    2004
    
    
    2003
    
    
    2002Net income as reported
    
    $
    22,672
    
    
    $
    16,581
    
    
    $
    13,932Add: Stock-based compensation expense
determined under APB 25, net of
related tax effects
    
    
    
    
    
    
    53Deduct: Total stock-based employee
compensation expense
determined under Fair Value Based
method, net of related tax effects
    
    
    (5
    )
    
    
    (21
    )
    
    
    (84
    )Pro forma net income
    
    $
    22,667
    
    
    $
    16,613
    
    
    $
    13,848Net income per share:Basic  Class A as reported
    
    
    7.00
    
    
    
    5.11
    
    
    
    4.33Basic  Class A pro forma
    
    
    7.00
    
    
    
    5.10
    
    
    
    4.29Basic  Class B as reported
    
    
    6.13
    
    
    
    4.60
    
    
    
    3.90Basic  Class B pro forma
    
    
    6.13
    
    
    
    4.60
    
    
    
    3.90Diluted  as reported
    
    
    6.70
    
    
    
    4.90
    
    
    
    4.14Diluted  pro forma
    
    
    6.70
    
    
    
    4.90
    
    
    
    4.11
  The Company has not issued any options since fiscal 2000. The weighted average fair
value at date of grant for options issued in 2000 was $12.50 per option. The fair value of
options at date of grant was estimated using the Black-Scholes option-pricing model with the
following weighted average assumptions: Risk-free interest rate
    
    
    6.54
    %Expected dividend yield
    
    
    0
    %Expected option life
    
    4 yearsExpected stock price volatility
    
    
    44.3
    %
  The effects of applying SFAS 123 for the pro forma disclosures are not necessarily indicative
of the effects expected on current or future net income and net income per common share as the
valuations are based on highly subjective assumptions about the future, including stock price
volatility and exercise patterns.The Company has outstanding stock appreciation rights (SARs) that have been granted to
non-employee directors and certain employees. Stock-based compensation under the SARs program
is subject to variable accounting in accordance with Financial Accounting Standards Board
Interpretation No. (FIN) 28, Accounting for Stock Appreciation Rights and Other Variable Stock
Option or Award Plans. The Company records compensation expense related to the vesting of
SARs using the appropriate amortization schedule as required by FIN 28. In addition, changes
in the market price of the Companys Class A Common Stock (Class A) impact the charge related
to SARs. 48




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##### Table of Contents



Effective beginning the third quarter of 2005, the Company will account for the Stock Option
Plan and the SARs program in accordance with SFAS 123R as discussed below under Recent
Accounting Standards.Environmental CostsCosts incurred to investigate and remediate contaminated sites are expensed as incurred.Store Opening CostsNoncapital expenditures incurred in opening a new store are expensed as incurred.Advertising and Sales Promotion CostsAdvertising and sales promotion costs are expensed as incurred and totaled $3,047,000,
$2,844,000 and $2,760,000 in 2004, 2003 and 2002, respectively.Rental ExpenseRental payments on operating leases are recorded over the lease term as they become payable or
receivable except for rental payments on leases with scheduled rent increases which are
recognized on a straight-line basis over the term of the lease.Income TaxesDeferred tax liabilities and assets are determined based on the difference between the
financial statement and tax bases of assets and liabilities, using enacted tax rates in effect
for the year in which the differences are expected to reverse.Common Stock and Net Income Per ShareEffective with the second quarter of 2004, the Company adopted EITF No. 03-6, Participating
Securities and the Two-Class method under Financial Accounting Standards Board Statement No.
128 which requires the use of the Two-Class method to calculate basic net income per share
when a company has convertible participating securities. Prior to November 10, 2004, the
Company had two classes of Common Stock including Class B Common Stock (Class B) which was
convertible on a share by share basis into Class A. Class B shareholders were entitled to
share in 90% of the dividends (other than stock dividends) paid to Class A shareholders. Under
the Two-Class method, the Company assumes that 100% of undistributed earnings are distributed
to Class A and Class B shareholders according to the formula for allocation of dividends.
Consequently, the Two-Class method results in a higher allocation of net income and net income
per share to Class A versus Class B shareholders. Basic net income per share is computed by
dividing the net income attributable to Class A and Class B shareholders, respectively, by the
weighted average number of common shares outstanding under each class during the period. In
accordance with EITF No. 03-6, prior periods have been restated using the Two-Class method. 49




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##### Table of Contents



Diluted net income per share is computed using the If Converted method in accordance with SFAS
128. Diluted net income per share is computed by dividing net income attributable to common
shareholders by the weighted average number of common and potential common shares outstanding
during the period. Potential common shares included in the diluted computation represent shares issuable upon assumed exercise of stock options using the Treasury Stock method.
Diluted net income per share is only shown for a single class of common shares because, under
the If Converted method, it is assumed that all Class B shares are converted to Class A. 50




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##### Table of Contents



Net Income Per Share Reconciliation (In Thousands Except Share and Per Share Data):
    
    2004
    
    
    2003
    
    
    2002Basic net income per share:Common Stock - Class ADividends paid (1)
    
    $
    2,360
    
    
    $
    1,009Undistributed earnings
    
    
    13,167
    
    
    
    9,298
    
    
    $
    8,619Allocated earnings
    
    $
    15,527
    
    
    $
    10,307
    
    
    $
    8,619Weighted average shares
    
    
    2,217,675
    
    
    
    2,015,859
    
    
    
    1,991,230Net income per share
    
    $
    7.00
    
    
    $
    5.11
    
    
    $
    4.33Common Stock - Class BDividends paid (1)
    
    $
    920
    
    
    $
    613Undistributed earnings
    
    
    6,225
    
    
    
    5,661
    
    
    $
    5,313Allocated earnings
    
    $
    7,145
    
    
    $
    6,274
    
    
    $
    5,313Weighted average shares
    
    
    1,164,977
    
    
    
    1,363,584
    
    
    
    1,363,790Net income per share
    
    $
    6.13
    
    
    $
    4.60
    
    
    $
    3.90Diluted net income per share:Net income allocated to Class A
    
    $
    15,527
    
    
    $
    10,307
    
    
    $
    8,619Net income allocated to Class B
    
    
    7,145
    
    
    
    6,274
    
    
    
    5,313Total net income
    
    $
    22,672
    
    
    $
    16,581
    
    
    $
    13,932Weighted average shares:Class A shares outstanding
    
    
    2,217,675
    
    
    
    2,015,859
    
    
    
    1,991,230Assumed conversion of Class B
    
    
    1,164,977
    
    
    
    1,363,584
    
    
    
    1,363,790Assumed exercise of stock options
    
    
    
    
    
    
    1,081
    
    
    
    10,941Total weighted average shares
    
    
    3,382,652
    
    
    
    3,380,524
    
    
    
    3,365,961Net income per share
    
    $
    6.70
    
    
    $
    4.90
    
    
    $
    4.14
   (1)
    Dividends paid exclude the payment of a $67,665 special dividend in fiscal 2004 as it
related to prior years undistributed earnings. 51




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##### Table of Contents



On November 10, 2004, Bernard Briskin, Chairman of the Board and Chief Executive Officer of the
Company, elected to convert Class B shares beneficially owned by him, including shares
beneficially owned with his wife, into Class A shares. The conversion of these shares
triggered the automatic and simultaneous conversion of all remaining Class B shares as provided
under the Companys Restated Certificate of Incorporation. After the conversion, the Company
has only Class A outstanding and all shareholders will participate equally in the undistributed
earnings of the Company.Use of EstimatesThe preparation of financial statements in conformity with generally accepted accounting
principles (GAAP) requires management to make estimates and assumptions for the reporting
period and as of the financial statement date. These estimates and assumptions affect the
reported amounts of assets and liabilities, the disclosure of contingent liabilities and the
reported amounts of revenues and expenses. Actual results could differ from these estimates.Impact of Recently Issued Accounting StandardsIn March 2004, the EITF amended and ratified previous consensus on EITF No. 03-1, The Meaning
of Other Than Temporary Impairment and its Application to Certain Issues. EITF No. 03-1
establishes guidance to be used in determining when an investment is considered impaired,
whether that impairment is other than temporary and the measurement of an impairment loss. The
effective date was originally the Companys third quarter of 2004. In September 2004, the
Financial Accounting Standards Board (FASB) issued EITF No. 03-1-1, Effective Date of
Paragraphs 10-20 of EITF 03-1 to delay the effective date pending further discussions by the
EITF. During the period of delay, the Company will continue to apply applicable pronouncements
to determine any other than temporary impairments of its investments.In June 2004, the EITF issued EITF No. 03-6 Participating Securities and the Two-Class method
under Financial Accounting Standards Board Statement No. 128 which requires the use of the
Two-Class method to calculate basic net income per share when a company has convertible
participating securities. EITF No. 03-6 was effective for the Companys second quarter of
2004. Adoption of the provisions of EITF No. 03-6 resulted in separate net income per share
disclosures for the Companys Class A and B.In November 2003, the EITF reached a consensus on Issue No. 03-10, Application of EITF 02-16
by Resellers to Sales Incentives Offered to Consumers by Manufacturers. EITF No. 03-10
addresses the accounting for manufacturer sales incentives offered directly to consumers,
including manufacturer coupons. EITF No. 03-10 was effective for the Companys first quarter
of 2004. Adoption of the provisions of EITF No. 03-10 did not have an impact on the Companys
consolidated financial statements.In November 2004, the FASB issued SFAS 151,
Inventory Costs - an amendment of ARB No. 43,
Chapter 4. SFAS 151 clarifies that inventory costs that are abnormal are required to be
charged to expense as incurred as opposed to being capitalized into inventory as a product
cost. SFAS 151 provides examples of abnormal costs including costs of idle 52




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##### Table of Contents



facilities,
excess freight and handling costs and spoilage. SFAS 151 is effective for the
Companys fiscal year beginning January 1, 2006. Adoption of this standard will not have an
impact on the Companys consolidated financial statements.In December 2004, the FASB issued SFAS 123R (revised 2004), Share-Based Payment which will be
effective in the third quarter of fiscal 2005. This statement will eliminate the ability to
account for share-based compensation transactions using APB 25, Accounting for Stock Issued to
Employees and will require instead that compensation expense be recognized based on the fair
value on the date of the grant. Additional footnote disclosures will be required. The Company
is in the process of evaluating the impact on the Companys consolidated financial statements.2.
    InvestmentsMarketable securities are shown on the accompanying Balance Sheets at their fair value. The
Companys investment in a limited partnership as of January 3, 2004 (shown in the table below)
was accounted for under the cost method as the Company owned less than 3% of the partnership
and did not have the ability to exercise significant influence over the operating and financial
policies of the partnership. The Company sold this investment in May 2004 for approximately
$4,070,000 recognizing a gain of $1,570,000. Unrealized(In Thousands)
    
    Cost
    
    
    Gain (Loss)
    
    
    Fair ValueAs of January 1, 2005:Investments:Mutual funds
    
    $
    21,729
    
    
    $
    (13
    )
    
    $
    21,716United States government securities
    
    
    1,997
    
    
    
    (16
    )
    
    
    1,981Debt securities
    
    
    2,185
    
    
    
    196
    
    
    
    2,381Total
    
    $
    25,911
    
    
    $
    167
    
    
    $
    26,078As of January 3, 2004:Investments:Mutual funds
    
    $
    26,755
    
    
    $
    186
    
    
    $
    26,941United States government securities
    
    
    1,994
    
    
    
    16
    
    
    
    2,010Debt securities
    
    
    2,010
    
    
    
    383
    
    
    
    2,393Limited partnership
    
    
    2,500
    
    
    
    
    
    
    
    2,500Total
    
    $
    33,259
    
    
    $
    585
    
    
    $
    33,844
  The investments in debt and United States government securities all have maturity dates of less
than two years. Realized net gain (loss) from the sale of investments was $1,739,000, $843,000
and ($211,000) in 2004, 2003 and 2002, respectively. In addition, the Company recognized
capital gain income from mutual funds of $48,000, $107,000 and $309,000 in 2004, 2003 and 2002,
respectively. Realized net gain (loss) from the sale of investments and capital gain income
are included in Other Income (Expense) on the Consolidated Statements of Operations and
Comprehensive Income. 53




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##### Table of Contents



3.
    Accounts and Notes Receivable, Net (In Thousands)
    
    January 1, 2005
    
    
    January 3, 2004Accounts receivable, trade
    
    $
    3,388
    
    
    $
    3,899Notes receivable
    
    
    
    
    
    
    96Other accounts receivable
    
    
    2,826
    
    
    
    2,9466,214
    
    
    
    6,941Less: Allowance for doubtful accounts and
notes receivable
    
    
    (181
    )
    
    
    (180
    )$
    6,033
    
    
    $
    6,761
  The provision (recoveries) for doubtful accounts and notes receivable in 2004, 2003 and 2002
was approximately $15,000, $0 and ($20,000).4.
    InventoriesInventories valued by the LIFO method totaled $15,586,000 in 2004, $13,880,000 in 2003 and
$11,601,000 in 2002. Inventory balances would have been $3,771,000, $3,399,000 and $3,186,000
higher at the end of 2004, 2003 and 2002, respectively, if they had been stated at the lower of
FIFO cost or market. The LIFO effect on net income was a decrease of approximately $221,000, a
decrease of $126,000 and an increase of $150,000 in 2004, 2003 and 2002, respectively.5.
    Significant SupplierDuring 2004, the Company procured approximately 20% of its product through Unified Western
Grocers, Inc. (Unified), a grocery cooperative. As a member-patron, the Company is required to
provide Unified with certain minimum deposits and credit in order to purchase product from the
cooperative. As of January 1, 2005, the Company had approximately $2,321,000 on deposit with
Unified. The minimum deposit requirement is satisfied through a combination of cash, credit
and ownership of equity shares in Unified.6.
    Property, Plant and Equipment (In Thousands)
    
    January 1, 2005
    
    
    January 3, 2004Land
    
    $
    8,584
    
    
    $
    8,584Buildings and improvements
    
    
    9,693
    
    
    
    9,693Store fixtures and office equipment
    
    
    40,049
    
    
    
    36,065Transportation equipment
    
    
    2,774
    
    
    
    2,664Machinery and equipment
    
    
    1,268
    
    
    
    1,236Leasehold improvements
    
    
    45,484
    
    
    
    39,206Leasehold interests
    
    
    4,538
    
    
    
    4,538Assets under capital leases
    
    
    3,058
    
    
    
    3,058Assets under construction
    
    
    761
    
    
    
    488116,209
    
    
    
    105,532Accumulated depreciation and
amortization
    
    
    (64,998
    )
    
    
    (59,895
    )$
    51,211
    
    
    $
    45,637
 54




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##### Table of Contents



As of January 1, 2005, approximately $26,364,000 of property, plant and equipment (at
cost) was fully depreciated and is still being used in operations. As of January 1, 2005, the
Company has recorded $2,749,000 in accumulated amortization for assets under capital lease.In the fourth quarter of 2003, the Company recorded a $4,311,000 pre-tax impairment on
long-lived assets related to leasehold improvements and equipment at its Pasadena store. Sales
at Pasadena have been below managements expectations since the stores initial opening in
September 2001. During the fourth quarter of 2003, a labor dispute in the Companys trade area
temporarily resulted in improved sales at the Pasadena store. Sales have declined since the
conclusion of the labor dispute although they are still higher than prestrike levels. The
Pasadena store is currently open and operating; however, sales still are not meeting
managements original expectations. The impaired assets are in use at the store at this time.
The impairment charge, a component of DSG&A expense, reflects the difference between the
carrying value of the Pasadena assets and the estimated fair value, which is based on the
discounted future cash flows using a risk-free interest rate. The Company has exercised its
right to terminate its lease at the Pasadena location effective Spring 2005; however,
discussions are currently ongoing as to the possibility of renewing the lease on different
terms.7.
    Other Current Liabilities (In Thousands)
    
    January 1, 2005
    
    
    January 3, 2004Employee compensated absences
    
    $
    5,267
    
    
    $
    4,612Stock appreciation rights
    
    
    3,057
    
    
    
    1,027Employee benefits
    
    
    2,834
    
    
    
    9,039Taxes (excluding income taxes)
    
    
    2,631
    
    
    
    3,015Payroll
    
    
    1,968
    
    
    
    1,803Workers compensation
    
    
    1,739
    
    
    
    1,065Rent
    
    
    1,005
    
    
    
    1,586Dividends payable
    
    
    846
    
    
    
    811Other
    
    
    3,734
    
    
    
    2,993$
    23,081
    
    
    $
    25,951
  8.
    Long-Term Debt Current
    
    
    Non-CurrentJanuary 1,
    
    
    January 3,
    
    
    January 1,
    
    
    January 3,(In Thousands)
    
    2005
    
    
    2004
    
    
    2005
    
    
    2004Obligations under capital
leases
    
    $
    273
    
    
    $
    245
    
    
    $
    536
    
    
    $
    8107% Subordinated income
debentures due
September 1, 2014
    
    
    
    
    
    
    
    
    
    
    1,228
    
    
    
    1,228$
    273
    
    
    $
    245
    
    
    $
    1,764
    
    
    $
    2,038
 55




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##### Table of Contents



At January 1, 2005, the approximate principal payments required on long-term debt for each
fiscal year are as follows: (In Thousands)2006
    
    $
    3042007
    
    
    2322014
    
    
    1,228$
    1,764
  The Company has bank revolving lines of credit in the amount of $12,000,000 which expires in
August 2006 and $3,000,000 which expires in October 2005. Borrowings bear interest at the
banks prime rate or the adjusted London Interbank Offer Rate (LIBOR) plus an index up to 1.2%.
At the end of 2004 and 2003, there were no amounts borrowed against either of the revolving
lines of credit. The Company currently maintains four standby letters of credit aggregating
$10,844,000 pursuant to the Companys general liability and workers compensation
self-insurance programs. The standby letters of credit reduce the available borrowings under
its revolving lines of credit.Debentures: The indenture relating to the 7% subordinated income debentures (7% Debentures),
due September 1, 2014, provides for interest payable semi-annually on March 1 and September 1
to the extent that current annual net income is sufficient therefor, or at the discretion of
the Company, out of available retained earnings. No accrued interest was in arrears as of
January 1, 2005. The debentures are recorded at face value which approximates its fair value.9.
    Capital StockClass A Common Stock: The Company is authorized to issue 10,000,000 shares of Class A, par
value $.25 per share. At January 1, 2005 and January 3, 2004, shares issued were 4,740,452 and
3,374,868,respectively, including 1,357,200 treasury shares. During 2003, the Company
purchased and retired 4,942 shares of its Class A for an aggregate purchase price of
approximately $296,000. The Class A has one vote per share on all matters on which
stockholders are entitled to vote or consent.Class B Common Stock: The Company was authorized to issue 1,500,000 shares of convertible
participating Class B, par value $.25 per share. At January 1, 2005 and January 3, 2004,
there were 0 and 1,363,584 shares issued and outstanding. The Class B had ten votes per
share on virtually all matters on which stockholders were entitled to vote or consent.
Cash or property dividends on Class B were restricted to an amount equal to 90% of any
dividend paid on Class A. Transfer of Class B was restricted to other Class B
stockholders and certain other classes of transferees. Class B was convertible, at the
option of the holder, into Class A on a share-for-share basis.On October 25, 2004, the Companys Board of Directors declared a special dividend of $20 per
share on its Class A and $18 per share on its Class B. The dividend totaled approximately
$67,665,000 and was paid on December 16, 2004 to holders of record on November 15, 2004. 56




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##### Table of Contents



As of the dividend declaration date, Bernard Briskin, Chairman of the Board and Chief Executive
Officer of the Company, was the beneficial owner of 1,362,496 shares of the Companys Class B
(a portion of which was beneficially owned with his spouse), representing over 99% of the then
outstanding Class B of the Company. On November 10, 2004, Mr. Briskin and his spouse elected
to convert shares of Class B owned by them into an equal number of the Companys Class A
 shares. The conversion of these shares triggered the automatic and simultaneous conversion of
all remaining Class B shares as provided under the Companys Restated Certificate of
Incorporation. As a result, all owners of the Companys Class B became owners of Class A prior
to the dividend record date and were entitled to receive the dividend payable on Class A issued
upon such conversion.The Board of Directors also approved a $20 antidilution adjustment reducing the exercise price
of all outstanding SARs to account for the anticipated effect of the special dividend on the
Companys Class A share price.On January 20, 2005, the Company paid a regular quarterly cash dividend of 25 cents per
share of Class A, aggregating $846,000, to stockholders of record on December 31, 2004.10.
    Stock Options and Stock Appreciation RightsIn 1998, the Company adopted the Stock Option Plan which initially provided for the granting of
stock options to key employees to purchase up to 35,000 shares of the Companys Class A. The
Stock Option Plan was amended in fiscal 2000 to increase the number of shares available
thereunder to an aggregate of 70,000 shares. The objective of the Stock Option Plan is to
attract and retain quality personnel and to promote the success of the Company by providing
employees the opportunity to share in its growth. These options vest at 25% per year beginning
at the end of the first year and expire five years from the date of grant. The exercise price
of stock options granted under the Stock Option Plan is equal to the fair market value of the
Companys Class A on the date of grant. There were no stock options issued and outstanding as
of January 1, 2005.The Company also has granted SARs covering shares of the Companys Class A to non-employee
directors and certain officers and employees of the Company. Each SAR entitles the holder to
receive upon exercise thereof the excess of the fair market value of a share of Class A on the
date of exercise over the fair market value of such share on the date granted. The SARs vest
25% each year beginning at the end of the first year and expire five years from the date of
grant.Stock options and SARs transactions during the past three years are summarized below. The
weighted average exercise price of SARs outstanding on October 25, 2004, was adjusted to
reflect the declaration of a special dividend of $20 per share of the Companys Class A on that
date to shareholders of record on November 15, 2004. 57




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##### Table of Contents



SARs (1)Officers and
    
    
    Non-EmployeeStock Options (1)
    
    
    Employees
    
    
    DirectorsWeighted
    
    
    
    
    
    
    Weighted
    
    
    
    
    
    
    WeightedOptions
    
    
    Average Price ($)
    
    
    SARs
    
    
    Average Price ($)
    
    
    SARs
    
    
    Average Price ($)Outstanding as of 12/29/01
    
    
    41,500
    
    
    
    16.97
    
    
    
    20,000
    
    
    
    14.53
    
    
    
    50,000
    
    
    
    12.85Exercised
    
    
    14,750
    
    
    
    19.07
    
    
    
    12,500
    
    
    
    16.72
    
    
    
    17,500
    
    
    
    9.06Outstanding as of 12/28/02
    
    
    26,750
    
    
    
    15.81
    
    
    
    7,500
    
    
    
    10.89
    
    
    
    32,500
    
    
    
    14.89Granted
    
    
    
    
    
    
    
    
    
    
    64,500
    
    
    
    51.88
    
    
    
    10,000
    
    
    
    34.25Exercised
    
    
    23,875
    
    
    
    16.62
    
    
    
    3,125
    
    
    
    13.44
    
    
    
    13,250
    
    
    
    9.06Forfeitures
    
    
    875
    
    
    
    9.06Outstanding as of 1/3/04
    
    
    2,000
    
    
    
    9.06
    
    
    
    68,875
    
    
    
    49.16
    
    
    
    29,250
    
    
    
    24.15Granted
    
    
    
    
    
    
    
    
    
    
    13,000
    
    
    
    57.00
    
    
    
    50,000
    
    
    
    57.50Exercised
    
    
    2,000
    
    
    
    9.06
    
    
    
    9,450
    
    
    
    34.81
    
    
    
    19,250
    
    
    
    19.71Outstanding as of 1/1/05
    
    
    0
    
    
    
    0
    
    
    
    72,425
    
    
    
    52.44
    
    
    
    60,000
    
    
    
    53.36Exercisable as of 1/1/05
    
    
    
    
    
    
    
    
    
    
    11,050Available for grant as of
1/1/05
    
    
    28,500
    
    
    
    
    
    
    
    N/A
    
    
    
    
    
    
    
    N/A
 The following table summarizes information about the Companys SARs outstanding at January
1, 2005: Options Outstanding (1)
    
    
    Options Exercisable (1)WeightedAverage
    
    
    Weighted
    
    
    
    
    
    
    WeightedRemaining
    
    
    Average
    
    
    
    
    
    
    Average($) Range of
    
    Number
    
    
    Contractual
    
    
    Exercise
    
    
    Number
    
    
    ExerciseExercise Price (1)
    
    Outstanding
    
    
    Life
    
    
    Price ($)
    
    
    Exercisable
    
    
    Price ($)SARs  Officers & Employees40.50
    
    
    20,000
    
    
    3.6 years
    
    
    40.50
    
    
    
    5,000
    
    
    
    40.5057.00
    
    
    39,425
    
    
    3.9 years
    
    
    57.00
    
    
    
    6,050
    
    
    
    57.0057.00
    
    
    13,000
    
    
    4.5 years
    
    
    57.0072,425
    
    
    3.9 years
    
    
    52.44
    
    
    
    11,050
    
    
    
    49.53SARs  Non-Employee Directors28.00
    
    
    2,500
    
    
    1.5 years
    
    
    28.0034.25
    
    
    7,500
    
    
    3.3 years
    
    
    34.2557.50
    
    
    50,000
    
    
    4.1 years
    
    
    57.5060,000
    
    
    3.8 years
    
    
    53.36
    
    
    
    0
    
    
    
    0
   (1)
    
    Exercise price reflects a $20 antidilution adjustment. See Note 9 above. For 2004, 2003 and 2002, the Company incurred compensation expense related to SARs of
$3,658,000, $740,000 and $481,000, respectively. 58




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11.
    Retirement PlansThe Company contributes to multi-employer union pension plans, administered by various
trustees, which may be deemed to be defined benefit plans. Contributions to these plans are
based upon negotiated wage contracts. Information relating to accumulated benefits and fund
assets as they may be allocable to the participants at January 1, 2005 is not available. The
Companys total union pension expense for all plans for 2004, 2003 and 2002 amounted to
$6,064,000, $4,787,000 and $3,086,000, respectively. Contributions to the multi-employer union
pension plan covering the majority of the Companys employees were suspended for two months in
2003 and six months in 2002.The Arden Group, Inc. 401(k) Retirement Savings Plan (Company Savings Plan) covers all nonunion
employees of the Company and its subsidiaries who have attained the age of 18 and have
completed at least one year of service. The Company Savings Plan provides that, with certain
limitations, a participating employee may elect to contribute up to 100% of such employees
annual compensation up to a maximum of $13,000 in 2004 to the Company Savings Plan on a
tax-deferred basis. The Company made discretionary contributions to the Company Savings Plan
of $805,000, $837,000 and $806,000 for the years 2004, 2003 and 2002, respectively.The Company maintains a noncontributory, trusteed Stock Bonus Plan (Plan) which is qualified
under Section 401(a) of the Internal Revenue Code of 1986, as amended. Under the Third
Amendment to the Plan, effective January 1, 2002, no new participants or contributions to the
Plan are allowed. Existing contributions must be invested in the Companys Class A with excess
cash being invested in certain government-backed securities.An employment agreement with a key executive officer provides for annual retirement
compensation equal to 25% of his average base salary and bonus earned in the last three years
prior to his retirement. The Company has accrued its obligation under the terms of the
employment agreement. The Company accrued $521,000, $101,000 and $510,000 toward this benefit
in 2004, 2003 and 2002, respectively.12.
    Multi-Employer Union Health Care PlansThe Company contributes to multi-employer union health care plans, administered by various
trustees, in accordance with the provisions of various labor contracts. Contributions to these
plans are generally based on the number of straight-time hours worked. The Companys expense
for these plans totaled $16,977,000, $21,019,000 and $11,927,000 for 2004, 2003 and 2002,
respectively. Health care expense in 2003 reflects a $5,797,000 assessment by the trust fund
covering the majority of the Companys employees to pay health care claims and restore trust
fund reserves depleted during the labor dispute. In addition, pension plan contributions for
the same group of employees were suspended for two months in 2003 and six months in 2002.
There were no other employer withdrawals, shortfall contributions, maintenance of benefit
clauses or other material changes that affected the comparability of employer and
multi-employer contributions from year to year. 59




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13.
    Income TaxesThe composition of the federal and state income tax provision (benefit) is as follows: (In Thousands)
    
    2004
    
    
    2003
    
    
    2002Current:Federal
    
    $
    11,433
    
    
    $
    12,457
    
    
    $
    7,420State
    
    
    3,385
    
    
    
    3,811
    
    
    
    2,026Total current tax provision
    
    
    14,818
    
    
    
    16,268
    
    
    
    9,446Deferred:Federal
    
    
    709
    
    
    
    (3,587
    )
    
    
    (73
    )State
    
    
    (29
    )
    
    
    (1,358
    )
    
    
    (17
    )Total deferred tax provision
    
    
    680
    
    
    
    (4,945
    )
    
    
    (90
    )Total income tax provision
    
    $
    15,498
    
    
    $
    11,323
    
    
    $
    9,356
  The Companys deferred tax assets (liabilities) were attributable to the following: (In Thousands)
    
    January 1, 2005
    
    
    January 3, 2004Deferred tax assets:Accrued expenses
    
    $
    6,640
    
    
    $
    6,369Deferred rent
    
    
    1,985
    
    
    
    1,822State income taxes
    
    
    1,170
    
    
    
    1,174Allowance for doubtful accounts
    
    
    74
    
    
    
    73Capital lease obligations
    
    
    333
    
    
    
    433Other
    
    
    328
    
    
    
    1,243Deferred tax assets
    
    
    10,530
    
    
    
    11,114Deferred tax liabilities:Deferred gain on debenture exchange
    
    
    (3,016
    )
    
    
    (3,177
    )Capital lease assets
    
    
    (126
    )
    
    
    (172
    )Other
    
    
    (1,058
    )
    
    
    (755
    )Deferred tax liabilities
    
    
    (4,200
    )
    
    
    (4,104
    )Deferred income taxes, net
    
    $
    6,330
    
    
    $
    7,010
  Reconciliation of the statutory federal rate and effective rate is as follows: 2004
    
    
    2003
    
    
    2002(In Thousands, Except Percentage Amounts)
    
    Amount
    
    
    Rate
    
    
    Amount
    
    
    Rate
    
    
    Amount
    
    
    RateFederal tax at statutory rate
    
    $
    13,360
    
    
    
    35.0
    %
    
    $
    9,767
    
    
    
    35.0
    %
    
    $
    8,151
    
    
    
    35.0
    %State income taxes, net of
federal tax benefit
    
    
    2,193
    
    
    
    5.7
    %
    
    
    1,603
    
    
    
    5.7
    %
    
    
    1,338
    
    
    
    5.7
    %Other
    
    
    (55
    )
    
    
    ( .1
    %)
    
    
    (47
    )
    
    
    ( .1
    %)
    
    
    (133
    )
    
    
    ( .5
    %)$
    15,498
    
    
    
    40.6
    %
    
    $
    11,323
    
    
    
    40.6
    %
    
    $
    9,356
    
    
    
    40.2
    %
  14.
    LeasesThe principal kinds of property leased by the Company and its subsidiaries are supermarket
buildings. The most significant obligations assumed under the lease terms, other than rental
payments, are the upkeep of the facilities, insurance and property taxes. Most supermarket
leases contain contingent rental provisions based on sales volume and have renewal options. 60




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The Companys decision to exercise renewal options is primarily dependent on the level of
business conducted at the location and the profitability thereof.All leases and subleases with an initial term greater than one year are accounted for under
SFAS 13, Accounting for Leases. These leases are classified as either capital leases,
operating leases or subleases, as appropriate.Assets Under Capital Leases: Assets under capital leases are capitalized using interest rates
appropriate at the inception of each lease. Contingent rentals associated with capital leases
in 2004, 2003 and 2002 were $464,000, $428,000 and $235,000, respectively, and accordingly have
been charged to expense as incurred. Following is an analysis of assets under capital leases: (In Thousands)
    
    January 1, 2005
    
    
    January 3, 2004Buildings:Cost
    
    $
    3,058
    
    
    $
    3,058Accumulated amortization
    
    
    (2,749
    )
    
    
    (2,636
    )$
    309
    
    
    $
    422
  Future minimum lease payments for the assets under capital leases at January 1, 2005 are as
follows: (In Thousands)2005
    
    $
    3472006
    
    
    3472007
    
    
    246Total minimum obligations
    
    
    940Interest
    
    
    (131
    )Present value of net minimum obligations
    
    
    809Current portion
    
    
    (273
    )Long-term obligations
    
    $
    536
  Operating Leases and Subleases: In addition to capital leases, the Company is obligated under
operating leases, primarily for buildings, which expire at various dates through 2026. Future
minimum lease payments for all noncancelable operating leases having a remaining term in excess
of one year at January 1, 2005 are as follows: Deduct
    
    
    NetSublease
    
    
    Rental(In Thousands)
    
    Commitments
    
    
    Rentals
    
    
    Commitments2005
    
    $
    7,537
    
    
    $
    597
    
    
    $
    6,9402006
    
    
    7,980
    
    
    
    617
    
    
    
    7,3632007
    
    
    8,250
    
    
    
    615
    
    
    
    7,6352008
    
    
    7,879
    
    
    
    611
    
    
    
    7,2682009
    
    
    7,539
    
    
    
    613
    
    
    
    6,926Thereafter
    
    
    76,533
    
    
    
    1,700
    
    
    
    74,833$
    115,718
    
    
    $
    4,753
    
    
    $
    110,965
 61




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Rent expense under operating leases was as follows: (In Thousands)
    
    2004
    
    
    2003
    
    
    2002Minimum rent
    
    $
    8,870
    
    
    $
    8,002
    
    
    $
    8,301Contingent rent
    
    
    1,629
    
    
    
    2,043
    
    
    
    1,27710,499
    
    
    
    10,045
    
    
    
    9,578Sublease rentals
    
    
    (1,636
    )
    
    
    (1,673
    )
    
    
    (1,707
    )$
    8,863
    
    
    $
    8,372
    
    
    $
    7,871
  15.
    Related Party TransactionsAt December 29, 2001, the Company held two notes receivable with balances totaling $135,000
from an officer/director of the Company. In August 2002, the notes were repaid in full by the
officer/director. These notes arose from transactions in 1979 and 1980 whereby the Company
loaned the officer/director money to purchase shares of the Companys Class A at the then fair
market value. The notes bore interest at the rate of 6% per annum payable annually.A director of the Company is a partner of a law firm which performs legal services for the
Company.16.
    Commitments and Contingent LiabilitiesThe Company has an employment agreement with a key executive officer and shareholder which
expires on January 1, 2007. In addition to a base salary, the agreement provides for a bonus
based on pre-tax earnings. No maximum compensation limit exists. Total salary and bonus
expensed in 2004, 2003 and 2002 was approximately $1,952,000, $1,565,000 and $1,379,000,
respectively.The Company is primarily self-insured for losses related to workers compensation and general
and auto liability claims. The Company maintains stop-loss coverage to limit its loss exposure
on a per claim basis. Liabilities associated with the risks that are retained by the Company
are estimated, in part, by considering historical claims experience and regression analysis.
Accruals are based on reported claims and an estimate of claims incurred but not reported.
While the ultimate amount of claims incurred are dependent on future developments, in
managements opinion recorded reserves are adequate to cover the future payment of claims. The
Companys liability reserve for unpaid and incurred but not reported claims at January 1, 2005
and January 3, 2004 was approximately $6,868,000 and $3,763,000, respectively. The increase
in the reserve is the result of the Companys switch from a guaranteed cost
workers compensation program to a high deductible workers compensation policy in
June 2003. The reserve as of January 3, 2004 reflects the accrual for claims for approximately seven
months, whereas, the reserve as of January 1, 2005 covers approximately nineteen months.As of January 1, 2005, management had authorized expenditures on incomplete projects for the
construction and purchase of property, plant and equipment which totaled approximately $2,086,000.The Company and its subsidiaries are subject to a myriad of environmental laws, regulations and
lease covenants with its landlords regarding air, water and land use, products for sale, and
the use, storage and disposal of hazardous materials. The Company believes it substantially
complies, and has in the past substantially complied, with federal, state and 62




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local environmental laws and regulations and private covenants. The Company cannot, at this
time, estimate the expense it ultimately may incur in connection with any violations; however,
it believes any such claims will not have a material adverse impact on either the Companys
consolidated financial position, results of operations or cash flows.The Company or its subsidiaries are defendants in a number of cases currently in litigation,
being vigorously defended, in which the complainants seek monetary damages. As of the date
hereof, no estimate of potential liability, if any, is possible. Based upon current
information, management, after consultation with legal counsel defending the Companys
interests in the cases, believes the ultimate disposition thereof will not have a material
effect upon either the Companys consolidated financial position, results of operations or cash
flows.17.
    Selected Quarterly Financial Data (Unaudited) (In Thousands, Except Per Share Data)DilutedGross
    
    
    
    
    
    
    Net IncomeQuarter
    
    
    
    
    
    Sales (1)
    
    
    Profit (1)
    
    
    Net Income (2)
    
    
    Per Share (3)2003First
    

    
    $
    99,620
    
    
    $
    44,325
    
    
    $
    2,785
    
    
    $
    .82Second
    
    
    100,550
    
    
    
    45,012
    
    
    
    3,275
    
    
    
    .97Third
    
    
    101,060
    
    
    
    45,432
    
    
    
    2,985
    
    
    
    .88Fourth (4)(5)
    
    
    185,148
    
    
    
    80,951
    
    
    
    7,536
    
    
    
    2.232004First (4)
    
    $
    147,394
    
    
    $
    66,054
    
    
    $
    8,555
    
    
    $
    2.53Second
    
    
    119,863
    
    
    
    53,037
    
    
    
    5,767
    
    
    
    1.70Third
    
    
    113,391
    
    
    
    50,955
    
    
    
    4,416
    
    
    
    1.31Fourth (5)
    
    
    122,250
    
    
    
    55,367
    
    
    
    3,934
    
    
    
    1.16
   (1)
    
    Sales and gross profit for 2003 and 2004 reflect the Companys change in classification of
net rental, license and other income to sales rather than as a reduction of DSG&A expense.
In addition, sales and cost of sales for one licensed department in the Companys stores were
previously recorded on the gross basis. The sales figures shown above reflect net licensed
revenue as a component of sales.(2)
    
    The fourth quarter of 2003 includes a $4,311 impairment charge related to the Companys
Pasadena location and a $5,797 charge to pay union health care claims and restore trust fund
reserves to the required levels. The second quarter of 2004 includes a $1,570 gain from the
sale of the Companys investment in a limited partnership which was accounted for under the
cost method.(3)
    
    Earnings per share is calculated using the weighted average outstanding shares for the
quarter. 63




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(4)
    
    The fourth quarter 2003 and the first quarter 2004 results were favorably impacted
by a labor dispute in the Companys trade area.(5)
    
    The fourth quarter of 2003 was a 14-week quarter compared to 13 weeks in the fourth quarter
of 2004. 64




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Report of Independent Registered Public Accounting Firm To the Stockholders of Arden Group, Inc.: We have completed an integrated audit of Arden Group, Inc.s January 1, 2005 consolidated financial
statements and of its internal control over financial reporting as of January 1, 2005 and audits of
its January 3, 2004 and December 28, 2002 consolidated financial statements in accordance with the
standards of the Public Company Accounting Oversight Board (United States). Our opinions, based on
our audits, are presented below. Consolidated financial statements In our opinion, the accompanying consolidated balance sheets and the related consolidated
statements of operations and comprehensive income, stockholders equity and cash flows, present
fairly, in all material respects, the financial position of Arden Group, Inc. and its subsidiaries
at January 1, 2005 and January 3, 2004, and the results of their operations and their cash flows
for each of the three years in the period ended January 1, 2005 in conformity with accounting
principles generally accepted in the United States of America. 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 of these statements in
accordance with the standards of the Public Company Accounting Oversight Board (United
States). 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 of financial
statements includes examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and significant estimates made
by management, and evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion. Internal control over financial reporting Also, in our opinion, managements assessment, included in Managements Report on Internal
Control Over Financial Reporting appearing under Item 9A, that the Company maintained effective
internal control over financial reporting as of January 1, 2005 based on criteria established in
Internal Control  Integrated Frameworkissued by the Committee of Sponsoring Organizations of
the Treadway Commission (COSO), is fairly stated, in all material respects, based on those
criteria. Furthermore, in our opinion, the Company maintained, in all material respects,
effective internal control over financial reporting as of January 1, 2005, based on criteria
established in Internal Control  Integrated Frameworkissued by the COSO. The Companys
management is responsible for maintaining effective internal control over financial reporting and
for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express opinions on managements 65




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assessment and on the effectiveness of the Companys internal control over financial reporting
based on our audit. We conducted our audit of internal control over financial reporting in
accordance with the standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to obtain reasonable assurance about
whether effective internal control over financial reporting was maintained in all material
respects. An audit of internal control over financial reporting includes obtaining an
understanding of internal control over financial reporting, evaluating managements assessment,
testing and evaluating the design and operating effectiveness of internal control, and performing
such other procedures as we consider necessary in the circumstances. We believe that our audit
provides a reasonable basis for our opinions. A companys internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles. A
companys internal control over financial reporting includes those policies and procedures that (i)
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of management and directors of the company;
and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the companys assets that could have a material effect on the
financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate. PricewaterhouseCoopers LLP
Los Angeles, California
March 8, 2005 66




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ARDEN GROUP, INC. AND
CONSOLIDATED SUBSIDIARIES  INDEX TO
EXHIBITS Exhibit3.1.1
    
    Restated Certificate of Incorporation of Arden Group, Inc. dated November 7, 1988 filed as
Exhibit 3.1 to the Annual Report on Form 10-K of Arden Group, Inc. for the fiscal year ended
December 31, 1988 and incorporated herein by reference.3.1.2
    
    Certificate of Amendment of Restated Certificate of Incorporation of Arden Group, Inc. dated
June 17, 1998 filed as Exhibit 3.1.2 to the Annual Report on Form 10-K of Arden Group, Inc.
for the fiscal year ended January 2, 1999 and incorporated herein by reference.3.2.1
    
    Amended and Restated By-Laws of Arden Group, Inc. as amended as of November 6, 2001 filed as
Exhibit 3.2.2 to the Annual Report on Form 10-K of Arden Group, Inc. for the fiscal year ended
December 29, 2001 and incorporated herein by reference.4.1
    
    Indenture dated as of September 1, 1964 between Arden Farms Co. and Security First National
Bank, as Trustee, pertaining to 6% Subordinated Income Debentures, due September 1, 2014,
filed as Exhibit 4.2 to Registration Statement on Form S-1 of Arden Group, Inc. and
Arden-Mayfair, Inc., Registration No. 2-58687, and incorporated herein by reference.4.1.1
    
    First Supplemental Indenture dated as of November 7, 1978, to Indenture which is Exhibit
4.1, filed as Exhibit 7 to the Annual Report on Form 10-K of Arden Group, Inc. for the fiscal
year ended December 30, 1978 and incorporated herein by reference.4.1.2
    
    Second Supplemental Indenture dated as of November 7, 1978, to Indenture which is Exhibit
4.1, filed as Exhibit 8 to the Annual Report on Form 10-K of Arden Group, Inc. for the fiscal
year ended December 30, 1978 and incorporated herein by reference.4.1.3
    
    Third Supplemental Indenture dated April 24, 1981, to Indenture which is Exhibit 4.1, filed
as Exhibit 4.2.3 to the Quarterly Report on Form 10-Q of Arden Group, Inc. for the quarter
ended April 4, 1981 and incorporated herein by reference.10.1*
    
    Employment Agreement dated May 13, 1988 by and among Arden Group, Inc., Arden-Mayfair, Inc.,
Telautograph Corporation and Gelsons Markets and Bernard Briskin, filed as Exhibit 10 to the
Quarterly Report on Form 10-Q of Arden Group, Inc. for the quarter ended July 2, 1988 and
incorporated herein by reference.
 67




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Exhibit10.2*
    
    Amendment to Employment Agreement dated April 27, 1994 by and between Arden Group, Inc.,
Arden-Mayfair, Inc., AMG Holdings, Inc. and Gelsons Markets and Bernard Briskin, filed as
Exhibit 10.7 to the Quarterly Report on Form 10-Q of Arden Group, Inc. for the quarter ended
April 2, 1994 and incorporated herein by reference.10.3
    
    Form of Indemnification Agreement between the Registrant and the Directors and certain
officers, filed as Exhibit 10.13 to the Annual Report on Form 10-K of Arden Group, Inc. for
the fiscal year ended December 29, 1990 and incorporated herein by reference.10.4*
    
    Second Amendment to Employment Agreement as of January 1, 1997 by and between Arden Group,
Inc., Arden-Mayfair, Inc., AMG Holdings, Inc. and Gelsons Markets and Bernard Briskin, filed
as Exhibit 10.9 to the Annual Report on Form 10-K of Arden Group, Inc. for the fiscal year
ended January 3, 1998 and incorporated herein by reference.10.5*
    
    Phantom Stock Plan of Arden Group, Inc., filed as Exhibit 10.11 to the Annual Report on Form
10-K of Arden Group, Inc. for the fiscal year ended January 2, 1999 and incorporated herein by
reference.10.6*
    
    Form of Non-Employee Director Phantom Stock Unit Agreement with each of John G. Danhakl,
Robert A. Davidow, Daniel Lembark and Ben Winters filed as Exhibit 10.1 to the Quarterly
Report on Form 10-Q of Arden Group, Inc. for the quarter ended July 1, 2000 and incorporated
herein by reference.10.7*
    
    Form of Non-Employee Director Phantom Stock Unit Agreement with Kenneth A. Goldman dated
June 19, 2001 filed as Exhibit 10.13 to the Annual Report on Form 10-K of Arden Group, Inc.
for the fiscal year ended December 29, 2001 and incorporated herein by reference.10.8*
    
    Form of Amendment to Non-Employee Director Phantom Stock Unit Agreement with each John G.
Danhakl, Robert A. Davidow, Daniel Lembark, Ben Winters and Kenneth A. Goldman dated December
9, 2002 filed as Exhibit 10.14 to the Annual Report on Form 10-K of Arden Group, Inc. for the
fiscal year ended December 28, 2002 and incorporated herein by reference.10.9*
    
    Arden Group, Inc., Non-Officer and Non-Director Stock Option Plan filed as Exhibit 10.15 to
the Annual Report on Form 10-K of Arden Group, Inc. for the fiscal year ended December 28,
2002 and incorporated herein by reference.10.9.1*
    
    Form of Stock Option Plan Agreement filed as Exhibit 10.15.1 to the Annual Report on Form
10-K of Arden Group, Inc. for the fiscal year ended December 28, 2002 and incorporated herein
by reference.
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##### Table of Contents



Exhibit10.10*
    
    Form of Non-Employee Director Phantom Stock Unit Agreement with Steven Romick filed as
Exhibit 10.1 to the Quarterly Report on Form 10-Q of Arden Group, Inc. for the quarter ended
June 28, 2003 and incorporated herein by reference.10.11*
    
    Form of Non-Employee Director Phantom Stock Unit Agreement with each of John G. Danhakl,
Robert A. Davidow, Ben Winters, Kenneth A. Goldman and Steven Romick dated January 20, 2004.21.
    
    Subsidiaries of Registrant filed as Exhibit 21 to the Annual Report on Form 10-K of Arden
Group, Inc. for the fiscal year ended December 28, 2002 and incorporated herein by reference.23.1
    
    Consent of Independent Registered Public Accounting Firm.31.1
    
    Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.31.2
    
    Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.32.1
    
    Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.32.2
    
    Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.*
    
    Indicates management contracts or compensatory plans or arrangements required to be filed as
an exhibit to this report.
 69