**UNITED STATES SECURITIES AND EXCHANGE COMMISSION**

**Washington,D. C. 20549**

 

**FORM 10-K**
| **(Mark One)**                           |
|------------------------------------------|
| **ý**                               |   | **ANNUAL  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|                                     |   | **For the fiscal year ended December  28, 2002** |
|                                     |   |   |
| **OR**                                   |
|                                     |   |   |
| **o**                                    |   | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF   THE SECURITIES EXCHANGE ACT OF 1934** |
|                                     |   | **For the transition period  from                             to                             ** |
|                                     |   |   |
| **Commission  file number  0-9904** |

 

**ARDEN GROUP, INC.**

(Exact name of registrantas specified in its charter)

 

| **Delaware**                                                                      |   | **95-3163136**                        |
|-----------------------------------------------------------------------------------|--------|---------------------------------------|
| (State or other  jurisdiction of   incorporation or organization)                 |   | (I.R.S. Employer  Identification No.) |
|                                                                              |   |                                  |
| **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 registered** |
|-------------------------|--------|-----------------------------------------------|
| None                    |   | None                                          |

 

Securities registered pursuant to Section 12(g) of the Act:

 

Class A Common Stock

(Title of class)

 

Indicate by check mark whether the registrant (1) has filed all reportsrequired to be filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days. Yes  ý   No o

 

Indicate by a check mark if disclosure of delinquent filers pursuant toItem 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 informationstatements incorporated by reference in Part III of this Form 10-K or anyamendment to this Form 10-K.  o

 

Indicate yes by check mark whether the registrant is an acceleratedfiler (as defined in Rule 12b-2 of the Securities Exchange Act of 1934).  Yes  o   No  ý

 

The aggregate market value of the voting and non-voting common equityheld by non-affiliates of the registrant based on the price at which the ClassA Common Stock last sold on June 28, 2002, the last business day of theregistrants most recently completed second fiscal quarter was $69,074,991.

 

The number of shares outstanding of the registrant’s classes of commonstock as of March 3, 2003 was:

 

2,016,985 of Class ACommon Stock

1,363,584 of Class BCommon Stock

 

 

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**TABLE OF CONTENTS**

 
| **PART I**         |
|--------------------|
|               | Item  1. | Business |
|               | Item  2. | Properties |
|               | Item 3. | Legal Proceedings |
|               | Item  4. | Submission  of Matters to a Vote of Security Holders |
|               |   |   |
| **PART II**        |
|               | Item  5. | Market  for the Registrant’s Common Stock and Related Stockholder Matters |
|               | Item  6. | Selected  Financial Data |
|               | Item  7. | Management’s  Discussion and Analysis of Financial Condition and Results of Operations |
|               | Item  7A. | Quantitative  and Qualitative Disclosures about Market Risks |
|               | Item  8. | Financial  Statements and Supplementary Data |
|               | Item  9. | Changes  in and Disagreements with Accountants on Accounting and Financial Disclosure |
|               |   |   |
| **PART III**       |
|               | Item  10. | Directors  and Executive Officers of the Registrant |
|               | Item  11. | Executive  Compensation |
|               | Item  12. | Security  Ownership of Certain Beneficial Owners and Management and Related Stockholder  Matters |
|               | Item  13. | Certain  Relationships and Related Transactions |
|               |   |   |
| **PART IV**        |
|               | Item  14. | Controls  and Procedures |
|               | Item  15. | Exhibits,  Financial Statement Schedules and Reports on Form 8-K |
|               |   |   |
| **Signatures**     |
|               |   |   |
| **Certifications** |
|                    |  |  |  |  |  |

 

 

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**PART I**

 
| Item 1. | Business;       |
|---------|-----------------|
|    |            |
| Item 2. | Properties; and |

 

**General**

 

The Registrant, Arden Group, Inc. (the “Company”), is a holding companywith certain real estate holdings which conducts other operations through itswholly-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.

 

**Business and Properties**

 

**MarketOperations**

 

Gelson’s currently operates 18 supermarkets in SouthernCalifornia.  As of December 28, 2002, 16supermarkets operated under the name “Gelson’s” and two under the name“Mayfair.”  In January 2003, one of theMayfair locations was converted to the Gelson’s name and format as part of amajor remodel.  Gelson’s and Mayfair areself-service cash-and-carry markets which offer a broad selection of local andnational brands as well as a limited number of private label items.  Gelson’s targets the consumer who valuessuperior customer service, merchandise presentation, selection and qualityproducts.

 

**StoreFormats and Business Strategy**

 

Gelson’s business strategy is to offer a comfortable shopping experiencewhich is superior to its competitors in terms of customer service andmerchandise selection and presentation. The goal of this strategy is to continue to develop and maintainGelson’s loyal base of customers and appeal to potential new customers.  Central elements of this strategy are asfollows:

 

Merchandise  The merchandise offerings in the markets aretailored in response to Gelson’s customer profile.  Gelson’s stores, which range in size from approximately 18,000 to40,000 square feet, typically carry a wide range of items, including all of thetraditional grocery categories such as dry groceries, produce, meat, seafood,bakery, dairy, wine and liquor, floral, sushi, vitamins, health and naturalfood 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 andfreshness.  Gelson’s merchandisingemphasizes

 

1

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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 oneremaining Mayfair store is approximately 24,000 square feet and offers a merchandiseselection equal in quality to a Gelson’s but generally less broad.

 

Service   Gelson’s emphasizes customer service by offering a variety ofservice departments including seafood, delicatessen, floral, sushi and bakerydepartments.  Some Gelson’s storesinclude additional service departments such as fresh pizza, coffee bars andcarving carts offering cooked turkey and other meats.  Additionally, selected stores offer banking and pharmacy servicesthrough third parties.  Stores arestaffed so that, even at peak times, customer checkout time is minimized.  In addition to checkers, there are usuallypersonnel assigned to bagging and carrying out purchases.  All employees are encouraged to knowcustomers by name and assist them whenever possible.  All stores offer Company credit cards to qualified customers aswell as allowing customers 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 ofoperation determined by local code or lease provisions, or as appropriate forthe business characteristics of a specific area.

 

Presentation   All stores are maintained in accordancewith extremely high standards. Personnel continuously fill and face shelves with groceries.  Produce and other perishables areaggressively trimmed and culled to maintain quality and appearance.

 

Pricing   The pricing strategy at the stores is to be competitive withintheir market niches, ranging from the more traditional to the more exotic, specialtyor high-end retailers.

 

Expansion and Store Development   Management regularly evaluates thefeasibility of opening new stores in and outside its existing trade area andremodeling existing stores in order to maximize the existing stores’ appeal toconsumers and their profit potential. In 2002 capital expenditures totaled $4,023,000 including initial costsrelated to a major remodel in progress at year-end.

 

Advertising and Promotion   Gelson’s advertises in newspapers on alimited basis.  Direct advertising isvery limited (primarily newsletters and direct mail) and is typically eventrather than price oriented, emphasizing, for example, special holidayselections, specialty items and services, recipes and new products.

 

**Competition**

 

The retail grocery business is very competitive.  Competition in the supermarket business isbased primarily upon price, merchandise variety and quality, service andlocation.  The number of stores, marketshare and availability of capital are also important competitive factors.  Gelson’s is in direct competition withnumerous local outlets of regional and national supermarket chains (most ofwhich have greater resources and a larger market share than Gelson’s),independent grocery stores, convenience stores, specialty and gourmet marketsand food departments in mass merchandise and club stores.  Competition also exists from many othertypes of retailers with respect to particular products.  Gelson's competes primarily by offering acombination of high-quality products and superior customer service.  The Company also believes that Gelson’sprime store locations and long-standing reputation add to its competitivestrength.

 

2

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Certain competitors of the Company have recently commenced offeringhome delivery as an addition to their existing retail store operations.  The Company continues to monitor andevaluate opportunities for home delivery, but has elected not to do so at thistime.

 

**Seasonality**

 

Gelson’s business is somewhat seasonal, with sales tending to increaseduring the last quarter of the year due to the holiday season.

 

**Supportand Other Services**

 

Each store has an on-site stockroom, the size of which varies for eachstore. In addition, Gelson’s operates a 98,000 square foot warehouse and anadjacent 4,000 square foot truck service facility in the City of Commerce,California.  The central warehousedistributes to the stores fresh produce, liquor, wine, floral and certain groceryitems.  On a limited basis, the storesalso receive meat, delicatessen, paper goods, health and beauty aids, hardwareand supply items from the warehouse.

 

The bulk of all merchandise purchasing takes place at Gelson’s officein Encino, California.  Approximately41% of the purchases are distributed through the central warehouse; theremainder are delivered directly to the stores from manufacturers orwholesalers.  The central purchasing anddistribution operations are conducted based on electronic in-storeordering systems.  Stores place and receiveorders for merchandise up to six days per week, with perishables ordered morefrequently than other goods.

 

The largest supplier for the stores is Unified Western Grocers, Inc.(formerly Certified Grocers), a cooperative wholesaler which has been asupplier to the Company for approximately twenty-eight years and whichaccounted for approximately 22% of Gelson’s purchases in 2002.  No other supplier accounts for a materialpercentage of Gelson’s purchases.  TheCompany believes that there would be a negative impact if the Company were tolose Unified Western Grocers, Inc. as a supplier for Gelson’s, but that suchimpact would likely be mitigated by a combination of events, which couldinclude:  (i) purchasing certain itemsfor direct store delivery, thereby freeing warehouse capacity to allow otheritems to be purchased through the warehouse and (ii) purchasing certainproducts through other wholesalers. However, such a loss could have a short-term adverse effect on theperformance of Gelson’s.

 

**Employees**

 

Gelson’s has approximately 1,147 full-time and 1,149 part-time store,warehouse and office employees.  MostGelson’s employees are covered by union collective bargaining agreements thatestablish working conditions, benefits, hours, rates of pay and procedures forthe orderly settlement of disputes.  Ingeneral, these agreements have been negotiated on an area-wide andindustry-wide basis.  The Companybelieves that its employee relations are good.

 

In addition, Arden-Mayfair has approximately 64 full-time employees atits executive and headquarters offices, some of whom are covered by acollective bargaining agreement.

 

3

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**Properties**

 

The Company currently owns two of its freestanding supermarket propertiesand 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 18,000 square feetof space leased to multiple tenants in addition to the approximately 40,000square foot Gelson’s Market.  Fifteen supermarketsand the warehouse and distribution facilities which service the markets areleased.  Gelson's corporate offices inEncino, California are also leased. Generally, supermarkets are leased for terms of 20 years initially andmay include options up to an additional 20 years under leases which generallystipulate a minimum rental against a percentage of gross sales.  The average term remaining on thesupermarket leases, including renewal options, is approximately 19 years.  The 18 markets range in size fromapproximately 18,000 to 40,000 square feet. Gelson’s warehouse, distribution and truck service facilities in theCity of Commerce, California are leased and contain approximately 102,000square feet.  The term of the leaseexpires in November 2017 including renewal options.

 

The Company owns its 30,000 square foot corporate headquarters officebuilding in Compton, California.  Inaddition, AMG Holdings, Inc. (“AMG Holdings”), a wholly-owned subsidiary ofArden-Mayfair, leases a 64,000 square foot building in Los Angeles consistingof office and warehouse space, which is subleased until the lease on theproperty expires in 2012 (including renewal options).

 

**GovernmentalRegulation**

 

Gelson’s is subject to regulation by a variety of governmentalagencies, including the U.S. Food and Drug Administration, the CaliforniaDepartment of Alcoholic Beverage Control, and state and local healthdepartments.  The Company believes thatGelson’s and Mayfair store operations comply with all federal, state and localhealth, environmental and other laws and regulations.  Although the Company cannot predict the effect of future laws orregulations on its operations, expenditures for continued compliance withcurrent laws are not expected to have a material adverse effect on Gelson’scompetitive position or the Company’s consolidated financial position, resultsof operations or cash flows.

 

Item 3.    Legal Proceedings

 

**LegalProceedings**

 

The Company and certain of its subsidiaries are involved in a number ofpending legal and/or administrative proceedings.  Such proceedings are not expected individually or in theaggregate to have a material adverse impact upon either the Company’s consolidatedfinancial position, results of operations or cash flows.  See Note 15 of Notes to ConsolidatedFinancial Statements.

 
| Item 4. | Submission of Matters to a Vote of Security Holders |
|---------|-----------------------------------------------------|

 

None.

 

4

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**PART II**

 
| Item 5. | Market for the Registrant’s Common Equity and  Related Stockholder Matters                                                                                                                                                                                                                                                |
|---------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|    |                                                                                                                                                                                                                                                                                                                           |
| (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: |

 
|        |   | **2002** |   | **2001** |   |
|-------------|--------|----------|--------|----------|--------|
|        |   | **High** |   | **Low**  |   | **High** |   | **Low** |   |
|        |   |     |   |     |   |   |   |   |   |
| 1st Quarter |   | 69.95    |   | 57.00    |   | 43.00 |   | 36.75 |   |
| 2nd Quarter |   | 67.50    |   | 52.00    |   | 55.00 |   | 40.16 |   |
| 3rd Quarter |   | 63.49    |   | 51.51    |   | 58.00 |   | 38.00 |   |
| 4th Quarter |   | 61.75    |   | 51.20    |   | 62.20 |   | 44.00 |   |

 
|   | There is no established public trading market for  the Company’s Class B Common Stock (“Class B”), which is subject to various  restrictions on transfer.  Class B is  convertible, at the option of the holder, into Class A on a share-for-share  basis.                                                                                                                             |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                                                                                       |
| (b)    | As of December 28, 2002, there were 1,139 holders of  record of the Company’s Class A, with aggregate holdings of 1,998,735 shares  of Class A.  This does not include  1,357,200 shares of the Company’s Class A owned by AMG Holdings.  As of the same date, there were 9 holders  of record of the Company’s Class B, with aggregate holdings of 1,363,584  shares of Class B. |
|   |                                                                                                                                                                                                                                                                                                                                                                                                       |
| (c)    | No dividends have been paid on either Class A or  Class B during the past three years.   Cash or property dividends on Class B are restricted to an amount  equal to 90% of any dividend paid on Class A.                                                                                                                                                                                             |

 

5

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| Item 6. | Selected Financial Data |
|---------|-------------------------|

 

**ARDEN GROUP, INC. and consolidated subsidiarIES**

 
| **(In  Thousands, Except Share and Per Share Data)** |   | **2002**  |    | **2001**  |   | **2000**  |   | **1999**  |    | **1998**  |   |
|------------------------------------------------------|--------|-----------|---------|-----------|--------|-----------|--------|-----------|---------|-----------|--------|
|                                                 |   |      |    |      |   |      |   |      |    |      |   |
| Operations For  The Year:                            |   |      |    |      |   |      |   |      |    |      |   |
|                                                 |   |      |    |      |   |      |   |      |    |      |   |
| Sales                                                |   | $         | 401,378 |      | $      | 391,880   |   | $         | 359,994 |      | $      | 324,168 |   | $ | 296,487 |   |
| Gross profit                                         |   | 174,462   |    | 165,578   |   | 149,110   |   | 131,722   |    | 119,892   |   |
| Operating income                                     |   | 22,343    |    | 20,112    |   | 19,838    |   | 16,830    |    | 16,010    |   |
| Other income  (expense), net                         |   | 1,644     |    | 1,926     |   | 1,019     |   | 1,009     |    | 1,085     |   |
| Income tax  provision                                |   | 9,641     |    | 8,731     |   | 8,498     |   | 6,122     |    | 7,014     |   |
| Net income                                           |   | $         | 14,346  |      | $      | 13,307    |   | $         | 12,359  |      | $      | 11,717 |   | $ | 10,081 |   |
|                                                 |   |      |    |      |   |      |   |      |    |      |   |
| Depreciation and  amortization                       |   | $         | 8,139   |      | $      | 7,872     |   | $         | 6,719   |      | $      | 5,824 |   | $ | 5,618 |   |
|                                                 |   |      |    |      |   |      |   |      |    |      |   |
| Financial  Position At Year-End:                     |   |      |    |      |   |      |   |      |    |      |   |
|                                                 |   |      |    |      |   |      |   |      |    |      |   |
| Total assets                                         |   | $         | 137,353 |      | $      | 121,526   |   | $         | 118,160 |      | $      | 111,279 |   | $ | 93,126 |   |
| Working capital                                      |   | 48,760    |    | 27,868    |   | 27,424    |   | 24,677    |    | 25,747    |   |
| Long-term debt                                       |   | 2,283     |    | 3,134     |   | 6,735     |   | 8,322     |    | 6,369     |   |
| Stockholders’  equity                           |   | 101,191   |    | 85,139    |   | 77,267    |   | 69,276    |    | 58,358    |   |
| Capital  expenditures                                |   | 4,023     |    | 10,066    |   | 9,882     |   | 19,630    |    | 4,244     |   |
|                                                 |   |      |    |      |   |      |   |      |    |      |   |
| Per Share Data:                                      |   |      |    |      |   |      |   |      |    |      |   |
|                                                 |   |      |    |      |   |      |   |      |    |      |   |
| Net income per  share - basic                        |   | $         | 4.28    |      | $      | 3.93      |   | $         | 3.52    |      | $      | 3.27 |   | $ | 2.81 |   |
| Net income per  share - diluted                      |   | $         | 4.26    |      | $      | 3.92      |   | $         | 3.52    |      | $      | 3.27 |   | $ | 2.81 |   |
|                                                 |   |      |    |      |   |      |   |      |    |      |   |
| Basic weighted  average shares outstanding           |   | 3,355,020 |    | 3,389,234 |   | 3,513,028 |   | 3,585,472 |    | 3,585,472 |   |
| Diluted weighted  average shares outstanding         |   | 3,365,961 |    | 3,398,671 |   | 3,515,117 |   | 3,585,472 |    | 3,585,472 |   |

 

*All years are 52 weeks.*

 

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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 safeharbor for forward-looking statements made by or on behalf of the Company.  Certain statements contained in Management’sDiscussion and Analysis, in other parts of this report and in other Companyfilings 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 andexpectations regarding important risk factors and are based on informationcurrently available to us.

 

The Company cautionsreaders that any forward-looking statements contained in this report or made bythe management of the Company involve risks and uncertainties, and are subjectto change based on various important factors. The following factors, among others, could affect the Company’sfinancial results and could cause the Company’s financial performance to differmaterially from the expectations expressed in any forward-looking statementmade by or on behalf of the Company:

 

•     the strength of the U.S. economy, in particular,the economic conditions in Southern California;

•     the effects of and changes in fiscal policies andlaws, as well as, changes in accounting policies and practices;

•     inflation or deflation;

•      potential business disruptions from actsof terrorism or national emergencies;

•     the impact of fluctuations in the Company’s stockprice on compensation expense;

•     the ability of vendors, including Unified WesternGrocers, Inc., to continue providing products and services in a timely manner;

•     consolidations in the supermarket industry andcompetition from other supermarkets and food retailers, some of which arenon-union;

•     the ability to renew current leases at favorablerates;

•     the ability of the Company to materially increasesales at its new Pasadena store which is dependent upon, among other things,the nature and success of the other tenants’ businesses in the center and theability of potential Gelson’s customers to accept and use the center’sunderground parking and validation system;

•     whether the landlord of the Century City ShoppingCenter implements a major construction project, the details of such project asand if implemented, and the effect of such project on the Gelson's store;

•     the amount of future premium increases incurred bythe Company in order to maintain adequate insurance coverage;

•     the impact of the Company’s workers’ compensationsafety records and claims experience and any changes to the insuranceindustry’s rating process and premium schedules on workers’ compensation expense;

•     the retirement of existing senior management;

•     the term of any future suspension and subsequentreinstatement of union pension contributions, the number of hours worked by theapplicable union employees, the required rate of contribution and the futurerate of return received by the union pension plans on their investments;

•     the adequacy of self-insurance reserves forreported claims and incurred but not reported claims and the rate of increasein health care costs;

•     the impact of uninsured losses;

•     any changes in assumptions or market conditionsthat could affect management’s estimate of future cash flows when evaluatingassets for impairment.

 

7

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Critical AccountingPolicies

 

The preparation of financialstatements in conformity with GAAP requires management to make estimates andassumptions about future events that may affect the reported amounts of assets,liabilities, revenues and expenses, as well as the disclosure of contingentassets and liabilities.  Management hasestablished accounting policies that they believe are appropriate in order toensure the accurate reporting of the Company’s operating results, financialposition and cash flows.  The Companyapplies these accounting policies in a consistent manner.  Management bases their estimates onhistorical experience, current and expected economic conditions and variousother factors that management believes to be reasonable under thecircumstances.  These estimates andassumptions form the basis for making judgments about the carrying values ofassets and liabilities that are not readily apparent from other sources.  The Company reevaluates these significantfactors and makes adjustments where facts and circumstances dictate.  Future events and their effects cannot bedetermined with absolute certainty, and therefore actual results may differfrom these estimates.

 

Management believes thatthe following accounting policies are the most critical in the preparation ofthe Company’s financial statements because they involve the most difficult,subjective or complex judgments about the effect of matters that are inherentlyuncertain.

 

*Investments*

 

Investmentsare accounted for under the provisions of SFAS 115, “Accounting for CertainInvestments in Debt and Equity Securities.” Management determines the appropriate classification of its investmentsin marketable securities at the time of purchase and reevaluates suchdetermination at each balance sheet date. Debt securities for which the Company does not have the intent orability to hold to maturity and equity securities are classified asavailable-for-sale investments and any unrealized holding gains and losses areincluded as a separate component of stockholders’ equity.

 

*Inventories*

 

The Company estimatesinventory adjustments based on historical experience derived from periodicphysical inventories and other factors. Allowances for inventory adjustments are recorded based on theseestimates to properly reflect inventory at the balance sheet date.

 

*Impairment of Long-Lived Assets*

 

The Company monitors thecarrying value of long-lived assets for potential impairment each quarterwhenever events or changes in circumstances indicate the carrying value of anasset may not be recoverable.  Impairmentis determined by comparing projected undiscounted cash flows to be generated bythe asset to its carrying value.  Ifimpairment is identified, a loss would be recorded equal to the excess of theasset’s net book value over the asset’s fair value.

 

*General & Auto Liability Costs*

 

The Company is primarilyself-insured for losses related to general and auto liability claims for up to$250,000.  Accruals are based onreported claims and an estimate of

 

8

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claims incurred but notreported.  While the ultimate amount ofclaims 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 recognizesrevenue at the time of sale.  Discountsgiven to customers are recorded at the point of sale as a reduction ofrevenues.  The Company maintains a baddebt allowance for receivables from vendors and Gelson’s credit cardsales.  Valuation reserves are adjustedperiodically based on historical recovery rates.

 

*Merchandise Costs*

 

Vendor rebates, creditsand promotional allowances that relate to the Company’s buying andmerchandising activities, including lump-sum payments associated with long-termcontracts, are recorded as a component of merchandise costs as they are earnedin accordance with the underlying agreement.

 

*Stock Options and Stock AppreciationRights*

 

The Company accounts forits Stock Option Plan using the intrinsic value based method prescribed inAccounting Principles Board Opinion No. (“APB”) 25, “Accounting for StockIssued to Employees.”  Accordingly, no**compensationcost has been recognized in the Company’s Statements of Operations andComprehensive Income for fiscal years 2002, 2001 or 2000.  SFAS 123, “Accounting for Stock-BasedCompensation,” encourages adoption of a fair value based method for valuing thecost of stock-based compensation. However, it allows companies to use the intrinsic value based methodprescribed by APB 25 and disclose pro forma net earnings and earnings per sharein accordance with SFAS 123.

 

Stock-based compensation under the SARs program issubject to variable accounting in accordance with Financial AccountingStandards Board Interpretation No. 28, “Accounting for Stock AppreciationRights and Other Variable Stock Option or Award Plans.”  As a result, changes in the market price ofthe Company’s Class A Common Stock impacts the SARs compensation charge.

 

**Results of Operations**

 

**2002 Compared to 2001**

 

Income before income taxesin 2002 increased 8.8% to $23,987,000 compared to $22,038,000 during 2001.Operating income increased 11.1% to $22,343,000 in 2002 compared to $20,112,000in 2001.

 

Sales from the Company’s18 supermarkets (all of which are located in Southern California) were$401,378,000 in 2002.  This representsan increase of 2.4% over 2001, which were $391,880,000.  The majority of the sales increase isattributable to the opening of the Pasadena store in September 2001.  Same store sales increased 1.0% in 2002 comparedto the prior year.

 

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In September 2001, theCompany opened a Gelson’s Market in a multi-use center in Pasadena, Californiawhich is currently performing significantly below management’s expectations.  Sales at the Pasadena store should improve asexisting retail tenants become more established and potential Gelson’scustomers accept and use the underground parking at the center.  However, the occurrence of these events doesnot guarantee that sales at the Pasadena store will increase to originallyestimated levels.  Enhancements haverecently been made to the interior of the store, as well as to traffic flow inthe garage and signage, but these changes have not yet resulted in asignificant increase in sales.  If salesat the Pasadena store do not materially increase, the Company’s fixed assets atthat store could become impaired.  TheCompany has the right, under certain circumstances, to terminate its lease inthe Spring of 2005 which would result in a significant write-off of fixedassets and other costs.

 

The Company’s grossprofit as a percent of sales was at 43.5% in 2002 compared to 42.3% in2001.  Product pricing decisions,increased buying allowances and to a limited extent lower supply costs contributedto the increase in margins.

 

Delivery, selling,general and administrative (“DSG&A”) expense as a percent of sales was37.9% in 2002 compared to 37.1% in 2001. Effective May 2002, the Company’s contributions to a multi-employerunion pension plan were reinstated for a period of six months.  As described below, payments to the unionpension plan had been suspended since late 1999.  The additional cost related to the contribution reinstatement wasapproximately $1,638,000 in 2002. DSG&A expense as a percent of sales also increased in 2002 due inpart to the inclusion of the Pasadena store for a full fiscal year.  In addition, an increase in workers’compensation premiums and union health care costs contributed to the rise inDSG&A expense.  Compensation expenserelating to stock appreciation rights (“SARs”) decreased from $1,223,000 in2001 to $481,000 in 2002.****

 

The Company contributesto several multi-employer union pension plans. Contributions to the union pension plan, covering a majority of theCompany’s employees, were suspended in 1999. In May 2002, the Southern California United Food & CommercialWorkers Unions and the Food Employers Joint Trust Funds (the “Trust”)reinstated for six months the contribution requirement for all companies withemployees belonging to these unions. Contributions to the multi-employer union pension fund were suspended bythe Trust for hours worked during the four month period beginning November 2002and ending February 2003 and reinstated for hours worked commencing March2003.  During the six monthreinstatement period in fiscal 2002, the Company incurred average incrementalmonthly expense of approximately $273,000. The actual pension payment is dependent upon straight-time hours workedand the required rate of contribution.

 

Stock-based compensationis subject to variable accounting in accordance with Financial AccountingStandards Board Interpretation No. 28, “Accounting for Stock AppreciationRights and Other Variable Stock Option or Award Plans.”  As a result, changes in the market price ofthe Company’s Class A Common Stock impacts the compensation charge related toSARs.  Assuming the Company’s stockprice remains at the December 28, 2002 closing price of $60.95, the Companyanticipates 2003 SARs compensation expense of approximately $95,000 on an aftertax basis related to the additional vesting of SARs.  Each dollar increase or decrease in the Company’s stock pricewill result in approximately $23,000 after tax compensation expense or expensereduction to the extent compensation expense was previously recognized,respectively.  The above estimates arebased on the number of outstanding SARs as of 

 

10

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December 28, 2002.  The exercise of these SARs or the issuanceof additional SARs would cause the estimates to vary.

 

Since October 1995, theCompany has purchased guaranteed costs workers’ compensation insurance.  Effective October 2002, the annual premiumfor workers’ compensation increased $1,900,000 over the prior year dueprimarily to the expiriation of a low premium policy and to industry wide priceincreases.  Earlier in 2002, Californiapassed legislation effective January 2003, aimed at reforming the workers’ compensationinsurance system in the state.  At thispoint in time, the Company is unable to predict how this legislation willimpact the insurance industry’s rating process and, ultimately, the long-termeffect on future premiums.  The Companydevotes substantial time and commitment to maintaining a safe work environmentand continues to review opportunities to contain workers’ compensationinsurance costs.

 

The Company is primarilyself-insured for losses related to general and auto liability claims for up to$250,000.  Accruals are based on reportedclaims and an estimate of claims incurred but not reported.  The Company’s liability reserve for unpaidand incurred but not reported claims at December 28, 2002 was approximately$1,057,000.  While the ultimate amountof claims incurred are dependent on future developments, in management’sopinion, recorded reserves are adequate to cover the future payment of claims.

 

The Company also carriesproperty, business interruption, fiduciary, directors and officers, crime,earthquake, special event and employee practices liability insurance.  Management believes, based on recent andpast experience, that current insurance coverage is adequate to meet therequirements of the Company.

 

The Company procuresapproximately 22 percent of its product through Unified Western Grocers, Inc.(“Unified”), a grocery cooperative.  Asa member-patron, the Company is required to provide Unified with certainminimum deposits and credit in order to purchase product from the cooperative.  As of December 28, 2002, the Company had approximately$1,418,000 on deposit with Unified.  Theminimum deposit requirement is satisfied through a combination of cash, creditand ownership of equity shares in Unified. In September 2002, Unified’s Board of Directors authorized aquasi-reorganization that eliminated its accumulated deficit in retainedearnings and restated assets and liabilities to their fair values.  Unified’s Board of Directors has adopted anequity enhancement plan for its 2002 fiscal year.  Under the equity enhancement plan, member-patrons will receivefive-year low interest bearing subordinated patronage dividend certificates inlieu of amounts previously paid in cash and Class B shares.  In 2002, the Company earned approximately$149,000 in subordinated patronage dividend certificates.  In the event Unified continues to incurreductions in earned surplus, the Company may face impairment issues relatingto the deposits provided to Unified.  Inview of the above the Company has currently elected not to recognize the 2002patronage dividend as income until the certificates are redeemed.  The Company will evaluate this policy on anannual basis based on facts and circumstances as they exist in the future.

 

Interest and dividendincome was $1,867,000 in 2002 compared to $2,166,000 for 2001 primarily due tolower**interestrates in 2002.

 

Interest expensedecreased to $321,000 in 2002 from $596,000 in 2001 primarily due to theprepayment of fixture financing debt in October 2001.

 

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Other income includesgains realized on investments of $98,000 and $383,000 in 2002 and 2001,respectively.

 

Unrealized gains oninvestments were $885,000 (net of income tax expense of $608,000) in 2002compared to unrealized losses of $652,000 (net of income tax benefits of$449,000) in 2001.

 

A major road improvement project has commenced alongSanta Monica Boulevard in West Los Angeles, California, which is estimated tolast approximately three years.  At sometimes during the construction schedule, construction will occur directly infront of, or very close to, the Century City Shopping Center, where Gelson’shas its Century City store.  It can beexpected that the sales of the Century City store will be negatively impactedduring the period when the construction is at or near the Century City ShoppingCenter, but that access to the shopping center is expected to be improved oncethe roadway project has been completed. In addition, the landlord of the Century City Shopping Center hasdiscussed with Gelson’s the landlord’s tentative plans for a major constructionproject which could result in the relocation of the movie theaters and othertenants to newly constructed areas immediately adjacent to the Gelson’sstore.  Those plans also include theexpansion of the Gelson’s store.  TheCompany does not know if or when this project might begin or how long it couldtake.  The project is in the verypreliminary planning and discussion stage. The Company expects, however, that the sales of the Century City storewill be negatively affected during this construction.  Although the Company also expects that the parking for Gelson’scustomers would be adversely affected by relocating the theaters and othertenants to the immediate vicinity of the Gelson’s store, it also anticipatesthat the relocation will increase foot traffic in the vicinity of the store andthat the expanded store with additional facilities and services and theincreased foot traffic will increase the number of customers.

 

During 2001, the Companyrepurchased and retired 109,927 shares of Class A Common Stock for an aggregatepurchase price of approximately $4,783,000. All shares were repurchased in private transactions with sellers notaffiliated with the Company.  Inaddition, 1,000 and 4,400 shares of Class B Common Stock were exchanged forClass A Common Stock shares during 2002 and 2001, respectively.

 

**2001 Compared to 2000**

 

Income before incometaxes in 2001 increased 5.7% to $22,038,000 compared to $20,857,000 during2000. Operating income increased 1.4% to $20,112,000 in 2001 compared to$19,838,000 in 2000.

 

Sales from the Company’s18 supermarkets (all of which are located in Southern California) were$391,880,000 in 2001.  This representsan increase of 8.9% over 2000, when sales were $359,994,000. The majority ofthe sales increase is attributable to the opening of new stores in Irvine, DanaPoint and Pasadena, California in September 2000, January 2001 andSeptember 2001, respectively.  Samestore sales increased 2.3% in 2001 compared to the prior year.  The increase in same store sales reflects tosome extent the positive impact of store remodel activity and pricing.

 

In September 2001, theCompany opened a Gelson’s Market in a multi-use center in Pasadena, Californiawhich performed below management’s expectations.  Management expects sales to

 

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improve as consumersrespond to a local advertising and pricing campaign, the apartments locatedabove the store are occupied, existing retail tenants become more establishedand enhancements to parking and traffic flow are implemented.  However, the occurrence of these events doesnot guarantee that sales at the Pasadena store will increase to originallyanticipated levels.

 

The Company’s grossprofit as a percent of sales was at 42.3% in 2001 compared to 41.4% in2000.  Added controls over productcosts, product pricing decisions and increased buying and promotionalallowances contributed to the increase in margins.

 

DSG&A expense as apercent of sales was 37.1% in 2001 compared to 35.9% in 2000.  The Company recognized compensation expenserelated to SARs of approximately $816,000 and $1,223,000 during the fourthquarter and year ended December 29, 2001, respectively, due to an increase inthe Company’s stock price in 2001. Earnings per share decreased $.14 and $.21 per share during the fourthquarter and year ended December 29, 2001, respectively, as a result of thischarge to compensation expense compared to $.03 per share during the fourthquarter and year ended December 30, 2000. Salaries and promotions expense in 2001 increased due to the opening ofnew stores, as described above.  Inaddition, a substantial increase in workers’ compensation premiums alsocontributed to the rise in DSG&A expense in spite of the Company’sfavorable claims experience.

 

The Company contributesto several multi-employer union pension plans. Contributions to the union pension plan, covering the majority of theCompany’s employees, were suspended during 2001 and 2000.  The pension plan trustees have reserved theright to reinstate the pension contribution with minimal notice.  If reinstated, we anticipate that theadditional pension expense could have a significant impact on the Company’sfinancial position, results of operations and cash flows.

 

The Company is primarilyself-insured for losses related to general and auto liability claims for up to$250,000 and $100,000, respectively. Accruals are based on reported claims and an estimate of claims incurredbut not reported.  The Company’sliability reserve for unpaid and incurred but not reported claims at December29, 2001 was approximately $1,199,000. While the ultimate amount of claims incurred are dependent on futuredevelopments, in management’s opinion, recorded reserves are adequate to coverthe future payment of claims.

 

The Company also carriesworkers’ compensation, property, business interruption, fiduciary, directorsand officers, crime, earthquake and special event liability insurance.  Management believes that based on recent andpast experience, current insurance coverage is adequate to meet therequirements of the Company.

 

The Company procuresapproximately 22 percent of its product through Unified, a grocerycooperative.  As a member-patron, theCompany is required to provide Unified with certain minimum deposits in orderto purchase product from the cooperative. As of December 29, 2001, the Company had approximately $1,606,000 ondeposit with Unified.  The minimumdeposit requirement is satisfied through a combination of cash and ownership ofequity shares in Unified.  Unified hasrecognized reductions in earned surplus in each of its fiscal years endingSeptember 29, 2001 and September 30, 2000. Unified’s Board of Directors has adopted an equity enhancement plan forits 2002 fiscal year.  Under the equityenhancement plan, member-patrons

 

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will receive interestbearing subordinated patronage dividend certificates in lieu of amountspreviously paid in cash.  The Companyhas historically received less than $120,000 annually in patronage dividends inthe form of cash and Class B shares.  Inthe event Unified continues to incur reductions in earned surplus, the Companymay face impairment issues relating to the deposits provided to Unified.

 

Interest and dividendincome was $2,166,000 in 2001 compared to $2,265,000 for 2000 primarily due tolower**interestrates and lower average levels of interest bearing investments in 2001.

 

Interest expensedecreased to $596,000 in 2001 from $782,000 in 2000 primarily due to lowerlevels of fixture financing debt throughout the year and the prepayment of thebalance in October 2001.

 

Other income (expense)includes gains (losses) realized on investments of $383,000 and ($434,000) in2001 and 2000, respectively.

 

Unrealized losses oninvestments were $652,000 (net of income tax benefits of $449,000) in 2001compared to unrealized gains of $445,000 (net of income tax expense of$306,000) in 2000.

 

During 2001, the Company repurchased and retired 109,927 shares ofClass A Common Stock for an aggregate purchase price of approximately$4,783,000.  All shares were repurchasedin private transactions with sellers not affiliated with the Company.  In addition, 4,400 shares of Class B CommonStock were exchanged for Class A Common Stock shares during 2001.

 

**Liquidity and Capital Resources**

 

The Company has anongoing program to remodel existing supermarkets and to add new stores.  Total 2002 capital expenditures were$4,023,000.  As of December 28,2002, authorized expenditures on incomplete projects for the purchase ofproperty, plant and equipment totaled approximately $2,505,000.  Of this total, approximately $1,584,000 hasbeen contractually committed.

 

The Company is subject toa myriad of environmental laws, regulations and lease covenants with itslandlords regarding air, water and land use, products for sale, and the use,storage and disposal of hazardous materials. The Company believes itsubstantially complies, and has in the past substantially complied, withfederal, state and local environmental laws and regulations and privatecovenants.  The Company cannot, at thistime, estimate the expense it ultimately may incur in connection with anycurrent or future violations; however, it believes any such claims will nothave a material adverse impact on either the Company’s consolidated financialposition, results of operations or cash flows.

 

The Company’s currentcash position including investments, the lines of credit and net cash providedby operating activities are the primary sources of funds available to meet theCompany’s capital expenditures and liquidity requirements. See Note 8 of Notesto Consolidated Financial Statements for a description of the Company’s creditlines.

 

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The Company generatedcash from operating activities of approximately $25,533,000 for the fifty-twoweeks ended December 28, 2002. Cash flows from operating activities resultedprimarily from net income plus non-cash expenses and changes in operatingworking capital, including the timing of estimated income tax payments.

 

The Company’s totalliabilities to equity ratio decreased to .36 at December 28, 2002 from .43 atDecember 29, 2001.  The Company’s currentratio was 2.55 at December 28, 2002 compared to 1.90 at December 29, 2001.  The Company’s current assets at the end of2002 were approximately $21,389,000 more than at the end of 2001.

 

The Company’s cashposition, including investments, at the end of 2002 was $57,727,000 compared to$33,954,000 at the end of 2001.  Cashnot required for the immediate needs of the Company has been temporarilyinvested in commercial paper, marketable securities and a limited partnershipthat invests primarily in publicly traded, high yield bonds.  All temporary investments are highly liquidexcept for the limited partnership investment of approximately $2,500,000 whichallows for withdrawals on a quarterly basis. See Notes 1 and 2 of Notes to Consolidated Financial Statements.  The Company is continually investigatingopportunities for the use of these funds including the expansion and remodelingof its supermarket operations.

 

The following table setsforth the Company’s contractual cash obligations and commercial commitments asof December 28, 2002.

 
|                                   |   | **Contractual  Cash Obligations (In Thousands)** |    |
|----------------------------------------|--------|--------------------------------------------------|---------|
|                                   |   | **Total**                                        |    | **Less Than  1 Year** |   | **1-3 Years** |   | **4-5 Years** |   | **After  5 Years** |   |
|                                   |   |                                             |    |   |   |   |   |   |   |   |   |
| 7%  Subordinated Income Debentures     |   |                                             |    |   |   |   |   |   |   |   |   |
| Due  September 2014 Including Interest |   | $                                                | 2,260   |   | $ | 86 |   | $ | 172 |   | $ | 172 |   | $ | 1,830 |   |
|                                   |   |                                             |    |   |   |   |   |   |   |   |   |
| Capital  Lease Obligations Including   |   |                                             |    |   |   |   |   |   |   |   |   |
| Interest                               |   | 1,635                                            |    | 348 |   | 694 |   | 593 |   |   |   |
|                                   |   |                                             |    |   |   |   |   |   |   |   |   |
| Operating  Leases                      |   | 104,296                                          |    | 7,274 |   | 14,705 |   | 13,446 |   | 68,871 |   |
|                                   |   |                                             |    |   |   |   |   |   |   |   |   |
| Total  Contractual Cash Obligations    |   | $                                                | 108,191 |   | $ | 7,708 |   | $ | 15,571 |   | $ | 14,211 |   | $ | 70,701 |   |
|                                   |   |                                             |    |   |   |   |   |   |   |   |   |
|                                   |   | **Other Commercial Commitments (In Thousands)**  |    |
|                                   |   | **Total**                                        |    | **Less Than  1 Year** |   | **1-3 Years** |   | **4-5 Years** |   | **After  5 Years** |   |
|                                   |   |                                             |    |   |   |   |   |   |   |   |   |
| Standby  Letter of Credit (1)          |   | $                                                | 244     |   | $ | 244 |   |   |   |   |   |   |   |

 

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(1)   The standby letter of credit is maintainedpursuant to the Company’s workers’ compensation self-insurance requirements foropen claims incurred prior to 1976.

 

# **Recent Accounting Standards**

 

In July 2001, theFinancial Accounting Standards Board (“FASB”) issued SFAS 141, “BusinessCombinations,” and SFAS 142, “Goodwill and Other Intangible Assets.”  These statements change the accounting forbusiness combinations and goodwill in two significant ways.  SFAS 141 requires that the purchase methodof accounting be used for business combinations.  Use of the pooling-of-interests method will be prohibited.  SFAS 142 changes the accounting for

 

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goodwill from anamortization method to an impairment-only approach.  Adoption of SFAS 141 and 142 in the Company’s 2002 fiscal yeardid not have an impact on the consolidated financial statements.

 

InOctober 2001, the FASB issued SFAS 144, “Accounting for the Impairment orDisposal of Long-Lived Assets,” which replaces SFAS 121, “Accounting forImpairment of Long-Lived Assets and for Long-Lived Assets to be DisposedOf.”  SFAS 144 establishes oneaccounting model, based on the framework established in SFAS 121, for therecognition, measurement and reporting of impairment of long-lived assets to beheld and used and of long-lived assets to be disposed of by sale. Adoption ofSFAS 144 in the Company’s 2002 fiscal year did not have an impact on theconsolidated financial statements.

 

InJune 2002, the FASB issued SFAS 146, “Accounting for Costs Associated with Exitor Disposal Activities.”  SFAS 146requires that a liability for costs associated with an exit or disposalactivity be recognized and measured initially at fair value only when theliability is incurred.  SFAS 146 iseffective for exit or disposal activities that are initiated after December 31,2002.  This standard is not expected tohave an impact on the Company’s consolidated financial statements.

 

InDecember 2002, the FASB issued SFAS 148, “Accounting for Stock-BasedCompensation-Transaction and Disclosure – Transition and Disclosure.”  SFAS 148 amends SFAS 123, “Accounting forStock-Based Compensation,” to provide alternative methods of transition for avoluntary change to the fair value based method of accounting for stock-basedemployee compensation.  In addition,SFAS 148 amends the disclosure requirements of SFAS 123 to require prominentdisclosures in both annual and interim financial statements about the method ofaccounting for stock-based employee compensation and the effect of the methodused on reported results.  The Companywill adopt the disclosure only provision of this Statement effective with thefirst quarter of fiscal 2003.

 
| Item  7A.     Quantitative and Qualitative Disclosures  about Market Risk |   |
|----------------------------------------------------------------------------------------------------|--------|

 

The Company could beexposed to market risk from changes in interest rates on debt.  The Company’s exposure to interest rate riskrelates to its $5,000,000 and $3,000,000 revolving lines of credit.  Borrowings under the agreements bearinterest as discussed in Note 8 of Notes to Consolidated FinancialStatements.  There were no borrowingsoutstanding under either line as of December 28, 2002.  Consequently, a hypothetical 1% interestrate change would have no impact on the Company’s results of operations.

 

A change in market pricesalso exposes the Company to market risk related to its investments whichtotaled $27,566,000 as of December 28, 2002. A hypothetical 10% drop in the market value of these investments wouldresult in a $2,757,000 unrealized pretax loss and a corresponding loss of alike amount in the fair value of these instruments.  This hypothetical drop would not affect cash flow and would nothave an impact on earnings until the investments were disposed of or the declineis deemed permanent.  In order tominimize the risk associated with market value fluctuations, the Companyactively manages its exposure through the regular review of its investmentportfolio.   The review takes intoconsideration, among other things, the risk

 

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level of the individualinvestments, the amount invested in each and current economic conditions.

 
| Item 8. | Financial Statements and Supplementary Data |
|---------|---------------------------------------------|

 

See Index to ConsolidatedFinancial Statements.

 
| Item 9. | Changes in and Disagreements with Accountants on  Accounting and Financial Disclosure |
|---------|---------------------------------------------------------------------------------------|

 

The Company filed acurrent report on Form 8-K dated June 14, 2002, to report a change in theCompany’s certifying accountant from Arthur Andersen LLP toPricewaterhouseCoopers LLP.  There wereno disagreements with accountants.

 

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**PART III**

 
| Item 10. | Directors and Executive Officers of the Registrant |
|----------|----------------------------------------------------|

 

Identification andInformation Concerning Directors

 

Below is set forthcertain information about each of the Company’s directors as of March 3,2003.  Certain of this information hasbeen supplied by the persons shown. Messrs. Robert A. Davidow and Kenneth A. Goldman were elected by theholders of Class A Common Stock. Messrs. Bernard Briskin, John G. Danhakl and Ben Winters were elected bythe holders of Class B Common Stock.

 
| **Name**           |   | **Age** |   | **Principal Occupation (1)  and Other Directorships**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |   | **Director  Since (2)** |   | **Term  Expires** |
|--------------------|--------|---------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------|--------|-------------------|
| Bernard Briskin    |   | 78      |   | Chairman of the Board  of Directors, President and Chief Executive Officer of the Company and  Arden-Mayfair, Inc. a subsidiary of the Company, and Chairman of the Board,  President, Chief Executive Officer and Chief Operating Officer of AMG  Holdings, Inc. and Chairman of the Board and Chief Executive Officer of  Gelson’s Markets, both subsidiaries of Arden-Mayfair, Inc.                                                                                                                                                             |   | 1970                    |   | 2004              |
|               |   |    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |   |                    |   |              |
| John G. Danhakl    |   | 46      |   | 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, Communications and Power Industries, Inc., Twinlab  Corporation, Diamond Triumph Auto Glass  Inc., Liberty Group Publishing Inc., Leslie’s Poolmart, Inc., Asian Media  Group LLC, MEMC Electronic Materials, Inc., VCA Antech, Inc., Petco Animal  Supplies, Inc., Phoenix Scientific, Inc. and Rite Aid Corporation. |   | 1995                    |   | 2004              |
|               |   |    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |   |                    |   |              |
| Robert A. Davidow  |   | 60      |   | Director of WHX  Corporation;  private investor.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |   | 1993                    |   | 2005              |
|               |   |    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |   |                    |   |              |
| Kenneth A. Goldman |   | 60      |   | Attorney with Reed  Smith Crosby Heafey LLP since January 2003, Attorney and Director with  Crosby, Heafey, Roach & May, A Professional Corporation from September  2000 - December 2002.  For more than  five years prior thereto, Attorney and Principal of Sanders, Barnet, Goldman,  Simons & Mosk, A Professional Corporation.                                                                                                                                                                                                        |   | 2001                    |   | 2004              |
|               |   |    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |   |                    |   |              |
| Ben Winters        |   | 82      |   | Business Consultant.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |   | 1978                    |   | 2003              |

 

Daniel Lembark served asa director of the Company from July 31, 1978 until his passing February 3,2003.  Mr. Lembark also served asChairman of the Audit Committee and a member of the Compensation Committee.

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| (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.                            |

 

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Identification ofExecutive Officers

 

Below is set forthcertain information about each of the executive officers of the Company as ofMarch 3, 2003:

 
| **Name**        |   | **Age** |   | **Position(s)**                                                                                                                                                                                                                                                                                                       |
|-----------------|--------|---------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|            |   |    |   |                                                                                                                                                                                                                                                                                                                  |
| Bernard Briskin |   | 78      |   | Chairman of the Board  of Directors, President and Chief Executive Officer of the Company and  Arden-Mayfair, Inc., and Chairman of the Board, President, Chief Executive  Officer and Chief Operating Officer of AMG Holdings, Inc. and Chairman of the  Board and Chief Executive Officer of Gelson’s Markets. |
|            |   |    |   |                                                                                                                                                                                                                                                                                                                  |
| David M. Oliver |   | 45      |   | Chief Financial Officer  of the Company and Arden-Mayfair, Inc., Chief Financial Officer and Secretary  of AMG Holdings, Inc. and Gelson’s Markets.                                                                                                                                                              |

 

Mr. Briskin served asChairman of the Executive Committee of the Board of Directors of Arden-Mayfairuntil August 1978, when he was elected President and Chief Executive Officer ofArden-Mayfair.  In November 1978, Mr.Briskin was elected President and Chief Executive Officer of the Company, andin 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, andChairman of the Board, President, Chief Executive Officer and Chief OperatingOfficer of AMG Holdings and Chairman of the Board and Chief Executive Officerof Gelson’s, pursuant to an employment agreement which expires onJanuary 1, 2005, although the term will be automatically extended forsuccessive one year periods unless certain termination notices are given byeither Mr. Briskin or the employers. See “Item 11.  ExecutiveCompensation.”

 

Mr. Oliver was electedChief Financial Officer of the Company in November 1999.  Mr. Oliver also serves as Chief FinancialOfficer of Arden-Mayfair, and Chief Financial Officer and Secretary of AMGHoldings and Gelson’s.  From August 1998until he joined the Company, he worked as an independent consultant.  From July 1997 to July 1998, Mr. Oliverserved as Senior Vice President, Chief Financial Officer of Hughes FamilyMarkets.  He served as Vice President,Controller of The Vons Companies, Inc. from July 1994 to April 1997 and asAssistant Controller from August 1988 to June 1994.  Mr. Oliver was employed by Arthur Andersen & Co. as aCertified Public Accountant in the audit department from June 1979 to May 1988.

 

Except for Mr. Briskin,who has an employment agreement, all officers serve at the pleasure of theBoard of Directors.

 

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| Item 11. | Executive Compensation |
|----------|------------------------|

 

## **General**

 

The following table setsforth the total annual and long-term compensation paid or accrued by theCompany and its subsidiaries in connection with all businesses of the Companyand its subsidiaries to or for the account of the Chief Executive Officer ofthe Company and each other executive officer of the Company whose total annual salaryand bonus for the fiscal year ended December 28, 2002 exceeded $100,000 in theaggregate.

 
|                              |   |                    |   |                                                |   |                                   |   | **Long Term  Compensation  Awards** |   |   |   |
|-----------------------------------|--------|-------------------------|--------|-----------------------------------------------------|--------|----------------------------------------|--------|-------------------------------------|--------|--------|--------|
| **Name and  Principal  Position** |   | **Annual Compensation** |   | **Securities-  Underlying  Options/  SARs  (#)(1)** |   | **All Other  Compensation  ($)(2)(3)** |   |
| **Year**                          |   | **Salary ($)**          |   | **Bonus ($)**                                       |
|                              |   |                    |   |                                                |   |                                   |   |                                |   |   |   |
| Bernard  Briskin,                 |   | 2002                    |   | 556,003                                             |   | 849,277                                |   |                                |   | 70,600 |   |
| Chief  Executive                  |   | 2001                    |   | 542,442                                             |   | 778,598                                |   |                                |   | 13,600 |   |
| Officer                           |   | 2000                    |   | 524,352                                             |   | 735,731                                |   |                                |   | 69,200 |   |
|                              |   |                    |   |                                                |   |                                   |   |                                |   |   |   |
| David  M. Oliver                  |   | 2002                    |   | 165,428                                             |   | 25,000                                 |   |                                |   | 16,000 |   |
| Chief  Financial                  |   | 2001                    |   | 160,000                                             |   | 25,000                                 |   |                                |   | 13,600 |   |
| Officer                           |   | 2000                    |   | 150,654                                             |   | 25,000                                 |   | 2,500                               |   |   |   |

 

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| (1)    | The Company did not  grant to Mr. Briskin or Mr. Oliver any restricted stock or stock options and  made no payout to them on any long-term incentive plan in fiscal years 2002,  2001 or 2000.  The Company granted  units of SARs covering 2,500 shares of Class A Common Stock under the Phantom  Stock Option Plan to Mr. Oliver in 2000.   No other SARs were granted to Mr. Briskin or Mr. Oliver in 2002, 2001  or 2000.                                                                           |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| (2)    | Includes the Company’s  contributions to the Arden Group, Inc. 401(k) Retirement Savings Plan.  In 2002, Mr. Briskin and Mr. Oliver were  each allocated $16,000 to their 401(k) accounts.                                                                                                                                                                                                                                                                                                               |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| (3)    | Perquisites and other  personal benefits did not exceed the lesser of $50,000 or 10% of the  compensation received by Mr. Briskin in 2001 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 and $55,600 in medical  reimbursements in 2002 and 2000, respectively.  Other compensation also includes $4,600 for use of a  Company-owned automobile by Mr. Briskin in 2002. |

 

Stock Appreciation Rights

 

The Company has grantedSARs covering shares of the Company’s Class A Common Stock to non-employeedirectors and persons who are at the vice president or higher level of theCompany.  Each SAR entitles the holderto receive upon exercise thereof the excess of the fair market value of a shareof Class A Common Stock on the date of exercise over the fair market value ofsuch share on the date granted.  TheSARs vest 25% each year beginning at the end of the first year and expire fiveyears from the date of grant.

 

20

----

 

No SARs were granted toexecutive officers during the 2002 fiscal year.  The following table provides information on the exercise of SARsby the named executive officers in fiscal 2002 and the number of each officers’SARs that were unexercised at December 28, 2002:

 

**AggregatedSAR Exercises in Last Fiscal Year and Fiscal**

**Year-EndUnexercised SARs**

 
| **Name**                        |   | **Shares  Acquired  on Exercise (#)** |   | **Value  Realized  ($)** |   | **Number of  Securities  Underlying Unexercised  SARs at  Fiscal Year-End  (#) ** |   | **Value  of  Unexercised  In-the-Money  SARs at  Fiscal Year-End  ($) ** |   |
|---------------------------------|--------|---------------------------------------|--------|--------------------------|--------|----------------------------------------------------------------------------------------|--------|------------------------------------------------------------------------------------|--------|
| **Exercisable/  Unexercisable** |   | **Exercisable/  Unexercisable**       |
|                            |   |                                  |   |                     |   |                                                                                   |   |                                                                               |   |
| David  M. Oliver                |   | 1,250                                 |   | 47,151                   |   | 0/1,250                                                                                |   | 0/39,900                                                                           |   |

 

EmploymentAgreement

 

The compensation of Mr.Briskin, the Chief Executive Officer of the Company, is established under anEmployment Agreement, as amended (“the Employment Agreement”) which expires onJanuary 1, 2005.  The Employment Agreementprovides that, upon the expiration of the initial term on January 1, 2004, theterm thereof is automatically extended for successive periods of one fiscalyear unless either the employers or Mr. Briskin gives notice of termination notless than 15 months and no more than 18 months prior to the date upon which theterm of the Employment Agreement will expire. Pursuant to the terms of the Employment Agreement, Mr. Briskin’s basesalary increases on January 1 of each year based upon increases in theConsumer Price Index subject to a maximum annual increase of 4%.  His annual bonus is equal to 2-1/2% ofthe Company’s first $2,000,000 of Pre-Tax Profits (as defined in the EmploymentAgreement) plus 3-1/2% of Pre-Tax Profits in excess of $2,000,000.  The Employment Agreement provides for anannual medical expense reimbursement up to $200,000 for Mr. Briskin and hisimmediate family, as well as annual retirement compensation equal totwenty-five percent of Mr. Briskin’s average base salary and bonus earned inthe last three fiscal years prior to his retirement and continuation of healthinsurance benefits and automobile allowance. The Employment Agreement provides that its terms are subject to reviewduring the 2002 fiscal year by the Compensation Committee of the Board ofDirectors.  Pursuant to this provision,discussions have taken place between Mr. Briskin and the Company concerningamendments of certain provisions of the Employment Agreement.  As of the date of this report thesediscussions are continuing.

 

Remuneration ofDirectors

 

Non-employee directorsare compensated for their services as directors at an annual rate of $22,800,plus $1,000 for each Board meeting attended and $1,000 for attendance at eachcommittee meeting.  Non-employeedirectors who serve as committee chairmen are entitled to an additional $4,200per year.  During 2000, the Companyissued SARs covering up to 10,000 shares of the Company's Class A Common Stockto each of Messrs.  Dankahl, Davidow,Lembark and Winters, the Company's then non-employee directors, with a base priceof $29-1/16 per share, representing the fair market value on the date of thegrant.  In 2001, Mr. Goldman was electeda director and was granted SARs covering 10,000 shares of the Company's Class ACommon Stock, with a base price of $48 per share, representing the fair marketvalue on the date of the grant.  Whenthe SARs are exercised, each unit entitles the holder to receive the excess ofthe fair market value of a share of Class A Common Stock on the date of exerciseover the base price.  All of the unitsvest 25% each year beginning at the end of the first year and expire five yearsfrom the date of grant.  During 2002,17,500 of the 50,000 SARs issued to non-employee directors have been exercised.  Mr. Briskin is an employee of the Companyand does not receive the compensation otherwise payable to directors.

 

21

----

 

 

Compensation CommitteeInterlocks and Insider Participation

 

The Board of Directors has a CompensationCommittee.  In 2002, the CompensationCommittee was comprised of the following directors, none of whom are or havebeen officers of the Company:

 

John G. Danhakl, Chairman

Robert A. Davidow

Kenneth A. Goldman (served as committee member throughJune 18, 2002)

Daniel Lembark (deceased February 3, 2003)

 

During 2002, Mr. Goldman was a director of a law firmwhich performed legal services for the Company.

 
| Item 12. | Security Ownership of Certain Beneficial Owners and  Management and Related Stockholder Matters |
|----------|-------------------------------------------------------------------------------------------------|

 

Security Ownership ofCertain Beneficial Owners

 

The following table setsforth information as of March 3, 2003 relating to the stockholdings of personsknown to the Company to be the beneficial owner of more than 5% of any class ofthe Company’s voting securities:

 
| **Name and Address of  Beneficial Owner**                                                                                                    |   | **Title of  Class**   |   | **Amount and****Nature of  Beneficial  Ownership(1)** |   | **Percent of  Class** |   | **Percent of  Total Vote** |   |
|----------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------|--------|-------------------------------------------------------|--------|-----------------------|--------|----------------------------|--------|
|                                                                                                                                         |   |                  |   |                                                  |   |                  |   |                       |   |
| City National Bank, as  Trustee of the Company’s Stock Bonus Plan and Trust  1950 Avenue of the Stars, 2nd Floor  Los Angeles, CA 90067 |   | Class A Common  Stock |   | 221,162                                               |   | 11.0                  | %      | 1.4                        | %      |
|                                                                                                                                         |   |                  |   |                                                  |   |                  |   |                       |   |
| Bernard Briskin   Arden Group, Inc. 9595 Wilshire Blvd., Suite 411    Beverly Hills, CA 90212                                           |   | Class A Common  Stock |   | 605,939                                               | (2)(3) | 30.0                  | %      | 3.9                        | %      |
|                                                                                                                                         |   |                  |   |                                                  |   |                  |   |                       |   |
| Royce & Associates,  LLC   1414 Avenue of the Americas   New York, NY 10019                                                              |   | Class A Common  Stock |   | 168,500                                               |   | 8.4                   | %      | 1.1                        | %      |
|                                                                                                                                         |   |                  |   |                                                  |   |                  |   |                       |   |
| Bernard Briskin                                                                                                                              |   | Class B Common  Stock |   | 1,362,496                                             | (3)    | 99.9                  | %      | 87.0                       | %      |

 

----

| (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 Company Class A Common Stock are not  deemed to be outstanding. |
|-----|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

22

----

 
| (2)    |   | This amount includes  the following shares:  (i) 186,096  shares held in trust (of which Mr. Briskin is a trustee) for the benefit of  Mr. Briskin and his children and (ii) 102,012 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.  Mr. Briskin  shares voting and investment power with respect to the shares referred to in  clause (i), and he has no voting or investment power with respect to the shares  referred to in clause (ii).  Nothing  herein should be construed as an admission that Mr. Briskin is in fact the  beneficial owner of any of these shares. |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| (3)    |   | This amount excludes  23,500 shares of Class A Common Stock and 4 shares of Class B Common Stock  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.                                                                                                                                                                                                                                                                                                                                                                                                                                           |

 

If Mr. Briskin convertedall of his Class B Common Stock to Class A Common Stock (convertible on ashare-for-share basis), his and his spouse’s beneficial ownership of Class ACommon Stock would be increased to 1,968,435 shares or 58.2% of the totalshares outstanding as of March 3, 2003.

 

Security Ownership ofManagement

 

The following tableshows, as of March 3, 2003, the beneficial ownership of the Company’s equitysecurities by each director, executive officer and by all directors andexecutive officers as a group:  
| **Name of Beneficial Owner**                                 |                  | **Title of  Class**   |      | **Amount and  Nature of  Beneficial  Ownership(1)** |   | **Percent  of Class(1)** |   | **Percent  of Total  Vote** |    |
|--------------------------------------------------------------|-----------------------|-----------------------|-----------|-----------------------------------------------------|--------|--------------------------|--------|-----------------------------|---------|
|                                                         |                  |                  |      |                                                |   |                     |   |                        |    |
| Bernard  Briskin                                             |                  | Class A Common  Stock |      | 605,939                                             | (2)    | 30.0                     | %      | 3.9                         | %       |
|                                                         |                  | Class B Common  Stock |      | 1,362,496                                           | (2)    | 99.9                     | %      | 87.0                        | %  |
|                                                         |                  |                  |      |                                                |   |                     |   |                        |    |
| John  G. Danhakl                                             |                  | Class A Common  Stock |      | 0                                                   |   |                     |   |                        |    |
|                                                         |                  |                  |      |                                                |   |                     |   |                        |    |
| Robert  A. Davidow                                           |                  | Class A Common  Stock |      | 0                                                   |   |                     |   |                        |    |
|                                                         |                  |                  |      |                                                |   |                     |   |                        |    |
| Kenneth  A. Goldman                                          |                  | Class A Common  Stock |      | 21,560                                              | (3)    | 1.1                      | %      |                        | (4)     |
|                                                         |                  |                  |      |                                                |   |                     |   |                        |    |
| David  M. Oliver                                             |                  | Class A Common  Stock |      | 0                                                   |   |                     |   |                        |    |
|                                                         |                  |                  |      |                                                |   |                     |   |                        |    |
| Ben  Winters                                                 |                  | Class A Common  Stock |      | 500                                                 |   |                     | (4)    |                        | (4)     |
|                                                         |                  |                  |      |                                                |   |                     |   |                        |    |
| All directors and  executive officers as a group (6 persons) |                  | Class A Common  Stock |      | 627,999                                             | (2)    | 31.1                     | %      | 4.0                         | %       |
|                                                         | Class B Common  Stock |                  | 1,362,496 | (2)                                                 | 99.9   | %                        | 87.0   | %                           |

 

----

| (1)    | Unless otherwise  indicated to the contrary, all beneficial owners have sole investment and  voting power.  The number of  outstanding shares of  Company Class A  Common Stock, on which the percentages shown in this table are based, does  not include 1,357,200 treasury shares of Company Class A  Common Stock. |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                  |
| (2)    | See notes (2) and (3)  to the table under “Security Ownership of Certain Beneficial Owners” set  forth above.                                                                                                                                                                                                               |
|   |                                                                                                                                                                                                                                                                                                                                  |
| (3)    | Held in trust by Mr.  Goldman, as trustee, for grandchildren of Mr. and Mrs. Briskin.                                                                                                                                                                                                                                                 |
|   |                                                                                                                                                                                                                                                                                                                                  |
| (4)    | Does not exceed 1%.                                                                                                                                                                                                                                                                                                                   |

 

23

----

 

EquityCompensation Plan Information

 

Thefollowing table provides information related to the Company’s equitycompensation plans as of December 28, 2002.

 
|                                                            |   | **(a)**                                                                                                              |   | **(b)**                                                                                              |   | **(c)**                                                                                                                                                                                   |   |
|-----------------------------------------------------------------|--------|----------------------------------------------------------------------------------------------------------------------|--------|------------------------------------------------------------------------------------------------------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
| **Plan  category**                                              |   | **Number of securities to********be issued upon exercise********of outstanding options,********warrants and rights** |   | **Weighted-average********exercise price of********outstanding options,********warrants and rights** |   | **Number of securities********remaining available********for future issuance********under equity********compensation plans********(excluding securities********reflected in column (a))** |   |
| Equity compensation plans approved by security  holders         |   | 0                                                                                                                    |   | 0                                                                                                    |   | 0                                                                                                                                                                                         |   |
|                                                            |   |                                                                                                                 |   |                                                                                                 |   |                                                                                                                                                                                      |   |
| Equity compensation plans not approved by security  holders (1) |   |                                                                                                                 |   |                                                                                                 |   |                                                                                                                                                                                      |   |
|                                                            |   |                                                                                                                 |   |                                                                                                 |   |                                                                                                                                                                                      |   |
| Non-officer and non-director Stock Option Plan                  |   | 26,750                                                                                                               |   | $35.81                                                                                               |   | 28,500                                                                                                                                                                                    |   |

 

----

(1)                                  Does not included SARs which provide for cashonly compensation.

 

In 1998, the Companyadopted a Non-Officer and Non-Director Stock Option Plan (the “Stock OptionPlan”) which was not submitted to security holders for approval and initiallyprovided for the granting of stock options to key employees to purchase up to35,000 shares of the Company’s Class A Common Stock.  The Stock Option Plan was amended in 2000 to increase the numberof shares available thereunder to an aggregate of 70,000 shares.  The objective of the Stock Option Plan is toattract and retain quality personnel and to promote the success of the Companyby providing employees the opportunity to share in its growth.  These options vest at 25% per year beginningat the end of the first year and expire five years from the date of grant.  The exercise price of stock options grantedunder the Stock Option Plan is equal to the fair market value of the Company’sClass A Common Stock on the date of grant.

 
| Item 13. | Certain Relationships and Related Transactions |
|----------|------------------------------------------------|

 

At December 29, 2001, theCompany held two notes receivable with balances totaling $135,000 from anofficer/director of the Company.  InAugust 2002, the notes were repaid by Mr. Briskin.  These notes arose from transactions in 1979 and 1980 whereby theCompany loaned Mr. Briskin $516,250 to purchase shares of the Company’s Class ACommon Stock at the then fair market value. The notes bore interest at the rateof 6% per annum payable annually.

 

A director of theCompany, Mr. Goldman, was a director of a law firm which performed legalservices for the Company.

 

24

----

 

**PART IV**

 
| Item 14. | Controls and Procedures |
|----------|-------------------------|

 

Withinthe 90-day period prior to the filing of this report, an evaluation was carriedout by the Company’s Chief Executive Officer and Chief Financial Officer of theeffectiveness of the Company’s disclosure controls and procedures (as definedin Rule 13a-14(c) and 15d-14(c) under the Securities Exchange Act of1934).  Based upon that evaluation, theChief Executive Officer and Chief Financial Officer concluded that thesedisclosure controls and procedures were effective.  No significant changes were made in the Company’s internalcontrols or in other factors that could significantly affect these controls subsequentto the date of their evaluation.

 
| Item 15. |   | Exhibits, Financial  Statement Schedules, and Reports on Form 8-K |
|----------|--------|-------------------------------------------------------------------|
|     |   |                                                              |
| (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)      |   | Reports on Form 8-K                                               |
|     |   |                                                              |
|     |   | None                                                              |
|     |   |                                                              |
| (c)      |   | Exhibits                                                          |
|     |   | See Index to Exhibits                                             |
|     |   |                                                              |
| (d)      |   | Other Financial  Schedules - None                                 |
|          |        |                                                                   |  |  |

 

25

----

 

**SIGNATURES**

 

Pursuant to therequirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, theregistrant has duly caused this report to be signed on its behalf by theundersigned, thereunto duly authorized.

 
| ARDEN GROUP, INC. |                                                    |
|-------------------|---------------------------------------------------------|
|              |                                                    | **Date** |
|              |                                                    |   |
| By                | /s/ BERNARD BRISKIN                                     |   | 03/20/03 |
|              | Bernard Briskin, Chairman of the Board,                 |   |
|              | President and Chief Executive Officer                   |   |
|              |                                                    |   |
| By                | /s/ DAVID M. OLIVER                                     |   | 03/20/03 |
|              | David M. Oliver, Chief Financial Officer                |   |
|              | (Principal Financial and Principal Accounting  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 theregistrant and in the capacities and on the date indicated.  The undersigned have also relied upon thereports of the registrant’s independent accountants at pages 52 and 53.

 
|   |                                                | **Date** |
|--------|-----------------------------------------------------|----------|
|   |                                                |     |
|   | /s/ BERNARD BRISKIN                                 |     | 03/20/03 |
|   | Bernard Briskin, Director and Chairman of the Board |     |
|   |                                                |     |   |
|   | /s/ JOHN G. DANHAKL                                 |     | 03/20/03 |
|   | John G. Danhakl, Director                           |     |
|   |                                                |     |
|   | /s/ ROBERT A. DAVIDOW                               |     | 03/20/03 |
|   | Robert A. Davidow, Director                         |     |
|   |                                                |     |
|   | /s/ KENNETH A. GOLDMAN                              |     | 03/20/03 |
|   | Kenneth A. Goldman, Director                        |     |
|   |                                                |     |
|   | /s/ BEN WINTERS                                     |     | 03/20/03 |
|   | Ben Winters, Director                               |     |

 

26

----

 

CERTIFICATIONS

 

 

I,Bernard Briskin, certify that:

 

1.                    I have reviewed this annual report on Form10-K of Arden Group, Inc.;

 

2.                    Based on my knowledge, this annual reportdoes not contain any untrue statement of a material fact or omit to state amaterial fact necessary to make the statements made, in light of thecircumstances under which such statements were made, not misleading withrespect to the period covered by this annual report;

 

3.                    Based on my knowledge, the financialstatements, and other financial information included in this annual report,fairly present in all material respects the financial condition, results ofoperations and cash flows of the registrant as of, and for, the periodspresented in this annual report;

 

4.                    The registrant’s other certifying officersand I are responsible for establishing and maintaining disclosure controls andprocedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for theregistrant and we have:

 

a)                   designed such disclosure controls andprocedures to ensure that material information relating to the registrant,including its consolidated subsidiaries, is made known to us by others withinthose entities, particularly during the period in which this annual report isbeing prepared;

 

b)                  evaluated the effectiveness of theregistrant’s disclosure controls and procedures a date within 90 days prior tothe filing date of this annual report (the “Evaluation Date”); and

 

c)                   presented in this annual report ourconclusions about the effectiveness of the disclosure controls and proceduresbased on our evaluation as of the Evaluation Date;

 

5.                    The registrant’s other certifying officersand I have disclosed, based on our most recent evaluation, to the registrant’sauditors and the audit committee of registrant’s board of directors (or personsperforming the equivalent function):

 

a)                   all significant deficiencies in the design oroperation of internal controls which could adversely affect the registrant’sability to record, process, summarize and report financial data and have identifiedfor the registrant’s auditors any material weaknesses in internal controls; and

 

b)                  any fraud, whether or not material, thatinvolves management or other employees who have a significant role in theregistrant’s internal controls; and 

 

6.                    The registrant’s other certifying officersand I have indicated in this annual report whether or not there weresignificant changes in internal controls or in other factors that couldsignificantly affect internal controls subsequent to the date of our most recentevaluation, including any corrective actions with regard to significantdeficiencies and material weaknesses.

 
| Date:  | March 20, 2003 |       |                    | /s/  BERNARD BRISKIN |
|--------|----------------|------------|-------------------------|----------------------|
|   |           | Signature: | Bernard  Briskin        |
|   |           | Title:     | Chief Executive Officer |

 

27

----

 

CERTIFICATIONS

 

I,David M. Oliver, certify that:

 

1.                    I have reviewed this annual report on Form10-K of Arden Group, Inc.;

 

2.                    Based on my knowledge, this annual reportdoes not contain any untrue statement of a material fact or omit to state amaterial fact necessary to make the statements made, in light of thecircumstances under which such statements were made, not misleading withrespect to the period covered by this annual report;

 

3.                    Based on my knowledge, the financialstatements, and other financial information included in this annual report,fairly present in all material respects the financial condition, results ofoperations and cash flows of the registrant as of, and for, the periodspresented in this annual report;

 

4.                    The registrant’s other certifying officersand I are responsible for establishing and maintaining disclosure controls andprocedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for theregistrant and we have:

 

a)                   designed such disclosure controls and proceduresto ensure that material information relating to the registrant, including itsconsolidated subsidiaries, is made known to us by others within those entities,particularly during the period in which this annual report is being prepared;

 

b)                  evaluated the effectiveness of theregistrant’s disclosure controls and procedures a date within 90 days prior tothe filing date of this annual report (the “Evaluation Date”); and

 

c)                   presented in this annual report ourconclusions about the effectiveness of the disclosure controls and proceduresbased on our evaluation as of the Evaluation Date;

 

5.                    The registrant’s other certifying officersand I have disclosed, based on our most recent evaluation, to the registrant’sauditors and the audit committee of registrant’s board of directors (or personsperforming the equivalent function):

 

a)                   all significant deficiencies in the design oroperation of internal controls which could adversely affect the registrant’sability to record, process, summarize and report financial data and haveidentified for the registrant’s auditors any material weaknesses in internalcontrols; and

 

b)                  any fraud, whether or not material, thatinvolves management or other employees who have a significant role in theregistrant’s internal controls; and 

 

6.                    The registrant’s other certifying officersand I have indicated in this annual report whether or not there weresignificant changes in internal controls or in other factors that couldsignificantly affect internal controls subsequent to the date of our mostrecent evaluation, including any corrective actions with regard to significantdeficiencies and material weaknesses.

 
| Date:  | March 20, 2003 |       |                    | /s/  DAVID M. OLIVER |
|--------|----------------|------------|-------------------------|----------------------|
|   |           | Signature: | David  M. Oliver        |
|   |           | Title:     | Chief Financial Officer |
|        |                |            |                         |                      |  |

 

 

28

----

 

**ARDENGROUP, INC. AND CONSOLIDATED SUBSIDIARIES**

 

**INDEX TOCONSOLIDATED FINANCIAL STATEMENTS**

 
| Financial Statements:                      |
|--------------------------------------------|
|                                       | Consolidated Balance  Sheets, December 28, 2002 and December 29, 2001 |
|                                       | Consolidated  Statements of Operations and Comprehensive Income for fiscal years 2002, 2001  and 2000 |
|                                       | Consolidated  Statements of Stockholders’ Equity for fiscal years 2002, 2001 and 2000 |
|                                       | Consolidated  Statements of Cash Flows for fiscal years 2002, 2001 and 2000 |
|                                       | Notes to  Consolidated Financial Statements |
|                                       |   |
| Reports of  Independent Public Accountants |

 

The financial statementsinclude the Registrant’s subsidiary (Arden-Mayfair, Inc.) and the subsidiariesof Arden-Mayfair, Inc.

 

Schedules are omitted because of the absence of the conditions underwhich they are required.

 

29

----

 

**ARDENGROUP, INC. AND CONSOLIDATED SUBSIDIARIES**

 

**CONSOLIDATED BALANCE SHEETS**

 

 
| **(In Thousands, Except Share and  Per Share Data)**                                                                                                                                               |   | **December 28, 2002** |    | **December 29, 2001** |    |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------|---------|-----------------------|---------|
| **Assets**                                                                                                                                                                                         |   |                  |    |                  |    |
| Current assets:                                                                                                                                                                                    |   |                  |    |                  |    |
| Cash and cash equivalents                                                                                                                                                                          |   | $                     | 30,161  |                  | $       | 15,103 |   |
| Investments                                                                                                                                                                                        |   | 27,566                |    | 18,851                |    |
| Accounts and notes  receivable, net                                                                                                                                                                |   | 5,412                 |    | 6,519                 |    |
| Inventories                                                                                                                                                                                        |   | 14,542                |    | 14,748                |    |
| Other current assets                                                                                                                                                                               |   | 2,473                 |    | 3,544                 |    |
| Total  current assets                                                                                                                                                                              |   | 80,154                |    | 58,765                |    |
|                                                                                                                                                                                               |   |                  |    |                  |    |
| Property held for resale  or sublease                                                                                                                                                              |   | 51                    |    | 728                   |    |
| Property, plant and  equipment, net                                                                                                                                                                |   | 52,454                |    | 56,618                |    |
| Deferred income taxes                                                                                                                                                                              |   | 580                   |    | 775                   |    |
| Other assets                                                                                                                                                                                       |   | 4,114                 |    | 4,640                 |    |
| Total  assets                                                                                                                                                                                      |   | $                     | 137,353 |                  | $       | 121,526 |   |
|                                                                                                                                                                                               |   |                  |    |                  |    |
| **Liabilities and Stockholders’ Equity**                                                                                                                                                      |   |                  |    |                  |    |
|                                                                                                                                                                                               |   |                  |    |                  |    |
| Current liabilities:                                                                                                                                                                               |   |                  |    |                  |    |
| Accounts  payable, trade                                                                                                                                                                           |   | $                     | 15,306  |                  | $       | 16,794 |   |
| Other  current liabilities                                                                                                                                                                         |   | 15,868                |    | 13,814                |    |
| Current  portion of long-term debt                                                                                                                                                                 |   | 220                   |    | 289                   |    |
| Total  current liabilities                                                                                                                                                                         |   | 31,394                |    | 30,897                |    |
|                                                                                                                                                                                               |   |                  |    |                  |    |
| Long-term debt                                                                                                                                                                                     |   | 2,283                 |    | 3,134                 |    |
| Other liabilities                                                                                                                                                                                  |   | 2,485                 |    | 2,356                 |    |
| Total  liabilities                                                                                                                                                                                 |   | 36,162                |    | 36,387                |    |
|                                                                                                                                                                                               |   |                  |    |                  |    |
| Commitments and  contingent liabilities (Note 15)                                                                                                                                                  |   |                  |    |                  |    |
|                                                                                                                                                                                               |   |                  |    |                  |    |
| Stockholders’ equity:                                                                                                                                                                         |   |                  |    |                  |    |
| Common  Stock, Class A, $.25 par value; authorized 10,000,000 shares; 3,355,935 and  3,340,185 shares issued and outstanding for 2002 and 2001, respectively,  including 1,357,200 treasury shares |   | 839                   |    | 835                   |    |
| Common  Stock, Class B, $.25 par value;   authorized 1,500,000 shares; 1,363,584 and 1,364,584 shares issued and  outstanding for 2002 and 2001, respectively                                 |   | 341                   |    | 341                   |    |
| Capital  surplus                                                                                                                                                                                   |   | 4,362                 |    | 3,680                 |    |
| Notes  receivable from officer/director                                                                                                                                                            |   |                  |    | (135                  | )       |
| Unrealized  gain (loss) on investments                                                                                                                                                             |   | 232                   |    | (653                  | )  |
| Retained  earnings                                                                                                                                                                                 |   | 99,170                |    | 84,824                |    |
|                                                                                                                                                                                               |   | 104,944               |    | 88,892                |    |
| Treasury  stock, 1,357,200 shares at cost                                                                                                                                                          |   | (3,753                | )       | (3,753                | )       |
| Total  stockholders’ equity                                                                                                                                                                   |   | 101,191               |    | 85,139                |    |
| Total  liabilities and stockholders’ equity                                                                                                                                                   |   | $                     | 137,353 |                  | $       | 121,526 |   |

* *

*The accompanying notes are an integral part of theseconsolidated financial statements.*

 

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**ARDENGROUP, INC. AND CONSOLIDATED SUBSIDIARIES**

 

**CONSOLIDATEDSTATEMENTS OF OPERATIONSAND COMPREHENSIVE INCOME**

** **
| **(In  Thousands, Except Share and Per Share Data)**                                                                  |   | **2002**  | ** ** | **2001**  | ** ** | **2000**  | ** ** |
|-----------------------------------------------------------------------------------------------------------------------|--------|-----------|------------|-----------|------------|-----------|------------|
|                                                                                                                  |   |      |       |      |       |      |       |
| Sales                                                                                                                 |   | $         | 401,378    |      | $          | 391,880   |       | $ | 359,994 |   |
| Cost  of sales                                                                                                        |   | 226,916   |       | 226,302   |       | 210,884   |       |
| Gross  profit                                                                                                         |   | 174,462   |       | 165,578   |       | 149,110   |       |
| Delivery,  selling, general and administrative expenses                                                               |   | 152,119   |       | 145,466   |       | 129,272   |       |
| Operating  income                                                                                                     |   | 22,343    |       | 20,112    |       | 19,838    |       |
| Interest  and dividend income                                                                                         |   | 1,867     |       | 2,166     |       | 2,265     |       |
| Other  income (expense), net                                                                                          |   | 98        |       | 356       |       | (464      | )          |
| Interest  expense                                                                                                     |   | (321      | )          | (596      | )          | (782      | )          |
| Income  before income taxes                                                                                           |   | 23,987    |       | 22,038    |       | 20,857    |       |
| Income  tax provision                                                                                                 |   | 9,641     |       | 8,731     |       | 8,498     |       |
| Net  income                                                                                                           |   | $         | 14,346     |      | $          | 13,307    |       | $ | 12,359 |   |
|                                                                                                                  |   |      |       |      |       |      |       |
| Other  comprehensive income (loss), net of tax:                                                                       |   |      |       |      |       |      |       |
| Unrealized  gain (loss) from investments:                                                                             |   |      |       |      |       |      |       |
| Unrealized  holding gains (losses) arising during the period                                                          |   | 732       |       | (680      | )          | 184       |       |
| Reclassification  adjustment for realized losses included in net income                                               |   | 153       |       | 28        |       | 261       |       |
| Net  unrealized gain (loss), net of income tax expense (benefit) of $608 for 2002,  ($449) for 2001 and $306 for 2000 |   | 885       |       | (652      | )          | 445       |       |
| Comprehensive  income                                                                                                 |   | $         | 15,231     |      | $          | 12,655    |       | $ | 12,804 |   |
|                                                                                                                  |   |      |       |      |       |      |       |
| Net  income per common share:                                                                                         |   |      |       |      |       |      |       |
| Basic                                                                                                                 |   | $         | 4.28       |      | $          | 3.93      |       | $ | 3.52 |   |
| Diluted                                                                                                               |   | $         | 4.26       |      | $          | 3.92      |       | $ | 3.52 |   |
|                                                                                                                  |   |      |       |      |       |      |       |
| Weighted  average common shares outstanding:                                                                          |   |      |       |      |       |      |       |
| Basic                                                                                                                 |   | 3,355,020 |       | 3,389,234 |       | 3,513,028 |       |
| Diluted                                                                                                               |   | 3,365,961 |       | 3,398,671 |       | 3,515,117 |       |

 

*The accompanying notes are anintegral part of these consolidated financial statements.*

 

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**ARDENGROUP, INC. AND CONSOLIDATED SUBSIDIARIES**

 

**CONSOLIDATEDSTATEMENTS OF STOCKHOLDERS’ EQUITY**

 
| **(In Thousands,  Except Share Data)**                                                         |   | **2002** | ** ** | **2001** | ** ** | **2000** | ** ** |
|------------------------------------------------------------------------------------------------|--------|----------|------------|----------|------------|----------|------------|
|                                                                                           |   |     |       |     |       |     |       |
| Common  Stock, Class A:                                                                        |   |     |       |     |       |     |       |
| Balance,  beginning of year                                                                    |   | $        | 835        |     | $          | 862      |       | $ | 894 |   |
| Purchase  and retirement of common stock (109,927 shares in 2001 and 127,976 shares, in  2000) |   |     |       | (28      | )          | (32      | )          |
| Shares  issued under Stock Option Plan (14,750 shares)                                         |   | 4        |       |     |       |     |       |
| Exchange  of stock                                                                             |   |     |       | 1        |       |     |       |
| Balance,  end of year                                                                          |   | 839      |       | 835      |       | 862      |       |
|                                                                                           |   |     |       |     |       |     |       |
| Common  Stock, Class B:                                                                        |   |     |       |     |       |     |       |
| Balance,  beginning of year                                                                    |   | 341      |       | 342      |       | 342      |       |
| Exchange  of stock                                                                             |   |     |       | (1       | )     |     |       |
| Balance,  end of year                                                                          |   | 341      |       | 341      |       | 342      |       |
|                                                                                           |   |     |       |     |       |     |       |
| Capital  surplus:                                                                              |   |     |       |     |       |     |       |
| Balance,  beginning of year                                                                    |   | 3,680    |       | 3,766    |       | 3,866    |       |
| Purchase  and retirement of common stock                                                       |   |     |       | (86      | )          | (100     | )          |
| Shares  issued under Stock Option Plan                                                         |   | 682      |       |     |       |     |       |
| Balance,  end of year                                                                          |   | 4,362    |       | 3,680    |       | 3,766    |       |
|                                                                                           |   |     |       |     |       |     |       |
| Notes  receivable from officer/director:                                                       |   |     |       |     |       |     |       |
| Balance,  beginning of year                                                                    |   | (135     | )          | (135     | )          | (175     | )          |
| Principal  received                                                                            |   | 135      |       |     |       | 40       |       |
| Balance,  end of year                                                                          |   | 0        |       | (135     | )          | (135     | )          |
|                                                                                           |   |     |       |     |       |     |       |
| Unrealized  gain (loss) on investments:                                                        |   |     |       |     |       |     |       |
| Balance,  beginning of year                                                                    |   | (653     | )          | (1       | )          | (446     | )          |
| Net  unrealized gain (loss)                                                                    |   | 885      |       | (652     | )          | 445      |       |
| Balance,  end of year                                                                          |   | 232      |       | (653     | )          | (1       | )          |
|                                                                                           |   |     |       |     |       |     |       |
| Retained  earnings:                                                                            |   |     |       |     |       |     |       |
| Balance,  beginning of year                                                                    |   | 84,824   |       | 76,186   |       | 68,548   |       |
| Net  income                                                                                    |   | 14,346   |       | 13,307   |       | 12,359   |       |
| Purchase  and retirement of common stock                                                       |   |     |       | (4,669   | )          | (4,721   | )          |
| Balance,  end of year                                                                          |   | 99,170   |       | 84,824   |       | 76,186   |       |
|                                                                                           |   |     |       |     |       |     |       |
| Stockholders’  equity before treasury stock                                               |   | 104,944  |       | 88,892   |       | 81,020   |       |
|                                                                                           |   |     |       |     |       |     |       |
| Treasury  stock, at cost                                                                       |   | (3,753   | )          | (3,753   | )          | (3,753   | )          |
|                                                                                           |   |     |       |     |       |     |       |
| Total  stockholders’ equity                                                               |   | $        | 101,191    |     | $          | 85,139   |       | $ | 77,267 |   |

 

*The accompanying notes are anintegral part of these consolidated financial statements.*

 

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**ARDENGROUP, INC. AND CONSOLIDATED SUBSIDIARIES**

 

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

 
| **(In  Thousands)**                                      |   | **2002** | ** ** | **2001** | ** ** | **2000** | ** ** |
|----------------------------------------------------------|--------|----------|------------|----------|------------|----------|------------|
|                                                     |   |     |       |     |       |     |       |
| Cash  flows from operating activities:                   |   |     |       |     |       |     |       |
| Cash  received from customers                            |   | $        | 402,847    |     | $          | 392,698  |       | $ | 358,007 |   |
| Cash  paid to suppliers and employees                    |   | (369,881 | )          | (364,624 | )          | (334,693 | )          |
| Interest  and dividends received                         |   | 1,604    |       | 1,935    |       | 2,029    |       |
| Interest  paid                                           |   | (331     | )          | (627     | )          | (761     | )          |
| Income  taxes paid                                       |   | (8,706   | )          | (9,800   | )          | (9,201   | )          |
| Net  cash provided by operating activities               |   | 25,533   |       | 19,582   |       | 15,381   |       |
|                                                     |   |     |       |     |       |     |       |
| Cash  flows from investing activities:                   |   |     |       |     |       |     |       |
| Capital  expenditures                                    |   | (4,023   | )          | (10,066  | )          | (9,882   | )          |
| Purchases  of investments                                |   | (21,667  | )          | (4,637   | )          | (2,614   | )          |
| Sales  of investments                                    |   | 14,686   |       | 282      |       | 5,797    |       |
| Proceeds  from the sale of property, plant and equipment |   | 68       |       | 54       |       | 121      |       |
| Other                                                    |   |     |       |     |       | (348     | )          |
| Net  cash used in investing activities                   |   | (10,936  | )          | (14,367  | )          | (6,926   | )          |
|                                                     |   |     |       |     |       |     |       |
| Cash  flows from financing activities:                   |   |     |       |     |       |     |       |
| Purchase  and retirement of Company stock                |   |     |       | (4,783   | )          | (4,853   | )          |
| Principal  payments on long-term debt                    |   |     |       | (4,762   | )          | (1,880   | )          |
| Principal  payments under capital lease obligations      |   | (250     | )          | (257     | )          | (229     | )          |
| Loan payments received  from officer/director            |   | 135      |       |     |       | 40       |       |
| Proceeds from exercise  of stock options                 |   | 576      |       |     |       |     |       |
| Net  cash provided by (used in) financing activities     |   | 461      |       | (9,802   | )          | (6,922   | )          |
|                                                     |   |     |       |     |       |     |       |
| Net  increase (decrease) in cash and cash equivalents    |   | 15,058   |       | (4,587   | )          | 1,533    |       |
|                                                     |   |     |       |     |       |     |       |
| Cash  and cash equivalents at beginning of year          |   | 15,103   |       | 19,690   |       | 18,157   |       |
|                                                     |   |     |       |     |       |     |       |
| Cash  and cash equivalents at end of year                |   | $        | 30,161     |     | $          | 15,103   |       | $ | 19,690 |   |

 

*The accompanying notes are anintegral part of these consolidated financial statements.*

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|                                                                                                |   | **2002** |   | **2001** |   | **2000** |   |
|-----------------------------------------------------------------------------------------------------|--------|----------|--------|----------|--------|----------|--------|
| **Reconciliation  of Net Income to Net Cash Provided by Operating Activities:**                     |   |     |   |     |   |     |   |
| Net  income                                                                                         |   | $        | 14,346 |     | $      | 13,307   |   | $ | 12,359 |   |
|                                                                                                |   |     |   |     |   |     |   |
| Adjustments  to reconcile net income to net cash provided by operating activities:                  |   |     |   |     |   |     |   |
| Depreciation  and amortization                                                                      |   | 8,139    |   | 7,872    |   | 6,719    |   |
| Provision  for losses on accounts and notes receivable                                              |   | (20      | )      | 58       |   | 142      |   |
| Net  loss (gain) from the disposal of property, plant and equipment                                 |   | (19      | )      | 44       |   | (19      | )      |
| Realized  loss (gain) on investments, net                                                           |   | (98      | )      | (383     | )      | 434      |   |
| Tax  benefit of stock option transactions                                                           |   | 110      |   |     |   |     |   |
|                                                                                                |   |     |   |     |   |     |   |
| Changes  in assets and liabilities net of effects from noncash investing and financing  activities: |   |     |   |     |   |     |   |
|                                                                                                |   |     |   |     |   |     |   |
| (Increase)  decrease in assets:                                                                     |   |     |   |     |   |     |   |
| Investments                                                                                         |   | (143     | )      | (182     | )      | (2       | )      |
| Accounts  and notes receivable                                                                      |   | 1,475    |   | 966      |   | (2,242   | )      |
| Inventories                                                                                         |   | 206      |   | (1,334   | )      | (1,212   | )      |
| Other  current assets                                                                               |   | 1,071    |   | (547     | )      | (903     | )      |
| Other  assets                                                                                       |   | 178      |   | (404     | )      | (602     | )      |
|                                                                                                |   |     |   |     |   |     |   |
| Increase  (decrease) in liabilities:                                                                |   |     |   |     |   |     |   |
| Accounts  payable and other accrued expenses                                                        |   | 572      |   | 1,092    |   | 659      |   |
| Deferred  income taxes                                                                              |   | (413     | )      | (1,189   | )      | (568     | )      |
| Other  liabilities                                                                                  |   | 129      |   | 282      |   | 616      |   |
| Net  cash provided by operating activities                                                          |   | $        | 25,533 |     | $      | 19,582   |   | $ | 15,381 |   |

 

*The accompanying notes are an integralpart of these consolidated financial statements.*

 

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**ARDENGROUP, INC. AND CONSOLIDATED SUBSIDIARIES**

 

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

 

1.                    AccountingPolicies

 

The following is a summary of significant accountingpolicies followed in the preparation of these consolidated financialstatements.

 

Basis of Presentation andBusiness Description

 

The consolidated financial statements of Arden Group,Inc. (the “Company”) include the accounts of the Company and its direct andindirect subsidiaries.  All intercompanyaccounts and transactions are eliminated in consolidation.  The Company operates 18 supermarkets inSouthern California.

 

Fiscal Year

 

The Company operates on a fiscal year ending on theSaturday closest to December 31.  Fiscalyears for the consolidated financial statements included herein ended onDecember 28, 2002, December 29, 2001 and December 30, 2000.  Each of the three years presented consistsof 52 weeks.

 

Cash and Cash Equivalents

 

The Consolidated Statements of Cash Flows classifychanges in cash and cash equivalents (short-term, highly liquid investmentsreadily convertible into cash with an original maturity at date of purchase ofthree months or less) according to operating, investing or financingactivities.  At times, cash balancesheld at financial institutions are in excess of federally insured limits.  The Company places its temporary cashinvestments with high credit, quality financial institutions and limits theamount of credit exposure to any one financial institution.  The Company believes no significantconcentration of credit risk exists with respect to these cash investments.

 

Investments

 

The Company invests in marketable securities includingmutual funds and debt and equity securities. Marketable securities are statedat market value as determined by the most recently traded price of eachsecurity at the balance sheet date.  Allmarketable securities are defined as available-for-sale investments under theprovisions of Statement of Financial Accounting Standards No. (“SFAS”) 115,“Accounting for Certain Investments in Debt and Equity Securities.”

 

Management determines the appropriate classificationof its investments in marketable securities at the time of purchase andreevaluates such determination at each balance sheet

 

 

35

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date.  Debtsecurities for which the Company does not have the intent or ability to hold tomaturity and equity securities are classified as available-for-sale.  Investments are carried at fair value, withthe unrealized gains and losses, net of tax, reported as a separate componentof stockholders’ equity.  The cost ofinvestments sold is determined based on the specific identification method.

 

In January 2001, the Company invested $2,500,000 in alimited partnership that invests primarily in publicly traded, high yieldbonds.  The holding represents less thana 3% interest and the Company does not have the ability to exercise significantinfluence over the operating and financial policies of the partnership.  Consequently, the investment is accountedfor under the cost method.  Thepartnership allows withdrawals on a quarterly basis.

 

Accounts and NotesReceivable

 

The Company monitors vendor receivables and extensionsof credit on an ongoing basis and has not experienced significant lossesrelated to its receivables.  At December28, 2002, the Company did not have significant credit risk concentrations.  No single group or customer represents greaterthan 2% of total accounts and notes receivable.  Issuance costs related to Gelson’s charge cards are notsignificant and are expensed as incurred.

 

Inventories

 

Supermarket nonperishable inventories are stated atthe lower of cost or market, with cost determined using the last-in, first-out(“LIFO”) method.  Perishable inventoriesare valued at the lower of cost on a first-in, first-out (“FIFO”) method ormarket.

 

The Company estimates inventory adjustments based onhistorical experience derived from periodic physical inventories and otherfactors.  Allowances for inventoryadjustments are recorded based on these estimates to properly reflect inventoryat the balance sheet date.

 

Property Held for Resaleor Sublease

 

It is the Company’s policy to hold for sale orsublease property considered by management as excess and no longer necessaryfor the operations of the Company.  Theaggregate carrying values of such owned property is periodically reviewed forimpairment and adjusted, when appropriate.

 

Property, Plant andEquipment

 

Property, plant and equipment is recorded atcost.  Depreciation is provided on thestraight-line method over the estimated useful lives of individual assets orclasses of assets as follows:

 
| Buildings and improvements          |   | 5  to 15 years             |
|-------------------------------------|--------|---------------------------------|
| Store fixtures and office equipment |   | 3  to    8 years |
| Transportation equipment            |   | 2  to    5 years |
| Machinery and equipment             |   | 3  to 10 years             |

 

36

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Improvements to leased properties are amortized overtheir estimated useful lives or lease period, whichever is shorter.  Leasehold interests are amortized over theinitial lease term.

 

Leased property meetingcertain capital lease criteria is capitalized and the present value of therelated lease payments is recorded as a liability.  Amortization of capitalized leased assets is computed on thestraight-line method over the shorter of the estimated useful life or theinitial lease term.

 

Normal repairs and maintenance are expensed asincurred.  Expenditures which materiallyincrease values, change capacities or extend useful lives are capitalized.  Replacements are capitalized and theproperty, plant and equipment accounts are relieved of the items beingreplaced.  The related costs andaccumulated depreciation of disposed assets are eliminated and any gain or losson disposition is included in income.

 

Impairment of Long-LivedAssets

 

The Company monitors the carrying value of long-livedassets for potential impairment each quarter whenever events or changes in circumstancesindicate the carrying value of an asset may not be recoverable.  Impairment is determined by comparingprojected undiscounted cash flows to be generated by the asset to its carryingvalue.  If impairment is identified, aloss would be recorded equal to the excess of the asset’s net book value overthe asset’s fair value.

 

Fair Value of FinancialInstruments

 

The carrying values of cash and cash equivalents,accounts receivable, accounts payable and accrued liabilities approximate fairvalues because of the short-term maturity of these instruments.  The fair value of long-term debt closelyapproximates its carrying value.  TheCompany uses quoted market prices, when available, or discounted cash flows tocalculate these fair values.

 

General & AutoLiability Costs

 

The Company is primarily self-insured for lossesrelated to general and auto liability claims for up to $250,000.  Accruals are based on reported claims and anestimate of claims incurred but not reported. The Company’s liability reserve for unpaid and incurred but not reportedclaims at December 28, 2002 was approximately $1,057,000.  While the ultimate amount of claims incurredare dependent on future developments, in management’s opinion, recordedreserves are adequate to cover the future payment of claims.

 

Revenue Recognition

 

The Company recognizes revenue at the time ofsale.  Discounts given to customers arerecorded at the point of sale as a reduction of revenues.  The Company maintains a bad debt allowancefor receivables from vendors and Gelson’s credit card sales.  Valuation reserves are adjusted periodicallybased on historical recovery rates.

 

37

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Merchandise Costs

 

Vendor rebates, credits and promotional allowancesthat relate to the Company’s buying and merchandising activities, includinglump-sum payments associated with long-term contracts, are recorded as acomponent of merchandise costs as they are earned in accordance with theunderlying agreement.

 

StockOptions and Stock Appreciation Rights

 

The Company accounts for itsStock Option Plan using the intrinsic value based method prescribed inAccounting Principles Board Opinion No. (“APB”) 25, “Accounting for StockIssued to Employees.”  Accordingly, no**compensationcost has been recognized in the Company’s Statements of Operations andComprehensive Income for fiscal years 2002, 2001 or 2000.  SFAS 123, “Accounting for Stock-BasedCompensation,” encourages adoption of a fair value based method for valuing thecost of stock-based compensation. However, it allows companies to use the intrinsic value based methodprescribed by APB 25 and disclose pro forma net earnings and earnings per sharein accordance with SFAS 123.

 

Stock-based compensationunder the SARs program is subject to variable accounting in accordance withFinancial Accounting Standards Board Interpretation No. 28, “Accounting forStock Appreciation Rights and Other Variable Stock Option or Award Plans.”  As a result, changes in the market price ofthe Company’s Class A Common Stock impacts the SARs compensation charge.

 

Environmental Costs

 

Costs incurred to investigate and remediatecontaminated sites are expensed as incurred.

 

Store Opening Costs

 

Noncapital expenditures incurred in opening a newstore are expensed as incurred.

 

Advertising and SalesPromotion Costs

 

Advertising and sales promotion costs are expensed asincurred and totaled $2,760,000, $3,187,000 and $2,630,000 in 2002, 2001 and2000, respectively.

 

Income Taxes

 

Deferred tax liabilities and assets are determinedbased on the difference between the financial statement and tax bases of assetsand liabilities, using enacted tax rates in effect for the year in which thedifferences are expected to reverse.

 

Net Income Per Share

 

Basic net income per share is computed by dividing thenet income attributable to common stockholders by the weighted average numberof common shares outstanding during the period.  Diluted net income per share is calculated by adjusting outstandingshares to include

 

38

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all potentially dilutive stock options.  The weighted average number of common sharesused to compute dilutive net income per share in 2000 excludes 30,000 sharesrelated to stock options.  These sharesare excluded due to their antidilutive effect on net income per share.

 

Use of Estimates

 

The preparation of financial statements in conformitywith accounting principles generally accepted in the United States requiresmanagement to make estimates and assumptions for the reporting period and as ofthe financial statement date.  Theseestimates and assumptions affect the reported amounts of assets andliabilities, the disclosure of contingent liabilities and the reported amountsof revenues and expenses.  Actual resultscould differ from these estimates. Significant estimates include the Company’s liabilities for general andauto liability self-insured retention.

 

Impact of Recently IssuedAccounting Standards

 

In July 2001, theFinancial Accounting Standards Board (“FASB”) issued SFAS 141, “BusinessCombinations,” and SFAS 142, “Goodwill and Other Intangible Assets.”  These statements change the accounting forbusiness combinations and goodwill in two significant ways.  SFAS 141 requires that the purchase methodof accounting be used for business combinations.  Use of the pooling-of-interests method will be prohibited.  SFAS 142 changes the accounting for goodwillfrom an amortization method to an impairment-only approach.  Adoption of SFAS 141 and 142 in the Company’s2002 fiscal year did not have an impact on the consolidated financialstatements.

 

InOctober 2001, the FASB issued SFAS 144, “Accounting for the Impairment orDisposal of Long-Lived Assets,” which replaces SFAS 121, “Accounting forImpairment of Long-Lived Assets and for Long-Lived Assets to be DisposedOf.”  SFAS 144 establishes oneaccounting model, based on the framework established in SFAS 121, for therecognition, measurement and reporting of impairment of long-lived assets to beheld and used and of long-lived assets to be disposed of by sale. Adoption ofSFAS 144 in the Company’s 2002 fiscal year did not have an impact on theCompany’s consolidated financial statements.

 

InJune 2002, the FASB issued SFAS 146, “Accounting for Costs Associated with Exitor Disposal Activities.”  SFAS 146requires that a liability for costs associated with an exit or disposalactivity be recognized and measured initially at fair value only when theliability is incurred.  SFAS 146 iseffective for exit or disposal activities that are initiated after December 31,2002.  This standard is not expected tohave an impact on the Company’s consolidated financial statements.

 

InDecember 2002, the FASB issued SFAS 148, “Accounting for Stock-BasedCompensation – Transition and Disclosure.” SFAS 148 amends FASB 123, “Accounting for Stock-Based Compensation,” toprovide alternative methods of transition for a voluntary change to the fairvalue based method of accounting for stock-based employee compensation.  In addition, SFAS 148 amends the disclosurerequirements of SFAS 123 to require prominent disclosures in both annual andinterim financial statements about the method of accounting for stock-basedemployee compensation and the effect of the method

 

39

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usedon reported results.  The Company willadopt the disclosure only provision of this statement effective with the firstquarter of fiscal 2003.

 

2.                    Investments

 

Marketable securities are shown on the accompanyingbalance sheet at their fair value.  Theinvestment in a limited partnership that invests primarily in publicly traded,high yield bonds is accounted for under the cost method as the Company ownsless than 3% of the partnership and does not have the ability to exercise significantinfluence over the operating and financial policies of the partnership.  The fair market value of the Company’sinvestment in the limited partnership was approximately $3,061,000 at December31, 2002.  The partnership allowswithdrawals on a quarterly basis.

 
| **(In  Thousands)**            |   | **Cost** |   | **Unrealized  Gain (Loss)** |   | **Fair Value** |   |
|--------------------------------|--------|----------|--------|-----------------------------|--------|----------------|--------|
| As of  December 28, 2002: |   |     |   |                        |   |           |   |
| Investments:                   |   |     |   |                        |   |           |   |
| Mutual funds                   |   | $        | 21,825 |                        | $      | (89            | )      | $ | 21,736 |   |
| Equity  securities             |   | 985      |   | 245                         |   | 1,230          |   |
| Debt securities                |   | 1,863    |   | 237                         |   | 2,100          |   |
| Limited  partnership           |   | 2,500    |   |                        |   | 2,500          |   |
| Total                          |   | $        | 27,173 |                        | $      | 393            |   | $ | 27,566 |   |

 
| **(In Thousands)**             |   | **Cost** |   | **Unrealized  Gain (Loss)** |   | **Fair Value** |   |
|--------------------------------|--------|----------|--------|-----------------------------|--------|----------------|--------|
| As of  December 29, 2001: |   |     |   |                        |   |           |   |
| Investments:                   |   |     |   |                        |   |           |   |
| Mutual funds                   |   | $        | 12,597 |                        | $      | (10            | )      | $ | 12,587 |   |
| Equity securities              |   | 2,237    |   | (13                         | )      | 2,224          |   |
| Debt securities                |   | 2,609    |   | (1,069                      | )      | 1,540          |   |
| Limited  partnership (1)       |   | 2,500    |   |                        |   | 2,500          |   |
| Total                          |   | $        | 19,943 |                        | $      | (1,092         | )      | $ | 18,851 |   |

 

----

(1)   The Company follows the cost method ofaccounting for this investment. Accordingly, the fair value reflects the cost basis.

 

The contractual maturities of available-for-sale debtsecurities at December 28, 2002 are as follows:

 
| **(In  Thousands)**                       |   | **Amortized  Cost** |   | **Fair  Value** |   |
|-------------------------------------------|--------|---------------------|--------|-----------------|--------|
|                                      |   |                |   |            |   |
| Due after one year  through three years   |   | $                   | 1,133  |            | $      | 1,373 |   |
| Due after three years  through five years |   | 730                 |   | 727             |   |
| Total                                     |   | $                   | 1,863  |            | $      | 2,100 |   |

 

40

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Realized net losses fromthe sale of securities were $211,000, $44,000 and $434,000 in 2002, 2001 and2000, respectively.

 

3.                    Accounts andNotes Receivable, Net

 
| **(In Thousands)**                                                |   | **December  28, 2002** |   | **December  29, 2001** |   |
|-------------------------------------------------------------------|--------|------------------------|--------|------------------------|--------|
| Accounts receivable,  trade                                       |   | $                      | 3,827  |                   | $      | 3,970 |   |
| Notes receivable                                                  |   | 116                    |   | 42                     |   |
| Other accounts  receivable                                        |   | 1,675                  |   | 2,764                  |   |
|                                                              |   | 5,618                  |   | 6,776                  |   |
| Less:  Allowance for doubtful accounts and notes  receivable |   | (206                   | )      | (257                   | )      |
|                                                              |   | $                      | 5,412  |                   | $      | 6,519 |   |

 

The provision for doubtful accounts and notesreceivable in 2002, 2001 and 2000 was approximately $20,000,  $58,000 and $142,000, respectively.

 

4.       Inventories

 

Inventories valued by the LIFO method totaled$11,601,000 in 2002, $11,779,000 in 2001 and $10,530,000 in 2000.  Inventory balances would have been$3,186,000, $3,440,000 and $3,253,000 higher at the end of 2002, 2001 and 2000,respectively, if they had been stated at the lower of FIFO cost or market.  The LIFO effect on net income and basic netincome per common share in 2002 was an increase of approximately $150,000 ($.04per share) and a decrease of $111,000 ($.03 per share) and $77,000 ($.02 pershare) in 2001 and 2000, respectively.

 

5.       Significant Supplier

 

The Company procures approximately 22 percent of itsproduct through Unified Western Grocers, Inc. (“Unified”), a grocerycooperative.  As a member-patron, theCompany is required to provide Unified with certain minimum deposits and creditin order to purchase product from the cooperative.  As of December 28, 2002, the Company had approximately $1,418,000on deposit with Unified.  The minimumdeposit requirement is satisfied through a combination of cash, credit andownership of equity shares in Unified. In September 2002, Unified’s Board of Directors authorized aquasi-reorganization that eliminated its accumulated deficit in retainedearnings and restated assets and liabilities to their fair values.  Unified’s Board of Directors has adopted anequity enhancement plan for its 2002 fiscal year.  Under the equity enhancement plan, member-patrons will receivefive-year low interest bearing subordinated patronage dividend certificates inlieu of amounts previously paid in cash and Class B shares.  In 2002, the Company earned approximately$149,000 in subordinated patronage dividend certificates.  In the event Unified continues to incur reductionsin earned surplus, the Company may face impairment issues relating to thedeposits provided to Unified.  In viewof the above, the Company has currently elected not to recognize the patronagedividend as income until the certificates are redeemed.  The Company will evaluate this policy on anannual basis based on facts and circumstances as they exist in the future.

 

41

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6.       Property, Plant and Equipment

 
| **(In Thousands)**                         |   | **December  28, 2002** |   | **December  29, 2001** |   |
|--------------------------------------------|--------|------------------------|--------|------------------------|--------|
| Land                                       |   | $                      | 8,110  |                   | $      | 8,110 |   |
| Buildings and  improvements                |   | 9,693                  |   | 9,693                  |   |
| Store fixtures and  office equipment       |   | 35,417                 |   | 35,775                 |   |
| Transportation  equipment                  |   | 2,796                  |   | 2,664                  |   |
| Machinery and equipment                    |   | 1,001                  |   | 973                    |   |
| Leasehold improvements                     |   | 42,153                 |   | 41,738                 |   |
| Leasehold interests                        |   | 4,538                  |   | 4,538                  |   |
| Assets under capital  leases               |   | 3,058                  |   | 3,058                  |   |
| Assets under  construction                 |   | 1,410                  |   | 373                    |   |
|                                       |   | 108,176                |   | 106,922                |   |
|                                       |   |                   |   |                   |   |
| Accumulated  depreciation and amortization |   | (55,722                | )      | (50,304                | )      |
|                                       |   | $                      | 52,454 |                   | $      | 56,618 |   |

 

As of December 28, 2002, approximately $17,121,000 ofproperty, plant and equipment (at cost) was fully depreciated and is stillbeing used in operations.  As ofDecember 28, 2002, the Company has recorded $2,523,000 in accumulatedamortization for assets under capital lease.

 

7.       Other Current Liabilities

 
| **(In Thousands)**                                                                |   | **December  28, 2002** |   | **December  29, 2001** |   |
|-----------------------------------------------------------------------------------|--------|------------------------|--------|------------------------|--------|
| Employee compensated  absences                                                    |   | $                      | 4,487  |                   | $      | 4,216 |   |
| Taxes (including taxes  collected from others of $1,556 and $1,398, respectively) |   | 3,771                  |   | 2,340                  |   |
| Payroll                                                                           |   | 1,322                  |   | 1,330                  |   |
| Employee benefits                                                                 |   | 1,277                  |   | 1,113                  |   |
| Other                                                                             |   | 5,011                  |   | 4,815                  |   |
|                                                                              |   | $                      | 15,868 |                   | $      | 13,814 |   |

 

8.       Long-Term Debt

 
|                                                     |   | **Current**           |       | **Non-Current**       |       |
|----------------------------------------------------------|--------|-----------------------|------------|-----------------------|------------|
| **(In Thousands)**                                       |   | **December  28,2002** |       | **December  29,2001** |       | **December  28,2002** |   | **December  29,2001** |   |
| Obligations under  capital leases                        |   | $                     | 220        |                  | $          | 289 |   | $ | 1,055 |   | $ | 1,906 |   |
| 7% Subordinated income  debentures due September 1, 2014 |   |                  | ** ** |                  | ** ** | 1,228 |   | 1,228 | ** ** |
|                                                     |   | $                     | 220        |                  | $          | 289 |   | $ | 2,283 |   | $ | 3,134 |   |

 

 

42

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At December 28, 2002, theapproximate principal payments required on long-term debt for each fiscal yearare as follows:

 
| **(In Thousands)** |   |
|--------------------|--------|
|               |   |
| 2004               |   | $ | 245 |   |
| 2005               |   | 273 |   |
| 2006               |   | 304 |   |
| 2007               |   | 233 |   |
| Thereafter         |   | 1,228 |   |
|               |   | $ | 2,283 |   |

 

The Company has bank revolving lines of credit in theamount of $5,000,000 and $3,000,000 which expire August 2004 and October 2003,respectively.  Borrowings bear interestat the bank’s prime rate or the adjusted LIBOR rate plus an index up to1.2%.  At the end of 2002 and 2001,there were no amounts borrowed against either of the revolving lines of credit.

 

Notes Payable: In 1999, 1997 and 1995, the Company borrowed $4,750,000 (at 6.98%),$2,500,000 (at 6.76%) and $2,750,000 (at 6.18%), respectively, under a$10,000,000 non-revolving line of credit to finance the purchase of supermarketequipment.  The note payable enteredinto in 1995 was paid in full in December 2000 and the 1997 and 1999 notespayable were paid in full in October 2001. The loan agreement expired in July 2002.

 

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 theextent that current annual net income is sufficient therefor, or at thediscretion of the Company, out of available retained earnings.  No accrued interest was in arrears as ofDecember 28, 2002.  The debentures arerecorded at face value which approximates its fair value.

 

9.       Capital Stock

 

Class A Common Stock: The Company is authorized to issue 10,000,000 shares of Class A CommonStock, par value $.25 per share.  AtDecember 28, 2002 and December 29, 2001, shares issued were 3,355,935 and3,340,185*,*respectively, including 1,357,200 treasury shares.  During 2001, the Company purchased andretired 109,927 shares of its Class A Common Stock for an aggregate purchaseprice of approximately $4,783,000.  TheClass A Common Stock has one vote per share on all matters on whichstockholders are entitled to vote or consent.

 

Class B Common Stock: The Company is authorized to issue 1,500,000 shares of Class B CommonStock, par value $.25 per share.  AtDecember 28, 2002 and December 29, 2001, there were 1,363,584 and 1,364,584shares, respectively, issued and outstanding. The Class B Common Stock has ten votes per share on virtually allmatters on which stockholders are entitled to vote or consent.  Transfer of Class B Common Stock isrestricted to other Class B stockholders and certain other classes oftransferees.  Class B Common Stock isconvertible, at the option of the holder, into Class A Common Stock on ashare-for-share basis.  The Class BCommon Stock is also automatically converted into Class A Common Stock under

 

43

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certain circumstances, including upon the transfer ofsuch stock to a transferee other than another Class B stockholder and certainother classes of transferees.  1,000 and4,400 shares of Class B Common Stock were exchanged for Class A Common Stockduring 2002 and 2001, respectively.  Noshares were converted in 2000.  Cash orproperty dividends on Class B Common Stock are restricted to an amount equal to90% of any dividend paid on Class A Common Stock.

 

10.     Stock Options and Stock Appreciation Rights

 

In 1998, the Company adopted a Non-Officer andNon-Director Stock Option Plan (the “Stock Option Plan”) which initiallyprovided for the granting of stock options to key employees to purchase up to35,000 shares of the Company’s Class A Common Stock.  The Stock Option Plan was amended in 2000 to increase the numberof shares available thereunder to an aggregate of 70,000 shares.  The objective of the Stock Option Plan is toattract and retain quality personnel and to promote the success of the Companyby providing employees the opportunity to share in its growth.  These options vest at 25% per year beginningat the end of the first year and expire five years from the date of grant.  The exercise price of stock options grantedunder the Stock Option Plan is equal to the fair market value of the Company’sClass A Common Stock on the date of grant. 

 

Compensation expense for the Company’s Stock OptionPlan as determined under SFAS 123 using the fair value based method would havereduced the Company’s pro forma net income and basic net income per commonshare to the pro forma amounts indicated below:

 
| **(In Thousands,  Except Net Income Per Share)** |   | **2002** |   | **2001** |   | **2000** |   |
|--------------------------------------------------|--------|----------|--------|----------|--------|----------|--------|
| Net income, as reported                          |   | $        | 14,346 |     | $      | 13,307   |   | $ | 12,359 |   |
| Net income, pro forma                            |   | 14,262   |   | 13,215   |   | 12,271   |   |
| Basic net income per common share, as reported   |   | 4.28     |   | 3.93     |   | 3.52     |   |
| Basic net income per common share, pro forma     |   | 4.25     |   | 3.90     |   | 3.49     |   |
| Diluted net income per common share, as reported |   | 4.26     |   | 3.92     |   | 3.52     |   |
| Diluted net income per common share, pro forma   |   | 4.24     |   | 3.89     |   | 3.49     |   |
|                                                  |        |          |        |          |        |          |        |  |  |  |

 

The weighted average fair value at date of grant foroptions issued in 2000 was $12.50 per option. The fair value of options at date of grant was estimated using theBlack-Scholes option-pricing model with the following weighted averageassumptions:

 
| Risk-free interest rate         |   | 6.54%   |
|---------------------------------|--------|---------|
| Expected dividend yield         |   | 0%      |
| Expected option life            |   | 4 years |
| Expected stock price volatility |   | 44.3%   |

 

The effects of applying SFAS 123 for the pro formadisclosures are not necessarily indicative of the effects expected on currentor future net income and basic net income per common share as the valuationsare based on highly subjective assumptions about the future, including stockprice volatility and exercise patterns.

 

The Company also has granted stock appreciation rights(“SARs”) covering shares of the Company’s Class A Common Stock to non-employeedirectors and persons who are at the

 

44

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vice president or higher level of the Company.  Each SAR entitles the holder to receive uponexercise thereof the excess of the fair market value of a share of Class ACommon Stock on the date of exercise over the fair market value of such shareon the date granted.  The SARs vest 25%each year beginning at the end of the first year and expire five years from thedate of grant.

 

Stock options and SARs transactions during the pastthree years have been as follows:

 
|                                           |   |               |   |                            |   | **SARs**                    |   |                            |
|------------------------------------------------|--------|--------------------|--------|---------------------------------|--------|-----------------------------|--------|---------------------------------|
|                                           |   | **Stock  Options** |   | **Officers**                    |   | **Non-Employee  Directors** |   |
|                                           |   | **Options**        |   | **Weighted  Average Price ($)** |   | **SARs**                    |   | **Weighted  Average Price ($)** |   | **SARs** |   | **Weighted  Average Price ($)** |   |
| Outstanding as  of

January 1, 2000            |   | 30,000             |   | 40.00                           |   | 10,000                      |   | 40.00                           |   |   |   |   |   |
| Granted                                        |   | 11,500             |   | 29.06                           |   | 10,000                      |   | 29.06                           |   | 40,000 |   | 29.06 |   |
| Outstanding as  of

December 30,  2000         |   | 41,500             |   | 36.97                           |   | 20,000                      |   | 34.53                           |   | 40,000 |   | 29.06 |   |
| Granted                                        |   |               |   |                            |   |                        |   |                            |   | 10,000 |   | 48.00 |   |
| Outstanding as  of

December 29,2001           |   | 41,500             |   | 36.97                           |   | 20,000                      |   | 34.53                           |   | 50,000 |   | 32.85 |   |
| Exercised                                      |   | 14,750             |   | 39.07                           |   | 12,500                      |   | 36.72                           |   | 17,500 |   | 29.06 |   |
| Outstanding as  of

December 28,  2002         |   | 26,750             |   | 35.81                           |   | 7,500                       |   | 30.89                           |   | 32,500 |   | 34.89 |   |
| Exercisable as  of

December 28, 2002          |   | 21,000             |   |                            |   | 2,500                       |   |                            |   | 5,000 |   |   |   |
| Available for  grant as of

December 28,  2002 |   | 28,500             |   |                            |   | 8,000                       |   |                            |   | N/A |   |   |   |
|                                                |        |                    |        |                                 |        |                             |        |                                 |  |  |  |  |  |  |  |  |  |  |

 

The following table summarizes information about theCompany’s Stock Options and SARs outstanding at December 28, 2002:

 
|                                 |   | **Options  Outstanding** |   | **Options  Exercisable**                            |   |
|--------------------------------------|--------|--------------------------|--------|-----------------------------------------------------|--------|
| **Range of   Exercise Price**        |   | **Number  Outstanding**  |   | **Weighted  Average  Remaining  Contractual  Life** |   | **Weighted  Average  Exercise  Price** |   | **Number  Exercisable** |   | **Weighted  Average  Exercise  Price** |   |
| Stock Options                        |   |                     |   |                                                |   |   |   |   |   |   |   |
| $ 29.06                              |   | 10,250                   |   | 2.2 years                                           |   | $29.06 |   | 4,500 |   | $29.06 |   |
| $ 40.00                              |   | 16,500                   |   | 0.9 years                                           |   | $40.00 |   | 16,500 |   | $40.00 |   |
|                                 |   |                     |   |                                                |   |   |   |   |   |   |   |
| SARs –  Non-Employee  Directors |   |                     |   |                                                |   |   |   |   |   |   |   |
| $ 29.06                              |   | 22,500                   |   | 2.2 years                                           |   | $29.06 |   | 2,500 |   | $29.06 |   |
| $ 48.00                              |   | 10,000                   |   | 3.5 years                                           |   | $48.00 |   | 2,500 |   | $48.00 |   |
|                                 |   |                     |   |                                                |   |   |   |   |   |   |   |
| SARs – Officers                 |   |                     |   |                                                |   |   |   |   |   |   |   |
| $ 29.06                              |   | 6,250                    |   | 2.2 years                                           |   | $29.06 |   | 1,250 |   | $29.06 |   |
| $ 40.00                              |   | 1,250                    |   | 0.9 years                                           |   | $40.00 |   | 1,250 |   | $40.00 |   |

 

For 2002, 2001 and 2000, the Company incurredcompensation expense related to SARs of $481,000, $1,223,000 and $148,000,respectively.

 

45

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11.     Retirement Plans

 

The Company contributes to multi-employer unionpension plans administered by various trustees which may be deemed to be definedbenefit plans.  Contributions to theseplans are based upon negotiated wage contracts.  Information relating to accumulated benefits and fund assets asthey may be allocable to the participants at December 28, 2002 is notavailable.  The Company’s total unionpension expense for all plans for 2002, 2001 and 2000 amounted to $3,086,000,$1,165,000 and $1,099,000, respectively. The Company’s 2001 and 2000 expense is lower than 2002 due to thereinstatement of a union pension contribution in May 2002.  The pension contribution was subsequentlysuspended again effective November 2002 and reinstated effective March 2003.

 

The Arden Group, Inc. 401(k) Retirement Savings Plan(the “Company Savings Plan”) covers all nonunion employees of the Company andits subsidiaries who have attained the age of 18 and have completed at leastone year of service.  The CompanySavings Plan provides that, with certain limitations, a participating employeemay elect to contribute up to 15% of such employee’s annual compensation to theCompany Savings Plan on a tax-deferred basis. The Company made discretionary contributions to the Company Savings Planof $806,000, $720,000 and $652,000 for the years 2002, 2001 and 2000,respectively.

 

The Company maintains a noncontributory, trusteedStock Bonus Plan (the “Plan”) which is qualified under Section 401 of theInternal Revenue Code of 1986, as amended. Under the Third Amendment to the Plan, effective January 1, 2002, no newparticipants or contributions to the Plan are allowed.  Existing contributions must be invested inthe Company’s Class A Common Stock with excess cash being invested in certaingovernment-backed securities. There were no contributions to the Plan in 2002, 2001 and 2000.  

 

An employment agreement with a key executive officerprovides for annual retirement compensation equal to 25% of his average basesalary and bonus earned in the last three years prior to his retirement.  The obligation determined on an actuarialbasis is being accrued over the seven-year term of his employmentagreement.  The Company accrued$348,000, $273,000 and $273,000 toward this benefit in 2002, 2001 and 2000,respectively. 

 

12.     Income Taxes

 

The composition of the federal and state income taxprovision (benefit) is as follows:

 
| **(In Thousands)**            |   | **2002** |   | **2001** |   | **2000** |   |
|-------------------------------|--------|----------|--------|----------|--------|----------|--------|
| Current:                      |   |     |   |     |   |     |   |
| Federal                       |   | $7,420   |   | $8,079   |   | $6,904   |   |
| State                         |   | 2,026    |   | 2,290    |   | 1,856    |   |
| Total current  tax provision  |   | 9,446    |   | 10,369   |   | 8,760    |   |
|                          |   |     |   |     |   |     |   |
| Deferred:                     |   |     |   |     |   |     |   |
| Federal                       |   | 150      |   | (1,204   | )      | (250     | )      |
| State                         |   | 45       |   | (434     | )      | (12      | )      |
| Total deferred  tax provision |   | 195      |   | (1,638   | )      | (262     | )      |
| Total income tax  provision   |   | $9,641   |   | $8,731   |   | $8,498   |   |

 

46

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The Company’s deferred tax assets (liabilities) wereattributable to the following:

 
| **(In Thousands)**                   |   | **December  28,  2002** |   | **December  29,  2001** |   |
|--------------------------------------|--------|-------------------------|--------|-------------------------|--------|
| Deferred tax  assets:                |   |                    |   |                    |   |
| Capital lease  obligations           |   | $                       | 524    |                    | $      | 903 |   |
| Accrued expenses                     |   | 2,475                   |   | 2,362                   |   |
| State income  taxes                  |   | 758                     |   | 750                     |   |
| Allowance for  doubtful accounts     |   | 84                      |   | 105                     |   |
| Other                                |   | 729                     |   | 964                     |   |
| Deferred tax  assets                 |   | 4,570                   |   | 5,084                   |   |
|                                 |   |                    |   |                    |   |
| Deferred tax  liabilities:           |   |                    |   |                    |   |
| Deferred gain on  debenture exchange |   | (3,338                  | )      | (3,495                  | )      |
| Capital lease  assets                |   | (218                    | )      | (540                    | )      |
| Other                                |   | (434                    | )      | (274                    | )      |
| Deferred tax  liabilities            |   | (3,990                  | )      | (4,309                  | )      |
| Deferred income  taxes, net          |   | $                       | 580    |                    | $      | 775 |   |

 

Reconciliation of the statutory federal rate andeffective rate is as follows:

 
|                                            |   | **2002**   |   | **2001** |   | **2000**   |   |
|-------------------------------------------------|--------|------------|--------|----------|--------|------------|--------|
| **(In Thousands, Except Percentage Amounts)**   |   | **Amount** |   | **Rate** |   | **Amount** |   | **Rate** |   | **Amount** |   | **Rate** |   |
| Federal tax at  statutory rate                  |   | $          | 8,396  |     | 35.0   | %          | $      | 7,713 |   | 35.0 | % | $ | 7,300 |   | 35.0 | % |
| State income  taxes, net of federal tax benefit |   | 1,378      |   | 5.7      | %      | 1,266      |   | 5.7 | % | 1,198 |   | 5.7 | % |
| Other                                           |   | (133       | )      | (.5      | %)     | (248       | )      | (1.1 | %) |   |   |   |   |
|                                            |   | $          | 9,641  |     | 40.2   | %          | $      | 8,731 |   | 39.6 | % | $ | 8,498 |   | 40.7 | % |

 

13.     Leases

 

The principal kinds of property leased by the Companyand 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 andproperty taxes.  Most supermarket leasescontain contingent rental provisions based on sales volume and have renewaloptions.  The Company’s decision toexercise renewal options is primarily dependent on the level of businessconducted at the location and the profitability thereof.

 

All leases and subleases with an initial term greaterthan one year are accounted for under SFAS 13, “Accounting for Leases.”  These leases are classified as eithercapital leases, operating leases or subleases, as appropriate.

 

Assets Under Capital Leases:  Assets under capital leases are capitalized using interest ratesappropriate at the inception of each lease. Contingent rentals associated with capital leases in 2002, 2001 and 2000were $235,000, $214,000 and $181,000, respectively, and accordingly have beencharged to expense as incurred. Following is an analysis of assets under capital leases:

 

47

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| **(In Thousands)**       |   | **December  28, 2002** |   | **December  29, 2001** |   |
|--------------------------|--------|------------------------|--------|------------------------|--------|
| Buildings:               |   |                   |   |                   |   |
| Cost                     |   | $                      | 3,058  |                   | $      | 3,058 |   |
| Accumulated amortization |   | (2,523                 | )      | (2,410                 | )      |
|                     |   | $                      | 535    |                   | $      | 648 |   |

 

Also, included in property held for sublease is aproperty classified as a capital lease with a net book value of $677,000 as ofyear-end 2001.  The lease for thisproperty was assigned to a third party in 2002, thereby fully and completelyterminating the Company’s obligation under the lease.

 

Future minimum lease payments for the assets undercapital leases at December 28, 2002 are as follows:

 
| **(In Thousands)**                        |   |   |   |
|-------------------------------------------|--------|--------|--------|
| 2003                                      |   | $      | 348    |   |
| 2004                                      |   | 347    |   |
| 2005                                      |   | 347    |   |
| 2006                                      |   | 347    |   |
| 2007                                      |   | 246    |   |
|                                      |   |   |   |
| Total minimum  obligations                |   | 1,635  |   |
|                                      |   |   |   |
| Interest                                  |   | (360   | )      |
|                                      |   |   |   |
| Present value of  net minimum obligations |   | 1,275  |   |
| Current portion                           |   | (220   | )      |
|                                      |   |   |   |
| Long-term  obligations                    |   | $      | 1,055  |   |

 

Operating Leases and Subleases:  Future minimum lease payments for allnoncancelable operating leases having a remaining term in excess of one year atDecember 28, 2002 are as follows:

 
| **(In Thousands)** |   | **Commitments** |    | **Deduct  Sublease  Rentals** |   | **Net  Rental  Commitments** |   |
|--------------------|--------|-----------------|---------|-------------------------------|--------|------------------------------|--------|
| 2003               |   | $               | 7,274   |                          | $      | 613                          |   | $ | 6,661 |   |
| 2004               |   | 7,541           |    | 620                           |   | 6,921                        |   |
| 2005               |   | 7,164           |    | 601                           |   | 6,563                        |   |
| 2006               |   | 6,811           |    | 577                           |   | 6,234                        |   |
| 2007               |   | 6,635           |    | 578                           |   | 6,057                        |   |
| Thereafter         |   | 68,871          |    | 2,864                         |   | 66,007                       |   |
|               |   | $               | 104,296 |                          | $      | 5,853                        |   | $ | 98,443 |   |

 

48

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Rent expense under operating leases was as follows:

 
| **(In Thousands)** |   | **2002** |   | **2001** |   | **2000** |   |
|--------------------|--------|----------|--------|----------|--------|----------|--------|
| Minimum rent       |   | $        | 7,540  |     | $      | 6,998    |   | $ | 6,164 |   |
| Contingent rent    |   | 1,277    |   | 1,389    |   | 1,247    |   |
|               |   | 8,817    |   | 8,387    |   | 7,411    |   |
| Sublease rentals   |   | (1,670   | )      | (1,644   | )      | (1,597   | )      |
|               |   | $        | 7,147  |     | $      | 6,743    |   | $ | 5,814 |   |

 

14.     Related Party Transactions

 

At December 29, 2001, the Company held two notesreceivable with balances totaling $135,000 from an officer/director of theCompany.  In August 2002, the notes wererepaid in full by the officer/director. These notes arose from transactions in 1979 and 1980 whereby the Companyloaned the officer/director money to purchase shares of the Company’s Class ACommon Stock at the then fair market value. The notes bore interest at the rateof 6% per annum payable annually.  TheDecember 29, 2001 receivable is shown on the balance sheet as a reduction ofstockholders’ equity.

 

A director of the Company was a director of a law firmwhich performed legal services for the Company.  

 

15.     Commitments and Contingent Liabilities

 

The Company has an employment agreement with a keyexecutive officer and shareholder which expires on January 1, 2005.  In addition to a base salary, the agreementprovides for a bonus based on pre-tax earnings.  No maximum compensation limit exists.  Total salary and bonus expensed in 2002, 2001 and 2000 wasapproximately $1,405,000, $1,321,000 and $1,260,000, respectively.

 

As of December 28, 2002, authorized expenditures onprojects in progress for the construction and purchase of property, plant andequipment totaled approximately $2,505,000. Of this total, approximately $1,584,000 has been contractuallycommitted.

 

The Company and its subsidiaries are subject to amyriad of environmental laws, regulations and lease covenants with its landlordsregarding air, water and land use, products for sale, and the use, storage anddisposal of hazardous materials. The Company believes it substantiallycomplies, and has in the past substantially complied, with federal, state andlocal environmental laws and regulations and private covenants.  The Company cannot, at this time, estimatethe expense it ultimately may incur in connection with any current or futureviolations; however, it believes any such claims will not have a materialadverse impact on either the Company’s consolidated financial position, resultsof operations or cash flows.

 

The Company or its subsidiaries are defendants in anumber of cases currently in litigation, being vigorously defended, in whichthe complainants seek monetary damages. As of the date hereof, no estimate of potential liability, if any, ispossible. Based upon current information, management, after consultation withlegal counsel defending the Company’s interests in the cases, believes theultimate disposition thereof will have no material effect upon either theCompany’s consolidated financial position, results of operations or cash flows.

 

49

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16.     Selected Quarterly Financial Data(Unaudited)

 

(In Thousands, Except Per Share Data)
| **Quarter** |   | **Sales** |    | **Gross  Profit** |   | **Net  Income** |   | **Diluted  Net Income  Per Share (1)** |   |
|-------------|--------|-----------|---------|-------------------|--------|-----------------|--------|----------------------------------------|--------|
|        |   |      |    |              |   |            |   |                                   |   |
| 2001        |   |      |    |              |   |            |   |                                   |   |
| First       |   | $         | 95,018  |              | $      | 39,879          |   | $                                      | 3,291  |   | $ | .95 |   |
| Second      |   | 96,301    |    | 40,508            |   | 3,594           |   | 1.05                                   |   |
| Third       |   | 96,920    |    | 41,397            |   | 3,380           |   | 1.01                                   |   |
| Fourth (2)  |   | 103,641   |    | 43,794            |   | 3,042           |   | .91                                    |   |
|        |   |      |    |              |   |            |   |                                   |   |
| 2002        |   |      |    |              |   |            |   |                                   |   |
| First       |   | $         | 100,560 |              | $      | 43,338          |   | $                                      | 3,785  |   | $ | 1.12 |   |
| Second      |   | 98,710    |    | 42,939            |   | 3,524           |   | 1.05                                   |   |
| Third       |   | 98,207    |    | 43,030            |   | 3,322           |   | .99                                    |   |
| Fourth (2)  |   | 103,901   |    | 45,155            |   | 3,715           |   | 1.10                                   |   |

 

----

(1)     Earnings per share is calculated using theweighted average outstanding shares for the quarter.  

 

(2)               In the fourthquarter, the Company recorded compensation expense of $210 in 2002 and $816 in2001 relating to stock appreciation rights. Costs associated with the opening of the Company’s Pasadena store inSeptember 2001 resulted in significantly higher operating expenses in thefourth quarter of 2001 compared to 2002.

 

50

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**REPORTOF INDEPENDENT PUBLIC ACCOUNTANTS**

 

To the Stockholders of Arden Group, Inc.:

 

In our opinion, the accompanying consolidatedbalance sheet and the related consolidated statement of operations andcomprehensive income, of stockholders’ equity and of cash flows present fairly,in all material respects, the financial position of Arden Group, Inc. and itssubsidiaries at December 28, 2002, and the results of their operations andtheir cash flows for each of the years in the periods ended December 28, 2002and December 30, 2000 in conformity with accounting principles generallyaccepted in the United States of America. These financial statements are theresponsibility of the Company’s management; our responsibility is to express anopinion on these financial statements based on our audits. We conducted ouraudits of these statements in accordance with auditing standards generallyaccepted in the United States of America, which require that we plan andperform the audit to obtain reasonable assurance about whether the financialstatements are free of material misstatement. An audit includes examining, on atest basis, evidence supporting the amounts and disclosures in the financialstatements, assessing the accounting principles used and significant estimatesmade by management, and evaluating the overall financial statementpresentation. We believe that our audits provide a reasonable basis for ouropinion.  The financial statements ofArden Group, Inc. and its subsidiaries as of December 29, 2001 and for the yearthen ended were audited by other independent accountants who have ceasedoperations.  Those independentaccountants expressed an unqualified opinion on those financial statements intheir report dated March 1, 2002.

 
| /s/ PRICEWATERHOUSECOOPERS LLP |   |
|--------------------------------|--------|
|                           |
| Los Angeles, California        |
| February 25, 2003              |

 

51

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THE FOLLOWING REPORT IS ACOPY OF A REPORT PREVIOUSLY ISSUED BY ARTHUR ANDERSEN LLP (ANDERSEN).  THIS REPORT HAS NOT BEEN REISSUED BYANDERSEN AND ANDERSEN DID NOT CONSENT TO THE INCORPORATION BY REFERENCE OF THISREPORT.  BECAUSE ANDERSEN HAS NOTCONSENTED TO THE INCLUSION OF ITS REPORT, IT MAY BE DIFFICULT TO SEEK REMEDIESAGAINST ANDERSEN AND THE ABILITY TO SEEK RELIEF AGAINST ANDERSEN MAY BE IMPAIRED.

 

**REPORTOF INDEPENDENT PUBLIC ACCOUNTANTS**

 

To the Stockholders of Arden Group, Inc.:

 

We have audited the accompanying consolidated balance sheet of ArdenGroup, Inc. (a Delaware corporation) and subsidiaries as of December 29, 2001,and the related consolidated statement of operations and comprehensive income,stockholders’ equity and cash flows for the period then ended.  These financial statements are theresponsibility of the Company’s management. Our responsibility is to express an opinion on these financialstatements based on our audit.

 

We conducted our audit in accordance with auditing standards generallyaccepted in the United States. Those standards require that we plan and performthe audit to obtain reasonable assurance about whether the financial statementsare free of material misstatement. An audit includes examining, on a testbasis, evidence supporting the amounts and disclosures in the financialstatements. An audit also includes assessing the accounting principles used andsignificant estimates made by management, as well as evaluating the overallfinancial statement presentation. We believe that our audit provides areasonable basis for our opinion.

 

In our opinion, the financial statements referred to above presentfairly, in all material respects, the financial position of Arden Group, Inc.and subsidiaries as of December 29, 2001, and the results of their operationsand their cash flows for the period then ended in conformity with accountingprinciples generally accepted in the United States.

 
| /s/ ARTHUR ANDERSEN LLP |   |
|-------------------------|--------|
|                    |
| Los Angeles, California |
| March 1, 2002           |

 

52

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**ARDENGROUP, INC. AND CONSOLIDATED SUBSIDIARIES**

 

**INDEX TOEXHIBITS**

 
| **Exhibit** |   |                                                                                                                                                                                                                                                                                                                                                               |
|-------------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|        |   |                                                                                                                                                                                                                                                                                                                                                               |
| 3.1.1       |   | 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.                                    |

 

53

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| **Exhibit** |   |                                                                                                                                                                                                                                                                                                                                              |
|-------------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|        |   |                                                                                                                                                                                                                                                                                                                                              |
| 10.2*       |   | 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*       |   | Extension Agreement dated January 4, 1981 regarding  promissory notes held by the Registrant between Arden Group, Inc. and Bernard  Briskin, filed as Exhibit 10.2 to the Quarterly Report on Form 10-Q of Arden  Group, Inc. for the quarter ended July 4, 1981 and incorporated herein by  reference.                                           |
|        |   |                                                                                                                                                                                                                                                                                                                                              |
| 10.4*       |   | Extension Agreement dated January 1, 1984 regarding  promissory notes held by the Registrant between Arden Group, Inc. and Bernard  Briskin filed as Exhibit 19.1 to the Quarterly Report on Form 10-Q of Arden  Group, Inc. for the quarter ended September 29, 1984 and incorporated herein  by reference.                                      |
|        |   |                                                                                                                                                                                                                                                                                                                                              |
| 10.5*       |   | Extension Agreement dated May 13, 1988 regarding  promissory notes held by the Registrant between Arden Group, Inc. and Bernard  Briskin filed as Exhibit 10.11 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.                                        |
|        |   |                                                                                                                                                                                                                                                                                                                                              |
| 10.6*       |   | Modification and Fourth Extension Agreement dated as  of January 1, 1994 regarding promissory notes held by the Registrant between  Arden Group, Inc. and Bernard Briskin, filed as Exhibit 10.8 to the Quarterly  Report on Form 10-Q of Arden Group, Inc. for the quarter ended April 2, 1994  and incorporated herein by reference.            |
|        |   |                                                                                                                                                                                                                                                                                                                                              |
| 10.7        |   | 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 year ended  December 29, 1990 and incorporated herein by reference.                                                                                      |
|        |   |                                                                                                                                                                                                                                                                                                                                              |
| 10.8*       |   | Amended Loan and Stock Pledge Agreement dated  November 4, 1993 regarding promissory notes held by the Registrant between  Arden Group, Inc. and Bernard Briskin, filed as Exhibit 10.6 to the Annual  Report on Form 10-K of Arden Group, Inc. for the year ended January 1, 1994  and incorporated herein by reference.                         |
|        |   |                                                                                                                                                                                                                                                                                                                                              |
| 10.9*       |   | 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 year  ended January 3, 1998 and incorporated herein by reference. |
|        |   |                                                                                                                                                                                                                                                                                                                                              |
| 10.10*      |   | Modification and Fifth Extension Agreement as of  January 1, 1997 regarding promissory notes held by the Registrant between  Arden Group, Inc. and Bernard Briskin, filed as Exhibit 10.10 to the Annual  Report on Form 10-K of Arden Group, Inc. for the year ended January 3, 1998  and incorporated herein by reference.                      |

 

54

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| **Exhibit** |   |                                                                                                                                                                                                                                                                                                    |
|-------------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|        |   |                                                                                                                                                                                                                                                                                                    |
| 10.11*      |   | 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  year ended January 2, 1999 and incorporated herein by reference.                                                                                                       |
|        |   |                                                                                                                                                                                                                                                                                                    |
| 10.12*      |   | 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. |
|        |   |                                                                                                                                                                                                                                                                                                    |
| 10.13*      |   | 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.                               |
|        |   |                                                                                                                                                                                                                                                                                                    |
| 10.14*      |   | 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.                                                                                                      |
|        |   |                                                                                                                                                                                                                                                                                                    |
| 10.15*      |   | Arden Group, Inc., Non-officer and Non-Director  Stock Option Plan.                                                                                                                                                                                                                                     |
|        |   |                                                                                                                                                                                                                                                                                                    |
| 10.15.1*    |   | Form of Stock Option Plan Agreement.                                                                                                                                                                                                                                                                    |
|        |   |                                                                                                                                                                                                                                                                                                    |
| 21.         |   | Subsidiaries of Registrant.                                                                                                                                                                                                                                                                             |
|        |   |                                                                                                                                                                                                                                                                                                    |
| 23.1        |   | Consent of Independent Public Accountants -  PricewaterhouseCoopers LLP.                                                                                                                                                                                                                                |
|        |   |                                                                                                                                                                                                                                                                                                    |
| 99.1        |   | Certification of Chief Executive Officer under  Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                          |
|        |   |                                                                                                                                                                                                                                                                                                    |
| 99.2        |   | Certification of Chief Financial Officer under  Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                          |
|        |   |                                                                                                                                                                                                                                                                                                    |

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*       Indicates management contracts or compensatory plans orarrangements required to be filed as an exhibit to this report.

 

55

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