**UNITEDSTATES SECURITIES AND EXCHANGE COMMISSION**

**Washington, D. C. 20549**

** **

**FORM 10-K**

**(Mark One)**

**x****                             ****ANNUAL REPORT PURSUANT TO SECTION13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 30, 2006**

**OR**

**o****                                ****TRANSITION REPORT PURSUANT TOSECTION 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.**(Exactname of registrant as specified in its charter)

** **

| **Delaware**                                        |   | **95-3163136**                        |
|-----------------------------------------------------|--------|---------------------------------------|
| (State or other  jurisdiction of                    |   | (I.R.S. Employer  Identification No.) |
| incorporation or  organization)                     |   |                                  |
|                                                |   |                                  |
| **2020  South Central Avenue, Compton, California** |   | **90220**                             |
| (Address of  principal executive offices)           |   | (Zip Code)                            |

 

Registrant’s telephone number,including area code **(310) 638-2842**

Securities registeredpursuant to Section 12(b) of the Act:
| **Title of class**   | ** ** | **Name of  each exchange on which registered** |
|----------------------|------------|------------------------------------------------|
| Class A Common Stock |       | NASDAQ Stock  Market LLC                       |

 

Securities registeredpursuant to Section 12(g) of the Act:

**Title ofeach class**(None)

Indicate by check mark if theregistrant is a well-known seasoned issuer, as defined in Rule 405 of theSecurities Act.

Yes o  No x

 

Indicate by check mark if the registrant is notrequired to file reports pursuant to Section 13 or Section 15(d) of theExchange Act.

Yes o  No x

 

Indicate by check mark whetherthe registrant (1) has filed all reports required to be filed by Section 13 or 15(d)of the Securities Exchange Act of 1934 during the preceding 12 months (or for suchshorter period that the registrant was required to file such reports), and (2) hasbeen subject to such filing requirements for the past 90 days.

Yes x  No o

 

Indicate by a check mark ifdisclosure of delinquent filers pursuant to Item 405 of Regulation S-K isnot contained herein, and will not be contained, to the best of registrant’s knowledge,in definitive proxy or information statements incorporated by reference in PartIII of this Form 10-K or any amendment to this Form 10-K.

x

 

Indicate by check mark whetherthe registrant is a large accelerated filer, an accelerated filer, or anon-accelerated filer. See definition of “accelerated filer and largeaccelerated filer” in Rule 12b-2 of the Exchange Act.

Large accelerated filer  o  Accelerated filer  xNon-accelerated filer o

 

Indicate by check mark whether the registrant is ashell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o  No x

 

The aggregate marketvalue of the voting and non-voting common equity held by non-affiliates of theregistrant based on the price at which the Class A Common Stock last sold onJune 30, 2006, the last business day of the registrant’s most recently completedsecond fiscal quarter was $116,146,484.

The number of sharesoutstanding of the registrant’s class of common stock as of March 2, 2007 was:

3,161,098 sharesof Class A Common Stock

 

 

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**TABLE OF CONTENTS**
| **PART I**     |                                                                                                                    |
|----------------|-------------------------------------------------------------------------------------------------------------------------|
| Item 1.        | Business                                                                                                                |
| Item 1A.       | Risk  Factors                                                                                                           |
| Item 1B.       | Unresolved Staff  Comments                                                                                              |
| 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 Equity, Related Stockholder Matters and Issuer Purchases  of Equity Securities |
| 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                                   |
| Item 9A.       | Controls and  Procedures                                                                                                |
| Item 9B.       | Other Information                                                                                                       |
|           |                                                                                                                    |
| **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, Related Transactions and Director Independence                                                  |
| Item 14.       | Principal  Accountant Fees and Services                                                                                 |
|           |                                                                                                                    |
| **PART IV**    |                                                                                                                    |
| Item 15.       | Exhibits and  Financial Statement Schedules                                                                             |
|           |                                                                                                                    |
| **Signatures** |                                                                                                                    |

 

** **

 

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**PART I**

Item 1.                Business

**General**

The Registrant,Arden Group, Inc. (Company), is a holding company which conducts operationsthrough its wholly-owned subsidiary, Arden-Mayfair, Inc. (Arden-Mayfair) andArden-Mayfair’s wholly-owned subsidiary, Gelson’s Markets (Gelson’s)which operates supermarkets in Southern California.  The Company also owns certain real estateproperties through its indirect wholly-owned subsidiary, Mayfair Realty,Inc.

Arden Group, Inc.is headquartered at 2020 South Central Avenue, Compton, California 90220 andits telephone number is (310) 638-2842.

**MarketOperations**

As of December 30,2006, Gelson’s operated 18 full-service supermarkets in Southern California,which carry both perishable and grocery products, 17 under the name “Gelson’s”and one under the name “Mayfair.”  Gelson’sand Mayfair are self-service cash-and-carry markets which offer abroad selection of local and national brands as well as a limited number ofprivate label items.  Gelson’s targetsthe consumer who values superior customer service, merchandise, presentationand selection.

**StoreFormats and Business Strategy**

Gelson’s businessstrategy is to offer a comfortable upscale shopping experience which issuperior to its competitors in terms of customer service and merchandisequality, selection and presentation.  Thegoal of this strategy is to continue to develop and maintain Gelson’s loyalbase 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 fromapproximately 18,000 to 40,000 square feet, typically carry a wide range ofitems, including traditional grocery categories such as dry groceries, produce,meat, seafood, bakery, dairy, wine and liquor, floral, sushi, vitamins, healthand natural food products, health and beauty aids and a selection of organicproducts.  Gelson’s perishables arepremium products, which are rigorously maintained and culled as appropriate toassure quality and freshness.  Gelson’smerchandising emphasizes specialty items such as imported foods and unusualdelicatessen items, and items found in service departments such as seafood,sit-down coffee areas, bakeries and service deli.  The Mayfair store offers a merchandiseselection which is equal in quality to a Gelson’s but is generally less broad.

Service  Gelson’s emphasizes customer service byoffering a variety of service departments including meat, seafood,delicatessen, floral, sushi and bakery departments.  All sushi and most bakery departments areoperated by third parties.  Some Gelson’sstores include additional service departments such as fresh pizza, coffee bars,gelato bars and carving carts offering cooked meats.  Additionally, selected stores offer bankingand pharmacy services through third

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parties.  Stores are staffed so that, even at peaktimes, customer checkout time is minimized. In addition to checkers, there are personnel assigned to bagging andcarrying out purchases.  All employeesare encouraged to know customers by name and assist them wheneverpossible.  All stores offer a Companycredit card to qualified customers in addition to the option of paying fortheir purchases with cash, checks or credit and debit cards.  Stores are typically open 14 to 17 hours perday, with hours of operation determined by local code, lease provisions or asappropriate for the business characteristics of each community.

Presentation  All stores are maintained in accordance withextremely high standards.  Personnelcontinually fill and face shelves with product. Produce and other perishables are trimmed and culled to maintain qualityand appearance.

Pricing  The pricing strategy at the stores is to be competitivewithin their market niches, ranging from the more traditional to the moreexotic, specialty or high-end retailers.

Expansion andStore Development Management regularly evaluates the feasibility of opening new stores inand outside its existing trade areas and remodeling existing stores in order tomaximize the existing stores’ appeal to consumers and their profitpotential.  In 2006, capital expenditurestotaled $4,868,000, which included costs of approximately $1,027,000 related tothe remodeling and expansion of the Century City store.

Advertising andPromotion  Gelson’sadvertises in newspapers on a limited basis. Direct advertising is very limited (primarily newsletters and directmail) and is typically event rather than price oriented, emphasizing, forexample, special holiday selections, specialty items, services, recipes and newproducts.  In addition, Gelson’smaintains a website at www.gelsons.comwhich allows customers to learn more about the Company and to read about foodrelated topics that may be of interest to them. The website also provides an opportunity for customers to request anewsletter, offer feedback and to place catering and holiday meal ordersonline.  The Company reevaluates itsstrategy regularly in an effort to identify the most effective means ofattracting and retaining customers.

**Competition**

The retail grocerybusiness is highly competitive. Competition in the supermarket business is based upon price, merchandisevariety and quality, service and location. The number of stores, market share and brand awareness are alsoimportant competitive factors.  Gelson’sis in direct competition with numerous local outlets of regional and nationalsupermarket chains (most of which have greater resources and a larger marketshare than Gelson’s), independent grocery stores, convenience stores, specialtyand gourmet markets and food and grocery departments in mass merchandise andclub stores.  The stores of the nationaland regional chains are generally larger than Gelson’s stores which, in somecases, enables them to offer more products. Competition also exists from other types of retailers with respect toparticular products.  Gelson’s competesprimarily by offering a combination of high-quality products and superiorcustomer service.  The Company alsobelieves that Gelson’s prime store locations and long-standing reputation addto its competitive strength.

Certaincompetitors of the Company offer home delivery, in-store banks and pharmaciesin addition to their existing retail store operations.  The Company continues to monitor and evaluateopportunities for home delivery, but has elected not to do so at thistime.  A few of the

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Company’s storesoffer in-store banks and pharmacies; most of the Company’s stores are not largeenough for such additional facilities.

**Seasonality**

Gelson’s businessis somewhat seasonal with sales tending to increase during the last quarter ofthe year due to the holiday season.

**Supportand Other Services**

Each store has anon-site stockroom, the size of which varies for each store. In addition, Gelson’soperates a 127,000 square foot warehouse and an adjacent 4,000 square foottruck service facility in the City of Commerce, California.  The central warehouse distributes freshproduce, liquor, wine, floral and certain grocery items to the stores.  On a limited basis, the stores also receivemeat, delicatessen, paper goods, health and beauty aids, hardware and supplyitems from the warehouse.

The bulk of allmerchandise purchasing takes place at Gelson’s headquarters in Encino,California.  Approximately 47% of thepurchases for 2006 were distributed through the central warehouse; theremainder was delivered directly to the stores from manufacturers, distributorsor wholesalers.  The central purchasingand distribution operations are conducted based on electronic in-storeordering systems.  Stores can place andreceive orders up to six days per week. Perishables are ordered more frequently than other goods.

The largest supplier forthe stores is Unified Western Grocers, Inc. (Unified) (formerly CertifiedGrocers), a grocery wholesale cooperative, which has been a supplier to theCompany for approximately thirty-two years and which accounted forapproximately 18% of Gelson’s purchases in fiscal 2006.  No other supplier accounts for more than 3%of Gelson’s purchases.  The Companybelieves that there would be a negative short-term impact if the Company wereto lose Unified as a supplier for Gelson’s, but that such impact would likelybe mitigated by a combination of events, which could include:  (i) purchasing certain items for direct storedelivery, thereby freeing warehouse capacity to allow other items to bepurchased through the warehouse and (ii) purchasing certain products throughother wholesalers.  However, such a losscould have an adverse effect on the performance of Gelson’s.

**Employees**

Gelson’s hadapproximately 1,316 full-time and 1,052 part-time store, warehouse and officeemployees at December 30, 2006.  MostGelson’s employees are covered by union collective bargaining agreements thatestablish rates of pay, benefits and procedures for the orderly settlement ofdisputes.  In general, these agreementshave been negotiated on a local industry-wide basis.

The Company recently completed negotiating a new union contract for itsRetail Clerks and Meatcutters with the United Food & Commercial WorkersInternational Union (UFCW) to replace the contract which expired on March 5,2007.  The new contract which expires March5, 2010 discontinues the use of a two-tier wage structure and provides for,among other things, wage increases and modifications to the pension and healthand welfare plans.  The Company

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contributes to multi-employer health care and pension plans for theUFCW, and therefore, the rates paid by all employers participating in the trustfunds must be equal.  Consequently, thebenefit contribution rates that the Company negotiated with the UFCW may changebased on the outcome of the union’s negotiations with the three major groceryretailers.  The Company’s employees whoare members of the UFCW voted to ratify the new contract in a vote held onFebruary 21 and 23, 2007.

In addition to employeesat Gelson’s, Arden-Mayfair had approximately 78 full-time and 3 part-timeemployees at its executive and headquarters offices at December 30, 2006, someof whom are covered by a collective bargaining agreement.

**GovernmentalRegulation**

Gelson’s issubject to regulation by a variety of governmental agencies, including the U.S.Food and Drug Administration, the California Department of Alcoholic BeverageControl, and state and local health departments.  The Company believes that Gelson’s andMayfair store operations comply with federal, state and local health,environmental and other laws and regulations. Although the Company cannot predict the effect of future laws orregulations on its operations, expenditures for continued compliance withcurrent laws are not expected to have a material adverse impact on Gelson’scompetitive position or the Company’s consolidated financial position, resultsof operations or cash flows.

**AvailableInformation**

The Company doesnot have an internet website to make its filings with the Securities andExchange Commission (SEC) available. However, it will provide free of charge upon written request toAssistant Secretary, Arden Group, Inc., P.O. Box 512256, Los Angeles,California 90051-0256 paper copies of its annual report on Form 10-K,quarterly reports on Form 10-Q, current reports on Form 8-K and amendments tothose reports filed or furnished pursuant to Section 13(a) or 15(d) of theSecurities Exchange Act of 1934, as amended, as soon as reasonably practicableafter electronically filing such material with the SEC.  This information is also available atwww.sec.gov.  The reference to thiswebsite address does not constitute incorporation by reference of theinformation contained on the website and should not be considered part of thisdocument.

Item1A.                 Risk Factors

The PrivateSecurities Litigation Reform Act of 1995 provides a safe harbor forforward-looking statements made by or on behalf of the Company.  Certain statements contained in this Item 1A,Item 7. Management’s Discussion and Analysis of Financial Condition and Resultsof Operations, other parts of this report and other Company filings areforward-looking statements.  Thesestatements discuss, among other things, future sales growth, operating resultsand financial condition.  Forward-lookingstatements reflect the Company’s current plans and expectations regardingimportant risk factors and are based on information currently known to theCompany.

The Companycautions readers that any forward-looking statements contained in this reportor made by the management of the Company involve risks and uncertainties, andare subject to change based on various important factors.  The Company does not undertake any obligationto update forward-looking statements. The factors listed below, among others, could affect the

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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:

*Changesin Economic, Political or Social Conditions*

Our profitability may be impacted by overall economic conditions,particularly in Southern California. Changes in economic conditions such as inflation, employment levels,interest rates and tax rates may reduce consumer spending or influence ourcustomers to shift their spending to our competitors.  In addition, our business may be subject tointerruption from acts of terrorism, national emergencies or natural disasters.

*Competition in the Grocery Business*

The retail grocery business is intensely competitive with respect toprice, food quality and selection, service and location.  During the past several years, there has beena consolidation in the supermarket industry. We are in direct competition with numerous local outlets of regional andnational supermarket chains, independent grocery stores, convenience stores, specialtyand gourmet markets and food and grocery departments in mass merchandise andclub stores.   There are a number of wellestablished competitors with substantially greater financial, marketing,personnel and other resources than ours, some of which are also nonunion.  We frequently face the opening of a new orremodeled competitor’s store in our trade area. Competition also requires us to periodically remodel our existingstores, at ever-increasing costs, in order to maintain their appeal.  An inability to successfully compete withother grocery retailers in our trade areas could prevent us from increasing orsustaining our revenues and profitability.

*Changes in Laws or Regulations or Failure to Comply*

We are subject to various federal, state and local laws, regulationsand licensing requirements which regulate health and sanitation standards, foodlabeling and handling, the sale of alcoholic beverages, employment, workingconditions, citizenship requirements and public accommodations.  Changes to such laws or regulations mayadversely affect our profitability by increasing our costs or affecting thesale of certain items.  In addition, wemust comply with state and local fire, zoning, land use and environmental regulations.  Failure to comply with these regulationscould adversely affect the operation of our existing stores or could delay orprevent the opening of a new store.

*Changes in Accounting Standards, Policies and Practices*

The issuance of new pronouncements or changes to existing accounting policiesand practices could have a significant impact on our reported results or changethe way we account for various transactions. New policies and changes to existing rules may adversely affect ourreported financial results.

*Availability and Retention of Retail Space*

We currently lease the majority of our store locations. Typically, oursupermarket leases have initial 20-year lease terms and may include options forup to an additional 20 years.  Theaverage term remaining on our supermarket leases, including renewal options, isapproximately 21 years.

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Our revenues and profitability would be negatively impacted if we areunable to renew these leases at reasonable rates.

Our continued growth depends to a significant degree on our ability toopen or acquire new stores in existing and new trade areas and to operate thesestores successfully.  Our expansionstrategy is dependent on finding suitable locations, and we face intensecompetition from other retailers for such sites.  We may not be able to find suitable locationsthat meet our demographic requirements at a reasonable cost.

*The Ability of our Vendors to Supply Products and Services in a TimelyManner*

Our business is dependent on our ability to purchase products from alarge wholesaler and numerous smaller vendors in a timely manner and atcompetitive prices.  The largest supplierfor our stores is Unified, a grocery wholesale cooperative, which has providedproduct for our stores for thirty-two years. We currently procure approximately 18% of our product from Unified.  Any disruption in the business of Unified orany of our other principal suppliers could negatively impact our sales andprofitability.  Even where we have accessto alternative sources of supply, the failure of a supplier to meet our demandsmay temporarily disrupt store level merchandise selection.

*Ability to Control  InsuranceCoverage Costs and Claims Experience*

We use a combination of insurance and self-insurance plans to providefor coverage associated with losses related to workers’ compensation, generaland auto liability, property damage, directors and officers liability,fiduciary, employment practices liability, business interruption, crime,earthquake and health care.  If insurancecosts increase, it could have a negative impact on our profitability if we arenot able to offset the effect of such increases with plan modifications, costcontrol measures, sales increases or by improving our operating efficiency.

We are self-insured for general and auto liability and, in some prior years,for workers’ compensation as well.  Wehave stop-loss insurance coverage to limit our exposure on a per claim basisand are insured for covered costs in excess of per claim limits.  The Company devotes substantial time andeffort to maintaining a safe environment in our stores, warehouse andoffices.  However, the cost of bothinsured and self-insured plans is highly dependent upon legal and legislativetrends, the inflation rate of premiums and our ability to manage claims.

*The Outcome of Current and Future Legal Proceedings*

From time to time we are the subject of complaints or litigation fromcustomers alleging injury, food quality or operational concerns.  We may be adversely affected by publicityresulting from such allegations, regardless of whether such allegations arevalid or whether we are liable.  We arealso subject to complaints or allegations from former or current employees,claims concerning hazardous substances on our current or previously owned properties,class action suits concerning warning labels and other claims.  A lawsuit or claim could result in a decisionagainst us that could have an adverse effect on our business.  Additionally, the cost of defending ourselvesagainst lawsuits and claims, regardless of merit, could have a negative impacton our profitability.

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*Impact of Local Projects in the Vicinity of our Supermarkets*

From time to time, local events or projects take place in the vicinityof our stores that may have a negative impact on our sales andprofitability.  Major road constructionon Santa Monica Boulevard near our Century City store began in March 2003 andwas completed during the fourth quarter of 2006.  At times during the project, constructionoccured directly in front of, or very close to, the shopping center in whichour store is located.  This construction,together with a major remodel of the shopping center, resulted in a significantdecline in sales and profitability for the store.  See Item 7. Management’s Discussion andAnalysis of Financial Condition and Results of Operations for furtherinformation.

*New Labor Contracts and Labor Stoppages*

The majority of our employees belong to unions with which we havesigned labor agreements which establish rates of pay, benefits and proceduresfor the orderly settlement of disputes. In order to continue to attract and retain quality personnel, we mayaccept terms that increase our operating costs, which in turn, may negativelyimpact our profitability.  If contractnegotiations are not successful, the union could vote to strike our stores,distribution center and offices.

The Company recently completed negotiations with the UFCW to renew thecontract covering the majority of our employees which expired on March 5,2007.  The new contract discontinues theuse of a two-tier wage structure and provides for, among other things, wageincreases and modifications to the pension and health and welfare plans.  Our new contract expires March 5, 2010.

The UFCW has not yet reached an agreement with the three largestgrocery retailers in the Company’s trade area. Their current agreement expires March 5, 2007.  If the UFCW is unable to negotiate a newcontract with these grocery companies, the union could vote to strike one ormore of them.  The decision to strike oneor more of our competitors could result in a temporary increase in sales andlabor and related costs similar to what the Company experienced during the2003-2004 labor dispute.  If the UFCWreaches an agreement with the other participating employers in our trade areaunder terms that are more favorable to the employers than those agreed to byGelson’s, this could affect our ability to compete with grocery retailers whoselabor costs are less than our own.  Inaddition, if the three major grocery retailers in our trade area agree to thewage rates that Gelson’s has negotiated under its new contract with the UFCW,then Gelson’s has agreed to further increase its hourly wage rate forexperienced level employees by an additional $.05 per hour in the second andthird years of the new contract.  Theelimination of the two-tier wage structure and increases in wage and benefitcosts provided under the new contract could negatively impact the Company’sprofitability unless it is able to offset the increased costs through acombination of sales growth, increased prices, management of labor hours andcost savings in other areas.  The Companycontributes to multi-employer health care and pension plans for the UFCW, andtherefore, the rates paid by all employers participating in the trust fundsmust be equal.  Consequently, the benefitcontribution rates that the Company negotiated with the UFCW may change basedon the outcome of the union’s negotiations with the three major groceryretailers.

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*Retention of Key Personnel*

Our success is dependent on our key employees.  We must continue to attract, retain andmotivate a sufficient number of qualified management and operating personnelincluding the replacement of senior management upon retirement.  Individuals of this caliber are historically inshort supply and this shortage may limit our ability to hire and retainqualified personnel, and thus, may hinder our ability to operate effectively.

*Stock Price Volatility*

The market price of our Class A Common Stock (Class A) could be subjectto significant fluctuation in response to various market factors and eventsincluding general economic and market conditions, variations in our earningsresults, publicity regarding us and our competitors and the grocery business ingeneral.  The stock market in recentyears has experienced extreme price and volume fluctuations that often havebeen unrelated or disproportionate to the operating performance of companies.Furthermore, there is not a significant volume of trading in our Class Awhich subjects our stock price to a higher level of volatility and mayadversely impact the liquidity of the stock. Under the new congressionally mandated diversification requirements,stock currently held for the benefit of participants in the Company’s StockBonus Plan could be sold which may have a negative effect on the price of ClassA.  Fluctuations in our Class A pricealso impact compensation expense as it relates to our outstanding stockappreciation rights (SARs).  See Item 7.Management’s Discussion and Analysis of Financial Condition and Results ofOperations for further information.

Item 1B.              Unresolved Staff Comments

None.

Item 2.                Properties

In November 2006, the Company formed a new indirect wholly-ownedsubsidiary called Mayfair Realty, Inc. (Mayfair Realty).  At the end of fiscal 2006, all real estateowned by the Company or Arden-Mayfair was transferred to Mayfair Realty.

Mayfair Realtycurrently owns two freestanding Gelson’s supermarket properties and a shoppingcenter in which a Gelson’s Market is located. The shopping center owned by Mayfair Realty, located in Calabasas,California, consists of approximately 58,000 leasable square feet,approximately 18,000 square feet of which is leased to multiple tenants andapproximately 40,000 square feet of which is leased to Gelson’s.  Fifteen******supermarketsand the warehouse and distribution facilities which service the markets areleased from third parties.  Gelson’scorporate offices in Encino, California and the Company’s executive office inBeverly Hills are also leased. Typically, supermarkets have initial 20-year lease terms and may includeoptions for up to an additional 20 years. These leases often require the payment of percentage rent on sales inexcess of certain levels in addition to minimum rent.  The average term remaining on the supermarketleases, including renewal options, is approximately 21 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 131,000square feet.  The term of the lease,including renewal options, expires in January 2021.  The

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Company exercisedits right to terminate the lease for its Pasadena store in the Spring of 2005,but the lease was reinstated by mutual agreement on different terms in April2005.

Mayfair Realtyowns a 30,000 square foot office building in Compton, California which servesas the Company’s headquarters and a parcel of unimproved land in Rubidoux, California.  The Company also owns (through MayfairRealty) or leases several parcels adjacent to, or near, four of its storeswhich are used for additional parking. In addition, AMG Holdings, Inc. (AMG Holdings), a wholly-ownedsubsidiary of Arden-Mayfair, leases a 62,000 square foot building in LosAngeles consisting of office and warehouse space, which is entirely subleaseduntil the lease on the property expires in 2012.

Item 3.                Legal Proceedings

The Company andcertain of its subsidiaries are involved in a number of pending legal and/oradministrative proceedings.  Suchproceedings are not expected individually or in the aggregate to have amaterial adverse impact upon either the Company’s consolidated financialposition, results of operations or cash flows. See the discussion of Commitments and Contingent Liabilities in Note 16of Notes to Consolidated Financial Statements.

Item 4.                Submission of Matters to aVote of Security Holders

There was no mattersubmitted during the fourth quarter of fiscal year 2006 to a vote of thesecurity holders of the Registrant.

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**PART II**

Item 5.                                                 Marketfor the Registrant’s Common Equity, Related Stockholder Matters and IssuerPurchases of Equity Securities

(a)                                  TheCompany’s Class A is traded in the NASDAQ Global Market System under the symbolARDNA.  During the past two years, the rangeof high and low sales prices (not including markups, markdowns or commissions)for each quarterly period was, according to NASDAQ, the following:

|             | ** ** | **2006** | ** ** | **2005** | ** ** |
|-------------|------------|----------|------------|----------|------------|
| ** **  | ** ** | **High** | ** ** | **Low**  | ** ** | **High** | ** ** | **Low** | ** ** |
|        |       |     |       |     |       |   |   |   |   |
| 1st Quarter |       | $        | 93.50      |     | $          | 82.00 |   | $ | 102.62 |   | $ | 66.29 |   |
| 2nd Quarter |       | 114.85   |       | 89.76    |       | 83.00 |   | 63.40 |   |
| 3rd Quarter |       | 120.10   |       | 96.10    |       | 93.45 |   | 72.05 |   |
| 4th Quarter |       | 141.03   |       | 113.50   |       | 92.45 |   | 72.20 |   |
|             |            |          |            |          |            |  |  |  |  |  |  |  |  |

 

The Company previously had outstanding shares of ClassB Common Stock (Class B) for which there was no established public tradingmarket and which were subject to various restrictions on transfer.  On November 10, 2004, all the Class B shares were converted into ClassA shares as provided under the Company’s Restated Certificate ofIncorporation.  As a result of theconversion, the Company has only Class A outstanding and all shareholdersparticipate equally in the undistributed earnings of the Company.

(b)                                 Asof December 30, 2006, there were 963 holders of record of the Company’s ClassA, with aggregate holdings of 3,161,098 shares of Class A.  This does not include 1,357,200******shares of the Company’s Class Aowned by AMG Holdings, a wholly-owned second-tier subsidiary of theCompany.

(c)                                  InAugust 2003, the Company established a regular quarterly dividend of 25 centsper share of Class A and 22.5 cents per share of Class B.  No dividends were paid on either Class A orClass B during any period presented prior to August 2003.  Cash or property dividends on Class B wererestricted to an amount equal to 90% of any dividend paid on Class A.  For fiscal years 2006 and 2005, the regularquarterly dividend was paid only to Class A, as all Class B had been convertedas discussed above.  The Companyanticipates payment of comparable Class A quarterly dividends in futurequarters*.*

On October 25,2004, the Board of Directors of the Company declared a special dividend in theamount of $20 per share on its outstanding Class A and $18 per share on itsoutstanding Class B payable on December 16, 2004 to shareholders of record onNovember 15, 2004.  As a result of theconversion on November 10, 2004 of Class B to Class A, the dividend was paid onClass A only.  The aggregate amount ofthe special dividend was approximately $67,665,000.

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The followingtable sets forth certain information with respect to purchases by the Companyof Class A during the quarter ended December 30, 2006:

Issuer Purchasesof Equity Securities (1)
| ** **                 | ** ** | **(a)**                         | ** ** | **(b)**                      | ** ** | **(c)**                                 | ** ** | **(d)**                                  | ** ** |
|----------------------------|------------|---------------------------------|------------|------------------------------|------------|-----------------------------------------|------------|------------------------------------------|------------|
| ** **                 | ** ** | ** **                      | ** ** | ** **                   | ** ** | ** **                              | ** ** | **Maximum Number (or**         | ** ** |
| ** **                 | ** ** | ** **                      | ** ** | ** **                   | ** ** | **Total Number of**           | ** ** | **Approximate Dollar**              | ** ** |
| ** **                 | ** ** | ** **                      | ** ** | ** **                   | ** ** | **Shares (or Units)**         | ** ** | **Value) of Shares (or**  | ** ** |
| ** **                 | ** ** | **Total Number of**   | ** ** | **Average Price**       | ** ** | **Purchased as Part of** | ** ** | **Units) that May Yet**   | ** ** |
| ** **                 | ** ** | **Shares (or Units)** | ** ** | **Paid per Share** | ** ** | **Publicly Announced**             | ** ** | **Be Purchased Under**         | ** ** |
| **Period**                 | ** ** | **Purchased**                   | ** ** | **(or Unit)**           | ** ** | **Plans or Programs**         | ** ** | **the Plans or Programs** | ** ** |
| October 1 - October 28     |       | 0                               |       | $                            | 0.00       |                                    | 0          |                                     | 91,235     |   |
| October 29 - November  25  |       | 0                               |       | 0.00                         |       | 0                                       |       | 91,235                                   |       |
| November 26 - December  30 |       | 68,331                          |       | 110.00                       |       | 68,331                                  |       | 22,904                                   |       |
| Total                      |       | 68,331                          |       | $                            | 110.00     |                                    | 68,331     |                                     | 22,904     |   |

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**(1)**                                  In April 2003 andFebruary 2006, the Company announced a stock repurchase program authorized bythe Board of Directors, to purchase up to 100,000 and 150,000 shares of itsClass A, respectively, in the open market or in private transactions.  The timing, volume and price of purchases areat the discretion of the management of the Company.

11

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Item 6.                SelectedFinancial Data 

**ARDEN GROUP, INC. ANDCONSOLIDATED SUBSIDIARIES**

(In Thousands,Except Share and Per Share Data)
| ** **                              | ** ** | **2006**  | ** ** | **2005**  | ** ** | **2004**  | ** ** | **2003**  | ** ** | **2002**  | ** ** |
|-----------------------------------------|------------|-----------|------------|-----------|------------|-----------|------------|-----------|------------|-----------|------------|
| Operations For The  Year:               |       |      |       |      |       |      |       |      |       |      |       |
| Sales (1)                               |       | $         | 482,737    |      | $          | 470,354   |       | $         | 502,898    |      | $          | 486,378 |   | $ | 398,231 |   |
| Gross profit (2)                        |       | 186,336   |       | 180,423   |       | 192,316   |       | 181,957   |       | 144,448   |       |
| Operating income (3)                    |       | 36,680    |       | 31,816    |       | 34,579    |       | 25,458    |       | 21,644    |       |
| Other income (expense),  net            |       | 2,439     |       | 1,606     |       | 3,591     |       | 2,446     |       | 1,644     |       |
| Income tax provision                    |       | 15,895    |       | 13,571    |       | 15,498    |       | 11,323    |       | 9,356     |       |
| Net income                              |       | $         | 23,224     |      | $          | 19,851    |       | $         | 22,672     |      | $          | 16,581 |   | $ | 13,932 |   |
| Net income per common  share:           |       |      |       |      |       |      |       |      |       |      |       |
| Basic – Class A  Common Stock      |       | $         | 7.16       |      | $          | 5.87      |       | $         | 7.00       |      | $          | 5.11 |   | $ | 4.33 |   |
| Basic – Class B  Common Stock      |       | N/A       |       | N/A       |       | 6.13      |       | 4.60      |       | 3.90      |       |
| Diluted                                 |       | 7.16      |       | 5.87      |       | 6.70      |       | 4.90      |       | 4.14      |       |
|                                    |       |      |       |      |       |      |       |      |       |      |       |
| Financial Position At  Year-End:        |       |      |       |      |       |      |       |      |       |      |       |
| Total assets (1)                        |       | $         | 145,601    |      | $          | 147,027   |       | $         | 122,135    |      | $          | 186,972 |   | $ | 138,971 |   |
| Working capital                         |       | 41,942    |       | 41,304    |       | 23,883    |       | 75,185    |       | 48,892    |       |
| Long-term debt                          |       | 1,228     |       | 1,453     |       | 1,764     |       | 2,038     |       | 2,283     |       |
| Stockholders’ equity               |       | 82,294    |       | 82,320    |       | 66,576    |       | 115,000   |       | 99,027    |       |
| Capital expenditures                    |       | 4,868     |       | 6,390     |       | 12,641    |       | 5,752     |       | 4,023     |       |
|                                    |       |      |       |      |       |      |       |      |       |      |       |
| Other Operating and  Financial Data:    |       |      |       |      |       |      |       |      |       |      |       |
| Number of stores at end  of fiscal year |       | 18        |       | 18        |       | 18        |       | 18        |       | 18        |       |
| Sales increase  (decrease) (1) (4):     |       |      |       |      |       |      |       |      |       |      |       |
| Total stores                            |       | 2.6       | %          | (6.6      | %)         | 3.4       | %          | 22.3      | %          | 2.5       | %          |
| Same stores                             |       | 2.6       | %          | (6.6      | %)         | 3.4       | %          | 22.3      | %          | 0.8       | %          |
|                                    |       |      |       |      |       |      |       |      |       |      |       |
| Depreciation and  amortization          |       | $         | 7,097      |      | $          | 7,401     |       | $         | 6,990      |      | $          | 8,126 |   | $ | 8,139 |   |
|                                    |       |      |       |      |       |      |       |      |       |      |       |
| Dividends declared per  common share:   |       |      |       |      |       |      |       |      |       |      |       |
| Class A Common  Stock                   |       | $         | 1.00       |      | $          | 1.00      |       | $         | 1.00       |      | $          | .50 |   |   |   |
| Class B Common  Stock                   |       | N/A       |       | N/A       |       | $         | .675       |      | $          | .45       |       |   |   |
|                                    |       |      |       |      |       |      |       |      |       |      |       |
| Special dividend  declared per Class A  |       |      |       |      |       |      |       |      |       |      |       |
| Common Stock  share                     |       |      |       |      |       | $         | 20.00      |      |       |      |       |   |
|                                    |       |      |       |      |       |      |       |      |       |      |       |
| Weighted average common  shares         |       |      |       |      |       |      |       |      |       |      |       |
| outstanding:                            |       |      |       |      |       |      |       |      |       |      |       |
| Basic – Class A  Common Stock      |       | 3,241,805 |       | 3,381,051 |       | 2,217,675 |       | 2,015,859 |       | 1,991,230 |       |
| Basic – Class B  Common Stock      |       | N/A       |       | N/A       |       | 1,164,977 |       | 1,363,584 |       | 1,363,790 |       |
| Diluted                                 |       | 3,241,805 |       | 3,381,051 |       | 3,382,652 |       | 3,380,524 |       | 3,365,961 |       |

 

*All yearsare 52 weeks except 2003 which is 53 weeks.*

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(1)                The Company’s results of operations andfinancial position reflect, to some extent, the impact of a labor dispute inthe Company’s trade areas in 2003 and 2004. See Item 7. Management’s Discussion and Analysis of Financial Conditionand Results of Operations for further information.

(2)                Gross profit for years prior to 2006 reflectsa reclassification of distribution, purchasing, advertising and occupancy costsfrom selling, general and administrative expense to cost of sales.  The Company retroactively reclassifiedapproximately $33,942, $33,097, $33,763 and $32,277 (stated in thousands) fromselling, general and administrative expense to cost of sales for 2005, 2004,2003 and 2002, respectively.  See Note 1of Notes to Consolidated Financial Statements for further information.

(3)                Fiscal 2003 operating income includes a$4,311 (stated in thousands) charge for impairment on long-lived assets relatedto leasehold improvements and equipment at the Pasadena store.

(4)                Same store sales increases are calculated bycomparing year-over-year sales for stores that were open in both years.  If a store was not open for the entire yearin both years being compared, then the store is not included in the same storeanalysis.  No stores were closed duringany of the periods presented.  Fiscal2003 was a 53-week year.  No adjustmentwas made to remove the additional week for comparison purposes.  Store sales used to calculate salesincreases, above, do not include revenue from leases, subleases, licensingarrangements and finance charges, and therefore, may not agree to totalyear-over-year sales increases as disclosed in Item 7. Management’s Discussionand Analysis of Financial Condition and Results of Operations.

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Item7.                                                   Management’sDiscussion and Analysis of Financial Condition and Results of Operations

The PrivateSecurities Litigation Reform Act of 1995 provides a safe harbor for forward-lookingstatements made by or on behalf of the Company. Certain statements contained in Management’s Discussion and Analysis of Financial Condition and Resultsof Operations, other parts of this report and other Company filings areforward-looking statements.  Thesestatements discuss, among other things, future sales growth, operating resultsand financial condition.  Forward-lookingstatements reflect the Company’s current plans and expectations regardingimportant risk factors and are based on information currently available tous.  The Company cautions readers thatany forward-looking statements contained in this report or made by themanagement of the Company involve risks and uncertainties, and are subject tochange based on various important factors. The Company does not undertake any obligation to update forward-lookingstatements.

**Results of Operations**

The results of operations for fiscal 2004 reflect the pervasive impactof a labor dispute in the Company’s trade area that commenced October 11, 2003and concluded February 29, 2004.  Thecollective bargaining agreement covering the majority of the Company’semployees, as well as other participating employers in Southern California,expired on October 5, 2003.  On October11, 2003, the UFCW declared a strike against Vons and in turn, Albertsons andRalphs locked out their UFCW employees. The labor dispute ended on February 29, 2004 when the UFCW announcedthat employees of these three major grocery retailers had ratified a newcontract which included a two-tier wage and benefit structure.  Prior to the labor dispute, the Company hadagreed with the UFCW to continue operating under a contract extension and to bebound by all modifications regarding trust funds and hourly wage rates asnegotiated between the UFCW and the three major grocery retailers.  In return, the UFCW agreed not to strike theCompany and Gelson’s remained open.  In avote held on March 24-25, 2004, employees of the Company who were membersof the UFCW, ratified a new labor contract on terms similar to those reached bythe three major grocery retailers and covering the period through March 5,2007.

The labor disputeresulted in a temporary shift in consumer shopping patterns and a significantincrease in the Company’s sales and operating income during the fourth quarter of 2003 and the firstquarter of 2004.  Since the conclusion ofthe labor dispute, customers have returned to their previous shopping patterns.  However, the Company successfully retainedsome of the incremental sales from new shoppers who experienced the Gelson’sformat and service during the labor dispute.

In February 2007, the Company completed negotiation of a new unioncontract with the UFCW to replace the contract which expired on March 5,2007.  The new contract eliminates thetwo-tier wage structure and provides for, among other things, wageincreases and modifications to the pension and health and welfare plans.  The Company’s employees who are members ofthe UFCW voted to ratify the new contract in a vote held on February 21 and 23,2007.  The new contract expires March 5,2010.  The Company contributes tomulti-employer health care and pension plans for the UFCW, and therefore, therates paid by all employers participating in the trust funds must be equal.  The UFCW has not yet reached an agreementwith the three major participating supermarket chains in the Company’s tradearea.  Consequently, the benefit 

14

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contribution rates that the Company negotiated with the UFCW may changebased on the outcome of the union’s negotiations with the three major groceryretailers.

If the UFCW reaches a wage agreement with the other participatingemployers in our trade area under terms that are more favorable to theemployers than those agreed to by Gelson’s, this could affect our ability tocompete with grocery retailers whose labor costs are less than our own.  In addition, if the three major groceryretailers in our trade area agree to the wage rates that Gelson’s hasnegotiated under its new contract with the UFCW, then Gelson’s has agreed tofurther increase its hourly wage rate for experienced level employees by anadditional $.05 per hour in the second and third years of the newcontract.  The elimination of thetwo-tier wage structure and increases in wage and benefit costs provided underthe new contract could negatively impact the Company’s profitability unless itis able to offset the increased costs through a combination of sales growth,increased prices, management of labor hours and cost savings in other areas.

**2006Compared to 2005**

Net income in 2006 increased 17.0% to $23,224,000 compared to$19,851,000 during 2005.  Operatingincome increased 15.3% to $36,680,000 in 2006 compared to $31,816,000 in 2005.

Sales from the Company’s 18 supermarkets (all of which are located inSouthern California), including revenue from licensing arrangements, subleases,leases and finance charges, were $482,737,000 in 2006.  This represents an overall and same storeincrease of 2.6% from 2005, when sales were $470,354,000.  The Company has experienced sales growth dueto product pricing decisions (to some extent resulting from product costincreases) and an increase in customer count.

The Company’s gross profit as a percent of sales was38.6% in 2006 compared to 38.4% in 2005. The Company includes product costs,net of discounts and allowances, and inbound freight charges, as well aswarehouse, transportation, purchasing, advertising and occupancy costs in costof sales, thereby reducing gross profit by these amounts.  As discussed under Note 1 to the ConsolidatedFinancial Statements, the gross profit percentage for 2005 has been revised toreflect the reclassification of certain costs previously recorded underselling, general and administrative (SG&A) expense to cost of sales.  Gross profit as a percent of sales for theCompany may not be comparable to those of other companies in the groceryindustry since there may be differences in recording certain costs as cost ofsales or as SG&A expense.

SG&A expenseas a percent of sales was 31.0% in 2006 compared to 31.6% in 2005.  The Company experienced a decrease in labor and other related payrollexpense as a percent of sales during 2006 compared to 2005 primarily due toincreased sales dollars which did not require a similar increase in laborhours.  In addition, the Companypurchased a one-year fully insured guaranteed cost workers’ compensationinsurance policy effective July 1, 2006 which limits the Company’s maximumexposure.  In 2005, the Company wasprimarily self-insured and recognized expense based on reported claims and anestimate of claims incurred but not reported. Workers’ compensation expense in the second half of 2006 compared to thesame period of the prior year is lower as the policy premium under the newguaranteed cost program is less than what was accrued in the prior year underthe Company’s former self-insured plan.  The overall 

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decrease in SG&A expense was partially offset by higher SARsexpense in 2006 compared to the prior year. During 2006, the Company recognized approximately $3,671,000 in SARscompensation expense due to an increase in the fair value of SARs since the endof the previous year, the additional vesting of SARs and the adoption ofStatement of Financial Accounting Standards No. (SFAS) 123(R) (revised 2004), “Share-BasedPayment,” as discussed below.  In 2005,the Company recognized $946,000 of SARs compensation expense.

The Companycontributes to several multi-employer union pension and health care plans.  Pension and health care payments are determinedbased on straight-time hours worked and the contribution rate as stipulated inthe Company’s various collective bargaining agreements.  The**Companyrecognized union pension expense of $6,801,000 in 2006 compared to $6,241,000in 2005.  Higher pension costs in 2006 resulted from anincrease in the average hourly pension contribution rate.  Union health care expense was$15,231,000 in 2006 compared to $16,047,000 in 2005.  Health care costs decreased due to areduction in the average hourly contribution rate and the number of hourseligible for contributions.

In June 2003, inan effort to control substantially increasing workers’ compensation rates, theCompany terminated itsguaranteed cost workers’ compensation insurance coverage and purchased a high deductibleworkers’ compensation policy.  TheCompany had stop-loss coverage to limit its exposure on a per claim basis andwas insured for covered costs in excess of per claim limits.  The Company experienced good results underthe high deductible program.  EffectiveJuly 2006, the Company purchased a one-year fully insured guaranteed costworkers’ compensation insurance policy at a favorable rate for losses occurringafter June 30, 2006.  This replaced thehigh deductible program for workers’ compensation.  The Company continues to maintain an accrualfor claims incurred prior to July 2006 under the high deductible program whichis based on both reported claims and an estimate of claims incurred but notreported.  While the Company devotessubstantial time and commitment to maintaining a safe work environment, theultimate cost of workers’ compensation is highly dependent upon legal andlegislative trends, the inflation rate of health care costs and the Company’sability to manage claims.

The Company is also primarily self-insured for losses related togeneral and auto liability claims for up to $250,000 and $100,000 per claim,respectively.  The Company has insurancefor claims in excess of these amounts. Accruals are based on reported claims and an estimate of claims incurredbut not reported.  While the ultimateamount of claims incurred is dependent on future developments, in management’sopinion, recorded reserves for general and auto liability claims and workers’compensation are adequate to cover the future payment of claims.

In addition to high deductible coverage for workers’ compensation andgeneral and auto liability claims, the Company also carries property, businessinterruption, fiduciary, directors and officers, crime, earthquake, specialevent and employment practices liability insurance.  Management believes, based on recent and pastexperience, that current insurance coverage meets the reasonable requirementsof the Company.

Stock-based compensation under the SARs program was previously subjectto variable accounting in accordance with Financial Accounting Standards BoardInterpretation No. (FIN) 28, “Accounting for Stock Appreciation Rights andOther Variable Stock Option or Award Plans,” an interpretation of AccountingPrinciples Board Opinion No. (APB) 25, “Accounting for 

16

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Stock Issued to Employees.” Under FIN 28, compensation expense was recognized as the SARs vestedusing the graded-vesting method as specified by FIN 28.  In addition, changes in the market price ofthe Company’s Class A impacted the recognition of SARs expense.  In 2005, the Company recorded compensationexpense related to SARs of $946,000.

Effective January 1, 2006, the Company adopted SFAS 123(R) (revised2004), “Share-Based Payment,” which requires the measurement and recognition ofcompensation expense based on the fair value of SARs.  The Company adopted SFAS 123(R) using themodified prospective transition method, and therefore prior period results havenot been restated.  As of January 1,2006, the cumulative effect of adopting SFAS 123(R) resulted in the recognitionof $288,000 in compensation expense. Compensation expense is recorded under SG&A expense on theConsolidated Statements of Operations and Comprehensive Income.

SFAS 123(R) requires the Company to remeasure the fair value of SARseach reporting period until the award is settled.  Compensation expense must be recognized eachreporting period for changes in fair value and vesting.  During 2006, the Company recorded $3,383,000of compensation expense related to the increase in the fair value of SARs andadditional vesting during the period, in addition to the $288,000 recorded as aresult of the adoption of SFAS 123(R) as discussed above.  As of December 30, 2006, assuming no changein the SARs fair value, there was approximately $667,000 of total unrecognizedcompensation cost related to unvested SARs which is expected to be recognizedover a weighted average period of 1.1 years. The total intrinsic value of SARs exercised during 2006 wasapproximately $1,305,000.  Intrinsicvalue represents the amount by which the fair value of SARs exceeds theexercise price.

During 2006, theCompany procured approximately 18% of its product through Unified, a grocerywholesale cooperative.  As amember-patron, the Company is required to provide Unified with certain minimumdeposits and credit in order to purchase product from the cooperative.  As of December 30, 2006, the Company hadapproximately $1,933,000 on deposit with Unified, in addition to approximately$503,000 related to ownership of equity shares in Unified.  In 2006 and 2005, the Company recordedapproximately $323,000 and $451,000, respectively, in patronage dividend incomereceived in the form of cash and Unified equity shares as a reduction of costof sales.

Interest and dividendincome was $2,560,000 in 2006 compared to $1,722,000 for 2005 primarily due tohigher interest rates and higher average cash levels in 2006.

SFAS 115, “Accounting forCertain Investments in Debt and Equity Securities,” requires that unrealizedholding gains and losses from available-for-sale securities be included as acomponent of stockholders’ equity. Unrealized losses on investments were $39,000 (net of income tax benefit**of $28,000) in 2006 compared to unrealized losses of$392,000 (net of income tax benefit of $269,000) in 2005.  Management does not believe any of theselosses are other-than-temporary.

Since March 2003, sales at the Company’s CenturyCity store have been negatively impacted by a road construction project in thevicinity of the store.  The project wascompleted during the fourth quarter of 2006. The Century City store has also experienced a decline in sales due to amajor construction project which began in March 2004 at the Century CityShopping Center, 

17

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where the Gelson’s store is located.  Furthermore, the Company commenced aremodeling project in July 2005 at the store which is now substantiallycompleted.

During 2006, the Company purchased 217,904 shares of Class A inunsolicited private transactions with unrelated parties for an aggregatepurchase price of approximately $19,999,000. As a result of the 2006 purchases of Class A shares, the weightedaverage shares outstanding of Class A used in computing net income per commonshare was 3,241,805 in 2006 as compared to 3,381,051 in 2005 which had theeffect of increasing net income per common share on a comparative basis.

**2005Compared to 2004**

Net income in 2005 decreased 12.4% to $19,851,000 compared to$22,672,000 during 2004.  Operatingincome decreased 8.0% to $31,816,000 in 2005 compared to $34,579,000 in 2004.

Sales from the Company’s 18 supermarkets (all of which are located inSouthern California), including revenue from licensing arrangements, subleases,leases and finance charges, were $470,354,000 in 2005.  This represents an overall decrease of 6.5%from 2004, when sales were $502,898,000 and a same store sales decrease of6.6%.  The labor dispute in the Company’strade area contributed to the higher sales in the prior year.  Sales were negatively impacted for threeweeks in the second half of 2004 as the Century City store was closed due toconstruction at the Century City Shopping Center as discussed above.  The store, which was closed for a total ofthree weeks, reopened on October 18, 2004. Sales in both 2004 and 2005 were also negatively impacted as a result ofongoing construction near the Century City store.  The Company does not believe that inflationcontributed significantly to the change in sales.

The Company’s gross profit as a percent of sales was38.4% in 2005 compared to 38.2% in 2004 primarily due to a combination of costreductions and product pricing decisions. The Company includes product costs, net of discounts and allowances, andinbound freight charges, as well as warehouse, transportation, purchasing,advertising and occupancy costs in cost of sales, thereby reducing gross profitby these amounts.  The gross profitpercentages for 2005 and 2004 have been revised to reflect the reclassificationof certain costs previously recorded under SG&A expense to cost of sales asdiscussed under Note 1 to the Consolidated Financial Statements.  Gross profit as a percent of sales for theCompany may not be comparable to those of other companies in the groceryindustry since there may be differences in recording certain costs as cost ofsales or as SG&A expense.

SG&A expenseas a percent of sales was 31.6% in 2005 compared to 31.4% in 2004.  During the labor dispute, the Companyachieved significant economies of scale from incremental sales.  SG&A expense as a percent of sales has increased since theconclusion of the labor dispute; however, the Company has succeeded inretaining some of the economies of scale due to the sales retained compared topre-strike periods.  Theseeconomies were partially offset by approximately $2,200,000 of bonus expenserecognized and paid in the first half of 2004 to the Company’s UFCW employeesand higher compensation expense in 2004 related to the Company’s SARsprogram.  During 2005, the Company recognized $946,000 of SARs compensationexpense compared to $3,658,000 in 2004 due to a reduction in the Company’sClass A price at the end of fiscal 2005 compared to the end of the previousyear.

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The Companycontributes to several multi-employer union pension and health care plans.  Pension and health care payments aredetermined based on straight-time hours worked and the contribution rate asstipulated in the Company’s various collective bargaining agreements.  The**Companyrecognized union pension expense of $6,241,000 in 2005 compared to $6,064,000in 2004.  Higher pension costs in 2005 resulted from anincrease in the average hourly pension contribution rate.  However, the increase was partially offset bya reduction in the number of labor hours worked as sales volumes declined in2005 compared to 2004.  Unionhealth care expense was $16,047,000 in 2005 compared to $16,977,000 in2004.  Health care costs decreased due tothe reduction in the number of labor hours worked as discussed above.

For a discussionof workers’ compensation, general and auto liability and other types ofinsurance coverage, see thediscussion under the heading “2006 Compared to 2005” presented above.

During 2005 and2004, stock-based compensation, under the SARs program, was subject to variableaccounting in accordance with FIN 28, “Accounting for Stock Appreciation Rightsand Other Variable Stock Option or Award Plans.”  For the fiscal year ended December 31, 2005,SARs compensation expense was $946,000 compared to $3,658,000 in fiscal2004.  The decrease in compensationexpense was due to a decrease in the Company’s Class A price during 2005partially offset by the additional vesting of SARs.

During 2005, theCompany procured approximately 18% of its product through Unified, a grocerywholesale cooperative.  As amember-patron, the Company is required to provide Unified with certain minimumdeposits and credit in order to purchase product from the cooperative.  As of December 31, 2005, the Company hadapproximately $1,730,000 on deposit with Unified, in addition to approximately$420,000 related to ownership of equity shares in Unified.  In 2005 and 2004, the Company recordedapproximately $451,000 and $569,000, respectively, in patronage dividend incomereceived in the form of cash and Unified equity shares as a reduction of costof sales.

Interest and dividendincome was $1,722,000 in 2005 compared to $1,986,000 for 2004 primarily due tolower cash levels in 2005 partially offset by higher interest rates.  Cash available for investment was substantiallylower in fiscal 2005 as a result of a special dividend of approximately$67,665,000 paid on December 16, 2004.

Other incomeincludes gains realized on investments of $36,000 and $1,787,000 in 2005 and2004, respectively.  During 2004, theCompany sold an investment in a limited partnership and recognized a gain ofapproximately $1,570,000.

SFAS 115, “Accounting forCertain Investments in Debt and Equity Securities,” requires that unrealizedholding gains and losses from available-for-sale securities be included as acomponent of stockholders’ equity. Unrealized losses on investments were $392,000 (net of income taxbenefit of $269,000) in 2005 compared to unrealized losses of $247,000 (net ofincome tax benefit of $169,000) in 2004. Management does not believe any of these losses are other-than-temporary.

 

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**Liquidity and Capital Resources**

The Company’s current cash position, including investments and net cashprovided by operating activities, are the primary sources of funds available tomeet the Company’s capital expenditure and liquidity requirements.  The Company’s cash position, includinginvestments, at December 30, 2006 was $55,509,000.  Cash not required for the immediate needs ofthe Company is temporarily invested in commercial paper and marketablesecurities.  Currently, all temporaryinvestments are highly liquid.  TheCompany is continually investigating opportunities for the use of these fundsincluding new locations and the expansion and remodel of existing stores.

The Company also has two revolving lines of credit totaling $23,000,000available for standby letters of credit, funding operations and expansion.  There were no outstanding borrowings againsteither of the revolving lines as of December 30, 2006.  The Company currently maintains five standbyletters of credit aggregating $12,469,000 pursuant to the Company’s leaserequirements and general and auto liability and workers’ compensation self-insuranceprograms.  The standby letters of creditreduce the available borrowings under its revolving lines.

The Company’sworking capital was $41,942,000 at December 30, 2006 compared to $41,304,000 atDecember 31, 2005.  Net cash provided byoperating activities totaled $26,720,000. Cash flows from operating activities resulted primarily from net incomeplus non-cash expenses and changes in working capital.

Net cash used ininvesting activities was $2,729,000 in 2006. Investing activities included capital expenditures of $4,868,000partially offset by the purchase and sale of investments which resulted in anet cash inflow of $1,924,000.  Net cashused in financing activities was $23,487,000 in 2006 which included payments tobuy back shares of the Company’s Class A of $19,999,000, cash dividend paymentsof $3,267,000 and principal payments on capital lease obligations of $221,000.

The Company’scurrent ratio was 1.89 at December 30, 2006 compared to 1.87 at December 31,2005.  The Company’s total liabilities toequity ratio decreased to .77 at December 30, 2006 from .79 at December31, 2005.

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The following table sets forth the Company’scontractual cash obligations and commercial commitments as of December 30,2006:

|                                                                           | ** ** | **Contractual Cash Obligations (In Thousands)** | ** ** |
|---------------------------------------------------------------------------|------------|---------------------------------------------------------------------|------------|
| ** **                                                                | ** ** | ** **                                                          | ** ** | **Less Than** | ** ** | ** ** | ** ** | ** ** | ** ** | **After** | ** ** |
| ** **                                                                | ** ** | **Total**                                                           | ** ** | **1 Year** | ** ** | **1-3 Years** | ** ** | **4-5 Years** | ** ** | **5 Years** | ** ** |
| 7% Subordinated Income  Debentures  Due September 2014 Including Interest |       | $                                                              | 1,916      |   | $  | 86 |   | $  | 172 |   | $  | 172 |   | $  | 1,486 |   |
|                                                                      |       |                                                                |       |   |   |   |   |   |   |   |   |
| Capital Lease Obligations  Including  Interest                            |       | 238                                                                 |       | 238 |   | 0 |   | 0 |   | 0 |   |
|                                                                      |       |                                                                |       |   |   |   |   |   |   |   |   |
| Operating Leases                                                          |       | 144,446                                                             |       | 9,640 |   | 18,893 |   | 17,544 |   | 98,369 |   |
|                                                                      |       |                                                                |       |   |   |   |   |   |   |   |   |
| Total Contractual Cash  Obligations (1)                                   |       | $                                                                   | 146,600    |   | $ | 9,964 |   | $ | 19,065 |   | $ | 17,716 |   | $ | 99,855 |   |
| ** **                                                                | ** ** | ** **                                                          | ** ** |
|                                                                           | ** ** | **Other Commercial Commitments (In Thousands)** | ** ** |
| ** **                                                                | ** ** | ** **                                                          | ** ** | **Less Than** | ** ** | ** ** | ** ** | ** ** | ** ** | **After** | ** ** |
| ** **                                                                | ** ** | **Total**                                                           | ** ** | **1 Year** | ** ** | **1-3 Years** | ** ** | **4-5 Years** | ** ** | **5 Years** | ** ** |
| Standby Letters of Credit  (2)                                            |       | $                                                                   | 12,469     |   | $ | 12,469 |   | $ | 0 |   | $ | 0 |   | $ | 0 |   |

 

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(1)          Other Contractual CashObligations

TheCompany had the following other contractual cash obligations at December 30,2006.  The Company is unable to includethese liabilities in the tabular disclosure of contractual cash obligations asthe exact timing and amount of payments is unknown.

*Self-Insurance Reserves*

TheCompany is primarily self-insured for losses related to general and autoliability claims and for all open years prior to July 1, 2006 for workers’compensation.  The Company purchased aone-year fully insured guaranteed cost workers’ compensation insurance policyfor losses occurring after June 30, 2006. This policy replaced the high deductible program for workers’compensation.  The Company maintainsstop-loss insurance coverage to limit its loss exposure on a per claim basis.Liabilities associated with the risks that are retained by the Company areestimated, in part, by considering historical claims experience and regressionanalysis. Accruals are based on reported claims and an estimate of claimsincurred but not reported.  While theultimate amount of claims incurred is dependent on future developments, inmanagement’s opinion recorded reserves are adequate to cover the future paymentof claims.  The Company’s liabilityreserve for unpaid and incurred but not reported claims at December 30, 2006was approximately $8,247,000.

*Employment Agreement*

The Companyhas an employment agreement with a key executive officer that provides forannual retirement compensation equal to 25% of his average base salary andbonus earned in the last three fiscal years prior to his retirement. TheCompany had accrued $2,211,000 under the terms of the employment agreement asof December 30, 2006.

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*Property,Plant and Equipment Purchases*

As of December 30, 2006, management had authorizedexpenditures on incomplete projects for the purchase of property, plant andequipment which totaled approximately $338,000. The Company has an ongoing program to remodel existing supermarkets andto add new stores.  During 2006, totalcapital expenditures were $4,868,000.

(2)          Standby Letters ofCredit

All of the Company’s letters of credit renewautomatically each year unless the issuer notifies the Company otherwise.  The amount of each letter of credit heldpursuant to the Company’s workers’ compensation and general and auto liabilityinsurance programs will be adjusted annually based upon the outstanding claimreserves as of the renewal date.  Eachletter of credit obligation related to insurance will cease when all claims forthe particular policy year are closed or the Company negotiates a release.

In April 2003, the Company announced a stock repurchase program,authorized by the Board of Directors, to purchase from time to time up to100,000 shares of its Class A in the open market or in privatetransactions.  The timing, volume andprice of purchases are at the discretion of the management of the Company.  In February 2006, the Company’s Board ofDirectors authorized the purchase of up to an additional 150,000 shares ofClass A.  During 2006 and 2005, theCompany purchased 217,904 and 4,250 shares of Class A, respectively, inunsolicited private transactions with unrelated parties for an aggregatepurchase price of approximately $19,999,000 and $334,000, respectively.  The remaining number of shares authorized forpurchase as of December 30, 2006 was 22,904.

During 2006 and 2005, the Company paid quarterly dividends of 25 centsper share of Class A for a total of approximately $3,267,000 and $3,382,000,respectively.

**Critical Accounting Policies**

Thepreparation of financial statements in conformity with accounting principlesgenerally accepted in the United States (GAAP) requires management to makeestimates and assumptions about future events that may affect the reportedamounts of assets, liabilities, revenues and expenses, as well as thedisclosure of contingent assets and liabilities.  Management has established accountingpolicies that they believe are appropriate in order to reflect the accuratereporting of the Company’s operating results, financial position and cashflows.  The Company applies theseaccounting policies in a consistent manner. Management bases their estimates on historical experience, current andexpected economic conditions and various other factors that management believesto be reasonable under the circumstances. These estimates and assumptions form the basis for making judgmentsabout the carrying values of assets and liabilities that are not readilyapparent from other sources.  The Companyreevaluates these significant factors and makes adjustments where facts andcircumstances dictate.  Future events andtheir effects cannot be determined with absolute certainty, and thereforeactual results may differ from estimates.

Managementbelieves that the following accounting policies are the most critical in thepreparation of the Company’s financial statements because they involve the mostdifficult, subjective or complex judgments about the effect of matters that areinherently uncertain.

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*Inventories*

Supermarket nonperishable inventories are recordedusing the retail method and are stated at the lower of cost or market, withcost determined using the last-in, first-out (LIFO) method.  Perishable inventories are valued at thelower of cost on a first-in, first-out (FIFO) basis or market.

Inventoryreserves are maintained for dry goods at historical run rates that are adjustedannually, and trued up at each physical count (three times per year) to ensureadequacy of the reserve. Inventories of perishable items are taken atthe end of every month, and balances are adjusted accordingly with the offsetrecorded in cost of sales.

*Impairment of Long-Lived Assets*

The Company monitors thecarrying value of long-lived assets for potential impairment whenever events orchanges in circumstances indicate the carrying value of an asset may not be recoverable.  Impairment is recognized when estimatedfuture cash flows (undiscounted and before interest charges) are less thancarrying value.  The estimation ofexpected future net cash flows is inherently uncertain and relies onassumptions regarding current and future economic and market conditions and theavailability of capital.  If impairmentanalysis assumptions change, then an adjustment to the carrying value of theCompany’s long-lived assets could occur. To the extent that an asset is impaired, the excess of the carryingamount of the asset over its estimated fair value is charged against earnings.

*Workers’ Compensation and Generaland Auto Liability Insurance*

The Company is primarilyself-insured for losses related to general and auto liability claims and forall open years prior to July 1, 2006 for workers’ compensation.  The Company purchases stop-loss insurancecoverage to limit its loss exposure on a per claim basis.  Accruals are based on reported claims and anestimate of claims incurred but not reported. 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.  TheCompany purchased a one-year fully insured guaranteed cost workers’compensation insurance policy for losses occurring after June 30, 2006.  This policy replaced the high deductibleprogram for workers’ compensation.

*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 cardusers.  Valuation reserves are adjustedperiodically based on historical recovery rates.  The Company records income from licensingarrangements, subleases, leases and finance charges as they are earned.

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*Cost ofSales*

Costof sales reflects the direct cost involved in bringing the Company’s product tomarket including product costs, net of discounts and allowances, and inboundfreight charges, as well as warehouse, transportation, purchasing, advertisingand occupancy costs.  Warehouse andtransportation costs include receiving and inspection costs, internal transfercosts, labor, building rent, utilities, depreciation, repairs and maintenanceand fuel for the Company’s distribution center and distribution system.  Purchasing costs include both labor andadministrative expense associated with the purchase of the Company’s products.  Advertising costs, net of vendorreimbursements, are expensed as incurred and include the cost of the Gelson’snewsletter, newspaper ads and other print advertising.  Occupancy costs consist of rent, depreciationand utilities related to Gelson’s operations. The Company previously recorded certain of these costs within SG&Aexpense.  See Note 1 of Notes toConsolidated Financial Statements for further information.

*VendorAllowances*

Promotionaland rebate allowances make up the majority of all allowances given to Gelson’sby its vendors. With promotional allowances, vendors pay the Company to promotetheir product. The promotion may be a temporary price reduction, a feature in aprint advertisement or newsletter, or placement of the vendor’s product in apreferred location in a store. The promotions are typically two to three weekslong and are recognized when the commitment has been fulfilled. Promotional andvendor cash rebate allowances are recorded as a reduction of cost of sales.  The Company also receives other allowanceswhich are recognized as a reduction of cost of sales when they are earned.

Occasionally, the Companyreceives rebate allowances in the form of upfront lump-sum payments fromvendors.  Under the terms of these long-termagreements, the Company earns the rebates as it purchases product from thevendor.  The upfront payments arerecorded as a liability when they are received and are recorded as a reductionof inventory cost as the product is purchased. In the event that the Company does not purchase the minimum amount ofproduct specified in the agreement, the upfront payments must be returned on apro rata basis to the vendor.  If thecontract does not specify that the rebate is earned as product is purchased,then the upfront payments are recorded as a liability when received andrecognized as a reduction of cost of sales on a pro rata basis as the productis sold.

*Stock Appreciation Rights*

Stock-based compensationunder the SARs program was previously subject to variable accounting inaccordance with FIN 28, “Accounting for Stock Appreciation Rights and OtherVariable Stock Option or Award Plans,” an interpretation of APB 25, “Accountingfor Stock Issued to Employees.”  UnderFIN 28, compensation expense was recognized as the SARs vested using thegraded-vesting method as specified by FIN 28. In addition, changes in the market price of the Company’s Class Aimpacted the recognition of SARs expense.

Effective January 1, 2006,the Company adopted SFAS 123(R) (revised 2004), “Share-Based Payment,” whichrequires the measurement and recognition of compensation expense based 

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on the fair value ofSARs.  The Company adopted SFAS 123(R)using the modified prospective transition method, and therefore prior periodresults have not been restated.  SFAS123(R) requires the Company to remeasure the fair value of SARs each reportingperiod until the award is settled. Compensation expense must be recognized each reporting period forchanges in fair value and vesting.

**RecentAccounting Standards**

In March 2004, the Emerging Issues Task Force (EITF) amended andratified previous consensus on EITF No. 03-1, “The Meaning ofOther-Than-Temporary Impairment and its Application to Certain Issues.”  EITF No. 03-1 establishes guidance to be usedin determining when an investment is considered impaired, whether thatimpairment is other-than-temporary and the measurement of an impairmentloss.  The effective date was originallythe Company’s third quarter of 2004.  InSeptember 2004, the Financial Accounting Standards Board (FASB) issued EITF No.03-1-1, “Effective Date of Paragraphs 10-20 of EITF 03-1,” to delaythe effective date pending further discussions by the EITF.  In November 2005, the FASB issued FASB StaffPosition (FSP) Nos. FAS 115-1 and FAS 124-1, “The Meaning ofOther-Than-Temporary Impairment and its Application to Certain Investments,”which addresses the determination as to when an investment is consideredimpaired, whether that impairment is other-than-temporary and the measurementof an impairment loss.  This FSP alsoincludes accounting considerations subsequent to the recognition of another-than-temporary impairment and requires certain disclosures aboutunrealized losses that have not been recognized as other-than-temporaryimpairments.  This pronouncement waseffective beginning with the Company’s first quarter of 2006.  The Company does not currently have anyunrealized investment losses that are other-than-temporary and, therefore,adoption of this standard on January 1, 2006 did not have an impact on theCompany’s consolidated financial statements.

In November 2004, the FASB issued SFAS 151, “Inventory Costs - anamendment of ARB No. 43, Chapter 4.” SFAS 151 clarifies that inventory costs that are “abnormal” are requiredto be charged to expense as incurred as opposed to being capitalized intoinventory as a product cost.  SFAS 151provides examples of “abnormal” costs including costs of idle facilities,excess freight and handling costs and spoilage. SFAS 151 was effective for the Company’s fiscal year beginning January1, 2006.  Adoption of this standard didnot have an impact on the Company’s consolidated financial statements.

In December 2004, the FASB issued SFAS 123(R) (revised 2004), “Share-BasedPayment.”     This statement eliminatedthe ability to account for share-based compensation transactions using APB 25, “Accountingfor Stock Issued to Employees,” and requires instead that compensation expensebe recognized based on the fair value on the date of grant and at each remeasurementdate for cash-settled SARs which are accounted for as liabilities.  The adoption of SFAS 123(R) impacted theCompany’s consolidated financial statements as discussed previously under theheading “2006 Compared to 2005.”

In October 2005, the FASB issued FSP FAS 13-1, “Accounting for RentalCosts Incurred during a Construction Period.” FSP FAS 13-1 clarifies that rental costs associated with ground orbuilding operating leases that are incurred during a construction period shouldbe recognized as rental expense.  Thisstatement was effective with the Company’s first quarter of 2006.  Adoption of this standard did not have animpact on the Company’s consolidated financial statements.

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In June 2006, the FASB ratified the consensus of EITF No. 06-3, “HowTaxes Collected from Customers and Remitted to Governmental Authorities ShouldBe Presented in the Income Statement (That Is, Gross versus Net Presentation).”  EITF No. 06-3 indicates that the incomestatement presentation on either a gross basis or a net basis of the taxeswithin the scope of the issue is an accounting policy decision.  The Company’s accounting policy is to presentthe taxes within the scope of EITF No. 06-3 on a net basis.  The adoption of EITF No. 06-3 in thefirst quarter of 2007 will not result in a change to the Company’s accountingpolicy and, accordingly, will not have a material effect on the Company’sconsolidated financial statements.

In June 2006, the FASB issued FIN 48, “Accounting for Uncertainty inIncome Taxes — an interpretation of FASB Statement No. 109.”  This interpretation prescribes a recognitionthreshold and measurement attribute for the financial statement recognition andmeasurement of a tax position taken or expected to be taken in a tax return,and provides guidance on derecognition, classification, interest and penalties,accounting in interim periods, disclosure and transition.  This interpretation, which is effective forfiscal years beginning after December 15, 2006, is not expected to have asignificant impact on the Company’s consolidated financial statements.

Item7A.                                         Quantitativeand Qualitative Disclosures about Market Risks

The Company currently has no outstanding bank debt orfixture financing.  If the Company shouldobtain financing or draw on its existing lines of credit, which bear interestat the bank’s reference rate or the bank’s adjusted London Interbank Offer Rate(LIBOR) plus a margin up to 1.2%, the Company could then be exposed to marketrisk related to interest fluctuations.

A change in market prices exposes the Company tomarket risk related to its investments. As of December 30, 2006, all investments were classified asavailable-for-sale securities and totaled $18,667,000.  A hypothetical 10% drop in the market valueof these investments would result in a $1,867,000 unrealized loss and acorresponding decrease in the fair value of these instruments.  This hypothetical drop would not affect cashflow and would not have an impact on earnings until the Company sold theinvestments.

Item 8.                FinancialStatements and Supplementary Data

See Index to Consolidated Financial Statements.

Item 9.                                                   Changes in and Disagreements with Accountantson Accounting and Financial Disclosure

The Company filed a current report on Form 8-K onMarch 31, 2006, to report a change in the Company’s certifying accountant fromPricewaterhouseCoopers LLP (PwC) to Moss Adams LLP (Moss).  There were no disagreements with accountants.

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Item 9A.                                         Controls and Procedures

**Evaluationof Disclosure Controls and Procedures**

An evaluation was carried out by the Company’s Chief Executive Officerand the person temporarily performing the functions of the Chief FinancialOfficer of the effectiveness of the Company’s disclosure controls andprocedures (as defined in Rules 13a-15(e) and 15d-15(e) under the SecuritiesExchange Act of 1934) as of December 30, 2006. Based upon that evaluation, the Chief Executive Officer and the persontemporarily performing the functions of the Chief Financial Officer concludedthat these disclosure controls and procedures were effective.

**Changes in Internal Control over Financial Reporting**

Management,with the participation of the Chief Executive Officer and the persontemporarily performing the functions of the Chief Financial Officer of theCompany, has evaluated any changes in the Company’s internal control overfinancial reporting that occurred during the most recent fiscal quarter. Basedon that evaluation, management, the Chief Executive Officer and the persontemporarily performing the functions of the Chief Financial Officer of theCompany have concluded that there has been no change in the Company’s internalcontrol over financial reporting during the Company’s fiscal quarter endedDecember 30, 2006 that has materially affected, or is reasonably likely to materiallyaffect, the Company’s internal control over financial reporting.

Item 9B.                                           Other Information

**None.**

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**PART III**

Item 10.                                             Directorsand Executive Officers of the Registrant

Identification andInformation Concerning Directors

Below is set forthcertain information about each of the Company’s directors as of March 2, 2007.  Certain of this information has been suppliedby the persons shown.
| **Name**           | ** ** | **Age** | ** ** | **Principal Occupation (1)  and Other Directorships**                                                                                                                                                                                                                                                                                                                                                                                 | ** ** | **Director  Since** | ** ** | **Term  Expires**      |
|--------------------|------------|---------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------|------------|------------------------|
| M. Mark Albert (3) |       | 44      |       | Managing Director of TCW/Crescent Mezzanine since  August 2006. Managing Director of Legacy Partners Group, LLC from February  2005 to July 2006. Partner of AV Advisor, LLC from July 2004 to February  2005. Managing Director of CIBC World Markets from March 2002 to June 2004.                                                                                                                                                  |       | 2007                |       | 2008                   |
|               |       |    |       |                                                                                                                                                                                                                                                                                                                                                                                                                                  |       |                |       |                   |
| Bernard Briskin    |       | 82      |       | Chairman of the Board of Directors, President and  Chief Executive Officer of the Company, and President and Chief Executive  Officer of Arden-Mayfair and Mayfair Realty, both subsidiaries of the Company,  and Chairman of the Board, President, Chief Executive Officer and Chief  Operating Officer of AMG Holdings and Chairman of the Board and Chief  Executive Officer of Gelson’s, both subsidiaries of Arden-Mayfair. |       | 1970 (2)            |       | 2007                   |
|               |       |    |       |                                                                                                                                                                                                                                                                                                                                                                                                                                  |       |                |       |                   |
| John G. Danhakl    |       | 50      |       | Managing Partner, Leonard Green & Partners, L.P.  since March 1995. Managing Director of Donaldson Lufkin Jenrette Securities  Corporation from March 1990 to February 1995. Director of Leslie’s Poolmart,  Inc., Horseshows in the Sun, Inc. (HITS), The Neiman Marcus Group, Inc.,  Petco Animal Supplies, Inc., Rite Aid Corporation, Sagittarius Brands, Inc.  and The Tire Rack, Inc.                                  |       | 1995                |       | 200­­­7 |
|               |       |    |       |                                                                                                                                                                                                                                                                                                                                                                                                                                  |       |                |       |                   |
| Robert A. Davidow  |       | 64      |       | Private Investor.                                                                                                                                                                                                                                                                                                                                                                                                                     |       | 1993                |       | 2008                   |
|               |       |    |       |                                                                                                                                                                                                                                                                                                                                                                                                                                  |       |                |       |                   |
| Kenneth A. Goldman |       | 64      |       | Attorney and Partner with Reed Smith LLP since  January 2003, Attorney and Director with Crosby, Heafey, Roach & May, A  Professional Corporation from September 2000 to December 2002. For more than  five years prior thereto, Attorney and Principal of Sanders, Barnet, Goldman,  Simons & Mosk, A Professional Corporation.                                                                                              |       | 2001                |       | 2007                   |
|               |       |    |       |                                                                                                                                                                                                                                                                                                                                                                                                                                  |       |                |       |                   |
| Steven Romick      |       | 43      |       | Investment Advisor, Member of First Pacific  Advisors, LLC                                                                                                                                                                                                                                                                                                                                                                            |       | 2003                |       | 2009                   |

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(1)                                  Unlessotherwise indicated, principal occupation or occupations shown have been suchfor a period of at least five years in the aggregate.

(2)                                  Dateshown for term of service indicates commencement of service as a director ofthe Company or Arden-Mayfair.

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(3)                                  EffectiveFebruary 28, 2007, the Board of Directors of the Company elected M. Mark Albertas a director to fill a vacancy on the Board of Directors having a term ofoffice expiring at the Annual Meeting of Stockholders in 2008.  Mr. Albert was also elected a member of theAudit Committee of the Board of Directors. Coinciding with Mr. Albert’s election to the Audit Committee, Mr. JohnG. Danhakl resigned his position on the Audit Committee.

Identification ofExecutive Officers

Below is set forthcertain information about each of the executive officers of the Company as ofMarch 2, 2007:

| Name            | ** ** | **Age** | ** ** | **Position(s)**                                                                                                                                                                                                                                                                                                                                                                                                                       |
|-----------------|------------|---------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|            |       |    |       |                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| Bernard Briskin |       | 82      |       | Chairman of the Board of Directors, President and  Chief Executive Officer of the Company, and President and Chief Executive  Officer of Arden-Mayfair and Mayfair Realty, both subsidiaries of the  Company, and Chairman of the Board, President, Chief Executive Officer and  Chief Operating Officer of AMG Holdings and Chairman of the Board and Chief  Executive Officer of Gelson’s, both subsidiaries of Arden-Mayfair. |

 

Mr. Briskin servedas Chairman 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 in his current positionswith the Company and its subsidiaries pursuant to an employment agreement whichexpires on January 1, 2009, although the term will be automaticallyextended for successive one year periods unless certain termination notices aregiven by either Mr. Briskin or the employers fifteen to eighteen months priorto the current expiration date.  See Item11.  Executive Compensation for furtherinformation.

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

# Audit Committee and Financial Expert

The Board ofDirectors has an Audit Committee comprised of three outside directors.  During 2006, the following individuals servedas members of the Audit Committee:

StevenRomick, Chairman

JohnG. Danhakl (from August 17, 2006)

RobertA. Davidow

Steven C. Gordon (throughJune 28, 2006)

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As a result of Steven C.Gordon’s decision not to stand for reelection as a Director at the AnnualMeeting of Stockholders held on June 28, 2006, a vacancy was created on theAudit Committee.  On August 17, 2006, theBoard of Directors of the Company elected John G. Danhakl to fill thevacancy.  Effective February 28, 2007,Mr. Danhakl resigned from the Audit Committee and the Board of Directorselected M. Mark Albert to replace him.

The Company’sBoard of Directors has determined that at least one person serving on the AuditCommittee is an “audit committee financial expert” as defined under Item 401(h)of Regulation S-K.  Steven Romick, theChairman of the Audit Committee, is independent as defined under applicable SECand the NASDAQ Stock Market (NASDAQ) rules and the Board of Directorsdetermined he was an “audit committee financial expert.”

Code of Ethics andBusiness Conduct

The Company hasadopted a Code of Ethics and Business Conduct applicable to all officers,management and employees.  The Code ofEthics and Business Conduct includes a Supplementary Code of Ethics forFinancial Professionals which is applicable to the chief executive officer,chief financial officer, principal accounting officer or controller andindividuals performing similar functions. A copy of the Code of Ethics and Business Conduct may be obtained,without charge, upon written request to the Assistant Secretary, Arden Group,Inc., P.O. Box 512256, Los Angeles, California 90051-0256.

Section 16(a)Beneficial Ownership Reporting Compliance

Section 16(a) ofthe Securities Exchange Act of 1934 requires that directors and executiveofficers of the Company, as well as persons holding more than ten percent (10%)of a registered class of the Company’s equity securities, file with the SECinitial reports of the ownership and reports of changes of ownership of Class Aand other equity securities of the Company. Based solely on review of copies of such reports furnished to theCompany and written representations that no other reports were required to befiled during the fiscal year ended December 30, 2006, all Section 16(a) filingrequirements applicable to the Company’s executive officers, directors andgreater than ten percent (10%) beneficial owners were complied with during suchfiscal year.

Item 11.                                             ExecutiveCompensation

CompensationDiscussion and Analysis

*The Company’s CompensationObjectives*

The Company’s generalobjective in setting executive compensation is to meet industry standards ofbase compensation, while providing an incentive program as part of the overallcompensation package to reward named executive officers and other executiveswho have made a contribution to the Company in the applicable period; torecognize, when applicable, the Company’s financial performance in bonus or otherincentive type payments; to reward those named executive officers and otherswho have performed up to and beyond the Company’s expectations for them; and toattract new executives who have the self-assurance of good job performance torecognize that a part of their overall compensation will be in a discretionarybonus structure.

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*Elements of the Company’sCompensation Program for Executives*

The Company’s compensationpackages for its named executives include elements of (1) a base salary; (2) adiscretionary or formula bonus; (3) a Company contribution to the employee’saccount in the Arden Group, Inc. 401(k) Retirement Savings Plan (401(k) Plan);(4) a medical benefits program; (5) possible participation in the Company’sSARs program; and (6) other minor benefits.

*Reasons for Including EachElement of Executive Compensation*

It is the Company’sphilosophy to reward its named executives at a level commensurate withexecutives at other companies in the upscale supermarket industry in SouthernCalifornia including a significant portion of performance-based compensation.  All executives other than the Company’s ChiefExecutive Officer (CEO) are employed on an at-will basis.  The CEO is the only executive with anemployment agreement as described below.

The Company currently has nostock options outstanding and does not presently plan on granting stockoptions.  Instead, it provides incentiveto certain named executive officers and other executives with participation inthe Company’s SARs program.  Typically,the Company’s CEO or certain other executives will periodically make a requestfor the Company to consider awarding SARs to certain employees.  The request(s) are typically brought beforethe Board of Directors to consider.  Inawarding SARs units, the Board takes into account the balance between theexecutive’s base salary level, past bonuses and the more long-term nature ofthe SARs program. Overall, the Company believes that the majority of thecompensation package should be in current compensation, but that there shouldbe a meaningful level of longer term rewards, such as contributions to the401(k) Plan and the SARs program.  Eachcase is discussed on a case by case, individual basis.  Also taken into account are the executive’sperformance, the Company’s performance and any other SARs units the particularexecutive in question may have.  SARsissued to date entitle the holder to receive upon exercise thereof the excessof the fair market value of a share of Class A on the date of exercise over thefair market value of such share on the date granted.  The SARs vest 25% each year beginning at theend of the first year and expire five years from the date of grant.  The CEO has never participated in the SARsprogram.

*Named Executive Officers’Compensation*

Bernard Briskin, Chairman ofthe Board of Directors, President and CEO of the Company has an employmentagreement (Employment Agreement) with the Company dating back to 1988.  The term of the Employment Agreementcurrently expires on January 1, 2009 and is automatically extended forsuccessive periods of one fiscal year unless either the Company and itssubsidiaries, which are parties to the Employment Agreement, or Mr. Briskingives notice of termination no less than fifteen months and no more thaneighteen months prior to the date upon which the then current term of theEmployment Agreement will expire.

The Employment Agreementpresently provides for 2007 base compensation of $647,282 which is adjustedeach year based on the increase in the Consumer Price Index, subject to amaximum annual increase of 4%, together with incentive formula basedcompensation predicated upon the Company’s pre-tax profits.  In addition, it provides for participation inthe Company’s medical plan, the use of a Company-owned car and an annualuninsured medical expense reimbursement

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of up to $200,000 for Mr.Briskin and his immediately family.  In2006, Mr. Briskin’s overall compensation was $2,082,516 which included a basesalary of $635,837 and incentive formula based compensation of $1,398,088.  Accordingly, 67% of Mr. Briskin’s overallcompensation is primarily incentive based. Mr. Briskin’s Employment Agreement provides that at such time as hisbase salary and bonus cease to accrue under the Employment Agreement for anyreason other than his breach of the Employment Agreement or termination of hisemployment for cause, the Company will thereafter pay him on a monthly basis inarrears, as long as he lives, an amount per annum equal to 25% of his averagebase salary and bonus earned in the last three full fiscal years prior to thecessation of his employment.  The Companywould also continue to provide Mr. Briskin during his lifetime with healthinsurance benefits and an automobile allowance equivalent to that which theCompany then grants to its senior executives and an annual uninsured medicalexpense reimbursement of up to $200,000 for Mr. Briskin and his immediatefamily.  At each time that modificationswere made to Mr. Briskin’s Employment Agreement, the Company carefullyevaluated the effects of Internal Revenue Code Section 162(m). The terms of theEmployment Agreement were subject to review during the 2003 fiscal year by theCompensation Committee of the Board of Directors.  During the review, discussions took placebetween Mr. Briskin and the Committee concerning amendments to certainprovisions of the Employment Agreement, but no amendments have yet beeneffected.

The Company’s other namedexecutive officer, Ms. Laura J. Neumann, received total compensation of$182,740 in 2006, consisting of a base salary of $136,620, a bonus of $25,000and other benefits amounting to $21,120. In addition, Ms. Neumann presently holds 1,750 units of SARs which wereawarded to her in 2003.  No additionalunits were awarded to her in 2006 and she exercised SARs covering 875 units in2006.  Based on the price of the Company’sClass A on December 30, 2006, Ms. Neumann had equity in her unexercisedvested SARs units of $58,459.

*How Amounts and Formulas areDetermined by the Company*

Toward the end of each year,the Company’s CEO and certain executives recommend to the CompensationCommittee bonuses for each named executive officer (other than the CEO of theCompany who is the only executive with an employment agreement) and otherexecutives for the year then being completed and salaries for each for theupcoming year.  Those recommendations arethen reviewed by the Compensation Committee of the Company’s Board ofDirectors.  In reviewing and finalizingbonuses and salary adjustments, the CEO and the Compensation Committee reviewindividual performance and results, as well as the performance of the Companyoverall.

## General

The followingtable sets forth the total annual and long-term compensation paid oraccrued by the Company and its subsidiaries in connection with all businessesof the Company and its subsidiaries to or for the account of the CEO of theCompany, the person acting in a similar capacity as the principal financialofficer during the 2006 fiscal year and each other executive officer of theCompany whose total annual salary and bonus for the fiscal year ended December30, 2006 exceeded $100,000 in the aggregate:

32

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**SummaryCompensation Table for 2006**
| **Name and  Principal Position**     | ** ** | **Year** | ** ** | **Salary  ($)** | ** ** | **Bonus  ($)** | ** ** | **Option  Awards  ($)** | ** ** | **Non-Equity  Incentive Plan  Compensation  ($)** | ** ** | **All Other  Compensation  ($)(3)** | ** ** | **Total  ($)** | ** ** |
|-------------------------------------------|------------|----------|------------|-----------------|------------|----------------|------------|-------------------------|------------|--------------------------------------------------------|------------|------------------------------------------|------------|----------------|------------|
| Bernard Briskin,  Chief Executive Officer |       | 2006     |       | 635,837         |       | (1             | )          | 0                       |       | 1,398,088                                              |       | 48,591                                   |       | 2,082,516      |       |
|                                      |       |     |       |            |       |           |       |                    |       |                                                   |       |                                     |       |           |       |
| Laura J. Neumann (2)                      |       | 2006     |       | 136,620         |       | 25,000         |       | 0                       |       | 0                                                      |       | 21,120                                   |       | 182,740        |       |

----

(1)                      The amount of Mr. Briskin’s bonus isdetermined under a formula based on the Company’s pre-tax profits and is shownunder the Non-Equity Incentive Plan Compensation column of this chart.  Mr. Briskin’s Employment Agreement providesfor an annual bonus equal to 21⁄2% of the Company’s first $2,000,000 of pre-taxprofits (as defined in the Employment Agreement) plus 31⁄2% of pre-tax profits inexcess of $2,000,000.

(2)                      During the Company’s 2006 fiscal year, it didnot have a Chief Financial Officer and Ms. Neumann, Senior Director ofFinancial Reporting and Compliance, acted in a similar capacity as thePrincipal Financial Officer of the Company.

(3)                      The following table sets forth the componentsof  All Other Compensation included inthe Summary Compensation Table for 2006:
| ** **       | ** ** | **Medical**        | ** ** | ** **        | ** ** | ** **    | ** ** | **Pay in**  | ** ** | ** ** | ** ** |
|------------------|------------|--------------------|------------|-------------------|------------|---------------|------------|------------------|------------|------------|------------|
| ** **       | ** ** | **Expense**        | ** ** | **401(k)**        | ** ** | **Auto**      | ** ** | **Lieu of** | ** ** | ** ** | ** ** |
| ** **       | ** ** | **Reimbursements** | ** ** | **Plan (1)** | ** ** | **Allowance** | ** ** | **Vacation**     | ** ** | **Total**  | ** ** |
| Bernard Briskin  |       | $                  | 24,010     |              | $          | 17,600        |       | $                | 6,981      |       | $          | 0 |   | $ | 48,591 |   |
| Laura J. Neumann |       | 0                  |       | 16,741            |       | 0             |       | 4,379            |       | 21,120     |       |
|             |       | $                  | 24,010     |              | $          | 34,341        |       | $                | 6,981      |       | $          | 4,379 |   | $ | 69,711 |   |

----

(1)       Includes Companydiscretionary contributions to the 401(k) Plan.

EmploymentAgreement and Payment Upon Termination

The compensationof Mr. Briskin, the CEO of the Company, is established under an EmploymentAgreement, as amended, which currently expires on January 1, 2009.  The Employment Agreement provides that, uponthe expiration of the initial term on January 1, 2004, the term thereof isautomatically extended for successive periods of one fiscal year unless eitherthe Company and its subsidiaries or Mr. Briskin gives notice of termination notless than fifteen months and no more than eighteen months prior to the dateupon which the then current term of the Employment Agreement will expire.  Pursuant to the terms of the EmploymentAgreement, Mr. Briskin’s base salary increases on January 1 of each yearbased upon increases in the Consumer Price Index subject to a maximum annualincrease of 4%.  His annual bonus isequal to 21⁄2% ofthe Company’s first $2,000,000 of pre-tax profits (as defined in the Employment

33

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Agreement) plus 31⁄2% of pre-tax profits in excess of$2,000,000.  The Employment Agreementprovides for an annual medical expense reimbursement up to $200,000 for Mr.Briskin and his immediate family.  Theterms of the Employment Agreement were subject to review during the 2003 fiscalyear by the Compensation Committee of the Board of Directors.  During the review, discussions took placebetween Mr. Briskin and the Committee concerning amendments to certainprovisions of the Employment Agreement, but no amendments have yet beeneffected.

Mr. Briskin’s Employment Agreement provides that at such time as hisbase salary and bonus cease to accrue under the Employment Agreement for anyreason other than his breach of the Employment Agreement or termination of hisemployment for cause, the Company will thereafter pay him on a monthly basis inarrears, as long as he lives, an amount per annum equal to 25% of his averagebase salary and bonus earned in the last three full fiscal years prior to thecessation of his employment.  The Companywould also continue to provide Mr. Briskin during his lifetime with healthinsurance benefits and an automobile allowance equivalent to that which theCompany then grants to its senior executives and an annual uninsured medicalexpense reimbursement of up to $200,000 for Mr. Briskin and his immediatefamily.  Assuming that as of December 29,2006, the last business day of the Company’s fiscal year ended December 30,2006, the Company’s obligation to make these payments was triggered, theCompany would be obligated to pay Mr. Briskin $40,004 per month on the firstday of each month beginning on February 1, 2007 and ending upon his death andto provide him with an automobile allowance which would be approximately$25,000 per year and health insurance benefits and uninsured medical expensereimbursements up to $200,000 per year for him and his immediate family.  For accrual purposes, it is assumed that thecost of the health insurance benefits and the uninsured medical reimbursementwould aggregate $200,000 per year.

StockAppreciation Rights

The Company has granted SARs covering shares of the Company’s Class Ato non-employee directors and certain officers and employees of theCompany.  Each SAR entitles the holder toreceive upon exercise thereof the excess of the fair market value of a share ofClass A on the date of exercise over the fair market value of such share on thedate granted.  The SARs vest 25% eachyear beginning at the end of the first year and expire five years from the dateof grant.  No SARs were granted toexecutive officers during 2006.

The following table provides information as to outstanding SARs held bynamed executive officers as of December 30, 2006:

**Outstanding SAR Awards at Fiscal Year-End for 2006**
| **Name**              | ** ** | **Number of Securities  Underlying  Unexercised  SARs (#)  Exercisable** | ** ** | **Number of Securities  Underlying  Unexercised  SARs (#)  Unexercisable** | ** ** | **SARs  Exercise  Price  ($)** | ** ** | **SARs  Expiration Date** | ** ** |
|-----------------------|------------|-----------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------|------------|--------------------------------|------------|--------------------------------|------------|
|                  |       |                                                                                    |       |                                                                                      |       |                           |       |                           |       |
| Laura J. Neumann  (1) |       | 875                                                                                     |       | 875                                                                                       | (2)        | 57.00                          |       | 12/5/08                        |       |

----

(1)           Acting in a similar capacity as thePrincipal Financial Officer.

(2)           These SARs will vest on December 5,2007.

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The following tableprovides information on the exercise of SARs by the named executive officer in2006:

**SARExercises 2006**
| ** **           | ** ** | **SAR Awards** | ** ** |
|----------------------|------------|----------------|------------|
| **Name**             | ** ** | ** **     | ** ** | **Number of Shares  Underlying SARs Exercised (#)** | ** ** | **Value Realized on  Exercise ($)** | ** ** |
| Laura J. Neumann (1) |       | 875            |       | 43,258 | (2) |
|                      |            |                |            |  |  |  |  |

----

(1)           Acting in a similar capacity as thePrincipal Financial Officer.

(2)                                  Difference between the fair market value of ashare of Class A on the date of exercise and the fair market value on the dateof grant.

Remuneration of Directors

The followingtable provides information as to director compensation for the year endedDecember 30, 2006:

**DirectorCompensation for 2006**
| **Name**            | ** ** | **Fees Earned or  Paid in Cash ($)** | ** ** | **SAR Awards  ($)(1)** | ** ** | **All Other  Compensation  ($)** | ** ** | **Total  ($)** | ** ** |
|---------------------|------------|---------------------------------------------------------------|------------|-----------------------------|------------|---------------------------------------|------------|----------------|------------|
|                |       |                                                          |       |                        |       |                                  |       |           |       |
| John G. Danhakl     |       | 50,000                                                        |       | 0                           |       | 0                                     |       | 50,000         |       |
| Robert A.  Davidow  |       | 54,000                                                        |       | 0                           |       | 0                                     |       | 54,000         |       |
| Kenneth A.  Goldman |       | 30,000                                                        |       | 0                           |       | 0                                     |       | 30,000         |       |
| Steven C. Gordon    |       | 27,000                                                        |       | 0                           |       | 0                                     |       | 27,000         |       |
| Steven Romick       |       | 58,000                                                        |       | 0                           |       | 0                                     |       | 58,000         |       |

----

(1)                As of December 30,2006, each of the directors held SARs covering 10,000 shares of Class A, exceptMr. Romick who held SARs covering 17,500 shares of Class A.  No SARs were granted to directors during2006.

Non-employeedirectors are compensated for their services as directors at an annual rate of$24,000, plus $1,000 for each Board meeting attended and $1,000 for attendanceat each committee meeting.  Non-employeedirectors who serve as committee chairmen are entitled to an additional $6,000per year.  Directors serving on the AuditCommittee receive an additional $12,000 per year and the Chairman of the AuditCommittee receives an additional $6,000 per

35

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year.  Mr. Briskin is an employee of theCompany and does not receive the compensation otherwise payable to directors.

Except for Mr.Albert, each of the non-employee directors presently hold SARs covering sharesof Class A.  When the SARs are exercised,each unit entitles the holder to receive the excess of the fair market value ofa share of Class A on the date of exercise over the fair market value on thedate of grant.  Units vest 25% each yearbeginning at the end of the first year and expire five years from the date ofgrant.

Compensation Committee Interlocks and Insider Participation

The Board of Directorshas a Compensation Committee.  In 2006,the Compensation Committee was comprised of the following directors, none ofwhom are or have been officers or employees of the Company:

John G. Danhakl, Chairman

Robert A. Davidow

Steven C. Gordon (through June 28, 2006)

CompensationCommittee Report

TheCompensation Committee has reviewed and discussed the Compensation Discussionand Analysis required by Item 402(b) of Regulation S-K with management of theCompany and based on such review and discussions, the Compensation Committeerecommended to the Board of Directors that the Compensation Discussion andAnalysis be included in the Company’s annual report on Form 10-K.

John G. Danhakl, Chairman

Robert A. Davidow

Members of theCompensation Committee

Theforegoing Compensation Committee Report shall not be deemed to be “solicitingmaterial,” or to be “filed” with the SEC or be subject to Regulation 14A or14C, other than as provided in Item 407(e)(5)(i) of Regulation S-K, or to theliabilities of section 18 of the Securities Exchange Act of 1934, except to theextent that the Company specifically requests that the information be treatedas soliciting material or specifically incorporates it by reference into adocument filed under the Securities Act of 1933 or the Securities Exchange Actof 1934.

Item12.                  SecurityOwnership of Certain Beneficial Owners and Management and Related StockholderMatters

Security Ownershipof Certain Beneficial Owners

The following table sets forth information as of March2, 2007 related to the stockholdings of persons known to the Company to be thebeneficial owner of more than 5% of the Class A of the Company, its onlyoutstanding class of equity securities:

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| **Name and Address of Beneficial Owner**                                                                                 | ** ** | **Amount and  Nature of Beneficial  Ownership (1)** | ** ** | **Percent of Class** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------|------------|--------------------------------|------------|
|                                                                                                                                              |       |                                                                    |       |                           |       |
| Bernard Briskin  Arden Group, Inc.  9595 Wilshire Boulevard, Suite 411  Beverly Hills, CA 90212                                                   |       | 1,899,195                                                               | (2)(3)     | 60.1                           | %          |
|                                                                                                                                              | * *   | * *                                                                | * *   | * *                       | * *   |
| City National Bank, as Trustee of the Company’s  Stock Bonus Plan and Trust  555 South Flower Street, 18th Floor  Los Angeles, CA 90071 |       | 166,222                                                                 |       | 5.3                            | %          |
|                                                                                                                                              |       |                                                                    |       |                           |       |
| Royce &  Associates, LLC  1414 Avenue of the Americas  New York, NY 10019                                                                     |       | 194,500                                                                 | (4)        | 6.2                            | %          |

----

(1)                                  Unless otherwise indicated to thecontrary, all beneficial owners have sole investment and voting power.  For purposes of this table, 1,357,200treasury shares of Class A are not deemed to be outstanding.

(2)                                  This amount includes the followingshares:  (i) 186,096 shares held in trust(of which Mr. Briskin is the trustee) for the benefit of Mr. Briskin and hischildren and (ii) an aggregate of 103,012 shares held by Mr. Briskin’s spouseor in her Individual Retirement Accounts for her benefit.  Mr. Briskin disclaims any beneficialownership of the shares set forth in clause (ii) hereof and has no voting orinvestment power with respect to these shares. Nothing herein should be construed as an admission that Mr. Briskin isin fact the beneficial owner of these shares.

(3)                                  This amount excludes 33,004 shares ofClass A held by The Judy and Bernard Briskin Foundation of which Mr. Briskinserves as a co-trustee.  Mr. Briskindisclaims any beneficial ownership with respect to these shares.

(4)                                  Based upon Schedule 13-G filed on January17, 2007 with the SEC.

Security Ownership ofManagement

The following table shows the beneficial ownership ofthe Company’s Class A, its only outstanding class of equity securities, by eachdirector, executive officer and by all directors and executive officers as agroup as of March 2, 2007:

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| **Name of Beneficial Owner**                  | ** ** | **Amount and  Nature of Beneficial  Ownership (1)** | ** ** | **Percent of Class** | ** ** |
|--------------------------------------------------------------|------------|-------------------------------------------------------------------------|------------|--------------------------------|------------|
|                                                         |       |                                                                    |       |                           |       |
| M. Mark Albert                                               |       | 0                                                                       |       |                           |       |
| Bernard Briskin                                              |       | 1,899,195                                                               | (2)        | 60.1                           | %          |
| John G. Danhakl                                              |       | 0                                                                       |       |                           |       |
| Robert A.  Davidow                                           |       | 0                                                                       |       |                           |       |
| Kenneth A.  Goldman                                          |       | 127,200                                                                 | (3)        | 4.0                            | %          |
| Steven Romick                                                |       | 0                                                                       |       |                           |       |
|                                                         |       |                                                                    |       |                           |       |
| All directors and  executive officers as a group (6 persons) |       | 2,026,395                                                               | (2)(3)     | 64.1                           | %          |

----

(1)                                  Unless otherwise indicated to thecontrary, all beneficial owners have sole investment and voting power.  The number of outstanding shares of Class A,on which the percentages shown in this table are based, does not include1,357,200 treasury shares of the Company’s Class A.

(2)                                  See notes (2) and (3) to the table underSecurity Ownership of Certain Beneficial Owners set forth above.

(3)                                  Of these shares, 39,200 are held in trustby Mr. Goldman, as trustee for the grandchildren of Mr. and Mrs. Briskin and88,000 are held by limited partnerships, of which Mr. Goldman is one of thegeneral partners and the limited partners are trusts of which the beneficiariesare members of Mr. and Mrs. Briskin’s family.

Equity Compensation Plan Information

The following table provides information related to the Company’sequity compensation plans as of December 30, 2006:
| ** **                                                      | ** ** | **(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                 |       | 0                                                                                                                                                    |       | 0                                                                                                           |       | 28,500                                                                                                                                                                                                       |       |

----

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

38

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In 1998, theCompany adopted a Stock Option Plan which was not submitted to security holdersfor approval and initially provided for the granting of stock options to keyemployees to purchase up to 35,000 shares of the Company’s Class A.  The Stock Option Plan was  amended in fiscal 2000 to increase the 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 on the date of grant.  As ofDecember 30, 2006, there were no stock options issued and outstanding.

Item 13.              Certain Relationships, RelatedTransactions and Director Independence

CertainRelationships and Related Transactions

A director of theCompany, Mr. Goldman, is a partner of a law firm which performs legal servicesfor the Company.

Review, Approvalor Ratification of Transactions with Related Parties

The Company has a policy to enter into or ratify a related partytransaction only if the Audit Committee has approved or ratified suchtransaction in accordance with the guidelines and determined that thetransaction is on terms comparable to those that could be obtained inarms-length dealings with a non-related third party.

 For purposes of this policy, arelated party transaction is a transaction or series of transactions betweenthe Company and an executive officer or director, a stockholder holding inexcess of 5% of the Company’s outstanding voting stock, a member of theimmediate family of an executive officer, director or 5% holder, an entityowned or controlled by any of the foregoing or in which any of the foregoinghas a substantial ownership interest or controls such entity.  Excluded from related party transactions aretransactions generally available to all employees, transactions involving lessthan $50,000 when aggregated with a series of similar transactions andcompensation matters approved by the Compensation Committee or the Board ofDirectors.

The Company’s policies and procedures for review, approval orratification of related party transactions are in writing.

DirectorsIndependence

TheBoard of Directors has determined that M. Mark Albert, John G. Danhakl, RobertA. Davidow and Steven Romick are independent directors as defined in thelisting standards for NASDAQ.  Thesedirectors constitute a majority of the members of the Board of Directors.  All of the directors who are members of theAudit Committee and Compensation Committee of the Board of Directors areindependent in compliance with the independent standards applicable for membersof those specific committees in the listing standards for NASDAQ.  In reaching the conclusion that Mr. Romick isindependent, the Board of Directors considered the fact that he

39

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hasan ownership interest in and is an employee of a limited liability company thatis the investment advisor to a group of mutual funds, one of which the Companyhas an investment in.  The mutual fund inwhich the Company has invested is not one that is managed by Mr. Romick.  The Company’s investment constituted lessthan 1.0% of the total funds held by the mutual fund as of December 30, 2006.

BernardBriskin and Kenneth A. Goldman are members of the Nominating Committee and arenot independent as defined in the listing standards for NASDAQ, but the Companyqualifies as a “Controlled Company” under the NASDAQ Marketplace Rule4350(c)(5) as Mr. Briskin controls more than fifty percent (50%) of the votingpower of the Company.  As a ControlledCompany, the listing requirements for NASDAQ do not require that the members ofits Nominating Committee or the Compensation Committee be independent or that amajority of its directors be independent.

Item 14.              Principal Accountant Fees and Services

# Audit Fees

Audit fees include theaggregate fees billed for the audit of the Company’s annual consolidatedfinancial statements and the reviews of each of the quarterly consolidatedfinancial statements included in the Company’s Forms 10-Q.  The aggregate audit fees billed to theCompany by Moss were approximately $273,000 for fiscal 2006 and $541,000 by PwCfor fiscal 2005.

# Audit-Related Fees

Audit-related fees incurredin connection with the audit of the Company’s employee benefit plans by Mosstotaled approximately $19,000 and $18,000 in 2006 and 2005, respectively.

Tax Fees

Fees billed by Moss for taxservices in 2006 aggregated approximately $43,000, including $32,000 for taxreturn and compliance work and $11,000 for other projects.  Fees billed by PwC for tax services in 2005aggregated approximately $77,000, including $33,000 for tax return andcompliance work and $44,000 for other projects.

# All Other Fees

Other than the fees forservices described above, there were no additional fees billed by Moss or PwCin 2006 or 2005.

It is the policy of the Audit Committee to pre-approve all audit andnon-audit services provided by the Company’s independent registered publicaccounting firm.  The Audit Committeereviewed the above-described fees for non-audit services and considered whetherthe provision of those services is compatible with maintaining the independenceof Moss and PwC and concluded that both have maintained their independence.

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

41

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**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                      |       | 3/13/07    |
|       |       | Bernard Briskin, Chairman of the Board, |       |       |
|       |       | President and Chief Executive Officer   |       |       |

 

Pursuant to therequirements of the Securities Exchange Act of 1934, this report has beensigned below by the following persons on behalf of the registrant and in thecapacities and on the date indicated.
|            | ** ** | **Date**                                                                 |
|------------|------------|--------------------------------------------------------------------------|
| ** ** | ** ** | ** **                                                               |
|       |       | /s/BERNARD BRISKIN                                                       |   | 3/13/07 |
|       |       | Bernard Briskin, Director, Chairman of the Board,  President             |   |   |
|       |       | and Chief Executive Officer                                              |   |   |
|       |       | (Principal Executive Officer)                                            |   |   |
|       |       |                                                                     |   |   |
|       |       | /s/LAURA J. NEUMANN                                                      |   | 3/13/07 |
|       |       | Laura J. Neumann, Senior Director of Financial  Reporting and Compliance |   |   |
|       |       | (Principal Financial and Principal Accounting  Officer)                  |   |   |
|       |       |                                                                     |   |   |
|       |       | /s/M. MARK ALBERT                                                        |   | 3/13/07 |
|       |       | M. Mark Albert, Director                                                 |   |   |
|       |       |                                                                     |   |   |
|       |       | /s/JOHN G. DANHAKL                                                       |   | 3/13/07 |
|       |       | John G. Danhakl, Director                                                |   |   |
|       |       |                                                                     |   |   |
|       |       | /s/ROBERT A. DAVIDOW                                                     |   | 3/13/07 |
|       |       | Robert A. Davidow, Director                                              |   |   |
|       |       |                                                                     |   |   |
|       |       | /s/KENNETH A. GOLDMAN                                                    |   | 3/13/07 |
|       |       | Kenneth A. Goldman, Director                                             |   |   |
|       |       |                                                                     |   |   |
|       |       | /s/STEVEN ROMICK                                                         |   | 3/13/07 |
|       |       | Steven Romick, Director                                                  |   |   |

 

42

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**ARDEN GROUP, INC. AND CONSOLIDATED SUBSIDIARIES**

**INDEX TO CONSOLIDATED FINANCIAL STATEMENTS**
|                                                                        | ** **                                                                                            | ** ** |
|------------------------------------------------------------------------|-------------------------------------------------------------------------------------------------------|------------|
| Management’s  Report on Internal Control over Financial Reporting |                                                                                                  |       |
|                                                                   |                                                                                                  |       |
| Report  of Independent Registered Public Accounting Firm               |                                                                                                  |       |
|                                                                   |                                                                                                  |       |
| Financial Statements:                                                  |                                                                                                  |       |
|                                                                   | Consolidated Balance  Sheets, December 30, 2006 and December 31, 2005                                 |       |   |
|                                                                   | Consolidated  Statements of Operations and Comprehensive Income for fiscal years 2006, 2005  and 2004 |       |   |
|                                                                   | Consolidated  Statements of Stockholders’ Equity for fiscal years 2006, 2005 and 2004            |       |   |
|                                                                   | Consolidated  Statements of Cash Flows for fiscal years 2006, 2005 and 2004                           |       |   |
|                                                                   | Notes to  Consolidated Financial Statements                                                           |       |   |

 

The financial statementsinclude the Company’s subsidiaries (Arden-Mayfair, Inc. and MayfairRealty, Inc.) and the subsidiaries of Arden-Mayfair, Inc.

 

Schedules are omittedbecause of the absence of the conditions under which they are required.

43

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**Management’s Report on Internal Control over Financial Reporting**

The management of the Company is responsible for establishing andmaintaining adequate internal control over financial reporting.  The Company’s internal control over financialreporting is a process designed to provide reasonable assurance regarding thereliability of financial reporting and the preparation of financial statementsfor external purposes in accordance with accounting principles generallyaccepted in the United States.  Becauseof its inherent limitations, internal control over financial reporting may notprevent or detect misstatements.  Also,projections of any evaluation of effectiveness to future periods are subject tothe risk that controls may become inadequate because of changes in conditionsor that the degree of compliance with the policies or procedures maydeteriorate.

The Company’s management assessed the effectiveness of the Company’sinternal control over financial reporting as of December 30, 2006.  In making the assessment, it used thecriteria set forth by the Committee of Sponsoring Organizations of the TreadwayCommission in *Internal Control-Integrated Framework*.  Based on that assessment, managementconcluded that, as of December 30, 2006, the Company’s internal control overfinancial reporting is effective based on those criteria.

Management’s assessment of the effectiveness of the Company’s internalcontrol over financial reporting as of December 30, 2006, has been audited byMoss Adams LLP, an independent registered public accounting firm, as stated intheir report which appears on page 45.

44

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### **Report of Independent Registered Public AccountingFirm**

Board of Directors andStockholders ofArden Group, Inc. and Consolidated Subsidiaries

We have audited theaccompanying consolidated balance sheet of Arden Group, Inc. and ConsolidatedSubsidiaries (the Company) as of December 30, 2006, and the relatedconsolidated statements of operations and comprehensive income, stockholders’equity and cash flows for the year ended December 30, 2006. We also haveaudited management’s assessment, included in the accompanying Management’sReport on Internal Control Over Financial Reporting, that the Company maintainedeffective internal control over financial reporting as of December 30, 2006,based on criteria set forth by the Committee of Sponsoring Organizations of theTreadway Commission (COSO) in *Internal Control -Integrated Framework*.  TheCompany’s management is responsible for these financial statements, formaintaining effective internal control over financial reporting, and for itsassessment of the effectiveness of internal control over financial reporting.Our responsibility is to express an opinion on these financial statements, anopinion on management’s assessment, and an opinion on the effectiveness of theCompany’s internal control over financial reporting based on our audits.

We conducted our audit inaccordance with the standards of the Public Company Accounting Oversight Board(United States). Those standards require that we plan and perform the audit toobtain reasonable assurance about whether the financial statements are free ofmaterial misstatement and whether effective internal control over financialreporting was maintained in all material respects. Our audit of financialstatements included examining, on a test basis, evidence supporting the amountsand disclosures in the financial statements, assessing the accountingprinciples used and significant estimates made by management, and evaluatingthe overall financial statement presentation. Our audit of internal controlover financial reporting included obtaining an understanding of internalcontrol over financial reporting, evaluating management’s assessment, testingand evaluating the design and operating effectiveness of internal control, andperforming such other procedures as we considered necessary in thecircumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal controlover financial reporting is a process designed to provide reasonable assuranceregarding the reliability of financial reporting and the preparation offinancial statements for external purposes in accordance with generallyaccepted accounting principles. A company’s internal control over financialreporting includes those policies and procedures that (1) pertain to themaintenance of records that, in reasonable detail, accurately and fairlyreflect the transactions and dispositions of the assets of the company; (2)provide reasonable assurance that transactions are recorded as necessary topermit preparation of financial statements in accordance with generallyaccepted accounting principles, and that receipts and expenditures of thecompany are being made only in accordance with authorizations of management anddirectors of the company; and (3) provide reasonable assurance regardingprevention or timely detection of unauthorized acquisition, use, or dispositionof the company’s assets that could have a material effect on the financialstatements.

45

----

Because of its inherentlimitations, internal control over financial reporting may not prevent ordetect misstatements. Also, projections of any evaluation of effectiveness tofuture periods are subject to the risk that controls may become inadequatebecause of changes in conditions, or that the degree of compliance with thepolicies or procedures may deteriorate.

In our opinion, thefinancial statements referred to above present fairly, in all materialrespects, the consolidated financial position of Arden Group, Inc. andConsolidated Subsidiaries, as of December 30, 2006, and the consolidatedresults of its operations and its cash flows for the year then ended inconformity with accounting principles generally accepted in the United Statesof America. Also in our opinion, management’s assessment that Arden Group, Inc.and Consolidated Subsidiaries, maintained effective internal control overfinancial reporting as of December 30, 2006, is fairly stated, in all materialrespects, based on criteria set forth by the Committee of SponsoringOrganizations of the Treadway Commission (COSO) in *InternalControl - Integrated Framework*. Furthermore, in our opinion, Arden Group, Inc. and ConsolidatedSubsidiaries, maintained, in all material respects, effective internal controlover financial reporting as of December 30, 2006, based on criteria set forthby the Committee of Sponsoring Organizations of the Treadway Commission (COSO)in *Internal Control - Integrated Framework*.

As described in Note 10 tothe consolidated financial statements, the Company adopted a new principle ofaccounting for share-based payments in accordance with Financial AccountingStandards Board Statement No. 123(R), *Share-Based Payment*.

Moss Adams LLPLos Angeles, California March 13, 2007

46

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## **Report of Independent Registered PublicAccounting Firm**

To the Stockholders ofArden Group, Inc.:

In our opinion,the consolidated balance sheet as of December 31, 2005****andthe related consolidated statements of operations and comprehensive income,stockholder’s equity and cash flows for each of the two years in the periodended December 31, 2005 present fairly, in all material respects, the financialposition of Arden Group, Inc. and its subsidiaries at December 31, 2005, andthe results of their operations and their ** **cash flows for each of the twoyears in the period ended December 31, 2005, in conformity with accountingprinciples generally accepted in the United States of America. These financialstatements****are the responsibility of the Company’smanagement.  Our responsibility is toexpress an opinion on these financial statements based on our audits.  We conducted our audits of these statementsin accordance with the standards of the Public Company Accounting OversightBoard (United States).  Those standardsrequire that we plan and perform the audit to obtain reasonable assurance aboutwhether the financial statements are free of material misstatement.  An audit includes examining, on a test basis,evidence supporting the amounts and disclosures in the financial statements,assessing the accounting principles used and significant estimates made bymanagement, and evaluating the overall financial statement presentation.  We believe that our audits provide areasonable basis for our opinion.

PricewaterhouseCoopers LLP

Los Angeles, California

March 8, 2006

 

47

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**ARDEN GROUP, INC. AND CONSOLIDATED SUBSIDIARIES**

# **CONSOLIDATEDBALANCE SHEETS**

(In Thousands, ExceptShare and Per Share Data)
| ** **                                                                                                                                                                                                                     | ** ** | **December 30, 2006** | ** ** | **December 31, 2005** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------|------------|---------------------------------|------------|
| **Assets**                                                                                                                                                                                                                     |       |                            |       |                            |       |
| Current assets:                                                                                                                                                                                                                |       |                            |       |                            |       |
| Cash and cash  equivalents                                                                                                                                                                                                     |       | $                               | 36,842     |                            | $          | 36,338 |   |
| Investments                                                                                                                                                                                                                    |       | 18,667                          |       | 20,650                          |       |
| Accounts  receivable, net of allowance for doubtful accounts of $192 and $195 as of  December 30, 2006 and  December 31,  2005, respectively                                                                              |       | 5,749                           |       | 5,714                           |       |
| Inventories, net                                                                                                                                                                                                               |       | 19,881                          |       | 19,146                          |       |
| Deferred income  taxes                                                                                                                                                                                                         |       | 5,083                           |       | 4,348                           |       |
| Other current  assets                                                                                                                                                                                                          |       | 2,884                           |       | 2,568                           |       |
| Total current  assets                                                                                                                                                                                                          |       | 89,106                          |       | 88,764                          |       |
| Property, plant and  equipment, net                                                                                                                                                                                            |       | 47,772                          |       | 50,025                          |       |
| Deferred income taxes                                                                                                                                                                                                          |       | 5,187                           |       | 4,850                           |       |
| Other assets                                                                                                                                                                                                                   |       | 3,536                           |       | 3,388                           |       |
| Total assets                                                                                                                                                                                                                   |       | $                               | 145,601    |                            | $          | 147,027 |   |
| **Liabilities and Stockholders’  Equity**                                                                                                                                                                                 |       |                            |       |                            |       |
| Current liabilities:                                                                                                                                                                                                           |       |                            |       |                            |       |
| Accounts  payable, trade                                                                                                                                                                                                       |       | $                               | 18,877     |                            | $          | 19,662 |   |
| Federal and  state income taxes payable                                                                                                                                                                                        |       | 3,214                           |       | 3,919                           |       |
| Current portion  of long-term debt                                                                                                                                                                                             |       | 225                             |       | 221                             |       |
| Other current  liabilities                                                                                                                                                                                                     |       | 24,848                          |       | 23,658                          |       |
| Total current  liabilities                                                                                                                                                                                                     |       | 47,164                          |       | 47,460                          |       |
| Long-term debt                                                                                                                                                                                                                 |       | 1,228                           |       | 1,453                           |       |
| Deferred rent                                                                                                                                                                                                                  |       | 6,070                           |       | 5,796                           |       |
| Other liabilities                                                                                                                                                                                                              |       | 8,845                           |       | 9,998                           |       |
| Total  liabilities                                                                                                                                                                                                             |       | 63,307                          |       | 64,707                          |       |
| Commitments and  contingent liabilities (Notes 14 and 16)                                                                                                                                                                      |       |                            |       |                            |       |
| Stockholders’ equity:                                                                                                                                                                                                     |       |                            |       |                            |       |
| Common Stock,  Class A, $.25 par value; authorized 10,000,000 shares; 4,518,298 and  4,736,202 shares issued and outstanding as of December 30, 2006 and December  31, 2005, respectively, including 1,357,200 treasury shares |       | 1,129                           |       | 1,184                           |       |
| Capital surplus                                                                                                                                                                                                                |       | 5,378                           |       | 5,638                           |       |
| Unrealized loss  on investments                                                                                                                                                                                                |       | (332                            | )          | (293                            | )          |
| Retained  earnings                                                                                                                                                                                                             |       | 79,872                          |       | 79,544                          |       |
|                                                                                                                                                                                                                           |       | 86,047                          |       | 86,073                          |       |
| Treasury stock,  1,357,200 shares at cost                                                                                                                                                                                      |       | (3,753                          | )          | (3,753                          | )          |
| Total  stockholders’ equity                                                                                                                                                                                               |       | 82,294                          |       | 82,320                          |       |
| Total liabilities and  stockholders’ equity                                                                                                                                                                               |       | $                               | 145,601    |                            | $          | 147,027 |   |

 

*Theaccompanying notes are an integral part of these consolidated financialstatements.*

48

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**ARDENGROUP, INC. AND CONSOLIDATED SUBSIDIARIES**

**CONSOLIDATED STATEMENTS OF OPERATIONS**

# **ANDCOMPREHENSIVE INCOME**

(In Thousands, Except Shareand Per Share Data)
| ** **                                                                                       | ** ** | **2006**  | ** ** | **2005**  | ** ** | **2004**  | ** ** |
|--------------------------------------------------------------------------------------------------|------------|-----------|------------|-----------|------------|-----------|------------|
| Sales                                                                                            |       | $         | 482,737    |      | $          | 470,354   |       | $ | 502,898 |   |
| Cost of sales  (1)                                                                               |       | 296,401   |       | 289,931   |       | 310,582   |       |
| Gross profit (1)                                                                                 |       | 186,336   |       | 180,423   |       | 192,316   |       |
| Selling, general  and administrative expense (1)                                                 |       | 149,656   |       | 148,607   |       | 157,737   |       |
| Operating income                                                                                 |       | 36,680    |       | 31,816    |       | 34,579    |       |
| Interest and  dividend income                                                                    |       | 2,560     |       | 1,722     |       | 1,986     |       |
| Other income  (expense), net                                                                     |       | 2         |       | 36        |       | 1,787     |       |
| Interest expense                                                                                 |       | (123      | )          | (152      | )          | (182      | )          |
| Income before income taxes                                                                       |       | 39,119    |       | 33,422    |       | 38,170    |       |
| Income tax  provision                                                                            |       | 15,895    |       | 13,571    |       | 15,498    |       |
| Net income                                                                                       |       | $         | 23,224     |      | $          | 19,851    |       | $ | 22,672 |   |
| Other  comprehensive loss, net of tax:                                                           |       |      |       |      |       |      |       |
| Unrealized loss from available-for-sale securities:                                              |       |      |       |      |       |      |       |
| Net unrealized holding loss arising during the  period                                           |       | (38       | )          | (381      | )          | (161      | )          |
| Reclassification adjustment for realized gain  included in net income                            |       | (1        | )          | (11       | )          | (86       | )          |
| Net unrealized loss, net of income tax benefit of  $28 for 2006, $269 for 2005 and $169 for 2004 |       | (39       | )          | (392      | )          | (247      | )          |
| Comprehensive income                                                                             |       | $         | 23,185     |      | $          | 19,459    |       | $ | 22,425 |   |
| Net income per  common share:                                                                    |       |      |       |      |       |      |       |
| Basic – Class A Common Stock                                                                |       | $         | 7.16       |      | $          | 5.87      |       | $ | 7.00 |   |
| Basic – Class B Common Stock                                                                |       | N/A       |       | N/A       |       | $         | 6.13       |   |
| Diluted                                                                                          |       | $         | 7.16       |      | $          | 5.87      |       | $ | 6.70 |   |
| Weighted average  common shares outstanding:                                                     |       |      |       |      |       |      |       |
| Basic – Class A Common Stock                                                                |       | 3,241,805 |       | 3,381,051 |       | 2,217,675 |       |
| Basic – Class B Common Stock                                                                |       | N/A       |       | N/A       |       | 1,164,977 |       |
| Diluted                                                                                          |       | 3,241,805 |       | 3,381,051 |       | 3,382,652 |       |

 

*The accompanying notes are an integral part of these consolidatedfinancial statements.*

----

(1)                                  Grossprofit for years prior to 2006 reflects a reclassification of distribution,purchasing, advertising and occupancy costs from selling, general andadministrative expense to cost of sales. See Note 1 of Notes to Consolidated Financial Statements for furtherinformation.

49

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**ARDEN GROUP, INC. AND CONSOLIDATED SUBSIDIARIES**

**CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY**

(In Thousands, Except Share Data)
| ** **                               | ** ** | **Common Stock** | ** ** | **Common Stock** | ** ** | ** **  | ** ** | **Unrealized Gain** | ** ** | ** **   | ** ** | ** **              | ** ** | ** **             | ** ** | **Total**  | ** ** |
|------------------------------------------|------------|-----------------------|------------|-----------------------|------------|-------------|------------|--------------------------|------------|--------------|------------|-------------------------|------------|------------------------|------------|------------|------------|
| ** **                               | ** ** | **Class A**      | ** ** | **Class B**      | ** ** | **Capital** | ** ** | **(Loss) on**       | ** ** | **Retained** | ** ** | **Treasury Stock** | ** ** | **Stockholders’** | ** ** |
| ** **                               | ** ** | **Shares**            | ** ** | **Amount**            | ** ** | **Shares**  | ** ** | **Amount**               | ** ** | **Surplus**  | ** ** | **Investments**         | ** ** | **Earnings**           | ** ** | **Shares** | ** ** | **Amount** | ** ** | **Equity** | ** ** |
| **Balance,  January 3, 2004**            |       | 3,374,868             |       | $                     | 844        |        | 1,363,584  |                     | $          | 341          |       | $                       | 5,547      |                   | $          | 346        |       | $ | 111,675 |   | 1,357,200 |   | $ | (3,753 | ) | $ | 115,000 |   |
|                                     |       |                  |       |                  |       |        |       |                     |       |         |       |                    |       |                   |       |       |       |   |   |   |   |
| Conversion of  Class B to Class A        |       | 1,363,584             |       | 341                   |       | (1,363,584  | )          | (341                     | )          | 0            |       | 0                       |       | 0                      |       | 0          |       | 0 |   | 0 |   |
| Shares issued  under Stock Option Plan   |       | 2,000                 |       | 0                     |       | 0           |       | 0                        |       | 96           |       | 0                       |       | 0                      |       | 0          |       | 0 |   | 96 |   |
| Net unrealized  loss                     |       | 0                     |       | 0                     |       | 0           |       | 0                        |       | 0            |       | (247                    | )          | 0                      |       | 0          |       | 0 |   | (247 | ) |
| Dividends  declared                      |       | 0                     |       | 0                     |       | 0           |       | 0                        |       | 0            |       | 0                       |       | (70,945                | )          | 0          |       | 0 |   | (70,945 | ) |
| Net income                               |       | 0                     |       | 0                     |       | 0           |       | 0                        |       | 0            |       | 0                       |       | 22,672                 |       | 0          |       | 0 |   | 22,672 |   |
|                                     |       |                  |       |                  |       |        |       |                     |       |         |       |                    |       |                   |       |       |       |   |   |   |   |
| **Balance,  January 1, 2005**            |       | 4,740,452             |       | 1,185                 |       | 0           |       | 0                        |       | 5,643        |       | 99                      |       | 63,402                 |       | 1,357,200  |       | (3,753 | ) | 66,576 |   |
|                                     |       |                  |       |                  |       |        |       |                     |       |         |       |                    |       |                   |       |       |       |   |   |   |   |
| Purchase and  retirement of common stock |       | (4,250                | )          | (1                    | )          | 0           |       | 0                        |       | (5           | )          | 0                       |       | (328                   | )          | 0          |       | 0 |   | (334 | ) |
| Net unrealized  loss                     |       | 0                     |       | 0                     |       | 0           |       | 0                        |       | 0            |       | (392                    | )          | 0                      |       | 0          |       | 0 |   | (392 | ) |
| Dividends  declared                      |       | 0                     |       | 0                     |       | 0           |       | 0                        |       | 0            |       | 0                       |       | (3,381                 | )          | 0          |       | 0 |   | (3,381 | ) |
| Net income                               |       | 0                     |       | 0                     |       | 0           |       | 0                        |       | 0            |       | 0                       |       | 19,851                 |       | 0          |       | 0 |   | 19,851 |   |
| ** **                               |       |                  |       |                  |       |        |       |                     |       |         |       |                    |       |                   |       |       |       |   |   |   |   |
| **Balance,  December 31, 2005**          |       | 4,736,202             |       | 1,184                 |       | 0           |       | 0                        |       | 5,638        |       | (293                    | )          | 79,544                 |       | 1,357,200  |       | (3,753 | ) | 82,320 |   |
|                                     |       |                  |       |                  |       |        |       |                     |       |         |       |                    |       |                   |       |       |       |   |   |   |   |
| Purchase and  retirement of common stock |       | (217,904              | )          | (55                   | )          | 0           |       | 0                        |       | (260         | )          | 0                       |       | (19,684                | )          | 0          |       | 0 |   | (19,999 | ) |
| Net unrealized  loss                     |       | 0                     |       | 0                     |       | 0           |       | 0                        |       | 0            |       | (39                     | )          | 0                      |       | 0          |       | 0 |   | (39 | ) |
| Dividends  declared                      |       | 0                     |       | 0                     |       | 0           |       | 0                        |       | 0            |       | 0                       |       | (3,212                 | )          | 0          |       | 0 |   | (3,212 | ) |
| Net income                               |       | 0                     |       | 0                     |       | 0           |       | 0                        |       | 0            |       | 0                       |       | 23,224                 |       | 0          |       | 0 |   | 23,224 |   |
|                                     |       |                  |       |                  |       |        |       |                     |       |         |       |                    |       |                   |       |       |       |   |   |   |   |
| **Balance, December 30, 2006**           |       | 4,518,298             |       | $                     | 1,129      |        | 0          |                     | $          | 0            |       | $                       | 5,378      |                   | $          | (332       | )          | $ | 79,872 |   | 1,357,200 |   | $ | (3,753 | ) | $ | 82,294 |   |

 

*Theaccompanying notes are an integral part of these consolidated financialstatements.*

50

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**ARDEN GROUP, INC. AND CONSOLIDATED SUBSIDIARIES**

# **CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

(In Thousands)
| ** **                                              | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|---------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Cash flows from  operating activities:                  |       |     |       |     |       |     |       |
| Cash received from customers                            |       | $        | 482,645    |     | $          | 470,646  |       | $ | 503,553 |   |
| Cash paid to suppliers and employees                    |       | (440,735 | )          | (426,372 | )          | (467,717 | )          |
| Interest and dividends received                         |       | 2,580    |       | 1,613    |       | 1,813    |       |
| Interest paid                                           |       | (125     | )          | (155     | )          | (184     | )          |
| Income taxes paid                                       |       | (17,645  | )          | (12,653  | )          | (26,046  | )          |
| Net cash provided by operating activities               |       | 26,720   |       | 33,079   |       | 11,419   |       |
| Cash flows from  investing activities:                  |       |     |       |     |       |     |       |
| Capital expenditures                                    |       | (4,868   | )          | (6,390   | )          | (12,641  | )          |
| Purchases of investments                                |       | (827     | )          | (713     | )          | (15,737  | )          |
| Sales of investments                                    |       | 2,751    |       | 5,579    |       | 25,070   |       |
| Proceeds from the sale of property, plant and equipment |       | 215      |       | 52       |       | 54       |       |
| Net cash used in investing activities                   |       | (2,729   | )          | (1,472   | )          | (3,254   | )          |
| Cash flows from  financing activities:                  |       |     |       |     |       |     |       |
| Purchase and retirement of Company stock                |       | (19,999  | )          | (334     | )          | 0        |       |
| Principal payments under capital lease obligations      |       | (221     | )          | (216     | )          | (246     | )          |
| Proceeds from exercise of stock options                 |       | 0        |       | 0        |       | 58       |       |
| Cash dividends paid                                     |       | (3,267   | )          | (3,382   | )          | (70,911  | )          |
| Net cash used in financing activities                   |       | (23,487  | )          | (3,932   | )          | (71,099  | )          |
| Net increase  (decrease) in cash and cash equivalents   |       | 504      |       | 27,675   |       | (62,934  | )          |
| Cash and cash  equivalents at beginning of year         |       | 36,338   |       | 8,663    |       | 71,597   |       |
| Cash and cash  equivalents at end of year               |       | $        | 36,842     |     | $          | 36,338   |       | $ | 8,663 |   |

 

*Theaccompanying notes are an integral part of these consolidated financialstatements.*

51

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| ** **                                                                                          | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| **Reconciliation  of Net Income to Net Cash Provided by Operating Activities:**                     |       |     |       |     |       |     |       |
| ** **                                                                                          |       |     |       |     |       |     |       |
| Net income                                                                                          |       | $        | 23,224     |     | $          | 19,851   |       | $ | 22,672 |   |
|                                                                                                |       |     |       |     |       |     |       |
| Adjustments to  reconcile net income to net cash provided by operating activities:                  |       |     |       |     |       |     |       |
| Depreciation and amortization                                                                       |       | 7,097    |       | 7,401    |       | 6,990    |       |
| Provision for losses on accounts receivable                                                         |       | 14       |       | 49       |       | 15       |       |
| Deferred income taxes                                                                               |       | (1,044   | )          | (2,600   | )          | 849      |       |
| Net (gain) loss from the disposal of property, plant  and equipment                                 |       | (191     | )          | 27       |       | 23       |       |
| Realized gain on investments, net                                                                   |       | (2       | )          | (36      | )          | (1,787   | )          |
| Amortization of discount on investments                                                             |       | (6       | )          | (62      | )          | (196     | )          |
| Stock appreciation rights compensation expense                                                      |       | 3,671    |       | 946      |       | 3,658    |       |
|                                                                                                |       |     |       |     |       |     |       |
| Changes in  assets and liabilities net of effects from noncash investing and financing  activities: |       |     |       |     |       |     |       |
|                                                                                                |       |     |       |     |       |     |       |
| (Increase) decrease in assets:                                                                      |       |     |       |     |       |     |       |
| Accounts and notes receivable                                                                       |       | (49      | )          | 270      |       | 713      |       |
| Inventories                                                                                         |       | (735     | )          | (381     | )          | (1,768   | )          |
| Other current assets                                                                                |       | (316     | )          | (549     | )          | (236     | )          |
| Other assets                                                                                        |       | (148     | )          | (403     | )          | 307      |       |
|                                                                                                |       |     |       |     |       |     |       |
| Increase (decrease) in liabilities:                                                                 |       |     |       |     |       |     |       |
| Accounts payable, trade and other current liabilities                                               |       | (2,859   | )          | 1,734    |       | (11,761  | )          |
| Federal and state income taxes payable                                                              |       | (705     | )          | 3,511    |       | (11,434  | )          |
| Deferred rent                                                                                       |       | 274      |       | 924      |       | 399      |       |
| Other liabilities                                                                                   |       | (1,505   | )          | 2,397    |       | 2,975    |       |
|                                                                                                |       |     |       |     |       |     |       |
| Net cash provided by  operating activities                                                          |       | $        | 26,720     |     | $          | 33,079   |       | $ | 11,419 |   |

 

*Theaccompanying notes are an integral part of these consolidated financialstatements.*

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**ARDENGROUP, INC. AND CONSOLIDATED SUBSIDIARIES**

# ** **

# **NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

1.       Summaryof Significant Accounting Policies

Basis of Presentation and Business Description

The consolidatedfinancial statements of Arden Group, Inc. (Company or Arden) include theaccounts of the Company and its direct and indirect subsidiaries.  Arden is a holding company which conductsoperations through its wholly-owned subsidiary, Arden-Mayfair, Inc.(Arden-Mayfair) and Arden-Mayfair’s wholly-owned subsidiary, Gelson’sMarkets (Gelson’s) which operates 18 supermarkets in Southern California.  The Company also owns certain real estateproperties through its indirect wholly-owned subsidiary, Mayfair Realty,Inc.  All intercompany accounts andtransactions are eliminated in consolidation.

Reclassifications

During 2006, the Companyreviewed the public filings of several competitors in the grocery industry todetermine how they classify certain expenses in their Statements ofOperations.  The Company determined that themajority of its competitors were recording distribution, purchasing,advertising and occupancy costs within cost of sales, whereas the Company had,in the past, classified these costs within selling, general and administrative(SG&A) expense.  Upon review,management determined that while both methods are acceptable under accountingprinciples generally accepted in the United States (GAAP), management believesthis alternative presentation provides increased comparability to the financialresults of its competitors.

TheCompany retroactively reclassified approximately $33,942,000 and $33,097,000from SG&A expense to cost of sales for fiscal years 2005 and 2004,respectively.  The following tablesummarizes the impact of the reclassifications on the Company’s ConsolidatedStatements of Operations and Comprehensive Income for 2005 and 2004.  None of the reclassifications had an impacton operating income, net income, net cash flow or any element of the Company’sConsolidated Balance Sheets.  See thediscussion under the heading Cost of Sales below for additional information.

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** **

|                         | ** ** | **2005**     | ** ** | **2004**      | ** ** |
|-------------------------|------------|--------------|------------|---------------|------------|
| ** **              | ** ** | **As**       | ** ** | **% of** | ** ** | **As** | ** ** | **% of** | ** ** | **As** | ** ** | **% of** | ** ** | **As** | ** ** | **% of** | ** ** |
| **(In Thousands)** | ** ** | **Reported** | ** ** | **Sales**     | ** ** | **Reclassified** | ** ** | **Sales** | ** ** | **Reported** | ** ** | **Sales** | ** ** | **Reclassified** | ** ** | **Sales** | ** ** |
| Sales                   |       | $            | 470,354    |          | 100.0      |   | $ | 470,354 |   | 100.0 |   | $ | 502,898 |   | 100.0 |   | $ | 502,898 |   | 100.0 |   |
| Cost of sales           |       | 255,989      |       | 54.4          |       | 289,931 |   | 61.6 |   | 277,485 |   | 55.2 |   | 310,582 |   | 61.8 |   |
|                    |       |         |       |          |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Gross profit            |       | 214,365      |       | 45.6          |       | 180,423 |   | 38.4 |   | 225,413 |   | 44.8 |   | 192,316 |   | 38.2 |   |
| SG&A expense        |       | 182,549      |       | 38.8          |       | 148,607 |   | 31.6 |   | 190,834 |   | 37.9 |   | 157,737 |   | 31.3 |   |
|                    |       |         |       |          |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Operating income        |       | $            | 31,816     |          | 6.8        |   | $ | 31,816 |   | 6.8 |   | $ | 34,579 |   | 6.9 |   | $ | 34,579 |   | 6.9 |   |

 

Certainamounts in prior periods have been reclassified to conform to the currentperiod financial statement presentation.

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 on December 30,2006, December 31, 2005 and January 1, 2005.  All years consisted of 52 weeks.

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

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 balances heldat 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.  TheCompany reviews its investment portfolio on a quarterly basis to determine ifmarket declines below book value may be other-than-temporary.  Any decline that is determined to be other-than-temporaryis recorded as a loss on the Consolidated Statements of Operations andComprehensive Income in accordance with Emerging Issues Task Force (EITF) No.03-1, “The Meaning of Other-Than-Temporary Impairment and itsApplication to Certain Issues.”  Allmarketable securities are defined as available-for-sale investments under theprovisions of Statement of Financial Accounting Standards No. (SFAS) 115, “Accountingfor Certain Investments in

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Debt and Equity Securities.”  The Company does not believe that any losseson its investments are other-than-temporary.

Management determines theappropriate classification of its investments in marketable securities at thetime of purchase and reevaluates such determination at each balance sheetdate.  Debt securities for which theCompany does not have the intent or ability to hold to maturity and equitysecurities 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, theCompany invested $2,500,000 in a limited partnership that invests primarily inpublicly traded, high yield bonds.  Thisinvestment was sold in May 2004.  Theholding represented less than a 3% interest and the Company did not have theability to exercise significant influence over the operating and financialpolicies of the partnership. Consequently, the investment was accounted for under the costmethod.  A gain of approximately$1,570,000 was recognized in 2004 equal to the difference between the salesprice and the original cost of the investment and is included in other income(expense), net on the Consolidated Statements of Operations and ComprehensiveIncome.

Accounts Receivable

The Company monitors vendor receivables and extensionsof credit on an ongoing basis and has not experienced significant lossesrelated to its receivables.  At December30, 2006, the Company did not have significant credit risk concentrations.  No customer or vendor represented greaterthan 3% of total accounts receivable.

Inventories

Supermarket nonperishable inventories are recordedusing the retail method and are stated at the lower of cost or market, withcost determined using the last-in, first-out (LIFO) method.  Perishable inventories are valued at the lowerof cost on a first-in, first-out (FIFO) basis or market.

Inventory reserves aremaintained for dry goods at historical run rates that are adjusted annually,and trued up at each physical count (three times per year) to ensure adequacyof the reserve. Inventories of perishable items are taken at the end of everymonth and balances are adjusted accordingly with the offset recorded in cost ofsales.

Property, Plant and Equipment

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  20 years |
|-------------------------------------|--------|---------------------|
| Store fixtures and office equipment |   | 3 to 8 years        |
| Transportation equipment            |   | 3 to 5 years        |
| Machinery and equipment             |   | 3 to 8 years        |

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Leasehold interests and improvements to leasedproperties are amortized over their estimated useful lives or lease period,whichever is shorter.

Leased property meeting certain capital lease criteriais capitalized and the present value of the related lease payments is recordedas a liability.  Amortization ofcapitalized leased assets is computed on the straight-line method over theshorter of the estimated useful life or the initial 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 SG&A expense on the Consolidated Statementsof Operations and Comprehensive Income.

Impairment of Long-Lived Assets

The Company monitors the carrying value of long-livedassets for potential impairment whenever events or changes in circumstancesindicate the carrying value of an asset may not be recoverable.  Impairment is recognized when estimated futurecash flows (undiscounted and before interest charges) are less than carryingvalue.  The estimation of expected futurenet cash flows is inherently uncertain and relies on assumptions regardingcurrent and future economic and market conditions and the availability ofcapital.  If impairment analysisassumptions change, then an adjustment to the carrying value of the Company’slong-lived assets could occur.  To theextent that an asset is impaired, the excess of the carrying amount of theasset over its estimated fair value is charged against earnings.  No impairments were recorded in 2006, 2005 or2004.

Fair Value of Financial Instruments

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.

Workers’ Compensation and General and Auto LiabilityCosts

In June 2003, the Companyterminated its guaranteed cost workers’ compensation policy and purchased ahigh deductible workers’ compensation policy. Accordingly, the Company was primarily self-insured for losses relatedto workers’ compensation for claims incurred prior to July 1, 2006, as well asgeneral and auto liability claims.  TheCompany maintained stop-loss coverage to limit its loss exposure on a perclaim basis and was insured for covered costs in excess of per claim limits.  Effective July 1, 2006, the Company purchased a one-year fully insuredguaranteed cost workers’ compensation insurance policy at a favorable rate toreplace the high deductible program for losses occurring after June 30,2006.  The Company continues to maintainan accrual for claims incurred prior to July 2006 under the

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highdeductible program which is based on both reported claims and an estimate ofclaims incurred but not reported.  TheCompany’s workers’ compensation and general and auto liability reserves forunpaid and incurred but not reported claims at December 30, 2006 and December31, 2005 were approximately $8,247,000 and $9,523,000, respectively.  While the ultimate amount of claims incurredare dependent on future developments, the recorded reserves reflect management’sbest estimate of claims to be incurred.

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 cardusers.  Valuation reserves are adjustedperiodically based on historical recovery rates.  The Company records income from licensingarrangements, subleases, leases and finance charges as they are earned.   Income from all licensing arrangements,rental income and finance charges represents less than 1% of sales for allperiods presented, and therefore is not disclosed separately on the ConsolidatedStatements of Operations and Comprehensive Income.

Cost of Sales

Cost of sales includesproduct costs, net of discounts and allowances, and inbound freight charges, aswell as warehouse, transportation, purchasing, advertising and occupancycosts.  Warehouse and transportation costsinclude receiving and inspection costs, internal transfer costs, labor,building rent, utilities, depreciation, repairs and maintenance and fuel forthe Company’s distribution center and distribution system.  Purchasing costs include both labor andadministrative expense associated with the purchase of the Company’sproducts.  Advertising costs, net ofvendor reimbursements, are expensed as incurred and include the cost of theGelson’s newsletter, newspaper ads and other print advertising.  Occupancy costs consist of rent, depreciationand utilities related to Gelson’s operations. All these costs reflect, in management’s opinion, the direct costinvolved in bringing the Company’s product to market. The following tablesummarizes warehouse, transportation, purchasing, advertising and occupancycosts for 2006, 2005 and 2004.

| (In Thousands)           | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|-------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Warehouse and  transportation |       | $        | 6,882      |     | $          | 6,659    |       | $ | 6,578 |   |
| Purchasing                    |       | 2,835    |       | 2,680    |       | 2,580    |       |
| Advertising                   |       | 1,148    |       | 1,137    |       | 1,549    |       |
| Occupancy                     |       | 23,394   |       | 23,466   |       | 22,390   |       |
|                          |       | $        | 34,259     |     | $          | 33,942   |       | $ | 33,097 |   |

 

VendorAllowances

Promotionaland rebate allowances make up the majority of all allowances. With promotionalallowances, vendors pay the Company to promote their product. The promotion maybe a temporary price reduction, a feature in a print advertisement ornewsletter, or placement of the vendor’s product in a preferred location in astore. The promotions are typically two to three weeks long and are recognizedwhen the commitment has been fulfilled. Promotional and vendor rebateallowances are recorded as a reduction of cost of

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sales.  The Company also receives other allowanceswhich are recognized as a reduction of cost of sales when they are earned.

Occasionally, the Companyreceives rebate allowances in the form of upfront lump-sum payments fromvendors.  Under the terms of theselong-term agreements, the Company earns the rebates as it purchases productfrom the vendor.  The upfrontpayments are recorded as a liability when they are received and are recorded asa reduction of inventory cost as the product is purchased.  In the event that the Company does notpurchase the minimum amount of product specified in the agreement, the upfrontpayments must be returned on a pro rata basis to the vendor.  If the contract does not specify that therebate is earned as product is purchased, then the upfront payments arerecorded as a liability when received and recognized as a reduction of cost ofsales on a pro rata basis as the product is sold.

Stock Options and StockAppreciation Rights

The Company has outstandingstock appreciation rights (SARs) that have been granted to non-employeedirectors and certain employees.  EachSAR entitles the holder to receive cash upon exercise equal to the excess of thefair market value of a share of the Company’s Class A Common Stock (Class A) onthe date of exercise over the fair market value of such share on the dategranted.  The SARs vest 25% each yearbeginning at the end of the first year and expire five years from the date ofgrant.

Stock-based compensationunder the SARs program was previously subject to variable accounting inaccordance with Financial Accounting Standards Board Interpretation No. (FIN)28, “Accounting for Stock Appreciation Rights and Other Variable Stock Optionor Award Plans,” an interpretation of Accounting Principles Board Opinion No.(APB) 25, “Accounting for Stock Issued to Employees.”  Under FIN 28, compensation expense wasrecognized as the SARs vested using the graded-vesting method as specified byFIN 28.  In addition, changes in themarket price of the Company’s Class A impacted the recognition of SARs expense.

Effective January 1, 2006,the Company adopted SFAS 123(R) (revised 2004), “Share-Based Payment,” whichrequires the measurement and recognition of compensation expense based on thefair value of SARs.  The Company adoptedSFAS 123(R) using the modified prospective transition method, and therefore,prior period results have not been restated. SFAS 123(R) requires the Company to remeasure the fair value of SARseach reporting period until the award is settled.  Compensation expense must be recognized eachreporting period for changes in fair value and vesting.

The fair value of each SARis estimated on the date of grant and, subsequently, at the end of eachreporting period using the Black-Scholes option-pricing model.  The Black-Scholes option-pricing modelincorporates various highly subjective assumptions, including expected term andvolatility.  The Company has reviewed itshistorical pattern of SARs exercises and has determined that meaningfuldifferences in SARs exercise activity exist between employees and non-employeedirectors.  Consequently, the Company hascategorized SARs into two groups for valuation purposes, as well as separategroups based on grant date.  Expectedvolatility was determined based on historical volatility using weeklydata.  The risk-free interest rate isbased on U.S. Treasury zero-coupon issues with a remaining term

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equal to the expected SARslife assumed at the date of grant less the time that has elapsed since thegrant date.  The expected term wascalculated based on historical experience. SFAS 123(R) also requires that a forfeiture assumption be applied toawards that are classified as liabilities such as SARs.  However, cash-settled SARs are remeasured atfair value at the end of each reporting period, and therefore, the impact ofactual forfeitures will be reflected at each remeasurement date.

The assumptions used in theBlack-Scholes option-pricing model as of fiscal 2006 year end were as follows:

| Dividend yield          |   | 0.0%   |   | - |   | .85%       |
|-------------------------|--------|--------|--------|---|--------|------------|
| Expected volatility     |   | 31.83% |   | - |   | 35.93%     |
| Risk-free interest rate |   | 4.785% |   | - |   | 5.1%       |
| Expected average term   |   | 3.16   |   | - |   | 3.52 years |

 

See Note 10 for furtherinformation related to SARs.

Rental Expense and Income

Rental payments on operating leases are recorded overthe lease term as they become payable or receivable except for rental paymentson leases with scheduled rent increases which are recognized on a straight-linebasis over the term of the lease.

Income Taxes

Deferred tax assets and liabilities 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.  SeeNote 13 for further information.

Common Stock and Net Income Per Share

Effective with the secondquarter of 2004, the Company adopted EITF No. 03-6, “Participating Securitiesand the Two-Class method under Financial Accounting Standards Board StatementNo. 128,” which requires the use of the Two-Class method to calculate basic netincome per share when a company has convertible participating securities.  Prior to November 10, 2004, the Company hadtwo classes of Common Stock including Class B Common Stock (Class B) which wasconvertible on a share-for-share basis into Class A.  Class B stockholders were entitled to sharein 90% of the dividends (other than stock dividends) paid to Class A stockholders.  Under the Two-Class method, the Companyassumes that 100% of undistributed earnings are distributed to Class A andClass B stockholders according to the formula for allocation of dividends.  Consequently, the Two-Class method results ina higher allocation of net income and net income per share to Class A versusClass B stockholders.  Basic net incomeper share is computed by dividing the net income attributable to Class A andClass B stockholders, respectively, by the weighted average number of commonshares outstanding under each class during the period.

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On November 10, 2004, Bernard Briskin,Chairman of the Board of Directors, President and Chief Executive Officer ofthe Company, elected to convert Class B shares beneficially owned by him,including shares beneficially owned with his spouse, into Class A shares.  The conversion of these shares triggered theautomatic and simultaneous conversion of all remaining Class B shares asprovided under the Company’s Restated Certificate of Incorporation.  After the conversion, the Company has onlyClass A outstanding and all stockholders participate equally in theundistributed earnings of the Company.

Diluted net income per share is computedusing the If Converted method in accordance with SFAS 128.  Diluted net income per share is computed bydividing net income attributable to common stockholders by the weighted averagenumber of common and potential common shares outstanding during theperiod.  Potential common shares includedin the diluted computation represent shares issuable upon assumed exercise ofstock options using the Treasury Stock method. Diluted net income per share is only shown for a single class of commonshares because, under the If Converted method, it is assumed that all Class Bshares are converted to Class A shares.

**Net Income Per Share Reconciliation**
| (In Thousands, Except Share and Per Share Data) | ** ** | **2006**  | ** ** | **2005**  | ** ** | **2004**  | ** ** |
|------------------------------------------------------------------------------------|------------|-----------|------------|-----------|------------|-----------|------------|
|                                                                               |       |      |       |      |       |      |       |
| Basic net income per  share:                                                       |       |      |       |      |       |      |       |
| Common Stock —  Class A                                                       |       |      |       |      |       |      |       |
| Dividends  declared (1)                                                            |       | $         | 3,212      |      | $          | 3,381     |       | $ | 2,360 |   |
| Undistributed  earnings                                                            |       | 20,012    |       | 16,470    |       | 13,167    |       |
| Allocated  earnings                                                                |       | $         | 23,224     |      | $          | 19,851    |       | $ | 15,527 |   |
|                                                                               |       |      |       |      |       |      |       |
| Weighted average  shares                                                           |       | 3,241,805 |       | 3,381,051 |       | 2,217,675 |       |
|                                                                               |       |      |       |      |       |      |       |
| Net income per  share                                                              |       | $         | 7.16       |      | $          | 5.87      |       | $ | 7.00 |   |
|                                                                               |       |      |       |      |       |      |       |
| Common Stock —  Class B                                                       |       |      |       |      |       |      |       |
|                                                                               |       |      |       |      |       |      |       |
| Dividends declared  (1)                                                            |       |      |       |      |       | $         | 920        |   |
| Undistributed  earnings                                                            |       |      |       |      |       | 6,225     |       |
| Allocated  earnings                                                                |       |      |       |      |       | $         | 7,145      |   |
|                                                                               |       |      |       |      |       |      |       |
| Weighted average  shares                                                           |       |      |       |      |       | 1,164,977 |       |
|                                                                               |       |      |       |      |       |      |       |
| Net income per  share                                                              |       |      |       |      |       | $         | 6.13       |   |
|                                                                               |       |      |       |      |       |      |       |
| Diluted net income per  share:                                                     |       |      |       |      |       |      |       |
|                                                                               |       |      |       |      |       |      |       |
| Net income  allocated to Class A                                                   |       | $         | 23,224     |      | $          | 19,851    |       | $ | 15,527 |   |
| Net income  allocated to Class B                                                   |       |      |       |      |       | 7,145     |       |
| Total net income                                                                   |       | $         | 23,224     |      | $          | 19,851    |       | $ | 22,672 |   |
|                                                                               |       |      |       |      |       |      |       |
| Weighted average  shares:                                                          |       |      |       |      |       |      |       |
|                                                                               |       |      |       |      |       |      |       |
| Class A shares  outstanding                                                        |       | 3,241,805 |       | 3,381,051 |       | 2,217,675 |       |
| Assumed  conversion of Class B                                                     |       |      |       |      |       | 1,164,977 |       |
| Total weighted  average shares                                                     |       | 3,241,805 |       | 3,381,051 |       | 3,382,652 |       |
|                                                                               |       |      |       |      |       |      |       |
| Net income per share                                                               |       | $         | 7.16       |      | $          | 5.87      |       | $ | 6.70 |   |

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(1)               Dividends declaredexclude the payment of a $67,665 special dividend in fiscal 2004 as it relatedto prior years’ undistributed earnings.

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Use of Estimates

The preparation of financial statements in conformitywith GAAP requires management to make estimates and assumptions for thereporting period and as of the financial statement date.  These estimates and assumptions affect thereported amounts of assets and liabilities, the disclosure of contingentliabilities and the reported amounts of revenues and expenses.  Actual results could differ from theseestimates.

Impact of Recently Issued Accounting Standards

In March 2004, the EITF amended and ratifiedprevious consensus on EITF No. 03-1, “The Meaning of Other-Than-TemporaryImpairment and its Application to Certain Issues.”  EITF No. 03-1 establishes guidance to be usedin determining when an investment is considered impaired, whether thatimpairment is other-than-temporary and the measurement of an impairmentloss.  The effective date was originallythe Company’s third quarter of 2004.  InSeptember 2004, the Financial Accounting Standards Board (FASB) issued EITF No.03-1-1, “Effective Date of Paragraphs 10-20 of EITF 03-1,” to delaythe effective date pending further discussions by the EITF.  In November 2005, the FASB issued FASB StaffPosition (FSP) Nos. FAS 115-1 and FAS 124-1, “The Meaning ofOther-Than-Temporary Impairment and its Application to Certain Investments,”which addresses the determination as to when an investment is consideredimpaired, whether that impairment is other-than-temporary and the measurementof an impairment loss.  This FSP alsoincludes accounting considerations subsequent to the recognition of another-than-temporary impairment and requires certain disclosures aboutunrealized losses that have not been recognized as other-than-temporaryimpairments.  This pronouncement waseffective beginning with the Company’s first quarter of 2006.  The Company does not currently have anyunrealized investment losses that are other-than-temporary and, therefore,adoption of this standard on January 1, 2006 did not have an impact on theCompany’s consolidated financial statements.

In November 2004, the FASB issued SFAS 151, “InventoryCosts - an amendment of ARB No. 43, Chapter 4.” SFAS 151 clarifies that inventory costs that are “abnormal” are requiredto be charged to expense as incurred as opposed to being capitalized intoinventory as a product cost.  SFAS 151provides examples of “abnormal” costs including costs of idle facilities,excess freight and handling costs and spoilage. SFAS 151 was effective for the Company’s fiscal year beginning January1, 2006.  Adoption of this standard didnot have an impact on the Company’s consolidated financial statements.

In December 2004, the FASB issued SFAS 123(R)(revised 2004), “Share-Based Payment.”    This statement eliminated the ability to account for share-basedcompensation transactions using APB 25, “Accounting for Stock Issued toEmployees,” and requires instead that compensation expense be recognized basedon the fair value on the date of the grant and at each remeasurement date forcash-settled SARs which are accounted for as liabilities.  The adoption of SFAS 123(R) impacted theCompany’s consolidated financial statements as discussed below in Note 10.

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In October 2005, the FASB issued FSP FAS13-1, “Accounting for Rental Costs Incurred during a Construction Period.”  FSP FAS 13-1 clarifies that rental costsassociated with ground or building operating leases that are incurred during aconstruction period should be recognized as rental expense.  This statement was effective with the Company’sfirst quarter of 2006.  Adoption of thisstandard did not have an impact on the Company’s consolidated financialstatements.

In June 2006, the FASB ratified the consensusof EITF No. 06-3, “How Taxes Collected from Customers and Remitted toGovernmental Authorities Should Be Presented in the Income Statement (That Is,Gross versus Net Presentation).”  EITF No.06-3 indicates that the income statement presentation on either a gross basisor a net basis of the taxes within the scope of the issue is an accountingpolicy decision.  The Company’saccounting policy is to present the taxes within the scope of EITF No. 06-3 ona net basis.  The adoption of EITF No. 06-3in the first quarter of 2007 will not result in a change to the Company’saccounting policy and, accordingly, will not have a material effect on theCompany’s consolidated financial statements.

In June 2006, the FASB issued FIN 48, “Accountingfor Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109.”  This interpretation prescribes a recognitionthreshold and measurement attribute for the financial statement recognition andmeasurement of a tax position taken or expected to be taken in a tax return,and provides guidance on derecognition, classification, interest and penalties,accounting in interim periods, disclosure and transition.  This interpretation, which is effective forfiscal years beginning after December 15, 2006, is not expected to have asignificant impact on the Company’s consolidated financial statements.

2.                   Investments

Marketable securities are shown on the accompanying ConsolidatedBalance Sheets at their fair value.
|                                      | ** ** | ** ** | ** ** | **Unrealized**       | ** ** | ** **          | ** ** |
|--------------------------------------|------------|------------|------------|----------------------|------------|---------------------|------------|
| **(In Thousands)**              | ** ** | **Cost**   | ** ** | **Gain (Loss)** | ** ** | **Fair Value** | ** ** |
|                                 |       |       |       |                 |       |                |       |
| As of December 30, 2006:             |       |       |       |                 |       |                |       |
|                                 |       |       |       |                 |       |                |       |
| Investments:                         |       |       |       |                 |       |                |       |
| Mutual funds                         |       | $          | 19,228     |                 | $          | (561                | )          | $ | 18,667 |   |
| Total                                |       | $          | 19,228     |                 | $          | (561                | )          | $ | 18,667 |   |
|                                 |       |       |       |                 |       |                |       |
| As of December 31,  2005:            |       |       |       |                 |       |                |       |
|                                 |       |       |       |                 |       |                |       |
| Investments:                         |       |       |       |                 |       |                |       |
| Mutual funds                         |       | $          | 18,399     |                 | $          | (509                | )          | $ | 17,890 |   |
| United States  government securities |       | 1,998      |       | (23                  | )          | 1,975               |       |
| Debt securities                      |       | 746        |       | 39                   |       | 785                 |       |
| Total                                |       | $          | 21,143     |                 | $          | (493                | )          | $ | 20,650 |   |

 

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Realized net gain from the sale of investments was $1,000, $8,000 and$1,739,000 in 2006, 2005 and 2004, respectively.  In addition, the Company recognized capitalgain income from mutual funds of $1,000, $28,000 and $48,000 in 2006, 2005 and2004, respectively.  Realized net gain(loss) from the sale of investments and capital gain income are included in otherincome (expense), net on the Consolidated Statements of Operations andComprehensive Income.

3.                   AccountsReceivable, Net
|                                        | ** ** | **December 30,** | ** ** | **December 31,** | ** ** |
|----------------------------------------|------------|-----------------------|------------|-----------------------|------------|
| **(In Thousands)**                | ** ** | **2006**              | ** ** | **2005**              | ** ** |
|                                   |       |                  |       |                  |       |
| Accounts receivable,  trade            |       | $                     | 3,471      |                  | $          | 3,220 |   |
| Other accounts  receivable             |       | 2,470                 |       | 2,689                 |       |
|                                   |       | 5,941                 |       | 5,909                 |       |
| Less: Allowance for  doubtful accounts |       | (192                  | )          | (195                  | )          |
|                                   |       | $                     | 5,749      |                  | $          | 5,714 |   |

The provision for doubtful accounts in 2006, 2005 and2004 was approximately $14,000, $49,000 and $15,000.

4.                   Inventories

Inventories valued by theLIFO method totaled $16,580,000 in 2006, $15,750,000 in 2005 and $15,586,000 in2004.  Inventory balances would have been$4,720,000, $4,155,000 and $3,771,000 higher at the end of 2006, 2005 and 2004,respectively, if they had been stated at the lower of FIFO cost or market.  The LIFO effect on net income was a decreaseof approximately $335,000, $227,000 and $221,000 in 2006, 2005 and 2004,respectively.

5.                   SignificantSupplier

During 2006, the Company procured approximately 18% ofits product through Unified Western Grocers, Inc. (Unified) (formerly CertifiedGrocers), a grocery wholesale cooperative. As a member-patron, the Company is required to provide Unified withcertain minimum deposits and credit in order to purchase product from thecooperative.  As of December 30, 2006,the Company had approximately $1,933,000 on deposit with Unified in addition toapproximately $503,000 related to ownership of equity shares in Unified.  These deposits are recorded under other assetson the Consolidated Balance Sheets.  Theminimum deposit requirement is satisfied through a combination of cash, creditand ownership of equity shares in Unified.

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6.                   Property,Plant and Equipment
|                                            | ** ** | **December 30,** | ** ** | **December 31,** | ** ** |
|--------------------------------------------|------------|-----------------------|------------|-----------------------|------------|
| **(In Thousands)**                    | ** ** | **2006**              | ** ** | **2005**              | ** ** |
| ** **                                 | ** ** | ** **            | ** ** | ** **            | ** ** |
| Land                                       |       | $                     | 8,633      |                  | $          | 8,633 |   |
| Buildings and  improvements                |       | 9,693                 |       | 9,693                 |       |
| Store fixtures and  office equipment       |       | 42,623                |       | 40,903                |       |
| Transportation  equipment                  |       | 3,831                 |       | 2,789                 |       |
| Machinery and equipment                    |       | 1,810                 |       | 1,752                 |       |
| Leasehold improvements                     |       | 48,018                |       | 47,513                |       |
| Leasehold interests                        |       | 4,538                 |       | 4,538                 |       |
| Assets under  construction                 |       | 1,289                 |       | 2,485                 |       |
| Assets under capital  leases               |       | 2,200                 |       | 2,200                 |       |
|                                       |       | 122,635               |       | 120,506               |       |
|                                       |       |                  |       |                  |       |
| Accumulated  depreciation and amortization |       | (74,863               | )          | (70,481               | )          |
|                                       |       | $                     | 47,772     |                  | $          | 50,025 |   |

As of December 30, 2006, approximately $34,480,000 ofproperty, plant and equipment (at cost) was fully depreciated and is stillbeing used in operations.  As of December30, 2006 and December 31, 2005, the Company recorded $2,119,000 and $2,031,000,respectively, in accumulated amortization for assets under capital lease.

7.                   OtherCurrent Liabilities
|                                 | ** ** | **December 30,** | ** ** | **December 31,** | ** ** |
|---------------------------------|------------|-----------------------|------------|-----------------------|------------|
| **(In Thousands)**         | ** ** | **2006**              | ** ** | **2005**              | ** ** |
| ** **                      | ** ** | ** **            | ** ** | ** **            | ** ** |
| Employee compensated  absences  |       | $                     | 5,133      |                  | $          | 5,211 |   |
| Stock appreciation  rights      |       | 5,289                 |       | 3,275                 |       |
| Employee benefits               |       | 2,820                 |       | 2,975                 |       |
| Taxes (excluding income  taxes) |       | 3,072                 |       | 2,462                 |       |
| Payroll                         |       | 1,290                 |       | 2,179                 |       |
| Workers’ compensation      |       | 2,021                 |       | 2,151                 |       |
| Dividends payable               |       | 790                   |       | 845                   |       |
| Rent                            |       | 818                   |       | 789                   |       |
| Other                           |       | 3,615                 |       | 3,771                 |       |
|                            |       | $                     | 24,848     |                  | $          | 23,658 |   |

8.                   Long-Term Debt
|                                                          | ** ** | **Current**           | ** ** | **Non-Current**       | ** ** |
|----------------------------------------------------------|------------|-----------------------|------------|-----------------------|------------|
| ** **                                               | ** ** | **December 30,** | ** ** | **December 31,** | ** ** | **December 30,** | ** ** | **December 31,** | ** ** |
| **(In Thousands)**                                  | ** ** | **2006**              | ** ** | **2005**              | ** ** | **2006** | ** ** | **2005** | ** ** |
| Obligations under  capital leases                        |       | $                     | 225        |                  | $          | 221 |   | $ | 0 |   | $ | 225 |   |
| 7% Subordinated income debentures  due September 1, 2014 |       | 0                     |       | 0                     |       | 1,228 |   | 1,228 |   |
|                                                     |       | $                     | 225        |                  | $          | 221 |   | $ | 1,228 |   | $ | 1,453 |   |

 

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The Company has revolving lines of credit in theamount of $20,000,000 which expires in August 2008 and $3,000,000 which expiresin October 2007.  Borrowings bearinterest at the bank’s prime rate or the adjusted London Interbank Offer Rate(LIBOR) plus a margin up to 1.2%.  At theend of 2006 and 2005, there were no amounts borrowed against either of therevolving lines of credit.  The Companycurrently maintains five standby letters of credit aggregating$12,469,000.  The standby letters ofcredit reduce the available borrowings under its revolving lines of credit.

Debentures: The indenture relating to the 7% Subordinated IncomeDebentures (7% Debentures), due September 1, 2014, provides for interest payablesemi-annually on March 1 and September 1 to the extent that current annualnet income is sufficient therefor, or at the discretion of the Company, out ofavailable retained earnings.  No accruedinterest was in arrears as of December 30, 2006.  The 7% Debentures are recorded at face valuewhich approximates its fair value.

9.                   Capital Stock

Class A Common Stock:  TheCompany is authorized to issue 10,000,000 shares of Class A, par value $.25 pershare.  At December 30, 2006 and December31, 2005, the number of shares issued were 4,518,298 and 4,736,202,respectively, including 1,357,200 treasury shares.  During 2006 and 2005, the Company purchasedand retired 217,904 and 4,250 shares of its Class A for an aggregate purchaseprice of approximately $19,999,000 and $334,000, respectively.  The Class A has one vote per share on allmatters on which stockholders are entitled to vote or consent.

Class B Common Stock:  TheCompany was authorized to issue 1,500,000 shares of convertible participatingClass B, par value $.25 per share.  As aresult of the automatic conversion of all Class B shares in 2004 as describedin Note 1 above, future issuances of Class B are prohibited.

On January 19, 2007, the Company paid aregular quarterly cash dividend of 25 cents per share of Class A, aggregatingapproximately $790,000, to stockholders of record on December 29, 2006.  During February 2006, the Company’s Board ofDirectors authorized the purchase of up to an additional 150,000 shares ofClass A under the Company’s existing stock buyback program.  During 2006, the Company purchased 217,904shares of Class A in unsolicited private transactions with unrelated partiesfor an aggregate purchase price of approximately $19,999,000.  The remaining number of shares authorized forpurchase is 22,904 as of December 30, 2006.

10.             Stock Options andStock Appreciation Rights

In 1998, the Company adopted 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. The Stock Option Plan was amended in fiscal 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 

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grant.  The exercise price ofstock options granted under the Stock Option Plan is equal to the fair marketvalue of the Company’s Class A on the date of grant.  There were no stock options issued andoutstanding as of December 30, 2006.

The Company also has granted SARs covering shares of the Company’sClass A to non-employee directors and certain employees of the Companyand its subsidiaries.  Each SAR entitlesthe holder to receive upon exercise thereof the excess of the fair market valueof a share of Class A on the date of exercise over the fair market valueof such 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.

Stock options and SARs transactions during the past three years aresummarized below.  The weighted averageexercise price of SARs outstanding on October 25, 2004, was adjusted to reflectthe declaration of a special dividend of $20 per share of the Company’sClass A on that date to stockholders of record on November 15, 2004.
|                                    | ** ** | ** **             | ** ** | ** **             | ** ** | **SARs**              | ** ** |
|------------------------------------|------------|------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                         | ** ** | ** **             | ** ** | ** **             | ** ** | **Officers and** | ** ** | **Non-Employee** | ** ** |
| ** **                         | ** ** | **Stock Options** | ** ** | **Employees**          | ** ** | **Directors**         | ** ** |
| ** **                         | ** ** | ** **             | ** ** | **Weighted**           | ** ** | ** **            | ** ** | **Weighted** | ** ** | ** ** | ** ** | **Weighted** | ** ** |
| ** **                         | ** ** | **Options**            | ** ** | **Average Price** | ** ** | **SARs**              | ** ** | **Average Price** | ** ** | **SARs** | ** ** | **Average Price** | ** ** |
| Outstanding as of  1/3/04          |       | 2,000                  |       | $                      | 9.06       |                  | 68,875     |   | $ | 49.16 |   | 29,250 |   | $ | 24.15 | *** *** |
|                               |       |                   |       |                   |       |                  |       |   |   |   |   |   | *** *** |
| Granted                            |       | 0                      |       | $                      | 0.00       |                  | 13,000     |   | $ | 57.00 |   | 50,000 |   | $ | 57.50 | *** *** |
| Exercised                          |       | 2,000                  |       | $                      | 9.06       |                  | 9,450      |   | $ | 34.81 |   | 19,250 |   | $ | 19.71 | *** *** |
|                               |       |                   |       |                   |       |                  |       |   |   |   |   |   | *** *** |
| Outstanding as of  1/1/05          |       | 0                      |       | $                      | 0.00       |                  | 72,425     |   | $ | 52.44 |   | 60,000 |   | $ | 53.36 | *** *** |
|                               |       |                   |       |                   |       |                  |       |   |   |   |   |   | *** *** |
| Granted                            |       | 0                      |       | $                      | 0.00       |                  | 5,000      |   | $ | 86.22 |   | 10,000 |   | $ | 78.43 | *** *** |
| Exercised                          |       | 0                      |       | $                      | 0.00       |                  | 10,375     |   | $ | 41.10 |   | 10,000 |   | $ | 57.50 | *** *** |
|                               |       |                   |       |                   |       |                  |       |   |   |   |   |   | *** *** |
| Outstanding as of  12/31/05        |       | 0                      |       | $                      | 0.00       |                  | 67,050     |   | $ | 56.72 |   | 60,000 |   | $ | 56.85 | *** *** |
|                               |       |                   |       |                   |       |                  |       |   |   |   |   |   | *** *** |
| Exercised                          |       | 0                      |       | $                      | 0.00       |                  | 21,650     |   | $ | 53.19 |   | 2,500 |   | $ | 28.00 | *** *** |
| Forfeited                          |       | 0                      |       | $                      | 0.00       |                  | 1,750      |   | $ | 57.00 |   | 10,000 |   | $ | 78.43 | *** *** |
|                               |       |                   |       |                   |       |                  |       |   |   |   |   |   | *** *** |
| Outstanding as of  12/30/06        |       | 0                      |       | $                      | 0.00       |                  | 43,650     |   | $ | 58.46 |   | 47,500 |   | $ | 53.83 | *** *** |
|                               |       |                   |       |                   |       |                  |       |   |   |   |   |   | *** *** |
| Exercisable as of  12/30/06        |       |                   |       |                   |       | 18,150                |       |   |   | 25,000 |   |   | *** *** |
|                               |       |                   |       |                   |       |                  |       |   |   |   |   |   | *** *** |
| Available for grant as of 12/30/06 |       | 28,500                 |       |                   |       | N/A                   |       |   |   | N/A |   |   | *** *** |

The aggregate intrinsic value of fully vested SARs asof December 30, 2006 is approximately $2,997,000, all of which are currentlyexercisable.

 

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The following table summarizes information about the Company’s SARsoutstanding at December 30, 2006:

|                                  | ** ** | **SARs Outstanding** | ** ** | **SARs Exercisable** | ** ** |
|----------------------------------|------------|---------------------------|------------|---------------------------|------------|
| ** **                       | ** ** | ** **                | ** ** | **Weighted**              | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                       | ** ** | ** **                | ** ** | **Average**               | ** ** | **Weighted** | ** ** | ** ** | ** ** | **Weighted** | ** ** |
| ** **                       | ** ** | ** **                | ** ** | **Remaining**             | ** ** | **Average** | ** ** | ** ** | ** ** | **Average** | ** ** |
| **Range of**                | ** ** | **Number**                | ** ** | **Contractual**           | ** ** | **Exercise** | ** ** | **Number** | ** ** | **Exercise** | ** ** |
| **Exercise Price**          | ** ** | **Outstanding**           | ** ** | **Life**                  | ** ** | **Price** | ** ** | **Exercisable** | ** ** | **Price** | ** ** |
|                             | * *   | * *                  | * *   | * *                  | * *   | * * | * * | * * | * * | * * | *** *** |
| SARs - Officers &  Employees | * *   | * *                  | * *   | * *                  | * *   | * * | * * | * * | * * | * * | *** *** |
| $40.50                           | * *   | 5,000                     |       | 1.6 years                 |       | $ | 40.50 |   | 0 |   | $ | 40.50 | *** *** |
| $57.00                           | * *   | 25,000                    |       | 1.9 years                 |       | $ | 57.00 |   | 14,750 |   | $ | 57.00 | *** *** |
| $57.00                           | * *   | 8,650                     |       | 2.5 years                 |       | $ | 57.00 |   | 2,150 |   | $ | 57.00 | *** *** |
| $86.22                           | * *   | 5,000                     |       | 4.0 years                 |       | $ | 86.22 |   | 1,250 |   | $ | 86.22 | *** *** |
|                             | * *   | 43,650                    |       | 2.2 years                 |       | $ | 58.46 |   | 18,150 |   | $ | 59.01 | *** *** |
|                             | * *   |                      |       |                      |       |   |   |   |   |   | *** *** |
| SARs - Non-Employee  Directors   | * *   |                      |       |                      |       |   |   |   |   |   | *** *** |
| $34.25                           | * *   | 7,500                     |       | 1.3 years                 |       | $ | 34.25 |   | 5,000 |   | $ | 34.25 | *** *** |
| $57.50                           | * *   | 40,000                    |       | 2.1 years                 |       | $ | 57.50 |   | 20,000 |   | $ | 57.50 | *** *** |
|                             | * *   | 47,500                    |       | 1.9 years                 |       | $ | 53.83 |   | 25,000 |   | $ | 52.85 | *** *** |

 

Stock-based compensationunder the SARs program was previously subject to variable accounting inaccordance with FIN 28, “Accounting for Stock Appreciation Rights and OtherVariable Stock Option or Award Plans,” an interpretation of APB 25, “Accountingfor Stock Issued to Employees.”  UnderFIN 28, compensation expense was recognized as the SARs vested using thegraded-vesting method as specified by FIN 28. In addition, changes in the market price of the Company’s Class Aimpacted the recognition of SARs expense. In 2005 and 2004, the Company recorded compensation expense related toSARs of $946,000 and $3,658,000, respectively.

Effective January 1, 2006, the Company adopted SFAS123(R) (revised 2004), “Share-Based Payment,” which requires the measurementand recognition of compensation expense based on the fair value of SARs.  The Company adopted SFAS 123(R) using themodified prospective transition method, and therefore, prior period resultshave not been restated.  As of January 1,2006, the cumulative effect of adopting SFAS 123(R) resulted in the recognitionof $288,000 in compensation expense. Compensation expense is recorded under SG&A expense on theConsolidated Statements of Operations and Comprehensive Income.

SFAS 123(R) requires the Company to remeasure the fairvalue of SARs each reporting period until the award is settled.  Compensation expense must be recognized eachreporting period for changes in fair value and vesting.  During 2006, the Company recorded $3,383,000of compensation expense ($2,006,000 net of tax) related to the increase in thefair value of SARs and additional vesting during the period, in addition to the $288,000 recorded as aresult of the adoption of SFAS 123(R) as discussed above.  As of December 30, 2006, assuming no changein the SARs fair value, there was approximately $667,000 of total unrecognizedcompensation cost related to unvested SARs which is expected to be recognizedover a weighted average period of 1.1 years. The total intrinsic value of SARs exercised during 2006 wasapproximately $1,305,000.  Intrinsicvalue represents the amount by which the fair value of SARs exceeds the exerciseprice.

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11.    Retirement Plans

The Company contributes to multi-employer unionpension plans, administered by various trustees, which may be deemed to bedefined benefit plans.  Contributions tothese plans are based upon negotiated labor contracts.  Information relating to accumulated benefitsand fund assets as they may be allocable to the participants at December 30,2006 is not available.  The Companyrecords pension expense for these plans as contributions are made.  The Company’s total union pension expense forall plans for 2006, 2005 and 2004 amounted to $6,801,000, $6,241,000 and$6,064,000, respectively.

The Arden Group, Inc. 401(k) Retirement Savings Plan(401(k) Plan) covers all non-union employees of the Company and itssubsidiaries who have attained the age of 18 and have completed at least oneyear of service.  On the first of themonth following the completion of one month of service, the 401(k) Planprovides that, with certain limitations, a qualifying employee may elect tocontribute up to 100% of such employee’s annual compensation to the 401(k) Planup to a maximum of $15,000 in 2006 on a tax-deferred basis.  In addition, employees over the age of 50 mayelect to make catch up contributions up to a maximum of $5,000 in 2006.  The Company made discretionary contributionsto the 401(k) Plan of $919,000, $801,000 and $805,000 for 2006, 2005 and 2004,respectively.

The Company maintains a noncontributory, trusteedStock Bonus Plan which presently is a qualified profit sharing plan underSection 401(a) of the Internal Revenue Code of 1986, as amended.  Existing plan assets must be invested in theCompany’s Class A with excess cash being invested in certain government-backedsecurities.  Recent legislation passed aspart of the Pension Protection Act of 2006 requires employers to allowparticipants who own employer securities the opportunity to diversify theirassets.  As a result, the Stock BonusPlan will be merged into the 401(k) Plan effective March 2007.

An employment agreement with a key executive officerprovides for annual post-employment compensation equal to 25% of his averagebase salary and bonus earned in the last three fiscal years prior to thecessation of his employment with the Company. The officer is entitled to monthly payments during his lifetimebeginning with the termination of his employment for any reason other than hisbreach of the employment agreement or termination for cause.  The Company has accrued its obligation under the terms of theemployment agreement.  The Companydecreased the accrual during 2006 and recognized income of approximately$536,000.  The decrease in the accrual isprimarily due to a change in estimate based on the refining of the assumptionsand underlying data, including the estimated payout term, in order to betterestimate the Company’s liability to the key executive officer.  During 2005 and 2004, the Company expensed$344,000 and $521,000, respectively. This accrual is recorded under other liabilities on the ConsolidatedBalance Sheets.

12.    Multi-Employer Union Health Care Plans

The Company contributes to multi-employer union healthcare plans, administered by various trustees, in accordance with the provisionsof various labor contracts. Contributions to these plans are generally based on the number ofstraight-time hours worked.  The Company’sexpense for these plans totaled $15,231,000, $16,047,000 and $16,977,000 for 

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2006, 2005 and 2004, respectively.  There were no employer withdrawals, shortfallcontributions, maintenance of benefit clauses or other material changes thataffected the comparability of employer and multi-employer contributionsfrom year to year.

13.    Income Taxes

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

| (In Thousands)           | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|-------------------------------|------------|----------|------------|----------|------------|----------|------------|
|                          |       |     |       |     |       |     |       |
| Current:                      |       |     |       |     |       |     |       |
| Federal                       |       | $        | 13,455     |     | $          | 12,944   |       | $ | 11,433 |   |
| State                         |       | 3,513    |       | 3,494    |       | 3,385    |       |
| Total current  tax provision  |       | 16,968   |       | 16,438   |       | 14,818   |       |
|                          |       |     |       |     |       |     |       |
| Deferred:                     |       |     |       |     |       |     |       |
| Federal                       |       | (1,009   | )          | (2,317   | )          | 709      |       |
| State                         |       | (64      | )          | (550     | )          | (29      | )          |
| Total deferred  tax provision |       | (1,073   | )          | (2,867   | )          | 680      |       |
| Total income tax  provision   |       | $        | 15,895     |     | $          | 13,571   |       | $ | 15,498 |   |

 

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

| (In Thousands)                  | ** ** | **December 30, 2006** | ** ** | **December 31, 2005** | ** ** |
|--------------------------------------|------------|---------------------------------|------------|---------------------------------|------------|
|                                 |       |                            |       |                            |       |
| Deferred tax assets:                 |       |                            |       |                            |       |
| Accrued expenses                     |       | $                               | 8,515      |                            | $          | 8,457 |   |
| Deferred rent                        |       | 2,473                           |       | 2,361                           |       |
| State income  taxes                  |       | 1,228                           |       | 1,182                           |       |
| Other                                |       | 1,578                           |       | 533                             |       |
| Deferred tax  assets                 |       | 13,794                          |       | 12,533                          |       |
|                                 |       |                            |       |                            |       |
| Deferred tax liabilities:            |       |                            |       |                            |       |
| Deferred gain on  debenture exchange |       | (2,694                          | )          | (2,855                          | )          |
| Other                                |       | (830                            | )          | (480                            | )          |
| Deferred tax  liabilities            |       | (3,524                          | )          | (3,335                          | )          |
| Deferred income taxes,  net          |       | $                               | 10,270     |                            | $          | 9,198 |   |

 

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

| (In Thousands, Except                 | ** ** | **2006**   | ** ** | **2005** | ** ** | **2004**   | ** ** |
|-------------------------------------------------|------------|------------|------------|----------|------------|------------|------------|
| **Percentage Amounts)**                    | ** ** | **Amount** | ** ** | **Rate** | ** ** | **Amount** | ** ** | **Rate** | ** ** | **Amount** | ** ** | **Rate** | ** ** |
| Federal tax at  statutory rate                  |       | $          | 13,691     |     | 35.0       | %          | $          | 11,698 |   | 35.0 | % | $ | 13,360 |   | 35.0 | % |
| State income taxes, net  of federal tax benefit |       | 2,248      |       | 5.7      | %          | 1,920      |       | 5.7 | % | 2,193 |   | 5.7 | % |
| Other                                           |       | (44        | )          | (.1      | )%         | (47        | )          | (.1 | )% | (55 | ) | (.1 | )% |
|                                            |       | $          | 15,895     |     | 40.6       | %          | $          | 13,571 |   | 40.6 | % | $ | 15,498 |   | 40.6 | % |

 

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14.    Leases

The principal kinds of property leased by the Companyand its subsidiaries are supermarket buildings. The most significant obligations assumed under the lease terms, otherthan rental payments, are the upkeep of the facilities, insurance and propertytaxes.  Most supermarket leases containcontingent 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 either capitalleases, operating leases or subleases, as appropriate.

Assets Under Capital Leases:  Assets under capital leases are capitalizedusing interest rates appropriate at the inception of each lease.  Contingent rentals associated with capitalleases in 2006, 2005 and 2004 were $242,000, $193,000 and $464,000,respectively, and accordingly have been charged to expense as incurred.  Following is an analysis of assets undercapital leases:

| (In Thousands)       | ** ** | **December 30, 2006** | ** ** | **December 31, 2005** | ** ** |
|---------------------------|------------|---------------------------------|------------|---------------------------------|------------|
| ** **                | ** ** | ** **                      | ** ** | ** **                      | ** ** |
| Buildings:                |       |                            |       |                            |       |
| Cost                      |       | $                               | 2,200      |                            | $          | 2,200 |   |
| Accumulated  amortization |       | (2,119                          | )          | (2,031                          | )          |
|                      |       | $                               | 81         |                            | $          | 169 |   |

 

Future minimum lease payments for assets under capitalleases at December 30, 2006 are as follows:

| (In Thousands)                       | ** ** | ** ** | ** ** |
|-------------------------------------------|------------|------------|------------|
| ** **                                | ** ** | ** ** | ** ** |
| Total minimum  obligations - 2007         |       | $          | 238        |   |
|                                      |       |       |       |
| Interest                                  |       | (13        | )          |
|                                      |       |       |       |
| Present value of net  minimum obligations |       | 225        |       |
| Current portion                           |       | (225       | )          |
|                                      |       |       |       |
| Long-term obligations                     |       | $          | 0          |   |

 

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Operating Leases and Subleases:  In addition to capital leases, the Company isobligated under operating leases, primarily for buildings, which expire atvarious dates through 2027.  Futureminimum lease payments for all noncancelable operating leases having aremaining term in excess of one year at December 30, 2006 are as follows:

|                         | ** ** | ** **      | ** ** | **Deduct**   | ** ** | **Net**         | ** ** |
|-------------------------|------------|-----------------|------------|--------------|------------|-----------------|------------|
| ** **              | ** ** | ** **      | ** ** | **Sublease** | ** ** | **Rental**      | ** ** |
| **(In Thousands)** | ** ** | **Commitments** | ** ** | **Rentals**  | ** ** | **Commitments** | ** ** |
| ** **              | ** ** | ** **      | ** ** | ** **   | ** ** | ** **      | ** ** |
| 2007                    |       | $               | 9,640      |         | $          | 581             |       | $ | 9,059 |   |
| 2008                    |       | 9,636           |       | 611          |       | 9,025           |       |
| 2009                    |       | 9,257           |       | 613          |       | 8,644           |       |
| 2010                    |       | 9,227           |       | 593          |       | 8,634           |       |
| 2011                    |       | 8,317           |       | 617          |       | 7,700           |       |
| Thereafter              |       | 98,369          |       | 491          |       | 97,878          |       |
|                    |       | $               | 144,446    |         | $          | 3,506           |       | $ | 140,940 |   |

 

Rent expense under operating leases was as follows:

| (In Thousands) | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|---------------------|------------|----------|------------|----------|------------|----------|------------|
| Minimum rent        |       | $        | 10,600     |     | $          | 10,468   |       | $ | 8,870 |   |
| Contingent rent     |       | 907      |       | 1,108    |       | 1,629    |       |
|                |       | 11,507   |       | 11,576   |       | 10,499   |       |
| Sublease rentals    |       | (1,824   | )          | (1,674   | )          | (1,636   | )          |
|                |       | $        | 9,683      |     | $          | 9,902    |       | $ | 8,863 |   |

 

15.    Related Party Transactions

A director of the Company is a partner of a law firmwhich performs legal services for the Company.

16.    Commitments and Contingent Liabilities

In February 2007, theCompany completed negotiation of a new union contract for its Retail Clerks andMeatcutters with the United Food & Commercial Workers InternationalUnion (UFCW) to replace the contract expiring on March 5, 2007.  The new contract eliminates the two-tierwage structure and provides for, among other things, wage increases andmodifications to the pension and health and welfare plans.  The Company’s employees who are members ofthe UFCW voted to ratify the new contract in a vote held on February 21 and 23,2007.  The new contract expires March 5,2010.  The Company contributes tomulti-employer health care and pension plans for the UFCW, and therefore, therates paid by all employers participating in the trust funds must beequal.  The UFCW has not yet reached anagreement with the three major participating supermarket chains in the Company’strade area.  Consequently, the benefitcontribution rates that the Company negotiated with the UFCW may change basedon the outcome of the union’s negotiations with the three major groceryretailers.

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If the UFCW reaches a wage agreement with the other participatingemployers in our trade area under terms that are more favorable to theemployers than those agreed to by Gelson’s, this could affect our ability tocompete with grocery retailers whose labor costs are less than our own.  In addition, if the three major groceryretailers in our trade area agree to the wage rates that Gelson’s hasnegotiated under its new contract with the UFCW, then Gelson’s has agreed tofurther increase its hourly wage rate for experienced level employees by anadditional $.05 per hour in the second and third years of the newcontract.  The elimination of thetwo-tier wage structure and increases in wage and benefit costs provided underthe new contract could negatively impact the Company’s profitability unless itis able to offset the increased costs through a combination of sales growth,increased prices, management of labor hours and cost savings in other areas.

The Company has an employment agreement with a keyexecutive officer and shareholder which currently expires on January 1,2009.  In addition to a base salary, theagreement provides for a bonus based on pre-tax earnings.  No maximum compensation limit exists.  Total salary and bonus expensed in 2006, 2005and 2004 was approximately $2,034,000, $1,804,000 and $1,952,000,respectively.  The unpaid bonus at yearend is recorded under accounts payable, trade on the Consolidated BalanceSheets.

The Company is primarily self-insured for lossesrelated to general and auto liability claims and, prior to July 1, 2006, forworkers’ compensation as well.  TheCompany purchased a one-year fully insured guaranteed cost workers’compensation insurance policy for losses occurring after June 30, 2006.  This policy replaced the high deductibleprogram for workers’ compensation.  TheCompany maintains stop-loss coverage to limit its loss exposure on a per claimbasis. Liabilities associated with the risks that are retained by the Companyare estimated, in part, by considering historical claims experience andregression analysis. Accruals are based on reported claims and an estimate ofclaims incurred but not reported.  Whilethe ultimate amount of claims incurred are dependent on future developments,the reserve represents the Company’s best estimate of future payments relatedto claims.  The Company’s liabilityreserve for unpaid and incurred but not reported claims at December 30, 2006and December 31, 2005 was approximately $8,247,000 and $9,523,000,respectively, and is recorded under other current liabilities and otherliabilities on the Consolidated Balance Sheets. The decrease in the reserve is the result of the Company’s ability tosuccessfully reduce the frequency and severity of claims incurred in 2006compared to 2005.  Effective July 2006,the Company was also able to purchase a one-year fully insured guaranteedcost workers’ compensation insurance policy at a favorable rate to replace thehigh deductible program for losses occurring after June 30, 2006.

As of December 30, 2006, management had authorizedexpenditures on incomplete projects for the construction and purchase ofproperty, plant and equipment which totaled approximately $338,000.

The Company and its subsidiaries are subject to amyriad 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 

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this time, estimate the expense it ultimately mayincur in connection with any violations; however, it believes any such claimswill not have a material adverse impact on either the Company’s consolidatedfinancial position, results of 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 not have a material effect upon either theCompany’s consolidated financial position, results of operations or cash flows.

 

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17.           Selected Quarterly Financial Data(Unaudited)

**(In Thousands,Except Per Share Data)**
| ** **  | ** ** | ** ** | ** ** | ** **     | ** ** | ** ** | ** ** | **Diluted**       | ** ** |
|-------------|------------|------------|------------|----------------|------------|------------|------------|-------------------|------------|
| ** **  | ** ** | ** ** | ** ** | **Gross**      | ** ** | **Net**    | ** ** | **Net Income**    | ** ** |
| **Quarter** | ** ** | **Sales**  | ** ** | **Profit (1)** | ** ** | **Income** | ** ** | **Per Share (2)** | ** ** |
| 2005        |       |       |       |           |       |       |       |              |       |
|        |       |       |       |           |       |       |       |              |       |
| First       |       | $          | 115,976    |           | $          | 44,236     |       | $                 | 5,483      |   | $ | 1.62 |   |
| Second      |       | 116,354    |       | 44,488         |       | 4,523      |       | 1.34              |       |
| Third       |       | 113,855    |       | 43,743         |       | 4,859      |       | 1.44              |       |
| Fourth      |       | 124,169    |       | 47,956         |       | 4,986      |       | 1.48              |       |
|        |       |       |       |           |       |       |       |              |       |
| 2006        |       |       |       |           |       |       |       |              |       |
|        |       |       |       |           |       |       |       |              |       |
| First       |       | $          | 118,053    |           | $          | 45,701     |       | $                 | 5,223      |   | $ | 1.59 |   |
| Second      |       | 119,114    |       | 46,197         |       | 4,658      |       | 1.44              |       |
| Third       |       | 118,141    |       | 45,322         |       | 5,780      |       | 1.79              |       |
| Fourth      |       | 127,429    |       | 49,116         |       | 7,563      |       | 2.34              |       |

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(1)             Asdiscussed above in Note 1, the Company began recording distribution,purchasing, advertising and occupancy costs in cost of sales beginning in thefourth quarter of 2006.  Previously, thesecosts were classified within SG&A expense. The table below reflects the impact on gross profit of reclassifyingthese costs from SG&A expense to cost of sales for the first three quartersof 2006 and all quarters of 2005.

 
|                       | ** ** | **2006**    | ** ** |
|-----------------------|------------|-------------|------------|
| ** **            | ** ** | **First**   | ** ** | **Second** | ** ** | **Third** | ** ** |
| **Gross Profit** | ** ** | **Quarter** | ** ** | **Quarter** | ** ** | **Quarter** | ** ** |
|                  |       |        |       |   |   |   |   |
| As reported           |       | $           | 54,014     |   | $ | 54,600 |   | $ | 54,069 |   |
| As reclassified       |       | 45,701      |       | 46,197 |   | 45,322 |   |
|                       |            |             |            |  |  |  |  |  |  |  |

 
|                       | ** ** | **2005**    | ** ** |
|-----------------------|------------|-------------|------------|
| ** **            | ** ** | **First**   | ** ** | **Second** | ** ** | **Third** | ** ** | **Fourth** | ** ** |
| **Gross Profit** | ** ** | **Quarter** | ** ** | **Quarter** | ** ** | **Quarter** | ** ** | **Quarter** | ** ** |
|                  |       |        |       |   |   |   |   |   |   |
| As reported           |       | $           | 52,504     |   | $ | 53,106 |   | $ | 52,327 |   | $ | 56,428 |   |
| As reclassified       |       | 44,236      |       | 44,488 |   | 43,743 |   | 47,956 |   |
|                       |            |             |            |  |  |  |  |  |  |  |  |  |  |

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(2)             Earningsper share is calculated using the weighted average outstanding shares for thequarter.

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**ARDEN GROUP, INC. AND CONSOLIDATED SUBSIDIARIES**

**INDEX TO EXHIBITS**
| 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.                                     |

 

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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       |       | Form of Indemnification Agreement between the  Registrant and the Directors and certain officers, filed as Exhibit 10.13 to  the Annual Report on Form 10-K of Arden Group, Inc. for the fiscal year ended  December 29, 1990 and incorporated herein by reference.                                                                                                  |
|       |       |                                                                                                                                                                                                                                                                                                                                                                 |
| 10.4*      |       | Second Amendment to Employment Agreement as of  January 1, 1997, by and between Arden Group, Inc., Arden-Mayfair, Inc., AMG  Holdings, Inc. and Gelson’s Markets and Bernard Briskin, filed as Exhibit  10.9 to the Annual Report on Form 10-K of Arden Group, Inc. for the fiscal  year ended January 3, 1998 and incorporated herein by reference.            |
|       |       |                                                                                                                                                                                                                                                                                                                                                                 |
| 10.5*      |       | Phantom Stock Plan of Arden Group, Inc., filed as  Exhibit 10.11 to the Annual Report on Form 10-K of Arden Group, Inc. for the  fiscal year ended January 2, 1999 and incorporated herein by reference.                                                                                                                                                             |
|       |       |                                                                                                                                                                                                                                                                                                                                                                 |
| 10.7*      |       | Form of Amendment to Non-Employee Director Phantom  Stock Unit Agreement with each John G. Danhakl, Robert A. Davidow, Daniel  Lembark, Ben Winters and Kenneth A. Goldman dated December 9, 2002, filed as  Exhibit 10.14 to the Annual Report on Form 10-K of Arden Group, Inc. for the  fiscal year ended December 28, 2002 and incorporated herein by reference. |
|       |       |                                                                                                                                                                                                                                                                                                                                                                 |
| 10.8*      |       | Arden Group, Inc., Non-Officer and Non-Director  Stock Option Plan filed as Exhibit 10.15 to the Annual Report on Form 10-K of  Arden Group, Inc. for the fiscal year ended December 28, 2002 and  incorporated herein by reference.                                                                                                                                 |
|       |       |                                                                                                                                                                                                                                                                                                                                                                 |
| 10.8.1*    |       | Form of Stock Option Plan Agreement filed as Exhibit  10.15.1 to the Annual Report on Form 10-K of Arden Group, Inc. for the fiscal  year ended December 28, 2002 and incorporated herein by reference.                                                                                                                                                              |
|       |       |                                                                                                                                                                                                                                                                                                                                                                 |
| 10.9*      |       | Form of Non-Employee Director Phantom Stock Unit  Agreement with Steven Romick filed as Exhibit 10.1 to the Quarterly Report on  Form 10-Q of Arden Group, Inc. for the quarter ended June 28, 2003 and  incorporated herein by reference.                                                                                                                           |
|       |       |                                                                                                                                                                                                                                                                                                                                                                 |
| 10.10*     |       | Form of Non-Employee Director Phantom Stock Unit  Agreement with each of John G. Danhakl, Robert A. Davidow, Ben Winters,  Kenneth A. Goldman and Steven Romick dated January 20, 2004.                                                                                                                                                                              |
|       |       |                                                                                                                                                                                                                                                                                                                                                                 |

 

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| Exhibit | ** ** | ** **                                                                                                                                                                                                                                   |
|---------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|    |       |                                                                                                                                                                                                                                         |
| 10.11*  |       | Form of Non-Employee Director Phantom Stock Unit  Agreement with Steven C. Gordon filed as Exhibit 10.1 to the Quarterly Report  on Form 10-Q of Arden Group, Inc. for the quarter ended July 2, 2005 and  incorporated herein by reference. |
|    |       |                                                                                                                                                                                                                                         |
| 21.     |       | Subsidiaries of Registrant.                                                                                                                                                                                                                  |
|    |       |                                                                                                                                                                                                                                         |
| 23.1    |       | Consent of Independent Registered Public Accounting  Firm.                                                                                                                                                                                   |
|    |       |                                                                                                                                                                                                                                         |
| 23.2    |       | Consent of Independent Registered Public Accounting  Firm.                                                                                                                                                                                   |
|    |       |                                                                                                                                                                                                                                         |
| 31.1    |       | Certification of Chief Executive Officer pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                         |
|    |       |                                                                                                                                                                                                                                         |
| 31.2    |       | Certification of Chief Financial Officer pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                         |
|    |       |                                                                                                                                                                                                                                         |
| 32.1    |       | Certification of Chief Executive Officer pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                         |
|    |       |                                                                                                                                                                                                                                         |
| 32.2    |       | Certification of Chief Financial Officer pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                         |

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*          Indicates management contracts orcompensatory plans or arrangements required to be filed as an exhibit to thisreport.

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