Tableof Contents

 

 

 

**UNITED STATES SECURITIES AND EXCHANGE COMMISSION**

**Washington,D. C. 20549**

** **

**FORM 10-K**

** **

**(Mark One)**
| **x**      | ** ** | **ANNUAL  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934**                                                                                                                                                                                          |
|------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** ** | ** ** | ** **                                                                                                                                                                                                                                                                                    |
|       |       | **For the fiscal year ended  January 3, 2009**                                                                                                                                                                                                                                           |
|       |       |                                                                                                                                                                                                                                                                                          |
| **OR**     |
|       |       |                                                                                                                                                                                                                                                                                          |
| **o**      | ** ** | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934**                                                                                                                                                                                      |
| ** ** | ** ** | ** **                                                                                                                                                                                                                                                                                    |
|       |       | **For the transition period  from                       to                    ** |

 

**Commission file number  0-9904**

 

**ARDEN GROUP, INC.**

(Exact name of 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 telephonenumber, including area code **(310) 638-2842**

 

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

 
| **(Title  of each 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:

 

**None**

(Title of each class)

 
| Indicate by check mark  if the registrant is a well-known seasoned issuer, as defined in  Rule 405 of the Securities Act. |
|--------------------------------------------------------------------------------------------------------------------------------|
| Yes o  No  x                                                                                                         |

 
| Indicate by check mark  if the registrant is not required to file reports pursuant to Section 13  or Section 15(d) of the Act. |
|-----------------------------------------------------------------------------------------------------------------------------------------------|
| Yes o  No  x                                                                                                                        |

 
| Indicate by check mark  whether the registrant (1) has filed all reports required to be filed by  Section 13 or 15(d) of the Securities Exchange Act of 1934 during  the preceding 12 months (or for such shorter period that the registrant was  required to file such reports), and (2) has been subject to such filing  requirements for the past 90 days.                                                                             Yes  x  No  o |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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

 

Indicate by checkmark whether the registrant is a large accelerated filer, an accelerated filer,a non-accelerated filer, or a smaller reporting company.  See the definitions of “large acceleratedfiler,” “accelerated filer” and “smaller reporting company” in Rule 12b-2of the Exchange Act.

 
| Large accelerated filer | o |   | Accelerated filer          | x |
|-------------------------|---|--------|----------------------------|---|
| Non-accelerated filer   | o |   | Smaller reporting  company | o |

 
| Indicate by check mark  whether the registrant is a shell company (as defined in Rule 12b-2 of  the 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 soldon June 27, 2008, the last businessday of the registrant’s most recently completed second fiscal quarter, was$143,468,177.

 

The number of sharesoutstanding of the registrant’s class of common stock as of March 6, 2009was:

 

3,161,098 sharesof Class A Common Stock

 

 

 

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**TABLE OF CONTENTS**

 
| **Page**   | ** ** | ** **        | ** ** | ** **                                                                                                              |
|------------|------------|-------------------|------------|-------------------------------------------------------------------------------------------------------------------------|
| ** ** | ** ** | **PART I**   | ** ** | ** **                                                                                                              |
| 1          |       | Item 1.           |       | Business                                                                                                                |
| 5          |       | Item 1A.          |       | Risk Factors                                                                                                            |
| 9          |       | Item 1B.          |       | Unresolved  Staff Comments                                                                                              |
| 9          |       | Item  2.          |       | Properties                                                                                                              |
| 10         |       | Item 3.           |       | Legal Proceedings                                                                                                       |
| 10         |       | Item 4.           |       | Submission  of Matters to a Vote of Security Holders                                                                    |
|       |       |              |       |                                                                                                                    |
| ** ** | ** ** | **PART II**  | ** ** | ** **                                                                                                              |
| 11         |       | Item 5.           |       | Market for  the Registrant’s Common Equity, Related Stockholder Matters and Issuer  Purchases of Equity Securities |
| 12         |       | Item 6.           |       | Selected Financial  Data                                                                                                |
| 13         |       | Item 7.           |       | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                             |
| 25         |       | Item 7A.          |       | Quantitative  and Qualitative Disclosures about Market Risks                                                            |
| 25         |       | Item 8.           |       | Financial  Statements and Supplementary Data                                                                            |
| 25         |       | Item 9.           |       | Changes in  and Disagreements with Accountants on Accounting and Financial Disclosure                                   |
| 26         |       | Item 9A.          |       | Controls and  Procedures                                                                                                |
| 26         |       | Item 9B.          |       | Other Information                                                                                                       |
|       |       |              |       |                                                                                                                    |
| ** ** | ** ** | **PART III** | ** ** | ** **                                                                                                              |
| 27         |       | Item 10.          |       | Directors  and Executive Officers of the Registrant                                                                     |
| 29         |       | Item 11.          |       | Executive  Compensation                                                                                                 |
| 37         |       | Item 12.          |       | Security  Ownership of Certain Beneficial Owners and Management and Related Stockholder  Matters                        |
| 39         |       | Item 13.          |       | Certain  Relationships, Related Transactions and Director Independence                                                  |
| 40         |       | Item 14.          |       | Principal  Accountant Fees and Services                                                                                 |
|       |       |              |       |                                                                                                                    |
| ** ** | ** ** | **PART IV**  | ** ** | ** **                                                                                                              |
| 42         |       | Item 15.          |       | Exhibits and  Financial Statement Schedules                                                                             |
|       |       |              |       |                                                                                                                    |
| ** ** | ** ** | **SIGNATURES**    |

 

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**PART I**

** **

Item1.                Business

 

**General**

** **

The Registrant,Arden Group, Inc. (Company or 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’s Markets (Gelson’s) whichoperates supermarkets in Southern California. The Company also owns certain real estate properties through asubsidiary, Mayfair Realty, Inc. (Mayfair Realty) which is wholly-owned bythe Company and Arden-Mayfair.

 

Arden isheadquartered at 2020 South Central Avenue, Compton, California 90220 and itstelephone number is (310) 638-2842.

 

**MarketOperations**

 

As of January 3, 2009,Gelson’s operated 18 full-service supermarkets in Southern California, whichcarry both perishable and grocery products, 17 under the name “Gelson’s” andone under the name “Mayfair.”  TheCompany is converting the remaining Mayfair store to the Gelson’s name andformat as part of a major remodel which is expected to be completed by thespring of 2009.  Gelson’s and Mayfairoffer a broad selection of local and national brands as well as a limitednumber of private label items.  Gelson’stargets the consumer who values superior customer service, merchandise,presentation and selection.  Gelson’salso operates a distribution center in the City of Commerce, California.

 

**StoreFormats and Business Strategy**

** **

Gelson’s businessstrategy is to offer a comfortable upscale shopping experience which is superiorto its competitors in terms of customer service and merchandise quality,selection and presentation.  The goal ofthis strategy is to continue to develop and maintain Gelson’s loyal base ofcustomers 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 organic products.  Gelson’s perishables are typically premiumproducts, which are rigorously maintained and culled as appropriate to assurequality 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 generally offers fewerchoices.

 

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Service  Gelson’s emphasizes customer service byoffering a variety of service departments including meat, seafood,delicatessen, floral, sushi, cheese 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,hot bars, gelato bars and carving carts offering cooked meats.  Additionally, selected stores offer bankingand pharmacy services through third parties. Stores are staffed so that, even at peak times, customer checkout timeis minimized.  In addition to checkers,there are personnel assigned to bagging and carrying out purchases.  All employees are encouraged to knowcustomers by name and assist them whenever possible.  All stores offer a Company charge card toqualified customers in addition to the option of paying for their purchaseswith cash, checks, credit or debit cards. Stores are typically open 14 to 17 hours per day, with hours ofoperation determined by local code, lease provisions or as appropriate for thebusiness 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 becompetitive within their market niches, ranging from the more traditional tothe more exotic, specialty or high-end retailers.

 

Expansion and StoreDevelopment  Managementregularly evaluates the feasibility of opening new stores in and outside itsexisting trade areas and remodeling existing stores in order to maximize theexisting stores’ appeal to consumers and their profit potential.  In 2008,capital expenditures totaled $5,159,000.

 

Advertising andPromotion  Gelson’sadvertises on a limited basis in newspapers and through its newsletter.  Advertising focuses on the promotion ofevents rather than prices; for example, Gelson’s emphasizes special holidayselections, new products, specialty items, services and recipes.  In addition, Gelson’s maintains a website at www.gelsons.com which allows customersto learn more about Gelson’s and to read about food related topics that may beof interest to them.  The website alsoprovides an opportunity for customers to request a newsletter, offer feedbackand to place catering and holiday meal orders online.  The Company reevaluates its strategyregularly in an effort to identify the most effective means of attracting andretaining 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 

 

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service.  The Company also believes that Gelson’s primestore locations and long-standing reputation add to 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 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 48% of thepurchases for 2008 were distributedthrough the central warehouse; the remainder was delivered directly to thestores from manufacturers, distributors or wholesalers.  The central purchasing and distributionoperations are conducted based on electronic in-store ordering systems.  Stores can place and receive orders up to sixdays per week.  Perishables are orderedmore frequently than other goods.

 

The largestsupplier for the stores is Unified Western Grocers, Inc. (Unified), agrocery wholesale cooperative, which has been a supplier to the Company forapproximately thirty-four years and which accounted for approximately 16% ofGelson’s purchases in fiscal 2008.  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 directstore delivery, thereby freeing warehouse capacity to allow other items to bepurchased through the warehouse and (ii) purchasing certain productsthrough other wholesalers.  However, sucha loss could have an adverse effect on the performance of Gelson’s.

 

**Employees**

 

Gelson’s hadapproximately 1,324 full-time and 967 part-time store, warehouse and officeemployees at January 3, 2009. Most Gelson’s employees are covered by union collective bargainingagreements that establish rates of pay, benefits and procedures for the orderlysettlement of disputes.  In general,these agreements have been negotiated on a local industry-wide basis.

 

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InFebruary 2007, the Company completed negotiation of a new union contractwith the United Food & Commercial Workers International Union (UFCW)to replace the contract which expired on March 5, 2007.  The Company’s employees who are members ofthe UFCW voted to ratify the new contract in a vote held on February 21and 23, 2007.  The new contract whichexpires March 5, 2010 discontinues the use of a two-tier wage structureand provides for, among other things, wage increases and modifications to thepension and health and welfare plans. The Company contributes to a multi-employer health care and pension plantrust on behalf of its employees who are members of the UFCW. All employers who participate in a multi-employer plan are required tocontribute at the same hourly rate based on straight time hours worked in orderto fund the plan.  Consequently, thebenefit contribution rates that the Company negotiated with the UFCW effective March 2007were subject to change retroactively based on the outcome of the union’snegotiations with the three major grocery retailers in our trade area whichwere completed in July 2007.  Theemployees of the three major grocery retailers voted to ratify their contracton July 22, 2007.  The UFCW’sagreement with the three major grocery retailers expires on March 6,2011.  Effective March 10, 2009, the Company’sUFCW employees voted to ratify an amendment to our contract with the UFCW whichextends the contract expiration date to March 6, 2011.

 

In addition toemployees at Gelson’s, Arden-Mayfair had approximately 68 full-time employeesat its executive and headquarters offices as of January 3,2009, some of 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 in all material respects with federal, stateand local health, environmental and other laws and regulations.  Although the Company cannot predict theeffect of future laws or regulations on its operations, expenditures forcontinued compliance with current laws are not expected to have a materialadverse impact on Gelson’s competitive position or the Company’s consolidatedfinancial position, results of operations or cash flows.

 

**AvailableInformation**

 

The Company does notpresently have an internet website to make its filings with the Securities andExchange Commission (SEC) available.  TheCompany is in the process of developing a website and will make its SEC filingsavailable free of charge through its website in the near future.  The Company will provide free of charge uponwritten request to Assistant Secretary, Arden Group, Inc., P.O. Box512256, Los Angeles, California 90051-0256 paper copies of its annual report onForm 10-K, quarterly reports on Form 10-Q, current reports on Form 8-Kand amendments to those reports filed or furnished pursuant to Section 13(a) or15(d) of the Securities Exchange Act of 1934, as amended, as soon asreasonably practicable after electronically filing such material with theSEC.  This information is also availableat www.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.

 

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Item1A.                 RiskFactors

 

The Private SecuritiesLitigation Reform Act of 1995 provides a safe harbor for forward-looking statementsmade by or on behalf of the Company. Certain statements contained in this Item 1A, Item 7 - Management’sDiscussion and Analysis of Financial Condition and Results of Operations, otherparts of this report and other Company filings are forward-lookingstatements.  These statements discuss,among other things, future sales, operating results and financialcondition.  Forward-looking statementsreflect the Company’s current plans and expectations regarding important riskfactors and are based on information currently known to the Company.

 

The Company cautionsreaders that any forward-looking statements contained in this report or made bythe management of the Company involve risks and uncertainties, and are subjectto change based on various important factors. Such statementsmay be identified by such words as “anticipate,” “expect,” “may,” “believe,” “could,”“estimate,” “project,” and similar words or phrases.  The Company does not undertake anyobligation to update forward-looking statements.  The factors listed below, among others, couldaffect the Company’s financial results and could cause the Company’s financialperformance to differ materially from the expectations expressed in anyforward-looking statement made by or on behalf of the Company:

 

*Changesin Economic, Political or Social Conditions*

* *

Ourprofitability may be impacted by both national and local economic conditions,particularly in Southern California. Changes in economic conditions such as recessionary cycles, increasedlevels of unemployment, higher consumer debt levels, inflation, higher interestrates and tax rates and increased energy costs may result in reduced consumerspending or influence our customers to shift their spending to our lower-pricedcompetitors.  The recent turmoil in theeconomy, including the financial and residential real estate markets, andhigher levels of unemployment will continue to influence consumer spendingpatterns in the future.  In addition,current market conditions may limit the amount that the Company can charge forits products.  If the Company is unableto pass increased costs on to its customers, profit margins may be negativelyaffected.  In addition, our business maybe subject to interruption from acts of terrorism, national emergencies ornatural disasters.

 

*Competitionin the Grocery Business*

* *

Theretail grocery business is intensely competitive with respect to price, foodquality and selection, service and location. During the past several years, there has been a consolidation in the supermarketindustry.  We are in direct competitionwith numerous local outlets of regional and national supermarket chains,independent grocery stores, convenience stores, specialty and gourmet marketsand food and grocery departments in mass merchandise and club stores.   There are a number of well establishedcompetitors with substantially greater financial, marketing, personnel andother 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.

 

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* *

*Foodand Drug Safety Concerns*

* *

Thereis increasing governmental scrutiny and public awareness regarding food anddrug safety. The Company could be adversely affected if consumers loseconfidence in the safety and quality of the Company’s food and drug products.Any events that give rise to actual or potential food contamination, drugcontamination or food-borne illness could result in product liability claimsand a loss of consumer confidence. In addition, adverse publicity about thesetypes of concerns whether valid or not, may discourage consumers from buyingthe Company’s products or cause production and delivery disruptions, whichcould have an adverse effect on the Company’s sales and results of operations.

 

*NewLabor Contracts and Labor Stoppages*

* *

Themajority of our employees belong to unions with which we have signed laboragreements which establish rates of pay, benefits and procedures for theorderly settlement of disputes.  In orderto continue to attract and retain quality personnel, we may accept terms thatincrease our operating costs, which in turn, may negatively impact ourprofitability.  If contract negotiationsare not successful, the union could recommend that our employees vote to strikeour stores, distribution center and offices.

 

InJuly 2007, the UFCW completed negotiation of a new contract with the threemajor grocery retailers in our trade area. The wage increases agreed to by these three competitors were somewhatless than the Company agreed to for certain job classifications and experiencelevels during our UFCW negotiations in February 2007 and March 2009.  This could affect our ability to compete withgrocery retailers whose labor costs are less than our own.

 

*Cost ofProviding Employee Benefits*

* *

TheCompany provides health insurance for the majority of its nonunion employees.  Health care costs have increasedsignificantly in recent years.  If thistrend continues, it could have a negative impact on the Company’sprofitability.  In addition, the Companycontributes to several multi-employer union health care plans in accordancewith the Company’s various collective bargaining agreements.  Currently, the health and welfare fund whichcovers the majority of the Company’s UFCW employees is overfunded.  The contribution rate paid by all employerswas reduced effective March 2007. Originally, the reduction in the health and welfare contribution ratewas expected to reduce the overfunded status of the fund over the term of thecurrent agreement which ends on March 6, 2011.  However, many factors influence how long thefund will maintain an overfunded status including changes in the cost of healthcare, the return on investments of funds held by the plan, changes to benefitsoffered under the plan and government regulations.  The Company’s health and welfare contributionrate was scheduled to increase effective with hours worked during March 2009;however, the Company was recently notified by the Southern California UnitedFood & Commercial Workers Unions and the Food Employers Joint TrustFunds (Trust) that the increase has been suspended for the six month periodbeginning March 2009 and ending August 2009.   The Trust will review the effective rateagain in August 2009.

 

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TheCompany also participates in various multi-employer union pension plans.  Adverse stock market developments havesignificantly impacted the funded status of pension plans on a worldwide basis.  Currently, the Company’s contributions underboth the UFCW health care and the pension plans are fixed under the terms ofthe current agreement which ends on March 6, 2011 except for thesuspension period as noted above.   Thecurrent economic conditions and the turmoil in the financial markets could havea significant impact on the funded status of the health care and pension plansin which the Company participates.  TheCompany anticipates that both health care and pension benefits will beimportant topics in future negotiations. If the Company and other participating employers are unable to negotiatean acceptable agreement with the union concerning employee benefits, a labordispute could result or the negotiations could result in a new agreementrequiring higher contribution rates.  Inaddition, if any of the participating employers in the plan withdraws from theplan due to insolvency and is not able to contribute an amount sufficient tocover the underfunded liabilities associated with its participants, the Companymay be required to make additional contributions.   Each of these scenarios could negativelyimpact the Company’s financial condition and results of operations.

 

*Retentionof Key Personnel*

* *

Oursuccess is dependent on our key employees. We must continue to attract, retain and motivate a sufficient number ofqualified management and operating personnel including the replacement ofsenior management upon retirement. Individuals of this caliber are historically in short supply and thisshortage may limit our ability to hire and retain qualified personnel, andthus, may hinder our ability to operate effectively.

 

*Changesin Laws or Regulations or Failure to Comply*

* *

Weare subject to various federal, state and local laws, regulations and licensingrequirements which regulate health and sanitation standards, food labeling andhandling, the sale of alcoholic beverages, employment practices, 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 environmentalregulations.  Failure to comply withthese regulations could adversely affect the operation of our existing storesor could delay or prevent the opening of a new store.

 

*Changesin Accounting Standards, Policies and Practices*

* *

Theissuance of new pronouncements or changes to existing accounting policies andpractices could have a significant impact on our reported results or change theway we account for various transactions. New policies and changes to existing rules may adversely affect ourreported financial results.

 

*Availabilityand Retention of Retail Space*

* *

Wecurrently lease the majority of our store locations. Typically, our supermarketleases have initial 20-year lease terms and may include options for up to anadditional 20 years.  The average termremaining on our supermarket leases, including renewal options, isapproximately 19 years.  Our revenues andprofitability would be negatively impacted if we are unable to renew theseleases at reasonable rates.

 

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Ourcontinued growth depends to a significant degree on our ability to open oracquire new stores in existing and new trade areas and to operate these storessuccessfully.  Our expansion strategy isdependent on finding suitable locations, and we face intense competition fromother retailers for such sites.  We maynot be able to find suitable locations that meet our demographic requirementsat a reasonable cost.

 

*TheAbility of our Vendors to Supply Products and Services in a Timely Manner*

 

Ourbusiness is dependent on our ability to purchase products from a largewholesaler and numerous smaller vendors in a timely manner and at competitiveprices.  The largest supplier for ourstores is Unified, a grocery wholesale cooperative, which has provided productfor our stores for approximately thirty-four years.  We currently procure approximately 16% of ourproduct from Unified.  Any disruption inthe business of Unified or any of our other principal suppliers couldnegatively impact our sales and profitability. Even where we have access to alternative sources of supply, the failureof a supplier to meet our demands may temporarily disrupt store levelmerchandise selection.

 

*Abilityto Control  Insurance Coverage Costs andClaims Experience*

 

Weuse a combination of insurance and self-insurance plans to provide for coverageassociated with losses related to workers’ compensation, general and autoliability, property damage, directors and officers liability, fiduciary,employment practices liability, business interruption, crime, earthquake andhealth care.  If insurance costsincrease, it could have a negative impact on our profitability if we are notable to offset the effect of such increases with plan modifications, costcontrol measures, sales increases or by improving our operating efficiency.

 

Weare self-insured for general and auto liability and, in some prior years, forworkers’ compensation as well.  We havestop-loss insurance coverage to limit our exposure on a per claim basis and areinsured 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.

 

*TheOutcome of Current and Future Legal Proceedings*

 

Fromtime to time we are the subject of complaints or litigation from customersalleging 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 ownedproperties, 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 if not covered byinsurance.  Additionally, the cost ofdefending ourselves against lawsuits and claims, regardless of merit, couldhave a negative impact on our profitability.

 

*Impactof Local Projects in the Vicinity of our Supermarkets*

 

Fromtime to time, local events or projects take place in the vicinity of our storesthat may have a negative impact on our sales and profitability.

 

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*StockPrice Volatility*

 

Themarket 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 have sometimesbeen 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. In March 2007, the Company merged its Stock Bonus Plan into its 401(k) RetirementSavings Plan (401(k) Plan) in order to satisfy the new congressionallymandated diversification requirements. Stock previously held for the benefit ofparticipants in the Company’s Stock Bonus Plan was transferred to individualparticipant accounts in the Company’s 401(k) Plan.  As of January 3,2009, participants in the Company’s 401(k) Planheld 79,283 shares of Class A in the401(k) Plan.  These participants canelect to sell their shares which may have a negative effect on the price of Class A.  Fluctuations in our Class A price alsoimpact compensation expense as it relates to our outstanding stock appreciationrights (SARs).  See Item 7 - Management’sDiscussion and Analysis of Financial Condition and Results of Operations forfurther information.

 

Item 1B.         Unresolved StaffComments

 

None.

 

Item2.            Properties

 

InNovember 2006, the Company formed a new wholly-owned subsidiary calledMayfair Realty.  At the end of fiscal2006, most real estate owned by the Company or Arden-Mayfair was transferred toMayfair 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, California 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 19 years.  The 18 markets range in size fromapproximately 18,000 to 40,000 square feet. Gelson’s warehouse, distribution and truck service facilities in theCity of Commerce, California are leased and contain approximately 131,000square feet.  The term of the lease,including renewal options, expires in January 2021.  Mayfair Realty also owns a 30,000 square footoffice building in Compton, California which serves as the Company’sheadquarters 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 stores whichare used for additional parking.  Inaddition, AMG Holdings, Inc. (AMG 

 

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Holdings), awholly-owned subsidiary of Arden-Mayfair, leases as a tenant, a 62,000 squarefoot building in Los Angeles, California consisting of office and warehousespace, which is entirely subleased until the lease on the property expires in2012.

 

Item3.            LegalProceedings

 

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.

 

Item4.            Submissionof Matters to a Vote of Security Holders

 

There was nomatter submitted during the fourth quarter of fiscal year 2008 to a vote of the security holders of theRegistrant.

 

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** **

**PART II**

** **

Item5.           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 under the symbolARDNA.  During the past two years, therange of high and low sales prices for each quarterly period was, according toNASDAQ, the following:

 
| ** **       | ** ** | **2008** | ** ** | **2007** | ** ** |
|------------------|------------|----------|------------|----------|------------|
| ** **       | ** ** | **High** | ** ** | **Low**  | ** ** | **High** | ** ** | **Low** | ** ** |
|             |       |     |       |     |       |   |   |   |   |
| 1st Quarter |       | $        | 159.50     |     | $          | 125.00 |   | $ | 133.50 |   | $ | 113.00 |   |
| 2nd Quarter |       | 144.77   |       | 114.06   |       | 144.05 |   | 128.26 |   |
| 3rd Quarter |       | 199.99   |       | 122.01   |       | 170.00 |   | 124.46 |   |
| 4th Quarter |       | 166.85   |       | 118.01   |       | 165.48 |   | 130.20 |   |
|                  |            |          |            |          |            |  |  |  |  |  |  |  |  |

 

(b)                                 Asof January 3, 2009, there were 825 holders of record of theCompany’s Class A, 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)                                  TheCompany declared regular quarterly dividends of 25 cents per share of Class Aduring fiscal 2008 and 2007.  The Companycurrently anticipates payment of comparable Class A quarterly dividends infuture quarters*.*

 

On November 3,2008, the Company’s Board of Directors declared a special cash dividend oftwenty-five dollars ($25) per share on its outstanding Class A payable on December 8,2008 to stockholders of record at the close of business on November 20,2008.  The aggregate amount of thespecial dividend was approximately $79,027,000.

 

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Item6.            SelectedFinancial Data

 

**ARDEN GROUP, INC. ANDCONSOLIDATED SUBSIDIARIES**

 

(In Thousands, ExceptShare and Per Share Data)

*All yearsare 52 weeks except 2008 which is 53 weeks.*

 
| ** **                                                     | ** ** | **2008**  | ** ** | **2007**  | ** ** | **2006**  | ** ** | **2005**  | ** ** | **2004**  | ** ** |
|----------------------------------------------------------------|------------|-----------|------------|-----------|------------|-----------|------------|-----------|------------|-----------|------------|
| Operations For  The Year (1):                                  |       |      |       |      |       |      |       |      |       |      |       |
| Sales                                                          |       | $         | 479,117    |      | $          | 485,939   |       | $         | 482,737    |      | $          | 470,354 |   | $ | 502,898 |   |
| Gross profit                                                   |       | 184,500   |       | 187,991   |       | 186,336   |       | 180,423   |       | 192,316   |       |
| Operating income                                               |       | 40,319    |       | 45,177    |       | 36,680    |       | 31,816    |       | 34,579    |       |
| Other income  (expense), net                                   |       | 1,188     |       | 3,307     |       | 2,439     |       | 1,606     |       | 3,591     |       |
| Income tax  provision                                          |       | 16,840    |       | 19,277    |       | 15,895    |       | 13,571    |       | 15,498    |       |
| Net income                                                     |       | $         | 24,667     |      | $          | 29,207    |       | $         | 23,224     |      | $          | 19,851 |   | $ | 22,672 |   |
|                                                           |       |      |       |      |       |      |       |      |       |      |       |
| Net income per  common share (2):                              |       |      |       |      |       |      |       |      |       |      |       |
| Basic —  Class A Common Stock                        |       | $         | 7.80       |      | $          | 9.24      |       | $         | 7.16       |      | $          | 5.87 |   | $ | 7.00 |   |
| Basic —  Class B Common Stock                        |       | N/A       |       | N/A       |       | N/A       |       | N/A       |       | 6.13      |       |
| Diluted                                                        |       | 7.80      |       | 9.24      |       | 7.16      |       | 5.87      |       | 6.70      |       |
|                                                           |       |      |       |      |       |      |       |      |       |      |       |
| Financial  Position At Year-End (1):                           |       |      |       |      |       |      |       |      |       |      |       |
| Total assets                                                   |       | $         | 99,810     |      | $          | 166,689   |       | $         | 145,601    |      | $          | 147,027 |   | $ | 122,135 |   |
| Working capital                                                |       | 13,847    |       | 70,154    |       | 41,942    |       | 41,304    |       | 23,883    |       |
| Long-term debt                                                 |       | 1,228     |       | 1,228     |       | 1,228     |       | 1,453     |       | 1,764     |       |
| Stockholders’  equity                                     |       | 51,160    |       | 108,493   |       | 82,294    |       | 82,320    |       | 66,576    |       |
| Capital  expenditures                                          |       | 5,159     |       | 3,824     |       | 4,868     |       | 6,390     |       | 12,641    |       |
|                                                           |       |      |       |      |       |      |       |      |       |      |       |
| Other Operating  and Financial Data:                           |       |      |       |      |       |      |       |      |       |      |       |
| Number of stores  at end of fiscal year                        |       | 18        |       | 18        |       | 18        |       | 18        |       | 18        |       |
| Sales increase  (decrease) (1) (3):                       |       |      |       |      |       |      |       |      |       |      |       |
| Total stores                                                   |       | (1.4      | )%         | .6        | %          | 2.6       | %          | (6.6      | )%         | 3.4       | %          |
| Same stores                                                    |       | (1.4      | )%         | .6        | %          | 2.6       | %          | (6.6      | )%         | 3.4       | %          |
|                                                           |       |      |       |      |       |      |       |      |       |      |       |
| Depreciation and amortization                                  |       | $         | 6,110      |      | $          | 6,685     |       | $         | 7,097      |      | $          | 7,401 |   | $ | 6,990 |   |
|                                                           |       |      |       |      |       |      |       |      |       |      |       |
| Dividends declared per common share (2):                       |       |      |       |      |       |      |       |      |       |      |       |
| Class A  Common Stock                                     |       | $         | 1.00       |      | $          | 1.00      |       | $         | 1.00       |      | $          | 1.00 |   | $ | 1.00 |   |
| Class B  Common Stock                                     |       | N/A       |       | N/A       |       | N/A       |       | $         | N/A        |      | $          | .675 |   |
| Special dividend  declared per Class A Common Stock share |       | $         | 25.00      |      |       |      |       |      |       |      | $          | 20.00  |   |
|                                                           |       |      |       |      |       |      |       |      |       |      |       |
| Weighted average  common shares outstanding (2):               |       |      |       |      |       |      |       |      |       |      |       |
| Basic —  Class A Common Stock                        |       | 3,161,098 |       | 3,161,098 |       | 3,241,805 |       | 3,381,051 |       | 2,217,675 |       |
| Basic —  Class B Common Stock                        |       | N/A       |       | N/A       |       | N/A       |       | N/A       |       | 1,164,977 |       |
| Diluted                                                        |       | 3,161,098 |       | 3,161,098 |       | 3,241,805 |       | 3,381,051 |       | 3,382,652 |       |

 

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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.

 

(2)             Prior to November 10, 2004, the Companyhad two classes of Common Stock including Class B Common Stock (Class B)which was convertible on a share-for-share basis into Class A.  Class B stockholders were entitled toshare in 90% of the dividends (other than stock dividends) paid to Class Astockholders.  On November 10, 2004,Bernard Briskin, Chairman of the Board of Directors, President and ChiefExecutive Officer of the Company, elected to convert Class B sharesbeneficially owned by him, including shares beneficially owned with his spouse,into Class A shares.  The conversionof these shares triggered the automatic and simultaneous conversion of allremaining Class B shares as provided under the Company’s RestatedCertificate of Incorporation.  After theconversion, the Company has only Class A outstanding and all stockholdersparticipate equally in the undistributed earnings of the Company.

 

(3)             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.  Fiscal2008 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.

 

Item 7.                                     Management’sDiscussion and Analysis of Financial Condition and Results of Operations

 

The Private SecuritiesLitigation 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, operating results andfinancial 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. Such statements may beidentified by such words as “anticipate,” “expect,” “may,” “believe,” “could,” “estimate,”“project,” and similar words or phrases. The Company does not undertake any obligation to updateforward-looking statements.

 

**Overview**

 

Ardenis a holding company which conducts operations through its first and secondtier wholly-owned subsidiaries, Arden-Mayfair and Gelson’s, respectively.  Gelson’s operates 18 full-servicesupermarkets in Southern California. Gelson’s caters to the upscale customer who expects superior quality,service and merchandise selection.  Inaddition to the customary supermarket offerings, Gelson’s offers specialtyitems such as imported foods, unusual delicatessen items and 

 

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organicand natural food products.  All Gelson’sstores include the typical service departments such as meat, seafood,delicatessen, floral, sushi, cheese and bakery. In addition, some stores offer further services including fresh pizza,coffee bars, hot bars, gelato bars and carving carts offering cooked meats.

 

TheCompany’s management focuses on a number of performance indicators inevaluating financial condition and results of operations.  Same store sales, gross profit and laborcosts are some of the key factors that management considers.  Both sales and gross profit are significantlyinfluenced by competition in our trade area. Gelson’s faces competition from regional and national supermarket chains(most of which have greater resources and a larger market share than Gelson’s),stores specializing in natural and organic foods, specialty and gourmet marketsand grocery departments in mass merchandise and club stores.  The recent downturn in economic conditionshas led to even greater competition in the grocery industry.  As discretionary income declines, someconsumers are reducing their spending and making more value consciousdecisions.  We are forced to compete forfewer customer dollars and keep our retail prices low as our competitors alsoreduce their prices in an attempt to maintain or increase their own marketshare.

 

Laborand other related payroll costs are the second largest expense (after productcost) incurred by Gelson’s, and thus is a financial measure which is carefullymonitored by management.  As of fiscal 2008 year end, Gelson’s had approximately 1,324full-time and 967 part-time store,warehouse and office employees.  Themajority of Gelson’s employees are members of the UFCW.  In February 2007, the Company completednegotiation of a new union contract with the UFCW to replace the contract whichexpired on March 5, 2007.  The threemajor grocery retailers in our trade area had not reached an agreement by thisdate.  The new Gelson’s contract startsthe elimination process of the two-tier wage configuration and returns it to asingle wage structure and provides for, among other things, wage increases andmodifications to the Company’s pension and health and welfare contributionrates.  The Company’s employees who aremembers of the UFCW voted to ratify the new contract in a vote held on February 21and 23, 2007.  The new contractoriginally had an expiration date of March 5, 2010 which was differentfrom the expiration date of the majors’ contract.  Effective March 10, 2009, the Company’sUFCW employees voted to ratify an amendment to our contract with the UFCW whichextends the contract expiration date to March 6, 2011, the same date thecontract between the UFCW and the majors expires.

 

TheCompany contributes to a multi-employer health care and pension plan trust onbehalf of its employees who are members of the UFCW.  All employers who participate in amulti-employer plan are required to contribute at the same hourly rate based onstraight time hours worked in order to fund the plan.  Consequently, the benefit contribution ratesthat the Company negotiated with the UFCW effective March 2007 weresubject to change retroactively based on the outcome of the union’snegotiations with the three major grocery retailers in our trade area which werecompleted in July 2007.  Theemployees of the three major grocery retailers voted to ratify their contracton July 22, 2007.  For purposes ofthe multi-employer plans for health care and pension benefits, Gelson’s issubject to the same contract and term as the majors which expires on March 6,2011.

 

Theagreement reached with the UFCW and the three major grocery retailers resultedin a substantial reduction in the average hourly contribution rates for pensionand health care.  The 

 

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majorityof the reduction relates to the health and welfare fund which was overfunded atthe time of contract negotiation.  Thereduction in the health and welfare contribution rate was originally expectedto substantially reduce the overfunded status of the fund during the term ofthe new contract.  The change incontribution rates for both pension and health care were retroactive to thebeginning of March 2007.  Thereduction in the contribution rates resulted in a substantial decrease in theCompany’s selling, general and administrative (SG&A) expense when comparingperiods covered by the current and the expired contracts.  The Company’s health and welfare contributionrate was scheduled to increase effective with hours worked during March 2009and after; however, the Company was recently notified by the Trust that theincrease has been suspended for the six month period beginning March 2009and ending August 2009.   The Trustwill review the effective rate again in August 2009.

 

Currenteconomic conditions and the turmoil in the financial markets couldsignificantly impact the future funded status of the health care and pensionplans in which the Company participates. Many factors influence the funded status of the plans including changesin the cost of health care, the return on investments of funds held by theplan, changes to benefits offered under the plan and government regulations.  The Company anticipates that both health careand pension benefits will be important topics in future negotiations.  If, in the future, the Company and otherparticipating employers are unable to negotiate an acceptable agreement withthe union concerning employee benefits, a labor dispute could result or thenegotiations could result in a new agreement requiring higher contributionrates.  In addition, if any of theparticipating employers in the plan withdraws from the plan due to insolvencyand is not able to contribute an amount sufficient to cover the underfundedliabilities associated with its participants, the Company may be required tomake additional contributions.  Each ofthese scenarios could negatively impact the Company’s financial condition andresults of operations.

 

Theagreement that the majors reached with the UFCW also provides for hourly wagerates based on job classification and experience that, in some cases, are lessthan those agreed to by Gelson’s.  Thiscould affect our ability to compete with grocery retailers whose hourly ratesare less than our own.  Increases inwages provided under the new contract will negatively impact the Company’sprofitability unless it is able to offset the increased expense through acombination of sales growth, increased gross margin, management of labor hours,decreased labor turnover and cost savings in other areas.  Current economic conditions make it difficultto achieve significant sales growth and increased profit margins.

 

Anothercomponent of labor related expense is the cost of workers’ compensation.  For claims incurred prior to July 1,2006, the Company is primarily self-insured through the use of a highdeductible policy which provides the Company with stop-loss coverage to limitits exposure on a per claim basis and provides coverage for qualifying costs inexcess of per claim limits.  Effective July 2006,the Company purchased a one-year fully insured guaranteed cost workers’compensation insurance policy to replace the high deductible program for lossesoccurring after June 30, 2006.  Theguaranteed cost program eliminates the Company’s risk against claims occurringafter June 30, 2006 and has resulted in lower workers’ compensationexpense compared to the high deductible program.  The Company has continued to renew theguaranteed cost policy annually.  TheCompany continues to maintain an accrual for claims incurred prior to July 2006under the high deductible program.  Thataccrual is based on both undeveloped reported claims and an estimate of claimsincurred but not reported.  While theCompany devotes substantial time and commitment to maintaining a safe workenvironment, the ultimate cost of 

 

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workers’compensation is highly dependent upon legal and legislative trends, theinflation rate of health care costs and the Company’s ability to manage claims.

 

Inthe past, the Company’s quarterly results have reflected significantfluctuations in operating income as a result of adjustments recorded to reflectthe change in the fair value of SARs that have been granted to non-employeedirectors and certain employees.  EachSAR entitles the holder to receive cash upon exercise equal to the excess ofthe fair market value of a share of the Company’s Class A, as determinedin accordance with the SARs agreement, on the date of exercise over the fairmarket value of such share on the date granted. Fluctuations in the market price of the Company’s Class A from theend of the previous fiscal year impact the recognition or reversal of SARscompensation expense in the year being reported upon.  Since the Company cannot predict futurefluctuations in the market price of its stock, it also cannot forecast futureSARs compensation expense adjustments and the extent to which operating incomewill be impacted.

 

**Results of Operations**

 

**2008 Compared to 2007**

 

Netincome in 2008 decreased 15.5% to$24,667,000 compared to $29,207,000during 2007.  Operating income decreased 10.8% to$40,319,000 in 2008 compared to $45,177,000 in 2007.

 

Salesfrom the Company’s 18 supermarkets (all of which are located in SouthernCalifornia), including revenue from licensing arrangements, subleases, leasesand finance charges, were $479,117,000 in 2008(a 53 week fiscal year).  This representsa decrease of 1.4% from 2007 (a 52 weekfiscal year), when sales were $485,939,000.  Sales during 2008 were negatively impacted byeconomic conditions, increased competition in our trade area and increased fueland food prices.  The extra week in 2008compared to the prior year somewhat offset the decrease in sales.

 

TheCompany’s gross profit as a percent of sales was 38.5% in 2008 compared to 38.7% in 2007. In calculatinggross profit, the Company deducts product costs, net of discounts andallowances, and inbound freight charges, as well as warehouse, transportation,purchasing, advertising and occupancy costs in 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 expense as apercent of sales was 30.1% in 2008 compared to 29.4% in 2007.  Theincrease in SG&A expense as a percent of sales is primarily due to anincrease in UFCW hourly wage rates effective early March 2008 inaccordance with the current collective bargaining agreement.  To a lesser extent, SG&A expense was alsoimpacted by hourly wage rate increases under collective bargaining agreementswith unions other than the UFCW.  Theseincreases were partially offset by lower SARs compensation expense in 2008compared to the prior year.  During 2008, the Company recognized $1,823,000 of SARs compensation expense comparedto $2,908,000 in 2007.

 

The Company contributesto several multi-employer union pension and health care plans.  Pension and health care payments aredetermined based on straight-time hours worked and the 

 

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contribution rate asstipulated in the Company’s various collective bargaining agreements.  The**Companyrecognized union pension expense of $5,065,000 in 2008 compared to $5,332,000in 2007. Union health care expense was $9,258,000in 2008 compared to $9,788,000 in 2007.  Costs decreased due to a reduction in the average hourlycontribution rate effective March 2007 as discussed above and in thenumber of hours eligible for contributions.

 

TheCompany is primarily self-insured for losses related to general and autoliability claims as well as for workers’ compensation in some prior years.  The Company has stop-loss insurance coverageto limit its exposure on a per claim basis and is insured for covered costs inexcess of per claim limits.  Accruals arebased on reported claims and an estimate of claims incurred but notreported.  While the ultimate amount ofclaims incurred is dependent on future developments, in management’s opinion,recorded reserves for general and auto liability claims and workers’compensation are adequate to cover the future payment of claims.

 

Inaddition to high deductible coverage for workers’ compensation and general andauto 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.

 

EffectiveJanuary 1, 2006, the Company adopted Statement of Financial AccountingStandards No. (SFAS) 123(R) (revised 2004), “Share-Based Payment,”which requires the measurement and recognition of compensation expense based onthe fair value of SARs.  SFAS 123(R) requiresthe Company to remeasure the fair value of SARs each reporting period until theaward is settled.  Compensation expensemust be recognized each reporting period for changes in fair value andvesting.  During 2008, the Companyrecognized $1,823,000 of SARs compensation expense due to an increase in thefair value of SARs at the time of exercise and the additional vesting ofSARs.  During 2007, the Companyrecognized $2,908,000 of SARs compensation expense.  Compensation expense is recorded underSG&A expense on the Consolidated Statements of Operations and ComprehensiveIncome.  As of January 3, 2009,assuming no change in the SARs fair value, there was approximately $2,886,000of total unrecognized compensation cost related to outstanding SARs which isexpected to be recognized over a weighted average period of 4.7 years.  The total intrinsic value of SARs exercisedduring 2008 and 2007 was approximately $3,443,000 and $5,643,000, respectively. Intrinsic value represents the amount by which the fair value of SARs onthe date of exercise exceeds the grant price.

 

During 2008, the Company procured approximately 16% ofits product through Unified, a grocery wholesale cooperative.  As a member-patron, the Company is requiredto provide Unified with certain minimum deposits and credit in order topurchase product from the cooperative. As of January 3, 2009, the Company had approximately $1,676,000on deposit with Unified, in addition to approximately $625,000 related toownership of equity shares in Unified. In 2008 and 2007, the Company recorded approximately$251,000 and $253,000, respectively, inpatronage dividend income received in the form of cash and Unified equityshares as a reduction of cost of sales.

 

Interest anddividend income was $2,460,000 in 2008compared to $3,340,000 for 2007 primarily due to lower interest rates in 2008 partially offset by increased average cashlevels.  Due to the

 

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special cash dividend paid on December 8, 2008 totalingapproximately $79,000,000, the Company anticipates a significant decrease ininvestment income in fiscal 2009.

 

SFAS 115, “Accountingfor Certain Investments in Debt and Equity Securities,” requires thatunrealized holding gains and losses from available-for-sale securities beincluded as a component of stockholders’ equity.  Unrealized gains on investments were $188,000(net of income tax expense**of $129,000)in 2008 compared to unrealized gains of $153,000 (net of income tax expense of $106,000) in 2007.

 

**2007 Compared to 2006**

 

Netincome in 2007 increased 25.8% to $29,207,000compared to $23,224,000 during 2006. Operating income increased 23.2%to $45,177,000 in 2007 compared to $36,680,000in 2006.

 

Salesfrom the Company’s 18 supermarkets (all of which are located in SouthernCalifornia), including revenue from licensing arrangements, subleases, leasesand finance charges, were $485,939,000 in2007. This represents an increase of .7%from 2006, when sales were $482,737,000. The Company experienced sales growth due to product pricing decisions(primarily due to product cost increases) partially offset by a decrease incustomer count.  Sales during 2007 wereinfluenced by increased competition in our trade area from new competitorsentering our market.  In addition, themerger trend amongst our competitors resulted in larger companies that possessstronger market recognition.

 

TheCompany’s gross profit as a percent of sales was 38.7% in 2007 compared to 38.6% in 2006.In calculating gross profit, the Company deducts product costs, net ofdiscounts and allowances, and inbound freight charges, as well as warehouse,transportation, purchasing, advertising and occupancy costs in cost ofsales.  Gross profit as a percent ofsales for the Company may not be comparable to those of other companies in thegrocery industry since there may be differences in recording certain costs ascost of sales or as SG&A expense.

 

SG&A expense as apercent of sales was 29.4% in 2007 compared to 31.0% in 2006.  TheCompany’s provision for all union pension and health care plans decreased 31.4%to $15,120,000 in 2007 compared to $22,032,000 in 2006 due to a reduction inthe average hourly contribution rates for pension and health care as discussedabove as well as a slight decrease in the number of hours eligible forcontributions.  Workers’ compensationexpense also decreased 39.5% to $2,992,000 in 2007 compared to $4,945,000 in2006 as discussed above.  Finally, lowerSARs compensation expense in 2007 compared to the prior year also contributedto the decrease in SG&A expense as a percent of sales.  During 2007, the Company recognized $2,908,000of SARs compensation expense compared to $3,671,000 in 2006.  The decrease in SG&A expense waspartially offset by an increase in labor costs as a result of the new contractwith the UFCW as discussed above.

 

The Company contributesto 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 $5,332,000in 2007 compared to $6,801,000 in 2006.  Union health care expense was $9,788,000 in2007 compared to $15,231,000 in 2006.  

 

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Costsdecreased due to a reduction in the average hourly contribution rate asdiscussed above and in the number of hours eligible for contributions.

 

Fora discussion of workers’ compensation, general and auto liability and othertypes of insurance coverage, see the discussion under the heading “2008Compared to 2007” presented above.

 

Stock-basedcompensation under the SARs program was previously subject to variableaccounting 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 Stock Issued toEmployees.”  Under FIN 28, compensationexpense was recognized as the SARs vested using the graded-vesting method.  In addition, changes in the market price ofthe Company’s Class A impacted the recognition of SARs expense.

 

EffectiveJanuary 1, 2006, the Company adopted SFAS 123(R) (revised 2004), “Share-BasedPayment,” which requires the measurement and recognition of compensationexpense based on the fair value of SARs. The Company adopted SFAS 123(R) using the modified prospectivetransition method, and therefore prior period results were not restated.  As of January 1, 2006, the cumulativeeffect of adopting SFAS 123(R) resulted in the recognition of $288,000 incompensation expense as well as additional expense of $3,383,000 related to anincrease in the fair value of SARs since the end of fiscal 2005 and theadditional vesting of SARs.  Compensationexpense is recorded under SG&A expense on the Consolidated Statements ofOperations and Comprehensive Income.

 

SFAS123(R) requires the Company to remeasure the fair value of SARs eachreporting period until the award is settled. Compensation expense must be recognized each reporting period forchanges in fair value and vesting. During 2007, the Company recorded$2,908,000 of compensation expenserelated to the increase in the fair value of SARs and additional vesting duringthe period.  As of December 29, 2007,assuming no change in the SARs fair value, there was approximately $4,541,000 of total unrecognized compensationcost related to SARs which is expected to be recognized over a weighted averageperiod of 4.6 years.  The total intrinsic value of SARs exercisedduring 2007 and 2006 was approximately $5,643,000 and $1,305,000, respectively.  Intrinsic value represents the amount bywhich the fair value of SARs on the date of exercise exceeds the grant price.

 

During 2007, the Company procured approximately 17% 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 29, 2007, the Company hadapproximately $1,659,000 on deposit withUnified, in addition to approximately $503,000related to ownership of equity shares in Unified.  In 2007and 2006, the Company recordedapproximately $253,000 and $323,000, respectively, in patronage dividendincome received in the form of cash and Unified equity shares as a reduction ofcost of sales.

 

Interest anddividend income was $3,340,000 in 2007 compared to $2,560,000 for 2006 primarilydue to increased cash levels and higher interest rates in 2007.

 

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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 gains on investments were $153,000 (net of income tax expenseof $106,000) in 2007 compared to unrealized losses of $39,000 (net of incometax benefit of $28,000) in 2006.

 

**Liquidityand Capital Resources**

 

TheCompany’s current cash position, including investments and net cash provided byoperating activities, are the primary sources of funds available to meet theCompany’s capital expenditure and liquidity requirements.  The Company’s cash position, includinginvestments, at January 3, 2009 was $19,144,000.  The Company’s cash position was reduced byapproximately $79,027,000 on December 8, 2008 when the Company paid aspecial cash dividend of twenty-five dollars ($25) per share on the Company’s Class A.  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 Mayfair store on Franklin Boulevard inHollywood, California is currently being converted to the Gelson’s name andformat as part of a major remodel which is expected to be completed by thespring of 2009.

 

TheCompany also has two revolving lines of credit totaling $23,000,000 availablefor standby letters of credit, funding operations and expansion.  There were no outstanding borrowings againsteither of the revolving lines as of January 3,2009. The Company currently maintains four standby letters of creditaggregating $9,569,000 pursuant to the Company’s lease requirements and generaland auto liability and workers’ compensation self-insurance programs.  The standby letters of credit reduce theavailable borrowings under its revolving lines.

 

The Company’s workingcapital was $13,847,000 at January 3,2009 compared to $70,154,000 at December 29, 2007.  The decrease is due to the payment of thespecial cash dividend as discussed above. The Companybelieves that its current working capital, as well as future cash flow, issufficient to meet its ongoing needs during fiscal 2009.  Net cash provided by operatingactivities during fiscal 2008 totaled $28,467,000.  Cash flows from operating activities resultedprimarily from net income plus non-cash expenses and changes in workingcapital.

 

Net cash provided byinvesting activities was $5,288,000 in 2008.  Investing activities included the sale of investments of $35,556,000primarily in anticipation of the special dividend partially offset by the purchaseof investments earlier in the year of $25,130,000 and capital expenditures of$5,159,000.  Net cash used in financingactivities consisted solely of dividends, both regular and special, paid during2008 totaling $82,188,000.

 

The Company’s current ratiowas 1.41 at January 3, 2009 compared to 2.63 at December 29, 2007. The Company’s total liabilities to equity ratio increased to .95 at January 3, 2009from .54 at December 29, 2007.  Both of these ratios were significantlyimpacted by the special dividend discussed above.

 

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The followingtable sets forth the Company’s contractual cash obligations and commercial commitmentsas of January 3, 2009:

 
| ** **                                                                    | ** ** | **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 |       | $                                                                   | 1,744      |   | $ | 86 |   | $ | 172 |   | $ | 172 |   | $ | 1,314 |   |
|                                                                          |       |                                                                |       |   |   |   |   |   |   |   |   |
| Operating Leases                                                              |       | 130,994                                                             |       | 10,828 |   | 20,336 |   | 18,935 |   | 80,895 |   |
|                                                                          |       |                                                                |       |   |   |   |   |   |   |   |   |
| Total  Contractual Cash Obligations (1)                                       |       | $                                                                   | 132,738    |   | $ | 10,914 |   | $ | 20,508 |   | $ | 19,107 |   | $ | 82,209 |   |

 
| ** **                     | ** ** | **Other Commercial Commitments (In Thousands)** | ** ** |
|--------------------------------|------------|---------------------------------------------------------------------|------------|
| ** **                     | ** ** | ** **                                                          | ** ** | **Less Than** | ** ** | ** ** | ** ** | ** ** | ** ** | **After** | ** ** |
| ** **                     | ** ** | **Total**                                                           | ** ** | **1 Year** | ** ** | **1-3 Years** | ** ** | **4-5 Years** | ** ** | **5 Years** | ** ** |
|                           |       |                                                                |       |   |   |   |   |   |   |   |   |
| Standby Letters  of Credit (2) |       | $                                                                   | 9,569      |   | $ | 9,569 |   | $ | 0 |   | $ | 0 |   | $ | 0 |   |
|                                |            |                                                                     |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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(1)   Other Contractual Cash Obligations

 

The Company had the following other contractual cash obligations at January 3, 2009.  The Company is unable to include theseliabilities in the tabular disclosure of contractual cash obligations as theexact 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 maintainsstop-loss insurance coverage to limit its loss exposure on a per claimbasis.  Effective July 1, 2006, theCompany purchased a fully insured guaranteed cost workers’ compensationinsurance policy for losses occurring after June 30, 2006.  This policy replaced the high deductibleprogram for workers’ compensation.  Liabilities associated with the risks that areretained by the Company under the high deductible programs are estimated, inpart, by considering historical claims experience and regression analysis.Accruals are based on reported claims and an estimate of claims incurred butnot reported.  While the ultimate amountof claims incurred is dependent on future developments, in management’s opinionrecorded reserves are adequate to cover the future payment of claims.  The Company’s liability reserve for unpaid andincurred but not reported claims at January 3,2009 was approximately $4,564,000.

 

*Employment Agreement*

 

The Company has an employment agreement (EmploymentAgreement) with a key executive officer that provides for annual retirementcompensation for the remainder of his lifetime equal to 25% of his average basesalary and bonus earned in the last three fiscal years prior to his retirement.The Company had accrued $2,122,000 under the terms of the employment agreementas of January 3, 2009.

 

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*Property, Plant and Equipment Purchases*

 

As of January 3, 2009, management had authorized expenditures onincomplete projects for the purchase of property, plant and equipment whichtotaled approximately $1,823,000.  The Company hasan ongoing program to remodel existing supermarkets and to add new stores.  During 2008,total capital expenditures were $5,159,000.

 

(2)       StandbyLetters of Credit

 

All of the Company’sletters of credit renew automatically each year unless the issuer notifies theCompany otherwise.  The amount of eachletter of credit held pursuant to the Company’s workers’ compensation andgeneral and auto liability insurance programs will be adjusted annually basedupon the outstanding claim reserves as of the renewal date.  Each letter of credit obligation related toinsurance will cease when all claims for the particular policy year are closedor the Company negotiates a release.

 

InApril 2003, the Company announced a stock repurchase program, authorizedby the Board of Directors, to purchase from time to time up to 100,000 sharesof its Class A in the open market or in private transactions.  The timing, volume and price of purchases areat 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 of Class A.  During 2006,the Company purchased 217,904 shares of Class A in unsolicited privatetransactions with unrelated parties for an aggregate purchase price ofapproximately $19,999,000.  The remainingnumber of shares authorized for purchase as of January 3, 2009 was 22,904.

 

During2008 and 2007,the Company paid regular quarterly dividends of 25 cents per share of Class Afor a total of approximately $3,161,000in each year.  In addition, the Companypaid a special cash dividend of twenty-five dollars ($25) per share on itsoutstanding Class A totaling approximately $79,027,000 on December 8,2008 to stockholders of record at the close of business on November 20,2008.

 

**CriticalAccounting Policies**

 

The preparation offinancial statements in conformity with accounting principles generallyaccepted in the United States (GAAP) requires management to make estimates andassumptions about future events that may affect the reported amounts of assets,liabilities, revenues and expenses, as well as the disclosure of contingentassets and liabilities.  Management has establishedaccounting policies that they believe are appropriate in order to reflect theaccurate reporting of the Company’s operating results, financial position andcash flows.  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.

 

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

 

*Inventories*

 

Supermarket nonperishable inventories are recorded using the retailmethod and are stated at the lower of cost or market, with cost determinedusing the last-in, first-out (LIFO) method. Perishable inventories are valued at the lower 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 at the endof every month, and balances are adjusted accordingly with the offset recordedin 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 berecoverable.  Impairment is recognizedwhen estimated future cash flows (undiscounted and before interest charges) areless than carrying value.  The estimationof expected 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 General and Auto Liability Insurance*

 

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 purchasesstop-loss insurance coverage to limit its loss exposure on a per claimbasis.  Accruals are based on reportedclaims and an estimate of claims incurred but not reported.  While the ultimate amount of claims incurredare dependent on future developments, in management’s opinion recorded reservesare adequate to cover the future payment of claims.  The Company purchased a fully insuredguaranteed cost workers’ compensation insurance policy for losses occurringafter June 30, 2006.  This policyreplaced the high deductible program for workers’ compensation.

 

*Cost of Sales*

 

Costof sales reflects the direct costs involved in bringing the Company’s productto market 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 costs, internal transfer costs, labor,building rent, utilities, depreciation, repairs and maintenance and fuel forthe 

 

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Company’sdistribution center and distribution system. Purchasing costs include both labor and administrative expenseassociated 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, common areacharges (where applicable), depreciation and utilities related to Gelson’soperations.

 

*Vendor Allowances*

 

The Company receives a variety ofallowances from its vendors whose products are sold in Gelson’s stores.  Typically, the vendors are paying the Companyto promote their products.  The promotionmay be 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 twoto three weeks long and are recognized when the commitment has beenfulfilled.  Vendor allowances arerecorded as a reduction of cost of sales.

 

Occasionally, the Company receives rebate allowances in theform of upfront lump-sum payments from vendors. Under the terms of these long-term agreements (which typically extendfor several months or years), the Company earns the rebates as it purchasesproduct from 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 Appreciation Rights*

 

Stock-basedcompensation under the SARs program was previously subject to variableaccounting in accordance with FIN 28, “Accounting for Stock Appreciation Rightsand Other Variable 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.  In addition,changes in the market price of the Company’s Class A impacted therecognition of SARs expense.

 

EffectiveJanuary 1, 2006, the Company adopted SFAS 123(R) (revised 2004), “Share-BasedPayment,” which requires the measurement and recognition of compensationexpense based on the fair value of SARs. The Company adopted SFAS 123(R) using the modified prospectivetransition method, and therefore prior period results were not restated.  SFAS 123(R) requires the Company toremeasure the fair value of SARs each reporting period until the award issettled.  Compensation expense must berecognized each reporting period for changes in fair value and vesting.

 

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**Recent Accounting Standards**

 

InSeptember 2006, the Financial Accounting Standards Board (FASB) issuedSFAS 157, “Fair Value Measurements.” SFAS 157 defines fair value, establishes a framework for measuring fairvalue in GAAP and expands disclosures about fair value measurements.  SFAS 157 does not require any new fair valuemeasurements.  The adoption of SFAS 157in the first quarter of 2008 did not have any impact on the Company’sconsolidated financial statements.  In February 2008,the FASB issued FASB Staff Position No. (FSP) FAS 157-2, “Effective Dateof FASB Statement No. 157,” which is effective for specified fair valuemeasures of nonfinancial assets and liabilities for financial statements issuedfor fiscal years beginning after November 15, 2008.  FSP FAS 157-2 is effective for the Company’sfirst quarter of 2009.  The Company iscurrently evaluating the impact, if any, that the implementation of theseprovisions may have on its consolidated financial statements.

 

InFebruary 2007, the FASB issued SFAS 159, “The Fair Value Option forFinancial Assets and Financial Liabilities Including an Amendment of FASBStatement No. 115.”  SFAS 159permits entities to make an irrevocable election to measure certain financialinstruments and other assets and liabilities at fair value on aninstrument-by-instrument basis. Unrealized gains and losses on items for which the fair value option hasbeen elected will be recognized into net earnings at each subsequent reportingdate.  Upon adoption of SFAS 159 in thefirst quarter of 2008, the Company did not elect the fair value option and,accordingly, its adoption did not have any effect on the Company’s consolidatedfinancial statements.

 

Item 7A.                           Quantitative andQualitative Disclosures about Market Risks

 

The Company currently has no outstanding bank debt or fixturefinancing.  If the Company should obtainfinancing or draw on its existing lines of credit, which bear interest at thebank’s reference rate or at the bank’s adjusted London Interbank Offer Rate(LIBOR) plus a margin up to 1.2%, theCompany could then be exposed to market risk related to interest fluctuations.

 

A change in market prices exposes the Company to market risk related toits investments.  As of January 3, 2009,all investments were classified as available-for-sale securities and totaled$8,658,000.  A hypothetical 10% drop inthe market value of these investments would result in a $866,000 unrealizedloss and a corresponding 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.                                     Financial Statements and SupplementaryData

 

See Index toConsolidated Financial Statements.

 

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

 

None.

 

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Item 9A.                           Controls and Procedures

 

Evaluationof Disclosure Controls and Procedures

 

Anevaluation was carried out by the Company’s Chief Executive Officer and theperson temporarily performing the functions of the Chief Financial Officer ofthe effectiveness of the Company’s disclosure controls and procedures (asdefined in Rules 13a-15(e) and 15d-15(e) under the SecuritiesExchange Act of 1934) as of January 3, 2009.  Based upon that evaluation, the ChiefExecutive Officer and the person temporarily performing the functions of theChief Financial Officer concluded that these disclosure controls and procedureswere effective.

 

Changesin Internal Control over Financial Reporting

 

Management, with the participation of the ChiefExecutive Officer and the person temporarily performing the functions of theChief Financial Officer of the Company, has evaluated any changes in theCompany’s internal control over financial reporting that occurred during themost recent fiscal quarter. Based on that evaluation, management, the ChiefExecutive Officer and the person temporarily performing the functions of theChief Financial Officer of the Company have concluded that there has been nochange in the Company’s internal control over financial reporting during theCompany’s fiscal quarter ended January 3,2009 that has materially affected, or isreasonably likely to materially affect, the Company’s internal control overfinancial reporting.

 

Item 9B.                             Other Information

 

None

 

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**PART III**

 

Item 10.                               Directors andExecutive Officers of the Registrant

 

Identification andInformation Concerning Directors

 

Below is set forthcertain information about each of the Company’s directors as of March 6, 2009.  Certain of this information has been suppliedby the persons shown.

 
| **Name**           | ** ** | **Age** | ** ** | **Principal Occupation (1)  and Other Directorships**                                                                                                                                                                                                                                                                                                                                                                                                     | ** ** | **Director  Since (2)** | ** ** | **Term  Expires** |
|--------------------|------------|---------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|-------------------|
| M. Mark Albert     |       | 46      |       | Managing Director of  TCW/Crescent Mezzanine, LLC (a mezzanine firm) since August 2006.  Managing Director of Legacy Partners Group, LLC from February 2005 to  July 2006. Partner of AV Advisory, LLC from July 2004 to  February 2005. Managing Director of CIBC World Markets from  March 2002 to June 2004.                                                                                                        |       | 2007                    |       | 2011              |
|               |       |    |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                      |       |                    |       |              |
| Bernard Briskin    |       | 84      |       | 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                    |       | 2010              |
|               |       |    |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                      |       |                    |       |              |
| John G. Danhakl    |       | 52      |       | Managing Partner,  Leonard Green & Partners, L.P. (a private equity firm) 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., Sagittarius  Brands, Inc. and The Tire Rack, Inc. |       | 1995                    |       | 2010              |
|               |       |    |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                      |       |                    |       |              |
| Robert A. Davidow  |       | 66      |       | Private Investor.                                                                                                                                                                                                                                                                                                                                                                                                                                         |       | 1993                    |       | 2011              |
|               |       |    |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                      |       |                    |       |              |
| Kenneth A. Goldman |       | 66      |       | Attorney and Partner  with Reed Smith LLP (a law firm) 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                    |       | 2010              |
|               |       |    |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                      |       |                    |       |              |
| Steven Romick      |       | 45      |       | Investment Advisor,  Member of First Pacific Advisors, LLC (investment advisors).                                                                                                                                                                                                                                                                                                                                                                         |       | 2003                    |       | 2009              |

 

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| (1)    | Unless otherwise  indicated, principal occupation or occupations shown have been such for a  period of at least five years in the aggregate. |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                         |
| (2)    | Date shown for term of  service indicates commencement of service as a director of the Company or  Arden-Mayfair.                            |

 

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Identification ofExecutive Officers

 

Below is set forthcertain information about each of the executive officers of the Company as of March6, 2009:

 
| **Name**        | ** ** | **Age** | ** ** | **Position(s)**                                                                                                                                                                                                                                                                                                                                                                                                                        |
|-----------------|------------|---------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|            |       |    |       |                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| Bernard Briskin |       | 84      |       | 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. Briskinserved as Chairman of the Executive Committee of the Board of Directors ofArden-Mayfair until August 1978, when he was elected President and ChiefExecutive Officer of Arden-Mayfair.  In November 1978,Mr. Briskin was elected President and Chief Executive Officer of theCompany, and in June 1994, he was elected Chairman of the Board of theCompany.  Mr. Briskin serves in hiscurrent positions with the Company and its subsidiaries pursuant to an EmploymentAgreement which expires on January 1, 2011, although the term will beautomatically extended for successive one year periods unless certaintermination notices are given by either Mr. Briskin or the employersfifteen to eighteen months prior to the current expiration date.  See Item 11 - Executive Compensation for further information.

 

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

 

# **AuditCommittee and Financial Expert**

# ** **

The Board ofDirectors has an Audit Committee comprised of three outside directors.  During 2008,the following individuals served as members of the Audit Committee:

 

Steven Romick,Chairman

M. Mark Albert

Robert A. Davidow

 

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) ofRegulation 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,directors, management and employees.  TheCode of Ethics and Business Conduct includes a 

 

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Supplementary Codeof Ethics for Financial Professionals which is applicable to the chiefexecutive officer, chief financial officer, principal accounting officer orcontroller and individuals performing similar functions.  A copy of the Code of Ethics and BusinessConduct may be obtained, without charge, upon written request to the AssistantSecretary, Arden Group, Inc., P.O. Box 512256, Los Angeles,California 90051-0256.

 

Section 16(a) BeneficialOwnership 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 January 3, 2009, 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.  Executive Compensation

 

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 orother incentive type payments; to reward those named executive officers andothers who have performed up to and beyond the Company’s expectations for them;and to attract new executives who have the self-assurance of good jobperformance to recognize that a part of their overall compensation will be in adiscretionary bonus structure.

 

*Elements of the Company’sCompensation Program for Executives*

 

The Company’s compensation packages for its namedexecutives include elements of (1) a base salary; (2) a discretionary or formulabonus; (3) a Company contribution to the employee’s account in the ArdenGroup, Inc. 401(k) Plan; (4) a medical benefits program; (5) possibleparticipation in the Company’s SARs program; and (6) other minorbenefits.  No SARs were granted in 2008.

 

*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-basedcompensation.  All executives other thanthe Company’s Chief Executive Officer (CEO) are employed on an at-willbasis.  The CEO is the only executivewith an Employment Agreement as described below.

 

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The Company currently has nostock options outstanding and does not presently plan on granting stockoptions.  Instead, it provides incentivesto 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 broughtbefore the Compensation Committee and the Board of Directors to consider.  In awarding SARs units, the Board ofDirectors takes into account the balance between the executive’s base salarylevel, past bonuses and the more long-term nature of the SARs program. Overall,the Company believes that the majority of the compensation package should be incurrent compensation, but that there should be a meaningful level of longerterm rewards, such as contributions to the 401(k) Plan and the SARsprogram.  Each case is discussed on acase by case, individual basis.  Alsotaken into account are the executive’s performance, the Company’s performanceand any other SARs units the particular executive in question may have.  SARs issued to date entitle the holder toreceive upon exercise thereof the excess of the fair market value of a share ofClass A, as determined in accordance with the SARs agreement, on the dateof exercise over the fair market value of such share on the date granted.  The SARs vest 25% each year beginning at theend of the first or third year and expire five or seven years from the date ofgrant, respectively.  The CEO has neverparticipated in the SARs program.

 

*Effectsof the Current Economic Climate*

 

Indetermining employee bonuses for 2008 and salaries for 2009, the CompensationCommittee also took into account the performance of the Company, including theeffects of the current economic climate.    Although thesefactors were also used by the Compensation Committee in prior years indetermining bonuses and salaries, the apparent severity of the economic recessionheightened their importance.  The Compensation Committee did not considerthe price of the Company’s stock, however, in making thesedeterminations.  The Compensation Committee also communicated tomanagement that these economic conditions, the Company’s performance and theireffects on compensation should not result in the Company’s taking unusual risksthat are not approved by the CEO or the Board of Directors.

 

*Named Executive Officers’Compensation*

 

Bernard Briskin, Chairman ofthe Board of Directors, President and CEO of the Company has an EmploymentAgreement with the Company dating back to 1988. The term of the Employment Agreement currently expires on January 1,2011 and is automatically extended for successive periods of one fiscal yearunless either the Company and its subsidiaries, who are parties to theEmployment Agreement, or Mr. Briskin gives notice of termination no lessthan fifteen months and no more than eighteen months prior to the date uponwhich the then current term of the Employment Agreement will expire.

 

TheEmployment Agreement presently provides for base compensation which is adjustedeach year based on the increase in the Consumer Price Index, subject to amaximum annual increase of 4%.  Mr. Briskinwas entitled to an adjustment to his base compensation effective January 1,2009; however, on account of current economic conditions, Mr. Briskinchose to voluntarily waive his right to an increase for 2009 only.  Consequently, Mr. Briskin’s basecompensation for 2009 will be $669,290, the same as for 2008.  The Employment Agreement also provides forincentive formula based compensation in an amount equal to 21⁄2% of the Company’sfirst 

 

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$2,000,000 of pre-tax profits (as defined in theEmployment Agreement) plus 31⁄2% of pre-tax profits in excess of $2,000,000. In addition, it provides for participation in the Company’s medicalplan, the use of a Company-owned car and an annual uninsured medical expensereimbursement of up to $200,000 for Mr. Briskin and his immediatelyfamily.  In 2008, Mr. Briskin’s overall compensation was $2,180,089 whichincluded a base salary of $669,290 and incentive formula based compensation of$1,484,719.  Accordingly, 68% of Mr. Briskin’soverall compensation was primarily incentive based in 2008.  Mr. Briskin’s Employment Agreement alsoprovides that at such time as his base salary and bonus cease to accrue underthe Employment Agreement for any reason other than his breach of the EmploymentAgreement or termination of his employment for cause, the Company willthereafter pay him on a monthly basis in arrears, as long as he lives, anamount per annum equal to 25% of his average base salary and bonus earned inthe last three full fiscal years prior to the cessation of his employment.  The Company would also continue to provide Mr. Briskinduring his lifetime with health insurance benefits and an automobile allowanceequivalent to that which the Company then grants to its senior executives andan annual uninsured medical expense reimbursement of up to $200,000 for Mr. Briskinand his immediate family.  At each timethat modifications were made to Mr. Briskin’s Employment Agreement, theCompany carefully evaluated the effects of Internal Revenue Code (IRC) Section 162(m).The terms of the Employment Agreement were subject to review during the 2003fiscal year by the Compensation Committee of the Board of Directors.  During the review, discussions took placebetween Mr. Briskin and the Compensation Committee concerning amendmentsto certain provisions of the Employment Agreement, but no amendments other thanas described in the following sentence have yet been effected.  In December 2008, the EmploymentAgreement was amended to bring it into compliance with IRC Section 409Awhich deals with non-qualified deferred compensation.  In addition, the Company is consideringwhether a further amendment to the Employment Agreement will be required in orderto continue to satisfy the requirements for deduction of remuneration payableto Mr. Briskin in excess of $1,000,000under IRC Section 162(m) in light of a change in position by, andrelated general public guidance from, the Internal Revenue Service with respectto certain performance based remuneration.

 

The Company’s other namedexecutive officer, Ms. Laura J. Neumann, received total compensation of$207,808 in 2008, consisting of a basesalary of $166,082, a bonus of $25,500, option awards in the form of SARs of$8,019 and other benefits amounting to $8,207. The $8,019 of option awards compensation represents the expenserecognized for financial statement reporting purposes with respect to fiscal 2008 for the change in fair value of SARsgranted in fiscal 2007 and previous years in accordance with SFAS 123(R) (revised2004), “Share-Based Payment,” and additional vesting. For information regardingvaluation assumptions used, see Note 1 of Notes to Consolidated FinancialStatements. This amount reflects compensation expense recorded in the Company’sfinancial statements for these awards which does not necessarily correspond tothe actual value that will be realized by Ms. Neumann.  Ms. Neumann presently holds 3,500 unitsof SARs which were awarded to her in 2007.  No SARs were granted to Ms. Neumannduring 2008.  Ms. Neumann exercisedSARs covering 875 units in each of 2008, 2007 and 2006.

 

*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 the 

 

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Company who is the onlyexecutive with an employment agreement) and other executives for the year thenbeing completed and salaries for each for the upcoming year.  Those recommendations are then reviewed bythe Compensation Committee of the Company’s Board of Directors.  In reviewing and finalizing bonuses andsalary adjustments, the CEO and the Compensation Committee review individualperformance and results, as well as the performance of the Company overall and,in this year, also took into account the existing economic conditions.

 

General

 

The followingtable sets forth the total annual and long-term compensation paid or accrued bythe Company and its subsidiaries in connection with all businesses of theCompany and its subsidiaries to or for the account of the CEO of the Companyand the person acting in a similar capacity as the Principal Financial Officerduring the past three fiscal years.

 

**SummaryCompensation Table**

 
| **Name and  Principal  Position** | ** ** | **Year** | ** ** | **Salary  ($)** | ** ** | **Bonus  ($)** | ** ** | **Option  Awards  ($)(3)** | ** ** | **Non-Equity  Incentive Plan  Compensation  ($)** | ** ** | **All Other  Compensation  ($) (4)** | ** ** | **Total  ($)** | ** ** |
|----------------------------------------|------------|----------|------------|-----------------|------------|----------------|------------|----------------------------|------------|--------------------------------------------------------|------------|------------------------------------------------|------------|----------------|------------|
|                                   |       |     |       |            |       |           |       |                       |       |                                                   |       |                                           |       |           |       |
| Bernard Briskin,  Chief                |       | 2008     |       | 669,290         |       |           | (1)        | 0                          |       | 1,484,719                                              |       | 26,080                                         |       | 2,180,089      |       |
| Executive Officer                      |       | 2007     |       | 647,282         |       |           | (1)        | 0                          |       | 1,737,772                                              |       | 26,877                                         |       | 2,411,931      |       |
|                                   |       | 2006     |       | 635,837         |       |           | (1)        | 0                          |       | 1,398,088                                              |       | 48,591                                         |       | 2,082,516      |       |
|                                   |       |     |       |            |       |           |       |                       |       |                                                   |       |                                           |       |           |       |
| Laura J. Neumann  (2)                  |       | 2008     |       | 166,082         |       | 25,500         |       | 8,019                      |       | 0                                                      |       | 8,207                                          |       | 207,808        |       |
|                                   |       | 2007     |       | 141,450         |       | 30,000         |       | 65,060                     |       | 0                                                      |       | 18,347                                         |       | 254,857        |       |
|                                   |       | 2006     |       | 136,620         |       | 25,000         |       | 75,647                     |       | 0                                                      |       | 21,120                                         |       | 258,387        |       |

 

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(1)       The amount of Mr. Briskin’s bonus is determined under a formulabased on the Company’s pre-tax profits and is shown under the Non-EquityIncentive Plan Compensation column of this chart.  Mr. Briskin’s Employment Agreementprovides for an annual bonus equal to 21⁄2 % of the Company’s first $2,000,000 ofpre-tax profits (as defined in the Employment Agreement) plus 31⁄2 % of pre-taxprofits in excess of $2,000,000.

 

(2)       The Company has not had a Chief Financial Officer since July 1,2005 and Ms. Neumann, Senior Director of Financial Reporting andCompliance, has acted in a similar capacity as the Principal Financial Officerof the Company since that date.

 

(3)       Option awards compensation represents the expense recognized forfinancial statement reporting purposes with respect to the past three fiscalyears for the change in fair value of SARs granted in fiscal 2007 and previous years in accordance with SFAS123(R) (revised 2004), “Shared-Based Payment.”  For information regarding valuationassumptions used, see Note 1 of Notes to Consolidated Financial Statements.This amount reflects the compensation expense recorded in the Company’sfinancial statements for these awards as a result of a change in the fair valueof the SARs and additional vesting during fiscal 2008, 2007 and 2006, and doesnot necessarily correspond to the actual value that will be realized by thenamed executive officer.  Under SFAS123(R), the measurement date for cash 

 

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settled SARs is the date of settlement.  Accordingly, liabilities related to SARs areremeasured at the end of each reporting period until settlement.

 

(4)       Thefollowing table sets forth the components of All Other Compensation included in the Summary Compensation Table:

 
| ** **       | ** ** | ** ** | ** ** | **Medical**       | ** ** | ** **        | ** ** | ** **    | ** ** | **Pay in**  | ** ** | ** ** | ** ** |
|------------------|------------|------------|------------|-------------------|------------|-------------------|------------|---------------|------------|------------------|------------|------------|------------|
| ** **       | ** ** | ** ** | ** ** | **Expense**       | ** ** | **401(k)**        | ** ** | **Auto**      | ** ** | **Lieu of** | ** ** | ** ** | ** ** |
| ** **       | ** ** | **Year**   | ** ** | **Reimbursement** | ** ** | **Plan (1)** | ** ** | **Allowance** | ** ** | **Vacation**     | ** ** | **Total**  | ** ** |
|             |       |       |       |              |       |              |       |          |       |             |       |       |       |
| Bernard Briskin  |       | 2008       |       | $                 | 7,301      |              | $          | 7,500         |       | $                | 11,279     |       | $          | 0 |   | $ | 26,080 |   |
|             |       | 2007       |       | 8,129             |       | 12,000            |       | 6,748         |       | 0                |       | 26,877     |       |
|             |       | 2006       |       | 24,010            |       | 17,600            |       | 6,981         |       | 0                |       | 48,591     |       |
|             |       |       |       |              |       |              |       |          |       |             |       |       |       |
| Laura J. Neumann |       | 2008       |       | 0                 |       | 7,500             |       | 0             |       | 707              |       | 8,207      |       |
|             |       | 2007       |       | 0                 |       | 12,000            |       | 0             |       | 6,347            |       | 18,347     |       |
|             |       | 2006       |       | 0                 |       | 16,741            |       | 0             |       | 4,379            |       | 21,120     |       |
|                  |            |            |            |                   |            |                   |            |               |            |                  |            |            |            |  |  |  |  |  |

 

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

 

EmploymentAgreement and Payment Upon Termination

 

The compensation of Mr. Briskin,the CEO of the Company, is established under an Employment Agreement, asamended, which currently expires on January 1, 2011.  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 oftermination not less than fifteen months and no more than eighteen months priorto the date upon which the then current term of the Employment Agreement willexpire.  Pursuant to the terms of theEmployment Agreement, Mr. Briskin’s base salary increases on January 1of each year based upon increases in the Consumer Price Index subject to amaximum annual increase of 4%.  Mr. Briskin was entitled to anadjustment to his base compensation effective January 1, 2009; however,due to current economic conditions, Mr. Briskin chose to voluntarily waivehis right to an increase for fiscal 2009 only. His annual bonus is equal to 21⁄2% of the Company’s first $2,000,000 of pre-tax profits (asdefined in the Employment Agreement) plus 31⁄2% of pre-tax profits in excess of$2,000,000.  The Employment Agreementprovides for an annual uninsured medical expense reimbursement up to $200,000for Mr. Briskin and his immediate family. The terms of the Employment Agreement were subject to review during the2003 fiscal year 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 other than asdescribed in the following sentence haveyet been effected.  In December 2008, the EmploymentAgreement was amended to bring it into compliance with IRC Section 409Awhich deals with non-qualified deferred compensation.

 

Mr. Briskin’s Employment Agreement provides that at such time ashis base salary and bonus cease to accrue under the Employment Agreement forany reason other than his breach of the Employment Agreement or termination ofhis employment for cause, the Company will thereafter pay him on a monthlybasis in arrears, as long as he lives, an amount per annum equal to 25% of hisaverage base salary and bonus earned in the last three full fiscal years priorto the 

 

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cessation of his employment.  TheCompany would also continue to provide Mr. Briskin during his lifetimewith health insurance benefits, an automobile allowance equivalent to thatwhich the Company then grants to its senior executives and an annual uninsuredmedical expense reimbursement of up to $200,000 for Mr. Briskin and hisimmediate family.  If the Company’sobligation to make these payments was triggered on January 2, 2009, thelast business day of the Company’s fiscal year ended January 3, 2009, theCompany would be obligated to pay Mr. Briskin monthly payments averaging$45,646 during his lifetime beginning on February 1, 2009 and to providehim with an automobile allowance which would be approximately $25,000 per yearand health insurance benefits and uninsured medical expense reimbursements upto $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 expensereimbursement would aggregate $200,000 per year.

 

StockAppreciation Rights

 

The Company has granted SARs covering shares of the Company’s Class Ato non-employee directors and to certain officers and 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, as determined in accordance with the SARsagreement, on the date of exercise over the fair market value of such share onthe date granted.  SARs grantedprior to December 2007 vest 25% each year beginning at the end of thefirst year and expire five years from the date of grant.  SARsgranted in December 2007 vest 25% each year beginning at the end of thethird year and expire seven years from the date of grant.  No SARs were granted during fiscal 2008.

 

The following table provides information as to outstanding SARs held bynamed executive officers as of January 3,2009:

 

**Outstanding SAR Awards at 2008Fiscal Year-End**

** **
| **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) |       | 0                                                                                               |       | 3,500                                                                                 | (2)        | 146.44                         |       | 12/5/2014                  |       |

 

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

 

(2)           These SARs vest 25% each year beginning on December 6, 2010.

 

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The following tableprovides information on the exercise of SARs by the named executive officers in2008:

 

**SARExercises 2008**

 
| ** **            | ** ** | **SAR Awards**                                                          | ** ** |
|-----------------------|------------|------------------------------------------------------------------------------|------------|
| **Name**              | ** ** | **Number of Shares  Underlying SARs Exercised (#)** | ** ** | **Value Realized on  Exercise ($)** | ** ** |
| ** **            | ** ** | ** **                                                                   | ** ** | ** ** | ** ** |
| Laura J. Neumann  (1) |       | 875                                                                          |       | 55,125 | (2) |

 

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(1)      Acting in a similar capacity as the PrincipalFinancial Officer.

 

(2)     Difference between the fair market value of a share of Class A onthe date of exercise and the fair market value on the date of grant.

 

Remuneration ofDirectors

 

The followingtable provides information as to non-employee director compensation for theyear ended January 3, 2009:

 

**DirectorCompensation for 2008**

** **
| **Name**            | ** ** | **Fees Earned or  Paid in Cash ($)** | ** ** | **Option  Awards  ($) (1)** | ** ** | **Total ($)** | ** ** |
|---------------------|------------|---------------------------------------------------------------|------------|----------------------------------|------------|--------------------|------------|
|                |       |                                                          |       |                             |       |               |       |
| M. Mark Albert      |       | 48,000                                                        |       | 170,643                          |       | 218,643            |       |
| John G. Danhakl     |       | 47,000                                                        |       | 197,846                          |       | 244,846            |       |
| Robert A.  Davidow  |       | 57,000                                                        |       | 334,420                          |       | 391,420            |       |
| Kenneth A.  Goldman |       | 28,000                                                        |       | 197,846                          |       | 225,846            |       |
| Steven Romick       |       | 59,000                                                        |       | 197,846                          |       | 256,846            |       |

 

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(1)                            Asof January 3, 2009, each of the directors held SARs covering7,000 shares of Class A, except Mr. Albert who held SARs covering14,500 shares of Class A.  No SARs were granted to Directors duringfiscal 2008.  Option awards compensationrepresents the expense recognized for financial statement reporting purposeswith respect to fiscal 2008 for the fairvalue of SARs granted in fiscal 2007 andprevious years in accordance with SFAS 123(R) (revised 2004), “Shared-BasedPayment,” and additional vesting.  Forinformation regarding valuation assumptions used, see Note 1 of Notes toConsolidated Financial Statements.  Theseamounts reflect the compensation expense recorded in the Company’s financialstatements for these awards which does not necessarily correspond to the actualvalue that will be realized by the named directors.

 

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Under SFAS 123(R), the measurement date for cash settled SARs is thedate of settlement.  Accordingly,liabilities related to SARs are remeasured at the end of each reporting perioduntil settlement.

 

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

 

Each of thenon-employee directors presently holds SARs covering shares of Class A.  When the SARs are exercised, each unitentitles the holder to receive the excess of the fair market value of a shareof Class A, as determined in accordance with the SARs agreement, on thedate of exercise over the fair market value on the date of grant.  SARs granted prior to December 2007 vest25% each year beginning at the end of the first year and expire five years fromthe date of grant.  SARs granted in December 2007 vest 25%each year beginning at the end of the third year and expire seven years fromthe date of grant.

 

Compensation Committee Interlocks and Insider Participation

 

The Board of Directorshas a Compensation Committee.  In 2008, the Compensation Committee was comprisedof the following directors, none of whom are or have been officers or employeesof the Company:

 

John G. Danhakl,Chairman

M. Mark Albert

Robert A. Davidow

 

CompensationCommittee Report

 

The CompensationCommittee has reviewed and discussed the Compensation Discussion and Analysisrequired by Item 402(b) of Regulation S-K with management of the Companyand based on such review and discussions, the Compensation Committee recommendedto the Board of Directors that the Compensation Discussion and Analysis beincluded in the Company’s annual report on Form 10-K.

 

John G. Danhakl, Chairman

M . Mark Albert

Robert A. Davidow

 

Members of theCompensation Committee

 

The foregoing CompensationCommittee Report shall not be deemed to be “soliciting material,” or to be “filed”with the SEC or be subject to Regulation 14A or 14C, other than as provided inItem 407(e)(5)(i) of Regulation S-K, or to the liabilities of Section 18of the Securities Exchange Act of 1934, except to the extent that the Companyspecifically requests that the information be treated as soliciting material orspecifically incorporates it by reference into a document filed under theSecurities Act of 1933 or the Securities Exchange Act of 1934.

 

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

 

Security Ownership ofCertain Beneficial Owners

 

The followingtable sets forth information as of March 6, 2009 related to thestockholdings of persons known to the Company to be the beneficial owner ofmore than 5% of the Class A of the Company, its only outstanding class ofequity securities:

 
| **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 |       | 1,806,095                                                               | (2)(3)     | 57.1                           | %          |
| * *                                                                                                     | * *   | * *                                                                | * *   | * *                       | * *   |
| Royce &  Associates, LLC

1414 Avenue of  the Americas

New York, NY  10019                         |       | 173,700                                                                 | (4)        | 5.5                            | %          |

 

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(1)           Unless otherwise indicated to thecontrary, all beneficial owners have sole investment and voting power.  For purposes of this table, 1,357,200 treasury shares of Class A arenot deemed to be outstanding.

 

(2)           This amount includes the followingshares:  (i) 186,096 shares held in trust (of which Mr. Briskin is thetrustee) for the benefit of Mr. Briskin and his children and (ii) anaggregate of 103,012 shares held by Mr. Briskin’sspouse or 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 votingor investment power with respect to these shares.  Nothing herein should be construed as anadmission that Mr. Briskin is in fact the beneficial owner of theseshares.

 

(3)           This amount excludes 33,004 shares of Class A held by The Judyand Bernard Briskin Foundation of which Mr. Briskin serves as aco-trustee.  Mr. Briskin disclaimsany beneficial ownership with respect to these shares.

 

(4)           Based upon Schedule 13-G filed on January 23,2009 with the SEC.

 

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Security Ownership of Management

 

The followingtable shows the beneficial ownership of the Company’s Class A, its onlyoutstanding class of equity securities, by each director, executive officer andby all directors and executive officers as a group as of March 6, 2009:

 
| ** **                                                   | ** ** | **Amount  and**           | ** ** | ** **            | ** ** |
|--------------------------------------------------------------|------------|---------------------------|------------|-----------------------|------------|
| ** **                                                   | ** ** | **Nature  of Beneficial** | ** ** | ** **            | ** ** |
| **Name of  Beneficial Owner**                                | ** ** | **Ownership  (1)**        | ** ** | **Percent  of Class** | ** ** |
| M. Mark Albert                                               |       | 0                         |       |                  |       |
| Bernard Briskin                                              |       | 1,806,095                 | (2)        | 57.1                  | %          |
| John G. Danhakl                                              |       | 0                         |       |                  |       |
| Robert A.  Davidow                                           |       | 0                         |       |                  |       |
| Kenneth A.  Goldman                                          |       | 130,000                   | (3)        | 4.1                   | %          |
| Laura J. Neumann  (4)                                        |       | 0                         |       |                  |       |
| Steven Romick                                                |       | 0                         |       |                  |       |
|                                                         |       |                      |       |                  |       |
| All directors  and executive officers as a group (7 persons) |       | 1,936,095                 | (2)(3)     | 61.2                  | %          |

 

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(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 include 1,357,200 treasury shares of the Company’s Class A.

 

(2)                                  See notes (2) and (3) to thetable under Security Ownership of Certain Beneficial Owners set forth above.

 

(3)                                  Of these shares, 42,000 are held in trust by Mr. Goldman, as trustee, for thegrandchildren of Mr. and Mrs. Briskin and 88,000 are held by limited partnerships, of which Mr. Goldmanis one of the general partners and the limited partners are trusts of which thebeneficiaries are members of Mr. and Mrs. Briskin’s family.

 

(4)                                  Ms. Neumann is Senior Director ofFinancial Reporting and Compliance and is included in the table on account ofher acting in 2008 in a similar capacity as the Principal Financial Officer ofthe Company.

 

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(5)                                  EquityCompensation Plan Information

 

Thefollowing table provides information related to the Company’s equitycompensation plans as of January 3, 2009:

 
| ** **                                                       | ** ** | **(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                                                                                                                                                                                                   |       |

 

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

 

In 1998, the Companyadopted a Stock Option Plan which was not submitted to security holders forapproval 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’s Class Aon the date of grant.  As of January 3, 2009,there were no stock options issued and outstanding.

 

Item13.          CertainRelationships, Related Transactions and Director Independence

 

CertainRelationships and Related Transactions

 

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

 

Review, Approvalor Ratification of Transactions with Related Parties

 

The Company has a writtenpolicy to enter into or ratify a related party transaction only if the AuditCommittee has approved or ratified such transaction in accordance with theguidelines and has determined that the transaction is on terms comparable tothose that could be obtained in arms-length dealings with a non-related thirdparty.

 

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For purposes of this policy,a related 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 the immediatefamily of an executive officer, director or 5% holder, an entity owned orcontrolled by any of the foregoing or in which any of the foregoing has asubstantial 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 andprocedures for review, approval or ratification of related party transactionsare in writing.

 

DirectorsIndependence

 

The Board of Directorshas determined that M. Mark Albert, John G. Danhakl, Robert A. Davidow andSteven Romick are independent directors as defined in the listing standards forNASDAQ.  These directors constitute amajority 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 independence standards applicable formembers of those specific committees in the listing standards for NASDAQ.  In reaching the conclusion that Mr. Romickis independent, the Board of Directors considered the fact that he has anownership interest in, and is an employee of, a limited liability company thatis the investment advisor to a group of mutual funds, in one of which theCompany had an investment.  The mutualfund in which the Company had invested is not one that was managed by Mr. Romick.  The Company’s investment was disposed of in December 2008.

 

Bernard Briskin andKenneth A. Goldman are members of the Nominating Committee and are notindependent as defined in the listing standards for NASDAQ, but the Companyqualifies as a “Controlled Company” under the NASDAQ Marketplace Rule 4350(c)(5) asMr. Briskin controls more than fifty percent (50%) of the voting power ofthe Company.  As a Controlled Company,the listing requirements for NASDAQ do not require that the members of itsNominating Committee or the Compensation Committee be independent or that amajority of its directors be independent.

 

Item14.              PrincipalAccountant Fees and Services

 

# **Audit Fees**

# ** **

Auditfees include the aggregate fees billed for the audit of the Company’s annualconsolidated financial statements and the reviews of each of the quarterlyconsolidated financial statements included in the Company’s Forms 10-Q.  The aggregate audit fees billed to theCompany by Moss Adams LLP (Moss) were approximately $305,000 and $296,000 for 2008and 2007, respectively.

 

Audit-RelatedFees

 

Audit-relatedfees incurred in connection with the audit of the Company’s employee benefitplans by Moss totaled approximately $24,000 and $20,000 in 2008 and 2007,respectively.

 

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TaxFees

 

Feesbilled by Moss for tax services in 2008aggregated approximately $104,000, including $34,000 for tax return andcompliance work and $70,000 for other projects. Fees billed by Moss for tax services in 2007aggregated approximately $53,000,including $32,000 for tax return andcompliance work and $21,000 for otherprojects.

 

# **AllOther Fees**

# ** **

Otherthan the fees for services described above, there were no additional feesbilled by Moss in 2008 or 2007.

 

Itis the policy of the Audit Committee to pre-approve all audit and non-auditservices provided by the Company’s independent registered public accountingfirm.  The Audit Committee reviewed theabove-described fees for non-audit services and considered whether theprovision of those services is compatible with maintaining the independence ofMoss and concluded that Moss has maintained their independence.

 

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** **

**PART IV**

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

** **

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** **

**SIGNATURES**

** **

Pursuant to therequirements of Section 13 or 15(d) of the Securities Exchange Act of1934, the registrant has duly caused this report to be signed on its behalf bythe undersigned, thereunto duly authorized.

 

 
| ARDEN GROUP, INC. |                                         |       |
|-------------------|----------------------------------------------|------------|
|              |                                         |       |
|              |                                         |       |
| ** **        | ** **                                   | **Date**   |
| ** **        | ** **                                   | ** ** |
| By                | /s/BERNARD BRISKIN                           |       | 3/16/09 |
| ** **        | **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                                                                           |       | 3/16/09    |
| **Bernard Briskin, Director, Chairman  of the Board, President and Chief Executive Officer** | ** ** | ** ** |
| **(Principal Executive Officer)**                                                            | ** ** | ** ** |
| ** **                                                                                   | ** ** | ** ** |
| /s/LAURA J. NEUMANN                                                                          |       | 3/16/09    |
| Laura J. Neumann,  Senior Director of Financial Reporting and Compliance                     |       |       |
| (Principal Financial  and Principal Accounting Officer)                                      |       |       |
|                                                                                         |       |       |
| /s/M. MARK ALBERT                                                                            |       | 3/16/09    |
| M. Mark Albert,  Director                                                                    |       |       |
|                                                                                         |       |       |
| /s/JOHN G. DANHAKL                                                                           |       | 3/16/09    |
| John G. Danhakl,  Director                                                                   |       |       |
|                                                                                         |       |       |
| /s/ROBERT A. DAVIDOW                                                                         |       | 3/16/09    |
| **Robert A. Davidow, Director**                                                              | ** ** | ** ** |
| ** **                                                                                   | ** ** | ** ** |
| /s/KENNETH A. GOLDMAN                                                                        |       | 3/16/09    |
| Kenneth A. Goldman,  Director                                                                |       |       |
|                                                                                         |       |       |
| /s/STEVEN ROMICK                                                                             |       | 3/16/09    |
| Steven Romick, Director                                                                      |       |       |

 

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

 

**INDEX TO CONSOLIDATED FINANCIAL STATEMENTS**

 
|                                                                                                                                                                         | **Page** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|----------|
|                                                                                                                                                                         |     |
| Management’s  Report on Internal Control over Financial Reporting                                                                                                       | 45       |
|                                                                                                                                                                         |     |
| Report  of Independent Registered Public Accounting Firm                                                                                                                     | 46       |
|                                                                                                                                                                         |     |
| Financial Statements:                                                                                                                                                        |     |
|                                                                                                                                                                         |     |
| Consolidated Balance  Sheets, January 3, 2009 and December 29, 2007                                                                                                | 48       |
| Consolidated Statements of Operations and  Comprehensive Income for fiscal years 2008, 2007 and 2006                                                                         | 49       |
| Consolidated Statements of Stockholders’ Equity for  fiscal years 2008, 2007 and 2006                                                                                   | 50       |
| Consolidated Statements of Cash Flows for fiscal years  2008, 2007 and 2006                                                                                                  | 51       |
| Notes to Consolidated  Financial Statements                                                                                                                                  | 53       |
|                                                                                                                                                                         |     |
| The financial  statements include the Company’s subsidiaries (Arden-Mayfair, Inc. and  Mayfair Realty, Inc.) and the subsidiaries of Arden-Mayfair, Inc. |

 

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

 

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

 

Themanagement of the Company is responsible for establishing and maintainingadequate 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 not preventor detect misstatements.  Also, projectionsof any evaluation of effectiveness to future periods are subject to the riskthat controls may become inadequate because of changes in conditions or thatthe degree of compliance with the policies or procedures may deteriorate.

 

TheCompany’s management assessed the effectiveness of the Company’s internalcontrol over financial reporting as of January 3,2009. In making the assessment, it used the criteria set forth by theCommittee of Sponsoring Organizations of the Treadway Commission in *Internal Control-Integrated Framework*.  Based on that assessment, managementconcluded that, as of January 3, 2009, the Company’s internal control overfinancial reporting is effective based on those criteria.

 

The effectivenessof the Company’s internal control over financial reporting as of January 3, 2009has been audited by Moss Adams LLP, an independent registered public accountingfirm, as stated in their report which appears on page 46.

 

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**Report of Independent Registered Public Accounting Firm**

 

Board of Directors andStockholders of

Arden Group, Inc. andConsolidated Subsidiaries

 

We have audited theaccompanying consolidated balance sheets of Arden Group, Inc. andConsolidated Subsidiaries (the Company) as of January 3,2009 and December 29, 2007,and the related consolidated statements of operations and comprehensive income,stockholders’ equity and cash flows for each of the years in the three-yearperiod ended January 3, 2009. We also have audited the Company’sinternal control over financial reporting as of January 3,2009, based on criteria set forth by theCommittee of Sponsoring Organizations of the Treadway Commission (COSO) in *Internal Control - Integrated Framework*.  The Company’s management is responsible forthese financial statements, for maintaining effective internal control overfinancial reporting, and for its assessment of the effectiveness of internalcontrol over financial reporting included in the accompanying Management’sReport on Internal Control over Financial Reporting. Our responsibility is toexpress an opinion on these financial statements and an opinion on the Company’sinternal control over financial reporting based on our audits.

 

We conducted our audits inaccordance with the standards of the Public Company Accounting Oversight Board(United States). Those standards require that we plan and perform the audits 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 audits of the 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, assessing the risk that a material weaknessexists, and testing and evaluating the design and operating effectiveness ofinternal control based on the assessed risk. Our audits also include performing such other procedures as weconsidered necessary in the circumstances. We believe that our audits provide areasonable basis for our opinions.

 

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) providereasonable assurance that transactions are recorded as necessary to permitpreparation of financial statements in accordance with generally acceptedaccounting principles, and that receipts and expenditures of the company arebeing made only in accordance with authorizations of management and directorsof the company; and (3) provide reasonable assurance regarding preventionor timely detection of unauthorized acquisition, use, or disposition of thecompany’s assets that could have a material effect on the financial statements.

 

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Because of its inherentlimitations, internal control over financial reporting may not prevent or detectmisstatements. Also, projections of any evaluation of effectiveness to futureperiods are subject to the risk that controls may become inadequate because ofchanges in conditions or that the degree of compliance with the policies orprocedures 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 January 3,2009 and December 29,2007, and the consolidated results of itsoperations and its cash flows for each of the years in the three-year periodended January 3, 2009, in conformity with accounting principlesgenerally accepted in the United States of America. Also in our opinion, ArdenGroup, Inc. and Consolidated Subsidiaries, maintained, in all materialrespects, effective internal control over financial reporting as of January 3, 2009,based on criteria set forth by the COSO in *Internal Control -Integrated Framework*.

 

As discussed in Note 1 tothe consolidated financial statements, effective the first day of its fiscal2008, the Company adopted Statement of Financial Accounting Standards No. 157,“Fair Value Measurements.”  As discussedin Note 1 to the consolidated financial statements, effective the first day ofits fiscal 2007, the Company adopted Financial Accounting Standards BoardInterpretation No. 48, “Accounting for Uncertainty in Income Taxes — anInterpretation of FASB Statement No. 109.”

 

MossAdams LLP

LosAngeles, California

March 13,2009

 

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**ARDEN GROUP, INC. ANDCONSOLIDATED SUBSIDIARIES**

** **

# **CONSOLIDATED BALANCE SHEETS**

 
| **(In Thousands, Except Share and Per Share Data)**                                                                                                                                                              | ** ** | **January 3****, 2009** | ** ** | **December 29****, 2007** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------|------------|-------------------------------------|------------|
| **Assets**                                                                                                                                                                                                       |       |                              |       |                                |       |
|                                                                                                                                                                                                             |       |                              |       |                                |       |
| Current assets:                                                                                                                                                                                                  |       |                              |       |                                |       |
| Cash and cash  equivalents                                                                                                                                                                                       |       | $                                 | 10,486     |                                | $          | 58,919 |   |
| Investments                                                                                                                                                                                                      |       | 8,658                             |       | 19,933                              |       |
| Accounts  receivable, net of allowance for doubtful accounts of $297 and $172  as of January 3, 2009 and December 29, 2007,  respectively                                                              |       | 5,271                             |       | 5,967                               |       |
| Inventories, net                                                                                                                                                                                                 |       | 17,846                            |       | 21,558                              |       |
| Deferred income  taxes                                                                                                                                                                                           |       | 2,586                             |       | 3,916                               |       |
| Other current  assets                                                                                                                                                                                            |       | 3,137                             |       | 2,856                               |       |
|                                                                                                                                                                                                             |       |                              |       |                                |       |
| Total current  assets                                                                                                                                                                                            |       | 47,984                            |       | 113,149                             |       |
|                                                                                                                                                                                                             |       |                              |       |                                |       |
| Property, plant  and equipment, net                                                                                                                                                                              |       | 43,792                            |       | 44,853                              |       |
| Deferred income  taxes                                                                                                                                                                                           |       | 4,728                             |       | 5,450                               |       |
| Other assets                                                                                                                                                                                                     |       | 3,306                             |       | 3,237                               |       |
|                                                                                                                                                                                                             |       |                              |       |                                |       |
| Total assets                                                                                                                                                                                                     |       | $                                 | 99,810     |                                | $          | 166,689 |   |
|                                                                                                                                                                                                             |       |                              |       |                                |       |
| **Liabilities  and Stockholders’ Equity**                                                                                                                                                                   | ** ** | ** **                        | ** ** | ** **                          | ** ** |
| ** **                                                                                                                                                                                                       | ** ** | ** **                        | ** ** | ** **                          | ** ** |
| Current  liabilities:                                                                                                                                                                                            |       |                              |       |                                |       |
| Accounts  payable, trade                                                                                                                                                                                         |       | $                                 | 15,092     |                                | $          | 20,367 |   |
| Federal and  state income taxes payable                                                                                                                                                                          |       | 195                               |       | 803                                 |       |
| Other current  liabilities                                                                                                                                                                                       |       | 18,850                            |       | 21,825                              |       |
|                                                                                                                                                                                                             |       |                              |       |                                |       |
| Total current  liabilities                                                                                                                                                                                       |       | 34,137                            |       | 42,995                              |       |
|                                                                                                                                                                                                             |       |                              |       |                                |       |
| Long-term debt                                                                                                                                                                                                   |       | 1,228                             |       | 1,228                               |       |
| Deferred rent                                                                                                                                                                                                    |       | 6,298                             |       | 6,144                               |       |
| Other  liabilities                                                                                                                                                                                               |       | 6,987                             |       | 7,829                               | ** ** |
|                                                                                                                                                                                                             |       |                              |       |                                | ** ** |
| Total  liabilities                                                                                                                                                                                               |       | 48,650                            |       | 58,196                              |       |
| Commitments and  contingent liabilities (Notes 14 and 16)                                                                                                                                                        |       |                              |       |                                |       |
| Stockholders’  equity:                                                                                                                                                                                      |       |                              |       |                                |       |
| Common Stock,  Class A, $.25 par value; authorized 10,000,000  shares; 3,161,098 shares issued and  outstanding as of January 3, 2009 and December 29, 2007,  excluding 1,357,200 treasury shares |       | 1,129                             |       | 1,129                               |       |
| Capital surplus                                                                                                                                                                                                  |       | 5,378                             |       | 5,378                               |       |
| Unrealized gain  (loss) on investments, net of tax                                                                                                                                                               |       | 9                                 |       | (179                                | )          |
| Retained  earnings                                                                                                                                                                                               |       | 48,397                            |       | 105,918                             |       |
|                                                                                                                                                                                                             |       | 54,913                            |       | 112,246                             |       |
| Treasury stock, 1,357,200 shares at cost                                                                                                                                                                         |       | (3,753                            | )          | (3,753                              | )          |
|                                                                                                                                                                                                             |       |                              |       |                                |       |
| Total  stockholders’ equity                                                                                                                                                                                 |       | 51,160                            |       | 108,493                             |       |
|                                                                                                                                                                                                             |       |                              |       |                                |       |
| Total  liabilities and stockholders’ equity                                                                                                                                                                 |       | $                                 | 99,810     |                                | $          | 166,689 |   |

* *

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

 

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** **

**ARDENGROUP, INC. AND CONSOLIDATED SUBSIDIARIES**

** **

**CONSOLIDATED STATEMENTS OFOPERATIONS**

# **AND COMPREHENSIVE INCOME**

 
| ** **                                                                                                           | ** ** | **Fifty-Three**           | ** ** | **Fifty-Two**              | ** ** | **Fifty-Two**              | ** ** |
|----------------------------------------------------------------------------------------------------------------------|------------|---------------------------|------------|----------------------------|------------|----------------------------|------------|
| ** **                                                                                                           | ** ** | **Weeks Ended**      | ** ** | **Weeks Ended**       | ** ** | **Weeks Ended**       | ** ** |
| **(In  Thousands, Except Share and Per Share Data)**                                                                 | ** ** | **January 3,  2009** | ** ** | **December 29, 2007** | ** ** | **December 30, 2006** | ** ** |
| Sales                                                                                                                |       | $                         | 479,117    |                       | $          | 485,939                    |       | $ | 482,737 |   |
|                                                                                                                 |       |                      |       |                       |       |                       |       |
| Cost of sales                                                                                                        |       | 294,617                   |       | 297,948                    |       | 296,401                    |       |
|                                                                                                                 |       |                      |       |                       |       |                       |       |
| Gross profit                                                                                                         |       | 184,500                   |       | 187,991                    |       | 186,336                    |       |
|                                                                                                                 |       |                      |       |                       |       |                       |       |
| Selling, general  and administrative expense                                                                         |       | 144,181                   |       | 142,814                    |       | 149,656                    |       |
|                                                                                                                 |       |                      |       |                       |       |                       |       |
| Operating income                                                                                                     |       | 40,319                    |       | 45,177                     |       | 36,680                     |       |
|                                                                                                                 |       |                      |       |                       |       |                       |       |
| Interest and  dividend income                                                                                        |       | 2,460                     |       | 3,340                      |       | 2,560                      |       |
|                                                                                                                 |       |                      |       |                       |       |                       |       |
| Other income  (expense), net                                                                                         |       | (907                      | )          | 64                         |       | 2                          |       |
|                                                                                                                 |       |                      |       |                       |       |                       |       |
| Interest expense                                                                                                     |       | (365                      | )          | (97                        | )          | (123                       | )          |
|                                                                                                                 |       |                      |       |                       |       |                       |       |
| Income before  income taxes                                                                                          |       | 41,507                    |       | 48,484                     |       | 39,119                     |       |
|                                                                                                                 |       |                      |       |                       |       |                       |       |
| Income tax  provision                                                                                                |       | 16,840                    |       | 19,277                     |       | 15,895                     |       |
|                                                                                                                 |       |                      |       |                       |       |                       |       |
| Net income                                                                                                           |       | $                         | 24,667     |                       | $          | 29,207                     |       | $ | 23,224 |   |
|                                                                                                                 |       |                      |       |                       |       |                       |       |
| Other  comprehensive gain (loss), net of tax:                                                                        |       |                      |       |                       |       |                       |       |
|                                                                                                                 |       |                      |       |                       |       |                       |       |
| Unrealized gain  (loss) from available-for-sale securities:                                                          |       |                      |       |                       |       |                       |       |
|                                                                                                                 |       |                      |       |                       |       |                       |       |
| Net unrealized  holding gain (loss) arising during the period                                                        |       | (428                      | )          | 153                        |       | (38                        | )          |
|                                                                                                                 |       |                      |       |                       |       |                       |       |
| Reclassification  adjustment for realized (gain) loss included in net income                                         |       | 616                       |       | 0                          |       | (1                         | )          |
|                                                                                                                 |       |                      |       |                       |       |                       |       |
| Net unrealized  gain (loss), net of income tax expense (benefit) of $129 for 2008, $106 for 2007  and ($28) for 2006 |       | 188                       |       | 153                        |       | (39                        | )          |
|                                                                                                                 |       |                      |       |                       |       |                       |       |
| Comprehensive  income                                                                                                |       | $                         | 24,855     |                       | $          | 29,360                     |       | $ | 23,185 |   |
|                                                                                                                 |       |                      |       |                       |       |                       |       |
| Net income per  common share:                                                                                        |       |                      |       |                       |       |                       |       |
|                                                                                                                 |       |                      |       |                       |       |                       |       |
| Basic and  diluted                                                                                                   |       | $                         | 7.80       |                       | $          | 9.24                       |       | $ | 7.16 |   |
|                                                                                                                 |       |                      |       |                       |       |                       |       |
| Weighted average  common shares outstanding:                                                                         |       |                      |       |                       |       |                       |       |
|                                                                                                                 |       |                      |       |                       |       |                       |       |
| Basic and  diluted                                                                                                   |       | 3,161,098                 |       | 3,161,098                  |       | 3,241,805                  |       |

 

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

 

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** **

**ARDEN GROUP, INC. ANDCONSOLIDATED SUBSIDIARIES**

** **

**CONSOLIDATED STATEMENTS OFSTOCKHOLDERS’ EQUITY**

 
| ** **                               |   |                           |   |        |   |        |   | **Unrealized**   |   |                |   |                   |   |       |   |       |   |
|------------------------------------------|--------|--------------------------------|--------|-------------|--------|-------------|--------|------------------|--------|---------------------|--------|------------------------|--------|------------|--------|------------|--------|
| ** **                               |   |                           |   |        |   |        |   | **Gain  (Loss)** |   |                |   |                   |   |       |   | **Total**  |   |
| ** **                               |   | **Common  Stock Class A** |   | **Capital** |   | **on**      |   | **Retained**     |   | **Treasury  Stock** |   | **Stockholders’** |   |
| **(In  Thousands, Except Share Data)**   |   | **Shares**                     |   | **Amount**  |   | **Surplus** |   | **Investments**  |   | **Earnings**        |   | **Shares**             |   | **Amount** |   | **Equity** |   |
| ** **                               |   |                           |   |        |   |        |   |             |   |                |   |                   |   |       |   |       |   |   |   |   |   |   |   |
| **Balance,  December 31, 2005**     |   | 4,736,202                      |   | $           | 1,184  |        | $      | 5,638            |   | $                   | (293   | )                      | $      | 79,544     |   | 1,357,200  |   | $ | (3,753 | ) | $ | 82,320 |   |
|                                     |   |                           |   |        |   |        |   |             |   |                |   |                   |   |       |   |       |   |
| Purchase and  retirement of common stock |   | (217,904                       | )      | (55         | )      | (260        | )      | 0                |   | (19,684             | )      | 0                      |   | 0          |   | (19,999    | )      |
| Net unrealized  loss                     |   | 0                              |   | 0           |   | 0           |   | (39              | )      | 0                   |   | 0                      |   | 0          |   | (39        | )      |
| Dividends  declared                      |   | 0                              |   | 0           |   | 0           |   | 0                |   | (3,212              | )      | 0                      |   | 0          |   | (3,212     | )      |
| Net income                               |   | 0                              |   | 0           |   | 0           |   | 0                |   | 23,224              |   | 0                      |   | 0          |   | 23,224     |   |
|                                     |   |                           |   |        |   |        |   |             |   |                |   |                   |   |       |   |       |   |
| **Balance,  December 30, 2006**     |   | 4,518,298                      |   | 1,129       |   | 5,378       |   | (332             | )      | 79,872              |   | 1,357,200              |   | (3,753     | )      | 82,294     |   |
|                                     |   |                           |   |        |   |        |   |             |   |                |   |                   |   |       |   |       |   |
| Net unrealized  gain                     |   | 0                              |   | 0           |   | 0           |   | 153              |   | 0                   |   | 0                      |   | 0          |   | 153        |   |
| Dividends  declared                      |   | 0                              |   | 0           |   | 0           |   | 0                |   | (3,161              | )      | 0                      |   | 0          |   | (3,161     | )      |
| Net income                               |   | 0                              |   | 0           |   | 0           |   | 0                |   | 29,207              |   | 0                      |   | 0          |   | 29,207     |   |
|                                     |   |                           |   |        |   |        |   |             |   |                |   |                   |   |       |   |       |   |
| **Balance,  December 29, 2007**     |   | 4,518,298                      |   | 1,129       |   | 5,378       |   | (179             | )      | 105,918             |   | 1,357,200              |   | (3,753     | )      | 108,493    |   |
|                                     |   |                           |   |        |   |        |   |             |   |                |   |                   |   |       |   |       |   |
| Net unrealized  gain                     |   | 0                              |   | 0           |   | 0           |   | 188              |   | 0                   |   | 0                      |   | 0          |   | 188        |   |
| Dividends  declared                      |   | 0                              |   | 0           |   | 0           |   | 0                |   | (82,188             | )      | 0                      |   | 0          |   | (82,188    | )      |
| Net income                               |   | 0                              |   | 0           |   | 0           |   | 0                |   | 24,667              |   | 0                      |   | 0          |   | 24,667     |   |
|                                     |   |                           |   |        |   |        |   |             |   |                |   |                   |   |       |   |       |   |
| **Balance,  January 3, 2009**       | .      | 4,518,298                      |   | $           | 1,129  |        | $      | 5,378            |   | $                   | 9      |                   | $      | 48,397     |   | 1,357,200  |   | $ | (3,753 | ) | $ | 51,160 |   |
|                                          |        |                                |        |             |        |             |        |                  |        |                     |        |                        |        |            |        |            |        |  |  |  |  |  |  |  |  |  |  |  |  |

 

*The  accompanying notes are an integral part ofthese consolidated financial statements.*

 

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** **

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

** **

# **CONSOLIDATED STATEMENTS OF CASH FLOWS**

# ** **

 
| ** **                                               | ** ** | **Fifty-Three**          | ** ** | **Fifty-Two**               | ** ** | **Fifty-Two**               | ** ** |
|----------------------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| ** **                                               | ** ** | **Weeks Ended**     | ** ** | **Weeks Ended**        | ** ** | **Weeks Ended**        | ** ** |
| **(In  Thousands)**                                      | ** ** | **January 3, 2009** | ** ** | **December 29,  2007** | ** ** | **December 30,  2006** | ** ** |
| Cash flows from  operating activities:                   |       |                     |       |                        |       |                        |       |
| Cash received  from customers                            |       | $                        | 479,578    |                        | $          | 485,819                     |       | $ | 482,645 |   |
| Cash paid to  suppliers and employees                    |       | (437,970                 | )          | (438,044                    | )          | (440,735                    | )          |
| Interest and  dividends received                         |       | 2,513                    |       | 3,186                       |       | 2,580                       |       |
| Interest paid                                            |       | (109                     | )          | (99                         | )          | (125                        | )          |
| Income taxes  paid                                       |       | (15,545                  | )          | (20,660                     | )          | (17,645                     | )          |
|                                                     |       |                     |       |                        |       |                        |       |
| Net cash  provided by operating activities               |       | 28,467                   |       | 30,202                      |       | 26,720                      |       |
|                                                     |       |                     |       |                        |       |                        |       |
| Cash flows from  investing activities:                   |       |                     |       |                        |       |                        |       |
| Capital  expenditures                                    |       | (5,159                   | )          | (3,824                      | )          | (4,868                      | )          |
| Purchases of  investments                                |       | (25,130                  | )          | (945                        | )          | (827                        | )          |
| Sales of  investments                                    |       | 35,556                   |       | 2                           |       | 2,751                       |       |
| Proceeds from  the sale of property, plant and equipment |       | 21                       |       | 28                          |       | 215                         |       |
|                                                     |       |                     |       |                        |       |                        |       |
| Net cash  provided by (used in) investing activities     |       | 5,288                    |       | (4,739                      | )          | (2,729                      | )          |
|                                                     |       |                     |       |                        |       |                        |       |
| Cash flows from  financing activities:                   |       |                     |       |                        |       |                        |       |
| Purchase and  retirement of Company stock                |       | 0                        |       | 0                           |       | (19,999                     | )          |
| Principal  payments under capital lease obligations      |       | 0                        |       | (225                        | )          | (221                        | )          |
| Cash dividends  paid                                     |       | (82,188                  | )          | (3,161                      | )          | (3,267                      | )          |
|                                                     |       |                     |       |                        |       |                        |       |
| Net cash used in  financing activities                   |       | (82,188                  | )          | (3,386                      | )          | (23,487                     | )          |
|                                                     |       |                     |       |                        |       |                        |       |
| Net increase  (decrease) in cash and cash equivalents    |       | (48,433                  | )          | 22,077                      |       | 504                         |       |
|                                                     |       |                     |       |                        |       |                        |       |
| Cash and cash  equivalents at beginning of year          |       | 58,919                   |       | 36,842                      |       | 36,338                      |       |
|                                                     |       |                     |       |                        |       |                        |       |
| Cash and cash  equivalents at end of year                |       | $                        | 10,486     |                        | $          | 58,919                      |       | $ | 36,842 |   |

 

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

 

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CONSOLIDATED STATEMENTS OF CASH FLOWS, Continued

 
| ** **                                                                                          | ** ** | **Fifty-Three**          | ** ** | **Fifty-Two**               | ** ** | **Fifty-Two**               | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| ** **                                                                                          | ** ** | **Weeks Ended**     | ** ** | **Weeks Ended**        | ** ** | **Weeks Ended**        | ** ** |
| ** **                                                                                          | ** ** | **January 3, 2009** | ** ** | **December 29,  2007** | ** ** | **December 30,  2006** | ** ** |
| **Reconciliation  of Net Income to Net Cash Provided by Operating Activities:**                     | ** ** | ** **               | ** ** | ** **                  | ** ** | ** **                  | ** ** |
| ** **                                                                                          | ** ** | ** **               | ** ** | ** **                  | ** ** | ** **                  | ** ** |
| Net income                                                                                          |       | $                        | 24,667     |                        | $          | 29,207                      |       | $ | 23,224 |   |
|                                                                                                |       |                     |       |                        |       |                        |       |
| Adjustments to  reconcile net income to net cash provided by operating activities:                  |       |                     |       |                        |       |                        |       |
| Depreciation and  amortization                                                                      |       | 6,110                    |       | 6,685                       |       | 7,097                       |       |
| Provision for  losses on accounts receivable                                                        |       | 169                      |       | 45                          |       | 14                          |       |
| Deferred income  taxes                                                                              |       | 1,923                    |       | 798                         |       | (1,044                      | )          |
| Net (gain) loss  from the disposal of property, plant and equipment                                 |       | 89                       |       | 30                          |       | (191                        | )          |
| Realized (gain)  loss on investments, net                                                           |       | 907                      |       | (64                         | )          | (2                          | )          |
| Amortization of  premium (discount) on investments                                                  |       | 259                      |       | 0                           |       | (6                          | )          |
| Stock  appreciation rights compensation expense                                                     |       | 1,823                    |       | 2,908                       |       | 3,671                       |       |
|                                                                                                |       |                     |       |                        |       |                        |       |
| Changes in  assets and liabilities net of effects from noncash investing and financing  activities: |       |                     |       |                        |       |                        |       |
|                                                                                                |       |                     |       |                        |       |                        |       |
| (Increase)  decrease in assets:                                                                     |       |                     |       |                        |       |                        |       |
| Accounts and  notes receivable                                                                      |       | 527                      |       | (263                        | )          | (49                         | )          |
| Inventories                                                                                         |       | 3,712                    |       | (1,677                      | )          | (735                        | )          |
| Other current  assets                                                                               |       | (281                     | )          | 28                          |       | (316                        | )          |
| Other assets                                                                                        |       | (69                      | )          | 299                         |       | (148                        | )          |
|                                                                                                |       |                     |       |                        |       |                        |       |
| Increase  (decrease) in liabilities:                                                                |       |                     |       |                        |       |                        |       |
| Accounts  payable, trade and other current liabilities                                              |       | (9,148                   | )          | (4,621                      | )          | (2,859                      | )          |
| Federal and  state income taxes payable                                                             |       | (608                     | )          | (2,411                      | )          | (705                        | )          |
| Deferred rent                                                                                       |       | 154                      |       | 74                          |       | 274                         |       |
| Other  liabilities                                                                                  |       | (1,767                   | )          | (836                        | )          | (1,505                      | )          |
|                                                                                                |       |                     |       |                        |       |                        |       |
| Net cash  provided by operating activities                                                          |       | $                        | 28,467     |                        | $          | 30,202                      |       | $ | 26,720 |   |

* *

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

 

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**ARDENGROUP, INC. AND CONSOLIDATED SUBSIDIARIES**

** **

# **NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

# ** **

1.                     Summary ofSignificant Accounting Policies

 

Basis of Presentation andBusiness 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’s Markets(Gelson’s) which operates 18 supermarketsin Southern California.  The Company andArden-Mayfair also own certain real estate properties through a wholly-ownedsubsidiary, Mayfair Realty, Inc. All intercompany accounts and transactions are eliminated inconsolidation.

 

Fiscal Year

 

The Company operates on afiscal year ending on the Saturday closest to December 31. Fiscal years for the consolidated financial statements included hereinended on January 3, 2009 (fiscal 2008 - 53 weeks), December 29, 2007(fiscal 2007 - 52 weeks) and December 30,2006 (fiscal 2006 - 52 weeks).

 

The following is asummary of significant accounting policies followed in the preparation of theseconsolidated financial statements.

 

Reclassifications

 

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

 

Cash and Cash Equivalents

 

The Consolidated Statementsof Cash Flows classify changes in cash and cash equivalents (short-term, highlyliquid investments readily convertible into cash with an original maturity atdate of purchase of three months or less) according to operating, investing orfinancing activities.  The Company placesits temporary cash investments with what it believes to be high credit, qualityfinancial institutions.

 

Investments

 

The Company invests inmarketable securities including mutual funds and debt and equity securities.Marketable securities are stated at market value as determined by the mostrecently traded price of each security at the balance sheet date.  The Company reviews its investment portfolioon a quarterly basis to determine if market declines below book value 

 

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may beother-than-temporary.  Any decline thatis determined to be other-than-temporary is recorded as a loss on theConsolidated Statements of Operations and Comprehensive Income in accordancewith Emerging Issues Task Force (EITF) No. 03-1, “The Meaning ofOther-Than-Temporary Impairment and its Application to Certain Issues.”  All marketable securities are defined asavailable-for-sale investments under the provisions of Statement of FinancialAccounting Standards No. (SFAS) 115, “Accounting for Certain Investmentsin Debt and Equity Securities.”  As of January 3,2009, the market value of the Company’s investments exceeded the investments’book value.

 

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.

 

Accounts Receivable

 

The Company monitorsvendor receivables and extensions of credit on an ongoing basis and has notexperienced significant losses related to its receivables.  At January 3,2009, the Company believes that it didnot have significant credit risk concentrations.  No customer or vendor represented greaterthan 3% of total accounts receivable.

 

Inventories

 

Supermarket nonperishableinventories are recorded using the retail method and are stated at the lower ofcost or market, with cost determined using the last-in, first-out (LIFO)method.  Perishable inventories arevalued at the lower 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 at the endof every month and balances are adjusted accordingly with the offset recordedin cost of sales.

 

Property, Plant andEquipment

 

Property, plant andequipment is recorded at cost. Depreciation is provided on the straight-line method over the estimateduseful lives of individual assets or classes 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 andimprovements to leased properties are amortized over their estimated usefullives or lease period, whichever is shorter.

 

Leased property meetingcertain capital lease criteria is capitalized and the present value of therelated lease payments is recorded as a liability.  Amortization of capitalized leased assets iscomputed on the straight-line method over the shorter of the estimated usefullife or the initial lease term.

 

Normal repairs andmaintenance are expensed as incurred. Expenditures which materially increase values, change capacities orextend useful lives are capitalized. Replacements are capitalized and the property, plant and equipmentaccounts are relieved of the items being replaced.  The related costs and accumulateddepreciation of disposed assets are eliminated and any gain or loss on dispositionis included in selling, general and administrative (SG&A) expense on theConsolidated Statements of Operations and Comprehensive Income.

 

Impairment of Long-LivedAssets

 

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 berecoverable.  Impairment is recognizedwhen estimated future cash flows (undiscounted and before interest charges) areless than carrying value.  The estimationof expected 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 againstearnings.  No impairments were recordedin 2008, 2007 or 2006.

 

Fair Value of FinancialInstruments

 

The carrying values ofcash and cash equivalents, accounts receivable, accounts payable and accruedliabilities approximate fair values because of the short-term maturity of theseinstruments.  The fair value of the Company’slong-term debt closely approximates its carrying value.  The Company uses quoted market prices, whenavailable, or discounted cash flows to calculate these fair values.

 

Workers’Compensation and General and Auto Liability Costs

 

In June 2003, the Company terminated its guaranteed cost workers’compensation policy and purchased a high deductible workers’ compensationpolicy.  Accordingly, the Company wasprimarily self-insured for losses related to workers’ compensation for claimsincurred prior to July 1, 2006, as well as general and auto liabilityclaims.  The Company maintained stop-losscoverage to limit its loss exposure on a per claim basis and was insured forcovered costs in excess of per claim limits. Effective July 1, 2006, the Company purchased a one-year fullyinsured guaranteed cost workers’ compensation insurance policy at a favorablerate to replace the high deductible program. Since then, the Company has continued to renew the workers’ compensationguaranteed cost policy annually.  TheCompany continues to maintain an accrual for claims incurred prior to July 2006under the high deductible 

 

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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  January  3,2009 and December  29, 2007  were approximately $4,564,000 and $7,107,000,respectively.  While the ultimate amountof claims incurred are dependent on future developments, the recorded reservesreflect management’s best estimate of claims to be incurred.

 

RevenueRecognition

 

The Company recognizes revenue at the time ofsale.  Discounts given to customers arerecorded at the point of sale as a reduction of revenues.  The Company maintains a bad debt allowancefor receivables from vendors and Gelson’s charge card users.  Valuation reserves are adjusted periodicallybased on historical recovery rates.  TheCompany records income from licensing arrangements, subleases, leases andfinance charges as they are earned.  Income from all licensing arrangements, rental income and financecharges represents less than 1% of sales for all periods presented and,therefore, is not disclosed separately on the Consolidated Statements ofOperations and Comprehensive Income.

 

Cost of Sales

 

Costof sales includes product costs, net of discounts and allowances, and inboundfreight charges, as well as warehouse, transportation, purchasing, advertisingand occupancy costs.  Warehouse andtransportation costs include receiving 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, common areacharges (where applicable), depreciation and utilities related to Gelson’soperations.  The following tablesummarizes warehouse, transportation, purchasing, net advertising and occupancycosts for 2008, 2007 and 2006.

 
| **(In Thousands)**       | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** |
|-------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Warehouse and  transportation |       | $        | 7,046      |     | $          | 7,117    |       | $ | 6,882 |   |
| Purchasing                    |       | 3,008    |       | 2,964    |       | 2,835    |       |
| Advertising                   |       | 1,049    |       | 1,017    |       | 1,148    |       |
| Occupancy                     |       | 23,624   |       | 23,436   |       | 23,394   |       |
|                          |       | $        | 34,727     |     | $          | 34,534   |       | $ | 34,259 |   |

 

Fair Value Measurements

 

On the first day of fiscal 2008, the Company adopted SFAS 157, “FairValue Measurements.”  SFAS 157 definesfair value, establishes a framework for measuring fair value under generally acceptedaccounting principles and expands disclosure about fair valuemeasurements.  SFAS 157 defines fairvalue as the amount that would be received upon sale of an asset or paid totransfer a liability in the principal or most advantageous market for the assetor liability in an orderly transaction between market participants on themeasurement date.  SFAS 157 also 

 

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establishes a fair value hierarchy which prioritizes the types ofinputs to valuation techniques that companies may use to measure fairvalue.  The fair value hierarchy givesthe highest priority to quoted prices in active markets for identical assets orliabilities (Level 1).  The next highestpriority is given to inputs other than quoted prices included in Level 1 thatare observable for the asset or liability, either directly or indirectly (Level2).  The lowest priority is given tounobservable inputs in which there is little or no market data available andwhich require the reporting entity to develop its own assumptions (Level 3).  The fair value of the Company’s financialassets and liabilities measured on a recurring basis includes investments whichappear under Assets on the Consolidated Balance Sheets.  The following table sets forth the fair valueof investments as of January 3, 2009 including the input level used todetermine fair value at the measurement date.

 
| **(In Thousands)** | ** ** | **Level 1** | ** ** | **Level 2** | ** ** | **Level 3** | ** ** | **Total** | ** ** |
|-------------------------|------------|------------------|------------|------------------|------------|------------------|------------|-----------|------------|
| Investments             |       | $                | 5,077      |             | $          | 3,581            |       | $         | 0          |   | $ | 8,658 |   |
|                         |            |                  |            |                  |            |                  |            |           |            |  |  |  |  |

 

Vendor Allowances

 

The Company receives a variety of allowances from its vendorswhose products are sold in Gelson’s stores. Typically, the vendors are paying the Company to promote theirproducts.  The promotion may be atemporary price reduction, a feature in a print advertisement or newsletter, orplacement of the vendor’s product in a preferred location in a store.  The promotions are typically two to threeweeks long and are recognized when the commitment has been fulfilled.  Vendor allowances are recorded as a reductionof cost of sales.

 

Occasionally, the Company receives rebate allowances in theform of upfront lump-sum payments from vendors. Under the terms of these long-term agreements (which typically extendfor several months or years), the Company earns the rebates as it purchasesproduct from 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 upfront paymentsmust 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.

 

StockAppreciation Rights

 

TheCompany has outstanding stock appreciation rights (SARs) that have been grantedto non-employee directors and certain employees.  Each SAR entitles the holder to receive cashupon exercise equal to the excess of the fair market value of a share of theCompany’s Class A Common Stock (Class A), as determined in accordancewith the SARs agreement, on the date of exercise over the fair market value ofsuch share on the date granted.  SARsgranted prior to December 2007 vest25% each year beginning at the end of the first year and expire five years fromthe date of grant.  SARs granted in December 2007 vest 25%each year beginning at the end of the third year and expire seven years fromthe date of grant.  No SARs were grantedin 2008.

 

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Stock-basedcompensation under the SARs program was previously subject to variableaccounting 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 Stock Issued toEmployees.”  Under FIN 28, compensationexpense was recognized as the SARs vested using the graded-vesting method asspecified by FIN 28.  In addition,changes in the market price of the Company’s Class A impacted therecognition of SARs expense.

 

EffectiveJanuary 1, 2006, the Company adopted SFAS 123(R) (revised 2004), “Share-BasedPayment,” which requires the measurement and recognition of compensationexpense based on the fair value of SARs. The Company adopted SFAS 123(R) using the modified prospectivetransition method and, therefore, prior period results were not restated.  SFAS 123(R) requires the Company toremeasure the fair value of SARs each reporting period until the award issettled.  Compensation expense must berecognized each reporting period for changes in fair value and vesting.

 

Thefair value of each SAR is estimated on the date of grant and, subsequently, atthe end of each reporting period using the Black-Scholes option-pricingmodel.  The Black-Scholes option-pricingmodel incorporates various highly subjective assumptions, including expectedterm and volatility.  The Company hasreviewed its historical pattern of SARs exercises and has determined thatmeaningful differences in SARs exercise activity exist between employees andnon-employee directors.  Consequently,the Company has categorized SARs into two groups for valuation purposes, aswell as separate groups based on grant date. Expected volatility was determined based on historical volatility usingweekly data.  The risk-free interest rateis based on U.S. Treasury zero-coupon issues with a remaining term equal to theexpected SARs life assumed at the date of grant less the time that has elapsedsince the grant date.  The expected termwas calculated based on historical experience. SFAS 123(R) also requires that a forfeiture assumption be appliedto awards 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.

 

Theassumptions used in the Black-Scholes option-pricing model as of fiscal 2008 year end were as follows:

 
| Dividend yield           |   | .73%   |  - | .75%       |   |
|--------------------------|--------|--------|---------|------------|--------|
| Expected  volatility     |   | 39.40% |  - | 40.12%     |   |
| Risk-free  interest rate |   | 1.346% |  - | 1.740%     |   |
| Expected average  term   |   | 3.52   |  - | 5.52 years |   |

 

See Note 10 for further information relatedto SARs.

 

Rental Expense and Income

 

Rental payments onoperating leases are recorded over the lease term as they become payable orreceivable except for rental payments on leases with scheduled rent increaseswhich are recognized on a straight-line basis over the term of the lease.

 

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Income Taxes

 

Deferred tax assets andliabilities are determined based on the difference between the financialstatement and tax bases of assets and liabilities, using enacted tax rates ineffect for the year in which the differences are expected to reverse.  The realization of deferred tax assets iscontingent upon the Company’s ability to generate future taxable income. SeeNote 13 for further information.

 

Common Stock and NetIncome Per Share

 

Basic net income per common share is computed by dividing net income bythe weighted average number of common shares outstanding during theperiod.  Diluted net income per commonshare is determined by dividing net income by the weighted average number ofcommon and potential common shares outstanding during the period.  There were no potential common sharesoutstanding during the periods presented and, therefore, basic and diluted netincome per common share are the same.

 

Use of Estimates

 

The preparation offinancial statements in conformity with accounting principles generallyaccepted in the United States (GAAP) requires management to make estimates andassumptions for the reporting 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 IssuedAccounting Standards

 

InSeptember 2006, the Financial Accounting Standards Board (FASB) issuedSFAS 157, “Fair Value Measurements.” SFAS 157 defines fair value, establishes a framework for measuring fairvalue in GAAP and expands disclosures about fair value measurements.  SFAS 157 does not require any new fair valuemeasurements.  The adoption of SFAS 157in the first quarter of 2008 did not have any impact on the Company’sconsolidated financial statements.  In February 2008,the FASB issued FASB Staff Position No. (FSP) FAS 157-2, “Effective Dateof FASB Statement No. 157,” which is effective for specified fair valuemeasures of nonfinancial assets and liabilities for financial statements issuedfor fiscal years beginning after November 15, 2008.  FSP FAS 157-2 is effective for the Company’sfirst quarter of 2009.  The Company iscurrently evaluating the impact, if any, that the implementation of theseprovisions may have on its consolidated financial statements.

 

InFebruary 2007, the FASB issued SFAS 159, “The Fair Value Option forFinancial Assets and Financial Liabilities Including an Amendment of FASBStatement No. 115.”  SFAS 159permits entities to make an irrevocable election to measure certain financialinstruments and other assets and liabilities at fair value on aninstrument-by-instrument basis. Unrealized gains and losses on items for which the fair value option hasbeen elected will be recognized into net earnings at each subsequent reportingdate.  Upon adoption of SFAS 159 in thefirst 

 

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quarterof 2008, the Company did not elect the fair value option and, accordingly, itsadoption did not have any effect on the Company’s consolidated financialstatements.

 

2.                     Investments

 

Marketable securities are shown on the accompanyingConsolidated Balance Sheets at their fair value.

 
| ** **                                  | ** ** | ** ** | ** ** | **Unrealized**   | ** ** | ** **      | ** ** |
|---------------------------------------------|------------|------------|------------|------------------|------------|-----------------|------------|
| **(In  Thousands)**                         | ** ** | **Cost**   | ** ** | **Gain  (Loss)** | ** ** | **Fair  Value** | ** ** |
| ** **                                  | ** ** | ** ** | ** ** | ** **       | ** ** | ** **      | ** ** |
| As of  January 3, 2009: Debentures     |       | $          | 8,643      |             | $          | 15              |       | $ | 8,658 |   |
|                                        |       |       |       |             |       |            |       |
| As of  December 29, 2007: Mutual funds |       | $          | 20,235     |             | $          | (302            | )          | $ | 19,933 |   |

 

All debtsecurities held as of January 3, 2009 have maturities of less than oneyear.  Realized net gains (losses) from thesale of investments was ($907,000), $0 and $1,000in 2008, 2007and 2006, respectively.  In addition, the Company recognized capitalgain income from mutual funds of $0, $64,000 and $1,000in 2008, 2007and 2006, respectively.  Realized net gain (loss) from the sale ofinvestments and capital gain income are included in other income (expense), neton the Consolidated Statements of Operations and Comprehensive Income.

 

3.                     AccountsReceivable, Net

 
| ** **                             | ** ** | **January 3****,** | ** ** | **December ****29,** | ** ** |
|----------------------------------------|------------|-------------------------|------------|---------------------------|------------|
| **(In Thousands)**                | ** ** | **2009**                | ** ** | **2007**                  | ** ** |
| ** **                             | ** ** | ** **              | ** ** | ** **                | ** ** |
| Accounts  receivable, trade            |       | $                       | 2,883      |                      | $          | 3,351 |   |
| Other accounts  receivable             |       | 2,685                   |       | 2,788                     |       |
|                                   |       | 5,568                   |       | 6,139                     |       |
| Less: Allowance  for doubtful accounts |       | (297                    | )          | (172                      | )          |
|                                   |       | $                       | 5,271      |                      | $          | 5,967 |   |

 

The provision fordoubtful accounts in 2008, 2007 and 2006was approximately $169,000, $45,000 and $14,000, respectively.

 

4.                     Inventories

 

Inventories valued by theLIFO method totaled $15,031,000 at January 3,2009 and $17,937,000at December 29, 2007. Inventory balances would have been $6,025,000 and $5,340,000 higher at the end of 2008 and 2007,respectively, if they had been stated at the lower of FIFO cost or market.  The LIFO effect on net income was a decreaseof approximately $406,000, $367,000 and $335,000 in 2008,2007 and 2006,respectively.

 

5.                       SignificantSupplier

 

During 2008, the Company procured approximately 16% ofits product through Unified Western Grocers, Inc. (Unified), a grocerywholesale cooperative.  As amember-patron, the Company is required to provide Unified with certain minimumdeposits and credit in order 

 

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to purchase product fromthe cooperative.  As of January 3, 2009,the Company had approximately $1,676,000 on deposit with Unified inaddition  to approximately $625,000related to ownership of equity shares in Unified.  The deposit is recorded under other assets onthe Consolidated Balance Sheets.  Theminimum deposit requirement is satisfied through a combination of cash, creditand ownership of equity shares in Unified.

 

6.                     Property,Plant and Equipment

 
| ** **                                 | ** ** | **January 3****,** | ** ** | **December 29****,** | ** ** |
|--------------------------------------------|------------|-------------------------|------------|---------------------------|------------|
| **(In Thousands)**                    | ** ** | **2009**                | ** ** | **2007**                  | ** ** |
| Land                                       |       | $                       | 8,633      |                      | $          | 8,633 |   |
| Buildings and  improvements                |       | 9,837                   |       | 9,693                     |       |
| Store fixtures  and office equipment       |       | 46,270                  |       | 44,821                    |       |
| Transportation  equipment                  |       | 4,134                   |       | 3,920                     |       |
| Machinery and  equipment                   |       | 1,930                   |       | 1,981                     |       |
| Leasehold  improvements                    |       | 50,875                  |       | 48,668                    |       |
| Leasehold  interests                       |       | 4,538                   |       | 4,538                     |       |
| Assets under  construction                 |       | 975                     |       | 1,137                     |       |
|                                       |       | 127,192                 |       | 123,391                   |       |
|                                       |       |                    |       |                      |       |
| Accumulated  depreciation and amortization |       | (83,400                 | )          | (78,538                   | )          |
|                                       |       |                    |       |                      |       |
|                                       |       | $                       | 43,792     |                      | $          | 44,853 |   |

 

As of January 3, 2009,approximately $54,889,000 of property, plant and equipment (at cost) was fullydepreciated and is still being used in operations.

 

7.                     Other CurrentLiabilities

 
| ** **                      | ** ** | **January 3,** | ** ** | **December 29,** | ** ** |
|---------------------------------|------------|---------------------|------------|-----------------------|------------|
| **(In Thousands)**         | ** ** | **2009**            | ** ** | **2007**              | ** ** |
| Employee  compensated absences  |       | $                   | 5,426      |                  | $          | 5,245 |   |
| Taxes (excluding  income taxes) |       | 3,080               |       | 3,154                 |       |
| Employee  benefits              |       | 2,446               |       | 2,589                 |       |
| Payroll                         |       | 1,355               |       | 1,371                 |       |
| Workers’  compensation     |       | 1,349               |       | 1,962                 |       |
| Dividends  payable              |       | 790                 |       | 790                   |       |
| Rent                            |       | 742                 |       | 738                   |       |
| Stock  appreciation rights      |       | 108                 |       | 2,653                 |       |
| Other                           |       | 3,554               |       | 3,323                 |       |
|                            |       | $                   | 18,850     |                  | $          | 21,825 |   |

 

8.                            Long-TermDebt

 
| ** **                             | ** ** | **Current**             | ** ** | **Non-Current**           | ** ** |
|----------------------------------------|------------|-------------------------|------------|---------------------------|------------|
| ** **                             | ** ** | **January 3****,** | ** ** | **December 29****,** | ** ** | **January 3****,** | ** ** | **December 29****,** | ** ** |
| **(In Thousands)**                | ** ** | **2009**                | ** ** | **2007**                  | ** ** | **2009** | ** ** | **2007** | ** ** |
| 7% Subordinated  income debentures due |       |                    |       |                      |       |   |   |   |   |
| September 1,  2014                |       | $                       | 0          |                      | $          | 0 |   | $ | 1,228 |   | $ | 1,228 |   |
|                                        |            |                         |            |                           |            |  |  |  |  |  |  |  |  |

 

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The Company hasrevolving lines of credit in the amount of $20,000,000 which expires in August 2010and $3,000,000 which expires in October 2009.  Borrowings bear interest at the bank’s primerate or at the adjusted London Interbank Offer Rate (LIBOR) plus a margin up to1.2%. At the end of 2008 and 2007, there were no amounts borrowed againsteither of the revolving lines of credit. The Company currently maintains four standby letters of creditaggregating $9,569,000 in connection withlease and self-insurance requirements. The standby letters of credit reduce the available borrowings under itsrevolving lines of credit.

 

Debentures: The indenturerelating to the 7% Subordinated Income Debentures (7% Debentures), due September 1,2014, provides for interest payable semi-annually on March 1 and September 1to the extent that current annual net income is sufficient therefor, or at thediscretion of the Company, out of available retained earnings.  All interest due and payable at January 3, 2009was paid.  The 7% Debentures are recordedat face value which approximates its fair value.

 

9.                    CapitalStock

 

Class A Common Stock:  The Company is authorized to issue 10,000,000shares of Class A, par value $.25 per share.  At January 3,2009 and December 29,2007, the number of shares issued were 4,518,298, including 1,357,200 treasury shares. During 2006, the Company purchasedand retired 217,904 shares of its Class A for an aggregate purchase priceof approximately $19,999,000 inunsolicited private transactions with unrelated parties.  No shares were purchased during 2008 and 2007.  In March 2007, the Company announced astock repurchase program, authorized by the Board of Directors, to purchasefrom time to time up to 200,000 shares ofits Class A in the open market or in private transactions. This was inaddition to the 22,904 shares remainingunder prior repurchase authorizations. The timing, volume and price of purchases are at the discretion of themanagement of the Company.

 

During 2008 and 2007, the Company paid regularquarterly dividends of 25 cents per share of Class A for a total ofapproximately $3,161,000 in each year. In addition, on December 8, 2008, the Company paid a special cashdividend of twenty-five dollars ($25) per share on its outstanding Class Atotaling approximately $79,027,000 to stockholders of record at the close ofbusiness on November 20, 2008.  On January 20, 2009,the Company paid a regular quarterly cash dividend of 25 cents per share of Class A,aggregating approximately $790,000, tostockholders of record on December 31,2008.

 

10.              StockAppreciation Rights

 

TheCompany has granted SARs covering shares of the Company’s Class A tonon-employee directors and certain employees of the Company and itssubsidiaries.  Each SAR entitles theholder to receive upon exercise thereof the excess of the fair market value ofa share of Class A, as determined in accordance with the SARs agreement,on the date of exercise over the fair market value of such share on the dategranted. SARsgranted prior to December 2007 vest 25% each year beginning at the end ofthe first year and expire five years from the date of grant.  SARsgranted in December 2007 vest 25% each year beginning at the end of thethird year and expire seven years from the date of grant. SARs transactionsduring the past three years are summarized below.

 

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| ** **                  | ** ** | **SARs**              | ** ** |
|-----------------------------|------------|-----------------------|------------|
| ** **                  | ** ** | **Officers and** | ** ** | **Non-Employee** | ** ** |
| ** **                  | ** ** | **Employees**         | ** ** | **Directors** | ** ** |
| ** **                  | ** ** | ** **            | ** ** | **Weighted** | ** ** | ** ** | ** ** | **Weighted** | ** ** |
| ** **                  | ** ** | **SARs**              | ** ** | **Average Price** | ** ** | **SARs** | ** ** | **Average Price** | ** ** |
|                        |       |                  |       |   |   |   |   |   |   |
| Outstanding as  of 12/31/05 |       | 67,050                |       | $ | 56.72 |   | 60,000 |   | $ | 56.85 |   |
|                        |       |                  |       |   |   |   |   |   |   |
| Exercised                   |       | 21,650                |       | $ | 53.19 |   | 2,500 |   | $ | 28.00 |   |
| Forfeited                   |       | 1,750                 |       | $ | 57.00 |   | 10,000 |   | $ | 78.43 |   |
|                        |       |                  |       |   |   |   |   |   |   |
| Outstanding as  of 12/30/06 |       | 43,650                |       | $ | 58.46 |   | 47,500 |   | $ | 53.83 |   |
|                        |       |                  |       |   |   |   |   |   |   |
| Granted                     |       | 72,000                |       | $ | 145.91 |   | 45,000 |   | $ | 140.79 |   |
| Exercised                   |       | 22,675                |       | $ | 54.97 |   | 35,000 |   | $ | 52.52 |   |
| Forfeited                   |       | 3,750                 |       | $ | 86.22 |   | 0 |   | $ | 0.00 |   |
|                        |       |                  |       |   |   |   |   |   |   |
| Outstanding as  of 12/29/07 |       | 89,225                |       | $ | 128.75 |   | 57,500 |   | $ | 122.69 |   |
|                        |       |                  |       |   |   |   |   |   |   |
| Granted                     |       | 0                     |       | $ | 0.00 |   | 0 |   | $ | 0.00 |   |
| Exercised                   |       | 17,100                |       | $ | 58.40 |   | 15,000 |   | $ | 68.09 |   |
| Forfeited                   |       | 0                     |       | $ | 0.00 |   | 0 |   | $ | 0.00 |   |
|                        |       |                  |       |   |   |   |   |   |   |
| Outstanding as  of 1/3/09   |       | 72,125                |       | $ | 145.42 |   | 42,500 |   | $ | 141.96 |   |
|                        |       |                  |       |   |   |   |   |   |   |
| Exercisable as  of 1/3/09   |       | 500                   |       |   | *** *** | 0 | *** *** | *** *** | *** *** |

*** ***

Theaggregate intrinsic value of fully vested SARs as of January 3, 2009 isapproximately $35,000.

 

Thefollowing table summarizes information about the Company’s SARs outstanding at January 3,2009:

 
|                                  | *** *** | *** ***    | *** *** | **SARs Outstanding** | *** *** | **SARs Exercisable** | *** *** |
|---------------------------------------|--------------|-----------------|--------------|---------------------------|--------------|---------------------------|--------------|
|                                  | *** *** | *** ***    | *** *** | **Weighted**              | *** *** | *** ***              | *** *** | *** *** | *** *** | *** *** | *** *** |
|                                  | *** *** | *** ***    | *** *** | **Average**               | *** *** | **Weighted**              | *** *** | *** *** | *** *** | **Weighted** | *** *** |
|                                  | *** *** | *** ***    | *** *** | **Remaining**             | *** *** | **Average**               | *** *** | *** *** | *** *** | **Average** | *** *** |
|                                  | *** *** | **Number**      | *** *** | **Contractual**           | *** *** | **Exercise**              | *** *** | **Number** | *** *** | **Exercise** | *** *** |
| **Exercise  Price**                   | *** *** | **Outstanding** | *** *** | **Life**                  | *** *** | **Price**                 | *** *** | **Exercisable** | *** *** | **Price** | *** *** |
| ** **                            | *** *** | ** **      | *** *** | ** **                | *** *** | ** **                | *** *** | ** ** | *** *** | ** ** | *** *** |
| SARs -  Officers & Employees | *** *** | *** ***    | *** *** | *** ***              | *** *** | *** ***              | *** *** | *** *** | *** *** |
| $                                | 57.00        |            | 500          |                      | .5 years     |                      | $            | 57.00 |   | 500 |   | $ | 57.00 |   |
| $                                | 121.03       |            | 1,125        |                      | 3.2 years    |                      | $            | 121.03 |   | 0 |   | $ | 0.00 |   |
| $                                | 146.44       |            | 70,500       |                      | 5.9 years    |                      | $            | 146.44 |   | 0 |   | $ | 0.00 |   |
|                                  |         | 72,125          |         | 5.8 years                 |         | $                         | 145.42       |   | 500 | *** *** | $ | 57.00 | *** *** |
| *** ***                          | *** *** | *** ***    | *** *** |                      | *** *** | *** ***              | *** *** | *** *** | *** *** | *** *** | *** *** |
| SARs -  Non-Employee Directors        | *** *** | *** ***    | *** *** | *** ***              | *** *** | *** ***              | *** *** | *** *** | *** *** |
| $                                | 121.03       |            | 7,500        |                      | 3.2 years    |                      | $            | 121.03 |   | 0 |   | $ | 0.00 |   |
| $                                | 146.44       |            | 35,000       |                      | 5.9 years    |                      | $            | 146.44 |   | 0 |   | $ | 0.00 |   |
|                                  |         | 42,500          |         | 5.4 years                 |         | $                         | 141.96       |   | 0 | *** *** | $ | 0.00 | *** *** |

 

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SARscompensation expense is recorded under SG&A expense on the ConsolidatedStatements of Operations and Comprehensive Income.  Effective January 1, 2006, the Companyadopted SFAS 123(R) (revised 2004), “Share-Based Payment,” using themodified prospective transition method, and therefore, prior period resultswere not restated.  As of January 1,2006, the cumulative effect of adopting SFAS 123(R) resulted in therecognition of $288,000 in compensation expense.  SFAS 123(R) requires the Company toremeasure the fair value of SARs each reporting period until the award issettled.  Compensation expense must berecognized each reporting 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 noted above.  The Company recognized $1,823,000 and$2,908,000 of SARs compensation expense in 2008 and 2007, respectively.

 

Asof January 3, 2009, assuming no change in the SARs fairvalue, there was approximately $2,886,000 of total unrecognized compensationcost related to unvested SARs which is expected to be recognized over aweighted average period of 4.7 years. The total intrinsic value of SARs exercised during 2008 was approximately $3,443,000.  Intrinsic value represents the amount bywhich the fair value of SARs exceeds the exercise price.

 

11.    Retirement Plans

 

The Companycontributes to multi-employer union pension plans, administered by varioustrustees, which may be deemed to be defined benefit plans.  Contributions to these plans are based uponnegotiated labor contracts.  Informationrelating to accumulated benefits and fund assets as they may be allocable tothe participants at January 3, 2009, is not available to the Company.  The Company records pension expense for theseplans as contributions are earned.  TheCompany’s total union pension expense for all plans for 2008, 2007 and 2006 amounted to $5,065,000, $5,332,000 and $6,801,000,respectively.

 

The Arden Group, Inc.401(k) Retirement Savings Plan (401(k) Plan) covers all non-unionemployees of the Company and its subsidiaries who have attained the age of 18and have completed the applicable service requirement, as well as retirees andemployees who have terminated but remain participants in the 401(k) Plan.  On the first of the month following thecompletion of one month of service, the 401(k) Plan provides that, withcertain limitations, a qualifying employee may elect to contribute up to 100%of such employee’s annual compensation to the 401(k) Plan up to a maximumof $15,500 in 2008 on a tax-deferredbasis.  In addition, employees over theage of 50 may elect to make catch up contributions up to a maximum of $5,000 in2008. The Company made discretionary contributions to the 401(k) Plan of$716,000, $929,000 and $919,000 for 2008,2007 and 2006,respectively.

 

The Company formerlymaintained a noncontributory, trusteed Stock Bonus Plan which qualified as aprofit sharing plan under Section 401(a) of the Internal Revenue Codeof 1986, as amended.  Plan assets wereinvested in the Company’s Class A with excess cash invested in certaingovernment-backed securities. Legislation passed as part of the Pension Protection Act of 2006required employers to allow participants who own employer 

 

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securities theopportunity to diversify their assets. As a result, the Stock Bonus Plan was merged into the 401(k) Planeffective March 2007.

 

Anemployment agreement with a key executive officer provides for annualpost-employment compensation equal to 25% of his average base salary and bonusearned in the last three fiscal years prior to the cessation of his employmentwith the Company.  The officer isentitled to monthly payments during his lifetime beginning with the terminationof his employment for any reason other than his breach of the employmentagreement or termination for cause.  TheCompany has accrued its obligation under the terms of the employment agreement.  The Company decreased the accrual during 2008, 2007and 2006 and recognized income ofapproximately $45,000, $44,000 and $536,000, respectively.  The decrease in the accrual is primarily dueto a change in estimate based on the refining of the assumptions and underlyingdata, including the estimated payout term. This accrual is recorded under other liabilities on the ConsolidatedBalance Sheets and totaled approximately $2,122,000as of January 3, 2009.

 

12.    Multi-EmployerUnion Health Care Plans

 

The Company contributesto multi-employer union health care plans, administered by various trustees, inaccordance with the provisions of various labor contracts.  Contributions to these plans are generallybased on the number of straight-time hours worked.  The Company’s expense for these plans totaled$9,258,000, $9,789,000 and $15,231,000for 2008, 2007and 2006, respectively.  The majority of Gelson’s employees are members of the United Food &Commercial Workers International Union (UFCW). The Company contributes to a multi-employer health and welfare trustfund on behalf of its employees who are members of the UFCW.  This fund was overfunded during 2007 contractnegotiations.  Consequently, theemployers negotiated a significant reduction in the average hourly contributionrates for health care which was expected to substantially reduce the overfundedstatus of the fund during the term of the new contract between the UFCW and theemployers which expires March 6, 2011. The Company’s health and welfare contribution rate was scheduled toincrease effective with hours worked during March 2009 and after; however,the Company was recently notified by the Southern California United Food &Commercial Workers Unions and the Food Employers Joint Trust Funds (Trust) thatthe increase has been suspended for the six month period beginning March 2009and ending August 2009.   The Trustwill review the effective rate again in August 2009.  Except as discussed above, there wereno employer withdrawals, shortfall contributions, maintenance of benefitclauses or other material changes that affected the comparability of employerand multi-employer contributions from year to year.

 

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13.    IncomeTaxes

 

The composition ofthe federal and state income tax provision (benefit) is as follows:

 
| **(In Thousands)**       | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** |
|-------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Current:                      |       |     |       |     |       |     |       |
| Federal                       |       | $        | 11,550     |     | $          | 14,702   |       | $ | 13,455 |   |
| State                         |       | 3,239    |       | 3,671    |       | 3,513    |       |
| Total current  tax provision  |       | 14,789   |       | 18,373   |       | 16,968   |       |
|                          |       |     |       |     |       |     |       |
| Deferred:                     |       |     |       |     |       |     |       |
| Federal                       |       | 1,652    |       | 540      |       | (1,009   | )          |
| State                         |       | 399      |       | 364      |       | (64      | )          |
| Total deferred  tax provision |       | 2,051    |       | 904      |       | (1,073   | )          |
| Total income tax  provision   |       | $        | 16,840     |     | $          | 19,277   |       | $ | 15,895 |   |

 

The Company’s deferred tax assets (liabilities) were attributable tothe following:

 
| ** **                           | ** ** | **January 3****,** | ** **  | **December 29,** | ** ** |
|--------------------------------------|------------|-------------------------|-------------|-----------------------|------------|
| **(In Thousands)**              | ** ** | **2009**                | ** **  | **2007**              | ** ** |
| Deferred tax  assets:                |       |                    |        |                  |       |
| Deferred rent                        |       | $                       | 2,566       |                  | $          | 2,504 |   |
| Property, plant  and equipment       |       | 1,582                   |        | 1,489                 |       |
| Self-insured  reserves               |       | 1,860                   |        | 2,895                 |       |
| Accrued expenses                     |       | 1,749                   |        | 3,028                 |       |
| State income  taxes                  |       | 1,150                   |        | 1,382                 |       |
| Accrued vacation                     |       | 1,134                   |        | 1,076                 |       |
| Other                                |       | 771                     |        | 538                   |       |
| Deferred tax  assets                 |       | 10,812                  |        | 12,912                |       |
|                                 |       |                    |        |                  |       |
| Deferred tax  liabilities:           |       |                    |        |                  |       |
| Deferred gain on  debenture exchange |       | (2,372                  | )           | (2,533                | )          |
| Other                                |       | (1,126                  | )           | (1,013                | )          |
| Deferred tax  liabilities            |       | (3,498                  | )           | (3,546                | )          |
| Deferred income taxes, net           |       | $                       |  7,314 |                  | $          | 9,366 |   |

 

Reconciliation ofthe statutory federal rate and effective rate is as follows:

 
| **(In Thousands, Except**             | ** ** | **2008**   | ** ** | **2007** | ** ** | **2006**   | ** ** |
|-------------------------------------------------|------------|------------|------------|----------|------------|------------|------------|
| **Percentage Amounts)**                    | ** ** | **Amount** | ** ** | **Rate** | ** ** | **Amount** | ** ** | **Rate** | ** ** | **Amount** | ** ** | **Rate** | ** ** |
| Federal tax at  statutory rate                  |       | $          | 14,527     |     | 35.0       | %          | $          | 16,969 |   | 35.0 | % | $ | 13,691 |   | 35.0 | % |
| State income  taxes, net of federal tax benefit |       | 2,385      |       | 5.8      | %          | 2,786      |       | 5.7 | % | 2,248 |   | 5.7 | % |
| Other                                           |       | (72        | )          | (.2      | )%         | (478       | )          | (.9 | )% | (44 | ) | (.1 | )% |
|                                            |       | $          | 16,840     |     | 40.6       | %          | $          | 19,277 |   | 39.8 | % | $ | 15,895 |   | 40.6 | % |

##### ** **

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##### **The Company adopted FIN 48, “Accounting for Uncertainty inIncome Taxes - an Interpretation of FASB Statement No. 109,” on the firstday of its 2007 fiscal year.  Theimplementation of FIN 48 did not result in a material adjustment to the Company’sliability for unrecognized income tax benefits. As of January 3, 2009 and December 29, 2007, the Company hadapproximately $6,000 and $23,000, respectively, of unrecognized tax benefits,all of which would impact our effective tax rate if recognized.  The Company does not believe that theunrecognized tax benefit will change significantly within the 2009 fiscalyear.  The following table reconciles theamount recorded for unrecognized tax benefits for the year ended January 3,2009:**

##### ** **

| **(In Thousands)**                             | ** ** | ** ** | ** ** |
|-----------------------------------------------------|------------|------------|------------|
| Unrecognized tax  benefits – beginning of year |       | $          | 23         |   |
| Decrease due to  lapse of statute of limitations    |       | (17        | )          |
| Unrecognized tax  benefits – end of year       |       | $          | 6          |   |

 

TheCompany recognizes interest and penalties related to uncertain tax positions ininterest expense and SG&A expense, respectively, in the ConsolidatedStatements of Operations and Comprehensive Income.  A reversal of interest recognized in priorperiods of $2,000 was recorded in 2008.  Nointerest was recognized during 2007.  Nopenalties were recognized during 2008 or2007.  As of January 3, 2009 and December 29, 2007,the Company had approximately $82,000 and$84,000 accrued for interest,respectively, and no accrual for penalties at the end of either period.  The interest accrual is net of the applicablefederal and state tax savings which would result if the interest were paid out.

 

TheCompany files income tax returns in the U.S. federal jurisdiction and theCalifornia state jurisdiction.  TheCompany is no longer subject to federal and state tax examinations for yearsbefore 2005 and 2004, respectively.

 

14.    Leases

 

The principal kinds ofproperty leased by the Company and its subsidiaries are supermarket land andbuildings.  The most significantobligations assumed under the lease terms, other than rental payments, are theupkeep of the facilities, utilities, insurance and property taxes.  Most supermarket leases contain contingentrental provisions based on sales volume and have renewal options.  The Company’s decision to exercise renewaloptions is primarily dependent on the level of business conducted at thelocation and the profitability thereof.

 

All leases and subleaseswith an initial term greater than one year are accounted for under SFAS 13, “Accountingfor Leases.”  These leases are classifiedas either capital leases, operating leases or subleases, as appropriate.

 

Assets Under CapitalLeases:  Assets under capital leases arecapitalized using interest rates appropriate at the inception of eachlease.  Contingent rentals associatedwith capital leases in 2008, 2007 and 2006 were $0, $231,000 and $242,000,respectively, and accordingly have been charged to expense as incurred.  There were no capital leases outstanding asof January 3, 2009 or December 29, 2007.

 

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Operating Leases andSubleases:  In addition to capitalleases, the Company is obligated under operating leases, primarily for land andbuildings, which expire at various dates through 2027.  Future minimum lease payments for allnoncancelable operating leases having a remaining term in excess of one year atJanuary 3, 2009 are as follows:

 
| ** **              | ** ** | ** **      | ** ** | **Deduct**   | ** ** | **Net**         | ** ** |
|-------------------------|------------|-----------------|------------|--------------|------------|-----------------|------------|
| ** **              | ** ** | ** **      | ** ** | **Sublease** | ** ** | **Rental**      | ** ** |
| **(In Thousands)** | ** ** | **Commitments** | ** ** | **Rentals**  | ** ** | **Commitments** | ** ** |
| 2009                    |       | $               | 10,828     |         | $          | 679             |       | $ | 10,149 |   |
| 2010                    |       | 10,507          |       | 684          |       | 9,823           |       |
| 2011                    |       | 9,829           |       | 709          |       | 9,120           |       |
| 2012                    |       | 9,669           |       | 544          |       | 9,125           |       |
| 2013                    |       | 9,266           |       | 78           |       | 9,188           |       |
| Thereafter              |       | 80,895          |       | 23           |       | 80,872          |       |
|                    |       |            |       |         |       |            |       |
|                    |       | $               | 130,994    |         | $          | 2,717           |       | $ | 128,277 |   |

 

Rent expense underoperating leases was as follows:

 
| **(In Thousands)** | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** |
|-------------------------|------------|----------|------------|----------|------------|----------|------------|
| Minimum rent            |       | $        | 11,324     |     | $          | 10,900   |       | $ | 10,600 |   |
|                    |       |     |       |     |       |     |       |
| Contingent rent         |       | 1,356    |       | 1,122    |       | 907      |       |
|                    |       |     |       |     |       |     |       |
|                    |       | 12,680   |       | 12,022   |       | 11,507   |       |
|                    |       |     |       |     |       |     |       |
| Sublease rentals        |       | (2,110   | )          | (1,963   | )          | (1,824   | )          |
|                    |       |     |       |     |       |     |       |
|                    |       | $        | 10,570     |     | $          | 10,059   |       | $ | 9,683 |   |

 

15.    Related Party Transactions

 

A director of the Company is a partner of a law firm which performslegal services for the Company.

 

16.    Commitments and ContingentLiabilities

 

The Company has anemployment agreement with a key executive officer and shareholder whichcurrently expires on January 1, 2011. In addition to a base salary, the agreement provides for a bonus basedon pre-tax earnings.  No maximum compensationlimit exists.  Total salary and bonusexpensed in 2008, 2007 and 2006 wasapproximately $2,154,000, $2,385,000 and$2,034,000, respectively.  The unpaid bonus at year end is recordedunder accounts payable, trade on the Consolidated Balance Sheets.  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 theterms of the employment agreement as discussed in Note 11.

 

The Company is primarily self-insured for losses related to general andauto liability claims and, for events occurring prior to July 1, 2006, forworkers’ compensation as well.  TheCompany purchased a fully insured guaranteed cost workers’ compensationinsurance policy 

 

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for losses occurring after June 30,2006. This policy replaced the high deductible program for workers’compensation and is currently effective through June 30, 2009.  For claims prior to July 1, 2006, 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 claims and incurred but not reported claims at January 3, 2009and December 29, 2007 was approximately $4,564,000 and $7,107,000, respectively, and is recorded underother current liabilities and other liabilities on the Consolidated BalanceSheets.

 

As of January 3, 2009,management had authorized expenditures on incomplete projects for theconstruction and purchase of property, plant and equipment which totaledapproximately $1,823,000.

 

The Company andits subsidiaries are subject to a myriad of environmental laws, regulations andlease covenants with its landlords regarding air, water and land use, productsfor sale, and the use, storage and disposal of hazardous materials. The Companybelieves it substantially complies, and has in the past substantially complied,with federal, state and local environmental laws and regulations and privatecovenants.  The Company cannot, at thistime, estimate the expense it ultimately may incur in connection with anyviolations; however, it believes any such claims will not have a materialadverse impact on either the Company’s consolidated financial position, resultsof operations or cash flows.

 

The Company or itssubsidiaries are defendants in a number of cases currently in litigation, beingvigorously defended, in which the complainants seek monetary damages.  As of March 13, 2009, no estimate ofpotential liability, if any, is possible. Based upon current information,management, after consultation with legal counsel defending the Company’sinterests in the cases, believes the ultimate disposition thereof will not havea material effect upon either the Company’s consolidated financial position,results of operations or cash flows.

 

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17.    SelectedQuarterly Financial Data (Unaudited)

 

(In Thousands, Except Per Share Data)

 
| ** **  | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Basic and Diluted** | ** ** |
|-------------|------------|------------|------------|------------|------------|------------|------------|---------------------------------|------------|
| ** **  | ** ** | ** ** | ** ** | **Gross**  | ** ** | **Net**    | ** ** | **Net Income**             | ** ** |
| **Quarter** | ** ** | **Sales**  | ** ** | **Profit** | ** ** | **Income** | ** ** | **Per Share (1)**     | ** ** |
| 2007        |       |       |       |       |       |       |       |                            |       |
|        |       |       |       |       |       |       |       |                            |       |
| First       |       | $          | 120,430    |       | $          | 47,188     |       | $                               | 6,466      |   | $ | 2.05 |   |
| Second      |       | 119,823    |       | 46,514     |       | 6,501      |       | 2.05                            |       |
| Third       |       | 119,433    |       | 46,700     |       | 8,884      |       | 2.81                            |       |
| Fourth      |       | 126,253    |       | 47,589     |       | 7,356      |       | 2.33                            |       |
|        |       |       |       |       |       |       |       |                            |       |
| 2008        |       |       |       |       |       |       |       |                            |       |
|        |       |       |       |       |       |       |       |                            |       |
| First       |       | $          | 118,816    |       | $          | 45,547     |       | $                               | 6,529      |   | $ | 2.07 |   |
| Second      |       | 116,616    |       | 44,925     |       | 6,614      |       | 2.09                            |       |
| Third       |       | 114,156    |       | 43,457     |       | 4,114      |       | 1.30                            |       |
| Fourth      |       | 129,529    |       | 50,571     |       | 7,410      |       | 2.34                            |       |

 

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| (1) | Earnings per share is calculated using the weighted average  outstanding shares for the quarter. The fourth quarter of 2008 was a 14 week  quarter compared to 13 weeks in the fourth quarter of 2007. |
|-----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

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

 

**INDEX TOEXHIBITS**

 
| **Exhibit** | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                              |
|-------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|        |       |                                                                                                                                                                                                                                                                                                                                                                                                    |
| 3.1.1       |       | Restated Certificate of  Incorporation of Arden Group, Inc. dated November 7, 1988, filed as  Exhibit 3.1 to the Annual Report on Form 10-K of Arden  Group, Inc. for the fiscal year ended December 31, 1988 and  incorporated herein by reference.                                                                                                                      |
|        |       |                                                                                                                                                                                                                                                                                                                                                                                                    |
| 3.1.2       |       | Certificate of  Amendment of Restated Certificate of Incorporation of Arden Group, Inc.  dated June 17, 1998, filed as Exhibit 3.1.2 to the Annual Report on  Form 10-K of Arden Group, Inc. for the fiscal year ended  January 2, 1999 and incorporated herein by reference.                                                                                             |
|        |       |                                                                                                                                                                                                                                                                                                                                                                                                    |
| 3.2.1       |       | Amended and Restated  By-Laws of Arden Group, Inc. as amended as of November 6, 2001,  filed as Exhibit 3.2.2 to the Annual Report on Form 10-K of Arden  Group, Inc. for the fiscal year ended December 29, 2001 and  incorporated herein by reference.                                                                                                                  |
|        |       |                                                                                                                                                                                                                                                                                                                                                                                                    |
| 4.1         |       | Indenture dated as of  September 1, 1964, between Arden Farms Co. and Security First National  Bank, as Trustee, pertaining to 6% Subordinated Income Debentures, due  September 1, 2014, filed as Exhibit 4.2 to Registration Statement  on Form S-1 of Arden Group, Inc. and Arden-Mayfair, Inc.,  Registration No. 2-58687, and incorporated herein by reference. |
|        |       |                                                                                                                                                                                                                                                                                                                                                                                                    |
| 4.1.1       |       | First Supplemental  Indenture dated as of November 7, 1978, to Indenture which is  Exhibit 4.1, filed as Exhibit 7 to the Annual Report on  Form 10-K of Arden Group, Inc. for the fiscal year ended  December 30, 1978 and incorporated herein by reference.                                                                                                             |
|        |       |                                                                                                                                                                                                                                                                                                                                                                                                    |
| 4.1.2       |       | Second Supplemental  Indenture dated as of November 7, 1978, to Indenture which is  Exhibit 4.1, filed as Exhibit 8 to the Annual Report on  Form 10-K of Arden Group, Inc. for the fiscal year ended  December 30, 1978 and incorporated herein by reference.                                                                                                            |
|        |       |                                                                                                                                                                                                                                                                                                                                                                                                    |
| 4.1.3       |       | Third Supplemental  Indenture dated April 24, 1981, to Indenture which is Exhibit 4.1,  filed as Exhibit 4.2.3 to the Quarterly Report on Form 10-Q of  Arden Group, Inc. for the quarter ended April 4, 1981 and  incorporated herein by reference.                                                                                                                      |
|        |       |                                                                                                                                                                                                                                                                                                                                                                                                    |
| 10.1*       |       | Employment Agreement  dated May 13, 1988, by and among Arden Group, Inc.,  Arden-Mayfair, Inc., Telautograph Corporation and Gelson’s Markets and  Bernard Briskin, filed as Exhibit 10 to the Quarterly Report on  Form 10-Q of Arden Group, Inc. for the quarter ended July 2,  1988 and incorporated herein by reference.                                    |

 

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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*       |       | 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. |
|        |       |                                                                                                                                                                                                                                                                                                                                                                                               |
| 10.4*       |       | Third  Amendment to Employment Agreement as of December 31, 2008, by and  between Arden Group, Inc., Arden-Mayfair, Inc., AMG  Holdings, Inc. and Gelson’s Markets and Bernard Briskin.                                                                                                                                                                                   |
|        |       |                                                                                                                                                                                                                                                                                                                                                                                               |
| 10.5        |       | 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.                                                                                                      |
|        |       |                                                                                                                                                                                                                                                                                                                                                                                               |
| 10.6*       |       | 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*       |       | 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*       |       | 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 each of John G.  Danhakl, Robert A. Davidow, Ben Winters, Kenneth A. Goldman and Steven Romick  dated January 20, 2004, filed as Exhibit 10.10 to the Annual Report  on Form 10-K of Arden Group, Inc. for the fiscal year ended  December 30, 2006 and incorporated herein by reference.           |
|        |       |                                                                                                                                                                                                                                                                                                                                                                                               |
| 10.10*      |       | Form of  Non-Employee Director Phantom Stock Unit Agreement with M. Mark Albert dated  March 13, 2007, filed as Exhibit 10.1 to the Quarterly Report on  Form 10-Q of Arden Group, Inc. for the quarter ended March 31,  2007 and incorporated herein by reference.                                                                                                  |
|        |       |                                                                                                                                                                                                                                                                                                                                                                                               |
| 10.11*      |       | Form of  Non-Employee Director Phantom Stock Unit Agreement with each of M. Mark  Albert, John G. Danhakl, Robert A. Davidow, Kenneth A. Goldman and Steven  Romick dated December 6, 2007, filed as Exhibit 10.10 to the Annual  Report on Form 10-K of Arden Group, Inc. for the fiscal year ended  December 29, 2007 and incorporated herein by reference.        |

 

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| **Exhibit** | ** ** | ** **                                                                                                 |
|-------------|------------|------------------------------------------------------------------------------------------------------------|
|        |       |                                                                                                       |
| 21.         |       | Subsidiaries of  Registrant.                                                                               |
|        |       |                                                                                                       |
| 23.1        |       | Consent of Independent  Registered Public Accounting Firm.                                                 |
|        |       |                                                                                                       |
| 31.1        |       | Certification  of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley  Act of 2002. |
|        |       |                                                                                                       |
| 31.2        |       | Certification  of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley  Act of 2002. |
|        |       |                                                                                                       |
| 32.1        |       | Certification  of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley  Act of 2002. |
|        |       |                                                                                                       |
| 32.2        |       | Certification  of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley  Act of 2002. |
|        |       |                                                                                                       |

 

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*        Indicates managementcontracts or compensatory plans or arrangements required to be filed as anexhibit to this report.

 

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