**UNITEDSTATES SECURITIES AND EXCHANGE COMMISSION****Washington,D. C. 20549**

 

**FORM 10-K**

**(Mark One)**

 

**x****                             ****ANNUAL REPORT PURSUANT TO SECTION 13OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934****For the fiscal year ended December 29,2007**

 

**OR**

 

**o****                                ****TRANSITION REPORT PURSUANT TO SECTION 13OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934****For the transition period from                       to**

 

**Commissionfile number  0-9904**

 

**ARDENGROUP, INC.**

**(Exactname of registrant as specified in its charter)**

 

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

 

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

 

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

 

| **(Title  of class)**      | ** ** | **Name of  each exchange on which registered** |
|----------------------------|------------|------------------------------------------------|
| Class A  Common Stock |       | NASDAQ Stock  Market LLC                       |

 

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

 

**Title ofeach class**(None)

 

Indicate by checkmark if the registrant is a well-known seasoned issuer, as defined in Rule 405of the Securities Act.

Yes  o    No  x

 

Indicate by checkmark if the registrant is not required to file reports pursuant to Section 13or Section 15(d) of the Exchange Act.

Yes  o    No  x

 

Indicate by checkmark whether the registrant (1) has filed all reports required to be filedby Section 13 or 15(d) of the Securities Exchange Act of 1934 duringthe preceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.

Yes  x    No  o

 

Indicate by acheck mark if disclosure of delinquent filers pursuant to Item 405 ofRegulation S-K is not contained herein, and will not be contained, to the best ofregistrant’s knowledge, in definitive proxy or information statementsincorporated by reference in Part III of this Form 10-K or anyamendment 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.  (Check one):

Large accelerated filer  o   Accelerated filer  x

Non-accelerated filer o   Smaller reporting company  o

 

Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2of the Exchange Act).          

Yes  o    No  x

 

The aggregate marketvalue of the voting and non-voting common equity held by non-affiliates of theregistrant based on the price at which the Class A Common Stock last soldon June 29, 2007, the last businessday of the registrant’s most recently completed second fiscal quarter, was $154,855,329.

 

The number of sharesoutstanding of the registrant’s class of common stock as of February 29, 2008 was:

 

3,161,098 shares of Class A Common Stock

 

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**TABLE OF CONTENTS**

 
| **Page**   | **PART I**   |                                                                                                                   |
|------------|-------------------|------------------------------------------------------------------------------------------------------------------------|
| 1          | Item 1.           | Business                                                                                                               |
| 4          | Item 1A.          | Risk Factors                                                                                                           |
| 8          | Item 1B.          | Unresolved Staff  Comments                                                                                             |
| 8          | Item  2.          | Properties                                                                                                             |
| 9          | Item 3.           | Legal Proceedings                                                                                                      |
| 9          | Item 4.           | Submission of  Matters to a Vote of Security Holders                                                                   |
|       |              |                                                                                                                   |
| ** ** | **PART II**  |                                                                                                                   |
| 10         | Item 5.           | Market for the  Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |
| 11         | Item 6.           | Selected Financial  Data                                                                                               |
| 13         | Item 7.           | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                            |
|       |              |                                                                                                                   |
| 24         | Item 7A.          | Quantitative  and Qualitative Disclosures about Market Risks                                                           |
| 24         | Item 8.           | Financial  Statements and Supplementary Data                                                                           |
| 24         | Item 9.           | Changes in and  Disagreements with Accountants on Accounting and Financial Disclosure                                  |
| 25         | Item 9A.          | Controls and  Procedures                                                                                               |
| 25         | Item 9B.          | Other Information                                                                                                      |
|       |              |                                                                                                                   |
|       | **PART III** |                                                                                                                   |
| 26         | Item 10.          | Directors and  Executive Officers of the Registrant                                                                    |
| 28         | Item 11.          | Executive  Compensation                                                                                                |
| 36         | Item 12.          | Security  Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters                        |
| 38         | Item 13.          | Certain  Relationships, Related Transactions and Director Independence                                                 |
| 39         | Item 14.          | Principal  Accountant Fees and Services                                                                                |
|       |              |                                                                                                                   |
|       | **PART IV**  |                                                                                                                   |
| 41         | 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) which operates supermarkets in Southern California.  The Company also owns certain real estateproperties through a subsidiary, Mayfair Realty, Inc. (Mayfair Realty)which is wholly-owned by the Company and Arden-Mayfair.

 

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

 

**MarketOperations**

 

As of December 29, 2007,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.”  Gelson’sand Mayfair are self-service cash-and-carry markets which offer a broadselection of local and national brands as well as a limited number of privatelabel items.  Gelson’s targets theconsumer who values superior customer service, merchandise, presentation andselection.  Gelson’s also operates adistribution center in the City of Commerce, California.

 

**StoreFormats and Business Strategy**

 

Gelson’s businessstrategy is to offer a comfortable upscale shopping experience which issuperior to its competitors in terms of customer service and merchandisequality, selection and presentation.  Thegoal of this strategy is to continue to develop and maintain Gelson’s loyalbase of customers and appeal to potential new customers.  Central elements of this strategy are asfollows:

 

Merchandise The merchandise offerings in the markets are tailored in response toGelson’s customer profile.  Gelson’sstores, which range in size from approximately 18,000 to 40,000 square feet,typically carry a wide range of items, including traditional grocery categoriessuch as dry groceries, produce, meat, seafood, bakery, dairy, wine and liquor,floral, sushi, vitamins, health and natural food products, health and beautyaids and a selection of organic products. Gelson’s perishables are typically premium products, which arerigorously maintained and culled as appropriate to assure quality andfreshness.  Gelson’s merchandisingemphasizes specialty items such as imported foods and unusual delicatessenitems, and items found in service departments such as seafood, sit-down coffeeareas, bakeries and service deli.  TheMayfair store offers a merchandise selection which is equal in quality to aGelson’s but generally offers fewer choices.

 

Service Gelson’s emphasizes customer service by offering a variety of servicedepartments including meat, seafood, delicatessen, floral, sushi, cheese andbakery departments.  All sushi 

 

 

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and most bakerydepartments are operated by third parties. Some Gelson’s stores include additional service departments such asfresh pizza, coffee bars, gelato bars and carving carts offering cookedmeats.  Additionally, selected storesoffer banking and pharmacy services through third parties.  Stores are staffed so that, even at peaktimes, customer checkout time is minimized. In addition to checkers, there are personnel assigned to bagging andcarrying out purchases.  All employeesare encouraged to know customers by name and assist them wheneverpossible.  All stores offer a Companycredit card to qualified customers in addition to the option of paying fortheir purchases with cash, checks, credit or debit cards.  Stores are typically open 14 to 17 hours perday, with hours of operation determined by local code, lease provisions or asappropriate for the business characteristics of each community.

 

Presentation All stores are maintained in accordance with extremely highstandards.  Personnel continually filland face shelves with product.  Produceand other perishables are trimmed and culled to maintain quality andappearance.

 

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

 

Expansion and StoreDevelopment  Management regularly evaluates thefeasibility of opening new stores in and outside its existing trade areas andremodeling existing stores in order to maximize the existing stores’ appeal toconsumers and their profit potential.  In2007, capital expenditures totaled $3,824,000.

 

Advertising andPromotion  Gelson’s advertises on a limited basis innewspapers and through its newsletter. Advertising focuses on the promotion of events rather than prices; forexample, Gelson’s emphasizes special holiday selections, new products,specialty items, services and recipes. In addition, Gelson’s maintains a website at www.gelsons.com which allows customers to learn moreabout the Company and to read about food related topics that may be of interestto them.  The website also provides anopportunity for customers to request a newsletter, offer feedback and to placecatering and holiday meal orders online. The Company reevaluates its strategy regularly in an effort to identifythe most effective means of attracting and retaining customers.

 

**Competition**

 

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

 

Certaincompetitors of the Company offer home delivery, in-store banks and pharmaciesin addition to their existing retail store operations.  The Company continues to monitor and evaluate

 

 

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opportunities forhome delivery, but has elected not to do so at this time.  A few of the Company’s stores offer in-storebanks and pharmacies; most of the Company’s stores are not large enough forsuch additional facilities.

 

**Seasonality**

 

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

 

**Supportand Other Services**

 

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

 

The bulk of allmerchandise purchasing takes place at Gelson’s headquarters in Encino,California.  Approximately 47% of the purchases for 2007 were distributed through the centralwarehouse; the remainder was delivered directly to the stores frommanufacturers, distributors or wholesalers. The central purchasing and distribution operations are conducted basedon electronic in-store ordering systems. Stores can place and receive orders up to six days per week.  Perishables are ordered more frequently thanother goods.

 

The largestsupplier for the stores is Unified Western Grocers, Inc. (Unified)(formerly Certified Grocers), a grocery wholesale cooperative, which has been asupplier to the Company for approximately thirty-three years and whichaccounted for approximately 17% of Gelson’spurchases in fiscal 2007.  No other supplier accounts for more than 3% of Gelson’s purchases.  The Company believes that there would be anegative short-term impact if the Company were to lose Unified as a supplierfor Gelson’s, but that such impact would likely be mitigated by a combinationof events, which could include:  (i) purchasingcertain items for direct store delivery, thereby freeing warehouse capacity toallow other items to be purchased through the warehouse and (ii) purchasingcertain products through other wholesalers. However, such a loss could have an adverse effect on the performance ofGelson’s.

 

**Employees**

 

Gelson’s hadapproximately 1,328 full-time and 1,001 part-time store, warehouse and officeemployees at December 29, 2007. 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.

 

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 

 

 

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March 5,2010 discontinues the use of a two-tier wage structure and provides for, amongother things, wage increases and modifications to the pension and health andwelfare plans.  The Company contributesto a multi-employer health care and pension plan trust on behalf of its employees who aremembers of the UFCW.  All employers whoparticipate in a multi-employer plan are required to contribute at the samehourly rate based on straight 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 whichwere completed in July 2007.  Theemployees of the three major grocery retailers voted to ratify their contracton July 22, 2007.  The new agreementexpires March 6, 2011, one year after Gelson’s contract with the UFCWexpires.

 

In addition toemployees at Gelson’s, Arden-Mayfair had approximately 69 full-time and 2 part-timeemployees at its executive and headquarters offices as of December 29, 2007,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 not havean internet website to make its filings with the Securities and ExchangeCommission (SEC) available.  However, itwill provide free of charge upon written request to Assistant Secretary, ArdenGroup, Inc., P.O. Box 512256, Los Angeles, California 90051-0256paper copies of its annual report on Form 10-K, quarterly reports on Form 10-Q,current reports on Form 8-K and amendments to those reports filed orfurnished pursuant to Section 13(a) or 15(d) of the SecuritiesExchange Act of 1934, as amended, as soon as reasonably practicable afterelectronically filing such material with the SEC.  This information is also available atwww.sec.gov.  The reference to this websiteaddress does not constitute incorporation by reference of the information containedon the website and should not be considered part of this document.

 

Item1A.             Risk Factors

 

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 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 financial 

 

 

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condition.  Forward-looking statements reflect theCompany’s current plans and expectations regarding important risk factors andare 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. The Company does not undertake any obligation to update forward-lookingstatements.  The factors listed below,among others, could affect the Company’s financial results and could cause theCompany’s financial performance to differ materially from the expectationsexpressed in any forward-looking statement made by or on behalf of the Company:

 

*Changesin Economic, Political or Social Conditions*

 

Ourprofitability may be impacted by overall economic conditions, particularly inSouthern California.  Changes in economicconditions such as inflation, employment levels, interest rates and tax ratesmay reduce consumer spending or influence our customers to shift their spendingto our competitors.  In addition, our businessmay be 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 thesupermarket industry.  We are in directcompetition with numerous local outlets of regional and national supermarketchains, independent grocery stores, convenience stores, specialty and gourmetmarkets and food and grocery departments in mass merchandise and clubstores.   There are a number of wellestablished competitors with substantially greater financial, marketing,personnel and other resources than ours, some of which are also nonunion.  We frequently face the opening of a new orremodeled competitor’s store in our trade area. Competition also requires us to periodically remodel our existingstores, at ever-increasing costs, in order to maintain their appeal.  An inability to successfully compete with othergrocery retailers in our trade areas could prevent us from increasing orsustaining our revenues and profitability.

 

*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 our profitability.  If contract negotiations are not successful,the union could recommend that our employees vote to strike our stores,distribution center and offices.

 

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

 

 

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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.  This could affect our ability tocompete with grocery retailers whose labor costs are less than our own.  The new agreement between the UFCW and thethree major grocery retailers expires on March 6, 2011, one year afterGelson’s contract with the UFCW expires.

 

*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, working conditions,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 20 years.  Our revenues andprofitability would be negatively impacted if we are unable to renew theseleases at reasonable rates.

 

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.

 

 

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* *

*The Ability of our Vendors toSupply 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-three years.  We currently procure approximately 17% of our product from Unified.  Any disruption in the business of Unified orany of our other principal suppliers could negatively impact our sales andprofitability.  Even where we have accessto alternative sources of supply, the failure of a supplier to meet our demandsmay temporarily disrupt store level merchandise selection.

 

*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.  Additionally, the cost of defending ourselvesagainst lawsuits and claims, regardless of merit, could have a negative impact onour 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.

 

*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 

 

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andthe grocery business in general.  Thestock market in recent years has experienced extreme price and volumefluctuations that often have been unrelated or disproportionate to theoperating performance of companies. Furthermore, there is not a significantvolume of trading in our Class A which subjects our stock price to ahigher level of volatility and may adversely impact the liquidity of thestock.  In March 2007, the Companymerged its Stock Bonus Plan into its 401(k) Retirement Savings Plan (401(k) Plan)in order to satisfy the new congressionally mandated diversificationrequirements. Stock previously held for the benefit of participants in theCompany’s Stock Bonus Plan was transferred to individual participant accountsin the Company’s 401(k) Plan.  As ofDecember 29, 2007, participants in the Company’s 401(k) Plan held106,838 shares of Class A in the 401(k) Plan.  These participants can elect to sell theirshares 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 Staff Comments

 

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 20 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 131,000 squarefeet.  The term of the lease, includingrenewal options, expires in January 2021. The Company exercised its right to terminate the lease for its Pasadenastore in the Spring of 2005, but the lease was reinstated by mutual agreementon different terms in April 2005.

 

Mayfair Realtyowns a 30,000 square foot office building in Compton, California which servesas the Company’s headquarters and a parcel of unimproved land in Rubidoux,California.  The Company also owns(through Mayfair Realty) or leases several parcels adjacent to, or near, fourof its stores which are used for additional parking.  In addition, AMG Holdings, Inc. (AMGHoldings), a wholly-owned subsidiary of Arden-Mayfair, leases as a tenant, a62,000 square foot 

 

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building in LosAngeles, California consisting of office and warehouse space, which is entirelysubleased until the lease on the property expires in 2012.

 

Item 3.                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.

 

Item 4.                Submissionof Matters to a Vote of Security Holders

 

There was nomatter submitted during the fourth quarter of fiscal year 2007 to a vote of the security holders of theRegistrant.

 

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** **

**PART II**

** **

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

 

(a)                                  The Company’s Class A is traded inthe NASDAQ Global Market under the symbol ARDNA.  During the past two years, the range of highand low sales prices for each quarterly period was, according to NASDAQ, thefollowing:

*** ***

| ** **  | ** ** | **2007** | ** ** | **2006** | ** ** |
|-------------|------------|----------|------------|----------|------------|
| ** **  | ** ** | **High** | ** ** | **Low**  | ** ** | **High** | ** ** | **Low** | ** ** |
|        |       |     |       |     |       |   |   |   |   |
| 1st Quarter |       | $        | 133.50     |     | $          | 113.00 |   | $ | 93.50 |   | $ | 82.00 |   |
| 2nd Quarter |       | 144.05   |       | 128.26   |       | 114.85 |   | 89.76 |   |
| 3rd Quarter |       | 170.00   |       | 124.46   |       | 120.10 |   | 96.10 |   |
| 4th Quarter |       | 165.48   |       | 130.22   |       | 141.03 |   | 113.50 |   |
|             |            |          |            |          |            |  |  |  |  |  |  |  |  |

 

(b)                                 As of December 29, 2007,there were 894 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 the Company.

 

(c)                                  The Company declared regular quarterlydividends of 25 cents per share of Class A during fiscal 2007 and2006.  The Company anticipates payment ofcomparable Class A quarterly dividends in future quarters*.*

 

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Item 6.                SelectedFinancial Data

 

**ARDEN GROUP, INC. ANDCONSOLIDATED SUBSIDIARIES**

 

(In Thousands,Except Share and Per Share Data)
| ** **                                      | ** ** | **2007**  | ** ** | **2006**  | ** ** | **2005**  | ** ** | **2004**  | ** ** | **2003**  | ** ** |
|-------------------------------------------------|------------|-----------|------------|-----------|------------|-----------|------------|-----------|------------|-----------|------------|
| Operations For The Year (1):                    |       |      |       |      |       |      |       |      |       |      |       |
| Sales                                           |       | $         | 485,939    |      | $          | 482,737   |       | $         | 470,354    |      | $          | 502,898 |   | $ | 486,378 |   |
| Gross profit                                    |       | 187,991   |       | 186,336   |       | 180,423   |       | 192,316   |       | 181,957   |       |
| Operating income (2)                            |       | 45,177    |       | 36,680    |       | 31,816    |       | 34,579    |       | 25,458    |       |
| Other income (expense), net                     |       | 3,307     |       | 2,439     |       | 1,606     |       | 3,591     |       | 2,446     |       |
| Income tax provision                            |       | 19,277    |       | 15,895    |       | 13,571    |       | 15,498    |       | 11,323    |       |
| Net income                                      |       | $         | 29,207     |      | $          | 23,224    |       | $         | 19,851     |      | $          | 22,672 |   | $ | 16,581 |   |
| Net income per common share (3):                |       |      |       |      |       |      |       |      |       |      |       |
| Basic –  Class A Common Stock         |       | $         | 9.24       |      | $          | 7.16      |       | $         | 5.87       |      | $          | 7.00 |   | $ | 5.11 |   |
| Basic –  Class B Common Stock         |       | N/A       |       | N/A       |       | N/A       |       | 6.13      |       | 4.60      |       |
| Diluted                                         |       | 9.24      |       | 7.16      |       | 5.87      |       | 6.70      |       | 4.90      |       |
|                                            |       |      |       |      |       |      |       |      |       |      |       |
| Financial Position At Year-End (1):             |       |      |       |      |       |      |       |      |       |      |       |
| Total assets                                    |       | $         | 166,689    |      | $          | 145,601   |       | $         | 147,027    |      | $          | 122,135 |   | $ | 186,972 |   |
| Working capital                                 |       | 70,154    |       | 41,942    |       | 41,304    |       | 23,883    |       | 75,185    |       |
| Long-term debt                                  |       | 1,228     |       | 1,228     |       | 1,453     |       | 1,764     |       | 2,038     |       |
| Stockholders’ equity                       |       | 108,493   |       | 82,294    |       | 82,320    |       | 66,576    |       | 115,000   |       |
| Capital expenditures                            |       | 3,824     |       | 4,868     |       | 6,390     |       | 12,641    |       | 5,752     |       |
|                                            |       |      |       |      |       |      |       |      |       |      |       |
| Other Operating and Financial Data:             |       |      |       |      |       |      |       |      |       |      |       |
| Number of stores at end of fiscal year          |       | 18        |       | 18        |       | 18        |       | 18        |       | 18        |       |
| Sales increase (decrease) (1) (4):         |       |      |       |      |       |      |       |      |       |      |       |
| Total stores                                    |       | .6        | %          | 2.6       | %          | (6.6      | %)         | 3.4       | %          | 22.3      | %          |
| Same stores                                     |       | .6        | %          | 2.6       | %          | (6.6      | %)         | 3.4       | %          | 22.3      | %          |
|                                            |       |      |       |      |       |      |       |      |       |      |       |
| Depreciation and amortization                   |       | $         | 6,685      |      | $          | 7,097     |       | $         | 7,401      |      | $          | 6,990 |   | $ | 8,126 |   |
|                                            |       |      |       |      |       |      |       |      |       |      |       |   |   |   |   |   |
| Dividends declared per common share (3):        |       |      |       |      |       |      |       |      |       |      |       |
| Class A  Common Stock                      |       | $         | 1.00       |      | $          | 1.00      |       | $         | 1.00       |      | $          | 1.00 |   | $ | .50 |   |
| Class B  Common Stock                      |       | N/A       |       | N/A       |       | N/A       |       | $         | .675       |      | $          | .45 |   |
|                                            |       |      |       |      |       |      |       |      |       |      |       |   |   |
| Special dividend declared per Class A      |       |      |       |      |       |      |       |      |       |      |       |
| Common Stock  share                             |       |      |       |      |       |      |       | $         | 20.00      |      |       |   |
|                                            |       |      |       |      |       |      |       |      |       |      |       |   |
| Weighted average common shares outstanding (3): |       |      |       |      |       |      |       |      |       |      |       |
| Basic –  Class A Common Stock         |       | 3,161,098 |       | 3,241,805 |       | 3,381,051 |       | 2,217,675 |       | 2,015,859 |       |
| Basic –  Class B Common Stock         |       | N/A       |       | N/A       |       | N/A       |       | 1,164,977 |       | 1,363,584 |       |
| Diluted                                         |       | 3,161,098 |       | 3,241,805 |       | 3,381,051 |       | 3,382,652 |       | 3,380,524 |       |

* *

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

 

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(1)                The Company’sresults of operations and financial position reflect, to some extent, theimpact of a labor dispute in the Company’s trade areas in 2003 and 2004.

 

(2)                Fiscal 2003operating income includes a $4,311 (stated in thousands) charge for impairmenton long-lived assets related to leasehold improvements and equipment at thePasadena store.

 

(3)                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.

 

(4)                Same storesales increases are calculated by comparing year-over-year sales for storesthat were open in both years.  If a storewas not open for the entire year in both years being compared, then the storeis not included in the same store analysis. No stores were closed during any of the periods presented.  Fiscal 2003 was a 53-week year.  No adjustment was made to remove theadditional week for comparison purposes. Store sales used to calculate sales increases, above, do not includerevenue from leases, subleases, licensing arrangements and finance charges, andtherefore, may not agree to total year-over-year sales increases as disclosedin Item 7 - Management’s Discussion and Analysis of Financial Condition andResults of Operations.

 

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Item7.                Management’s Discussion andAnalysis 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 andAnalysis of Financial Condition and Results of Operations, other parts of this report and otherCompany filings are forward-looking statements. These statements discuss, among other things, future sales, operatingresults and financial condition. Forward-looking statements reflect the Company’s current plans andexpectations regarding important risk factors and are based on informationcurrently available to us.  The Companycautions readers that any forward-looking statements contained in this reportor made by the management of the Company involve risks and uncertainties, andare subject to change based on various important factors.  The Company does not undertake any obligationto update forward-looking statements.

 

**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 organic andnatural 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, 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 already faces competition from regional and nationalsupermarket chains (most of which have greater resources and a larger marketshare than Gelson’s), stores specializing in natural and organic foods,specialty and gourmet markets and grocery departments in mass merchandise andclub stores.  We anticipate havingincreased competition from new competitors moving into our trade area.  In addition, if the merger trend among ourcompetitors continues, this may impact our ability to compete, as the newlyformed larger competitors may possess stronger bargaining power with vendorsand suppliers and have greater market recognition among consumers.

 

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 fiscal2007 year end, Gelson’s had approximately 1,328 full-time and 1,001 part-timestore, warehouse and office employees. The majority 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 

 

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aremembers of the UFCW voted to ratify the new contract in a vote held on February 21and 23, 2007.  The new contract expires March 5,2010.

 

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 whichwere completed in July 2007.  Theemployees of the three major grocery retailers voted to ratify their contracton July 22, 2007.  The new agreementexpires March 6, 2011, one year after Gelson’s contract with the UFCWexpires.  If no extension agreement isreached and Gelson’s contract expires prior to the others’, it is possible thatGelson’s will be required to negotiate separately and suffer a job action if anagreement cannot be reached.

 

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 majority of thereduction relates to the health and welfare fund which, as of the first quarterof 2007, was overfunded in total, for all employers, by approximately$500,000,000.  The reduction in thehealth and welfare contribution rate is expected to substantially reduce theoverfunded status of the fund during the term of the new contract between theUFCW and the three major grocery retailers. The change in contribution rates for both pension and health care wereretroactive to the beginning of March 2007.  The reduction in the contribution rates hasand will continue to result in a substantial decrease in the Company’s selling,general and administrative (SG&A) expense when comparing periods covered bythe current and the expired contracts.

 

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 increase the Company’s payroll costsunless it is able to offset the increased expense through a combination ofsales growth, increased gross margin, management of labor hours, decreasedlabor turnover and cost savings in other areas.

 

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 a decrease in workers’compensation expense.  Effective July 2007,the Company entered into another one-year fully insured guaranteed cost workers’compensation insurance policy at a significantly lower rate compared to theprevious policy year which will further reduce SG&A expense through June 30,2008.  The Company continues to maintainan accrual for claims incurred prior to July 2006 under the highdeductible program.  That accrual isbased on both undeveloped reported claims and an estimate of claims incurredbut not reported.  While the Companydevotes substantial time and commitment to 

 

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maintaininga safe work environment, the ultimate cost of workers’ compensation is highly dependentupon legal and legislative trends, the inflation rate of health care costs andthe 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**

 

**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 has experienced sales growth due to product pricingdecisions (primarily due to product cost increases) partially offset by adecrease in customer count.  Sales during2007 were influenced by increased competition in our trade area from newcompetitors entering our market.  Inaddition, the merger trend amongst our competitors resulted in larger companiesthat possess stronger 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.  The Company’s provision for all union pensionand health care plans decreased 31.4% to $15,120,000 in 2007 compared to$22,032,000 in 2006 due to a reduction in the average hourly contribution ratesfor pension and health care as discussed above as well as a slight decrease inthe number of hours eligible for contributions. Workers’ compensation expense also decreased 39.5% to $2,992,000 in 2007compared to $4,945,000 in 2006 as discussed above.  Finally, lower SARs compensation expense in2007 compared to the prior year also contributed to the decrease in SG&Aexpense as a percent of sales.  During2007, the Company recognized $2,908,000 of SARs compensation expense comparedto $3,671,000 in 2006.  The decrease inSG&A expense 

 

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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.  Costs decreased due to a reduction in theaverage hourly contribution rate and the number of hours eligible forcontributions as discussed above.

 

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 not reported.  While the ultimate amount of claims incurredis dependent on future developments, in management’s opinion, recorded reservesfor general and auto liability claims and workers’ compensation are adequate tocover 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.

 

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 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.  The Companyadopted SFAS 123(R) using the modified prospective transition method, andtherefore 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 

 

16

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expectedto be recognized over a weighted average period of 4.6 years.  The totalintrinsic value of SARs exercised during 2007and 2006 was approximately $5,643,000 and$1,305,000, respectively.  Intrinsicvalue represents the amount by which the fair value of SARs on the date ofexercise 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 $207,000 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.

 

SFAS 115, “Accountingfor Certain 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 expense**of $106,000) in 2007compared to unrealized losses of $39,000(net of income tax benefit of $28,000) in2006. Management does not believe any of these losses areother-than-temporary.

 

**2006 Compared to 2005**

 

Netincome in 2006 increased 17.0% to $23,224,000 compared to $19,851,000 during2005.  Operating income increased 15.3%to $36,680,000 in 2006 compared to $31,816,000 in 2005.

 

Salesfrom the Company’s 18 supermarkets (all of which are located in SouthernCalifornia), including revenue from licensing arrangements, subleases, leasesand finance charges, were $482,737,000 in 2006. This represents an increase of 2.6% from 2005, when sales were$470,354,000.  The Company hasexperienced sales growth due to product pricing decisions (to some extentresulting from product cost increases) and an increase in customer count.

 

TheCompany’s gross profit as a percent of sales was 38.6% in 2006 compared to38.4% in 2005. In calculating gross profit, the Company deducts product costs,net of discounts and allowances, and inbound freight charges, as well aswarehouse, transportation, purchasing, advertising and occupancy costs in costof sales.  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 31.0% in 2006 compared to 31.6% in 2005.  The Company experienced adecrease in labor and other related payroll expense as a percent of salesduring 2006  compared  to 2005 primarily due to increased sales dollars which did not require a similarincrease in labor hours.  In addition,workers’ compensation expense in the second half of 2006 compared to the sameperiod of the prior year is lower as the policy premium under the guaranteed costprogram is less than what was accrued in the prior year under the Company’sformer self-insured plan as discussed above.   The overall decrease in SG&A expense was 

 

17

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partiallyoffset by higher SARs expense in 2006 compared to the prior year.  During 2006, the Company recognizedapproximately $3,671,000 in SARs compensation expense due to an increase in thefair value of SARs since the end of the previous year, the additional vestingof SARs and the adoption of SFAS 123(R) (revised 2004), “Share-BasedPayment,” as discussed above.  In 2005,the Company recognized $946,000 of SARs compensation expense.

 

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 $6,801,000 in 2006 compared to $6,241,000in 2005.  Higher pension costs in 2006resulted from an increase in the average hourly pension contribution rate.  Union health care expense was $15,231,000 in 2006compared to $16,047,000 in 2005.  Healthcare costs decreased due to a reduction in the average hourly contribution rateand the number of hours eligible for contributions.

 

For a discussion ofworkers’ compensation, general and auto liability and other types of insurancecoverage, see the discussion under the heading “2007 Compared to 2006” presented above.

 

During 2006, the Companyprocured approximately 18% of its product through Unified, a grocery wholesalecooperative.  As a member-patron, theCompany is required to provide Unified with certain minimum deposits and creditin order to purchase product from the cooperative.  As of December 30, 2006, the Company hadapproximately $1,933,000 on deposit with Unified, in addition to approximately$503,000 related to ownership of equity shares in Unified.  In 2006 and 2005, the Company recorded approximately$323,000 and $451,000, respectively, in patronage dividend income received inthe form of cash and Unified equity shares as a reduction of cost of sales.

 

Interest anddividend income was $2,560,000 in 2006 compared to $1,722,000 for 2005 primarilydue to higher interest rates and higher average cash levels in 2006.

 

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 losses on investments were $39,000(net of income tax benefit**of $28,000) in2006 compared to unrealized losses of $392,000 (net of income tax benefit of$269,000) in 2005.  Management does notbelieve any of these losses are other-than-temporary.

 

During2006, the Company purchased 217,904 shares of Class A in unsolicitedprivate transactions with unrelated parties for an aggregate purchase price ofapproximately $19,999,000.  As a resultof the 2006 purchases of Class A shares, the weighted average sharesoutstanding of Class A used in computing net income per common share was3,241,805 in 2006 as compared to 3,381,051 in 2005 which had the effect ofincreasing net income per common share on a comparative basis.

 

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**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 December 29, 2007 was $78,852,000.  Cash not required for the immediate needs ofthe Company is temporarily invested in commercial paper and marketablesecurities.  Currently, all temporaryinvestments are highly liquid.  TheCompany is continually investigating opportunities for the use of these fundsincluding new locations and the expansion and remodel of existing stores.  The Mayfair store on Franklin Boulevard inHollywood, California is currently being remodeled and, when completed in theSummer of 2008, will become a Gelson’s.

 

TheCompany also has two revolving lines of credit totaling $23,000,000 available for standby letters ofcredit, funding operations and expansion. There were no outstanding borrowings against either of the revolvinglines as of December 29, 2007. The Company currently maintains four standby letters of creditaggregating $9,569,000 pursuant to theCompany’s lease requirements and general and auto liability and workers’compensation self-insurance programs. The standby letters of credit reduce the available borrowings under itsrevolving lines.

 

The Company’s workingcapital was $70,154,000 at December 29, 2007compared to $41,942,000 at December 30,2006. Net cash provided by operating activities totaled $30,202,000. Cash flows from operating activities resulted primarily from net incomeplus non-cash expenses and changes in working capital.

 

Net cash used ininvesting activities was $4,739,000 in 2007. Investing activities primarily included capital expenditures of $3,824,000 and the purchase of investments of$945,000.  Net cash used in financingactivities was $3,386,000 in 2007 which included cash dividend payments of $3,161,000 and principal payments on capitallease obligations of $225,000.

 

The Company’s currentratio was 2.63 at December 29, 2007compared to 1.89 at December 30, 2006.  The Company’s total liabilities to equityratio decreased to .54 at December 29, 2007from .77 at December 30, 2006.

 

The followingtable sets forth the Company’s contractual cash obligations and commercialcommitments as of December 29, 2007:

 
| ** **                                                                    | ** ** | **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 |       | $                                               | 1,830      |   | $ | 86 |   | $ | 172 |   | $ | 172 |   | $ | 1,400 |   |
|                                                                          |       |                                            |       |   |   |   |   |   |   |   |   |
| Operating Leases (1)                                                          |       | 137,927                                         |       | 10,442 |   | 19,673 |   | 18,388 |   | 89,424 |   |
|                                                                          |       |                                            |       |   |   |   |   |   |   |   |   |
| Total Contractual Cash Obligations (2)                                        |       | $                                               | 139,757    |   | $ | 10,528 |   | $ | 19,845 |   | $ | 18,560 |   | $ | 90,824 |   |

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

 

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(1)          Operating leases does notinclude a five-year option period for one store for which the rent amount isnot yet determinable.

 

(2)   Other Contractual CashObligations

 

                        The Company hadthe following other contractual cash obligations at December 29, 2007.  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.  Effective July 1,2006, the Company purchased a fully insured guaranteed cost workers’compensation insurance policy for losses occurring after June 30,2006.  This policy replaced the highdeductible program for workers’ compensation. The Company maintains stop-loss insurance coverage to limit its lossexposure on a per claim basis. Liabilities associated with the risks that areretained by the Company are estimated, in part, by considering historicalclaims experience and regression analysis. Accruals are based on reportedclaims and an estimate of claims incurred but not reported.  While the ultimate amount of claims incurredis dependent on future developments, in management’s opinion recorded reservesare adequate to cover the future payment of claims.  The Company’s liability reserve for unpaidand incurred but not reported claims at December 29, 2007 was approximately $7,107,000.

 

*Employment Agreement*

 

The Company has an employment agreement with a key executiveofficer that provides for annual retirement compensation equal to 25% of his average base salary and bonus earnedin the last three fiscal years prior to his retirement. The Company had accrued$2,167,000 under the terms of theemployment agreement as of December 29,2007.

 

*Property, Plant and Equipment Purchases*

 

As of December 29, 2007, management had authorized expenditures onincomplete projects for the purchase of property, plant and equipment whichtotaled approximately $3,867,000.  The Company has an ongoingprogram to remodel existing supermarkets and to add new stores.  During 2007,total capital expenditures were $3,824,000.

 

(3)          Standby Letters of Credit

 

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

 

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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 Ain unsolicited private transactions with unrelated parties for an aggregatepurchase price of approximately $19,999,000.  The remaining number of shares authorized forpurchase as of December 29, 2007 was 22,904.

 

During2007 and 2006,the Company paid quarterly dividends of 25cents per share of Class A for a total of approximately $3,161,000 and $3,267,000,respectively.

 

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

 

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

 

*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.

 

 

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* *

*                       **Impairmentof Long-Lived Assets*

 

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

 

*                       **Workers’Compensation and General and Auto Liability Insurance*

 

                       The Company isprimarily self-insured for losses related to general and auto liability claimsand 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 ofSales*

 

                       Cost of salesreflects the direct costs involved in bringing the Company’s product to marketincluding product costs, net of discounts and allowances, and inbound freightcharges, as well as warehouse, transportation, purchasing, advertising andoccupancy 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.

 

*                       **Vendor Allowances*

 

                        Promotional andrebate allowances make up the majority of all allowances received by Gelson’sfrom its vendors. With promotional allowances, vendors pay the Company topromote their product. The promotion may be a temporary price reduction, afeature in a print advertisement or newsletter, or placement of the vendor’sproduct in a preferred location in a store. The promotions are typically two tothree weeks long and are recognized when the commitment has been fulfilled.Promotional and vendor cash rebate 

 

 

22

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

 

                        Occasionally, the 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 the graded-vestingmethod.  In addition, changes in themarket price of the Company’s Class A impacted the recognition of SARsexpense.

 

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 have not beenrestated.  SFAS 123(R) requires theCompany 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 and vesting.

 

**Recent Accounting Standards**

 

InJune 2006, the Financial Accounting Standards Board (FASB) ratified theconsensus of Emerging Issues Task Force (EITF) No. 06-3, “How TaxesCollected from Customers and Remitted to Governmental Authorities Should BePresented in the Income Statement (That Is, Gross versus Net Presentation).”  EITF No. 06-3 indicates that the incomestatement presentation on either a gross basis or a net basis of the taxeswithin the scope of the issue is an accounting policy decision.  The Company’s accounting policy is to presentthe taxes within the scope of EITF No. 06-3 on a net basis.  The adoption of EITF No. 06-3 in thefirst quarter of 2007 did not result in a change to the Company’s accountingpolicy and, accordingly, did not have any effect on the Company’s consolidatedfinancial statements.

 

InJune 2006, the FASB issued FIN 48, “Accounting for Uncertainty in IncomeTaxes — an Interpretation of FASB Statement No. 109.”  This interpretation prescribes a recognitionthreshold and measurement attribute for the financial statement recognition andmeasurement of a tax position taken or expected to be taken in a tax return,and provides guidance on derecognition, classification, interest and penalties,accounting in interim periods, disclosure and 

 

 

23

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transition.  This interpretation, which was effective forthe Company on the first day of its 2007 fiscal year, did not have asignificant impact on the Company’s consolidated financial statements.

 

InSeptember 2006, the FASB issued SFAS 157, “Fair Value Measurements.”  SFAS 157 defines fair value, establishes aframework for measuring fair value in GAAP and expands disclosures about fairvalue measurements.  SFAS 157 does notrequire any new fair value measurements. This statement is effective for financial statements issued for theCompany’s first quarter of 2008 and is not expected to have a significantimpact on the Company’s 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.  Unrealizedgains and losses on items for which the fair value option has been elected willbe included in net earnings at each subsequent reporting date.  SFAS 159 will be effective at the beginningof the Company’s fiscal year 2008 and is not expected to have a significantimpact on the Company’s consolidated financial statements.

 

Item 7A.                                       Quantitative and Qualitative Disclosures about MarketRisks

 

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%, the Company could then be exposed to marketrisk related to interest fluctuations.

 

A change in market prices exposes the Company to market risk related toits investments.  As of December 29, 2007,all investments were classified as available-for-sale securities and totaled $19,933,000. A hypothetical 10% drop in themarket value of these investments would result in a $1,993,000 unrealized loss and a corresponding decrease in the fairvalue of these instruments.  Thishypothetical drop would not affect cash flow and would not have an impact onearnings until the Company sold the investments.

 

Item 8.                                                 Financial Statements and SupplementaryData

 

See Index toConsolidated Financial Statements.

 

Item 9.                                                   Changes in andDisagreements with Accountants on Accounting and Financial Disclosure

 

None.

 

 

24

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Item 9A.                                       Controls andProcedures

 

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 December 29,2007. Based upon that evaluation, the Chief Executive Officer and the persontemporarily performing the functions of the Chief Financial Officer concludedthat these disclosure controls and procedures were effective.

 

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 December 29,2007 that has materially affected, or isreasonably likely to materially affect, the Company’s internal control overfinancial reporting.

 

Item 9B.                                           OtherInformation

 

**None.**

** **

** **

**25**

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** **

**PART III**

** **

Item 10.  Directorsand Executive Officers of the Registrant

 

Identification andInformation Concerning Directors

 

Below is set forthcertain information about each of the Company’s directors as of February 29,2008.  Certain of this information has been suppliedby the persons shown.

 
| ** **         | ** ** | ** ** | ** ** | **Principal Occupation (1)**                                                                                                                                                                                                                                                                                                                                                                                                                              | ** ** | **Director**  | ** ** | **Term**    |
|--------------------|------------|------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------|------------|-------------|
| **Name**           | ** ** | **Age**    | ** ** | **and Other Directorships**                                                                                                                                                                                                                                                                                                                                                                                                                               | ** ** | **Since (2)** | ** ** | **Expires** |
| M. Mark Albert (3) |       | 45         |       | 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          |       | 2008        |
|               |       |       |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                      |       |          |       |        |
| Bernard Briskin    |       | 83         |       | 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    |       | 51         |       | 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  |       | 65         |       | Private Investor.                                                                                                                                                                                                                                                                                                                                                                                                                                         |       | 1993          |       | 2008        |
|               |       |       |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                      |       |          |       |        |
| Kenneth A. Goldman |       | 65         |       | 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      |       | 44         |       | 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. |
|-----|----------------------------------------------------------------------------------------------------------------------------------------------|

 

 

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| (2)    | Date shown for term of  service indicates commencement of service as a director of the Company or  Arden-Mayfair.                                                                                                                                                                                                                                                                                                                                                                          |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| (3)    | Effective  February 28, 2007, the Board of Directors of the Company elected M. Mark  Albert as a director to fill a vacancy on the Board of Directors having a  term of office expiring at the Annual Meeting of Stockholders in 2008.  Mr. Albert was also elected a member of the Audit Committee of the Board  of Directors. Coinciding with Mr. Albert’s election to the Audit  Committee, Mr. John G. Danhakl resigned his position on the Audit  Committee. |

 

Identification ofExecutive Officers

 

Below is set forthcertain information about each of the executive officers of the Company as of February 29,2008:

 
| **Name**        | ** ** | **Age** | ** ** | **Position(s)**                                                                                                                                                                                                                                                                                                                                                                                                                        |
|-----------------|------------|---------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|            |       |    |       |                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| Bernard Briskin |       | 83      |       | 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 anemployment agreement which expires on January 1, 2010, although the termwill be automatically 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 2007,the following individuals served as members of the Audit Committee:

 
|   |   | Steven Romick, Chairman                           |
|--------|--------|---------------------------------------------------|
|   |   | M. Mark Albert (from  February 28, 2007)     |
|   |   | John G. Danhakl  (through February 28, 2007) |
|   |   | Robert A. Davidow                                 |

 

 

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On August 17, 2006,the Board of Directors of the Company elected John G. Danhakl to fill a vacancyon the Audit Committee.  Effective February 28,2007, the Board of Directors elected M. Mark Albert to serve on the AuditCommittee, and Mr. Danhakl concurrently resigned from the Audit Committee.

 

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 Supplementary Code of Ethics forFinancial Professionals which is applicable to the chief executive officer,chief financial officer, principal accounting officer or controller andindividuals performing similar functions. A copy of the Code of Ethics and Business Conduct may be obtained, withoutcharge, upon written request to the Assistant Secretary, 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’sequity securities, file with the SEC initial reports of the ownership andreports of changes of ownership of Class A and other equity securities ofthe Company.  Based solely on review ofcopies of such reports furnished to the Company and written representationsthat no other reports were required to be filed during the fiscal year ended December 29, 2007,all Section 16(a) filing requirements applicable to the Company’sexecutive officers, directors and greater than ten percent (10%) beneficial owners were complied withduring such fiscal 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.

 

 

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*Elements of the Company’sCompensation Program for Executives*

 

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

 

*Reasons for Including Each Elementof 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.

 

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 of Directorstakes into account the balance between the executive’s base salary level, pastbonuses and the more long-term nature of the SARs program. Overall, the Companybelieves that the majority of the compensation package should be in currentcompensation, but that there should be a meaningful level of longer termrewards, 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.

 

*Named Executive Officers’Compensation*

 

Bernard Briskin, Chairman ofthe Board of Directors, President and CEO of the Company has an employmentagreement (Employment Agreement) with the Company dating back to 1988.  The term of the Employment Agreementcurrently expires on January 1, 2010 and is automatically extended forsuccessive periods of one fiscal year unless either the Company and itssubsidiaries, who are parties to the Employment Agreement, or Mr. Briskingives notice of termination no less than fifteen months and no more thaneighteen months prior to the date upon which the then current term of theEmployment Agreement will expire.

 

The Employment Agreementpresently provides for 2008 basecompensation of $669,290 which isadjusted each year based on the increase in the Consumer Price Index, subjectto a maximum annual increase of 4%,together with incentive formula based compensation in an amount equal to 21⁄2% ofthe Company’s first $2,000,000 of pre-tax profits (as defined in the EmploymentAgreement) plus 31⁄2% of pre-tax profits in excess of $2,000,000.  In addition, it provides for 

 

 

29

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participation in the Company’smedical plan, the use of a Company-owned car and an annual uninsured medicalexpense reimbursement of up to $200,000for Mr. Briskin and his immediately family.  In 2007,Mr. Briskin’s overall compensation was $2,411,931which included a base salary of $647,282and incentive formula based compensation of $1,737,772.  Accordingly, 72%of Mr. Briskin’s overall compensation is primarily incentive based.  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 hisaverage base salary and bonus earned in the last three full fiscal years priorto the cessation of his employment.  TheCompany would also continue to provide Mr. Briskin during his lifetimewith health insurance benefits and an automobile allowance equivalent to thatwhich the Company then grants to its senior executives and an annual uninsuredmedical expense reimbursement of up to $200,000for Mr. Briskin and his immediate family. At each time that modifications were made to Mr. Briskin’sEmployment Agreement, the Company carefully evaluated the effects of InternalRevenue Code (IRC) Section 162(m). The terms of the Employment Agreementwere subject to review during the 2003 fiscal year by the CompensationCommittee of the Board of Directors. During the review, discussions took place between Mr. Briskin andthe Committee concerning amendments to certain provisions of the EmploymentAgreement, but no amendments have yet been effected.  In addition, the Company is consideringwhether an amendment to the Employment Agreement will be required in order tocontinue to satisfy the requirements for deduction of remuneration payable to Mr. Briskinin excess of $1,000,000 under IRC Section 162(m) in light of a changein position by, and related general public guidance from, the Internal RevenueService with respect to certain performance based remuneration.

 

The Company’s other namedexecutive officer, Ms. Laura J. Neumann, received total compensation of $254,857 in 2007,consisting of a base salary of $141,450,a bonus of $30,000, option awards in theform of SARs of $65,060 and otherbenefits amounting to $18,347.  The $65,060of option awards compensation represents the expense recognized for financialstatement reporting purposes with respect to fiscal 2007 for the increase in fair value of SARs granted in fiscal 2007and previous years in accordance with SFAS 123(R) (revised 2004), “Share-BasedPayment” and additional vesting. For information regarding valuationassumptions used, see Note 1 of Notes to Consolidated Financial Statements.This amount reflects compensation expense recorded in the Company’s financialstatements for these awards which does not necessarily correspond to the actualvalue that will be realized by Ms. Neumann.  Ms. Neumann presently holds 875 units of SARs which were awarded to her in2003 and 3,500 units granted in 2007.  Ms. Neumannexercised SARs covering 875 units in both 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 theCompany who is the only executive with an employment agreement) and otherexecutives for the year then being completed and salaries for each for theupcoming year.  Those recommendations arethen reviewed by the Compensation Committee of the Company’s Board ofDirectors.  In reviewing and finalizingbonuses and salary adjustments, the CEO and the Compensation 

 

 

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Committee review individualperformance and results, as well as the performance of the Company overall.

 

## **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 2007 and 2006 fiscal years.

 

**SummaryCompensation Table**

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

 

----

| (1)    |   | The  amount of Mr. Briskin’s bonus is determined under a formula based on the  Company’s pre-tax profits and is shown under the Non-Equity Incentive Plan  Compensation column of this chart. Mr. Briskin’s Employment Agreement  provides for an annual bonus equal to 21⁄2% of the Company’s first $2,000,000 of pre-tax profits (as defined in  the Employment Agreement) plus 31⁄2% of pre-tax profits in excess of $2,000,000.                                                                                                                                                                                                                                                                                                                       |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| (2)    |   | During  the Company’s 2007 and 2006 fiscal  years, it did not have a Chief Financial Officer and Ms. Neumann, Senior  Director of Financial Reporting and Compliance, acted in a similar capacity  as the Principal Financial Officer of the Company.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| (3)    |   | Option  awards compensation represents the expense recognized for financial statement  reporting purposes with respect to fiscal 2007  and 2006 for the increase in fair value of SARs granted in fiscal 2007 and  previous years in accordance with SFAS 123(R) (revised 2004),  “Shared-Based Payment.” For information regarding valuation assumptions used,  see Note 1 of Notes to Consolidated Financial Statements. This amount  reflects the compensation expense recorderd in the Company’s financial  statements for these awards as a result of an increase in the fair value of  the SARs and additional vesting during fiscal 2007  and 2006, and does not necessarily correspond to the actual value that will  be realized by the named executive officer. |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|   |   | Under  SFAS 123(R), the measurement date for cash settled SARs is the date of  settlement. Accordingly, liabilities related to SARs are remeasured at the  end of each reporting period until settlement. As of December 29, 2007,  the fair value of SARs granted in 2007 to Ms. Neumann without regard to  vesting or forfeitures was $141,435.                                                                                                                                                                                                                                                                                                                                                                                                                                   |

 

 

31

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(4)                                  The following table sets forth thecomponents of  All Other Compensationincluded in the Summary Compensation Table:

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

----

(1)                                  Represents Company discretionary contributionsto the 401(k) Plan.

 

EmploymentAgreement and Payment Upon Termination

 

The compensationof Mr. Briskin, the CEO of the Company, is established under an EmploymentAgreement, as amended, which currently expires on January 1, 2010.  The Employment Agreement provides that, uponthe expiration of the initial term on January 1, 2004, the term thereof isautomatically extended for successive periods of one fiscal year unless eitherthe Company and its subsidiaries or Mr. Briskin gives notice of terminationnot less than fifteen months and no more than eighteen months prior to the dateupon which the then current term of the Employment Agreement will expire.  Pursuant to the terms of the EmploymentAgreement, Mr. Briskin’s base salary increases on January 1 of eachyear based upon increases in the Consumer Price Index subject to a maximumannual increase of 4%.  His annual bonus is equal to 21⁄2% of the Company’s first $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. The Employment Agreement provides for an annual uninsured medicalexpense reimbursement up to $200,000 for Mr. Briskinand his immediate family.  The terms ofthe Employment Agreement were subject to review during the 2003 fiscal year bythe Compensation Committee of the Board of Directors.  During the review, discussions took placebetween Mr. Briskin and the Committee concerning amendments to certainprovisions of the Employment Agreement, but no amendments have yet beeneffected.

 

Mr. Briskin’s Employment Agreement provides that at such time 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 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 $200,000for Mr. Briskin and his immediate family. If the Company’s obligation to make these payments was triggered on December 28, 2007,the last business day of the Company’s fiscal year ended December 29, 2007,the Company would be obligated to pay Mr. Briskin $43,212 per month on the first day of each month beginning on February 1,2008 and ending upon his death and to provide him with an automobile allowancewhich would be approximately $25,000 per year and health insurance benefits anduninsured medical expense reimbursements up to $200,000per year for him and his immediate family. For accrual 

 

32

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purposes, it is assumed that the cost of the health insurance benefitsand the uninsured medical expense reimbursement 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 granted prior to December 2007vest 25% each year beginning at the end of the first year and expire five yearsfrom the date of grant.  SARs granted inDecember 2007 vest 25% each year beginning at the end of the third yearand expire seven years from the date of grant.

 

The following table provides information as to SARs granted to namedexecutive officers during fiscal 2007:

 

**SAR Granted During Fiscal 2007**

 
| **Name**             | ** ** | **Grant Date** | ** ** | **Number of   Securities   Underlying  SARs (#)** | ** ** | **Exercise or   Base Price  of SARs ($/Sh)** | ** ** | **Fiscal 2007  Year End   Fair Value  of SARs ($)** | ** ** |
|----------------------|------------|----------------|------------|---------------------------------------------------|------------|----------------------------------------------|------------|----------------------------------------------------------|------------|
|                 |       |           |       |                                              |       |                                         |       |                                                     |       |
| Laura J. Neumann (1) |       | 12/6/2007      |       | 3,500                                             |       | 146.44                                       |       | 141,435                                                  | (2)        |

----

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

 

(2)                                  See note 3 under Summary CompensationTable.

 

The following table provides information as to outstanding SARs held bynamed executive officers as of December 29,2007:

 

**Outstanding SAR Awards at 2007 Fiscal 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) |       | 875                                                                    |       | 0                                                                        |       | 57.00                               |       | 12/4/2008                 |       |
|                 |       | 0                                                                      |       | 3,500                                                                    | (2)        | 146.44                              |       | 12/5/2014                 |       |

----

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

 

(2)                                  These SARs vest25% each year beginning at the end of the third year.

 

33

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The followingtable provides information on the exercise of SARs by the named executiveofficers in 2007:

 

**SAR Exercises2007**

 
| ** **           | ** ** | **SAR Awards**                                      | ** ** |
|----------------------|------------|-----------------------------------------------------|------------|
| **Name**             | ** ** | **Number of Shares  Underlying SARs Exercised (#)** | ** ** | **Value Realized on  Exercise ($)** | ** ** |
| Laura J. Neumann (1) |       | 875                                                 |       | 90,978 | (2) |

----

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

 

(2)                                  Differencebetween the fair market value of a share of Class A on the date ofexercise 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 December 29, 2007:

 

**DirectorCompensation for 2007**

 
| **Name**           | ** ** | **Fees Earned or   Paid in Cash ($)** | ** ** | **Option Awards  ($) (1)** | ** ** | **Total  ($)** | ** ** |
|--------------------|------------|---------------------------------------|------------|----------------------------|------------|----------------|------------|
|               |       |                                  |       |                       |       |           |       |
| M. Mark Albert     |       | 42,000                                |       | 183,529                    |       | 225,529        |       |
| John G. Danhakl    |       | 50,000                                |       | 366,642                    |       | 416,642        |       |
| Robert A. Davidow  |       | 57,000                                |       | 289,417                    |       | 346,417        |       |
| Kenneth A. Goldman |       | 30,000                                |       | 367,168                    |       | 397,168        |       |
| Steven Romick      |       | 61,000                                |       | 660,199                    |       | 721,199        |       |

----

(1)                                  As of December 29, 2007,each of the directors held SARs covering 9,500shares of Class A, except Mr. Davidow and Mr. Albert who heldSARs covering 12,000 and 17,000 shares of Class A,respectively.  Option awardscompensation represents the expense recognized for financial statementreporting purposes with respect to fiscal 2007for the fair value of SARs granted in fiscal 2007 and previous years inaccordance with SFAS 123(R) (revised 2004), “Shared-Based Payment” andadditional vesting.  For informationregarding valuation assumptions used, see Note 1 of Notes to ConsolidatedFinancial Statements.  These amountsreflect the compensation expense recorded in the Company’s financial statementsfor these awards which does not necessarily correspond to the actual value thatwill be realized by the named directors.

 

34

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UnderSFAS 123(R), the measurement date for cash settled SARs is the date ofsettlement.  Accordingly, liabilitiesrelated to SARs are remeasured at the end of each reporting period untilsettlement.  As of December 29,2007, the fair value of SARs granted to Directors during 2007 without regard tovesting or forfeitures were as follows:

 

| **Director**                                                          | ** ** | **Grant Date** | ** ** | **Fair Value** | ** ** |
|-----------------------------------------------------------------------|------------|----------------|------------|----------------|------------|
| Mr. Albert                                                            |       | 3/13/2007      |       | $              | 431,800    |   |
| Each of Messrs. Albert, Danhakl, Davidow, Goldman   & Romick |       | 12/6/2007      |       | $              | 283,080    |   |

 

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 inDecember 2007 vest 25% each year beginning at the end of the third yearand expire seven years from the date of grant.

 

Compensation Committee Interlocks and Insider Participation

 

The Board ofDirectors has a Compensation Committee. In 2007, the CompensationCommittee was comprised of the following directors, none of whom are or havebeen officers or employees of the Company:

 
|   |   | John G. Danhakl,  Chairman                 |
|--------|--------|--------------------------------------------|
|   |   | M. Mark Albert (from  March 13, 2007) |
|   |   | 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 Committeerecommended to the Board of Directors that the Compensation Discussion andAnalysis be included in the Company’s annual report on Form 10-K.

 

John G. Danhakl, Chairman

M . Mark Albert

Robert A. Davidow

Members of theCompensation Committee

 

35

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

 

Item12.                                                       Security Ownership of Certain BeneficialOwners and Management and Related Stockholder Matters

 

Security Ownershipof Certain Beneficial Owners

 

The followingtable sets forth information as of February 29, 2008 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 |       | 1,885,745                                           | (2)(3)     | 59.6                 | %          |
|                                                                                                       |       |                                                |       |                 |       |
| Royce & Associates, LLC  1414 Avenue of the Americas  New York, NY 10019                          |       | 187,000                                             | (4)        | 5.9                  | %          |

----

(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 25,2008 with the SEC.

 

36

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Security Ownershipof 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 February 29,2008:

 
| ** **                                                   | ** ** | **Amount and**           | ** ** | ** **            | ** ** |
|--------------------------------------------------------------|------------|--------------------------|------------|-----------------------|------------|
| ** **                                                   | ** ** | **Nature of Beneficial** | ** ** | ** **            | ** ** |
| **Name of Beneficial Owner**                                 | ** ** | **Ownership  (1)**       | ** ** | **Percent  of Class** | ** ** |
|                                                         |       |                     |       |                  |       |
| M. Mark Albert                                               |       | 0                        |       |                  |       |
| Bernard Briskin                                              |       | 1,885,745                | (2)        | 59.6                  | %          |
| John G. Danhakl                                              |       | 0                        |       |                  |       |
| Robert A.  Davidow                                           |       | 0                        |       |                  |       |
| Kenneth A.  Goldman                                          |       | 128,800                  | (3)        | 4.1                   | %          |
| Laura J. Neumann  (4)                                        |       | 0                        |       |                  |       |
| Steven Romick                                                |       | 0                        |       |                  |       |
|                                                         |       |                     |       |                  |       |
| All directors  and executive officers as a group (7 persons) |       | 2,014,545                | (2)(3)     | 63.7                  | %          |

----

(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, 40,800 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 2007 in a similar capacity as the Principal Financial Officer ofthe Company.

 

37

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Equity Compensation Plan Information

 

Thefollowing table provides information related to the Company’s equitycompensation plans as of December 29,2007:

 
| ** **                                                           | ** ** | **(a)**                                                                                            | ** ** | **(b)**                                                                            | ** ** | **(c)**                                                                                                                                               | ** ** |
|----------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| **Plan category**                                                    | ** ** | **Number of Securities to  be Issued Upon Exercise  of Outstanding Options,  Warrants and Rights** | ** ** | **Weighted-Average  Exercise Price of  Outstanding Options,  Warrants and Rights** | ** ** | **Number of Securities  Remaining Available  for Future Issuance  Under Equity  Compensation Plans  (Excluding Securities  Reflected in Column (a))** | ** ** |
|                                                                 |       |                                                                                               |       |                                                                               |       |                                                                                                                                                  |       |
| Equity  compensation plans approved by security holders              |       | 0                                                                                                  |       | 0                                                                                  |       | 0                                                                                                                                                     |       |
| Equity  compensation plans not approved by security holders (1) |       |                                                                                               |       |                                                                               |       |                                                                                                                                                  |       |
| Non-Officer and  Non-Director Stock Option Plan                      |       | 0                                                                                                  |       | 0                                                                                  |       | 28,500                                                                                                                                                |       |

----

(1)                                  Does notinclude 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 December 29, 2007,there were no stock options issued and outstanding.

 

Item13.                                           Certain Relationships, RelatedTransactions and Director Independence

 

CertainRelationships and Related Transactions

 

A director of theCompany, Mr. Goldman, is a partner of a law firm which performs 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.

 

38

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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 outstandingvoting stock, a member of the immediate family 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 aseries of similar transactions and compensation matters approved by theCompensation Committee or the Board of Directors.

 

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 has an investment.  The mutualfund in which the Company has invested is not one that is managed by Mr. Romick.  The Company’s investment constituted lessthan 1% of the total funds held by the mutual fund as of December 29, 2007.

 

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.                                           Principal Accountant 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 $292,000 and $272,000 for 2007 and 2006,respectively.

 

InJuly 2007, the Company responded to a comment letter from the SEC.  As a result, Moss billed the Companyapproximately $4,000 in fees related to researching issues raised in the letterand reviewing the Company’s response.

 

39

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# **Audit-RelatedFees**

 

Audit-relatedfees incurred in connection with the audit of the Company’s employee benefitplans by Moss totaled approximately $20,000and $19,000 in 2007 and 2006, respectively.

 

TaxFees

 

Feesbilled by Moss for tax services in 2007aggregated approximately $53,000, including$32,000 for tax return and compliancework and $21,000 for other projects.  Fees billed by Moss for tax services in 2006 aggregated approximately $43,000, including $32,000 for tax return and compliance work and $11,000 for other projects.

 

# **AllOther Fees**

 

Otherthan the fees for services described above, there were no additional feesbilled by Moss in 2007 or 2006.

 

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.

 

40

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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                |

 

41

----

 

**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                      |       | 3/7/08 |
|              | Bernard Briskin, Chairman of the Board, |       |   |
|              | President and Chief Executive Officer   |       |   |
|              |                                    |       |   |

 
| Pursuant to the requirements of the Securities Exchange Act of 1934,  this report has been signed below by the following persons on behalf of the  registrant and in the capacities and on the date indicated. |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 
|   |                                                                     | ** ** | **Date** |
|--------|--------------------------------------------------------------------------|------------|----------|
|   |                                                                     |       |     |
|   | /s/BERNARD BRISKIN                                                       |       | 3/7/08   |
|   | Bernard Briskin, Director, Chairman of the Board,  President             |       |     |
|   | and Chief Executive Officer                                              |       |     |
|   | (Principal Executive Officer)                                            |       |     |
|   |                                                                     |       |     |
|   | /s/LAURA J. NEUMANN                                                      |       | 3/7/08   |
|   | Laura J. Neumann,  Senior Director of Financial Reporting and Compliance |       |     |
|   | (Principal Financial  and Principal Accounting Officer)                  |       |     |
|   |                                                                     |       |     |
|   | /s/M. MARK ALBERT                                                        |       | 3/7/08   |
|   | M. Mark Albert,  Director                                                |       |     |
|   |                                                                     |       |     |
|   | /s/JOHN G. DANHAKL                                                       |       | 3/7/08   |
|   | John G. Danhakl,  Director                                               |       |     |
|   |                                                                     |       |     |
|   | /s/ROBERT A. DAVIDOW                                                     |       | 3/7/08   |
|   | Robert A. Davidow, Director                                              |       |     |
|   |                                                                     |       |     |
|   | /s/KENNETH A. GOLDMAN                                                    |       | 3/7/08   |
|   | Kenneth A. Goldman,  Director                                            |       |     |
|   |                                                                     |       |     |
|   | /s/STEVEN ROMICK                                                         |       | 3/7/08   |
|   | Steven Romick, Director                                                  |       |     |

 

42

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** **

**ARDENGROUP, INC. and consolidatedsubsidiarIES**

 

**INDEX TO CONSOLIDATED FINANCIAL STATEMENTS**

 

 
| ** **                                                                                            | ** ** | **Page** |
|-------------------------------------------------------------------------------------------------------|------------|----------|
|                                                                                                  |       |     |
| Management’s Report on  Internal Control over Financial Reporting                                |       | 44       |
| Report of Independent  Registered Public Accounting Firm                                              |       | 45       |
|                                                                                                  |       |     |
| Financial Statements:                                                                                 |       |     |
| Consolidated  Balance Sheets, December 29, 2007 and December 30, 2006                       |       | 48       |
| Consolidated  Statements of Operations and Comprehensive Income for fiscal years 2007, 2006  and 2005 |       | 49       |
| Consolidated  Statements of Stockholders’ Equity for fiscal years 2007, 2006 and 2005            |       | 50       |
| Consolidated  Statements of Cash Flows for fiscal years 2007,  2006 and 2005                          |       | 51       |
| Notes  to Consolidated Financial Statements                                                           |       | 53       |

 

 

The financialstatements include the Company’s subsidiaries (Arden-Mayfair, Inc. andMayfair Realty, Inc.) and the subsidiaries of Arden-Mayfair, Inc.

 

Schedules areomitted because of the absence of the conditions under which they are required.

 

 

43

----

 

**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 notprevent or detect misstatements.  Also,projections of any evaluation of effectiveness to future periods are subject tothe risk that controls may become inadequate because of changes in conditionsor that the degree of compliance with the policies or procedures maydeteriorate.

 

TheCompany’s management assessed the effectiveness of the Company’s internalcontrol over financial reporting as of December 29, 2007.  In making the assessment, it used thecriteria set forth by the Committee of Sponsoring Organizations of the TreadwayCommission in *Internal Control-Integrated Framework*.  Based on that assessment, managementconcluded that, as of December 29, 2007, 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 December 29,2007 has been audited by Moss Adams LLP, an independent registered publicaccounting firm, as stated in their report which appears on page 45.

 

 

44

----

 

### **Report of IndependentRegistered 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 December 29, 2007 and December 30,2006, and the related consolidated statements of operations and comprehensiveincome, stockholders’ equity and cash flows for each of the years in thetwo-year period ended December 29, 2007. We also have audited the Company’sinternal control over financial reporting as of December 29, 2007, basedon criteria set forth by the Committee of Sponsoring Organizations of theTreadway Commission (COSO) in *Internal Control -Integrated Framework*.  TheCompany’s management is responsible for these financial statements, formaintaining effective internal control over financial reporting, and for itsassessment of the effectiveness of internal control over financial reporting,included in the accompanying Management’s Report on Internal Control overFinancial Reporting. Our responsibility is to express an opinion on thesefinancial statements and an opinion on the Company’s internal control overfinancial 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 financial reportingincludes those policies and procedures that (1) pertain to the maintenanceof records that, in reasonable detail, accurately and fairly reflect thetransactions 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.

 

 

45

----

 

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

 

In our opinion, thefinancial statements referred to above present fairly, in all material respects,the consolidated financial position of Arden Group, Inc. and ConsolidatedSubsidiaries, as of December 29, 2007 and December 30, 2006, and theconsolidated results of its operations and its cash flows for each of the yearsin the two-year period ended December 29, 2007, in conformity withaccounting principles generally accepted in the United States of America. Alsoin our opinion, Arden Group, Inc. and Consolidated Subsidiaries, maintained,in all material respects, effective internal control over financial reportingas of December 29, 2007, based on criteria set forth by the COSO in *Internal Control - Integrated Framework*.

 

As described in Note 10 tothe consolidated financial statements, effective January 1, 2006, theCompany adopted a new principle of accounting for share-based payments inaccordance with Financial Accounting Standards Board Statement No. 123(R),*Share-Based Payment*.

 

MossAdams LLP

LosAngeles, California

March 5,2008

 

 

46

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## ** **

## **Reportof Independent Registered Public Accounting Firm**

## ** **

To the Stockholders ofArden Group, Inc.

 

In our opinion, theconsolidated statements of operations and comprehensive income, stockholders’equity and cash flows for the year ended December 31, 2005 present fairly, inall material respects, the results of Arden Group, Inc. and itssubsidiaries their operations and their ** **cash flows for the year then ended,in conformity with accounting principles generally accepted in the UnitedStates of America. These financial statements****arethe responsibility of the Company’s management. Our responsibility is to express an opinion on these financialstatements based on our audits.  Weconducted our audits of these statements in accordance with the standards ofthe Public Company Accounting Oversight Board (United States).  Those standards require that we plan andperform the audit to obtain reasonable assurance about whether the financialstatements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting theamounts and disclosures in the financial statements, assessing the accountingprinciples used and significant estimates made by management, and evaluatingthe overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

 

PricewaterhouseCoopersLLP

Los Angeles, California

March 8, 2006

 

 

47

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**ARDEN GROUP, INC. ANDCONSOLIDATED SUBSIDIARIES**

 

**CONSOLIDATED BALANCE SHEETS**

 

(In Thousands, ExceptShare and Per Share Data)

 
| ** **                                                                                                                                                                                                         | ** ** | **December 29, 2007** | ** ** | **December 30, 2006** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------|------------|----------------------------|------------|
| **Assets**                                                                                                                                                                                                         | ** ** | ** **                 | ** ** | ** **                 | ** ** |
| Current assets:                                                                                                                                                                                                    |       |                       |       |                       |       |
| Cash and cash  equivalents                                                                                                                                                                                         |       | $                          | 58,919     |                       | $          | 36,842 |   |
| Investments                                                                                                                                                                                                        |       | 19,933                     |       | 18,667                     |       |
| Accounts  receivable, net of allowance for doubtful accounts of $172 and $192 as of  December 29, 2007 and December 30, 2006,  respectively                                                              |       | 5,967                      |       | 5,749                      |       |
| Inventories, net                                                                                                                                                                                                   |       | 21,558                     |       | 19,881                     |       |
| Deferred income  taxes                                                                                                                                                                                             |       | 3,916                      |       | 5,083                      |       |
| Other current  assets                                                                                                                                                                                              |       | 2,856                      |       | 2,884                      |       |
| Total current  assets                                                                                                                                                                                              |       | 113,149                    |       | 89,106                     |       |
| Property, plant and equipment, net                                                                                                                                                                                 |       | 44,853                     |       | 47,772                     |       |
| Deferred income taxes                                                                                                                                                                                              |       | 5,450                      |       | 5,187                      |       |
| Other assets                                                                                                                                                                                                       |       | 3,237                      |       | 3,536                      |       |
| Total assets                                                                                                                                                                                                       |       | $                          | 166,689    |                       | $          | 145,601 |   |
| **Liabilities and Stockholders’ Equity**                                                                                                                                                                      | ** ** | ** **                 | ** ** | ** **                 | ** ** |
| Current liabilities:                                                                                                                                                                                               |       |                       |       |                       |       |
| Accounts  payable, trade                                                                                                                                                                                           |       | $                          | 20,367     |                       | $          | 18,877 |   |
| Federal and  state income taxes payable                                                                                                                                                                            |       | 803                        |       | 3,214                      |       |
| Current portion  of long-term debt                                                                                                                                                                                 |       | 0                          |       | 225                        |       |
| Other current  liabilities                                                                                                                                                                                         |       | 21,825                     |       | 24,848                     |       |
| Total current  liabilities                                                                                                                                                                                         |       | 42,995                     |       | 47,164                     |       |
| Long-term debt                                                                                                                                                                                                     |       | 1,228                      |       | 1,228                      |       |
| Deferred rent                                                                                                                                                                                                      |       | 6,144                      |       | 6,070                      |       |
| Other liabilities                                                                                                                                                                                                  |       | 7,829                      |       | 8,845                      |       |
| Total  liabilities                                                                                                                                                                                                 |       | 58,196                     |       | 63,307                     |       |
| Commitments and contingent liabilities (Notes 14 and 16)                                                                                                                                                           |       |                       |       |                       |       |
| Stockholders’ equity:                                                                                                                                                                                         |       |                       |       |                       |       |
| Common Stock,  Class A, $.25 par value; authorized 10,000,000 shares; 4,518,298 shares  issued and outstanding as of December 29,  2007 and December 30, 2006,  including 1,357,200 treasury shares |       | 1,129                      |       | 1,129                      |       |
| Capital surplus                                                                                                                                                                                                    |       | 5,378                      |       | 5,378                      |       |
| Unrealized loss  on investments, net of tax                                                                                                                                                                        |       | (179                       | )          | (332                       | )          |
| Retained  earnings                                                                                                                                                                                                 |       | 105,918                    |       | 79,872                     |       |
|                                                                                                                                                                                                               |       | 112,246                    |       | 86,047                     |       |
| Treasury stock,  1,357,200 shares at cost                                                                                                                                                                          |       | (3,753                     | )          | (3,753                     | )          |
| Total  stockholders’ equity                                                                                                                                                                                   |       | 108,493                    |       | 82,294                     |       |
| Total  liabilities and stockholders’ equity                                                                                                                                                                   |       | $                          | 166,689    |                       | $          | 145,601 |   |

 

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

 

 

48

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**ARDENGROUP, INC. AND CONSOLIDATED SUBSIDIARIES**

 

**CONSOLIDATED STATEMENTS OF OPERATIONS**

**AND COMPREHENSIVE INCOME**

 

(InThousands, Except Share and Per Share Data)

 
| ** **                                                                                                             | ** ** | **2007**  | ** ** | **2006**  | ** ** | **2005**  | ** ** |
|------------------------------------------------------------------------------------------------------------------------|------------|-----------|------------|-----------|------------|-----------|------------|
| Sales                                                                                                                  |       | $         | 485,939    |      | $          | 482,737   |       | $ | 470,354 |   |
| Cost of sales                                                                                                          |       | 297,948   |       | 296,401   |       | 289,931   |       |
| Gross profit                                                                                                           |       | 187,991   |       | 186,336   |       | 180,423   |       |
| Selling, general and administrative expense                                                                            |       | 142,814   |       | 149,656   |       | 148,607   |       |
| Operating income                                                                                                       |       | 45,177    |       | 36,680    |       | 31,816    |       |
| Interest and dividend income                                                                                           |       | 3,340     |       | 2,560     |       | 1,722     |       |
| Other income (expense), net                                                                                            |       | 64        |       | 2         |       | 36        |       |
| Interest expense                                                                                                       |       | (97       | )          | (123      | )          | (152      | )          |
| Income before  income taxes                                                                                            |       | 48,484    |       | 39,119    |       | 33,422    |       |
| Income tax provision                                                                                                   |       | 19,277    |       | 15,895    |       | 13,571    |       |
| Net income                                                                                                             |       | $         | 29,207     |      | $          | 23,224    |       | $ | 19,851 |   |
| Other comprehensive gain (loss), net of tax:                                                                           |       |      |       |      |       |      |       |
| Unrealized gain  (loss) from available-for-sale securities:                                                            |       |      |       |      |       |      |       |
| Net unrealized  holding gain (loss) arising during the period                                                          |       | 153       |       | (38       | )          | (381      | )          |
| Reclassification  adjustment for realized gain included in net income                                                  |       | 0         |       | (1        | )          | (11       | )          |
| Net unrealized  gain (loss), net of income tax expense (benefit) of $106 for 2007, ($28)  for 2006 and ($269) for 2005 |       | 153       |       | (39       | )          | (392      | )          |
| Comprehensive  income                                                                                                  |       | $         | 29,360     |      | $          | 23,185    |       | $ | 19,459 |   |
| Net income per common share:                                                                                           |       |      |       |      |       |      |       |
| Basic and  diluted                                                                                                     |       | $         | 9.24       |      | $          | 7.16      |       | $ | 5.87 |   |
| Weighted average common shares outstanding:                                                                            |       |      |       |      |       |      |       |
| Basic and  diluted                                                                                                     |       | 3,161,098 |       | 3,241,805 |       | 3,381,051 |       |

 

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

 

 

49

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**ARDEN GROUP, INC. AND CONSOLIDATED 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,  January 1, 2005**       |       | 4,740,452                      |       | $           | 1,185      |        | $          | 5,643            |       | $                   | 99         |                   | $          | 63,402     |       | 1,357,200  |       | $ | (3,753 | ) | $ | 66,576 |   |
|                                     |       |                           |       |        |       |        |       |             |       |                |       |                   |       |       |       |       |       |
| Purchase and  retirement of common stock |       | (4,250                         | )          | (1          | )          | (5          | )          | 0                |       | (328                | )          | 0                      |       | 0          |       | (334       | )          |
| Net unrealized  loss                     |       | 0                              |       | 0           |       | 0           |       | (392             | )          | 0                   |       | 0                      |       | 0          |       | (392       | )          |
| Dividends  declared                      |       | 0                              |       | 0           |       | 0           |       | 0                |       | (3,381              | )          | 0                      |       | 0          |       | (3,381     | )          |
| Net income                               |       | 0                              |       | 0           |       | 0           |       | 0                |       | 19,851              |       | 0                      |       | 0          |       | 19,851     |       |
|                                     |       |                           |       |        |       |        |       |             |       |                |       |                   |       |       |       |       |       |
| **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 |   |

 

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

 

50

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

 

**CONSOLIDATED STATEMENTS OF CASHFLOWS**

 

(In Thousands)

 
| ** **                                               | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** |
|----------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Cash flows from operating activities:                    |       |     |       |     |       |     |       |
| Cash received  from customers                            |       | $        | 485,819    |     | $          | 482,645  |       | $ | 470,646 |   |
| Cash paid to  suppliers and employees                    |       | (438,044 | )          | (440,735 | )          | (426,372 | )          |
| Interest and  dividends received                         |       | 3,186    |       | 2,580    |       | 1,613    |       |
| Interest paid                                            |       | (99      | )          | (125     | )          | (155     | )          |
| Income taxes  paid                                       |       | (20,660  | )          | (17,645  | )          | (12,653  | )          |
|                                                     |       |     |       |     |       |     |       |
| Net cash  provided by operating activities               |       | 30,202   |       | 26,720   |       | 33,079   |       |
|                                                     |       |     |       |     |       |     |       |
| Cash flows from investing activities:                    |       |     |       |     |       |     |       |
| Capital  expenditures                                    |       | (3,824   | )          | (4,868   | )          | (6,390   | )          |
| Purchases of  investments                                |       | (945     | )          | (827     | )          | (713     | )          |
| Sales of  investments                                    |       | 2        |       | 2,751    |       | 5,579    |       |
| Proceeds from  the sale of property, plant and equipment |       | 28       |       | 215      |       | 52       |       |
|                                                     |       |     |       |     |       |     |       |
| Net cash used in  investing activities                   |       | (4,739   | )          | (2,729   | )          | (1,472   | )          |
|                                                     |       |     |       |     |       |     |       |
| Cash flows from financing activities:                    |       |     |       |     |       |     |       |
| Purchase and  retirement of Company stock                |       | 0        |       | (19,999  | )          | (334     | )          |
| Principal  payments under capital lease obligations      |       | (225     | )          | (221     | )          | (216     | )          |
| Cash dividends  paid                                     |       | (3,161   | )          | (3,267   | )          | (3,382   | )          |
|                                                     |       |     |       |     |       |     |       |
| Net cash used in  financing activities                   |       | (3,386   | )          | (23,487  | )          | (3,932   | )          |
|                                                     |       |     |       |     |       |     |       |
| Net increase (decrease) in cash and cash equivalents     |       | 22,077   |       | 504      |       | 27,675   |       |
|                                                     |       |     |       |     |       |     |       |
| Cash and cash equivalents at beginning of year           |       | 36,842   |       | 36,338   |       | 8,663    |       |
|                                                     |       |     |       |     |       |     |       |
| Cash and cash equivalents at end of year                 |       | $        | 58,919     |     | $          | 36,842   |       | $ | 36,338 |   |

 

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

 

51

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| ** **                                                                                          | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| **Reconciliation  of Net Income to Net Cash Provided by Operating Activities:**                     |       |     |       |     |       |     |       |
|                                                                                                |       |     |       |     |       |     |       |
| Net income                                                                                          |       | $        | 29,207     |     | $          | 23,224   |       | $ | 19,851 |   |
|                                                                                                |       |     |       |     |       |     |       |
| Adjustments to  reconcile net income to net cash provided by operating activities:                  |       |     |       |     |       |     |       |
| Depreciation and  amortization                                                                      |       | 6,685    |       | 7,097    |       | 7,401    |       |
| Provision for  losses on accounts receivable                                                        |       | 45       |       | 14       |       | 49       |       |
| Deferred income  taxes                                                                              |       | 798      |       | (1,044   | )          | (2,600   | )          |
| Net (gain) loss  from the disposal of property, plant and equipment                                 |       | 30       |       | (191     | )          | 27       |       |
| Realized gain on  investments, net                                                                  |       | (64      | )          | (2       | )          | (36      | )          |
| Amortization of discount  on investments                                                            |       | 0        |       | (6       | )          | (62      | )          |
| Stock  appreciation rights compensation expense                                                     |       | 2,908    |       | 3,671    |       | 946      |       |
|                                                                                                |       |     |       |     |       |     |       |
| Changes in  assets and liabilities net of effects from noncash investing and financing  activities: |       |     |       |     |       |     |       |
|                                                                                                |       |     |       |     |       |     |       |
| (Increase)  decrease in assets:                                                                     |       |     |       |     |       |     |       |
| Accounts and  notes receivable                                                                      |       | (263     | )          | (49      | )          | 270      |       |
| Inventories                                                                                         |       | (1,677   | )          | (735     | )          | (381     | )          |
| Other current  assets                                                                               |       | 28       |       | (316     | )          | (549     | )          |
| Other assets                                                                                        |       | 299      |       | (148     | )          | (403     | )          |
|                                                                                                |       |     |       |     |       |     |       |
| Increase  (decrease) in liabilities:                                                                |       |     |       |     |       |     |       |
| Accounts  payable, trade and other current liabilities                                              |       | (4,621   | )          | (2,859   | )          | 1,734    |       |
| Federal and  state income taxes payable                                                             |       | (2,411   | )          | (705     | )          | 3,511    |       |
| Deferred rent                                                                                       |       | 74       |       | 274      |       | 924      |       |
| Other  liabilities                                                                                  |       | (836     | )          | (1,505   | )          | 2,397    |       |
|                                                                                                |       |     |       |     |       |     |       |
| Net cash  provided by operating activities                                                          |       | $        | 30,202     |     | $          | 26,720   |       | $ | 33,079 |   |

 

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

 

52

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** **

**ARDENGROUP, INC. AND CONSOLIDATED SUBSIDIARIES**

 

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

 

1.       Summary of Significant 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 December 29, 2007, December 30, 2006 and December 31,2005.  All years consisted of 52 weeks.

 

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

 

Cash and Cash Equivalents

 

The ConsolidatedStatements of Cash Flows classify changes in cash and cash equivalents(short-term, highly liquid investments readily convertible into cash with anoriginal maturity at date of purchase of three months or less) according tooperating, investing or financing activities. The Company places its temporary cash investments with high credit,quality financial 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 may be other-than-temporary.  Any decline that is determined to beother-than-temporary is recorded as a loss on the Consolidated Statements ofOperations and Comprehensive Income in accordance with Emerging Issues TaskForce (EITF) No. 03-1, “The Meaning of Other-Than-Temporary Impairment andits Application to Certain Issues.”  Allmarketable securities are defined as available-for-sale investments under theprovisions of Statement of 

 

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Financial AccountingStandards No. (SFAS) 115, “Accounting for Certain Investments in Debt andEquity Securities.”  The Company does notbelieve that any losses on its investments are other-than-temporary.

 

                             Management determines the appropriate classificationof its investments in marketable securities at the time of purchase andreevaluates such determination at each balance sheet date.  Debt securities for which the Company doesnot have the intent or ability to hold to maturity and equity securities areclassified as available-for-sale. Investments are carried at fair value, with the unrealized gains andlosses, net of tax, reported as a separate component of stockholders’equity.  The cost of investments sold isdetermined based on the Specific Identification method.

 

Accounts Receivable

 

The Company monitors vendorreceivables and extensions of credit on an ongoing basis and has notexperienced significant losses related to its receivables.  At December 29, 2007, the Company did nothave significant credit risk concentrations. No customer or vendor represented greater than 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  |

 

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.

 

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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 ondisposition is included in selling, general and administrative (SG&A)expense on the Consolidated Statements of Operations and Comprehensive Income.

 

                             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 againstearnings.  No impairments were recordedin 2007, 2006or 2005.

 

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 theCompany’s long-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 andpurchased a high deductible workers’ compensation policy.  Accordingly, the Company was primarilyself-insured for losses related to workers’ compensation for claims incurredprior to July 1, 2006, as well as general and auto liability claims.  The Company maintained stop-loss coverage tolimit its loss exposure on a per claim basis and was insured for covered costsin excess of per claim limits.  Effective July 1,2006, the Company purchased a one-year fully insured guaranteed cost workers’compensation insurance policy at a favorable rate to replace the highdeductible program.  Effective July 1,2007, the Company renewed the guaranteed cost policy for an additionalyear.  The Company continues to maintainan accrual for claims incurred prior to July 2006 under the highdeductible program which is based on both reported claims and an estimate ofclaims incurred but not reported.  The Company’s workers’ compensation andgeneral and auto liability reserves for unpaid and incurred but not  reported claims  at  December  29, 2007  and December  30, 2006  were approximately $7,107,000 and $8,247,000, respectively.  While the ultimate amount of claims incurredare dependent on future developments, the recorded reserves reflect management’sbest estimate of claims to be incurred.

 

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Revenue Recognition

 

The Company recognizes revenue at the time ofsale.  Discounts given to customers arerecorded at the point of sale as a reduction of revenues.  The Company maintains a bad debt allowancefor receivables from vendors and Gelson’s credit card 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 salesfor all periods presented, and therefore is not disclosed separately on theConsolidated Statements of Operations 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 and transportationcosts include receiving costs, internal transfer costs, labor, building rent,utilities, depreciation, repairs and maintenance and fuel for the 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.  All these costs reflect, inmanagement’s opinion, the direct costs involved in bringing the Company’sproduct to market.  The following tablesummarizes warehouse, transportation, purchasing, advertising and occupancycosts for 2007, 2006 and 2005.

 
| **(In Thousands)**           | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** |
|------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Warehouse and transportation |       | $        | 7,117      |     | $          | 6,882    |       | $ | 6,659 |   |
| Purchasing                   |       | 2,964    |       | 2,835    |       | 2,680    |       |
| Advertising                  |       | 1,017    |       | 1,148    |       | 1,137    |       |
| Occupancy                    |       | 23,436   |       | 23,394   |       | 23,466   |       |
|                         |       | $        | 34,534     |     | $          | 34,259   |       | $ | 33,942 |   |

 

Vendor Allowances

 

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

 

                              Occasionally, the 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 

 

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and are recorded as a reduction of inventory cost as theproduct is purchased.  In the event thatthe Company does not purchase the minimum amount of product specified in theagreement, the upfront payments must be returned on a pro rata basis to thevendor.  If the contract does not specifythat the rebate 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 vest 25%each year beginning at the end of the first year and expire five years from thedate of grant.  SARs granted in December 2007vest 25% each year beginning at the end of the third year and expire sevenyears from the date of grant.

 

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 have not beenrestated.  SFAS 123(R) requires theCompany 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 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 

 

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valueat the end of each reporting period and, therefore, the impact of actualforfeitures will be reflected at each remeasurement date.

 

Theassumptions used in the Black-Scholes option-pricing model as of fiscal 2007 year end were as follows:

 

| Dividend yield          |   | .70%   |   |   |   |       |   |
|-------------------------|--------|--------|--------|--------|--------|------------|--------|
| Expected volatility     |   | 33.49% |   | -      |   | 37.63%     |   |
| Risk-free interest rate |   | 3.028% |   | -      |   | 3.221%     |   |
| Expected average term   |   | 3.16   |   | -      |   | 3.52 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.

 

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 the period.  Diluted net income per common share isdetermined by dividing net income by the weighted average number of common andpotential 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 of financial statementsin conformity with accounting principles generally accepted in the UnitedStates (GAAP) requires management to make estimates and assumptions for thereporting period and as of the financial statement date.  These estimates and assumptions affect thereported amounts of assets and liabilities, the disclosure of contingentliabilities and the reported amounts of revenues and expenses.  Actual results could differ from theseestimates.

 

Impact of Recently IssuedAccounting Standards

 

InJune 2006, the Financial Accounting Standards Board (FASB) ratified theconsensus of EITF No. 06-3, “How Taxes Collected from Customers andRemitted to Governmental 

 

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AuthoritiesShould Be Presented in the Income Statement (That Is, Gross versus NetPresentation).”  EITF No. 06-3indicates that the income statement presentation on either a gross basis or anet basis of the taxes within the scope of the issue is an accounting policydecision.  The Company’s accountingpolicy is to present the taxes within the scope of EITF No. 06-3 on a netbasis.  The adoption of EITF No. 06-3in the first quarter of 2007 did not result in a change to the Company’saccounting policy and, accordingly, did not have any effect on the Company’sconsolidated financial statements.

 

InJune 2006, the FASB issued FIN 48, “Accounting for Uncertainty in IncomeTaxes — an Interpretation of FASB Statement No. 109.”  This interpretation prescribes a recognitionthreshold and measurement attribute for the financial statement recognition andmeasurement of a tax position taken or expected to be taken in a tax return,and provides guidance on derecognition, classification, interest and penalties,accounting in interim periods, disclosure and transition.  This interpretation, which was effective forthe Company on the first day of its 2007 fiscal year, did not have asignificant impact on the Company’s consolidated financial statements.

 

InSeptember 2006, the FASB issued SFAS 157, “Fair Value Measurements.”  SFAS 157 defines fair value, establishes aframework for measuring fair value in GAAP and expands disclosures about fair valuemeasurements.  SFAS 157 does not requireany new fair value measurements.  Thisstatement is effective for financial statements issued for the Company’s firstquarter of 2008 and is not expected to have a significant impact on the Company’sconsolidated 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 included in net earnings at each subsequent reportingdate.  SFAS 159 will be effective at thebeginning of the Company’s fiscal year 2008 and is not expected to have asignificant impact on the Company’s consolidated financial statements.

 

2.       Investments

 

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

 
| ** **                     | ** ** |       | ** **   | **Unrealized** | ** ** | ** **      | ** ** |
|--------------------------------|------------|------------|--------------|----------------|------------|-----------------|------------|
| **(In Thousands)**             | ** ** | **Cost**   | ** **   | **Loss**       | ** ** | **Fair  Value** | ** ** |
| ** **                     | ** ** | ** ** | ** **   | ** **     | ** ** | ** **      | ** ** |
| As of December 29,  2007: |       |       |         |           |       |            |       |
| Mutual funds                   |       | $          |  20,235 |           | $          |   302      |       | $ |  19,933 |   |
|                           |       |       |         |           |       |            |       |
| As of December 30,  2006: |       |       |         |           |       |            |       |
| Mutual funds                   |       | $          | 19,228       |           | $          | 561             |       | $ | 18,667 |   |

 

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Realized net gainfrom the sale of investments was $0, $1,000 and $8,000 in 2007, 2006 and 2005,respectively.  In addition, the Companyrecognized capital gain income from mutual funds of $64,000, $1,000 and $28,000in 2007, 2006 and 2005, respectively. Realized net gain (loss) from the sale of investments and capital gainincome are included in other income (expense), net on the ConsolidatedStatements of Operations and Comprehensive Income.

 

3.                     Accounts Receivable, Net

 
| ** **                            | ** ** | **December 29,** | ** ** | **December 30,** | ** ** |
|---------------------------------------|------------|-----------------------|------------|-----------------------|------------|
| **(In Thousands)**                    | ** ** | **2007**              | ** ** | **2006**              | ** ** |
|                                  |       |                  |       |                  |       |
| Accounts receivable, trade            |       | $                     | 3,351      |                  | $          | 3,471 |   |
| Other accounts receivable             |       | 2,788                 |       | 2,470                 |       |
|                                  |       | 6,139                 |       | 5,941                 |       |
| Less: Allowance for doubtful accounts |       | (172                  | )          | (192                  | )          |
|                                  |       | $                     | 5,967      |                  | $          | 5,749 |   |

 

The provision fordoubtful accounts in 2007, 2006 and 2005was approximately $45,000, $14,000 and $49,000,respectively.

 

4.                     Inventories

 

Inventories valued by theLIFO method totaled $17,937,000 at December 29,2007 and $16,580,000at December 30, 2006.  Inventory balances would have been $5,340,000 and $4,720,000higher at the end of 2007 and 2006, respectively, if they had been stated atthe lower of FIFO cost or market.  TheLIFO effect on net income was a decrease of approximately $367,000, $335,000and $227,000 in 2007, 2006 and 2005, respectively.

 

5.                     Significant Supplier

 

During 2007, the Company procured approximately 17% of its product through Unified WesternGrocers, Inc. (Unified) (formerly Certified Grocers), a grocery wholesalecooperative.  As a member-patron, theCompany is required to provide Unified with certain minimum deposits and creditin order to purchase product from the cooperative.  As of December 29, 2007, the Company hadapproximately $1,659,000 on deposit withUnified in addition  to approximately $503,000 related to ownership of equity sharesin Unified.  The deposit is recordedunder other assets on the Consolidated Balance Sheets.  The minimum deposit requirement is satisfiedthrough a combination of cash, credit and ownership of equity shares inUnified.

 

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6.                     Property, Plant and Equipment

 
| ** **                                | ** ** | **December 29,** | ** ** | **December 30,** | ** ** |
|-------------------------------------------|------------|-----------------------|------------|-----------------------|------------|
| **(In Thousands)**                        | ** ** | **2007**              | ** ** | **2006**              | ** ** |
|                                      |       |                  |       |                  |       |
| Land                                      |       | $                     | 8,633      |                  | $          | 8,633 |   |
| Buildings and improvements                |       | 9,693                 |       | 9,693                 |       |
| Store fixtures and office equipment       |       | 44,821                |       | 42,623                |       |
| Transportation equipment                  |       | 3,920                 |       | 3,831                 |       |
| Machinery and equipment                   |       | 1,981                 |       | 1,810                 |       |
| Leasehold improvements                    |       | 48,668                |       | 48,018                |       |
| Leasehold interests                       |       | 4,538                 |       | 4,538                 |       |
| Assets under construction                 |       | 1,137                 |       | 1,289                 |       |
| Assets under capital leases               |       | 0                     |       | 2,200                 |       |
|                                      |       | 123,391               |       | 122,635               |       |
|                                      |       |                  |       |                  |       |
| Accumulated depreciation and amortization |       | (78,538               | )          | (74,863               | )          |
|                                      |       | $                     | 44,853     |                  | $          | 47,772 |   |

 

As of December 29, 2007,approximately $48,725,000 of property,plant and equipment (at cost) was fully depreciated and is still being used inoperations.  As of December 30, 2006,the Company recorded $2,119,000 inaccumulated amortization for assets under capital lease.

 

7.                     Other Current Liabilities

 
| ** **                     | ** ** | **December 29,** | ** ** | **December 30,** | ** ** |
|--------------------------------|------------|-----------------------|------------|-----------------------|------------|
| **(In Thousands)**             | ** ** | **2007**              | ** ** | **2006**              | ** ** |
|                           |       |                  |       |                  |       |
| Employee compensated absences  |       | $                     | 5,245      |                  | $          | 5,133 |   |
| Taxes (excluding income taxes) |       | 3,154                 |       | 3,072                 |       |
| Stock appreciation rights      |       | 2,653                 |       | 5,289                 |       |
| Employee benefits              |       | 2,589                 |       | 2,820                 |       |
| Workers’ compensation     |       | 1,962                 |       | 2,021                 |       |
| Payroll                        |       | 1,371                 |       | 1,290                 |       |
| Dividends payable              |       | 790                   |       | 790                   |       |
| Rent                           |       | 738                   |       | 818                   |       |
| Other                          |       | 3,323                 |       | 3,615                 |       |
|                           |       | $                     | 21,825     |                  | $          | 24,848 |   |

 

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8.                     Long-Term Debt

 
| ** **                                                    | ** ** | **Current**           | ** ** | **Non-Current**       | ** ** |
|---------------------------------------------------------------|------------|-----------------------|------------|-----------------------|------------|
| ** **                                                    | ** ** | **December 29,** | ** ** | **December 30,** | ** ** | **December 29,** | ** ** | **December 30,** | ** ** |
| **(In Thousands)**                                            | ** ** | **2007**              | ** ** | **2006**              | ** ** | **2007** | ** ** | **2006** | ** ** |
|                                                          |       |                  |       |                  |       |   |   |   |   |
| Obligations under capital leases                              |       | $                     | 0          |                  | $          | 225 |   | $ | 0 |   | $ | 0 |   |
| 7% Subordinated income debentures due September 1,  2014 |       | 0                     |       | 0                     |       | 1,228 |   | 1,228 |   |
|                                                          |       | $                     | 0          |                  | $          | 225 |   | $ | 1,228 |   | $ | 1,228 |   |

 

The Company hasrevolving lines of credit in the amount of $20,000,000 which expires in August 2008and $3,000,000 which expires in October 2008.  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 2007 and 2006, therewere no amounts borrowed against either of the revolving lines of credit.  The Company currently maintains four standbyletters of credit aggregating $9,569,000 in connection with lease andself-insurance requirements.  The standbyletters of credit reduce the available borrowings under its revolving lines ofcredit.

 

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 December 29,2007 was paid.  The 7% Debentures arerecorded at face value which approximates its fair value.

 

9.                    Capital Stock

 

Class A Common Stock:  The Company is authorized to issue 10,000,000shares of Class A, par value $.25 per share.  At December 29, 2007 and December 30,2006, the number of shares issued were 4,518,298, including 1,357,200 treasuryshares.  During 2006 and 2005, the Companypurchased and retired 217,904 and 4,250shares of its Class A for an aggregate purchase price of approximately $19,999,000 and $334,000,respectively, in unsolicited private transactions with unrelated parties.  No shares were purchased during 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 of its Class A in the open marketor in private transactions. This was in addition 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.

 

On January 18, 2008, the Company paid a regularquarterly cash dividend of 25 cents per share of Class A, aggregatingapproximately $790,000, to stockholders of record on December 28, 2007.

 

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10.               Stock Appreciation Rights

 

The Company hasgranted SARs covering shares of the Company’s Class A to non-employeedirectors and certain employees of the Company and its subsidiaries.  Each SAR entitles the holder to receive uponexercise thereof the excess of the fair market value of a share of Class A,as determined in accordance with the SARs agreement, on the date of exerciseover the fair market value of such share on the date granted. SARs granted prior to December 2007vest 25% each year beginning at the end of the first year and expire five yearsfrom the date of grant.  SARs granted inDecember 2007 vest 25% each year beginning at the end of the third yearand expire seven years from the date of grant. SARs transactions during thepast three years are summarized below.

 
| ** **                 | ** **   | **SARs**         | *** *** |
|----------------------------|--------------|------------------|--------------|
| ** **                 | ** **   | **Officers and** | ** **   | **Non-Employee** | *** *** |
| ** **                 | ** **   | **Employees**    | ** **   | **Directors** | *** *** |
| ** **                 | ** **   | ** **       | ** **   | **Weighted** | ** ** | ** ** | *** *** | **Weighted** | *** *** |
| ** **                 | ** **   | **SARs**         | ** **   | **Average Price** | ** ** | **SARs** | ** ** | **Average Price** | ** ** |
| Outstanding as of 1/1/05   |         | 72,425           |         | $ | 52.44 |   | 60,000 |   | $ | 53.36 |   |
| *** ***               | *** *** | *** ***     | *** *** | *** *** | *** *** | *** *** | *** *** | *** *** | *** *** |
| Granted                    |         | 5,000            |         | $ | 86.22 |   | 10,000 |   | $ | 78.43 |   |
| Exercised                  |         | 10,375           |         | $ | 41.10 |   | 10,000 |   | $ | 57.50 |   |
| *** ***               | *** *** | *** ***     | *** *** | *** *** | *** *** | *** *** | *** *** | *** *** | *** *** |
| 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 |   |
| *** ***               | *** *** | *** ***     | *** *** | *** *** | *** *** | *** *** | *** *** | *** *** | *** *** |
| Exercisable as of 12/29/07 |         | 13,975           |         |   |   | 2,500 | *** *** | *** *** | *** *** |

*** ***

Theaggregate intrinsic value of fully vested SARs as of December 29, 2007is approximately $1,445,000.

*** ***

***63***

----

*** ***

***The following table summarizes information about the Company’sSARs outstanding at December 29, 2007:***

*** ***

| ** **                           | ** **   | **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                   |         | 12,475               |         | .9 years             |         | $ | 57.00 |   | 12,475 |   | $ | 57.00 |   |
| $  57.00                   |         | 4,750                |         | 1.5 years            |         | $ | 57.00 |   | 1,500 |   | $ | 57.00 |   |
| $121.03                              |         | 1,500                |         | 4.2 years            |         | $ | 121.03 |   | 0 |   | $ | 121.03 |   |
| $146.44                              |         | 70,500               |         | 6.9 years            |         | $ | 146.44 |   | 0 |   | $ | 146.44 |   |
|                                 |         | 89,225               |         | 5.8 years            |         | $ | 128.75 |   | 13,975 |   | $ | 57.00 |   |
|                                 |         |                 |         |                 |         |   |   |   |   |   |   |
| SARs - Non-Employee Directors        | *** *** | *** ***         | *** *** | *** ***         | *** *** | *** *** | *** *** | *** *** | *** *** | *** *** | *** *** |
| $  57.50                   |         | 12,500               |         | 1.1 years            |         | $ | 57.50 |   | 2,500 |   | $ | 57.50 |   |
| $121.03                              |         | 10,000               |         | 4.2 years            |         | $ | 121.03 |   | 0 |   | $ | 121.03 |   |
| $146.44                              |         | 35,000               |         | 6.9 years            |         | $ | 146.44 |   | 0 |   | $ | 146.44 |   |
|                                 |         | 57,500               |         | 5.2 years            |         | $ | 122.69 |   | 2,500 |   | $ | 57.50 |   |

*** ***

SARscompensation expense is recorded under SG&A expense on the ConsolidatedStatements of Operations and Comprehensive Income.  In 2005, the Company recorded compensationexpense related to SARs of $946,000 in accordance with FIN 28 as discussed inNote 1.  Effective January 1, 2006,the Company adopted SFAS 123(R) (revised 2004), “Share-Based Payment,”using the modified prospective transition method, and therefore, prior periodresults have not been 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 $2,908,000 of SARscompensation expense in 2007.

 

Asof December 29, 2007, assuming no change in the SARs fairvalue, there was approximately $4,541,000of total unrecognized compensation cost related to unvested SARs which isexpected to be recognized over a weighted average period of 4.6 years.  The total intrinsic value of SARs exercisedduring 2007 was approximately $5,643,000. Intrinsic value represents the amount by which the fair value of SARsexceeds 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 December 29, 2007, is not available.  The Company records pension expense for theseplans as contributions are earned.  TheCompany’s total union pension expense for all plans for 2007, 2006 and 2005 amounted to $5,332,000, $6,801,000 and $6,241,000, respectively.

 

64

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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 2007 on a tax-deferred basis. In addition, employees over the age of 50 may elect to make catch upcontributions up to a maximum of $5,000in 2007. The Company made discretionary contributions to the 401(k) Plan of$929,000, $919,000 and $801,000 for 2007, 2006and 2005, 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.  Recentlegislation passed as part of the Pension Protection Act of 2006 requiresemployers to allow participants who own employer securities the opportunity todiversify their assets.  As a result, theStock Bonus Plan was merged into the 401(k) Plan effective 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 employmentagreement.  The Company decreased theaccrual during 2007 and 2006 andrecognized income of approximately $44,000and $536,000, respectively.  The decreasein the accrual is primarily due to a change in estimate based on the refiningof the assumptions and underlying data, including the estimated payout term.  The Company expensed $344,000 during 2005.  Thisaccrual is recorded under other liabilities on the Consolidated Balance Sheetsand totaled approximately $2,167,000 as of December 29, 2007.

 

12.               Multi-Employer Union 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$9,789,000, $15,231,000 and $16,047,000for 2007, 2006and 2005, respectively.  The majority of Gelson’semployees are members of the United Food & Commercial WorkersInternational Union (UFCW).  The Companycontributes to a multi-employer health and welfare trust fund on behalf of itsemployees who are members of the UFCW. As of March 5, 2007, this fund was overfunded in total, for allemployers, by approximately $500,000,000. Consequently, the employers negotiated a significant reduction in theaverage hourly contribution rates for health care which is expected tosubstantially reduce the overfunded status of the fund during the term of thenew contract between the UFCW and the three major grocery retailers whichexpires March 6, 2011.  Except as discussed above, there were noemployer withdrawals, shortfall

 

65

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contributions,maintenance of benefit clauses or other material changes that affected thecomparability of employer and multi-employer contributions from year to year.

 

13.               Income Taxes

 

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

 

| **(In Thousands)**            | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** |
|-------------------------------|------------|----------|------------|----------|------------|----------|------------|
|                          |       |     |       |     |       |     |       |
| Current:                      |       |     |       |     |       |     |       |
| Federal                       |       | $        | 14,702     |     | $          | 13,455   |       | $ | 12,944 |   |
| State                         |       | 3,671    |       | 3,513    |       | 3,494    |       |
| Total current  tax provision  |       | 18,373   |       | 16,968   |       | 16,438   |       |
|                          |       |     |       |     |       |     |       |
| Deferred:                     |       |     |       |     |       |     |       |
| Federal                       |       | 540      |       | (1,009   | )          | (2,317   | )          |
| State                         |       | 364      |       | (64      | )          | (550     | )          |
| Total deferred  tax provision |       | 904      |       | (1,073   | )          | (2,867   | )          |
| Total income tax  provision   |       | $        | 19,277     |     | $          | 15,895   |       | $ | 13,571 |   |

 

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

 

| ** **                           | ** ** | **December 29,** | ** ** | **December 30,** | ** ** |
|--------------------------------------|------------|-----------------------|------------|-----------------------|------------|
| **(In Thousands)**                   | ** ** | **2007**              | ** ** | **2006**              | ** ** |
|                                 |       |                  |       |                  |       |
| Deferred tax assets:                 |       |                  |       |                  |       |
| Accrued expenses                     |       | $                     | 6,999      |                  | $          | 8,515 |   |
| Deferred rent                        |       | 2,504                 |       | 2,473                 |       |
| State income  taxes                  |       | 1,382                 |       | 1,228                 |       |
| Other                                |       | 2,027                 |       | 1,578                 |       |
| Deferred tax  assets                 |       | 12,912                |       | 13,794                |       |
|                                 |       |                  |       |                  |       |
| Deferred tax liabilities:            |       |                  |       |                  |       |
| Deferred gain on  debenture exchange |       | (2,533                | )          | (2,694                | )          |
| Other                                |       | (1,013                | )          | (830                  | )          |
| Deferred tax  liabilities            |       | (3,546                | )          | (3,524                | )          |
| Deferred income  taxes, net          |       | $                     | 9,366      |                  | $          | 10,270 |   |

 

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

 

| **(In Thousands, Except**                      | ** ** | **2007**   | ** ** | **2006** | ** ** | **2005**   | ** ** |
|------------------------------------------------|------------|------------|------------|----------|------------|------------|------------|
| **Percentage Amounts)**                        | ** ** | **Amount** | ** ** | **Rate** | ** ** | **Amount** | ** ** | **Rate** | ** ** | **Amount** | ** ** | **Rate** | ** ** |
| Federal tax at statutory rate                  |       | $          | 16,969     |     | 35.0       | %          | $          | 13,691 |   | 35.0 | % | $ | 11,698 |   | 35.0 | % |
| State income taxes, net of federal tax benefit |       | 2,786      |       | 5.7      | %          | 2,248      |       | 5.7 | % | 1,920 |   | 5.7 | % |
| Other                                          |       | (478       | )          | (.9      | )%         | (44        | )          | (.1 | )% | (47 | ) | (.1 | )% |
|                                           |       | $          | 19,277     |     | 39.8       | %          | $          | 15,895 |   | 40.6 | % | $ | 13,571 |   | 40.6 | % |

##### ** **

TheCompany adopted FIN 48, “Accounting for Uncertainty in Income Taxes - anInterpretation of FASB Statement No. 109,” on the first day of its 2007fiscal year.  The implementation of FIN48 did not result in a material adjustment to the Company’s liability

 

66

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forunrecognized income tax benefits.  At thetime of adoption and as of December 29, 2007, the Company hadapproximately $40,000 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 2008 fiscalyear.  The following table reconciles theamount recorded for unrecognized tax benefits for the year ended December 29,2007:

 

| **(In Thousands)**                                 | ** ** | ** ** | ** ** |
|----------------------------------------------------|------------|------------|------------|
|                                               |       |       |       |
| Unrecognized tax benefits — beginning of year |       | $          | 40         |   |
| Decrease due to lapse of statute of limitations    |       | (17        | )          |
| Unrecognized tax  benefits — end of year      |       | $          | 23         |   |

 

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.  No interest or penalties were recognizedduring 2007.  As of December 29,2007, the Company had approximately $84,000 and $0 accrued for interest andpenalties, respectively.  The interestaccrual is net of the applicable federal and state tax savings which wouldresult 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 2004 and 2003, 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, utilites, 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.

 

67

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Assets Under CapitalLeases:  Assets under capital leases arecapitalized using interest rates appropriate at the inception of eachlease.  Contingent rentals associatedwith capital leases in 2007, 2006 and 2005were $231,000, $242,000 and $193,000,respectively, and accordingly have been charged to expense as incurred.  Following is an analysis of assets undercapital leases:

 

| ** **                | ** ** | **December 29,** | ** ** | **December 30,** | ** ** |
|---------------------------|------------|-----------------------|------------|-----------------------|------------|
| **(In Thousands)**        | ** ** | **2007**              | ** ** | **2006**              | ** ** |
|                      |       |                  |       |                  |       |
| Buildings:                |       |                  |       |                  |       |
| Cost                      |       | $                     | 0          |                  | $          | 2,200 |   |
| Accumulated  amortization |       | (0                    | )          | (2,119                | )          |
|                      |       | $                     | 0          |                  | $          | 81 |   |

 

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 atDecember 29, 2007 are as follows:

 

| ** **         | ** ** | ** **      | ** ** | **Deduct**   | ** ** | **Net**         | ** ** |
|--------------------|------------|-----------------|------------|--------------|------------|-----------------|------------|
| ** **         | ** ** | ** **      | ** ** | **Sublease** | ** ** | **Rental**      | ** ** |
| **(In Thousands)** | ** ** | **Commitments** | ** ** | **Rentals**  | ** ** | **Commitments** | ** ** |
|               |       |            |       |         |       |            |       |
| 2008               |       | $               | 10,442     |         | $          | 653             |       | $ | 9,789 |   |
| 2009               |       | 9,978           |       | 656          |       | 9,322           |       |
| 2010               |       | 9,695           |       | 638          |       | 9,057           |       |
| 2011               |       | 9,210           |       | 662          |       | 8,548           |       |
| 2012               |       | 9,178           |       | 498          |       | 8,680           |       |
| Thereafter         |       | 89,424          |       | 32           |       | 89,392          |       |
|               |       | $               | 137,927    |         | $          | 3,139           |       | $ | 134,788 |   |

 

Rent expense underoperating leases was as follows:

 

| **(In Thousands)** | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** |
|--------------------|------------|----------|------------|----------|------------|----------|------------|
| Minimum rent       |       | $        | 10,900     |     | $          | 10,600   |       | $ | 10,468 |   |
| Contingent rent    |       | 1,122    |       | 907      |       | 1,108    |       |
|               |       | 12,022   |       | 11,507   |       | 11,576   |       |
| Sublease rentals   |       | (1,963   | )          | (1,824   | )          | (1,674   | )          |
|               |       | $        | 10,059     |     | $          | 9,683    |       | $ | 9,902 |   |

 

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 Contingent Liabilities

 

The Company has anemployment agreement with a key executive officer and shareholder whichcurrently expires on January 1, 2010. In addition to a base salary, the agreement provides for a bonus basedon pre-tax earnings.  No maximumcompensation limit exists.

 

68

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Total salary and bonusexpensed in 2007, 2006 and 2005 wasapproximately $2,385,000, $2,034,000 and $1,804,000,respectively.  The unpaid bonus at yearend is recorded under accounts payable, trade on the Consolidated BalanceSheets.  The officer is entitled tomonthly payments during his lifetime beginning with the termination of hisemployment for any reason other than his breach of the employment agreement ortermination for cause.  The Company hasaccrued its obligation under the terms of the employment agreement as discussedin Note 1.

 

TheCompany is primarily self-insured for losses related to general and autoliability claims and, prior to July 1, 2006, for workers’ compensation aswell.  The Company purchased a fullyinsured guaranteed cost workers’ compensation insurance policy for lossesoccurring after June 30, 2006. This policy replaced the high deductible program for workers’compensation and is currently effective through June 30, 2008.  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 December 29, 2007and December 30, 2006 was approximately $7,107,000 and $8,247,000,respectively, and is recorded under other current liabilities and otherliabilities on the Consolidated Balance Sheets.

 

As of December 29, 2007,management had authorized expenditures on incomplete projects for theconstruction and purchase of property, plant and equipment which totaledapproximately $3,867,000.

 

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 the date hereof, 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.

 

69

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17.               Selected Quarterly Financial Data (Unaudited)

 

(In Thousands,Except Per Share Data)

 
| ** **  | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Diluted**       | ** ** |
|-------------|------------|------------|------------|------------|------------|------------|------------|-------------------|------------|
| ** **  | ** ** | ** ** | ** ** | **Gross**  | ** ** | **Net**    | ** ** | **Net Income**    | ** ** |
| **Quarter** | ** ** | **Sales**  | ** ** | **Profit** | ** ** | **Income** | ** ** | **Per Share (1)** | ** ** |
| 2006        |       |       |       |       |       |       |       |              |       |
|        |       |       |       |       |       |       |       |              |       |   |   |   |   |
| First       |       | $          | 118,053    |       | $          | 45,701     |       | $                 | 5,223      |   | $ | 1.59 |   |
| Second      |       | 119,114    |       | 46,197     |       | 4,658      |       | 1.44              |       |
| Third       |       | 118,141    |       | 45,322     |       | 5,780      |       | 1.79              |       |
| Fourth      |       | 127,429    |       | 49,116     |       | 7,563      |       | 2.34              |       |
|        |       |       |       |       |       |       |       |              |       |
| 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              |       |

----

(1)       Earnings per share is calculated usingthe weighted average outstanding shares for the quarter.

 

70

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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.                                    |

 

71

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| **Exhibit** |   |                                                                                                                                                                                                                                                                                                                                                                                               |
|-------------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|        |   |                                                                                                                                                                                                                                                                                                                                                                                               |
| 10.2*       |   | Amendment to Employment  Agreement dated April 27, 1994, by and between Arden Group, Inc.,  Arden-Mayfair, Inc., AMG Holdings, Inc. and Gelson’s Markets and  Bernard Briskin, filed as Exhibit 10.7 to the Quarterly Report on Form  10-Q of Arden Group, Inc. for the quarter ended April 2, 1994 and  incorporated herein by reference.                 |
|        |   |                                                                                                                                                                                                                                                                                                                                                                                               |
| 10.3        |   | Form of  Indemnification Agreement between the Registrant and the Directors and  certain officers, filed as Exhibit 10.13 to the Annual Report on  Form 10-K of Arden Group, Inc. for the fiscal year ended  December 29, 1990 and incorporated herein by reference.                                                                                                      |
|        |   |                                                                                                                                                                                                                                                                                                                                                                                               |
| 10.4*       |   | Second Amendment to  Employment Agreement as of January 1, 1997, by and between Arden  Group, Inc., Arden-Mayfair, Inc., AMG Holdings, Inc. and  Gelson’s Markets and Bernard Briskin, filed as Exhibit 10.9 to the  Annual Report on Form 10-K of Arden Group, Inc. for the fiscal year  ended January 3, 1998 and incorporated herein by reference. |
|        |   |                                                                                                                                                                                                                                                                                                                                                                                               |
| 10.5*       |   | Phantom Stock Plan of  Arden Group, Inc., filed as Exhibit 10.11 to the Annual Report on  Form 10-K of Arden Group, Inc. for the fiscal year ended  January 2, 1999 and incorporated herein by reference.                                                                                                                                                                 |
|        |   |                                                                                                                                                                                                                                                                                                                                                                                               |
| 10.6*       |   | 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.                                                                                                                                      |
|        |   |                                                                                                                                                                                                                                                                                                                                                                                               |
| 10.7*       |   | 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.                                                                                                                                                                  |
|        |   |                                                                                                                                                                                                                                                                                                                                                                                               |
| 10.8*       |   | 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.                               |
|        |   |                                                                                                                                                                                                                                                                                                                                                                                               |
| 10.9*       |   | 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.                                                                                                       |
|        |   |                                                                                                                                                                                                                                                                                                                                                                                               |
| 10.10*      |   | 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.                                                                                                                                                                                              |

 

72

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| **Exhibit** |   |                                                                                                       |
|-------------|--------|------------------------------------------------------------------------------------------------------------|
|        |   |                                                                                                       |
| 21.         |   | Subsidiaries of  Registrant.                                                                               |
|        |   |                                                                                                       |
| 23.1        |   | Consent of Independent  Registered Public Accounting Firm.                                                 |
|        |   |                                                                                                       |
| 23.2        |   | Consent of Independent  Registered Public Accounting Firm.                                                 |
|        |   |                                                                                                       |
| 31.1        |   | Certification  of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley  Act of 2002. |
|        |   |                                                                                                       |
| 31.2        |   | Certification  of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley  Act of 2002. |
|        |   |                                                                                                       |
| 32.1        |   | Certification  of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley  Act of 2002. |
|        |   |                                                                                                       |
| 32.2        |   | Certification  of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley  Act of 2002. |
|        |   |                                                                                                       |

----

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

 

73

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