**UNITED STATES SECURITIES AND EXCHANGE COMMISSION**

**Washington, D. C. 20549**

 

**FORM 10-K**

 
| **(Mark One)** |
|----------------|
| **ý**     | **ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE  SECURITIES  EXCHANGE ACT OF 1934** |
|           |   |
|           | **For the fiscal year  ended January 3, 2004** |
|           |   |
| **OR**         |
|           |   |
| **o**          | **TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF  THE SECURITIES  EXCHANGE ACT OF 1934** |
|           |   |
|           | **For the transition period from                            to                         ** |

 

**Commission file number  0-9904**

 

| **ARDEN  GROUP, INC.**                                  |
|---------------------------------------------------------|
| (Exact name of registrant as specified in  its charter) |

 

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

 

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

 

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

 

| **Title of each class** |   | **Name of each exchange on which registered** |
|-------------------------|--------|-----------------------------------------------|
| None                    |   | None                                          |

 

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

 

| **Class A Common Stock** |
|--------------------------|
| (Title of class)         |

 

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

 

Indicate by a check mark if disclosure of delinquent filers pursuant toItem 405 of Regulation S-K is not contained herein, and will not be contained,to the best of registrant’s knowledge, in definitive proxy or informationstatements incorporated by reference in Part III of this Form 10-K or anyamendment to this Form 10-K.  o

 

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

 

The aggregate market value of the voting and non-voting common equityheld by non-affiliates of the registrant based on the price at which the ClassA Common Stock last sold on June 27, 2003, the last business day of theregistrants most recently completed second fiscal quarter was $71,202,402.

 

The number of shares outstanding of the registrant’s classes of commonstock as of March 5, 2004 was:

 

| 2,017,668 of Class A Common Stock |
|-----------------------------------|
| 1,363,584 of Class B Common Stock |

 

 

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**TABLE OF CONTENTS**

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

 

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**PARTI**

 

Item 1.                                                   Business;

 

Item 2.                                                   Properties;and

 

**General**

 

The Registrant, Arden Group, Inc. (the “Company”), is a holding companywith certain real estate holdings which conducts other operations through itswholly-owned subsidiary, Arden-Mayfair, Inc. (“Arden-Mayfair”).  Arden-Mayfair’s wholly-owned subsidiary,Gelson’s Markets (“Gelson’s”), operates supermarkets in Southern California.

 

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

 

**Businessand Properties**

 

**Market Operations**

 

Gelson’s currently operates 18 supermarkets in Southern California; 17under the name “Gelson’s” and one under the name “Mayfair.”  Gelson’s and Mayfair are self-servicecash-and-carry markets which offer a broad selection of local and nationalbrands as well as a limited number of private label items.  Gelson’s targets the consumer who valuessuperior customer service, merchandise presentation, selection and qualityproducts.

 

**Store Formats andBusiness Strategy**

 

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

 

Merchandise The merchandise offerings in the markets 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 all of the traditional grocerycategories such as dry groceries, produce, meat, seafood, bakery, dairy, wineand liquor, floral, sushi, vitamins, health and natural food products, healthand beauty aids and a selection of organic products.  Gelson’s perishables are premium products, which are rigorouslymaintained and culled as appropriate to assure quality and freshness.  Gelson’s merchandising emphasizes specialtyitems such as imported foods and unusual delicatessen items, and items found inservice departments such as seafood, sit-down coffee areas, bakeries andservice deli.  The one

 

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remaining Mayfair store offers a merchandise selection equal in qualityto a Gelson’s but generally less broad.

 

Service Gelson’s emphasizes customer service by offering a variety of servicedepartments including seafood, delicatessen, floral, sushi and bakerydepartments.  All sushi and most bakerydepartments are operated by third parties. Some Gelson’s stores include additional service departments such asmeat, fresh pizza, coffee bars and carving carts offering cooked turkey andother meats.  Additionally, selectedstores offer 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 usually personnel assigned to baggingand carrying out purchases.  Allemployees are encouraged to know customers by name and assist them wheneverpossible.  All stores offer a Companycredit card to qualified customers as well as allowing customers the option ofpaying for their purchases with cash, checks or credit and debit cards.  Stores are typically open 14 to 17 hours perday, with hours of operation determined by local code or lease provisions, oras appropriate for the business characteristics of a specific area.

 

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 Store Development  Management regularly evaluates thefeasibility of opening new stores in and outside its existing trade area andremodeling existing stores in order to maximize the existing stores’ appeal toconsumers and their profit potential. In 2003 capital expenditures totaled $5,752,000 including certain costsrelated to the remodel and conversion of the Silverlake/Los Feliz Mayfairlocation to the Gelson’s name and format during the first quarter of 2003.

 

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

 

**Competition**

 

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

 

2

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Certain competitors of the Company offer home delivery, in-store banksand pharmacies as an addition to their existing retail store operations.  The Company continues to monitor andevaluate opportunities for home delivery, but has elected not to do so at thistime.  Only a few of the Company’sstores offer in-store banks and pharmacies; most of the Company’s stores arenot large enough for such additional facilities.

 

**Seasonality**

 

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

 

**Support and OtherServices**

 

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

 

The bulk of all merchandise purchasing takes place at Gelson’s officein Encino, California.  Approximately43% of the purchases are distributed through the central warehouse; theremainder are delivered directly to the stores from manufacturers orwholesalers.  The central purchasing anddistribution operations are conducted based on electronic in-store orderingsystems.  Stores place and receiveorders for merchandise up to six days per week, with perishables ordered morefrequently than other goods.

 

The largest supplier for the stores is Unified Western Grocers, Inc.(formerly Certified Grocers), a cooperative wholesaler which has been asupplier to the Company for approximately twenty-nine years and which accountedfor approximately 21% of Gelson’s purchases in 2003.  No other supplier accounts for a material percentage of Gelson’spurchases.  The Company believes thatthere would be a negative impact if the Company were to lose Unified WesternGrocers, Inc. as a supplier for Gelson’s, but that such impact would likely bemitigated by a combination of events, which could include:  (i) purchasing certain items for directstore delivery, thereby freeing warehouse capacity to allow other items to bepurchased through the warehouse and (ii) purchasing certain products throughother wholesalers.  However, such a losscould have a short-term adverse effect on the performance of Gelson’s.

 

**Employees**

 

Gelson’s had approximately 1,205 full-time and 1,682 part-time store,warehouse and office employees at January 3, 2004.  The number of part-time employees increasedfrom 1,149 at the end of the prior year primarily as a result of additionalsales during a labor dispute involving other supermarkets in the Company’strade area.  Most Gelson’s employees arecovered by union collective bargaining agreements that establish workingconditions, benefits, hours, rates of pay and procedures for the orderlysettlement of disputes.  In general,these agreements have been negotiated on an area-wide and industry-wide basis.

 

3

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On October 5, 2003, the union contract covering most of theCompany’s Gelson’s employees expired. Prior to the contract expiration, the Company had agreed with the unionto continue operating under contract extensions and to be bound by allmodifications or by new contract, as applicable, regarding trust funds andhourly wage rates as negotiated between the union and three major groceryretailers.  On February 28, 2004,employees of the three major retailers ratified a new union laborcontract.  The new contract providesfor, among other things, a new two-tier employment structure, elimination ofhealth care maintenance of benefits provided for under the prior agreement andbonus payments in lieu of wage increases. In a vote held on March 24-25, 2004, employees of the Company who aremembers of the United Food and Commercial Workers (“UFCW”) ratified a new laborcontract on terms similar to those reached by the three major groceryretailers.  The new labor contractexpires in March 2007.

 

In addition to employees at Gelson’s, Arden-Mayfair had approximately65 full-time employees at its executive and headquarters offices atJanuary 3, 2004, some of whom are covered by a collective bargainingagreement.

 

**Properties**

 

The Company currently owns two of its freestanding supermarketproperties and a shopping center in which a Gelson’s Market is located.  The shopping center owned by the Company,located in Calabasas, California, consists of approximately 58,000 leasablesquare feet, approximately 18,000 square feet of which is leased to multipletenants and approximately 40,000 square feet of which is leased to Gelson’sMarkets.  Fifteen******supermarkets and the warehouse anddistribution facilities which service the markets are leased from thirdparties.  Gelson’s corporate offices inEncino, California are also leased. Generally, supermarkets are leased for terms of 20 years initially andmay include options for up to an additional 20 years under leases whichgenerally stipulate a minimum rental against a percentage of gross sales.  The average term remaining on thesupermarket leases, including renewal options, is approximately 18 years.  The 18 markets range in size fromapproximately 18,000 to 40,000 square feet. Gelson’s warehouse, distribution and truck service facilities in theCity of Commerce, California are leased and contain approximately 102,000square feet.  The term of the leaseexpires in November 2017 including renewal options.

 

The Company owns its 30,000 square foot corporate headquarters officebuilding in Compton, California.  TheCompany also owns or leases several parcels adjacent to, or near, three of itsstores which are used for additional parking. In addition, AMG Holdings, Inc. (“AMG Holdings”), a wholly-ownedsubsidiary of Arden-Mayfair, leases a 64,000 square foot building in LosAngeles consisting of office and warehouse space, which is entirely subleaseduntil the lease on the property expires in 2012.

 

**GovernmentalRegulation**

 

Gelson’s is subject to regulation by a variety of governmentalagencies, including the U.S. Food and Drug Administration, the CaliforniaDepartment of Alcoholic Beverage Control, and state and local health departments.  The Company believes that Gelson’s andMayfair store operations

 

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comply with federal, state and local health, environmental and otherlaws and regulations.  Although theCompany cannot predict the effect of future laws or regulations on itsoperations, expenditures for continued compliance with current laws are notexpected to have a material adverse effect on Gelson’s competitive position orthe Company’s consolidated financial position, results of operations or cashflows.

 

Item 3.                                                   LegalProceedings

 

The Company and certain of its subsidiaries are involved in a number ofpending legal and/or administrative proceedings.  Such proceedings are not expected individually or in theaggregate to have a material adverse impact upon either the Company’sconsolidated financial position, results of operations or cash flows.  See Note 16 of Notes to ConsolidatedFinancial Statements.

 

Item 4.                                                   Submissionof Matters to a Vote of Security Holders

 

There was no matter submitted during the fourth quarter of fiscal year2003 to a vote of the security holders of the Registrant.

 

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**PARTII**

** **

Item 5.                                                   Marketfor the Registrant’s Common Equity and Related Stockholder Matters

 

(a)                                  The Company’s Class ACommon Stock (“Class A”) is traded over-the-counter in the NASDAQ NationalMarket System.  During the past twoyears, the range of high and low sales prices (not including markups, markdownsor commissions) for each quarterly period was, according to NASDAQ, thefollowing:

 

|        |   | **2003** |   | **2002** |   |
|-------------|--------|----------|--------|----------|--------|
|        |   | **High** |   | **Low**  |   | **High** |   | **Low** |   |
|        |   |     |   |     |   |   |   |   |   |
| 1st Quarter |   | 61.86    |   | 50.95    |   | 69.95 |   | 57.00 |   |
| 2nd Quarter |   | 62.00    |   | 53.22    |   | 67.50 |   | 52.00 |   |
| 3rd Quarter |   | 64.75    |   | 57.15    |   | 63.49 |   | 51.51 |   |
| 4th Quarter |   | 80.98    |   | 61.25    |   | 61.75 |   | 51.20 |   |

 

There is no established public trading market for the Company’s Class BCommon Stock (“Class B”), which is subject to various restrictions ontransfer.  Class B is convertible intoClass A on a share-for-share basis, at the option of the holder or upon theoccurrence of certain events.

 

(b)                                 As of January 3,2004, there were 1,110 holders of record of the Company’s Class A, withaggregate holdings of 2,017,668 shares of Class A.  This does not include 1,357,200******shares of the Company’s Class A owned by AMGHoldings, a wholly owned second-tier subsidiary of the Company.  As of the same date, there were 9 holders ofrecord of the Company’s Class B, with aggregate holdings of 1,363,584 shares ofClass B.

 

(c)                                  In August 2003,the Company established a regular quarterly dividend of 25 cents per share ofClass A and 22.5 cents per share of Class B. No dividends were paid on either Class A or Class B during any periodpresented prior to August 2003. Cash or property dividends on Class B are restricted to an amount equalto 90% of any dividend paid on Class A. The Company anticipates payment of comparable quarterly dividends infuture quarters.

 

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Item 6.                                                   SelectedFinancial Data 

 

**ARDENGROUP, INC. AND CONSOLIDATED SUBSIDIARIES**

 

(In Thousands, Except Share and Per Share Data)

 
|                                        |   | **2003**  |    | **2002**  |   | **2001**  |   | **2000**  |    | **1999**  |   |
|---------------------------------------------|--------|-----------|---------|-----------|--------|-----------|--------|-----------|---------|-----------|--------|
|                                        |   |      |    |      |   |      |   |      |    |      |   |
| Operations For The Year:                    |   |      |    |      |   |      |   |      |    |      |   |
|                                        |   |      |    |      |   |      |   |      |    |      |   |
| Sales                                       |   | $         | 489,710 |      | $      | 401,378   |   | $         | 391,880 |      | $      | 359,994 |   | $ | 324,168 |   |
| Gross profit                                |   | 213,329   |    | 174,462   |   | 165,578   |   | 149,110   |    | 131,722   |   |
| Operating income                            |   | 25,458    |    | 21,644    |   | 19,377    |   | 19,205    |    | 16,397    |   |
| Other income (expense), net                 |   | 2,446     |    | 1,644     |   | 1,926     |   | 1,019     |    | 1,009     |   |
| Income tax provision                        |   | 11,323    |    | 9,356     |   | 8,432     |   | 8,240     |    | 5,946     |   |
|                                        |   |      |    |      |   |      |   |      |    |      |   |
| Net income                                  |   | $         | 16,851  |      | $      | 13,932    |   | $         | 12,871  |      | $      | 11,984 |   | $ | 11,460 |   |
|                                        |   |      |    |      |   |      |   |      |    |      |   |
| Net income per share - basic                |   | $         | 4.91    |      | $      | 4.15      |   | $         | 3.80    |      | $      | 3.41 |   | $ | 3.20 |   |
| Net income per share - diluted              |   | $         | 4.90    |      | $      | 4.14      |   | $         | 3.79    |      | $      | 3.41 |   | $ | 3.20 |   |
|                                        |   |      |    |      |   |      |   |      |    |      |   |
| Financial Position At Year-End:             |   |      |    |      |   |      |   |      |    |      |   |
|                                        |   |      |    |      |   |      |   |      |    |      |   |
| Total assets                                |   | $         | 186,972 |      | $      | 138,971   |   | $         | 122,834 |      | $      | 118,279 |   | $ | 111,337 |   |
| Working capital                             |   | 70,147    |    | 48,892    |   | 27,975    |   | 27,504    |    | 24,735    |   |
| Long-term debt                              |   | 2,038     |    | 2,283     |   | 3,134     |   | 6,735     |    | 8,322     |   |
| Stockholders’ equity                   |   | 115,000   |    | 99,027    |   | 83,389    |   | 75,953    |    | 68,337    |   |
| Capital expenditures                        |   | 5,752     |    | 4,023     |   | 10,066    |   | 9,882     |    | 19,630    |   |
|                                        |   |      |    |      |   |      |   |      |    |      |   |
| Other Statistics:                           |   |      |    |      |   |      |   |      |    |      |   |
|                                        |   |      |    |      |   |      |   |      |    |      |   |
| Depreciation and amortization               |   | $         | 8,126   |      | $      | 8,139     |   | $         | 7,872   |      | $      | 6,719 |   | $ | 5,824 |   |
| Dividends declared per common share         |   | $         | .50     |      |   |      |   |      |    |      |   |   |   |   |   |   |
| Basic weighted average shares outstanding   |   | 3,379,443 |    | 3,355,020 |   | 3,389,234 |   | 3,513,028 |    | 3,585,472 |   |
| Diluted weighted average shares outstanding |   | 3,380,524 |    | 3,365,961 |   | 3,398,671 |   | 3,515,117 |    | 3,585,472 |   |

 

*All years are 52weeks except 2003 which is 53 weeks.*

 

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

 

The Private Securities Litigation Reform Act of 1995 provides a safeharbor for forward-looking statements made by or on behalf of the Company.  Certain statements contained in Management’sDiscussion and Analysis, in other parts of this report and in other Companyfilings are forward-looking statements. These statements discuss, among other things, future sales growth,operating results and financial condition. Forward-looking statements reflect the Company’s current plans andexpectations regarding important risk factors and are based on informationcurrently available to us.

 

The Company cautions readers that any forward-looking statementscontained in this report or made by the management of the Company involve risksand uncertainties, and are subject to change based on various importantfactors.  The following factors, amongothers, 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:

 

•                  the strength ofthe U.S. economy, in particular, the economic conditions in SouthernCalifornia;

•                  the effects ofand changes in fiscal policies and laws, as well as, changes in accountingpolicies and practices;

•                  inflation ordeflation;

•                  potentialbusiness disruptions from acts of terrorism or national emergencies;

•                  the impact offluctuations in the Company’s stock price on compensation expense;

•                  the ability ofvendors, including Unified Western Grocers, Inc., to continue providingproducts and services in a timely manner;

•                  consolidationsin the supermarket industry and competition from other supermarkets and foodretailers, some of which are non-union;

•                  the ability torenew current leases at favorable rates;

•                  the ability ofthe Company to materially increase sales at its Pasadena store;

•                  implementationof a major construction project at the Century City Shopping Center and theeffect of such project when implemented on the Gelson’s store located in thecenter;

•                  the amount offuture premium increases incurred by the Company in order to maintain currentlevels of insurance coverage;

•                  the financialimpact of the Company’s termination of its guaranteed cost workers’compensation policy and the resulting change to self-insurance with stop-losscoverage for workers’ compensation claims;

•                  the impact ofthe Company’s workers’ compensation safety records and claims experience andany changes to the insurance industry’s rating process and premium schedules onworkers’ compensation stop-loss coverage;

•                  the adequacy ofself-insurance reserves for reported claims and incurred but not reportedclaims;

•                  the impact ofuninsured losses;

•                  the term of newlabor contracts;

•                  the impact ofany violation of environmental laws, regulations or lease provisions;

•                  the retirementof existing senior management;

 

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•                  the term of anyfuture suspension and subsequent reinstatement of multi-employer union pensioncontributions, the number of hours worked by the applicable union employees,the required rate of contribution and the future rate of return received by theunion pension plans on their investments;

•                  changes in theCompany’s health care costs;

•                  any changes inassumptions or market conditions that could affect management’s estimate offuture cash flows when evaluating assets for impairment.

 

**Results of Operations**

 

**2003 Compared to 2002**

 

The results of operations for the 53 weeks ended January 3, 2004compared to the 52 weeks ended December 28, 2002 reflects the pervasiveimpact of a labor dispute in the Company’s trade area that commencedOctober 11, 2003 and concluded February 29, 2004.  The collective bargaining agreement coveringthe majority of the Company’s employees, as well as other participatingemployers in Southern California, expired on October 5, 2003.  On October 11, 2003, the UFCW declareda strike against Vons and in turn, Albertsons and Ralphs locked out their UFCWemployees.  On February 29, 2004,the UFCW announced that employees of these three major grocery retailersratified a new contract thereby ending the labor dispute.  Prior to the labor dispute the Company hadagreed with the UFCW to continue operating under a contract extension and toagree to be bound by all modifications regarding trust funds and hourly wagerates as negotiated between the UFCW and the three major groceryretailers.  In return, the UFCW agreed notto strike the Company.  Gelson’s remainedopen; its employees elected not to strike the Company.

 

In a vote held on March 24-25, 2004, employees of the Company who aremembers of the UFCW ratified a new labor contract on terms similar to thosereached by the three major grocery retailers. The new labor contract expires in March 2007.

 

The labor dispute resulted in a temporary shift in consumer shoppingpatterns as many customers of the three major grocery retailers chose to shopat other grocery retailers.  This shiftin consumer shopping patterns resulted in a significant increase in theCompany’s sales and operating income during the fourth quarter of 2003 andfirst quarter of 2004.  The Companyanticipates that with the February 2004 contract settlement most formercustomers of the three major grocery retailers will in time return to theirprevious shopping patterns but that the Company’s post-strike sales will besomewhat greater than comparable pre-strike levels as a result of the retentionof some of the new shoppers that came to Gelson’s during the labordispute.  The Company also expects thatcosts under the new labor contract will be somewhat less than during thecomparable pre-strike levels.

 

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Income before income taxes in 2003 increased 19.8% to $27,904,000compared to $23,288,000 during 2002 reflecting the benefit of higher fourthquarter sales attributable primarily to the labor dispute in the Company’strade area and an additional week in the 2003 fiscal year. Operating income increased17.6% to $25,458,000 in 2003 compared to $21,644,000 in 2002.

 

Sales from the Company’s 18 supermarkets (all of which are located inSouthern California) were $489,710,000 in 2003.  This represents an increase of 22.0% over 2002, when sales were$401,378,000.  The sales increase isprimarily attributable to the labor dispute in the Company’s trade area and theadditional week included in the 2003 fiscal year.

 

Under generally accepted accounting principles, the Company reviews thecarrying values of its property, plant and equipment to evaluate whether any ofthose assets are impaired.  Based onsuch review, the Company recorded a $4,311,000 impairment on long-lived assetsrelated to its Pasadena store that opened in September 2001. Theimpairment charge, a component of delivery, selling, general and administrativeexpenses, reduces the carrying value of the impaired assets to currentestimated fair value.  Although sales atthe Pasadena store temporarily increased during the labor dispute discussedabove, they have continually been below management’s expectations since thestore’s opening, and expectations are that sales will not materially increasefrom pre-strike levels.  In the Springof 2005, the Company has the right, under certain circumstances, to terminatethe Pasadena lease which, if exercised, would result in an additional write-offof fixed assets as well as certain other costs.

 

The Company’s gross profit as a percent of sales was at 43.6% in 2003compared to 43.5% in 2002.  Overall, thegross profit percentage remains consistent with the prior year.

 

Delivery, selling, general and administrative (“DSG&A”) expense asa percent of sales was 38.4% in 2003 compared to 38.1% in 2002.  During the labor dispute, the Companyachieved significant economies of scale from incremental sales.  These economies were offset by the$4,311,000 Pasadena impairment charge, $5,797,000 in health care contributionsarising from the labor dispute and higher contributions to our multi-employerunion health care and pension plans in 2003. The Company recognized union health care expense of $21,019,000 in 2003,which includes the $5,797,000 noted above, compared to $11,927,000 in2002.  Union pension expense in 2003 ran$4,787,000 in 2003 compared to $3,086,000 in 2002.

 

The new collective bargaining agreement ratified by employees of Vons,Ralphs and Albertsons eliminates the health care maintenance of benefitsobligation included in the prior agreement. The same agreement was ratified by Gelson’s employees.  The expired agreement provided that ifhealth care maintenance of benefits is eliminated in a successor collectivebargaining agreement, employers are required to contribute an amount sufficientto restore the total cash reserves to an amount equal to the unpaid health careclaims liability.  The labor disputeresulted in a depletion of funds in the multi-employer health and welfare trustfund.  The Company has been assessed$5,797,000 to pay union health care claims and restore trust fund reserves tothe required levels.  This $5,797,000has been reflected as a charge to income in the fourth quarter of 2003 and isincluded as a component of the $21,019,000 union health care expense for 2003presented above. 

 

The Company contributes to several multi-employer union pensionplans.  Contributions to the unionpension plan covering the majority of the Company’s employees have beenperiodically suspended and reinstated in recent years.  Pension plan contributions were suspendedfor two

 

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months in 2003 and six months in 2002. Pension payments are dependent upon straight-time hours worked and therequired rate of contribution.

 

In June 2003, in an effort to control the substantially increasingworkers’ compensation costs, the Company terminated its guaranteed costworkers’ compensation insurance policy and purchased a high deductible workers’compensation policy.  The Company hasstop-loss coverage to limit its loss exposure on a per claim basis.  No assurance can be given that this changewill result in a reduction in workers’ compensation expense or limit futureincreases.  The Company devotessubstantial time and commitment to maintaining a safe work environment.  The ultimate cost of workers’ compensationis highly dependent upon legal and legislative trends, the inflation rates ofhealth care costs and the Company’s ability to manage claims.  Self-insurance accruals for losses up to thepurchased stop-loss coverage are based on reported claims and an estimate ofclaims incurred but not reported.  TheCompany is also primarily self-insured for losses related to general and autoliability claims for up to $250,000 per claim. Accruals are based on reported claims and an estimate of claims incurredbut not reported.  While the ultimateamount of claims incurred is dependent on future developments, in management’sopinion, recorded reserves are adequate to cover the future payment of claims.

 

The Company also carries property, business interruption, fiduciary,directors and officers, crime, earthquake, special event and employee practicesliability insurance.  Managementbelieves, based on recent and past experience, that current insurance coveragemeets the reasonable requirements of the Company.

 

Stock-based compensation, under the stock appreciation rights (“SARs”)program, is subject to variable accounting in accordance with FinancialAccounting Standards Board (“FASB”) Interpretation No. 28, “Accounting forStock Appreciation Rights and Other Variable Stock Option or Award Plans.”  Changes in the market price of the Company’sClass A Common Stock impacts the compensation charge related to SARs.  Assuming the Company’s stock price remainsat the January 2, 2004 closing price of $76.65, the Company anticipates2004 SARs compensation expense of approximately $157,000 on an after tax basisrelated to the additional vesting of SARs. For the fiscal year ended January 3, 2004, SARs compensationexpense was $740,000 compared to $481,000 in fiscal 2002.  Each dollar increase or decrease in theCompany’s stock price will result in approximately $18,000 after taxcompensation expense or expense reduction to the extent compensation expensewas previously recognized, respectively. The above estimates are based on the number of outstanding SARs as ofJanuary 2, 2004.  The exercise ofthese SARs or the grant of additional SARs could cause the estimates tovary.  On January 20, 2004, theCompany granted SARs covering 10,000 shares to each of the five non-employeemembers of the Board of Directors at a base price of $77.50 per share, the fairmarket value of the Class A Common Stock on that date.

 

During 2003, the Company procured approximately 21% of its productthrough Unified Western Grocers, Inc. (“Unified”), a grocery cooperative.  As a member-patron, the Company is requiredto provide Unified with certain minimum deposits and credit in order topurchase product from the cooperative. As of January 3, 2004, the Company had approximately $2,223,000 ondeposit with Unified.  The minimum depositrequirement is satisfied through a combination of cash,

 

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credit and ownership of equity shares in Unified.  In Fiscal 2003, the Company recorded$169,000 in patronage dividends income received in the form of equity shares inUnified.

 

Interest and dividend income was $1,768,000 in 2003 compared to$1,867,000 for 2002 primarily due to lower**interest rates in 2003 offset in part byhigher levels of investments.

 

Interest expense decreased to $272,000 in 2003 from $321,000 in 2002primarily due to the termination of a capital lease obligation inJune 2002.

 

Other income includes gains realized on investments of $950,000 and$98,000 in 2003 and 2002, respectively.

 

Unrealized gains on investments were $114,000 (net of income taxexpense of $78,000) in 2003 compared to unrealized gains of $885,000 (net ofincome tax expense of $608,000) in 2002.

 

The effective income tax rate was 40.6% in 2003 compared to 40.2% in2002.

 

A major road improvement project is underconstruction along Santa Monica Boulevard in West Los Angeles, California,which is estimated to last approximately two more years.  At some times during the constructionschedule, construction will occur directly in front of, or very close to, theCentury City Shopping Center, where Gelson’s has its Century City store.  It can be expected that the sales of theCentury City store will be negatively impacted during the period when theconstruction is at or near the Century City Shopping Center, but that access tothe shopping center is expected to be improved once the roadway project hasbeen completed.  In addition, thelandlord of the Century City Shopping Center has discussed with Gelson’s thelandlord’s plans for a major construction project which would result in therelocation of the movie theaters, food court and other tenants to newlyconstructed areas immediately adjacent to the Gelson’s store.  Those plans also include the expansion ofthe Gelson’s store.  The preliminaryphase of that construction began in March 2004.  The Company does not know how long this project will take.  The project plans are still beingdeveloped.  The Company expects that thesales of the Century City store will be negatively affected during thisconstruction.  Although the Company alsoexpects that the parking for Gelson’s customers would be adversely affected byrelocating the theaters, food court and other tenants to the immediate vicinityof the Gelson’s store, it also anticipates that the relocation will increase foottraffic in the vicinity of the store and that the expanded store withadditional facilities and services and the increased foot traffic will increasethe number of customers.

 

During 2003, the Company repurchased and retired 4,942 shares of ClassA Common Stock for an aggregate purchase price of approximately $296,000.

 

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**2002 Compared to 2001**

 

Income before income taxes in 2002 increased 9.3% to $23,288,000compared to $21,303,000 during 2001. Operating income increased 11.7% to$21,644,000 in 2002 compared to $19,377,000 in 2001.

 

Sales from the Company’s 18 supermarkets (all of which are located inSouthern California) were $401,378,000 in 2002.  This represented an increase of 2.4% over 2001, when sales were$391,880,000.  The majority of the salesincrease was attributable to the opening of the Pasadena store inSeptember 2001.  Same store salesincreased 1.0% in 2002 compared to the prior year.

 

In September 2001, the Company opened a Gelson’s Market in amulti-use center in Pasadena, California which has performed significantlybelow management’s expectations.  Sincesales at the Pasadena store had not materially increased and are not expectedto materially increase from pre-strike levels, the Company determined duringthe fourth quarter of 2003 that its fixed assets at that store had becomeimpaired (see MD&A 2003 Compared to 2002). The Company has the right, under certain circumstances, to terminate itslease in the Spring of 2005 which would result in a significant write-off offixed assets and other costs.

 

The Company’s gross profit as a percent of sales was at 43.5% in 2002compared to 42.3% in 2001.  Productpricing decisions, increased buying allowances and, to a limited extent, lowersupply costs contributed to the increase in margins.

 

DSG&A expense as a percent of sales was 38.1% in 2002 compared to37.3% in 2001.  Effective May 2002, theCompany’s contributions to a multi-employer union pension plan were reinstatedfor a period of six months.  Asdescribed below, payments to the union pension plan had been suspended sincelate 1999.  The additional cost relatedto the contribution reinstatement was approximately $1,638,000 in 2002.  DSG&A expense as a percent of sales alsoincreased in 2002 due in part to the inclusion of the Pasadena store for a fullfiscal year.  In addition, an increasein workers’ compensation premiums and union health care costs contributed tothe rise in DSG&A expense. Compensation expense relating to SARs decreased from $1,223,000 in 2001to $481,000 in 2002.****

 

The Company contributes to several multi-employer union pensionplans.  Contributions to the unionpension plan, covering a majority of the Company’s employees, were suspended in1999.  In May 2002, the Southern CaliforniaUnited Food & Commercial Workers Unions and the Food Employers Joint TrustFunds (the “Trust”) reinstated, for six months, the contribution requirementfor all companies with employees belonging to these unions.  Contributions to the multi-employer unionpension fund were suspended by the Trust for hours worked during the four-monthperiod beginning November 2002 and ending February 2003 andreinstated for hours worked commencing March 2003.  During the six month reinstatement period infiscal 2002, the Company incurred average incremental monthly expense ofapproximately $273,000.  The actualpension payment is dependent upon straight-time hours worked and the requiredrate of contribution.

 

Stock-based compensation is subject to variable accounting inaccordance with FASB Interpretation No. 28, “Accounting for Stock AppreciationRights and Other Variable Stock Option or Award Plans.”  As a result, changes in the market price ofthe Company’s Class A

 

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Common Stock impacts the compensation charge related to SARs.  Based on the number of outstanding SARs asof December 28, 2002, each dollar increase or decrease in the Company’sstock price results in approximately $23,000 after tax compensation expense orexpense reduction to the extent compensation expense was previously recognized,respectively.

 

The Company purchased guaranteed cost workers’ compensation insurancefrom October 1995 through mid-June 2003.  In June 2003, the Company terminated its guaranteed costinsurance and purchased a high deductible workers’ compensation policy (seeMD&A 2003 Compared to 2002). Effective October 2002, the annual premium for workers’compensation increased $1,900,000 over the prior year due primarily to the expirationof a low premium policy and to industry-wide price increases.  Earlier in 2002, California passedlegislation effective January 2003, aimed at reforming the workers’compensation insurance system in the state. The Company is unable to predict how this legislation will impact theinsurance industry’s rating process and, ultimately, the long-term effect onfuture premiums.  The Company devotessubstantial time and commitment to maintaining a safe work environment andcontinues to review opportunities to contain workers’ compensation insurancecosts.

 

The Company is primarily self-insured for losses related to general andauto liability claims for up to $250,000 per claim.  Accruals are based on reported claims and an estimate of claimsincurred but not reported.  TheCompany’s liability reserve for unpaid and incurred but not reported claims atDecember 28, 2002 was approximately $1,057,000.  While the ultimate amount of claims incurred are dependent onfuture developments, in management’s opinion, recorded reserves are adequate tocover the future payment of claims.

 

The Company also carries property, business interruption, fiduciary,directors and officers, crime, earthquake, special event and employee practicesliability insurance.  Management believes,based on recent and past experience, that current insurance coverage isadequate to meet the requirements of the Company.

 

During 2002, the Company procured approximately 22% of its productthrough Unified Western Grocers, Inc. (“Unified”), a grocery cooperative.  As a member-patron, the Company is requiredto provide Unified with certain minimum deposits and credit in order topurchase product from the cooperative. As of December 28, 2002, the Company had approximately $1,418,000on deposit with Unified.  The minimumdeposit requirement is satisfied through a combination of cash, credit andownership of equity shares in Unified. In September 2002, Unified’s Board of Directors authorized aquasi-reorganization that eliminated its accumulated deficit in retainedearnings and restated assets and liabilities to their fair values.  Unified’s Board of Directors adopted anequity enhancement plan for its 2002 fiscal year.  Under the equity enhancement plan, member-patrons receivedfive-year low interest bearing subordinated patronage dividend certificates inlieu of amounts previously paid in cash and Class B shares.  In 2002, the Company earned approximately$149,000 in subordinated patronage dividend certificates.  The Company has elected to not recognize the2002 patronage dividend as income until the certificates are redeemed.

 

Interest and dividend income was $1,867,000 in 2002 compared to$2,166,000 for 2001 primarily due to lower**interest rates in 2002.

 

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Interest expense decreased to $321,000 in 2002 from $596,000 in 2001primarily due to the prepayment of fixture financing debt in October 2001.

 

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

 

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

 

A major road improvement project hascommenced along Santa Monica Boulevard in West Los Angeles, California, whichis estimated to last approximately three years.  At some times during the construction schedule, construction willoccur directly in front of, or very close to, the Century City Shopping Center,where Gelson’s has its Century City store. It can be expected that the sales of the Century City store will benegatively impacted during the period when the construction is at or near theCentury City Shopping Center, but that access to the shopping center isexpected to be improved once the roadway project has been completed.  In addition, the landlord of the CenturyCity Shopping Center has discussed with Gelson’s the landlord’s plans for amajor construction project which would result in the relocation of the movie theatersand other tenants to newly constructed areas immediately adjacent to theGelson’s store.  Those plans alsoinclude the expansion of the Gelson’s store. The preliminary phase of that construction began in March 2004.  The Company does not know how long thisproject will take.  The project plansare still being developed.  The Companyexpects that the sales of the Century City store will be negatively affectedduring this construction.  Although theCompany also expects that the parking for Gelson’s customers would be adverselyaffected by relocating the theaters and other tenants to the immediate vicinityof the Gelson’s store, it also anticipates that the relocation will increasefoot traffic in the vicinity of the store and that the expanded store withadditional facilities and services and the increased foot traffic will increasethe number of customers.

 

During 2001, the Company repurchased and retired 109,927 shares ofClass A Common Stock for an aggregate purchase price of approximately $4,783,000.  All shares were repurchased in privatetransactions with sellers not affiliated with the Company.  In addition, 1,000 and 4,400 shares of ClassB Common Stock were exchanged for Class A Common Stock shares during 2002 and2001, respectively.

 

**Liquidity and CapitalResources**

 

The Company has an ongoing program to remodel existing supermarkets andto add new stores.  During thefifty-three weeks ended January 3, 2004 (“Fiscal 2003”), total capitalexpenditures were $5,752,000.  As ofJanuary 3, 2004, authorized expenditures on incomplete projects for thepurchase of property, plant and equipment totaled approximately$3,242,000.  Of this total,approximately $2,383,000 has been contractually committed.

 

The Company is subject to a myriad ofenvironmental laws, regulations and lease covenants with its landlordsregarding air, water and land use, products for sale, and the use, storage anddisposal of hazardous materials. The Company believes it substantiallycomplies, and has in the past substantially complied, with federal, state andlocal environmental laws and regulations and

 

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private covenants.  The Company cannot, at this time, estimate the expense itultimately may incur in connection with any current or future violations;however, it believes any such claims will not have a material adverse impact oneither the Company’s consolidated financial position, results of operations orcash flows.

 

The Company’s current cash position including investments, the lines ofcredit and net cash provided by operating activities are the primary sources offunds available to meet the Company’s capital expenditures and liquidityrequirements. See Note 8 of Notes to Consolidated Financial Statements for adescription of the Company’s credit lines.

 

The Company’s working capital was $70,147,000 at January 3, 2004compared to $48,892,000 at December 28, 2002.

 

During Fiscal 2003, the Company generated approximately $52,550,000cash from operating activities.  Currentliabilities at the end of Fiscal 2003 increased $29,441,000 over the prioryear.  Cash flows from operatingactivities resulted primarily from net income plus non-cash expenses andchanges in working capital.

 

Net cash used in investing activities was $10,661,000 for Fiscal2003.  Investing activities primarilyreflects capital expenditures on retail stores and purchases of investments.

 

Net cash used in financing activities was $453,000 for Fiscal2003.  Financing activities include thepurchase and retirement of Company stock, cash dividend payments, principalpayments on capital lease obligations and proceeds from the exercise of stockoptions.

 

The Company’s total liabilities to equity ratio increased to .63 atJanuary 3, 2004 from .40 at December 28, 2002 reflecting the impactof higher current liabilities with increased sales and the Company’s obligationto pay $5,797,000 in additional union health care contributions arising fromthe labor dispute.  The Company’s currentratio was 2.15 at January 3, 2004 compared to 2.56 at December 28,2002.

 

The Company’s cash position, including investments, at the end of 2003was $105,441,000 compared to $57,727,000 at the end of 2002.  Current liabilities at the end of Fiscal2003 increased $29,441,000 over the prior year.  Cash not required for the immediate needs of the Company has beentemporarily invested in commercial paper, marketable securities and a limitedpartnership that invests primarily in publicly traded, high yield bonds.  All temporary investments are highly liquidexcept for the limited partnership investment of approximately $2,500,000 whichallows for withdrawals on a quarterly basis. See Notes 1 and 2 of Notes to Consolidated Financial Statements.  The Company is continually investigatingopportunities for the use of these funds including new locations and theexpansion and remodeling of its supermarket operations.

 

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The following table sets forth the Company’s contractual cashobligations and commercial commitments as of January 3, 2004.

 
|                                                                          |   | **Contractual  Cash Obligations (In Thousands)** |    |
|-------------------------------------------------------------------------------|--------|--------------------------------------------------|---------|
|                                                                          |   | **Total**                                        |    | **Less Than  1 Year** |   | **1-3 Years** |   | **4-5 Years** |   | **After  5 Years** |   |
|                                                                          |   |                                             |    |   |   |   |   |   |   |   |   |
| 7% Subordinated Income Debentures Due  September 2014 Including Interest |   | $                                                | 2,174   |   | $ | 86 |   | $ | 172 |   | $ | 172 |   | $ | 1,744 |   |
|                                                                          |   |                                             |    |   |   |   |   |   |   |   |   |
| Capital Lease Obligations Including  Interest                                 |   | 1,288                                            |    | 347 |   | 695 |   | 246 |   |   |   |
|                                                                          |   |                                             |    |   |   |   |   |   |   |   |   |
| Operating Leases                                                              |   | 101,674                                          |    | 7,704 |   | 14,872 |   | 13,562 |   | 65,536 |   |
|                                                                          |   |                                             |    |   |   |   |   |   |   |   |   |
| Total Contractual Cash Obligations                                            |   | $                                                | 105,136 |   | $ | 8,137 |   | $ | 15,739 |   | $ | 13,980 |   | $ | 67,280 |   |

 
|                          |   | **Other  Commercial Commitments (In Thousands)** | ** ** |
|-------------------------------|--------|--------------------------------------------------|------------|
|                          |   | **Total**                                        |       | **Less Than  1 Year** | ** ** | **1-3 Years** | ** ** | **4-5 Years** | ** ** | **After  5 Years** | ** ** |
|                          |   |                                             |       |   |   |   |   |   |   |   |   |
| Standby Letters of Credit (1) |   | $                                                | 4,494      |   | $ | 4,494 |   |   |   |   |   |   |   |
|                               |        |                                                  |            |  |  |  |  |  |  |  |  |  |  |

 

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(1)          The standby letters of credit are maintainedpursuant to the Company’s insurance programs.

 

In April 2003, the Company announced a stock repurchase program,authorized by the Board of Directors, to purchase from time to time up to100,000 shares of its Class A Common Stock in the open market or in privatetransactions.  The timing, volume andprice of purchases are at the discretion of the management of the Company.  During 2003, the Company purchased andretired 4,942 shares of its Class A Common Stock for an aggregate purchaseprice of approximately $296,000.

 

Critical Accounting Policies

 

The preparation of financial statements in conformity with generallyaccepted accounting principles (“GAAP”) requires management to make estimatesand assumptions about future events that may affect the reported amounts ofassets, liabilities, revenues and expenses, as well as the disclosure ofcontingent assets and liabilities. Management has established accounting policies that they believe areappropriate in order to reflect the accurate reporting of the Company’soperating results, financial position and cash flows.  The Company applies these accounting policies in a consistentmanner.  Management bases theirestimates on historical experience, current and expected economic conditionsand various other 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 that the following accounting policies are the mostcritical in the preparation of the Company’s financial statements because theyinvolve the most difficult, subjective or complex judgments about the effect ofmatters that are inherently uncertain.

 

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*Investments*

 

Investments are accounted for under the provisions of Statement ofFinancial Accounting Standards No. (“SFAS”) 115, “Accounting for Certain Investmentsin Debt and Equity Securities.” Management determines the appropriate classification of its investmentsin marketable securities at the time of purchase and reevaluates suchdetermination at each balance sheet date. Debt securities for which the Company does not have the intent orability to hold to maturity and equity securities are classified asavailable-for-sale investments and any unrealized gains and losses are includedas a separate component of stockholders’ equity.

 

*Inventories*

 

Supermarket nonperishable inventories are stated at the lower of costor 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”) method or market.

 

The Company estimates inventory adjustments based on historicalexperience derived from periodic physical inventories.  Allowances for inventory adjustments arerecorded based on these estimates to properly reflect inventory at the balancesheet date.

 

*Impairment ofLong-Lived Assets*

 

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

 

*Workers’ Compensation and General and Auto Liability Insurance*

 

The Company is primarily self-insured for losses related to workers’compensation and general and auto liability claims.  The Company purchases stop-loss coverage to limit its lossexposure on a per claim basis.  Accrualsare based on reported claims and an estimate of claims incurred but notreported.  While the ultimate amount ofclaims incurred are dependent on future developments, in management’s opinionrecorded reserves are adequate to cover the future payment of claims.

 

*Revenue Recognition*

 

The Company recognizes revenue at the time of sale.  Discounts given to customers are recorded atthe point of sale as a reduction of revenues. The Company maintains a bad debt allowance for receivables from vendorsand Gelson’s credit card sales. Valuation reserves are adjusted periodically based on historicalrecovery rates.

 

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*Merchandise Costs*

 

Vendor rebates, credits and promotional allowances that relate to theCompany’s buying and merchandising activities, including lump-sum paymentsassociated with long-term contracts, are recorded as a component of merchandisecosts as they are earned in accordance with the underlying agreement.

 

*Stock Options and Stock Appreciation Rights*

 

The Company accounts for its Stock Option Plan using the intrinsicvalue based method prescribed in Accounting Principles Board Opinion No.(“APB”) 25, “Accounting for Stock Issued to Employees.”  Accordingly, no**compensation cost has beenrecognized in the Company’s Statements of Operations and Comprehensive Incomefor fiscal years 2003, 2002 or 2001. SFAS 123, “Accounting for Stock-Based Compensation,” (as amended by SFAS148, “Accounting for Stock-Based Compensation-Transition and Disclosure”) encouragesadoption of a fair value based method for valuing the cost of stock-basedcompensation.  However, it allowscompanies to use the intrinsic value based method prescribed by APB 25 anddisclose pro forma net earnings and earnings per share in accordance with SFAS123.

 

Stock-based compensation under the stock appreciation rights program issubject to variable accounting in accordance with FASB Interpretation No. 28,“Accounting for Stock Appreciation Rights and Other Variable Stock Option orAward Plans.”  As a result, changes inthe market price of the Company’s Class A Common Stock impacts compensationexpense.

 

**RecentAccounting Standards**

 

In April 2003, the FASB issued SFAS 149, “Amendment of Statement133 on Derivative Instruments and Hedging Activities.”  SFAS 149 amends and clarifies financialaccounting and reporting for derivative instruments, including certainderivative instruments embedded in other contracts and for hedging activitiesunder SFAS 133, “Accounting for Derivative Instruments and HedgingActivities.”  This statement iseffective for contracts entered into or modified after June 30, 2003.  The adoption of this standard did not haveany impact on the Company’s consolidated financial statements as the Companyhas not entered into hedging or derivative contracts.

 

Effective the first quarter of 2003, the Company adopted EmergingIssues Task Force Issue No. (“EITF”) 02-16, “Accounting by a Customer(including a Reseller) for Certain Consideration

 

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Received from a Vendor.”  EITF02-16 addresses how a retailer should account for vendor credits and cashconsideration received from a vendor. Adoption of the provisions of EITF 02-16 did not have a significantimpact on the Company’s consolidated financial statements.

 

In November 2003, the Emerging Issues Task Force reached aconsensus on EITF 03-10, “Application of EITF 02-16 by Resellers to SalesIncentives Offered to Consumers by Manufacturers.”  EITF 03-10 addresses the accounting for manufacturer salesincentives offered directly to consumers, including manufacturer coupons.  EITF 03-10 is effective for the firstinterim period beginning after November 25, 2003.  Adoption of the provisions of EITF 03-10will not have an impact on the Company’s consolidated financial statements.

 

Item 7A.                                         Quantitativeand Qualitative Disclosures about Market Risks

 

The Company currently has no bank debt or fixture financing.  If the Company should obtain financing ordraw on its existing lines of credit, which bear interest at the bank’sreference rate or the bank’s adjusted LIBOR rate plus an index up to 1.2%, theCompany could then be exposed to market risk related to interest fluctuations.

 

A change in market prices exposes the Company to market risk related toits investments which totaled $33,844,000 as of January 3, 2004.  A hypothetical 10% drop in the market valueof these investments would result in a $3,384,000 unrealized loss and acorresponding decrease in the fair value of these instruments.  This hypothetical drop would not affect cashflow and would not have an impact on earnings until the Company sold theinvestments.

 

Item 8.                                                   FinancialStatements and Supplementary Data

 

See Index to Consolidated FinancialStatements.

 

Item 9.                                                   Changesin and Disagreements with Accountants on Accounting and Financial Disclosure

 

As previously reported in June 2002, PricewaterhouseCoopers LLPreplaced Arthur Andersen LLP as the Company’s certifying accountant.

 

Item 9A.                                         Controlsand Procedures

 

An evaluation was carried out by the Company’s Chief Executive Officerand Chief Financial Officer of the effectiveness of the Company’s disclosurecontrols and procedures (as defined in Rule 13a-15(e) or 15d-15(e) under theSecurities Exchange Act of 1934) as of January 3, 2004.  Based upon that evaluation, the ChiefExecutive Officer and Chief Financial Officer concluded that these disclosurecontrols and procedures were effective. During the fiscal quarter ended January 3, 2004, there have been nochanges in the Company’s internal control over financial reporting that havematerially affected or are reasonably likely to materially affect the Company’sinternal control over financial reporting.

 

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**PARTIII**

** **

Item 10.                                             Directorsand Executive Officers of the Registrant

 

Identification and Information Concerning Directors

 

Below is set forth certain information about each of the Company’sdirectors as of March 1, 2004. Certain of this information has been supplied by the persons shown.  Messrs. Robert A. Davidow and Kenneth A.Goldman were elected by the holders of Class A Common Stock.  Messrs. Bernard Briskin, John G. Danhakl,Steven Romick and Ben Winters were elected by the holders of Class B CommonStock.

 
| **Name**           |   | **Age** |   | **Principal Occupation (1)  and Other Directorships**                                                                                                                                                                                                                                                                                                                                                                                                                                       |   | **Director  Since (2)** |   | **Term  Expires** |
|--------------------|--------|---------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------|--------|-------------------|
| Bernard Briskin    |   | 79      |   | Chairman of the Board of Directors, President and Chief Executive  Officer of the Company and Arden-Mayfair, Inc., a subsidiary of the Company,  and Chairman of the Board, President, Chief Executive Officer and Chief  Operating Officer of AMG Holdings, Inc. and Chairman of the Board and Chief  Executive Officer of Gelson’s Markets, both subsidiaries of Arden-Mayfair,  Inc.                                                                                                |   | 1970                    |   | 2004              |
|               |   |    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |   |                    |   |              |
| John G. Danhakl    |   | 47      |   | Partner, Leonard Green & Partners since March 1995. Managing  Director of Donaldson Lufkin Jenrette Securities Corporation from  March 1990 to February 1995. Director of Big 5 Sporting Goods  Corporation, Diamond Triumph Auto Glass, Inc., Liberty Group Publishing,  Inc., Leslie’s Poolmart, Inc., AsianMedia Group LLC, MEMC Electronic  Materials, Inc., VCA Antech, Inc., Petco Animal Supplies, Inc., Phoenix  Scientific, Inc. and Rite Aid Corporation. |   | 1995                    |   | 2004              |
|               |   |    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |   |                    |   |              |
| Robert A. Davidow  |   | 61      |   | Director of WHX Corporation; private investor.                                                                                                                                                                                                                                                                                                                                                                                                                                              |   | 1993                    |   | 2005              |
|               |   |    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |   |                    |   |              |
| Kenneth A. Goldman |   | 61      |   | Attorney with Reed Smith LLP since January 2003, Attorney and  Director with Crosby, Heafey, Roach & May, A Professional Corporation  from September 2000 - December 2002. For more than five years prior  thereto, Attorney and Principal of Sanders, Barnet, Goldman, Simons &  Mosk, A Professional Corporation.                                                                                                                                                  |   | 2001                    |   | 2004              |
|               |   |    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |   |                    |   |              |
| Steven Romick      |   | 40      |   | Investment Advisor, Senior Vice President of First Pacific Advisors,  Inc.                                                                                                                                                                                                                                                                                                                                                                                                                  |   | 2003                    |   | 2006              |
|               |   |    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |   |                    |   |              |
| Ben Winters        |   | 83      |   | Business Consultant.                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |   | 1978                    |   | 2006              |

 

----

(1)                                  Unless otherwiseindicated, principal occupation or occupations shown have been such for aperiod of at least five years in the aggregate.

 

(2)                                  Date shown for termof service indicates commencement of service as a director of the Company orArden-Mayfair.

 

21

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Identification of Executive Officers

 

Below is set forth certain information about each of the executiveofficers of the Company as of March 1, 2004:

 
| **Name**        |   | **Age** |   | **Position(s)**                                                                                                                                                                                                                                                                                                       |
|-----------------|--------|---------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|            |   |    |   |                                                                                                                                                                                                                                                                                                                  |
| Bernard Briskin |   | 79      |   | Chairman of the Board of Directors, President and Chief Executive  Officer of the Company and Arden-Mayfair, Inc., and Chairman of the Board,  President, Chief Executive Officer and Chief Operating Officer of AMG  Holdings, Inc. and Chairman of the Board and Chief Executive Officer of  Gelson’s Markets. |
|            |   |    |   |                                                                                                                                                                                                                                                                                                                  |
| David M. Oliver |   | 46      |   | Chief Financial Officer of the Company and Arden-Mayfair, Inc., Chief  Financial Officer and Secretary of AMG Holdings, Inc. and Gelson’s Markets.                                                                                                                                                               |

 

Mr. Briskin served as Chairman of the Executive Committee of the Boardof Directors of Arden-Mayfair until August 1978, when he was electedPresident and Chief Executive Officer of Arden-Mayfair.  In November 1978, Mr. Briskin waselected President and Chief Executive Officer of the Company, and inJune 1994 he was elected Chairman of the Board of the Company.  Mr. Briskin serves as Chairman of the Board,President and Chief Executive Officer of the Company and Arden-Mayfair, andChairman of the Board, President, Chief Executive Officer and Chief OperatingOfficer of AMG Holdings and Chairman of the Board and Chief Executive Officerof Gelson’s, pursuant to an employment agreement which expires onJanuary 1, 2006, although the term will be automatically extended forsuccessive one year periods unless certain termination notices are given byeither Mr. Briskin or the employers fifteen to eighteen months prior to thethen expiration date.  See “Item11.  Executive Compensation.”

 

Mr. Oliver was elected Chief Financial Officer of the Company inNovember 1999.  Mr. Oliver alsoserves as Chief Financial Officer of Arden-Mayfair, and Chief Financial Officerand Secretary of AMG Holdings and Gelson’s. From August 1998 until he joined the Company, he worked as anindependent consultant.  FromJuly 1997 to July 1998, Mr. Oliver served as Senior Vice President,Chief Financial Officer of Hughes Family Markets.  He served as Vice President, Controller of The Vons Companies,Inc. from July 1994 to April 1997 and as Assistant Controller fromAugust 1988 to June 1994.  Mr.Oliver was employed by Arthur Andersen & Co. as a Certified PublicAccountant in the audit department from June 1979 to May 1988.  Mr. Oliver has resigned his position withthe Company effective April 3, 2004 to pursue another opportunity and asearch has been undertaken for his replacement.

 

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

 

22

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# **Audit Committee andFinancial Expert**

 

The Board of Directors has an Audit Committee comprised of threeoutside directors.  During 2003, thefollowing individuals served as members of the Audit Committee:

 

Ben Winters, Chairman

Robert A. Davidow

Steven Romick (committee member sinceApril 9, 2003)

Daniel Lembark (deceased February 3,2003)

 

The Company’s Board of Directors has determined that at least oneperson serving on the Audit Committee is an “audit committee financial expert”as defined under Item 401(h) of Regulation S-K.  Ben Winters, the Chairman of the Audit Committee, is an “auditcommittee financial expert” and is independent as defined under applicable SECand NASDAQ rules.

 

Code of Ethics and Business Conduct

 

The Company has adopted a Code of Ethics and Business Conductapplicable to all officers, management and employees.  The Code of Ethics and Business Conduct includes a SupplementaryCode of Ethics for Financial Professionals which is applicable to the chiefexecutive officer, chief financial officer, principal accounting officer orcontroller, or individuals performing similar functions.  A copy of the Code of Ethics and BusinessConduct may be obtained, without charge, upon written request to the AssistantSecretary, Arden Group, Inc., P.O. Box 512256, Los Angeles, California90051-0256.

 

Section 16(a) Beneficial Ownership Reporting Compliance

 

Section 16(a) of the Securities Exchange Act of 1934 requires thatdirectors and executive officers of the Company, as well as persons holdingmore than ten percent (10%) of a registered class of the Company’s equitysecurities, file with the Securities and Exchange Commission initial reports ofthe ownership and reports of changes of ownership of Class A Common Stock andother equity securities of the Company. Based solely on review of copies of such reports furnished to theCompany and written representations that no other reports were required to befiled during the fiscal year ended January 3, 2004, all Section 16(a)filing requirements applicable to the Company’s executive officers, directorsand greater than ten percent (10%) beneficial owners were complied with, exceptthat Steven Romick inadvertently was late in filing the required Form 3 within10 days of his election as a director.

 

23

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Item 11.                                             ExecutiveCompensation

 

General

 

The following table sets forth the total annual and long-termcompensation paid or accrued by the Company and its subsidiaries in connectionwith all businesses of the Company and its subsidiaries to or for the accountof the Chief Executive Officer of the Company and each other executive officerof the Company whose total annual salary and bonus for the fiscal year endedJanuary 3, 2004 exceeded $100,000 in the aggregate.

 
|                              |       |           |   |          |   |    |   | **Long Term  Compensation**                         |   |                                      |   |
|-----------------------------------|------------|----------------|--------|---------------|--------|---------|--------|-----------------------------------------------------|--------|-------------------------------------------|--------|
|                              |       |           |   | **Awards**    |   |    |   |
| **Name and  Principal  Position** |       |           |   |          |   |    |   | **Securities-  Underlying  Options/  SARs  (#)(1)** |   | **All Other  Compen-  sation  ($)(2)(3)** |   |
| **Annual  Compensation**          |
| **Year**                          | ** ** | **Salary ($)** |   | **Bonus ($)** |
|                              |       |           |   |          |   |    |   |                                                |   |                                      |   |
| Bernard Briskin,                  |       | 2003           |   | 573,239       |   | 991,334 |   |                                                |   | 19,184                                    |   |
| Chief Executive                   |       | 2002           |   | 556,003       |   | 823,390 |   |                                                |   | 70,600                                    |   |
| Officer                           |       | 2001           |   | 542,442       |   | 751,970 |   |                                                |   | 13,600                                    |   |
|                              |       |           |   |          |   |    |   |                                                |   |                                      |   |
| David M. Oliver                   |       | 2003           |   | 170,940       |   | 25,000  |   |                                                |   | 16,000                                    |   |
| Chief Financial                   |       | 2002           |   | 165,428       |   | 25,000  |   |                                                |   | 16,000                                    |   |
| Officer                           |       | 2001           |   | 160,000       |   | 25,000  |   |                                                |   | 13,600                                    |   |

 

----

(1)                                  The Company did notgrant to Mr. Briskin or Mr. Oliver any restricted stock or stock options andmade no payout to them on any long-term incentive plan in fiscal years 2003,2002 or 2001.  The Company granted unitsof SARs covering 2,500 shares of Class A Common Stock under the Phantom StockOption Plan to Mr. Oliver in 2000.  Noother SARs were granted to Mr. Briskin or Mr. Oliver in 2003, 2002 or 2001.

 

(2)                                  Includes theCompany’s contributions to the Arden Group, Inc. 401(k) Retirement SavingsPlan.  In 2003, Mr. Briskin and Mr.Oliver were each allocated $16,000 to their 401(k) accounts.

 

(3)                                  Perquisitesand other personal benefits did not exceed the lesser of $50,000 or 10% of thecompensation received by Mr. Briskin in 2003 and 2001 or by Mr. Oliver in anyof the years for which compensation information is reported.  In accordance with his employment agreement,Mr. Briskin received approximately $50,000 in medical reimbursements in2002.  Other compensation also includes$3,184 and $4,600 for use of a Company-owned automobile by Mr. Briskin in 2003and 2002.

 

StockAppreciation Rights

 

The Company has granted SARscovering shares of the Company’s Class A Common Stock to non-employee directorsand certain officers and employees of the Company.  Each SAR entitles the holder to receive upon exercise thereof theexcess of the fair market value of a share of Class A Common Stock 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 year and expire five years from the date of grant.

 

24

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No SARs were granted toexecutive officers during the 2003 fiscal year.  The following table provides information on the exercise of SARsby the named executive officer in Fiscal 2003 and the number of that officer’sSARs that were unexercised at January 3, 2004:

 

**Aggregated SAR Exercises in Last Fiscal Yearand FiscalYear-End Unexercised SARs**

 
|             |   |                                  |   |                    |   | **Number of  Securities  Underlying Unexercised  SARs at  Fiscal Year-End (#)** |   | **Value of  Unexercised  In-the-Money  SARs at  Fiscal Year-End ($)** |   |
|------------------|--------|---------------------------------------|--------|-------------------------|--------|---------------------------------------------------------------------------------|--------|-----------------------------------------------------------------------|--------|
| **Name**         |   | **Shares  Acquired  on Exercise (#)** |   | **Value  Realized ($)** |   | **Exercisable/  Unexercisable**                                                 |   | **Exercisable/  Unexercisable**                                       |   |
|             |   |                                  |   |                    |   |                                                                            |   |                                                                  |   |
| David M.  Oliver |   | 625                                   |   | 27,148                  |   | 0/625                                                                           |   | 0/29,742                                                              |   |

 

EmploymentAgreement

 

The compensation of Mr.Briskin, the Chief Executive Officer of the Company, is established under anEmployment Agreement, as amended (“the Employment Agreement”) which expires onJanuary 1, 2006.  The EmploymentAgreement provides that, upon the expiration of the initial term onJanuary 1, 2004, the term thereof is automatically extended for successiveperiods of one fiscal year unless either the employers or Mr. Briskin givesnotice of termination not less than 15 months and no more than 18 months priorto the date upon which the term of the Employment Agreement will expire.  Pursuant to the terms of the EmploymentAgreement, Mr. Briskin’s base salary increases on January 1 of each yearbased upon increases in the Consumer Price Index subject to a maximum annualincrease of 4%.  His annual bonus isequal to 2-1/2% of the Company’s first $2,000,000 of Pre-Tax Profits (asdefined in the Employment Agreement) plus 3-1/2% of Pre-Tax Profits in excessof $2,000,000.  The Employment Agreementprovides for an annual medical expense reimbursement up to $200,000 for Mr.Briskin and his immediate family, as well as annual retirement compensationequal to twenty-five percent of Mr. Briskin’s average base salary and bonusearned in the last three fiscal years prior to his retirement and continuationof health insurance benefits and automobile allowance.  The Employment Agreement provides that itsterms are subject to review during the 2002 fiscal year by the CompensationCommittee of the Board of Directors. Pursuant to this provision, discussions took place between Mr. Briskinand the Committee concerning amendments to certain provisions of the EmploymentAgreement, but no amendments have yet been effected.

 

Remunerationof Directors

 

Non-employee directors arecompensated for their services as directors at an annual rate of $22,800, plus$1,000 for each Board meeting attended and $1,000 for attendance at eachcommittee meeting.  Non-employeedirectors who serve as committee chairmen are entitled to an additional $4,200per year.  In 2003, Mr. Romick waselected a director and was granted SARs covering 10,000 shares of the Company’sClass A Common Stock, with a base price of $54.25 per share, representing thefair market value on the

 

25

----

 

date of the grant.  When the SARs are exercised, each unitentitles the holder to receive the excess of the fair market value of a shareof Class A Common Stock on the date of exercise over the base price.  Units vest 25% each year beginning at theend of the first year and expire five years from the date of grant.  Mr. Briskin is an employee of the Companyand does not receive the compensation otherwise payable to directors.

 

On January 20, 2004 theCompany issued SARs covering 10,000 shares of the Company’s Class A CommonStock to each of the Company’s then non-employee directors, with a base priceof $77.50 per share, representing the fair market value on the date of grant.

 

Compensation Committee Interlocks and Insider Participation

 

The Board of Directors has a Compensation Committee.  In 2003, the Compensation Committee wascomprised of the following directors, none of whom are or have been officers ofthe Company:

 

John G. Danhakl, Chairman

Robert A. Davidow

Ben Winters (committee member since April 9, 2003)

Daniel Lembark (deceased February 3, 2003)

 

Item 12.                                           SecurityOwnership of Certain Beneficial Owners and Management and Related StockholderMatters

 

Security Ownership of Certain Beneficial Owners

 

The following table sets forth information asof March 1, 2004 relating to the stockholdings of persons known to theCompany to be the beneficial owner of more than 5% of any class of theCompany’s voting securities: 

 
| **Name and Address of  Beneficial Owner**                                                                                                    |   | **Common  Stock Class** |     | **Amount and  Nature of  Beneficial  Ownership (1)** |     | **Percent of  Class** |     | **Percent of  Total Vote** |     |
|----------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------|----------|------------------------------------------------------|----------|-----------------------|----------|----------------------------|----------|
|                                                                                                                                         |   |                    |     |                                                 |     |                  |     |                       |     |
| City National Bank, as Trustee of the Company’s Stock Bonus Plan and  Trust  1950 Avenue of the Stars, 2nd Floor  Los Angeles, CA 90067 |   | Class A                 |     | 214,513                                              |     | 10.6                  | %        | 1.4                        | %        |
|                                                                                                                                         |   |                    |     |                                                 |     |                  |     |                       |     |
| Bernard Briskin  Arden Group, Inc.  9595 Wilshire Blvd., Suite 411  Beverly Hills, CA 90212                                                  |   | Class A                 |     | 594,759                                              | (2)(4)   | 29.5                  | %        | 3.8                        | %        |
|                                                                                                                                         |   |                    | * * |                                                 | * * |                  | * * |                       | * * |
| Royce & Associates, LLC  1414 Avenue of the Americas  New York, NY 10019                                                                 |   | Class A                 |     | 180,018                                              | (3)      | 8.9                   | %        | 1.2                        | %        |
|                                                                                                                                         |   |                    |     |                                                 |     |                  |     |                       |     |
| Bernard Briskin                                                                                                                              |   | Class B                 |     | 1,362,496                                            | (4)      | 99.9                  | %        | 87.0                       | %        |

 

26

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----

(1)                                  Unless otherwiseindicated to the contrary, all beneficial owners have sole investment andvoting power.  For purposes of thistable, 1,357,200 treasury shares of Company Class A Common Stock are not deemedto be outstanding.

 

(2)                                  Thisamount includes the following shares: (i) 186,096 shares held in trust (of which Mr. Briskin is a trustee) forthe benefit of Mr. Briskin and his children and (ii) 103,012 shares held inIndividual Retirement Accounts for Mr. Briskin’s wife.  Mr. Briskin disclaims any beneficialownership of the shares set forth in clause (ii) hereof.  Mr. Briskin shares voting and investmentpower with respect to the shares referred to in clause (i), and he has novoting or investment power with respect to the shares referred to in clause(ii).  Nothing herein should beconstrued as an admission that Mr. Briskin is in fact the beneficial owner ofany of these shares.

 

(3)                                  Basedupon Schedule 13-G filed on January 27, 2004 with the Securities andExchange Commission.

 

(4)                                  Thisamount excludes 27,250 shares of Class A and 4 shares of Class B held by TheJudy and Bernard Briskin Foundation of which Mr. Briskin serves as aco-trustee.  Mr. Briskin disclaims anybeneficial ownership with respect to these shares.

 

If Mr. Briskin converted all of his Class B Common Stock to Class ACommon Stock (convertible on a share-for-share basis), his and his spouse’sbeneficial ownership of Class A Common Stock would be increased to 1,957,255shares or 57.9% of the total shares outstanding as of March 1, 2004.

 

Security Ownership of Management

 

The following table shows, as ofMarch 1, 2004, the beneficial ownership of the Company’s equity securitiesby each director, executive officer and by all directors and executive officersas a group:

 
| **Name of Beneficial Owner**                                 |   | **Common  Stock Class** |   | **Amount and  Nature of Beneficial Ownership (1)** |     | **Percent of  Class (1)** |   | **Percent of  Total Vote** |   |
|--------------------------------------------------------------|--------|-------------------------|--------|----------------------------------------------------|----------|---------------------------|--------|----------------------------|--------|
|                                                         |   |                    |   |                                               |     |                      |   |                       |   |
| Bernard Briskin                                              |   | Class A  Class B        |   | 594,759   1,362,496                                | (2)  (2) | 29.5  99.9                | %  %   | 3.8  87.0                  | %  %   |
| John G. Danhakl                                              |   | Class A                 |   | 0                                                  |     |                      |   |                       |   |
| Robert A. Davidow                                            |   | Class A                 |   | 0                                                  |     |                      |   |                       |   |
| Kenneth A. Goldman                                           |   | Class A                 |   | 24,440                                             | (3)      | 1.2                       | %      |                       | (4)    |
| David M. Oliver                                              |   | Class A                 |   | 0                                                  |     |                      |   |                       |   |
| Steven Romick                                                |   | Class A                 |   | 0                                                  |     |                      |   |                       |   |
| Ben Winters                                                  |   | Class A                 |   | 500                                                |     |                      | (4)    |                       | (4)    |
|                                                         |   |                    |   |                                               |     |                      |   |                       |   |
| All directors and executive officers  as a group (7 persons) |   | Class A  Class B        |   | 619,699  1,362,496                                 | (2)  (2) | 30.7  99.9                | %  %   | 4.0  87.0                  | %  %   |

 

----

(1)                                  Unless otherwiseindicated to the contrary, all beneficial owners have sole investment and votingpower.  The number of outstanding sharesof Company Class A Common

 

27

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Stock, on which the percentages shown in this table are based, does notinclude 1,357,200 treasury shares of Company Class A Common Stock.

 

(2)                                  Seenotes (2) and (4) to the table under “Security Ownership of Certain BeneficialOwners” set forth above.

 

(3)                                  Held in trust by Mr.Goldman, as trustee, for grandchildren of Mr. and Mrs. Briskin.

 

(4)                                  Does not exceed 1%.

 

Equity Compensation Plan Information

 

The following table providesinformation related to the Company’s equity compensation plans as ofJanuary 3, 2004.

 
|                                                            |   | **(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                 |   | 2,000                                                                                               |   | $   29.06                                                                     |   | 28,500                                                                                                                                                 |   |

 

----

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

 

In 1998, the Company adopted aNon-Officer and Non-Director Stock Option Plan (the “Stock Option Plan”) whichwas not submitted to security holders for approval and initially provided forthe granting of stock options to key employees to purchase up to 35,000 sharesof the Company’s Class A Common Stock. The Stock Option Plan was amended in 2000 to increase the number ofshares available thereunder to an aggregate of 70,000 shares.  The objective of the Stock Option Plan is toattract and retain quality personnel and to promote the success of the Companyby providing employees the opportunity to share in its growth.  These options vest at 25% per year beginningat the end of the first year and expire five years from the date of grant.  The exercise price of stock options grantedunder the Stock Option Plan is equal to the fair market value of the Company’sClass A Common Stock on the date of grant.

 

Item 13.                                           CertainRelationships and Related Transactions

 

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

 

28

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**PART IV**

 

Item 14.                                             PrincipalAccountant Fees and Services

 

# **Audit Fees**

 

Audit fees include theaggregate fees billed for the audit of the Company’s annual consolidatedfinancial statements and the reviews of each of the quarterly consolidatedfinancial statements included in the Company’s Forms 10-Q.  The aggregate audit fees billed to theCompany by PricewaterhouseCoopers were $142,800 for the fiscal year endedJanuary 3, 2004 (“Fiscal 2003”) and $131,250 for the fiscal year endedDecember 28, 2002 (“Fiscal 2002”).

 

In September 2003, theCompany restated its previously issued financial statements for fiscal years2002, 2001 and 2000 to reflect rental expense and income on a straight-linebasis for leases having scheduled fixed rent increases.  The aggregate fees billed to the Company byPricewaterhouseCoopers for audit services rendered related to this restatementaggregated $75,000.

 

# **Audit-Related Fees**

 

Audit-related fees include feesfor professional services rendered in connection with the audit of the Company’semployee benefit plans and consultation relating to internal controls.  PricewaterhouseCoopers billed the Company$29,165 in Fiscal 2003 and $16,800 in Fiscal 2002 for such audit relatedservices.

 

# **Tax Fees**

 

Fees paid toPricewaterhouseCoopers for tax services in Fiscal 2003 aggregated $117,668,including $31,160 for tax return and compliance work, $53,000 for LIFO taxconsulting services and $33,508 for other projects.  Fees paid to PricewaterhouseCoopers for tax services in Fiscal2002 aggregated $37,425, including $24,875 for tax return and compliance work,and $12,550 for other tax services.

 

# **All Other Fees**

# ** **

Other than the fees forservices described above, there were no additional fees billed byPricewaterhouseCoopers in Fiscal 2003 or Fiscal 2002.

 

It is the policy of the AuditCommittee to pre-approve all audit and non-audit services provided byPricewaterhouseCoopers.  The AuditCommittee has reviewed the above-described fees for non-audit services andconsidered whether the provision of those services is compatible withmaintaining the independence of PricewaterhouseCoopers and has concluded thatPricewaterhouseCoopers has maintained its independence.

 

29

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Item 15.                                             Exhibits,Financial Statement Schedules and Reports on Form 8-K

 

(a)                                Exhibits and FinancialStatements and Schedules

 

(1)           Financial Statements

See Index toConsolidated Financial Statements

 

(2)           Financial Statement Schedules - None

 

(3)           Exhibits

See Index toExhibits

 

(b)                               Reports on Form 8-K

On November 11, 2003, the Company filed a Form8-K furnishing under Item 12 a press release announcing the results ofoperations for the quarter ended September 27, 2003

 

(c)                                Exhibits

See Index to Exhibits

 

(d)                               Other FinancialSchedules - None

 

30

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**SIGNATURES**

 

Pursuant to the requirements ofSection 13 or 15(d) of the Securities Exchange Act of 1934, the registranthas duly caused this report to be signed on its behalf by the undersigned,thereunto duly authorized.

 

ARDEN GROUP, INC.

 
|                                                                                                                                                                                                                                                                                                                                   |                                                     | **Date** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|----------------------------------------------------------|----------|
|                                                                                                                                                                                                                                                                                                                                   |                                                     |     |
| By                                                                                                                                                                                                                                                                                                                                     | /s/BERNARD  BRISKIN                                      | 04/02/04 |
|                                                                                                                                                                                                                                                                                                                                   | **Bernard Briskin, Chairman of the Board,**              |     |
|                                                                                                                                                                                                                                                                                                                                   | **President and Chief Executive Officer**                |     |
|                                                                                                                                                                                                                                                                                                                                   |                                                     |     |
| By                                                                                                                                                                                                                                                                                                                                     | /s/DAVID M.  OLIVER                                      | 04/02/04 |
|                                                                                                                                                                                                                                                                                                                                   | David M.  Oliver, Chief Financial Officer                |     |
|                                                                                                                                                                                                                                                                                                                                   | (Principal  Financial and Principal Accounting Officer)  |     |
|                                                                                                                                                                                                                                                                                                                                   |                                                     |     |
|                                                                                                                                                                                                                                                                                                                                   |                                                     |     |
| Pursuant to  the requirements of the Securities Exchange Act of 1934, this report has been  signed below by the following persons on behalf of the registrant and in the  capacities and on the date indicated.   The undersigned have also relied upon the reports of the registrant’s  independent accountants at page 55. |
|                                                                                                                                                                                                                                                                                                                                   |                                                     |     |
|                                                                                                                                                                                                                                                                                                                                   |                                                     | **Date** |
|                                                                                                                                                                                                                                                                                                                                   |                                                     |     |
|                                                                                                                                                                                                                                                                                                                                   | /s/BERNARD  BRISKIN                                      | 04/02/04 |
|                                                                                                                                                                                                                                                                                                                                   | **Bernard Briskin, Director and Chairman of the  Board** |     |
|                                                                                                                                                                                                                                                                                                                                   |                                                     |     |
|                                                                                                                                                                                                                                                                                                                                   | /s/JOHN G.  DANHAKL                                      | 04/02/04 |
|                                                                                                                                                                                                                                                                                                                                   | John G. Danhakl,  Director                               |     |
|                                                                                                                                                                                                                                                                                                                                   |                                                     |     |
|                                                                                                                                                                                                                                                                                                                                   | /s/ROBERT A.  DAVIDOW                                    | 04/02/04 |
|                                                                                                                                                                                                                                                                                                                                   | **Robert A. Davidow, Director**                          |     |
|                                                                                                                                                                                                                                                                                                                                   |                                                     |     |
|                                                                                                                                                                                                                                                                                                                                   | /s/KENNETH  A. GOLDMAN                                   | 04/02/04 |
|                                                                                                                                                                                                                                                                                                                                   | Kenneth A.  Goldman, Director                            |     |
|                                                                                                                                                                                                                                                                                                                                   |                                                     |     |
|                                                                                                                                                                                                                                                                                                                                   | /s/STEVEN  ROMICK                                        | 04/02/04 |
|                                                                                                                                                                                                                                                                                                                                   | Steven  Romick, Director                                 |     |
|                                                                                                                                                                                                                                                                                                                                   |                                                     |     |
|                                                                                                                                                                                                                                                                                                                                   | /s/BEN  WINTERS                                          | 04/02/04 |
|                                                                                                                                                                                                                                                                                                                                   | Ben Winters,  Director                                   |     |

 

31

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**ARDEN GROUP, INC. AND CONSOLIDATEDSUBSIDIARIES**

 

**INDEX TO CONSOLIDATED FINANCIAL STATEMENTS**

 
| Financial  Statements:                                                                               |   |
|------------------------------------------------------------------------------------------------------|--------|
| Consolidated Balance Sheets, January 3, 2004 and  December 28, 2002                        |   |
| Consolidated Statements of Operations and  Comprehensive Income for fiscal years 2003, 2002 and 2001 |   |
| Consolidated Statements of Stockholders’  Equity for fiscal years 2003, 2002 and 2001           |   |
| Consolidated Statements of Cash Flows for  fiscal years 2003, 2002 and 2001                          |   |
| Notes to Consolidated Financial Statements                                                           |   |
|                                                                                                 |   |
| Reports of Independent Auditors                                                                      |   |

 

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

 

 

Schedules are omitted becauseof the absence of the conditions under which they are required.

 

32

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**ARDEN GROUP, INC. ANDCONSOLIDATED SUBSIDIARIES**

 

# **CONSOLIDATED BALANCE SHEETS**

# ** **

(In Thousands, Except Share andPer Share Data)

 

 
| **Assets**                                                                                                                                                                                         |   | **January 3,  2004** |    | **December 28,  2002** |   |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------------|---------|-----------------------------|--------|
|                                                                                                                                                                                               |   |                      |    |                        |   |
| Current assets:                                                                                                                                                                                    |   |                      |    |                        |   |
| Cash and cash equivalents                                                                                                                                                                          |   | $                         | 71,597  |                        | $      | 30,161 |   |
| Investments                                                                                                                                                                                        |   | 33,844                    |    | 27,566                      |   |
| Accounts and notes receivable, net                                                                                                                                                                 |   | 6,761                     |    | 5,544                       |   |
| Inventories                                                                                                                                                                                        |   | 16,997                    |    | 14,542                      |   |
| Other current assets                                                                                                                                                                               |   | 1,783                     |    | 2,473                       |   |
|                                                                                                                                                                                               |   |                      |    |                        |   |
| Total current assets                                                                                                                                                                               |   | 130,982                   |    | 80,286                      |   |
|                                                                                                                                                                                               |   |                      |    |                        |   |
| Property held for resale or sublease                                                                                                                                                               |   | 51                        |    | 51                          |   |
| Property, plant and equipment, net                                                                                                                                                                 |   | 45,637                    |    | 52,454                      |   |
| Deferred income taxes                                                                                                                                                                              |   | 7,010                     |    | 2,066                       |   |
| Other assets                                                                                                                                                                                       |   | 3,292                     |    | 4,114                       |   |
|                                                                                                                                                                                               |   |                      |    |                        |   |
| Total assets                                                                                                                                                                                       |   | $                         | 186,972 |                        | $      | 138,971 |   |
|                                                                                                                                                                                               |   |                      |    |                        |   |
| **Liabilities and Stockholders’ Equity**                                                                                                                                                      |   |                      |    |                        |   |
|                                                                                                                                                                                               |   |                      |    |                        |   |
| Current liabilities:                                                                                                                                                                               |   |                      |    |                        |   |
| Accounts payable, trade                                                                                                                                                                            |   | $                         | 22,797  |                        | $      | 15,306 |   |
| Other current liabilities                                                                                                                                                                          |   | 37,793                    |    | 15,868                      |   |
| Current portion of long-term debt                                                                                                                                                                  |   | 245                       |    | 220                         |   |
|                                                                                                                                                                                               |   |                      |    |                        |   |
| Total current liabilities                                                                                                                                                                          |   | 60,835                    |    | 31,394                      |   |
|                                                                                                                                                                                               |   |                      |    |                        |   |
| Long-term debt                                                                                                                                                                                     |   | 2,038                     |    | 2,283                       |   |
| Deferred rent                                                                                                                                                                                      |   | 4,473                     |    | 3,782                       |   |
| Other liabilities                                                                                                                                                                                  |   | 4,626                     |    | 2,485                       |   |
|                                                                                                                                                                                               |   |                      |    |                        |   |
| Total liabilities                                                                                                                                                                                  |   | 71,972                    |    | 39,944                      |   |
|                                                                                                                                                                                               |   |                      |    |                        |   |
| Commitments and contingent liabilities  (Note 16)                                                                                                                                                  |   |                      |    |                        |   |
|                                                                                                                                                                                               |   |                      |    |                        |   |
| Stockholders’ equity:                                                                                                                                                                         |   |                      |    |                        |   |
| Common Stock, Class A, $.25 par value;  authorized 10,000,000 shares; 3,374,868 and 3,355,935 shares issued and  outstanding for 2003 and 2002, respectively, including 1,357,200 treasury  shares |   | 844                       |    | 839                         |   |
| Common Stock, Class B, $.25 par value;  authorized 1,500,000 shares; 1,363,584 shares issued and outstanding                                                                                       |   | 341                       |    | 341                         |   |
| Capital surplus                                                                                                                                                                                    |   | 5,547                     |    | 4,362                       |   |
| Unrealized gain (loss) on investments                                                                                                                                                              |   | 346                       |    | 232                         |   |
| Retained earnings                                                                                                                                                                                  |   | 111,675                   |    | 97,006                      |   |
|                                                                                                                                                                                               |   |                      |    |                        |   |
|                                                                                                                                                                                               |   | 118,753                   |    | 102,780                     |   |
| Treasury stock, 1,357,200 shares at cost                                                                                                                                                           |   | (3,753                    | )       | (3,753                      | )      |
|                                                                                                                                                                                               |   |                      |    |                        |   |
| Total stockholders’ equity                                                                                                                                                                    |   | 115,000                   |    | 99,027                      |   |
|                                                                                                                                                                                               |   |                      |    |                        |   |
| Total liabilities and stockholders’ equity                                                                                                                                                    |   | $                         | 186,972 |                        | $      | 138,971 |   |

 

*The accompanying notes are an integral partof these consolidated financial statements.*

 

33

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**ARDEN GROUP, INC. ANDCONSOLIDATED SUBSIDIARIES**

 

**CONSOLIDATED STATEMENTS OF OPERATIONSAND COMPREHENSIVE INCOME**

# ** **

(In Thousands, Except Share andPer Share Data)

 
|                                                                                                                |   | **2003**  |    | **2002**  |   | **2001**  |   |
|---------------------------------------------------------------------------------------------------------------------|--------|-----------|---------|-----------|--------|-----------|--------|
|                                                                                                                |   |      |    |      |   |      |   |
| Sales                                                                                                               |   | $         | 489,710 |      | $      | 401,378   |   | $ | 391,880 |   |
|                                                                                                                |   |      |    |      |   |      |   |
| Cost of sales                                                                                                       |   | 276,381   |    | 226,916   |   | 226,302   |   |
|                                                                                                                |   |      |    |      |   |      |   |
| Gross profit                                                                                                        |   | 213,329   |    | 174,462   |   | 165,578   |   |
|                                                                                                                |   |      |    |      |   |      |   |
| Delivery, selling, general and  administrative expenses                                                             |   | 187,871   |    | 152,818   |   | 146,201   |   |
|                                                                                                                |   |      |    |      |   |      |   |
| Operating income                                                                                                    |   | 25,458    |    | 21,644    |   | 19,377    |   |
|                                                                                                                |   |      |    |      |   |      |   |
| Interest and dividend income                                                                                        |   | 1,768     |    | 1,867     |   | 2,166     |   |
|                                                                                                                |   |      |    |      |   |      |   |
| Other income (expense), net                                                                                         |   | 950       |    | 98        |   | 356       |   |
|                                                                                                                |   |      |    |      |   |      |   |
| Interest expense                                                                                                    |   | (272      | )       | (321      | )      | (596      | )      |
|                                                                                                                |   |      |    |      |   |      |   |
| Income before income taxes                                                                                          |   | 27,904    |    | 23,288    |   | 21,303    |   |
|                                                                                                                |   |      |    |      |   |      |   |
| Income tax provision                                                                                                |   | 11,323    |    | 9,356     |   | 8,432     |   |
|                                                                                                                |   |      |    |      |   |      |   |
| Net income                                                                                                          |   | $         | 16,581  |      | $      | 13,932    |   | $ | 12,871 |   |
|                                                                                                                |   |      |    |      |   |      |   |
| Other comprehensive income (loss), net of  tax:                                                                     |   |      |    |      |   |      |   |
|                                                                                                                |   |      |    |      |   |      |   |
| Unrealized gain (loss) from investments:                                                                            |   |      |    |      |   |      |   |
|                                                                                                                |   |      |    |      |   |      |   |
| Unrealized holding gains (losses) arising  during the period                                                        |   | 568       |    | 732       |   | (680      | )      |
|                                                                                                                |   |      |    |      |   |      |   |
| Reclassification adjustment for realized  (gains) losses included in net income                                     |   | (454      | )       | 153       |   | 28        |   |
|                                                                                                                |   |      |    |      |   |      |   |
| Net unrealized gain (loss), net of income  tax expense (benefit) of $78 for 2003, $608 for 2002 and ($449) for 2001 |   | 114       |    | 885       |   | (652      | )      |
|                                                                                                                |   |      |    |      |   |      |   |
| Comprehensive income                                                                                                |   | $         | 16,695  |      | $      | 14,817    |   | $ | 12,219 |   |
|                                                                                                                |   |      |    |      |   |      |   |
| Net income per common share:                                                                                        |   |      |    |      |   |      |   |
|                                                                                                                |   |      |    |      |   |      |   |
| Basic                                                                                                               |   | $         | 4.91    |      | $      | 4.15      |   | $ | 3.80 |   |
|                                                                                                                |   |      |    |      |   |      |   |
| Diluted                                                                                                             |   | $         | 4.90    |      | $      | 4.14      |   | $ | 3.79 |   |
|                                                                                                                |   |      |    |      |   |      |   |
| Weighted average common shares outstanding:                                                                         |   |      |    |      |   |      |   |
|                                                                                                                |   |      |    |      |   |      |   |
| Basic                                                                                                               |   | 3,379,443 |    | 3,355,020 |   | 3,389,234 |   |
|                                                                                                                |   |      |    |      |   |      |   |
| Diluted                                                                                                             |   | 3,380,524 |    | 3,365,961 |   | 3,398,671 |   |

 

*The accompanying notes are an integral partof these consolidated financial statements.*

 

34

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**ARDEN GROUP, INC. ANDCONSOLIDATED SUBSIDIARIES**

 

**CONSOLIDATEDSTATEMENTS OF STOCKHOLDERS’ EQUITY**

 

(In Thousands, Except ShareData)

 
|                                                                                       |   | **2003** |    | **2002** |   | **2001** |   |
|--------------------------------------------------------------------------------------------|--------|----------|---------|----------|--------|----------|--------|
|                                                                                       |   |     |    |     |   |     |   |
| Common Stock, Class A:                                                                     |   |     |    |     |   |     |   |
| Balance, beginning of year                                                                 |   | $        | 839     |     | $      | 835      |   | $ | 862 |   |
| Purchase and retirement of common stock  (4,942 shares in 2003 and 109,927 shares in 2001) |   | (1       | )       |     |   | (28      | )      |
| Shares issued under Stock Option Plan  (14,750 shares)                                     |   | 6        |    | 4        |   |     |   |
| Exchange of stock                                                                          |   |     |    |     |   | 1        |   |
|                                                                                       |   |     |    |     |   |     |   |
| Balance, end of year                                                                       |   | 844      |    | 839      |   | 835      |   |
|                                                                                       |   |     |    |     |   |     |   |
| Common Stock, Class B:                                                                     |   |     |    |     |   |     |   |
| Balance, beginning of year                                                                 |   | 341      |    | 341      |   | 342      |   |
| Exchange of stock                                                                          |   |     |    |     |   | (1       | )      |
|                                                                                       |   |     |    |     |   |     |   |
| Balance, end of year                                                                       |   | 341      |    | 341      |   | 341      |   |
|                                                                                       |   |     |    |     |   |     |   |
| Capital surplus:                                                                           |   |     |    |     |   |     |   |
| Balance, beginning of year                                                                 |   | 4,362    |    | 3,680    |   | 3,766    |   |
| Purchase and retirement of common stock                                                    |   | (5       | )       |     |   | (86      | )      |
| Shares issued under Stock Option Plan                                                      |   | 1,190    |    | 682      |   |     |   |
|                                                                                       |   |     |    |     |   |     |   |
| Balance, end of year                                                                       |   | 5,547    |    | 4,362    |   | 3,680    |   |
|                                                                                       |   |     |    |     |   |     |   |
| Notes receivable from officer/director:                                                    |   |     |    |     |   |     |   |
| Balance, beginning of year                                                                 |   | 0        |    | (135     | )      | (135     | )      |
| Principal received                                                                         |   |     |    | 135      |   |     |   |
|                                                                                       |   |     |    |     |   |     |   |
| Balance, end of year                                                                       |   | 0        |    | 0        |   | (135     | )      |
|                                                                                       |   |     |    |     |   |     |   |
| Unrealized gain (loss) on investments:                                                     |   |     |    |     |   |     |   |
| Balance, beginning of year                                                                 |   | 232      |    | (653     | )      | (1       | )      |
| Net unrealized gain (loss)                                                                 |   | 114      |    | 885      |   | (652     | )      |
|                                                                                       |   |     |    |     |   |     |   |
| Balance, end of year                                                                       |   | 346      |    | 232      |   | (653     | )      |
|                                                                                       |   |     |    |     |   |     |   |
| Retained earnings:                                                                         |   |     |    |     |   |     |   |
| Balance, beginning of year                                                                 |   | 97,006   |    | 83,074   |   | 74,872   |   |
| Net income                                                                                 |   | 16,581   |    | 13,932   |   | 12,871   |   |
| Dividends to common stockholders                                                           |   | (1,622   | )       |     |   |     |   |
| Purchase and retirement of common stock                                                    |   | (290     | )       |     |   | (4,669   | )      |
|                                                                                       |   |     |    |     |   |     |   |
| Balance, end of year                                                                       |   | 111,675  |    | 97,006   |   | 83,074   |   |
|                                                                                       |   |     |    |     |   |     |   |
| Stockholders’ equity before treasury stock                                            |   | 118,753  |    | 102,780  |   | 87,142   |   |
|                                                                                       |   |     |    |     |   |     |   |
| Treasury stock, at cost                                                                    |   | (3,753   | )       | (3,753   | )      | (3,753   | )      |
|                                                                                       |   |     |    |     |   |     |   |
| Total stockholders’ equity                                                            |   | $        | 115,000 |     | $      | 99,027   |   | $ | 83,389 |   |

 

*The accompanying notes are an integral partof these consolidated financial statements.*

 

35

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**ARDEN GROUP, INC. ANDCONSOLIDATED SUBSIDIARIES**

 

# **CONSOLIDATED STATEMENTS OFCASH FLOWS**

# ** **

(In Thousands)

 
|                                                     |   | **2003** |    | **2002** |   | **2001** |   |
|----------------------------------------------------------|--------|----------|---------|----------|--------|----------|--------|
|                                                     |   |     |    |     |   |     |   |
| Cash flows from operating activities:                    |   |     |    |     |   |     |   |
| Cash received from customers                             |   | $        | 488,562 |     | $      | 402,847  |   | $ | 392,698 |   |
| Cash paid to suppliers and employees                     |   | (430,982 | )       | (369,881 | )      | (364,624 | )      |
| Interest and dividends received                          |   | 1,472    |    | 1,604    |   | 1,935    |   |
| Interest paid                                            |   | (258     | )       | (331     | )      | (627     | )      |
| Income taxes paid                                        |   | (6,244   | )       | (8,706   | )      | (9,800   | )      |
|                                                     |   |     |    |     |   |     |   |
| Net cash provided by operating activities                |   | 52,550   |    | 25,533   |   | 19,582   |   |
|                                                     |   |     |    |     |   |     |   |
| Cash flows from investing activities:                    |   |     |    |     |   |     |   |
| Capital expenditures                                     |   | (5,752   | )       | (4,023   | )      | (10,066  | )      |
| Purchases of investments                                 |   | (11,836  | )       | (21,667  | )      | (4,637   | )      |
| Sales of investments                                     |   | 6,828    |    | 14,686   |   | 282      |   |
| Proceeds from the sale of property, plant  and equipment |   | 99       |    | 68       |   | 54       |   |
|                                                     |   |     |    |     |   |     |   |
| Net cash used in investing activities                    |   | (10,661  | )       | (10,936  | )      | (14,367  | )      |
|                                                     |   |     |    |     |   |     |   |
| Cash flows from financing activities:                    |   |     |    |     |   |     |   |
| Purchase and retirement of Company stock                 |   | (296     | )       |     |   | (4,783   | )      |
| Principal payments on long-term debt                     |   |     |    |     |   | (4,762   | )      |
| Principal payments under capital lease  obligations      |   | (220     | )       | (250     | )      | (257     | )      |
| Loan payments received from officer/director             |   |     |    | 135      |   |     |   |
| Proceeds from exercise of stock options                  |   | 874      |    | 576      |   |     |   |
| Cash dividends paid                                      |   | (811     | )       |     |   |     |   |
|                                                     |   |     |    |     |   |     |   |
| Net cash provided by (used in) financing  activities     |   | (453     | )       | 461      |   | (9,802   | )      |
|                                                     |   |     |    |     |   |     |   |
| Net increase (decrease) in cash and cash  equivalents    |   | 41,436   |    | 15,058   |   | (4,587   | )      |
|                                                     |   |     |    |     |   |     |   |
| Cash and cash equivalents at beginning of  year          |   | 30,161   |    | 15,103   |   | 19,690   |   |
|                                                     |   |     |    |     |   |     |   |
| Cash and cash equivalents at end of year                 |   | $        | 71,597  |     | $      | 30,161   |   | $ | 15,103 |   |

 

*The accompanying notes are an integral partof these consolidated financial statements.*

 

36

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|                                                                                               |   | **2003** |   | **2002** |   | **2001** |   |
|----------------------------------------------------------------------------------------------------|--------|----------|--------|----------|--------|----------|--------|
|                                                                                               |   |     |   |     |   |     |   |
| **Reconciliation of Net Income to Net Cash Provided by Operating  Activities:**                    |   |     |   |     |   |     |   |
|                                                                                               |   |     |   |     |   |     |   |
| Net income                                                                                         |   | $        | 16,581 |     | $      | 13,932   |   | $ | 12,871 |   |
|                                                                                               |   |     |   |     |   |     |   |
| Adjustments to reconcile net income to net  cash provided by operating activities:                 |   |     |   |     |   |     |   |
| Depreciation and amortization                                                                      |   | 8,126    |   | 8,139    |   | 7,872    |   |
| Provision for losses on accounts and notes  receivable                                             |   |     |   | (20      | )      | 58       |   |
| Loss on impairment of long-lived assets                                                            |   | 4,311    |   |     |   |     |   |
| Net loss (gain) from the disposal of  property, plant and equipment                                |   | 33       |   | (19      | )      | 44       |   |
| Realized loss (gain) on investments, net                                                           |   | (950     | )      | (98      | )      | (383     | )      |
| Tax benefit of stock option transactions                                                           |   | 232      |   | 110      |   |     |   |
| Stock compensation expense                                                                         |   | 90       |   |     |   |     |   |
|                                                                                               |   |     |   |     |   |     |   |
| Changes in assets and liabilities net of  effects from noncash investing and financing activities: |   |     |   |     |   |     |   |
|                                                                                               |   |     |   |     |   |     |   |
| (Increase) decrease in assets:                                                                     |   |     |   |     |   |     |   |
| Investments                                                                                        |   | (128     | )      | (143     | )      | (182     | )      |
| Accounts and notes receivable                                                                      |   | (1,217   | )      | 1,450    |   | 940      |   |
| Inventories                                                                                        |   | (2,455   | )      | 206      |   | (1,334   | )      |
| Other current assets                                                                               |   | 690      |   | 1,071    |   | (547     | )      |
| Other assets                                                                                       |   | 822      |   | 178      |   | (404     | )      |
|                                                                                               |   |     |   |     |   |     |   |
| Increase (decrease) in liabilities:                                                                |   |     |   |     |   |     |   |
| Accounts payable and other accrued expenses                                                        |   | 28,605   |   | 572      |   | 1,092    |   |
| Deferred income taxes                                                                              |   | (5,022   | )      | (698     | )      | (1,488   | )      |
| Deferred rent                                                                                      |   | 691      |   | 724      |   | 761      |   |
| Other liabilities                                                                                  |   | 2,141    |   | 129      |   | 282      |   |
|                                                                                               |   |     |   |     |   |     |   |
| Net cash provided by operating activities                                                          |   | $        | 52,550 |     | $      | 25,533   |   | $ | 19,582 |   |

 

*The accompanying notes are an integral partof these consolidated financial statements.*

 

37

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**ARDEN GROUP, INC. ANDCONSOLIDATED SUBSIDIARIES**

 

# **NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS**

 

----

 

1.                    Accounting Policies

 

Basis of Presentation and Business Description

 

Theconsolidated financial statements of Arden Group, Inc. (the “Company”) includethe accounts of the Company and its direct and indirect subsidiaries.  All intercompany accounts and transactionsare eliminated in consolidation.  TheCompany operates 18 supermarkets in Southern California.

 

Fiscal Year

 

The Companyoperates on a fiscal year ending on the Saturday closest toDecember 31.  Fiscal years for theconsolidated financial statements included herein ended on January 3, 2004(53-weeks), December 28, 2002 (52-weeks) and December 29, 2001(52-weeks).

 

The followingis a summary of significant accounting policies followed in the preparation ofthese consolidated financial statements.

 

Cash and Cash Equivalents

 

TheConsolidated Statements of Cash Flows classify changes in cash and cashequivalents (short-term, highly liquid investments readily convertible intocash with an original maturity at date of purchase of three months or less)according to operating, investing or financing activities.  At times, cash balances held at financialinstitutions are in excess of federally insured limits.  The Company places its temporary cashinvestments with high credit, quality financial institutions and limits theamount of credit exposure to any one financial institution.  The Company believes no significantconcentration of credit risk exists with respect to these cash investments.

 

Investments

 

The Companyinvests in marketable securities including mutual funds and debt and equitysecurities. Marketable securities are stated at market value as determined bythe most recently traded price of each security at the balance sheet date.  All marketable securities are defined asavailable-for-sale investments under the provisions of Statement of FinancialAccounting Standards No. (“SFAS”) 115, “Accounting for Certain Investments inDebt and Equity Securities.”

 

Managementdetermines the appropriate classification of its investments in marketablesecurities at the time of purchase and reevaluates such determination at eachbalance sheet

 

38

----

 

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.

 

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

 

Accounts and Notes Receivable

 

The Companymonitors vendor receivables and extensions of credit on an ongoing basis andhas not experienced significant losses related to its receivables.  At January 3, 2004, the Company did nothave significant credit risk concentrations. No single group or customer represents greater than 2% of total accountsand notes receivable.  Issuance costsrelated to Gelson’s charge cards are not significant and are expensed asincurred.

 

Inventories

 

Supermarketnonperishable inventories are stated at the lower of cost or market, with costdetermined using the last-in, first-out (“LIFO”) method.  Perishable inventories are valued at thelower of cost on a first-in, first-out (“FIFO”) method or market.

 

The Companyestimates inventory adjustments based on historical experience derived fromperiodic physical inventories and other factors.  Allowances for inventory adjustments are recorded based on theseestimates to properly reflect inventory at the balance sheet date.

 

Property Held for Resale or Sublease

 

It is theCompany’s policy to hold for sale or sublease property considered by managementas excess and no longer necessary for the operations of the Company.  The aggregate carrying values of such ownedproperty is periodically reviewed for impairment and adjusted, whenappropriate.

 

Property, Plant and Equipment

 

Property,plant and equipment 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 15  years           |
|--------------------------------------|--------------------------|
| Store  fixtures and office equipment | 3 to   8 years |
| Transportation  equipment            | 2 to   5 years |
| Machinery  and equipment             | 3 to 10  years           |

 

39

----

 

Improvementsto leased properties are amortized over their estimated useful lives or leaseperiod, whichever is shorter.  Leaseholdinterests are amortized over the initial lease term.

 

Leased property meeting certain capital lease criteria is capitalizedand the present value of the related lease payments is recorded as aliability.  Amortization of capitalizedleased assets is computed on the straight-line method over the shorter of theestimated useful life or the initial lease term.

 

Normal repairsand maintenance 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 accumulated depreciation of disposed assetsare eliminated and any gain or loss on disposition is included in income.

 

Impairment of Long-Lived Assets

 

The Companymonitors the carrying value of long-lived assets for potential impairment eachquarter whenever events or changes in circumstances indicate the carrying valueof an asset may not be recoverable. Impairment is determined by comparing projected undiscounted cash flowsto be generated by the asset to its carrying value.  If impairment is identified, a loss would be recorded equal tothe excess of the asset’s net book value over the asset’s fair value.

 

Fair Value of Financial Instruments

 

The carryingvalues of cash and cash equivalents, accounts receivable, accounts payable andaccrued liabilities approximate fair values because of the short-term maturityof these instruments.  The fair value oflong-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

 

InJune 2003, the Company terminated its guaranteed cost workers’compensation policy and purchased a high deductible workers’ compensationpolicy.  Accordingly, the Company isprimarily self-insured for losses related to workers’ compensation and generaland auto liability claims.  The Companymaintains stop-loss coverage to limit its loss exposure on a per claimbasis.  Accruals are based on reportedclaims and an estimate of claims incurred but not reported.  The Company’s liability reserve for unpaidand incurred but not reported claims at January 3, 2004 was approximately$3,763,000.  While the ultimate amountof claims incurred are dependent on future developments, in management’sopinion, recorded reserves are adequate to cover the future payment of claims.

 

Revenue Recognition

 

The Companyrecognizes revenue at the time of sale. Discounts given to customers are recorded at the point of sale as areduction of revenues.  The Companymaintains a bad debt allowance for receivables from vendors and Gelson’s creditcard sales.  Valuation reserves areadjusted periodically based on historical recovery rates.

 

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Merchandise Costs

 

Vendorrebates, credits and promotional allowances that relate to the Company’s buyingand merchandising activities, including lump-sum payments associated withlong-term contracts, are recorded as a component of merchandise costs as theyare earned in accordance with the underlying agreement.

 

Stock Options and Stock Appreciation Rights

 

The Companyuses the intrinsic value method prescribed by Accounting Principles BoardOpinion No. 25, “Accounting for Stock Issued to Employee,” to account foremployee stock options.  Under thismethod, because the exercise price of the stock options equals the market priceof the underlying stock on the date of the grant, no compensation expense isrecognized.  The table below presentspro forma results for the current and prior years, as if the Company had usedthe alternate fair value method of accounting for stock-based compensation,prescribed by SFAS 123, “Accounting for Stock-Based Compensation” (as amendedby SFAS 148, “Accounting for Stock-Based Compensation – Transition andDisclosure”).  Under this pro formamethod, the fair value of each option grant was estimated at the date of grantusing the Black-Scholes option-pricing model and was recognized over thevesting period.

 
| **(In  Thousands, Except Net Income Per Share)**                                                  |   | **2003** |   | **2002** |   | **2001** |   |
|---------------------------------------------------------------------------------------------------|--------|----------|--------|----------|--------|----------|--------|
|                                                                                              |   |     |   |     |   |     |   |
| Net income, as reported                                                                           |   | $        | 16,581 |     | $      | 13,932   |   | $ | 12,871 |   |
| Deduct total stock-based compensation  expense determined under the fair value method, net of tax |   | (21      | )      | (84      | )      | (93      | )      |
|                                                                                              |   |     |   |     |   |     |   |
| Net income, pro forma                                                                             |   | $        | 16,560 |     | $      | 13,848   |   | $ | 12,778 |   |
| Basic net income per common share, as  reported                                                   |   | 4.91     |   | 4.15     |   | 3.80     |   |
| Basic net income per common share, pro  forma                                                     |   | 4.90     |   | 4.13     |   | 3.77     |   |
| Diluted net income per common share, as  reported                                                 |   | 4.90     |   | 4.14     |   | 3.79     |   |
| Diluted net income per common share, pro  forma                                                   |   | 4.90     |   | 4.11     |   | 3.76     |   |

 

The weighted average fair value at date of grant for options issued in2000 was $12.50 per option.  The fairvalue of options at date of grant was estimated using the Black-Scholesoption-pricing model with the following weighted average assumptions:

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

 

The effects of applying SFAS 123 for the pro forma disclosures are notnecessarily indicative of the effects expected on current or future net incomeand basic net income per common share as the valuations are based on highlysubjective assumptions about the future, including stock price volatility andexercise patterns.

 

Stock-based compensation under the stock appreciation rights (“SARs”)program is subject to variable accounting in accordance with FinancialAccounting Standards Board Interpretation No. 28, “Accounting for StockAppreciation Rights and Other Variable Stock Option or Award Plans.”  As a result, changes in the market price ofthe Company’s Class A Common Stock impacts the SARs compensation charge.

 

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Environmental Costs

 

Costs incurredto investigate and remediate contaminated sites are expensed as incurred.

 

Store Opening Costs

 

Noncapitalexpenditures incurred in opening a new store are expensed as incurred.

 

Advertising and Sales Promotion Costs

 

Advertisingand sales promotion costs are expensed as incurred and totaled $2,844,000,$2,760,000 and $3,187,000 in 2003, 2002 and 2001, respectively.

 

Rental Expense

 

Rentalpayments on operating leases are recorded over the lease term as they becomepayable or receivable except rental payments on leases with scheduled rentincreases which are recognized on a straight-line basis over the term of thelease.

 

Income Taxes

 

Deferred taxliabilities and assets are determined based on the difference between thefinancial statement and tax bases of assets and liabilities, using enacted taxrates in effect for the year in which the differences are expected to reverse.

 

Net Income Per Share

 

Basic netincome per share is computed by dividing the net income attributable to commonstockholders by the weighted average number of common shares outstanding duringthe period.  Diluted net income pershare is computed by dividing the net income attributable to commonshareholders by the weighted-average number of common and common equivalentshares outstanding during the period. Common share equivalents included in the diluted computation representshares issuable upon assumed exercise of stock options using the treasury stockmethod.

 

The followingtable reflects the calculation of basic and diluted net income per commonshare:

 
| **(In  Thousands, Except Share and Per Share Data)** |   | **2003**  |   | **2002**  |   | **2001**  |   |
|------------------------------------------------------|--------|-----------|--------|-----------|--------|-----------|--------|
| Net income per common share – Basic             |   |      |   |      |   |      |   |
| Net income                                           |   | $         | 16,581 |      | $      | 13,932    |   | $ | 12,871 |   |
| Weighted average shares outstanding                  |   | 3,379,443 |   | 3,355,020 |   | 3,389,234 |   |
| Net income per common share – Basic             |   | $         | 4.91   |      | $      | 4.15      |   | $ | 3.80 |   |
|                                                 |   |      |   |      |   |      |   |
| Net income per common share – Diluted           |   |      |   |      |   |      |   |
| Net income                                           |   | $         | 16,581 |      | $      | 13,932    |   | $ | 12,871 |   |
| Weighted average shares outstanding                  |   | 3,379,443 |   | 3,355,020 |   | 3,389,234 |   |
| Dilutive impact of options outstanding               |   | 1,081     |   | 10,941    |   | 9,437     |   |
| Weighted average shares outstanding  dilutive        |   | 3,380,524 |   | 3,365,961 |   | 3,398,671 |   |
| Net income per common share – Diluted           |   | $         | 4.90   |      | $      | 4.14      |   | $ | 3.79 |   |

 

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Use of Estimates

 

Thepreparation of financial statements in conformity with accounting principlesgenerally accepted in the United States requires management to make estimatesand assumptions for the reporting period and as of the financial statementdate.  These estimates and assumptionsaffect the reported amounts of assets and liabilities, the disclosure ofcontingent liabilities and the reported amounts of revenues and expenses.  Actual results could differ from theseestimates.

 

Impact of Recently Issued Accounting Standards

 

InApril 2003, the Financial Accounting Standards Board (“FASB”) issued SFAS149, “Amendment of Statement 133 on Derivative Instruments and HedgingActivities.”  SFAS 149 amends andclarifies financial accounting and reporting for derivative instruments,including certain derivative instruments embedded in other contracts and forhedging activities under SFAS 133, “Accounting for Derivative Instruments andHedging Activities.”  This statement iseffective for contracts entered into or modified after June 30, 2003.  The adoption of this standard did not haveany impact on the Company’s consolidated financial statements as the Companyhas not entered into hedging or derivative contracts.

 

Effective thefirst quarter of 2003, the Company adopted Emerging Issues Task Force Issue No.(“EITF”) 02-16, “Accounting by a Customer (including a Reseller) for CertainConsideration Received from a Vendor.” EITF 02-16 addresses how a retailer should account for vendor creditsand cash consideration received from a vendor. Adoption of the provisions of EITF 02-16 did not have a significantimpact on the Company’s consolidated financial statements.

 

InNovember 2003, the Emerging Issues Task Force reached a consensus on IssueNo. 03-10, “Application of EITF 02-16 by Resellers to Sales Incentives Offeredto Consumers by Manufacturers.”  EITF03-10 addresses the accounting for manufacturer sales incentives offereddirectly to consumers, including manufacturer coupons.  EITF 03-10 is effective for the firstinterim period beginning after November 25, 2003.  Adoption of the provisions of EITF 03-10will not have an impact on the Company’s consolidated financial statements.

 

2.                    Investments

 

Marketablesecurities are shown on the accompanying balance sheet at their fairvalue.  The investment in a limitedpartnership that invests primarily in publicly traded, high yield bonds isaccounted for under the cost method as the Company owns less than 3% of thepartnership and does not have the ability to exercise significant influenceover the operating and

 

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financialpolicies of the partnership.  The fairmarket value of the Company’s investment in the limited partnership wasapproximately $3,942,000 at December 31, 2003.  The partnership allows withdrawals on a quarterly basis.

 
| **(In  Thousands)**                 |   | **Cost** |   | **Unrealized  Gain (Loss)** |   | **Fair Value** |   |
|-------------------------------------|--------|----------|--------|-----------------------------|--------|----------------|--------|
| As of January 3, 2004:         |   |     |   |                        |   |           |   |
|                                |   |     |   |                        |   |           |   |
| Investments:                        |   |     |   |                        |   |           |   |
| Mutual funds                        |   | $        | 26,755 |                        | $      | 186            |   | $ | 26,941 |   |
| United States government securities |   | 1,994    |   | 16                          |   | 2,010          |   |
| Debt securities                     |   | 2,010    |   | 383                         |   | 2,393          |   |
| Limited partnership (1)             |   | 2,500    |   |                        |   | 2,500          |   |
| Total                               |   | $        | 33,259 |                        | $      | 585            |   | $ | 33,844 |   |

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

 

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(1)          TheCompany follows the cost method of accounting for this investment.  Accordingly, the fair value reflects thecost basis.

 

Thecontractual maturities of available-for-sale debt securities at January 3,2004 are as follows:

 
| **(In  Thousands)**                    |   | **Amortized  Cost** |   | **Fair  Value** |   |
|----------------------------------------|--------|---------------------|--------|-----------------|--------|
|                                   |   |                |   |            |   |
| Due after one year through three years |   | $                   | 2,010  |            | $      | 2,393 |   |
|                                        |        |                     |        |                 |        |  |  |

 

Realized netgains (losses) from the sale of securities were $843,000, ($211,000) and($44,000) in 2003, 2002 and 2001, respectively.

 

3.                     Accountsand Notes Receivable, Net

 
| **(In  Thousands)**                                         |   | **January 3,  2004** |        | **December 28,  2002** |   |
|-------------------------------------------------------------|--------|---------------------------|-------------|-----------------------------|--------|
| Accounts receivable, trade                                  |   | $                         |  3,899 |                        | $      |  3,827 |   |
| Notes receivable                                            |   | 96                        |        | 116                         |   |
| Other accounts receivable                                   |   | 2,946                     |        | 1,807                       |   |
|                                                        |   | 6,941                     |        | 5,750                       |   |
| Less: Allowance for doubtful accounts and  notes receivable |   | (180                      | )           | (206                        | )      |
|                                                        |   | $                         | 6,761       |                        | $      | 5,544 |   |

 

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There was no provision for doubtful accounts and notes receivable in2003.  The provision in 2002 and 2001was approximately $20,000 and $58,000, respectively.

 

4.                    Inventories

 

Inventories valued by the LIFO method totaled $13,880,000 in 2003,$11,601,000 in 2002 and $11,779,000 in 2001. Inventory balances would have been $3,399,000, $3,186,000 and $3,440,000higher at the end of 2003, 2002 and 2001, respectively, if they had been statedat the lower of FIFO cost or market.  TheLIFO effect on net income and basic net income per common share was a decreaseof approximately $126,000 ($.04 per share), an increase of $150,000 ($.04 pershare) and a decrease of $111,000 ($.03 per share) in 2003, 2002 and 2001,respectively.

 

5.                    SignificantSupplier

 

During 2003,the Company procured approximately 21% of its product through Unified WesternGrocers, Inc. (“Unified”), a grocery cooperative.  As a member-patron, the Company is required to provide Unifiedwith certain minimum deposits and credit in order to purchase product from thecooperative.  As of January 3,2004, the Company had approximately $2,223,000 on deposit with Unified.  The minimum deposit requirement is satisfiedthrough a combination of cash, credit and ownership of equity shares inUnified.

 

6.                    Property,Plant and Equipment

 
| **(In  Thousands)**                       |   | **January 3,  2004** |         | **December 28,  2002** |   |
|-------------------------------------------|--------|---------------------------|--------------|-----------------------------|--------|
|                                      |   |                      |         |                        |   |
| Land                                      |   | $                         | 8,584        |                        | $      | 8,110 |   |
| Buildings and improvements                |   | 9,693                     |         | 9,693                       |   |
| Store fixtures and office equipment       |   | 36,065                    |         | 35,417                      |   |
| Transportation equipment                  |   | 2,664                     |         | 2,796                       |   |
| Machinery and equipment                   |   | 1,236                     |         | 1,001                       |   |
| Leasehold improvements                    |   | 39,206                    |         | 42,153                      |   |
| Leasehold interests                       |   | 4,538                     |         | 4,538                       |   |
| Assets under capital leases               |   | 3,058                     |         | 3,058                       |   |
| Assets under construction                 |   | 488                       |         | 1,410                       |   |
|                                      |   | 105,532                   |         | 108,176                     |   |
|                                      |   |                      |         |                        |   |
| Accumulated depreciation and amortization |   | (59,895                   | )            | (55,722                     | )      |
|                                      |   | $                         |  45,637 |                        | $      |  52,454 |   |

 

As ofJanuary 3, 2004, approximately $19,258,000 of property, plant andequipment (at cost) was fully depreciated and is still being used inoperations.  As of January 3, 2004,the Company has recorded $2,636,000 in accumulated amortization for assetsunder capital lease.

 

In the fourthquarter of Fiscal 2003, the Company recorded a $4,311,000 pre-tax impairment onlong-lived assets related to its Pasadena retail store.  Sales at Pasadena have been belowmanagement’s expectations since the store’s initial opening inSeptember 2001.  During the fourthquarter of 2003, a labor dispute in the Company’s trade area temporarilyresulted in improved sales at Pasadena, however, sales remain at levels belowmanagement’s

 

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expectationsand are anticipated to decline significantly from strike levels at theconclusion of the labor dispute.  Theimpairment charge, a component of delivery, selling, general and administrativeexpenses, reflects the difference between the carrying value of the Pasadenaassets and the estimated fair value, which was based on the discounted futurecash flows using a risk-free interest rate.

 

7.                    Other CurrentLiabilities

 
| **(In  Thousands)**                                                                     |   | **January 3,  2004** |   | **December 28,  2002** |   |
|-----------------------------------------------------------------------------------------|--------|---------------------------|--------|-----------------------------|--------|
|                                                                                    |   |                      |   |                        |   |
|  Employee compensated absences                                                     |   | $                         | 4,612  |                        | $      | 4,487 |   |
|  Taxes (including taxes collected from others of $2,461 and  $1,556, respectively) |   | 14,857                    |   | 3,771                       |   |
|  Payroll                                                                           |   | 1,803                     |   | 1,322                       |   |
|  Employee benefits                                                                 |   | 9,039                     |   | 2,083                       |   |
|  Other                                                                             |   | 7,482                     |   | 4,205                       |   |
|                                                                                    |   | $                         | 37,793 |                        | $      | 15,868 |   |

 

8.                    Long-Term Debt

 
|                                                          |   | **Current**               |   | **Non-Current**             |         |
|---------------------------------------------------------------|--------|---------------------------|--------|-----------------------------|--------------|
| **(In  Thousands)**                                           |   | **January 3,  2004** |   | **December 28,  2002** |         | **January 3,  2004** |   | **December 28,  2002** |   |
|                                                          |   |                      |   |                        |         |   |   |   |   |
| Obligations under capital leases                              |   | $                         | 245    |                        | $            | 220 |   | $ | 810 |   | $ | 1,055 |   |
| 7% Subordinated income debentures due  September 1, 2014 |   |                      |   |                        | *** *** | 1,228 |   | 1,228 | *** *** |
|                                                          |   | $                         | 245    |                        | $            | 220 |   | $ | 2,038 |   | $ | 2,283 |   |

 

AtJanuary 3, 2004, the approximate principal payments required on long-termdebt for each fiscal year are as follows:

 
| **(In  Thousands)** |   |   |   |
|---------------------|--------|--------|--------|
|                |   |   |   |
| 2005                |   | $      | 273    |   |
| 2006                |   | 304    |   |
| 2007                |   | 233    |   |
| 2014                |   | 1,228  |   |
|                |   | $      | 2,038  |   |

 

The Companyhas bank revolving lines of credit in the amount of $10,000,000 which expiresin August 2004 and $3,000,000 which expires in October 2004.  Borrowings bear interest at the bank’s primerate or the adjusted LIBOR rate plus an index up to 1.2%.  At the end of 2003 and 2002, there were noamounts borrowed against either of the revolving lines of credit.

 

Debentures:The indenture relating to the 7% subordinated income debentures (“7%Debentures”), due September 1, 2014, provides for interest payablesemi-annually on March 1 and September 1 to the extent that currentannual net income is sufficient therefor,

 

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or at thediscretion of the Company, out of available retained earnings.  No accrued interest was in arrears as ofJanuary 3, 2004.  The debenturesare recorded at face value which approximates its fair value.

 

9.                    Capital Stock

 

Class A CommonStock:  The Company is authorized toissue 10,000,000 shares of Class A Common Stock, par value $.25 per share.  At January 3, 2004 andDecember 28, 2002, shares issued were 3,374,868 and 3,355,935*,*respectively,including 1,357,200 treasury shares. During 2003 and 2001, the Company purchased and retired 4,942 and109,927 shares of its Class A Common Stock for an aggregate purchase price ofapproximately $296,000 and $4,783,000, respectively.  The Class A Common Stock has one vote per share on all matters onwhich stockholders are entitled to vote or consent.

 

Class B CommonStock:  The Company is authorized toissue 1,500,000 shares of Class B Common Stock, par value $.25 per share.  At January 3, 2004 andDecember 28, 2002, there were 1,363,584 shares, issued andoutstanding.  The Class B Common Stockhas ten votes per share on virtually all matters on which stockholders areentitled to vote or consent.  Transferof Class B Common Stock is restricted to other Class B stockholders and certainother classes of transferees.  Class BCommon Stock is convertible, at the option of the holder, into Class A CommonStock on a share-for-share basis.  TheClass B Common Stock is also automatically converted into Class A Common Stockunder certain circumstances, including upon the transfer of such stock to atransferee other than another Class B stockholder and certain other classes oftransferees.  1,000 and 4,400 shares ofClass B Common Stock were exchanged for Class A Common Stock during 2002 and2001, respectively.  Cash or propertydividends on Class B Common Stock are restricted to an amount equal to 90% ofany dividend paid on Class A Common Stock.

 

Supplemental Cash Flow Information: On January 20, 2004, the Companypaid a regular quarterly cash dividend of 25 cents per share of Class A CommonStock and 22.5 cents per share of Class B Common Stock, aggregating $811,000,to stockholders of record on December 31, 2003.

 

10.              Stock Options andStock Appreciation Rights

 

In 1998, theCompany adopted a Non-Officer and Non-Director Stock Option Plan (the “StockOption Plan”) which initially provided for the granting of stock options to keyemployees to purchase up to 35,000 shares of the Company’s Class A CommonStock.  The Stock Option Plan wasamended in 2000 to increase the number of shares available thereunder to anaggregate of 70,000 shares.  Theobjective of the Stock Option Plan is to attract and retain quality personneland to promote the success of the Company by providing employees theopportunity to share in its growth. These options vest at 25% per year beginning at the end of the firstyear and expire five years from the date of grant.  The exercise price of stock options granted under the StockOption Plan is equal to the fair market value of the Company’s Class A CommonStock on the date of grant.

 

The Companyalso has granted SARs covering shares of the Company’s Class A Common Stock tonon-employee directors, officers and certain employees of the Company.  Each SAR entitles the holder to receive uponexercise thereof the excess of the fair market value of a share of Class ACommon Stock on the date of exercise over the fair market value of such shareon the date granted.  The SARs vest 25%each year beginning at the end of the first year and expire five years from thedate of grant.

 

47

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Stock optionsand SARs transactions during the past three years have been as follows:

 
|                                            |   |               |   |                            |   | **SARs**                    |   |
|-------------------------------------------------|--------|--------------------|--------|---------------------------------|--------|-----------------------------|--------|
|                                            |   | **Stock  Options** |   | **Officers  and  Employees**    |   | **Non-Employee  Directors** |   |
|                                            |   | **Options**        |   | **Weighted  Average Price ($)** |   | **SARs**                    |   | **Weighted  Average Price ($)** |   | **SARs** |   | **Weighted  Average Price ($)** |   |
| Outstanding as of  December 29, 2001       |   | 41,500             |   | 36.97                           |   | 20,000                      |   | 34.53 |   | 50,000 |   | 32.85 |   |
| Exercised                                       |   | 14,750             |   | 39.07                           |   | 12,500                      |   | 36.72 |   | 17,500 |   | 29.06 |   |
| Outstanding as of  December 28, 2002       |   | 26,750             |   | 35.81                           |   | 7,500                       |   | 30.89 |   | 32,500 |   | 34.89 |   |
| Granted                                         |   | —             |   | —                          |   | 64,500                      |   | 71.88 |   | 10,000 |   | 54.25 |   |
| Exercised                                       |   | 23,875             |   | 36.62                           |   | 3,125                       |   | 33.44 |   | 13,250 |   | 29.06 |   |
| Forfeitures                                     |   | 875                |   | 29.06                           |   | —                      |   | — |   | — |   | — |   |
| Outstanding as of  January 3, 2004         |   | 2,000              |   | 29.06                           |   | 68,875                      |   | 69.16 |   | 29,250 |   | 44.15 |   |
|                                            |   |               |   |                            |   |                        |   |   |   |   |   |   |   |
| Exercisable as of  January 3, 2004         |   | —             |   |                            |   | 1,875                       |   |   |   | 6,750 |   |   |   |
|                                            |   |               |   |                            |   |                        |   |   |   |   |   |   |   |
| Available for grant as of  January 3, 2004 |   | 28,500             |   |                            |   | N/A                         |   |   |   | N/A |   |   |   |

 

The following table summarizes information about the Company’s StockOptions and SARs outstanding at January 3, 2004:

 
|                             |   | **Options  Outstanding**                   |   |                                                |   |
|----------------------------------|--------|--------------------------------------------|--------|-----------------------------------------------------|--------|
| **($) Range of  Exercise Price** |   | **Number  Outstanding**                    |   | **Weighted  Average  Remaining  Contractual  Life** |   | **Weighted  Average  Exercise  Price ($)** |   | **Options  Exercisable** |   |
| **Number  Exercisable**          |   | **Weighted  Average  Exercise  Price ($)** |
| Stock Options                    |   |                                       |   |                                                |   |   |   |   |   |   |   |
| 29.06                            |   | 2,000                                      |   | 1.2 years                                           |   | 29.06 |   | — |   | — |   |
|                             |   |                                       |   |                                                |   |   |   |   |   |   |   |
| SARs - Officers & Employees  |   |                                       |   |                                                |   |   |   |   |   |   |   |
| 29.06                            |   | 4,375                                      |   | 1.2 years                                           |   | 29.06 |   | 1,875 |   | 29.06 |   |
| 60.50                            |   | 20,000                                     |   | 4.6 years                                           |   | 60.50 |   | — |   | — |   |
| 77.00                            |   | 44,500                                     |   | 4.9 years                                           |   | 77.00 |   | — |   | — |   |
|                             |   | 68,875                                     |   | 4.6 years                                           |   | 69.16 |   | 1,875 |   | 29.06 |   |
|                             |   |                                       |   |                                                |   |   |   |   |   |   |   |
| SARs - Non-Employee Directors    |   |                                       |   |                                                |   |   |   |   |   |   |   |
| 29.06                            |   | 9,250                                      |   | 1.2 years                                           |   | 29.06 |   | 1,750 |   | 29.06 |   |
| 48.00                            |   | 10,000                                     |   | 2.5 years                                           |   | 48.00 |   | 5,000 |   | 48.00 |   |
| 54.25                            |   | 10,000                                     |   | 4.3 years                                           |   | 54.25 |   | — |   | — |   |
|                             |   | 29,250                                     |   | 2.7 years                                           |   | 44.15 |   | 6,750 |   | 43.09 |   |

 

For 2003, 2002 and 2001, the Company incurred compensation expenserelated to SARs of $740,000, $481,000 and $1,223,000, respectively.

 

On January 20, 2004, the Company granted SARs aggregating 50,000units at a base of $77.50 per unit to non-employee members of its Board ofDirectors on that date.

 

48

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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 wage contracts.  Informationrelating to accumulated benefits and fund assets as they may be allocable tothe participants at January 3, 2004 is not available.  The Company’s total union pension expensefor all plans for 2003, 2002 and 2001 amounted to $4,787,000, $3,086,000 and$1,165,000, respectively.  Contributionsto the multi-employer union pension plan covering the majority of the Company’semployees were suspended for two months in 2003, six months in 2002 and twelvemonths in 2001.

 

The ArdenGroup, Inc. 401(k) Retirement Savings Plan (the “Company Savings Plan”) coversall nonunion employees of the Company and its subsidiaries who have attainedthe age of 18 and have completed at least one year of service.  The Company Savings Plan provides that, withcertain limitations, a participating employee may elect to contribute up to100% of such employee’s annual compensation up to a maximum of $13,000 in 2003to the Company Savings Plan on a tax-deferred basis.  The Company made discretionary contributions to the CompanySavings Plan of $837,000, $806,000 and $720,000 for the years 2003, 2002 and2001, respectively.

 

The Companymaintains a noncontributory, trusteed Stock Bonus Plan (the “Plan”) which isqualified under Section 401(a) of the Internal Revenue Code of 1986, asamended.  Under the Third Amendment tothe Plan, effective January 1, 2002, no new participants or contributionsto the Plan are allowed.  Existingcontributions must be invested in the Company’s Class A Common Stock withexcess cash being invested in certain government-backed securities.  There were no contributions to the Plan infiscal years 2003, 2002 or 2001.

 

An employmentagreement with a key executive officer provides for annual retirementcompensation equal to 25% of his average base salary and bonus earned in thelast three years prior to his retirement. The Company has accrued its obligation under the terms of the employmentagreement.  The Company accrued$104,000, $348,000 and $273,000 toward this benefit in 2003, 2002 and 2001,respectively.

 

12.              Multi-Employer UnionHealth Care Plans

 

The Companycontributes to multi-employer union health care plans, administered by varioustrustees, in accordance with the provisions of various labor contracts.  Contributions to these plans are generallybased on the number of hours worked. The Company’s expense for these plans totaled $21,019,000, $11,927,000and $10,249,000 for 2003, 2002 and 2001, respectively.

 

Health careexpense in 2003 reflects a $5,797,000 assessment by the trust fund covering themajority of the Company’s employees to pay health care claims and restore trustfund reserves depleted during a labor dispute.

 

49

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13.              Income Taxes

 

The compositionof the federal and state income tax provision (benefit) is as follows:

 
| **(In  Thousands)**          |   | **2003** |         | **2002** |         | **2001** |         |
|------------------------------|--------|----------|--------------|----------|--------------|----------|--------------|
|                         |   |     |         |     |         |     |         |
| Current:                     |   |     |         |     |         |     |         |
| Federal                      |   | $        | 12,457       |     | $            | 7,420    |         | $ | 8,079 |   |
| State                        |   | 3,811    |         | 2,026    |         | 2,290    |         |
| Total current tax provision  |   | 16,268   |         | 9,446    |         | 10,369   |         |
|                         |   |     |         |     |         |     |         |
| Deferred:                    |   |     | *** *** |     | *** *** |     | *** *** |
| Federal                      |   | (3,587   | )            | (73      | )            | (1,438   | )            |
| State                        |   | (1,358   | )            | (17      | )            | (499     | )            |
| Total deferred tax provision |   | (4,945   | )            | (90      | )            | (1,937   | )            |
| Total income tax provision   |   | $        | 11,323       |     | $            | 9,356    |         | $ | 8,432 |   |

 

The Company’sdeferred tax assets (liabilities) were attributable to the following:

 
| **(In  Thousands)**                 |   | **January 3,  2004** |   | **December 28,  2002** |   |
|-------------------------------------|--------|---------------------------|--------|-----------------------------|--------|
|                                |   |                      |   |                        |   |
| Deferred tax assets:                |   |                      |   |                        |   |
| Capital lease obligations           |   | $                         | 433    |                        | $      | 524 |   |
| Accrued expenses                    |   | 6,369                     |   | 2,422                       |   |
| Deferred rent                       |   | 1,822                     |   | 1,539                       |   |
| State income taxes                  |   | 1,174                     |   | 758                         |   |
| Allowance for doubtful accounts     |   | 73                        |   | 84                          |   |
| Other                               |   | 1,243                     |   | 729                         |   |
| Deferred tax assets                 |   | 11,114                    |   | 6,056                       |   |
|                                |   |                      |   |                        |   |
| Deferred tax liabilities:           |   |                      |   |                        |   |
| Deferred gain on debenture exchange |   | (3,177                    | )      | (3,338                      | )      |
| Capital lease assets                |   | (172                      | )      | (218                        | )      |
| Other                               |   | (755                      | )      | (434                        | )      |
| Deferred tax liabilities            |   | (4,104                    | )      | (3,990                      | )      |
| Deferred income taxes, net          |   | $                         | 7,010  |                        | $      | 2,066 |   |

 

Reconciliationof the statutory federal rate and effective rate is as follows:

 
| **(In  Thousands, Except**                      |   | **2003**   |   | **2002** |   | **2001**   |   |
|-------------------------------------------------|--------|------------|--------|----------|--------|------------|--------|
| **Percentage  Amounts)**                        |   | **Amount** |   | **Rate** |   | **Amount** |   | **Rate** |   | **Amount** |   | **Rate** |   |
|                                            |   |       |   |     |   |       |   |   |   |   |   |   |   |
| Federal tax at statutory rate                   |   | $          | 9,767  |     | 35.0   | %          | $      | 8,151 |   | 35.0 | % | $ | 7,456 |   | 35.0 | % |
| State income taxes, net of federal tax  benefit |   | 1,603      |   | 5.7      | %      | 1,338      |   | 5.7 | % | 1,224 |   | 5.7 | % |
| Other                                           |   | (47        | )      | (.1      | %)     | (133       | )      | (.5 | %) | (248 | ) | (1.1 | %) |
|                                            |   | $          | 11,323 |     | 40.6   | %          | $      | 9,356 |   | 40.2 | % | $ | 8,432 |   | 39.6 | % |

 

50

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14.              Leases

 

The principalkinds of property leased by the Company and its subsidiaries are supermarketbuildings.  The most significantobligations assumed under the lease terms, other than rental payments, are theupkeep of the facilities, 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 andsubleases with an initial term greater than one year are accounted for underSFAS 13, “Accounting for Leases.”  Theseleases are classified as either capital leases, operating leases or subleases,as appropriate.

 

Assets UnderCapital Leases:  Assets under capitalleases are capitalized using interest rates appropriate at the inception ofeach lease.  Contingent rentalsassociated with capital leases in 2003, 2002 and 2001 were $428,000, $235,000and $214,000, respectively, and accordingly have been charged to expense asincurred.  Following is an analysis ofassets under capital leases:

 
| **(In  Thousands)**      |   | **January 3,  2004** |   | **December 28,  2002** |   |
|--------------------------|--------|---------------------------|--------|-----------------------------|--------|
|                     |   |                      |   |                        |   |
| Buildings:               |   |                      |   |                        |   |
| Cost                     |   | $                         | 3,058  |                        | $      | 3,058 |   |
| Accumulated amortization |   | (2,636                    | )      | (2,523                      | )      |
|                     |   | $                         | 422    |                        | $      | 535 |   |

 

Future minimumlease payments for the assets under capital leases at January 3, 2004 areas follows:

 
| **(In  Thousands)**                      |   |   |       |
|------------------------------------------|--------|--------|------------|
|                                     |   |   |       |
| 2004                                     |   | $      | 348        |   |
| 2005                                     |   | 347    |       |
| 2006                                     |   | 347    |       |
| 2007                                     |   | 246    |       |
|                                     |   |   | ** ** |
| Total minimum obligations                |   | 1,288  |       |
|                                     |   |   | ** ** |
| Interest                                 |   | (233   | )          |
|                                     |   |   | ** ** |
| Present value of net minimum obligations |   | 1,055  |       |
| Current portion                          |   | (245   | )          |
|                                     |   |   | ** ** |
| Long-term obligations                    |   | $      | 810        |   |

 

51

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OperatingLeases and Subleases:  In addition tocapital leases, the Company is obligated under operating leases, primarily forbuildings, which expire at various dates through 2023.  Future minimum lease payments for allnoncancelable operating leases having a remaining term in excess of one year atJanuary 3, 2004 are as follows:

 
| **(In  Thousands)** |   | **Commitments** |    | **Deduct  Sublease  Rentals** |   | **Net  Rental  Commitments** |   |
|---------------------|--------|-----------------|---------|-------------------------------|--------|------------------------------|--------|
|                |   |            |    |                          |   |                         |   |
| 2004                |   | $               | 7,704   |                          | $      | 602                          |   | $ | 7,102 |   |
| 2005                |   | 7,454           |    | 597                           |   | 6,857                        |   |
| 2006                |   | 7,418           |    | 577                           |   | 6,841                        |   |
| 2007                |   | 7,200           |    | 581                           |   | 6,619                        |   |
| 2008                |   | 6,362           |    | 571                           |   | 5,791                        |   |
| Thereafter          |   | 65,536          |    | 2,293                         |   | 63,243                       |   |
|                |   | $               | 101,674 |                          | $      | 5,221                        |   | $ | 96,453 |   |

 

Rent expenseunder operating leases was as follows:

 
| **(In  Thousands)** |   | **2003** |   | **2002** |   | **2001** |   |
|---------------------|--------|----------|--------|----------|--------|----------|--------|
|                |   |     |   |     |   |     |   |
| Minimum rent        |   | $        | 8,002  |     | $      | 8,301    |   | $ | 7,811 |   |
| Contingent rent     |   | 2,043    |   | 1,277    |   | 1,389    |   |
|                |   | 10,045   |   | 9,578    |   | 9,200    |   |
| Sublease rentals    |   | (1,673   | )      | (1,707   | )      | (1,696   | )      |
|                |   | $        | 8,372  |     | $      | 7,871    |   | $ | 7,504 |   |

 

15.              Related PartyTransactions

 

AtDecember 29, 2001, the Company held two notes receivable with balancestotaling $135,000 from an officer/director of the Company.  In August 2002, the notes were repaidin full by the officer/director.  Thesenotes arose from transactions in 1979 and 1980 whereby the Company loaned theofficer/director money to purchase shares of the Company’s Class A Common Stockat the then fair market value. The notes bore interest at the rate of 6% perannum payable annually.

 

A director ofthe Company is a partner of a law firm which performs legal services for theCompany.

 

16.              Commitments andContingent Liabilities

 

The Companyhas an employment agreement with a key executive officer and shareholder whichexpires on January 1, 2006.  Inaddition to a base salary, the agreement provides for a bonus based on pre-taxearnings.  No maximum compensation limitexists.  Total salary and bonus expensedin 2003, 2002 and 2001 was approximately $1,565,000, $1,379,000 and $1,294,000,respectively.

 

As ofJanuary 3, 2004, authorized expenditures on projects in progress for theconstruction and purchase of property, plant and equipment totaledapproximately $3,242,000.  Of thistotal, approximately $2,383,000 has been contractually committed.

 

52

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The Companyand its subsidiaries are subject to a myriad of environmental laws, regulationsand lease covenants with its landlords regarding air, water and land use,products for sale, and the use, storage and disposal of hazardous materials.The Company believes it substantially complies, and has in the pastsubstantially complied, with federal, state and local environmental laws andregulations and private covenants.  TheCompany cannot, at this time, estimate the expense it ultimately may incur inconnection with any violations; however, it believes any such claims will nothave a material adverse impact on either the Company’s consolidated financialposition, results of operations or cash flows.

 

The Company orits subsidiaries are defendants in a number of cases currently in litigation,being vigorously defended, in which the complainants seek monetarydamages.  As of the date hereof, noestimate of potential liability, if any, is possible. Based upon currentinformation, management, after consultation with legal counsel defending theCompany’s interests in the cases, believes the ultimate disposition thereofwill not have a material effect upon either the Company’s consolidatedfinancial position, results of operations or cash flows.

 

17.     Selected Quarterly FinancialData (Unaudited)

 

(In Thousands, Except Per ShareData)

 
| **Quarter** |   | **Sales** |    | **Gross  Profit** |   | **Net Income** |   | **Diluted  Net Income  Per Share (1)** |   |
|-------------|--------|-----------|---------|-------------------|--------|----------------|--------|----------------------------------------|--------|
|        |   |      |    |              |   |           |   |                                   |   |
| 2002        |   |      |    |              |   |           |   |                                   |   |
|        |   |      |    |              |   |           |   |                                   |   |
| First       |   | $         | 100,560 |              | $      | 43,338         |   | $                                      | 3,682  |   | $ | 1.09 |   |
| Second      |   | 98,710    |    | 42,939            |   | 3,420          |   | 1.02                                   |   |
| Third       |   | 98,207    |    | 43,030            |   | 3,218          |   | .96                                    |   |
| Fourth      |   | 103,901   |    | 45,155            |   | 3,612          |   | 1.07                                   |   |
|        |   |      |    |              |   |           |   |                                   |   |
| 2003        |   |      |    |              |   |           |   |                                   |   |
|        |   |      |    |              |   |           |   |                                   |   |
| First       |   | $         | 100,364 |              | $      | 43,767         |   | $                                      | 2,785  |   | $ | .82 |   |
| Second      |   | 101,243   |    | 44,417            |   | 3,275          |   | .97                                    |   |
| Third       |   | 101,898   |    | 44,910            |   | 2,985          |   | .88                                    |   |
| Fourth (2)  |   | 186,205   |    | 80,235            |   | 7,536          |   | 2.23                                   |   |

 

----

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

 

(2)          Thefourth quarter results were favorably impacted by a labor dispute in theCompany’s trade area.

 

53

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18.              Subsequent Event

 

The collective bargainingagreement with the United Food and Commercial Workers (“UFCW”), which coversthe majority of the Company’s employees, expired on October 5, 2003.  Three major grocery retailers covered underthe expired agreement operated under strike or lockout from October 11,2003 through February 29, 2004 when a contract settlement wasreached.  During the labor dispute theCompany operated under contract extensions. In return, the UFCW agreed not to strike the Company.  Gelson’s remained open; its employeeselected not to strike the Company.  Thelabor dispute resulted in a temporary shift in consumer shopping patterns and asignificant increase in the Company’s sales and results of operations duringthe fourth quarter of 2003 and the first quarter of 2004.  The Company anticipates that with theFebruary 2004 contract settlement most former customers of the three majorgrocery retailers will return to their previous shopping patterns but thatpost-strike sales will be somewhat greater than during comparable pre-strikelevels as a result of the retention of some of the new shoppers that came toGelson’s during the labor dispute.

 

Prior to the contractexpiration, the Company agreed to be bound by all modifications regarding trustfunds and hourly wage rates as negotiated between the UFCW and the three majorgrocery retailers.  In lateFebruary 2004, employees of the three major retailers ratified a new laborcontract.  The new contract providesfor, among other things, a new two-tier employment structure, elimination ofhealth care maintenance of benefits provided for under the prior agreement andbonus payments in lieu of wage increases. In a vote held on March 24-25, 2004, employees of the Company who aremembers of the UFCW ratified a new labor contract on terms similar to thosereached by the three major grocery retailers. The new labor contract expires in March 2007.

 

54

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**REPORTOF INDEPENDENT AUDITORS**

 

 

To the Stockholders of ArdenGroup, Inc.:

 

In our opinion, theaccompanying consolidated balance sheets and the related consolidatedstatements of operations and comprehensive income, stockholders’ equity andcash flows, present fairly, in all material respects, the financial position ofArden Group, Inc. and its subsidiaries at January 3, 2004 and December 28,2002 and the results of their operations and their cash flows for each of thethree years in the period ended January 3, 2004 in conformity withaccounting principles generally accepted in the United States of America. Thesefinancial statements are the responsibility of the Company’s management; ourresponsibility is to express an opinion on these financial statements based onour audits. We conducted our audits of these statements in accordance withauditing standards generally accepted in the United States of America, whichrequire that we plan and perform the audit to obtain reasonable assurance aboutwhether the financial statements are free of material misstatement. An auditincludes examining, on a test basis, evidence supporting the amounts anddisclosures in the financial statements, assessing the accounting principlesused and significant estimates made by management, and evaluating the overallfinancial statement presentation. We believe that our audits provide areasonable basis for our opinion.

 

 
| /s/PRICEWATERHOUSECOOPERS  LLP |   |
|--------------------------------|--------|
|                           |
|                           |
| Los Angeles,  California       |
| March 12,  2004           |

 

55

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**ARDEN GROUP, INC. ANDCONSOLIDATED SUBSIDIARIES**

 

**INDEX TO EXHIBITS**

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

 

56

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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 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 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 year ended January 2, 1999 and  incorporated herein by reference.                                                                                                                                                                        |
|        |   |                                                                                                                                                                                                                                                                                                                                                                           |
| 10.6*       |   | Form of  Non-Employee Director Phantom Stock Unit Agreement with each of John G.  Danhakl, Robert A. Davidow, Daniel Lembark and Ben Winters filed as Exhibit 10.1  to the Quarterly Report on Form 10-Q of Arden Group, Inc. for the quarter  ended July 1, 2000 and incorporated herein by reference.                                                                   |
|        |   |                                                                                                                                                                                                                                                                                                                                                                           |
| 10.7*       |   | Form of  Non-Employee Director Phantom Stock Unit Agreement with Kenneth A. Goldman  dated June 19, 2001 filed as Exhibit 10.13 to the Annual Report on Form  10-K of Arden Group, Inc. for the fiscal year ended December 29, 2001  and incorporated herein by reference.                                                                                           |
|        |   |                                                                                                                                                                                                                                                                                                                                                                           |
| 10.8*       |   | Form of  Amendment to Non-Employee Director Phantom Stock Unit Agreement with each  John G. Danhakl, Robert A. Davidow, Daniel Lembark, Ben Winters and Kenneth  A. Goldman dated December 9, 2002 filed as Exhibit 10.14 to the Annual  Report on Form 10-K of Arden Group, Inc. for the fiscal year ended  December 28, 2002 and incorporated herein by reference. |
|        |   |                                                                                                                                                                                                                                                                                                                                                                           |
| 10.9*       |   | Arden Group,  Inc., Non-Officer and Non-Director Stock Option Plan filed as Exhibit 10.15  to the Annual Report on Form 10-K of Arden Group, Inc. for the fiscal year  ended December 28, 2002 and incorporated herein by reference.                                                                                                                                      |
|        |   |                                                                                                                                                                                                                                                                                                                                                                           |
| 10.9.1*     |   | Form of  Stock Option Plan Agreement filed as Exhibit 10.15.1 to the Annual Report on  Form 10-K of Arden Group, Inc. for the fiscal year ended December 28,  2002 and incorporated herein by reference.                                                                                                                                                                  |

 

57

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| **Exhibit** |   |                                                                                                                                                                                                                                            |
|-------------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|        |   |                                                                                                                                                                                                                                            |
| 10.10*      |   | Form of  Non-Employee Director Phantom Stock Unit Agreement with Steven Romick filed  as Exhibit 10.1 to the Quarterly Report on Form 10-Q of Arden Group, Inc. for  the quarter ended June 28, 2003 and incorporated herein by reference. |
|        |   |                                                                                                                                                                                                                                            |
| 21.         |   | Subsidiaries  of Registrant filed as Exhibit 21 to the Annual Report on Form 10-K of Arden  Group, Inc. for the fiscal year ended December 28, 2002 and incorporated  herein by reference.                                                 |
|        |   |                                                                                                                                                                                                                                            |
| 23.1        |   | Consent of  Independent Accountants.                                                                                                                                                                                                            |
|        |   |                                                                                                                                                                                                                                            |
| 31.1        |   | Certification  of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley  Act of 2002.                                                                                                                                      |
|        |   |                                                                                                                                                                                                                                            |
| 31.2        |   | Certification  of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley  Act of 2002.                                                                                                                                      |
|        |   |                                                                                                                                                                                                                                            |
| 32.1        |   | Certification  of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley  Act of  2002.                                                                                                                                |
|        |   |                                                                                                                                                                                                                                            |
| 32.2        |   | Certification  of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley  Act of 2002.                                                                                                                                      |

 

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*                                         Indicatesmanagement contracts or compensatory plans or arrangements required to be filedas an exhibit to this report.

 

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