Tableof Contents

 

 

 

**UNITED STATES SECURITIES AND EXCHANGE COMMISSION**

**Washington, D. C. 20549**

 

**FORM 10-K**

 

**(Mark One)**

 

**x****     ****ANNUAL REPORT PURSUANT TO SECTION 13OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

** **

**For thefiscal year ended January 2, 2010**

** **

**OR**

 

**o****        ****TRANSITION REPORT PURSUANT TO SECTION 13OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

** **

**For thetransition period from                to           **

** **

**Commissionfile number  0-9904**

 

**ARDEN GROUP, INC.**

(Exact name of registrant as specified in its charter)

 

| **Delaware**                     | ** ** | **95-3163136**                        |
|----------------------------------|------------|---------------------------------------|
| (State or other  jurisdiction of |       | (I.R.S. Employer  Identification No.) |
| incorporation or  organization)  |       |                                  |

 

| **2020  South Central Avenue, Compton, California** | ** ** | **90220**  |
|-----------------------------------------------------|------------|------------|
| (Address of  principal executive offices)           |       | (Zip Code) |

 

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

 

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

 

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

 

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

 

**None**

(Title of each class)

 

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

 

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

 

Indicate by checkmark whether the registrant (1) has filed all reports required to be filedby Section 13 or 15(d) of the Securities Exchange Act of 1934 duringthe preceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.   Yes x  No o

 

Indicate by checkmark whether the registrant has submitted electronically and posted on itscorporate Web site, if any, every Interactive Data File required to besubmitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 ofthis chapter) during the preceding 12 months (or for such shorter period thatthe registrant was required to submit and post such files).   Yes o  No o

 

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

 

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

 

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

 

Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2of the Act).    Yes o  No x

 

The aggregate marketvalue of the voting and non-voting common equity held by non-affiliates of theregistrant based on the price at which the Class A Common Stock last soldon July 3, 2009, the last business day of the registrant’s most recentlycompleted second fiscal quarter, was $157,461,886.

 

The number of sharesoutstanding of the registrant’s class of common stock as of March 5, 2010was:

 

3,161,098 sharesof Class A Common Stock

 

DOCUMENTSINCORPORATED BY REFERENCE

 

The information requiredby Part III of this report is incorporated by reference from theRegistrant’s definitive Proxy Statement for the Annual Meeting of Stockholdersto be held June 15, 2010.

 

 

 

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**TABLEOF CONTENTS**

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

 

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** **

**PART I**

 

Item1.                Business

 

**General**

 

The Registrant,Arden Group, Inc. (Company or Arden), is a holding company which conductsoperations through its wholly-owned subsidiary, Arden-Mayfair, Inc.(Arden-Mayfair) and Arden-Mayfair’s wholly-owned subsidiary, Gelson’s Markets(Gelson’s) which operates supermarkets in Southern California.  The Company also owns certain real estateproperties through a subsidiary, Mayfair Realty, Inc. (Mayfair Realty)which is wholly-owned by the Company and Arden-Mayfair.  The Company is a Delaware Corporationorganized in 1988.

 

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

 

**MarketOperations**

 

As of January 2,2010, Gelson’s operated 18 full-service supermarkets in Southern California,which carry both perishable and dry grocery products.  Gelson’s offers a broad selection of localand national brands as well as a limited number of private label items.  Gelson’s targets the consumer who valuessuperior customer service, merchandise, presentation and selection.  Gelson’s also operates a distribution centerin the City of Commerce, California.

 

**StoreFormats and Business Strategy**

 

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

 

Merchandise The merchandise offerings in the markets are tailored in response toGelson’s customer profile.  Gelson’sstores, which range in size from approximately 18,000 to 40,000 square feet,typically carry a wide range of items, including traditional grocery categoriessuch as dry groceries, produce, meat, seafood, bakery, dairy, wine and liquor,floral, sushi, vitamins and health and beauty aids.  Gelson’s perishables are typically premiumproducts, which are rigorously maintained and culled as appropriate to assurequality and freshness.  Gelson’s merchandisingincludes specialty items such as imported foods, unusual delicatessen items andorganic and natural food products.

 

Service Gelson’s emphasizes customer service by offering a variety of servicedepartments including meat, seafood, delicatessen, floral, sushi, cheese andbakery departments.  All sushi and mostbakery departments are operated by third parties.  Some Gelson’s stores include additionalservice departments such as fresh pizza, coffee bars, hot bars, gelato bars andcarving carts offering cooked meats. Additionally, selected stores offer banking and pharmacy servicesthrough third parties.  Stores arestaffed so that, even at peak times, customer checkout time is minimized.  In addition to checkers, there are personnelassigned to bagging and assisting customers. All employees are encouraged to know customers by name and assist themwhenever possible.  All stores offer a 

 

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Company chargecard to qualified customers in addition to the option of paying for theirpurchases with cash, checks, credit or debit cards.  Stores are typically open 14 to 17 hours perday, with hours of operation determined by local code, lease provisions or asappropriate for the business characteristics of each community.

 

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

 

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

 

Expansion and StoreDevelopment  Management regularly evaluates thefeasibility of opening new stores in and outside its existing trade areas andremodeling existing stores in order to maximize the existing stores’ appeal toconsumers and their profit potential.  In2009, capital expenditures totaled $2,890,000.

 

Advertising andPromotion  Gelson’s advertises on a limited basis innewspapers and through its newsletter. In the past, advertising has focused primarily on the promotion of eventsrather than prices; for example, Gelson’s emphasizes special holidayselections, new products, specialty items, services and recipes.  More recently, with the continued downturn inthe economy, the Company has redirected more of its advertising to focus oncompetitive pricing as consumers have become more and more priceconscious.  In addition, Gelson’smaintains a website at www.gelsons.com which allows customers to learn more about Gelson’sand to read about food related topics that may be of interest to them.  The website also provides an opportunity forcustomers to request a newsletter, offer feedback and to place catering andholiday meal orders online.  The Companyreevaluates its strategy regularly in an effort to identify the most effectivemeans of attracting and retaining customers.

 

**Competition**

 

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

 

Certaincompetitors of the Company offer home delivery, in-store banks and pharmaciesin addition to their existing retail store operations.  The Company continues to monitor and evaluateopportunities for home delivery, but has elected not to do so at thistime.  A few of the Company’s storesoffer in-store banks and pharmacies; most of the Company’s stores are not largeenough for such additional facilities.

 

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**Seasonality**

 

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

 

**Supportand Other Services**

 

Each store has anon-site stockroom, the size of which varies for each store.  In addition, Gelson’s operates a 127,000square foot warehouse and an adjacent 4,000 square foot truck service facilityin the City of Commerce, California.  Thecentral warehouse distributes fresh produce, liquor, wine, floral and certaingrocery items to the stores.  The storesalso receive meat, delicatessen, paper goods, health and beauty aids, hardwareand supply items from the warehouse on a limited basis.

 

The bulk of allmerchandise purchasing takes place at Gelson’s headquarters in Encino,California.  Approximately 49% of thepurchases for 2009 were distributed through the central warehouse; the remainderwas delivered directly to the stores from manufacturers, distributors orwholesalers.  The central purchasing anddistribution operations are conducted based on electronic in-store orderingsystems.  Stores can place and receiveorders up to six days per week. Perishables are ordered more frequently than other goods.

 

The largestsupplier for the stores is Unified Grocers, Inc. (Unified), a grocerywholesale cooperative, which has been a supplier to the Company forapproximately thirty-five years and which accounted for approximately 16% ofGelson’s purchases in fiscal 2009.  Noother supplier accounts for more than 4% of Gelson’s purchases.  The Company believes that there would be anegative short-term impact if the Company were to lose Unified as a supplierfor Gelson’s, but that such impact would likely be mitigated by a combinationof events, which could include:  (i) purchasingcertain items for direct store delivery, thereby freeing warehouse capacity toallow other items to be purchased through the warehouse and (ii) purchasingcertain products through other wholesalers. However, such a loss could have a short-term adverse effect on theperformance of Gelson’s.

 

**Employees**

 

Gelson’s hadapproximately 1,274 full-time and 860 part-time store, warehouse and officeemployees at January 2, 2010. Most Gelson’s employees are covered by union collective bargainingagreements that establish rates of pay, benefits and procedures for the orderlysettlement of disputes.  In general,these agreements have been negotiated on a local industry-wide basis.

 

In addition toemployees at Gelson’s, Arden-Mayfair had approximately 62 employees at itsexecutive and headquarters offices as of January 2,2010, some of whom are covered by a collective bargaining agreement.

 

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**GovernmentalRegulation**

 

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

 

**AvailableInformation**

 

The Companymaintains a website at www.ardengroupinc.com. Access to the Company’s Securities and Exchange Commission (SEC)filings, including annual reports on Form 10-K, quarterly reports on Form 10-Q,current reports on Form 8-K, Section 16 filings and all amendments tothose reports, are available through our website free of charge, as soon asreasonably practicable after these reports are filed electronically with theSEC.  In addition, the Company willprovide free of charge upon written request to Assistant Secretary, Arden Group, Inc.,P.O. Box 512256, Los Angeles, California 90051-0256 paper copies of thereports listed above.

 

Item1A.                 Risk Factors

 

The Private SecuritiesLitigation Reform Act of 1995 provides a safe harbor for forward-lookingstatements made by or on behalf of the Company. Certain statements contained in this Item 1A, Item 7 - Management’s Discussionand Analysis of Financial Condition and Results of Operations, other parts ofthis report and other Company filings are forward-looking statements.  These statements discuss, among other things,future sales, operating results and financial condition.  Forward-looking statements reflect theCompany’s current plans and expectations regarding important risk factors andare based on information currently known to the Company.

 

The Company cautionsreaders that any forward-looking statements contained in this report or made bythe management of the Company involve risks and uncertainties, and are subjectto change based on various important factors. Such statements may be identified by such words as “anticipate,” “expect,”“may,” “believe,” “could,” “estimate,” “project,” and similar words orphrases.  The Company does not undertake any obligation toupdate forward-looking statements.  Thefactors listed below, among others, could affect the Company’s financialresults and could cause the Company’s financial performance to differmaterially from the expectations expressed in any forward-looking statementmade by or on behalf of the Company:

 

*Changesin Economic, Political or Social Conditions*

 

Ourprofitability may be impacted by both national and local economic conditions,particularly in Southern California. Changes in economic conditions such as recessionary cycles, increasedlevels of unemployment, higher consumer debt levels, inflation, higher interestrates and tax rates and increased energy costs may result in reduced consumerspending or influence our customers to shift their spending to our lower-pricedcompetitors.  The recent downturn in theeconomy, including the financial and residential real estate markets, andhigher levels of unemployment have and will 

 

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continueto influence consumer spending patterns in the future.  In addition, current market conditions havecontinued to limit the amount that the Company can charge for its products andthe Company has recently emphasized price specials in its advertising.  If the Company’s sales volume continues todecrease or if the Company is unable to pass increased costs on to itscustomers, profit margins may be negatively affected.  In addition, our business may be subject tointerruption from acts of terrorism, national emergencies or natural disasters.

 

*Competitionin the Grocery Business*

 

Theretail grocery business is intensely competitive with respect to price, foodquality and selection, service and location. During the past several years, there has been a consolidation in thesupermarket industry.  The Company is indirect competition with numerous local outlets of regional and nationalsupermarket chains, independent grocery stores, convenience stores, specialtyand gourmet markets and food and grocery departments in mass merchandise andclub stores.  There are a number of wellestablished competitors with substantially greater financial, marketing,personnel and other resources than ours, some of which are also nonunion.  The Company frequently faces the opening of anew or remodeled competitor’s store in its trade area.  Competition also requires us to periodicallyremodel our existing stores in order to maintain their appeal.  An inability to successfully compete withother grocery retailers in our trade areas could prevent us from increasing orsustaining our revenues and profitability.

 

*Foodand Drug Safety Concerns*

 

Thereis increasing governmental scrutiny and public awareness regarding food anddrug safety.  The Company could beadversely affected if consumers lose confidence in the safety and quality ofthe Company’s food and drug products.  Anyevents that give rise to actual or potential food contamination, drugcontamination or food-borne illness could result in product liability claimsand a loss of consumer confidence.  Inaddition, adverse publicity about these types of concerns whether valid or not,may discourage consumers from buying the Company’s products or cause productionand delivery disruptions, which could have an adverse effect on the Company’ssales and results of operations.

 

*NewLabor Contracts and Labor Stoppages*

 

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

 

InJuly 2007, the United Food & Commercial Workers InternationalUnion (UFCW) completed negotiation of a new contract with the three majorgrocery retailers in our trade area.  Thewage increases agreed to by these three competitors were somewhat less than theCompany agreed to for certain job classifications and experience levels duringour UFCW negotiations in February 2007 and March 2009.  This could affect our ability to compete withgrocery retailers whose labor costs are less than our own.  Our contact with the UFCW expires March 6,2011, the same as the majors’ contract.

 

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*Cost ofProviding Employee Benefits*

 

TheCompany provides health insurance for the majority of its nonunionemployees.  Health care costs haveincreased significantly in recent years. If this trend continues, it could have a negative impact on theCompany’s profitability.  In addition,the Company contributes to several multi-employer union health care plans inaccordance with the Company’s various collective bargaining agreements.  Previously, the health and welfare fund whichcovers the majority of the Company’s UFCW employees was overfunded.  The contribution rate paid by all employerswas reduced effective March 2007. Originally, the reduction in the health and welfare contribution ratewas expected to reduce the overfunded status of the fund over the term of thecurrent agreement which ends on March 6, 2011.  However, many factors influence the status ofthe fund including changes in the cost of health care, the return on investmentof funds held by the plan, changes to benefits offered under the plan andgovernment regulations.  The Company’shealth and welfare contribution rate was scheduled to increase effective with hoursworked during March 2009; however, the Company was notified by theSouthern California United Food & Commercial Workers Unions and theFood Employers Joint Trust Funds (Trust), in the first quarter of 2009, thatthe increase had been suspended.   TheTrust is in the process of reviewing their health and welfare reserves. Basedon informal discussions, the Company currently anticipates that it will benotified in April 2010 of an increase effective beginning with March 2010hours worked.  The Trust has indicatedthat the increase could be significant.

 

TheCompany also participates in various multi-employer union pension plans.  Adverse financial market developments havesignificantly impacted the funded status of pension plans on a worldwide basis.  Currently, the Company’s contributions underthe UFCW pension plan are fixed under the terms of the current agreement whichends on March 6, 2011.  The ongoingeconomic downturn has had a significant impact on the funded status of thehealth care and pension plans to which the Company contributes. The Companyanticipates that both health care and pension benefits will be important topicsin future negotiations.  If the Companyand other participating employers are unable to negotiate an acceptableagreement with the union concerning employee benefits, a labor dispute couldresult or the negotiations could result in a new agreement requiring highercontribution rates.  In addition, if anyof the participating employers in the plan withdraws from the plan due to insolvencyand is not able to contribute an amount sufficient to cover the underfundedliabilities associated with its participants, the Company may be required tomake additional contributions.  Each ofthese scenarios could negatively impact the Company’s financial condition andresults of operations.

 

*Retentionof Key Personnel*

 

Oursuccess is dependent on our key employees. We must continue to attract, retain and motivate a sufficient number ofqualified management and operating personnel including the replacement ofsenior management upon retirement. Individuals of this caliber could be in short supply and this shortagemay limit our ability to hire and retain qualified personnel, and thus, mayhinder our ability to operate effectively.

 

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*Changesin Laws or Regulations or Failure to Comply*

 

Weare subject to various federal, state and local laws, regulations and licensingrequirements which regulate health and sanitation standards, food labeling andhandling, the sale of alcoholic beverages, employment practices, workingconditions, citizenship requirements and public accommodations.  Changes to such laws or regulations mayadversely affect our profitability by increasing our costs or affecting thesale of certain items.  In addition, wemust comply with state and local fire, zoning, land use and environmentalregulations.  Failure to comply withthese regulations could adversely affect the costs and the operation of ourexisting stores or could delay or prevent the opening of a new store.

 

*Changesin Accounting Standards, Policies and Practices*

 

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

 

*Availabilityand Retention of Retail Space*

 

Wecurrently lease the majority of our store locations.  Typically, our supermarket leases haveinitial 20-year lease terms and may include options for up to an additional 20years.  The average term remaining on oursupermarket leases, including renewal options, is approximately 18 years.  Our revenues and profitability would benegatively impacted if we are unable to renew these leases at reasonable rates.

 

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

 

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

 

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

 

*Abilityto Control  Insurance Coverage Costs andClaims Experience*

 

Weuse a combination of insurance and self-insurance plans to provide for coverageassociated with losses related to workers’ compensation, general and autoliability, property damage, directors and officers liability, fiduciary,employment practices liability, business interruption, crime, earthquake andhealth care.  If insurance costsincrease, it could have a negative impact on our profitability if we 

 

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arenot able to offset the effect of such increases with plan modifications, costcontrol measures, sales increases or by improving our operating efficiency.

 

Weare self-insured for general and auto liability and, in some prior years, forworkers’ compensation as well.  We havestop-loss insurance coverage to limit our exposure on a per claim basis and areinsured for covered costs in excess of per claim limits.  The Company devotes substantial time andeffort to maintaining a safe environment in our stores, warehouse and offices.  However, the cost of both insured andself-insured plans is highly dependent upon legal and legislative trends, theinflation rate of premiums and our ability to manage claims.

 

*TheOutcome of Current and Future Legal Proceedings*

 

Fromtime to time we are the subject of complaints or litigation from customersalleging injury, food quality or operational concerns.  We may be adversely affected by publicityresulting from such allegations, regardless of whether such allegations arevalid or whether we are liable.  We arealso subject to complaints or allegations from former or current employees,claims concerning hazardous substances on our current or previously ownedproperties, class action suits concerning warning labels and other claims.  A lawsuit or claim could result in a decisionagainst us that could have an adverse effect on our business if not covered byinsurance.  Additionally, the cost ofdefending ourselves against lawsuits and claims, regardless of merit, couldhave a negative impact on our profitability.

 

*Impactof Local Projects in the Vicinity of our Supermarkets*

 

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

 

*StockPrice Volatility*

 

Themarket price of our Class A Common Stock (Class A) could be subjectto significant fluctuation in response to various market factors and eventsincluding general economic and market conditions, variations in our earningsresults, publicity regarding the Company or its competitors and the grocerybusiness in general.  The stock market inrecent years has experienced extreme price and volume fluctuations that havesometimes been unrelated or disproportionate to the operating performance ofcompanies.  Furthermore, there is not asignificant volume of trading in our Class A which subjects our stockprice to a higher level of volatility and may adversely impact the liquidity ofthe stock.  In March 2007, theCompany merged its Stock Bonus Plan into its 401(k) Retirement SavingsPlan (401(k) Plan) in order to satisfy the new congressionally mandateddiversification requirements.  Stockpreviously held for the benefit of participants in the Company’s Stock BonusPlan was transferred to individual participant accounts in the Company’s 401(k) Plan.  As of January 2,2010, participants in the Company’s 401(k) Planheld 72,744 shares of Class A in the 401(k) Plan.  These participants can elect to sell theirshares which may have a negative effect on the price of Class A.  Fluctuations in our Class A price alsoimpact compensation expense as it relates to our outstanding stock appreciationrights (SARs).  See Item 7 - Management’sDiscussion and Analysis of Financial Condition and Results of Operations forfurther information.

 

Item 1B.              Unresolved Staff Comments

 

None.

 

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Item 2.                Properties

 

The Company’s wholly-owned subsidiary, Mayfair Realty, currently ownstwo freestanding Gelson’s supermarket properties and a shopping center in whicha Gelson’s Market is located.  Theshopping center owned by Mayfair Realty, located in Calabasas, California,consists of approximately 58,000 leasable square feet, approximately 18,000square feet of which is leased to multiple tenants and approximately 40,000square feet of which is leased to Gelson’s. The remaining fifteen******supermarketsand the warehouse and distribution facilities which service the markets areleased from third parties.  Gelson’s corporateoffices in Encino, California and the Company’s executive office in BeverlyHills, California are also leased. Typically, supermarkets have initial 20-year lease terms and may includeoptions for up to an additional 20 years. These leases often require the payment of percentage rent on sales inexcess of certain levels in addition to minimum rent.  The average term remaining on Gelson’ssupermarket leases, including renewal options, is approximately 18 years.  The 18 markets range in size from approximately18,000 to 40,000 square feet.  Gelson’swarehouse, distribution and truck service facilities in the City of Commerce,California are leased and contain approximately 131,000 square feet.  The term of the lease, including renewaloptions, expires in January 2021. Mayfair Realty also owns a 30,000 square foot office building inCompton, California which serves as the Company’s headquarters and a parcel ofunimproved land in Rubidoux, California. The Company also owns (through Mayfair Realty) or leases several parcelsadjacent to, or near, four of its stores which are used for additionalparking.  In addition, AMG Holdings, Inc.(AMG Holdings), a wholly-owned subsidiary of Arden-Mayfair, leases as a tenant,a 62,000 square foot building in Los Angeles, California consisting of officeand warehouse space, which is entirely subleased to a third party until thelease on the property expires in 2012.

 

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 expectedindividually or in the aggregate to have a material adverse impact upon eitherthe Company’s consolidated financial position, results of operations or cashflows.  See the discussion of Commitmentsand Contingent Liabilities in Note 16 of Notes to Consolidated FinancialStatements.

 

Item 4.                Reserved

 

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**PART II**

** **

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

 

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

 
| ** **       | ** ** | **2009** | ** ** | **2008** | ** ** |
|------------------|------------|----------|------------|----------|------------|
| ** **       | ** ** | **High** | ** ** | **Low**  | ** ** | **High** | ** ** | **Low** | ** ** |
|             |       |     |       |     |       |   |   |   |   |
| 1st Quarter |       | $        | 128.14     |     | $          | 76.56 |   | $ | 159.50 |   | $ | 125.00 |   |
| 2nd Quarter |       | 131.50   |       | 103.55   |       | 144.77 |   | 114.06 |   |
| 3rd Quarter |       | 134.14   |       | 112.57   |       | 199.99 |   | 122.01 |   |
| 4th Quarter |       | 122.52   |       | 89.98    |       | 166.85 |   | 118.01 |   |
|                  |            |          |            |          |            |  |  |  |  |  |  |  |  |

 

(b)                                 As of January 2, 2010,there were 795 holders of record of the Company’s Class A, with aggregateholdings of 3,161,098 shares of Class A. This does not include 1,357,200******shares ofthe Company’s Class A owned by AMG Holdings, a wholly-owned second-tiersubsidiary of the Company.

 

(c)                                  The Company declared regularquarterly dividends of 25 cents per share of Class A during fiscal 2009and 2008.  The Company currentlyanticipates payment of comparable Class A quarterly dividends in futurequarters*.*

 

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

 

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Stock Performance Chart

 

The following graph compares the cumulative stockholder return on theCompany’s Class A with the cumulative total return of the S&P 500Index and the S&P Food Retail Index for the five-year period ending December 31,2009.  The graph assumes that $100 wasinvested on December 31, 2004, in the Class A and in each of theabove-mentioned indices with all dividends reinvested.  The information presented in the graph wasobtained by the Company from outside sources it considers to be reliable buthas not been independently verified by the Company.

 

 
| ** **                 | ** ** | **2004**   | ** ** | **2005**  | ** ** | **2006**   | ** ** | **2007**   | ** ** | **2008**   | ** ** | **2009**   | ** ** |
|----------------------------|------------|------------|------------|-----------|------------|------------|------------|------------|------------|------------|------------|------------|------------|
| **Arden Group, Inc.** | ** ** | **100.00** | ** ** | **93.27** | ** ** | **128.07** | ** ** | **150.85** | ** ** | **157.83** | ** ** | **119.91** | ** ** |
| S&P 500 Index          |       | 100.00     |       | 104.91    |       | 121.48     |       | 129.04     |       | 83.29      |       | 102.12     |       |
| S&P Food Retail  Index |       | 100.00     |       | 105.60    |       | 123.71     |       | 132.18     |       | 93.38      |       | 85.93      |       |

 

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Item 6.                Selected Financial Data

 

**ARDEN GROUP, INC. ANDCONSOLIDATED SUBSIDIARIES**

 

(In Thousands, ExceptShare and Per Share Data)

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

 
| ** **                                   | ** ** | **2009**  | ** ** | **2008**  | ** ** | **2007**  | ** ** | **2006**  | ** ** | **2005**  | ** ** |
|----------------------------------------------|------------|-----------|------------|-----------|------------|-----------|------------|-----------|------------|-----------|------------|
| Operations  For The Year:                    |       |      |       |      |       |      |       |      |       |      |       |
|                                         |       |      |       |      |       |      |       |      |       |      |       |
| Sales  (1)                                   |       | $         | 431,170    |      | $          | 479,117   |       | $         | 485,939    |      | $          | 482,737 |   | $ | 470,354 |   |
| Gross  profit                                |       | 166,239   |       | 184,500   |       | 187,991   |       | 186,336   |       | 180,423   |       |
| Operating  income                            |       | 36,036    |       | 40,319    |       | 45,177    |       | 36,680    |       | 31,816    |       |
| Other  income (expense), net                 |       | 253       |       | 1,188     |       | 3,307     |       | 2,439     |       | 1,606     |       |
| Income  tax provision                        |       | 14,665    |       | 16,840    |       | 19,277    |       | 15,895    |       | 13,571    |       |
| Net  income                                  |       | $         | 21,624     |      | $          | 24,667    |       | $         | 29,207     |      | $          | 23,224 |   | $ | 19,851 |   |
|                                         |       |      |       |      |       |      |       |      |       |      |       |
| Net  income per common share:                |       |      |       |      |       |      |       |      |       |      |       |
| Basic                                        |       | $         | 6.84       |      | $          | 7.80      |       | $         | 9.24       |      | $          | 7.16 |   | $ | 5.87 |   |
| Diluted                                      |       | 6.84      |       | 7.80      |       | 9.24      |       | 7.16      |       | 5.87      |       |
|                                         |       |      |       |      |       |      |       |      |       |      |       |
| Financial  Position At Year-End:             |       |      |       |      |       |      |       |      |       |      |       |
|                                         |       |      |       |      |       |      |       |      |       |      |       |
| Total  assets                                |       | $         | 115,097    |      | $          | 99,810    |       | $         | 166,689    |      | $          | 145,601 |   | $ | 147,027 |   |
| Working  capital                             |       | 33,925    |       | 13,847    |       | 70,154    |       | 41,942    |       | 41,304    |       |
| Long-term  debt                              |       | 1,228     |       | 1,228     |       | 1,228     |       | 1,228     |       | 1,453     |       |
| Stockholders’  equity                   |       | 69,610    |       | 51,160    |       | 108,493   |       | 82,294    |       | 82,320    |       |
| Capital  expenditures                        |       | 2,890     |       | 5,159     |       | 3,824     |       | 4,868     |       | 6,390     |       |
|                                         |       |      |       |      |       |      |       |      |       |      |       |
| Other  Operating and Financial Data:         |       |      |       |      |       |      |       |      |       |      |       |
|                                         |       |      |       |      |       |      |       |      |       |      |       |
| Number  of stores at end of fiscal year      |       | 18        |       | 18        |       | 18        |       | 18        |       | 18        |       |
|                                         |       |      |       |      |       |      |       |      |       |      |       |
| Sales  increase (decrease) (1):              |       |      |       |      |       |      |       |      |       |      |       |
| Total  stores                                |       | (10.1     | )%         | (1.4      | )%         | .6        | %          | 2.6       | %          | (6.6      | )%         |
| Same  stores                                 |       | (10.1     | )%         | (1.4      | )%         | .6        | %          | 2.6       | %          | (6.6      | )%         |
|                                         |       |      |       |      |       |      |       |      |       |      |       |
| Depreciation  and amortization               |       | $         | 5,599      |      | $          | 6,110     |       | $         | 6,685      |      | $          | 7,097 |   | $ | 7,401 |   |
| Dividends  declared per common share         |       | $         | 1.00       |      | $          | 1.00      |       | $         | 1.00       |      | $          | 1.00 |   | $ | 1.00 |   |
| Special  dividend declared per common share  |       |      |       | $         | 25.00      |      |       |      |       |      |       |   |
|                                         |       |      |       |      |       |      |       |      |       |      |       |
| Weighted  average common shares outstanding: |       |      |       |      |       |      |       |      |       |      |       |
| Basic                                        |       | 3,161,098 |       | 3,161,098 |       | 3,161,098 |       | 3,241,805 |       | 3,381,051 |       |
| Diluted                                      |       | 3,161,098 |       | 3,161,098 |       | 3,161,098 |       | 3,241,805 |       | 3,381,051 |       |

 

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(1)          Same store sales increasesor decreases are calculated by comparing year-over-year sales for stores thatwere open in both years.  If a store wasnot open for the entire year in both years being compared, then the store isnot included in the same store analysis. No stores were opened or closed during any of the periodspresented.  Fiscal 2008 was a 53-weekyear.  No adjustment was made to removethe additional week for comparison purposes. Store sales used to calculate sales increases or decreases, above, donot include revenue from leases, subleases, licensing arrangements and financecharges and, therefore, may not agree to total year-over-year sales increasesas disclosed in Item 7 - Management’s Discussion and Analysis of FinancialCondition and Results of Operations.

 

Item 7.                                           Management’s Discussion and Analysis ofFinancial Condition and Results of Operations

 

The Private SecuritiesLitigation Reform Act of 1995 provides a safe harbor for forward-lookingstatements made by or on behalf of the Company. Certain statements contained in Management’s Discussion andAnalysis of Financial Condition and Results of Operations, other parts of this report and otherCompany filings are forward-looking statements. These statements discuss, among other things, future sales, operatingresults and financial condition. Forward-looking statements reflect the Company’s current plans andexpectations regarding important risk factors and are based on informationcurrently available to us.  The Companycautions readers that any forward-looking statements contained in this reportor made by the management of the Company involve risks and uncertainties, and aresubject to change based on various important factors.  Such statements may beidentified by such words as “anticipate,” “expect,” “may,” “believe,” “could,” “estimate,”“project,” and similar words or phrases. The Companydoes not undertake any obligation to update forward-looking statements.

 

**Overview**

 

Ardenis a holding company which conducts operations through its first and secondtier wholly-owned subsidiaries, Arden-Mayfair and Gelson’s, respectively.  Gelson’s operates 18 full-servicesupermarkets in Southern California. Gelson’s caters to the upscale customer who expects superior quality,service and merchandise selection.  Inaddition to the customary supermarket offerings, Gelson’s offers specialtyitems such as imported foods, unusual delicatessen items and organic andnatural food products.  Gelson’s storesinclude the typical service departments such as meat, seafood, delicatessen,floral, sushi, cheese and bakery.  Inaddition, some stores offer further services including fresh pizza, coffeebars, hot bars, gelato bars and carving carts offering cooked meats.

 

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

 

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Laborand other related payroll costs are the second largest expense (after productcost) incurred by Gelson’s, and thus is a financial measure which is carefullymonitored by management.  As of fiscal2009 year end, Gelson’s had approximately 1,274 full-time and 860 part-timestore, warehouse and office employees. The majority of Gelson’s employees are members of the UFCW.  In February 2007, the Company completednegotiation of a new union contract with the UFCW to replace the contract whichexpired on March 5, 2007.  The threemajor grocery retailers in our trade area had not reached an agreement by thisdate.  The new Gelson’s contract startedthe elimination process of the two-tier wage configuration and returned it to asingle wage structure and provided for, among other things, wage increases andmodifications to the Company’s pension and health and welfare contributionrates.  The new contract originally hadan expiration date of March 5, 2010 which was different from theexpiration date of the majors’ contract. Effective March 10, 2009, the Company’s UFCW employees voted toratify an amendment to our contract with the UFCW which extends the contractexpiration date to March 6, 2011, the same date the contract between theUFCW and the majors expires.

 

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

 

Theagreement reached with the UFCW and the three major grocery retailers resultedin a substantial reduction in the average hourly contribution rates for pensionand health care.  The majority of thereduction relates to the health and welfare fund which was overfunded at thetime of contract negotiation.  Thereduction in the health and welfare contribution rate was originally expectedto substantially reduce the overfunded status of the fund during the term ofthe new contract.  The change incontribution rates for both pension and health care were retroactive to thebeginning of March 2007.  Thereduction in the contribution rates resulted in a substantial decrease in theCompany’s selling, general and administrative (SG&A) expense when comparingperiods covered by the current and the expired contracts.  The Company’s health and welfare contributionrate was scheduled to increase effective with hours worked during March 2009and after; however, the Company was notified by the Trust, during the firstquarter of 2009, that the increase had been suspended.  The Trust is in the process of reviewingtheir health and welfare reserves. Based on informal discussions, the Company currentlyanticipates that it will be notified in April 2010 of an increaseeffective beginning with March 2010 hours worked.  The Trust has indicated that the increasecould be significant.

 

Theongoing economic downturn has had a significant impact on the funded status ofthe health care and pension plans to which the Company contributes.  Many factors influence the funded status ofthe plans including changes in the cost of health care, the return oninvestments of funds held by the plan, changes to benefits offered under theplan and government regulations.  TheCompany anticipates that both health care and pension benefits will beimportant topics in future negotiations. If, in the future, the Company and other participating employers areunable to negotiate an acceptable agreement with the union concerning employeebenefits, a labor dispute could result or the 

 

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negotiationscould result in a new agreement requiring higher contribution rates.  In addition, if any of the participatingemployers in the plan withdraws from the plan due to insolvency and is not ableto contribute an amount sufficient to cover the underfunded liabilitiesassociated with its participants, the Company may be required to makeadditional contributions.  Each of thesescenarios could negatively impact the Company’s financial condition and resultsof operations.

 

Theagreement that the majors reached with the UFCW also provides for hourly wagerates based on job classification and experience that, in some cases, are lessthan those agreed to by Gelson’s.  Thisaffects our ability to compete with grocery retailers whose hourly rates areless than our own.  Increases in wagesprovided under the new contract have negatively impacted the Company’sprofitability to the extent it has been unable to offset the increased expensethrough a combination of sales growth, increased gross margin, management oflabor hours, decreased labor turnover and cost savings in other areas.  Current economic and competitive conditionsmake it difficult to achieve significant sales growth and increased profitmargins.

 

Anothercomponent of labor related expense is the cost of workers’ compensation.  For claims incurred prior to July 1,2006, the Company is primarily self-insured through the use of a highdeductible policy which provides the Company with stop-loss coverage to limitits exposure on a per claim basis and provides coverage for qualifying costs inexcess of per claim limits.  Since July 1,2006, the Company has purchased fully insured guaranteed cost workers’compensation insurance to replace the high deductible program. The guaranteedcost program eliminates the Company’s risk against claims occurring after June 30,2006 and has resulted in lower workers’ compensation expense compared to thehigh deductible program.  The Companycontinues to maintain an accrual for claims incurred prior to July 2006under the high deductible program.  Thataccrual is based on both undeveloped reported claims and an estimate of claimsincurred but not reported.  While theCompany devotes substantial time and commitment to maintaining a safe workenvironment, the ultimate cost of workers’ compensation is highly dependentupon legal and legislative trends, the inflation rate of health care costs andthe Company’s ability to manage claims.

 

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

 

**Results of Operations**

 

**2009 Compared to 2008**

 

Salesfrom the Company’s 18 supermarkets (all of which are located in SouthernCalifornia), including revenue from licensing arrangements, subleases, leasesand finance charges, were $431,170,000 in 2009. This represents a decrease of 10.0% from 2008, when sales were$479,117,000.  2009 sales declinedpartially as a result of fewer weeks in 2009 (a 52-week fiscal 

 

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year)compared to 2008 (a 53-week fiscal year). Sales were also negatively impacted by economic conditions and increasedcompetition in our trade area.

 

TheCompany’s gross profit as a percent of sales was 38.6% in 2009 compared to38.5% in 2008. In calculating gross profit, the Company deducts product costs,net of discounts and allowances, and inbound freight charges, as well aswarehouse, transportation, purchasing, advertising and occupancy costs.  Gross profit as a percent of sales for theCompany may not be comparable to those of other companies in the groceryindustry since there may be differences in recording certain costs as cost ofsales or as SG&A expense.

 

SG&A expense as apercent of sales was 30.2% in 2009 compared to 30.1% in 2008.  The increase in SG&A expense as a percentof sales is primarily due to an increase in the UFCW hourly wage rateseffective early March 2008 and 2009 in accordance with the currentcollective bargaining agreement.  To alesser extent, SG&A expense was also impacted by hourly wage rate increasesunder collective bargaining agreements with unions other than the UFCW and anincrease in utility costs.  Also, assales decrease, SG&A expense as a percent of sales increases to some degreeas certain of the Company’s costs are fixed and do not decrease proportionatelywith a decline in revenues.  The increasein SG&A expense as a percent of sales was partially offset by a decrease inSARs compensation expense.  During 2009,the Company reversed $273,000 of SARs compensation expense recognized in priorperiods due to a decrease in the fair value of SARs during the year partiallyoffset by additional vesting.  TheCompany recognized $1,823,000 of SARs compensation expense during 2008.

 

The Company contributesto several multi-employer union pension and health care plans.  Pension and health care payments aredetermined based on straight-time hours worked and the contribution rate asstipulated in the Company’s various collective bargaining agreements.  The**Companyrecognized union pension expense of $4,730,000 in 2009 compared to $5,065,000in 2008.  Union health care expense was$8,815,000 in 2009 compared to $9,258,000 in 2008.  Costs decreased due to a reduction in the number ofhours eligible for contributions.

 

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

 

Inaddition to coverage for workers’ compensation and general and auto liabilityclaims, the Company also carries property, business interruption, fiduciary,directors and officers, crime, earthquake, special event and employmentpractices liability insurance. Management believes, based on recent and past experience, that currentinsurance coverage meets the reasonable requirements of the Company.

 

Authoritativeguidance requires the Company to measure and recognize compensation expensebased on the fair value of SARs.  Thefair value must be remeasured each reporting period until the award is settledand compensation expense must be recognized or reversed each reporting periodto reflect changes in fair value and vesting. During 2009, the Company reversed $273,000 of SARs 

 

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compensationexpense recognized in prior periods due to a decrease in the fair value of SARsduring the year partially offset by additional vesting.  During 2008, the Company recognized$1,823,000 of SARs compensation expense. Compensation expense is included under SG&A expense on theConsolidated Statements of Operations and Comprehensive Income.  As of January 2, 2010, assuming nochange in the SARs fair value, there was approximately $1,046,000 of totalunrecognized compensation cost related to outstanding SARs which was expectedto be recognized over a weighted average period of 3.8 years were it not forthe exchange discussed below.  The totalintrinsic value of SARs exercised during 2009 and 2008 was approximately$34,000 and $3,443,000, respectively. Intrinsic value represents the amount by which the current fair value ofSARs exceeds the grant price.

 

InJanuary 2010, current holders of the Company’s SARs with a grant date onor before December 6, 2007 were offered the opportunity to exchange theirthen outstanding SARs units for an equal number of new SARs units with a lowergrant price of $110 and a new vesting period. Existing grant prices for these units ranged from $121.03 to$146.44.  Ordinarily, the grant price isdetermined based upon the fair market value of a share of the Company’s Class Aon the date of grant.  On the date theexchange offer was made to these SARs holders, the Class A closing pricewas $95.98 per share. For those holders who accepted the Company’s exchangeoffer, the new SARs were granted effective January 15, 2010 and expire January 15,2017.  The fair market value of a shareof the Company’s Class A on the grant date was $108.71.  In the event that the SARs holder opted toexchange their SARs, they also agreed to start their vesting period over. Thenew SARs vest 25% each year beginning at the end of the third year and expireseven years from the date of grant.  Ofthe 110,625 SARs units outstanding at fiscal 2009 year end, 99,000 SARs unitswere exchanged.  The Company had accruedapproximately $830,000 related to the exchanged SARs as of January 2,2010.  These same SARs units were valuedat $817,000 as of January 15, 2010 just prior to the exchange.  After the exchange, the accrual of $817,000was reversed in fiscal 2010.  The Companywill continue to measure the fair value of the new SARs at the end of eachreporting period going forward and will recognize compensation expense toreflect any increase in fair value and vesting if appropriate.  The Company cannot predict futurefluctuations in the market price of its Class A and, therefore, cannotforecast future SARs compensation expense adjustments.

 

During2009, the Company procured approximately 16% of its product through Unified, agrocery wholesale cooperative.  As amember-patron, theCompany is required to provide Unified with certain minimum deposits in orderto purchase product from the cooperative. As of January 2, 2010, the Company had approximately $1,628,000 ondeposit with Unified, in addition to approximately $694,000 related toownership of equity shares in Unified. There is no established public trading market for Unified’s shares.  In 2009 and 2008, the Company recordedapproximately $56,000 and $251,000, respectively, in patronage dividend incomereceived in the form of cash and Unified equity shares as a reduction of costof sales.

 

Interest and dividendincome was $756,000 in 2009 compared to $2,460,000 for 2008. The decrease ispartially due to significantly lower interest rates as a result of the generaleconomic financial crisis.  In addition,the Company’s cash available for investment was significantly lower during 2009compared to 2008 due to a special cash dividend paid on December 8, 2008totaling approximately $79,027,000.

 

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**2008 Compared to 2007**

 

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

 

TheCompany’s gross profit as a percent of sales was 38.5% in 2008 compared to 38.7% in 2007. In calculatinggross profit, the Company deducts product costs, net of discounts and allowances,and inbound freight charges, as well as warehouse, transportation, purchasing, advertisingand occupancy costs.  Gross profit as apercent of sales for the Company may not be comparable to those of othercompanies in the grocery industry since there may be differences in recordingcertain costs as cost of sales or as SG&A expense.

 

SG&A expense as apercent of sales was 30.1% in 2008 compared to 29.4% in 2007.  The increase in SG&A expense as a percentof sales is primarily due to an increase in UFCW hourly wage rates effectiveearly March 2008 in accordance with the current collective bargainingagreement.  To a lesser extent, SG&Aexpense was also impacted by hourly wage rate increases under collectivebargaining agreements with unions other than the UFCW.  These increases were partially offset bylower SARs compensation expense in 2008 compared to the prior year.  During 2008,the Company recognized $1,823,000 of SARscompensation expense compared to $2,908,000in 2007.

 

The Company contributesto several multi-employer union pension and health care plans.  Pension and health care payments aredetermined based on straight-time hours worked and the contribution rate asstipulated in the Company’s various collective bargaining agreements.  The**Company recognizedunion pension expense of $5,065,000 in 2008compared to $5,332,000 in 2007. Union health care expense was $9,258,000in 2008 compared to $9,788,000 in 2007.  Costs decreased due to a reduction in the averagehourly contribution rate effective March 2007 and in the number of hourseligible for contributions.

 

Fora discussion of workers’ compensation, general and auto liability and othertypes of insurance coverage, see the discussion under the heading “2009Compared to 2008” presented above.

 

During 2008, the Company procured approximately 16% ofits product through Unified, a grocery wholesale cooperative.  As a member-patron, the Company is requiredto provide Unified with certain minimum deposits in order to purchase productfrom the cooperative.  As of January 3, 2009,the Company had approximately $1,628,000 on deposit with Unified, in additionto approximately $672,000 related to ownership of equity shares inUnified.  There is no established publictrading market for Unified’s shares.  In 2008 and 2007,the Company recorded approximately $251,000 and $253,000, respectively, in patronage dividend income received in theform of cash and Unified equity shares as a reduction of cost of sales.

 

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

 

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**Liquidityand Capital Resources**

 

TheCompany’s current cash position, including investments and net cash provided byoperating activities, are the primary sources of funds available to meet theCompany’s capital expenditure and liquidity requirements.  The Company’s cash position, includinginvestments, at January 2, 2010 was $38,381,000.  The Company’s cash position had been reducedby approximately $79,027,000 on December 8, 2008 when the Company paid aspecial cash dividend of twenty-five dollars ($25) per share on the Company’s Class A.  Cash not required for the immediate needs ofthe Company is temporarily invested in U.S. Treasuries, certificates ofdeposit, money market funds, commercial paper and corporate and governmentsecurities.  Currently, all temporaryinvestments are highly liquid.  TheCompany is continually investigating opportunities for the use of these fundsincluding new locations and the expansion and remodel of existing stores.  The Company completed the conversion of itslast remaining Mayfair store to the Gelson’s name and format as part of a majorremodel during the Spring of 2009.  Allof the Company’s 18 stores are now operated under the Gelson’s name.

 

TheCompany also has two revolving lines of credit totaling $23,000,000 availablefor standby letters of credit, funding operations and expansion.  There were no outstanding borrowings againsteither of the revolving lines as of January 2, 2010.  The Company currently maintains four standbyletters of credit aggregating $8,769,000 pursuant to the Company’s leaserequirements and general and auto liability and workers’ compensationself-insurance programs.  The standbyletters of credit reduce the available borrowings under its revolving lines.

 

The Company’s workingcapital was $33,925,000 at January 2, 2010 compared to $13,847,000 at January 3,2009.  The Company believes thatits current working capital, as well as future cash flow, is sufficient to meetits ongoing needs during fiscal 2010.  Net cash provided by operating activitiesduring fiscal 2009 totaled $25,734,000. Cash flows from operating activities resulted primarily from net incomeplus non-cash expenses and changes in working capital.

 

Net cash used byinvesting activities was $19,879,000 in 2009. Investing activities included the purchase of investments of $30,164,000and capital expenditures of $2,890,000 partially offset by the sale ofinvestments of $13,127,000.  Net cashused in financing activities consisted solely of dividends paid during2009 totaling $3,161,000.

 

The Company’s currentratio was 2.04 at January 2, 2010 compared to 1.41 at January 3,2009.  The Company’s total liabilities toequity ratio decreased to .65 at January 2, 2010 from .95 at January 3,2009.

 

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The followingtable sets forth the Company’s contractual cash obligations and commercialcommitments as of January 2, 2010:

 
| ** **                                                                    | ** ** | **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 |       | $                                                | 1,658      |   | $ | 86 |   | $ | 172 |   | $ | 1,400 |   | $ | 0 |   |
|                                                                          |       |                                             |       |   |   |   |   |   |   |   |   |
| Operating  Leases                                                             |       | 121,401                                          |       | 10,896 |   | 20,208 |   | 17,997 |   | 72,300 |   |
|                                                                          |       |                                             |       |   |   |   |   |   |   |   |   |
| Total  Contractual Cash Obligations (1)                                       |       | $                                                | 123,059    |   | $ | 10,982 |   | $ | 20,380 |   | $ | 19,397 |   | $ | 72,300 |   |

 
| ** **                     |       | **Other Commercial Commitments (In Thousands)** |       |
|--------------------------------|------------|-------------------------------------------------|------------|
| ** **                     | ** ** | **Total**                                       | ** ** | **Less  Than  1 Year** | ** ** | **1-3  Years** | ** ** | **4-5  Years** | ** ** | **After  5 Years** | ** ** |
|                           |       |                                            |       |   |   |   |   |   |   |   |   |
| Standby  Letters of Credit (2) |       | $                                               | 8,769      |   | $ | 8,769 |   | $ | 0 |   | $ | 0 |   | $ | 0 |   |
|                                |            |                                                 |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

----

(1)   Other Contractual CashObligations

 

The Company had the following other contractual cash obligations at January 2,2010.  The Company is unable to includethese liabilities in the tabular disclosure of contractual cash obligations asthe exact timing and amount of payments is unknown.

 

*Self-Insurance Reserves*

 

TheCompany is primarily self-insured for losses related to general and autoliability claims and for all open years prior to July 1, 2006 for workers’compensation.  The Company maintainsstop-loss insurance coverage to limit its loss exposure on a per claimbasis.  Effective July 1, 2006, theCompany purchased a fully insured guaranteed cost workers’ compensationinsurance policy for losses occurring after June 30, 2006.  This policy replaced the high deductibleprogram for workers’ compensation. Liabilities associated with the risks that are retained by the Companyunder the high deductible programs are estimated, in part, by consideringhistorical claims experience and regression analysis.  Accruals are based on reported claims and anestimate of claims incurred but not reported. While the ultimate amount of claims incurred is dependent on futuredevelopments, in management’s opinion recorded reserves are adequate to coverthe future payment of claims.  TheCompany’s liability reserve for unpaid and incurred but not reported claims at January 2,2010 was approximately $4,577,000.

 

*Employment Agreement*

 

The Company has an employment agreement with a key executiveofficer that provides for annual retirement compensation for the remainder ofhis lifetime equal to 25% of his average base salary and bonus earned in thelast three fiscal years prior to his retirement.  The Company had accrued $1,873,000 under theterms of the employment agreement as of January 2, 2010.

 

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*Property, Plant and Equipment Purchases*

 

As of January 2, 2010, management had authorized expenditures onincomplete projects for the purchase of property, plant and equipment whichtotaled approximately $1,489,000.  The Company hasan ongoing program to remodel existing supermarkets and to add new stores.  During 2009, total capital expenditures were$2,890,000.

 

(2)   Standby Letters of Credit

 

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

 

InMarch 2007, the Company announced a stock repurchase program, authorizedby the Board of Directors, to purchase from time to time up to 200,000 shares of its Class A in the openmarket or in private transactions.  Thiswas in addition to 22,904 sharesremaining under prior repurchase authorizations.  The timing, volume and price of purchases areat the discretion of the management of the Company.  No stock was repurchased under this programin 2009, 2008 or 2007.

 

During2009 and 2008, the Company paid regular quarterly dividends of 25 cents pershare of Class A for a total of approximately $3,161,000 in each year.  Inaddition, the Company paid a special cash dividend of twenty-five dollars ($25)per share on its outstanding Class A totaling approximately $79,027,000 onDecember 8, 2008 to stockholders of record at the close of business on November 20,2008.

 

**CriticalAccounting Policies**

 

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

 

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

 

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*Inventories and Cost of Sales*

 

Supermarket nonperishableinventories are recorded using the retail method and are stated at the lower ofcost or market, with cost determined using the last-in, first-out (LIFO)method.  Perishable inventories arevalued at the lower of cost on a first-in, first-out (FIFO) basis ormarket.  Under the retail inventorymethod, cost of sales is determined by applying a cost-to-retail ratio to salesfor the period to determine cost of sales. Cost of sales is then deducted from beginning inventory plus purchasesto arrive at ending inventory.  TheCompany performs physical inventories of nonperishable items at all of itslocations three times per year, at which time, ending inventory and cost ofsales are adjusted to reflect actual inventory on hand and cost of sales.  Physical inventories of perishable productsare conducted at the end of each fiscal month.

 

Approximately 88.6% and88.2% of the Company’s inventories were valued using the LIFO method as of January 2,2010 and January 3, 2009, respectively. The LIFO method assumes that the cost of the most recently purchaseditems are the first to be sold, and thus, are used to measure cost of sales,leaving the earlier costs residing in the ending inventory valuation.  The Company uses the Link-Chain, Dollar-Valuemethod for purposes of calculating its LIFO charge or credit each year fornonperishable inventories.  This methodrequires management to compute a cumulative price index which represents thechange in inventory cost since the base year (i.e., the beginning of the yearin which LIFO was first elected) compared to the current cost of inventory.  The cumulative index is then applied to thecurrent cost of inventory to determine the value of inventory at base yearcosts.  This computation is performedseparately for each of the Company’s individual LIFO pools (i.e., groupings ofsimilar items such as basic grocery, housewares, alcoholic beverages,etc.)  The LIFO method requiresmanagement to make assumptions and to apply judgment regarding inventory mixand factors related to the computation of price indices which could impact theending inventory valuation as well as cost of sales.  If the FIFO method had been used fornonperishable inventories instead of the LIFO method, total inventory as of January 2,2010 and January 3, 2009 would have been higher by approximately$6,433,000 and $6,025,000, respectively.

 

The Company evaluatesinventory shortages throughout the year based on actual physical counts at itsstores and warehouse.  Allowances forinventory shortages are recorded based on the results of these counts toprovide for estimated shortages from the last physical count to the financialstatement date.   Although the Companyhas sufficient historical data to record reasonable estimates of inventoryshortages, actual results could differ. As of January 2, 2010, a difference between actual and estimatedshortages of, for example, 25 basis points would have an annual impact ofapproximately $611,000 on cost of sales.

 

*Impairment of Long-Lived Assets*

 

The Company monitors thecarrying value of long-lived assets for potential impairment whenever events orchanges in circumstances indicate the carrying value of an asset may not berecoverable.  Impairment is recognizedwhen estimated future cash flows (undiscounted and before interest charges) areless than carrying value.  The factorthat most significantly affects the impairment calculation is management’sestimate of future cash flows which is inherently uncertain and relies onvarious assumptions regarding current and future economic and market conditionsand the availability of capital.   TheCompany’s cash flow projection looks several years into the future and includesassumptions such as the rate of inflation/deflation, the strength of theeconomy, competition in our trade area, the ability to secure subtenants andthe Company’s ability to negotiate early 

 

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terminationagreements.  If impairment analysisassumptions change, then an adjustment to the carrying value of the Company’slong-lived assets could occur.  To theextent that an asset is impaired, the excess of the carrying amount of theasset over its estimated fair value is charged against earnings.  No asset impairment charges or adjustmentswere recognized during fiscal 2009, 2008 or 2007.

 

*Workers’Compensation and General and Auto Liability Insurance*

 

The Company is primarilyself-insured (i) for losses for all years related to general and autoliability claims and (ii) for all years prior to July 1, 2006 for workers’compensation for years in which the Company did not enter into a guaranteedcost program.  Where primarily selfinsured, the Company purchases stop-loss insurance coverage to limit its lossexposure on a per claim basis.  Relatedaccruals are based on reported claims and an estimate of claims incurred butnot reported.  The amount of reserves forreported claims are determined by a third party administrator claimsrepresentative who considers the individual facts of each claim includingseverity in arriving at an estimate of the Company’s total exposure.  In addition, the Company analyzes itshistorical paid and incurred loss trends in order to further develop anestimate of its ultimate cost of reported claims and claims incurred but notreported.  Such estimates and historicaltrends are not an absolute indication of future results, and the Companyreevaluates these reserves quarterly based on the most current informationavailable.  The ultimate cost of claimsare impacted by numerous variables including the frequency and severity ofclaims, legal and legislative trends, changes in benefit levels, the rate ofinflation and claim settlement patterns.

 

Since July 1, 2006,the Company has purchased fully insured guaranteed cost workers’ compensationinsurance thereby limiting its exposure for workers’ compensation to the costof the related insurance premium.  TheCompany’s self insured workers’ compensation accrual for claims incurred priorto July 2006 decreased from $4,384,000 at the beginning of fiscal 2009 to$3,484,000 at the end of the year as a result of payments of $2,074,000, whichamount was partially offset by reserve adjustments of $1,174,000.  The Company expects the workers’ compensationreserve to continue to decline as it continues to pay down and closeoutstanding workers’ compensation claims which occurred prior to July 1,2006.  The Company’s reserves for generaland auto liability claims increased by approximately $376,000 during fiscal2009.  The net increase reflects a netaccrual, including reserve adjustments, of $541,000 partially offset bypayments of $165,000.

 

*Vendor Allowances*

 

The Company receives avariety of allowances from its vendors whose products are sold in Gelson’sstores.  Typically, the vendors arepaying the Company to promote their products. The promotion may be a temporary price reduction, a feature in a printadvertisement or newsletter, or placement of the vendor’s product in apreferred location in a store.  Thepromotions are typically two to four weeks long, and the allowances arerecognized as a reduction of cost of sales as the commitment is fulfilled.

 

Vendor funds that havebeen earned as a result of completing the required performance under the termsof the underlying agreements but for which the product has not yet been soldare recognized as reductions of inventory. The amount and timing of recognition of vendor allowances as a reductionof cost of sales, as well as the amount of vendor funds remaining in ending inventory,requires management judgment and estimates. Management estimates current year purchase volume based on 

 

23

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projected and historicaldata.  In turn, the estimated purchasevolume is used to determine the amount of vendor allowances to recognize eachperiod.  The Company does not expect thatthere will be a significant change in the annual level of vendor support;however, a one percent change in total vendor funds earned would likewiseimpact gross profit by approximately four basis points as a percent of sales.

 

*StockAppreciation Rights*

 

Outstanding SARs arerevalued at the end of each quarter using the Black-Scholes option-pricingmodel which incorporates various highly subjective assumptions, includingexpected term, expected volatility, expected dividend yield and a risk-freeinterest rate.  The fair value of SARs,as determined using the Black-Scholes option-pricing model, does not necessarilyreflect the amount that will be paid out in accordance with the SARs agreementon the date of exercise.  In addition,changes in the market price of the Company’s Class A can and havesignificantly impacted the recognition or reversal of SARs expense.

 

**Recent Accounting Standards**

 

InFebruary 2008, the Financial Accounting Standards Board (FASB) issuedguidance which is effective for specified fair value measures of nonfinancialassets and liabilities for financial statements issued for fiscal years beginningafter November 15, 2008.  Adoptionof the guidance in the first quarter of 2009 did not have any impact on theCompany’s consolidated financial statements.

 

InApril 2009, the FASB issued guidance on how to determine the fair value ofassets and liabilities when the volume and level of activity for theasset/liability has significantly decreased and on identifying circumstancesthat indicate a transaction is not orderly. The guidance also requires disclosures about the fair value of financialinstruments on an interim basis in addition to the annual disclosurerequirements.  The guidance was effectivefor interim and annual reporting periods ending after June 15, 2009.  Adoption of the guidance in the secondquarter of 2009 did not have any impact on the Company’s consolidated financialstatements.

 

InJune 2009, the FASB issued guidance establishing the Accounting StandardsCodification (ASC) which will serve as a single source of authoritative GAAPrecognized by the FASB to be applied by nongovernmental entities.  Rules and interpretive releases of theSEC under authority of federal securities laws are also sources ofauthoritative GAAP for SEC registrants. On the effective date of the guidance, the ASC superseded allthen-existing non-SEC accounting and reporting standards.  All other nongrandfathered non-SEC accountingliterature not included in the ASC became nonauthoritative.  The guidance was effective for financial statementsissued for interim and annual periods ending after September 15, 2009.  Adoption of the guidance did not have animpact on the Company’s consolidated financial statements.

 

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Item 7A.             Quantitative and Qualitative Disclosuresabout Market Risks

 

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

 

A change in market prices exposes the Company to market risk related toits investments.  As of January 2,2010, all investments were classified as available-for-sale securities andtotaled $25,201,000.  A hypothetical 10%drop in the market value of these investments would result in a $2,520,000unrealized loss and a corresponding decrease in the fair value of theseinstruments.  This hypothetical dropwould not affect cash flow and would not have an impact on earnings until theCompany sold the investments.

 

Item 8.                Financial Statements and SupplementaryData

 

See Index to ConsolidatedFinancial Statements.

 

Item 9.                Changes in and Disagreementswith Accountants on Accounting and Financial Disclosure

 

None.

 

Item 9A.             Controls andProcedures

 

Evaluationof Disclosure Controls and Procedures

 

Anevaluation was carried out by the Company’s Chief Executive Officer and theChief Financial Officer of the effectiveness of the Company’s disclosurecontrols and procedures (as defined in Rules 13a-15(e) and 15d-15(e) underthe Securities Exchange Act of 1934) as of January 2, 2010.  Based upon that evaluation, the ChiefExecutive Officer and the Chief Financial Officer concluded that thesedisclosure controls and procedures were effective.

 

Changes in Internal Control over Financial Reporting

 

Management, with the participation of the Chief ExecutiveOfficer and the Chief Financial Officer of the Company, has evaluated anychanges in the Company’s internal control over financial reporting thatoccurred during the most recent fiscal quarter. Based on that evaluation, management, the Chief Executive Officer andthe Chief Financial Officer of the Company have concluded that there has beenno change in the Company’s internal control over financial reporting during theCompany’s fiscal quarter ended January 2, 2010 that has materiallyaffected, or is reasonably likely to materially affect, the Company’s internalcontrol over financial reporting.

 

Item 9B.              Other Information

 

None

 

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**PART III**

 

Item 10.*             *Directors and Executive Officers of theRegistrant

 

Theinformation required by this Item 10 is incorporated by reference from theCompany’s definitive proxy statement for the 2010 Annual Meeting ofStockholders to be filed no later than 120 days after the end of the Company’s2009 fiscal year with the SEC pursuant to Regulation 14A under the SecuritiesExchange Act of 1934, as amended (2010 Proxy Statement).

 

Item 11.              Executive Compensation

 

Theinformation required by this Item 11 is incorporated by reference from the 2010Proxy Statement.

 

Item 12.              Security Ownership of Certain Beneficial Owners andManagement and Related Stockholder Matters

 

Theinformation required by this Item 12 is incorporated by reference from the 2010Proxy Statement.

 

Item 13.              Certain Relationships, RelatedTransactions and Director Independence

 

Theinformation required by this Item 13 is incorporated by reference from the 2010Proxy Statement.

 

Item 14.              Principal Accountant Fees and Services

 

Theinformation required by this Item 14 is incorporated by reference from the 2010Proxy Statement.

 

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**PART IV**

 

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

 

** **

**27**

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** **

**SIGNATURES**

** **

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

 

ARDEN GROUP, INC.

 
|       |                                       | ** ** | **Date**   |
|------------|--------------------------------------------|------------|------------|
|       |                                       |       |       |
| By         | /s/BERNARD BRISKIN                         |       | 3/10/10    |
|       | Bernard Briskin,  Chairman of the Board,   |       |       |
| ** ** | **President and Chief Executive  Officer** | ** ** | ** ** |

# ** **

Pursuant to therequirements of the Securities Exchange Act of 1934, this report has beensigned below by the following persons on behalf of the registrant and in thecapacities and on the date indicated.

 
|       |                                                         | ** ** | **Date**   |
|------------|--------------------------------------------------------------|------------|------------|
|       |                                                         |       |       |
|       | /s/BERNARD BRISKIN                                           |       | 3/10/10    |
|       | Bernard Briskin,  Director, Chairman of the Board, President |       |       |
| ** ** | and Chief Executive  Officer                                 | ** ** |       |
| ** ** | (Principal Executive  Officer)                               | ** ** |       |
| ** ** |                                                         | ** ** |       |
| ** ** | /s/LAURA J. NEUMANN                                          | ** ** | 3/10/10    |
| ** ** | Laura J. Neumann, Chief  Financial Officer                   | ** ** |       |
| ** ** | (Principal Financial  and Principal Accounting Officer)      | ** ** |       |
| ** ** |                                                         | ** ** |       |
| ** ** | /s/M. MARK ALBERT                                            | ** ** | 3/10/10    |
| ** ** | M. Mark Albert,  Director                                    | ** ** |       |
| ** ** |                                                         | ** ** |       |
| ** ** | /s/JOHN G. DANHAKL                                           | ** ** | 3/10/10    |
| ** ** | John G. Danhakl,  Director                                   | ** ** |       |
| ** ** |                                                         | ** ** |       |
| ** ** | /s/ROBERT A. DAVIDOW                                         | ** ** | 3/10/10    |
| ** ** | Robert A. Davidow,  Director                                 | ** ** |       |
| ** ** |                                                         | ** ** |       |
| ** ** | /s/KENNETH A. GOLDMAN                                        | ** ** | 3/10/10    |
| ** ** | Kenneth A. Goldman,  Director                                | ** ** |       |
| ** ** |                                                         | ** ** |       |
| ** ** | /s/STEVEN ROMICK                                             | ** ** | 3/10/10    |
| ** ** | Steven Romick, Director                                      | ** ** | ** ** |

 

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

 

**INDEX TO CONSOLIDATED FINANCIAL STATEMENTS**

 
|                                                                                                 |   | **Page** |
|------------------------------------------------------------------------------------------------------|--------|----------|
|                                                                                                 |   |     |
| Management’s  Report on Internal Control over Financial Reporting                               |   | 30       |
|                                                                                                 |   |     |
| Report  of Independent Registered Public Accounting Firm                                             |   | 31       |
|                                                                                                 |   |     |
| Financial Statements:                                                                                |   |     |
| Consolidated  Balance Sheets, January 2, 2010  and January 3, 2009                         |   | 33       |
| Consolidated Statements of Operations and  Comprehensive Income for fiscal years 2009, 2008 and 2007 |   | 34       |
| Consolidated Statements of Stockholders’ Equity for  fiscal years 2009, 2008 and 2007           |   | 35       |
| Consolidated Statements of Cash Flows for fiscal years  2009, 2008 and 2007                          |   | 36       |
| Notes to Consolidated Financial Statements                                                           |   | 38       |

 

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

 

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

 

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

 

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

 

TheCompany’s management assessed the effectiveness of the Company’s internalcontrol over financial reporting as of January 2, 2010.  In making the assessment, it used thecriteria set forth by the Committee of Sponsoring Organizations of the TreadwayCommission in *Internal Control-Integrated Framework*.  Based on that assessment, managementconcluded that, as of January 2, 2010, the Company’s internal control overfinancial reporting is effective based on those criteria.

 

The effectivenessof the Company’s internal control over financial reporting as of January 2,2010 has been auditedby Moss Adams LLP, an independent registered public accounting firm, as statedin their report which appears on page 31.

 

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**Report of Independent Registered Public Accounting Firm**

 

Board of Directors andStockholders of

Arden Group, Inc. andConsolidated Subsidiaries

 

We have audited theaccompanying consolidated balance sheets of Arden Group, Inc. andConsolidated Subsidiaries (the Company) as of January 2,2010 and January 3, 2009, and the related consolidated statements ofoperations and comprehensive income, stockholders’ equity and cash flows foreach of the years in the three-year period ended January 2, 2010.  Wealso have audited the Company’s internal control over financial reporting as ofJanuary 2, 2010, based on criteriaset forth by the Committee of Sponsoring Organizations of the TreadwayCommission (COSO) in *Internal Control -Integrated Framework*.  TheCompany’s management is responsible for these financial statements, formaintaining effective internal control over financial reporting, and for itsassessment of the effectiveness of internal control over financial reportingincluded in the accompanying Management’s Report on Internal Control overFinancial Reporting.  Our responsibilityis to express an opinion on these financial statements and an opinion on theCompany’s internal control over financial reporting based on our audits.

 

We conducted our audits inaccordance with the standards of the Public Company Accounting Oversight Board(United States).  Those standards requirethat we plan and perform the audits to obtain reasonable assurance aboutwhether the financial statements are free of material misstatement and whethereffective internal control over financial reporting was maintained in allmaterial respects.  Our audits of thefinancial statements included examining, on a test basis, evidence supportingthe amounts and disclosures in the financial statements, assessing theaccounting principles used and significant estimates made by management, andevaluating the overall financial statement presentation.  Our audit of internal control over financialreporting included obtaining an understanding of internal control overfinancial reporting, assessing the risk that a material weakness exists, andtesting and evaluating the design and operating effectiveness of internalcontrol based on the assessed risk.  Ouraudits also include performing such other procedures as we considered necessaryin the circumstances.  We believe thatour audits provide a reasonable basis for our opinions.

 

A company’s internal controlover financial reporting is a process designed to provide reasonable assuranceregarding the reliability of financial reporting and the preparation offinancial statements for external purposes in accordance with generallyaccepted accounting principles.  Acompany’s internal control over financial reporting includes those policies andprocedures that (1) pertain to the maintenance of records that, inreasonable detail, accurately and fairly reflect the transactions anddispositions of the assets of the company; (2) provide reasonableassurance that transactions are recorded as necessary to permit preparation offinancial statements in accordance with generally accepted accountingprinciples, and that receipts and expenditures of the company are being madeonly in accordance with authorizations of management and directors of thecompany; and (3) provide reasonable assurance regarding prevention ortimely detection of unauthorized acquisition, use, or disposition of thecompany’s assets that could have a material effect on the financial statements.

 

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Because of its inherentlimitations, internal control over financial reporting may not prevent ordetect misstatements.  Also, projectionsof any evaluation of effectiveness to future periods are subject to the risk thatcontrols may become inadequate because of changes in conditions or that thedegree of compliance with the policies or procedures may deteriorate.

 

In our opinion, thefinancial statements referred to above present fairly, in all materialrespects, the consolidated financial position of Arden Group, Inc. andConsolidated Subsidiaries, as of January 2,2010 and January 3, 2009, and the consolidated results of its operationsand its cash flows for each of the years in the three-year period ended January 2, 2010, in conformity with accountingprinciples generally accepted in the United States of America.  Also in our opinion, Arden Group, Inc.and Consolidated Subsidiaries, maintained, in all material respects, effectiveinternal control over financial reporting as of January 2,2010, based on criteria set forth by the COSO in *InternalControl - Integrated Framework*.

 

As discussed in Note 1 tothe consolidated financial statements, effective the first day of its fiscal2008, the Company adopted Statement of Financial Accounting Standards No. 157,“Fair Value Measurements” (codified in Financial Accounting Standards BoardAccounting Standards Codification Topic 820, “Fair Value Measurements andDisclosures.”)

 

 

/s/MossAdams LLP

LosAngeles, California

March 10,2010

 

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**ARDEN GROUP, INC. ANDCONSOLIDATED SUBSIDIARIES**

 

**CONSOLIDATED BALANCE SHEETS**

# ** **

(In Thousands, ExceptShare and Per Share Data)

 
| ** **                                                                                                                                                                                                     | ** ** | **January 2, 2010** | ** ** | **January 3, 2009** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------|------------|--------------------------|------------|
| **Assets**                                                                                                                                                                                                     |       |                     |       |                     |       |
| ** **                                                                                                                                                                                                     |       |                     |       |                     |       |
| Current  assets:                                                                                                                                                                                               |       |                     |       |                     |       |
| Cash and cash equivalents                                                                                                                                                                                      |       | $                        | 13,180     |                     | $          | 10,486 |   |
| Investments                                                                                                                                                                                                    |       | 25,201                   |       | 8,658                    |       |
| Accounts receivable, net of allowance for doubtful  accountsof $300 and  $297 as of January 2, 2010 and January 3, 2009, respectively                                                                |       | 5,423                    |       | 5,271                    |       |
| Inventories,  net                                                                                                                                                                                              |       | 16,874                   |       | 17,846                   |       |
| Deferred  income taxes                                                                                                                                                                                         |       | 2,870                    |       | 2,586                    |       |
| Other  current assets                                                                                                                                                                                          |       | 2,933                    |       | 3,137                    |       |
|                                                                                                                                                                                                           |       |                     |       |                     |       |
| Total  current assets                                                                                                                                                                                          |       | 66,481                   |       | 47,984                   |       |
|                                                                                                                                                                                                           |       |                     |       |                     |       |
| Property,  plant and equipment, net                                                                                                                                                                            |       | 40,981                   |       | 43,792                   |       |
| Deferred  income taxes                                                                                                                                                                                         |       | 4,345                    |       | 4,728                    |       |
| Other  assets                                                                                                                                                                                                  |       | 3,290                    |       | 3,306                    |       |
|                                                                                                                                                                                                           |       |                     |       |                     |       |
| Total  assets                                                                                                                                                                                                  |       | $                        | 115,097    |                     | $          | 99,810 |   |
|                                                                                                                                                                                                           |       |                     |       |                     |       |
| **Liabilities and Stockholders’ Equity**                                                                                                                                                                  |       |                     |       |                     |       |
|                                                                                                                                                                                                           |       |                     |       |                     |       |
| Current  liabilities:                                                                                                                                                                                          |       |                     |       |                     |       |
| Accounts  payable, trade                                                                                                                                                                                       |       | $                        | 12,366     |                     | $          | 14,714 |   |
| Federal  and state income taxes payable                                                                                                                                                                        |       | 863                      |       | 195                      |       |
| Other  current liabilities                                                                                                                                                                                     |       | 19,327                   |       | 19,228                   |       |
|                                                                                                                                                                                                           |       |                     |       |                     |       |
| Total  current liabilities                                                                                                                                                                                     |       | 32,556                   |       | 34,137                   |       |
|                                                                                                                                                                                                           |       |                     |       |                     |       |
| Long-term  debt                                                                                                                                                                                                |       | 1,228                    |       | 1,228                    |       |
| Deferred  rent                                                                                                                                                                                                 |       | 6,397                    |       | 6,298                    |       |
| Other  liabilities                                                                                                                                                                                             |       | 5,306                    |       | 6,987                    |       |
|                                                                                                                                                                                                           |       |                     |       |                     |       |
| Total  liabilities                                                                                                                                                                                             |       | 45,487                   |       | 48,650                   |       |
|                                                                                                                                                                                                           |       |                     |       |                     |       |
| Commitments  and contingent liabilities (Notes 14 and 16)                                                                                                                                                      |       |                     |       |                     |       |
|                                                                                                                                                                                                           |       |                     |       |                     |       |
| Stockholders’  equity:                                                                                                                                                                                    |       |                     |       |                     |       |
|                                                                                                                                                                                                           |       |                     |       |                     |       |
| Common  Stock, Class A, $.25 par value; authorized 10,000,000 shares; 3,161,098  shares issued and outstanding as of January 2, 2010 and January 3,  2009, excluding 1,357,200 treasury  shares |       | 1,129                    |       | 1,129                    |       |
| Capital  surplus                                                                                                                                                                                               |       | 5,378                    |       | 5,378                    |       |
| Unrealized  gain (loss) on investments, net of tax                                                                                                                                                             |       | (4                       | )          | 9                        |       |
| Retained  earnings                                                                                                                                                                                             |       | 66,860                   |       | 48,397                   |       |
|                                                                                                                                                                                                           |       |                     |       |                     |       |
|                                                                                                                                                                                                           |       | 73,363                   |       | 54,913                   |       |
| Treasury  stock, 1,357,200 shares at cost                                                                                                                                                                      |       | (3,753                   | )          | (3,753                   | )          |
|                                                                                                                                                                                                           |       |                     |       |                     |       |
| Total  stockholders’ equity                                                                                                                                                                               |       | 69,610                   |       | 51,160                   |       |
|                                                                                                                                                                                                           |       |                     |       |                     |       |
| Total  liabilities and stockholders’ equity                                                                                                                                                               |       | $                        | 115,097    |                     | $          | 99,810 |   |

* *

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

 

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**ARDENGROUP, INC. AND CONSOLIDATED SUBSIDIARIES**

 

**CONSOLIDATED STATEMENTS OFOPERATIONSAND COMPREHENSIVE INCOME**

# ** **

(In Thousands, Except Share and Per Share Data)

 
| ** **                                                                                                         | ** ** | **Fifty-Two**

**Weeks Ended**

**January 2, 2010** | ** ** | **Fifty-Three**

**Weeks  Ended**

**January 3,  2009** | ** ** | **Fifty-Two**

**Weeks  Ended**

**December 29,  2007** | ** ** |
|--------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------|------------|--------------------------------------------------------------|------------|--------------------------------------------------------------|------------|
| Sales                                                                                                              |       | $                                                        | 431,170    |                                                         | $          | 479,117                                                      |       | $ | 485,939 |   |
|                                                                                                               |       |                                                     |       |                                                         |       |                                                         |       |
| Cost of sales                                                                                                      |       | 264,931                                                  |       | 294,617                                                      |       | 297,948                                                      |       |
|                                                                                                               |       |                                                     |       |                                                         |       |                                                         |       |
| Gross profit                                                                                                       |       | 166,239                                                  |       | 184,500                                                      |       | 187,991                                                      |       |
|                                                                                                               |       |                                                     |       |                                                         |       |                                                         |       |
| Selling, general and administrative expense                                                                        |       | 130,203                                                  |       | 144,181                                                      |       | 142,814                                                      |       |
|                                                                                                               |       |                                                     |       |                                                         |       |                                                         |       |
| Operating income                                                                                                   |       | 36,036                                                   |       | 40,319                                                       |       | 45,177                                                       |       |
|                                                                                                               |       |                                                     |       |                                                         |       |                                                         |       |
| Interest and dividend income                                                                                       |       | 756                                                      |       | 2,460                                                        |       | 3,340                                                        |       |
|                                                                                                               |       |                                                     |       |                                                         |       |                                                         |       |
| Other income (expense), net                                                                                        |       | 0                                                        |       | (907                                                         | )          | 64                                                           |       |
|                                                                                                               |       |                                                     |       |                                                         |       |                                                         |       |
| Interest expense                                                                                                   |       | (503                                                     | )          | (365                                                         | )          | (97                                                          | )          |
|                                                                                                               |       |                                                     |       |                                                         |       |                                                         |       |
| Income before income taxes                                                                                         |       | 36,289                                                   |       | 41,507                                                       |       | 48,484                                                       |       |
|                                                                                                               |       |                                                     |       |                                                         |       |                                                         |       |
| Income tax provision                                                                                               |       | 14,665                                                   |       | 16,840                                                       |       | 19,277                                                       |       |
|                                                                                                               |       |                                                     |       |                                                         |       |                                                         |       |
| Net income                                                                                                         |       | $                                                        | 21,624     |                                                         | $          | 24,667                                                       |       | $ | 29,207 |   |
|                                                                                                               |       |                                                     |       |                                                         |       |                                                         |       |
| Other comprehensive gain (loss), net of tax:                                                                       |       |                                                     |       |                                                         |       |                                                         |       |
|                                                                                                               |       |                                                     |       |                                                         |       |                                                         |       |
| Unrealized gain (loss) from available-for-sale  securities:                                                        |       |                                                     |       |                                                         |       |                                                         |       |
|                                                                                                               |       |                                                     |       |                                                         |       |                                                         |       |
| Net unrealized holding gain (loss) arising during  the period                                                      |       | (13                                                      | )          | (428                                                         | )          | 153                                                          |       |
|                                                                                                               |       |                                                     |       |                                                         |       |                                                         |       |
| Reclassification adjustment for realized loss  includedin net income                                               |       | 0                                                        |       | 616                                                          |       | 0                                                            |       |
|                                                                                                               |       |                                                     |       |                                                         |       |                                                         |       |
| Net unrealized gain (loss), net of income tax  expense (benefit)of  ($9) for 2009, $129 for 2008 and $106 for 2007 |       | (13                                                      | )          | 188                                                          |       | 153                                                          |       |
|                                                                                                               |       |                                                     |       |                                                         |       |                                                         |       |
| Comprehensive income                                                                                               |       | $                                                        | 21,611     |                                                         | $          | 24,855                                                       |       | $ | 29,360 |   |
|                                                                                                               |       |                                                     |       |                                                         |       |                                                         |       |
| Net income per common share:                                                                                       |       |                                                     |       |                                                         |       |                                                         |       |
|                                                                                                               |       |                                                     |       |                                                         |       |                                                         |       |
| Basic and diluted                                                                                                  |       | $                                                        | 6.84       |                                                         | $          | 7.80                                                         |       | $ | 9.24 |   |
|                                                                                                               |       |                                                     |       |                                                         |       |                                                         |       |
| Weighted average common shares outstanding:                                                                        |       |                                                     |       |                                                         |       |                                                         |       |
|                                                                                                               |       |                                                     |       |                                                         |       |                                                         |       |
| Basic and diluted                                                                                                  |       | 3,161,098                                                |       | 3,161,098                                                    |       | 3,161,098                                                    |       |

 

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

 

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**ARDEN GROUP, INC. ANDCONSOLIDATED SUBSIDIARIES**

 

**CONSOLIDATED STATEMENTS OF STOCKHOLDERS’EQUITY**

 
| ** **                            | ** ** | ** **                    | ** ** | ** **  | ** ** | ** **  | ** ** | **Unrealized**   | ** ** | ** **         | ** ** | ** **             | ** ** | ** ** | ** ** | ** ** | ** ** |
|---------------------------------------|------------|-------------------------------|------------|-------------|------------|-------------|------------|------------------|------------|--------------------|------------|------------------------|------------|------------|------------|------------|------------|
| ** **                            | ** ** | ** **                    | ** ** | ** **  | ** ** | ** **  | ** ** | **Gain  (Loss)** | ** ** | ** **         | ** ** | ** **             | ** ** | ** ** | ** ** | **Total**  | ** ** |
| ** **                            | ** ** | **Common Stock Class A** | ** ** | **Capital** | ** ** | **on**      | ** ** | **Retained**     | ** ** | **Treasury Stock** | ** ** | **Stockholders’** | ** ** |
| **(In Thousands, Except Share Data)** | ** ** | **Shares**                    | ** ** | **Amount**  | ** ** | **Surplus** | ** ** | **Investments**  | ** ** | **Earnings**       | ** ** | **Shares**             | ** ** | **Amount** | ** ** | **Equity** | ** ** |
| ** **                            | ** ** | ** **                    | ** ** | ** **  | ** ** | ** **  | ** ** | ** **       | ** ** | ** **         | ** ** | ** **             | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Balance, December 30, 2006**   |       | 4,518,298                     |       | $           | 1,129      |        | $          | 5,378            |       | $                  | (332       | )                      | $          | 79,872     |       | 1,357,200  |       | $ | (3,753 | ) | $ | 82,294 |   |
|                                  |       |                          |       |        |       |        |       |             |       |               |       |                   |       |       |       |       |       |
| Net unrealized gain                   |       | 0                             |       | 0           |       | 0           |       | 153              |       | 0                  |       | 0                      |       | 0          |       | 153        |       |
| Dividends declared                    |       | 0                             |       | 0           |       | 0           |       | 0                |       | (3,161             | )          | 0                      |       | 0          |       | (3,161     | )          |
| Net income                            |       | 0                             |       | 0           |       | 0           |       | 0                |       | 29,207             |       | 0                      |       | 0          |       | 29,207     |       |
|                                  |       |                          |       |        |       |        |       |             |       |               |       |                   |       |       |       |       |       |
| **Balance, December 29, 2007**   |       | 4,518,298                     |       | 1,129       |       | 5,378       |       | (179             | )          | 105,918            |       | 1,357,200              |       | (3,753     | )          | 108,493    |       |
|                                  |       |                          |       |        |       |        |       |             |       |               |       |                   |       |       |       |       |       |
| Net unrealized gain                   |       | 0                             |       | 0           |       | 0           |       | 188              |       | 0                  |       | 0                      |       | 0          |       | 188        |       |
| Dividends declared                    |       | 0                             |       | 0           |       | 0           |       | 0                |       | (82,188            | )          | 0                      |       | 0          |       | (82,188    | )          |
| Net income                            |       | 0                             |       | 0           |       | 0           |       | 0                |       | 24,667             |       | 0                      |       | 0          |       | 24,667     |       |
|                                  |       |                          |       |        |       |        |       |             |       |               |       |                   |       |       |       |       |       |
| **Balance, January 3, 2009**     |       | 4,518,298                     |       | 1,129       |       | 5,378       |       | 9                |       | 48,397             |       | 1,357,200              |       | (3,753     | )          | 51,160     |       |
|                                  |       |                          |       |        |       |        |       |             |       |               |       |                   |       |       |       |       |       |
| Net unrealized loss                   |       | 0                             |       | 0           |       | 0           |       | (13              | )          | 0                  |       | 0                      |       | 0          |       | (13        | )          |
| Dividends declared                    |       | 0                             |       | 0           |       | 0           |       | 0                |       | (3,161             | )          | 0                      |       | 0          |       | (3,161     | )          |
| Net income                            |       | 0                             |       | 0           |       | 0           |       | 0                |       | 21,624             |       | 0                      |       | 0          |       | 21,624     |       |
|                                  |       |                          |       |        |       |        |       |             |       |               |       |                   |       |       |       |       |       |
| **Balance, January 2, 2010**     |       | 4,518,298                     |       | $           | 1,129      |        | $          | 5,378            |       | $                  | (4         | )                      | $          | 66,860     |       | 1,357,200  |       | $ | (3,753 | ) | $ | 69,610 |   |

 

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

 

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

 

**CONSOLIDATED STATEMENTS OF CASHFLOWS**

# ** **

(In Thousands)

 
| ** **                                               | ** ** | **Fifty-Two**

**Weeks Ended**

**January 2, 2010** | ** ** | **Fifty-Three**

**Weeks  Ended**

**January 3,  2009** | ** ** | **Fifty-Two**

**Weeks  Ended**

**December 29,  2007** | ** ** |
|----------------------------------------------------------|------------|----------------------------------------------------------|------------|--------------------------------------------------------------|------------|--------------------------------------------------------------|------------|
| Cash  flows from operating activities:                   |       |                                                     |       |                                                         |       |                                                         |       |
| Cash  received from customers                            |       | $                                                        | 431,108    |                                                         | $          | 479,578                                                      |       | $ | 485,819 |   |
| Cash  paid to suppliers and employees                    |       | (391,957                                                 | )          | (437,970                                                     | )          | (438,044                                                     | )          |
| Interest  and dividends received                         |       | 565                                                      |       | 2,513                                                        |       | 3,186                                                        |       |
| Interest  paid                                           |       | (87                                                      | )          | (109                                                         | )          | (99                                                          | )          |
| Income  taxes paid                                       |       | (13,895                                                  | )          | (15,545                                                      | )          | (20,660                                                      | )          |
|                                                     |       |                                                     |       |                                                         |       |                                                         |       |
| Net  cash provided by operating activities               |       | 25,734                                                   |       | 28,467                                                       |       | 30,202                                                       |       |
|                                                     |       |                                                     |       |                                                         |       |                                                         |       |
| Cash  flows from investing activities:                   |       |                                                     |       |                                                         |       |                                                         |       |
| Capital  expenditures                                    |       | (2,890                                                   | )          | (5,159                                                       | )          | (3,824                                                       | )          |
| Purchases  of investments                                |       | (30,164                                                  | )          | (25,130                                                      | )          | (945                                                         | )          |
| Sales  of investments                                    |       | 13,127                                                   |       | 35,556                                                       |       | 2                                                            |       |
| Proceeds  from the sale of property, plant and equipment |       | 48                                                       |       | 21                                                           |       | 28                                                           |       |
|                                                     |       |                                                     |       |                                                         |       |                                                         |       |
| Net  cash provided by (used in) investing activities     |       | (19,879                                                  | )          | 5,288                                                        |       | (4,739                                                       | )          |
|                                                     |       |                                                     |       |                                                         |       |                                                         |       |
| Cash  flows from financing activities:                   |       |                                                     |       |                                                         |       |                                                         |       |
| Principal  payments under capital lease obligations      |       | 0                                                        |       | 0                                                            |       | (225                                                         | )          |
| Cash  dividends paid                                     |       | (3,161                                                   | )          | (82,188                                                      | )          | (3,161                                                       | )          |
|                                                     |       |                                                     |       |                                                         |       |                                                         |       |
| Net  cash used in financing activities                   |       | (3,161                                                   | )          | (82,188                                                      | )          | (3,386                                                       | )          |
|                                                     |       |                                                     |       |                                                         |       |                                                         |       |
| Net  increase (decrease) in cash and cash equivalents    |       | 2,694                                                    |       | (48,433                                                      | )          | 22,077                                                       |       |
|                                                     |       |                                                     |       |                                                         |       |                                                         |       |
| Cash  and cash equivalents at beginning of year          |       | 10,486                                                   |       | 58,919                                                       |       | 36,842                                                       |       |
|                                                     |       |                                                     |       |                                                         |       |                                                         |       |
| Cash  and cash equivalents at end of year                |       | $                                                        | 13,180     |                                                         | $          | 10,486                                                       |       | $ | 58,919 |   |

 

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

 

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CONSOLIDATED STATEMENTS OF CASH FLOWS, Continued

 
| ** **                                                                                          | ** ** | **Fifty-Two**

**Weeks Ended**

**January 2, 2010** | ** ** | **Fifty-Three**

**Weeks  Ended**

**January 3,  2009** | ** ** | **Fifty-Two**

**Weeks  Ended**

**December 29,  2007** | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------|------------|--------------------------------------------------------------|------------|--------------------------------------------------------------|------------|
| **Reconciliation of Net Income to Net Cash  Provided****by Operating Activities:**                  |       |                                                     |       |                                                         |       |                                                         |       |
|                                                                                                |       |                                                     |       |                                                         |       |                                                         |       |
| Net  income                                                                                         |       | $                                                        | 21,624     |                                                         | $          | 24,667                                                       |       | $ | 29,207 |   |
|                                                                                                |       |                                                     |       |                                                         |       |                                                         |       |
| Adjustments  to reconcile net income to net cash provided by operating activities:                  |       |                                                     |       |                                                         |       |                                                         |       |
| Depreciation  and amortization                                                                      |       | 5,599                                                    |       | 6,110                                                        |       | 6,685                                                        |       |
| Provision  for losses on accounts receivable                                                        |       | 94                                                       |       | 169                                                          |       | 45                                                           |       |
| Deferred  income taxes                                                                              |       | 108                                                      |       | 1,923                                                        |       | 798                                                          |       |
| Net  loss from the disposal of property, plant and equipment                                        |       | 54                                                       |       | 89                                                           |       | 30                                                           |       |
| Realized  (gain) loss on investments, net                                                           |       | 0                                                        |       | 907                                                          |       | (64                                                          | )          |
| Amortization  of premium on investments                                                             |       | 472                                                      |       | 259                                                          |       | 0                                                            |       |
| Stock  appreciation rights compensation expense (income)                                            |       | (273                                                     | )          | 1,823                                                        |       | 2,908                                                        |       |
|                                                                                                |       |                                                     |       |                                                         |       |                                                         |       |
| Changes  in assets and liabilities net of effects from noncash investing and financing  activities: |       |                                                     |       |                                                         |       |                                                         |       |
|                                                                                                |       |                                                     |       |                                                         |       |                                                         |       |
| (Increase)  decrease in assets:                                                                     |       |                                                     |       |                                                         |       |                                                         |       |
| Accounts  and notes receivable                                                                      |       | (246                                                     | )          | 527                                                          |       | (263                                                         | )          |
| Inventories                                                                                         |       | 972                                                      |       | 3,712                                                        |       | (1,677                                                       | )          |
| Other  current assets                                                                               |       | 204                                                      |       | (281                                                         | )          | 28                                                           |       |
| Other  assets                                                                                       |       | 16                                                       |       | (69                                                          | )          | 299                                                          |       |
|                                                                                                |       |                                                     |       |                                                         |       |                                                         |       |
| Increase  (decrease) in liabilities:                                                                |       |                                                     |       |                                                         |       |                                                         |       |
| Accounts  payable, trade and other current liabilities                                              |       | (2,402                                                   | )          | (9,148                                                       | )          | (4,621                                                       | )          |
| Federal  and state income taxes payable                                                             |       | 668                                                      |       | (608                                                         | )          | (2,411                                                       | )          |
| Deferred  rent                                                                                      |       | 99                                                       |       | 154                                                          |       | 74                                                           |       |
| Other  liabilities                                                                                  |       | (1,255                                                   | )          | (1,767                                                       | )          | (836                                                         | )          |
|                                                                                                |       |                                                     |       |                                                         |       |                                                         |       |
| Net  cash provided by operating activities                                                          |       | $                                                        | 25,734     |                                                         | $          | 28,467                                                       |       | $ | 30,202 |   |

 

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

 

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**ARDENGROUP, INC. AND CONSOLIDATED SUBSIDIARIES**

 

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

# ** **

1.       Summary of Significant Accounting Policies

 

Basis of Presentation andBusiness Description

 

The consolidatedfinancial statements of Arden Group, Inc. (Company or Arden) include theaccounts of the Company and its direct and indirect subsidiaries.  Arden is a holding company which conductsoperations through its wholly-owned subsidiary, Arden-Mayfair, Inc.(Arden-Mayfair) and Arden-Mayfair’s wholly-owned subsidiary, Gelson’s Markets(Gelson’s) which operates 18 supermarketsin Southern California.  The Company andArden-Mayfair also own certain real estate properties through a wholly-ownedsubsidiary, Mayfair Realty, Inc. All intercompany accounts and transactions are eliminated inconsolidation.

 

Fiscal Year

 

The Company operates on afiscal year ending on the Saturday closest to December 31. Fiscal years for the consolidated financial statements included hereinended on January 2, 2010 (fiscal 2009 - 52 weeks), January 3, 2009(fiscal 2008 - 53 weeks) and December 29, 2007 (fiscal 2007 - 52 weeks).

 

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

 

Reclassifications

 

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

 

Cash and Cash Equivalents

 

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

 

Investments

 

The Company invests inmarketable securities including mutual funds and debt and equitysecurities.  Marketable securities arestated at market value as determined by the most recently traded price of eachsecurity at the balance sheet date.  TheCompany reviews its investment portfolio on a quarterly basis to determine if marketdeclines below book value may be other-than-temporary.  Any decline that is determined to beother-than-temporary is recorded as 

 

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a loss on theConsolidated Statements of Operations and Comprehensive Income in accordancewith authoritative guidance.  As of January 2,2010, the book value of the Company’s investments exceeded the market value byapproximately $8,000.

 

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 that the Company does not intend to hold to maturity andequity securities are classified as available-for-sale.  As of January 2, 2010, all marketablesecurities were classified as available-for-sale.  Investments are carried at fair value, withthe unrealized gains and losses, net of tax, reported as a separate componentof stockholders’ equity.  The cost ofinvestments sold is determined based on the Specific Identification method.

 

Accounts Receivable

 

The Company monitorsvendor receivables and extensions of credit on an ongoing basis and has notexperienced significant losses related to its receivables.  At January 2, 2010, the Company believesthat it did not have significant credit risk concentrations.  No customer or vendor represented greaterthan 3% of total accounts receivable.

 

Inventories

 

Supermarket nonperishableinventories are recorded using the retail method and are stated at the lower ofcost or market, with cost determined using the last-in, first-out (LIFO)method.  Perishable inventories arevalued at the lower of cost on a first-in, first-out (FIFO) basis or market.

 

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

 

Property, Plant andEquipment

 

Property, plant andequipment is recorded at cost. Depreciation is provided on the straight-line method over the estimateduseful lives of individual assets or classes of assets as follows:

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

 

Leasehold interests andimprovements to leased properties are amortized over their estimated usefullives or lease period, whichever is shorter.

 

Leased property meetingcertain capital lease criteria is capitalized and the present value of therelated lease payments is recorded as a liability.  Amortization of capitalized leased assets iscomputed on the straight-line method over the shorter of the estimated usefullife or the initial lease term.  There wereno capitalized leases at January 2, 2010 and January 3, 2009.

 

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

 

Impairment ofLong-Lived Assets

 

The Company monitors thecarrying value of long-lived assets for potential impairment whenever events orchanges in circumstances indicate the carrying value of an asset may not berecoverable.  Impairment is recognizedwhen estimated future cash flows (undiscounted and before interest charges) areless than carrying value.  The estimationof expected future net cash flows is inherently uncertain and relies onassumptions regarding current and future economic and market conditions and theavailability of capital.  If impairmentanalysis assumptions change, then an adjustment to the carrying value of theCompany’s long-lived assets could occur. To the extent that an asset is impaired, the excess of the carryingamount of the asset over its estimated fair value is charged againstearnings.  No impairments were recordedin 2009, 2008 or 2007.

 

Workers’Compensation and General and Auto Liability Costs

 

In June 2003, the Company terminated its guaranteed cost workers’compensation policy and purchased a high deductible workers’ compensationpolicy.  Accordingly, the Company wasprimarily self-insured for losses related to workers’ compensation for claimsincurred prior to July 1, 2006, as well as general and auto liabilityclaims.  The Company maintained stop-losscoverage to limit its loss exposure on a per claim basis and was insured forcovered costs in excess of per claim limits. Since July 1, 2006, the Company has purchased fully insuredguaranteed cost workers’ compensation insurance to replace the high deductibleprogram.  The Company continues tomaintain an accrual for claims incurred prior to July 2006 under the highdeductible program which is based on both reported claims and an estimate ofclaims incurred but not reported.  TheCompany’s workers’ compensation and general and auto liability reserves forunpaid and incurred but not reported claims at January 2, 2010 and January 3,2009 were approximately $4,577,000 and $5,101,000, respectively.  While the ultimate amount of claims incurredare dependent on future developments, the recorded reserves reflect management’sbest estimate of claims to be incurred.

 

RevenueRecognition

 

The Company recognizes revenue at the time ofsale.  Discounts given to customers arerecorded at the point of sale as a reduction of revenues.  The Company maintains a bad debt allowancefor receivables from vendors and Gelson’s charge card users.  Valuation reserves are adjusted periodicallybased on historical recovery rates.  TheCompany records income from licensing arrangements, subleases, leases andfinance charges as they are earned.  Incomefrom all licensing arrangements, rental income and finance charges representsapproximately 1% of sales for all periods presented and, therefore, is notdisclosed separately on the Consolidated Statements of Operations andComprehensive Income.

 

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Gelson’ssells gift cards (and previously gift certificates) to its customers in itsretail stores.  The gift cards andcertificates do not have an expiration date and Gelson’s does not charge anadministrative fee on unused gift cards. The Company records unredeemed gift cards and certificates underAccounts Payable, Trade on its Consolidated Balance Sheets.  In the past, the Company has recognizedrevenue from gift cards and certificates only when they were redeemed by itscustomers.  Beginning in the firstquarter of 2009, the Company began recording revenue when the likelihood of thegift cards and certificates being redeemed is remote and there is no legalobligation to remit the unredeemed gift cards and certificates to relevantjurisdictions (gift card breakage).  TheCompany determined the appropriate gift card breakage rate based on an analysisof historical redemption patterns.  As aresult of this analysis, the Company determined that the likelihood of Gelson’sgift cards and certificates being redeemed beyond three years from the date ofissuance is remote.  During 2009, theCompany recorded $490,000 of revenue related to gift card breakage of which$432,000 was related to prior years and was recorded in the first quarter of2009.  Gift card breakage is included inSales on the Consolidated Statements of Operations and Comprehensive Income.

 

Cost of Sales

 

Costof sales includes product costs, net of discounts and allowances, and inboundfreight charges, as well as warehouse, transportation, purchasing, advertisingand occupancy costs.  Warehouse andtransportation costs include receiving costs, internal transfer costs, labor,building rent, utilities, depreciation, repairs and maintenance and fuel forthe Company’s distribution center and distribution system.  Purchasing costs include both labor andadministrative expense associated with the purchase of the Company’sproducts.  Advertising costs, net ofvendor reimbursements, are expensed as incurred and include the cost of theGelson’s newsletter, newspaper ads and other print advertising.  Occupancy costs consist of rent, common areacharges (where applicable), depreciation and utilities related to Gelson’soperations.  The following tablesummarizes warehouse, transportation, purchasing, net advertising and occupancycosts for 2009, 2008 and 2007.

 
| **(In  Thousands)**          | ** ** | **2009** | ** ** | **2008** | ** ** | **2007** | ** ** |
|------------------------------|------------|----------|------------|----------|------------|----------|------------|
|                         |       |     |       |     |       |     |       |
| Warehouse and transportation |       | $        | 7,014      |     | $          | 7,046    |       | $ | 7,117 |   |
| Purchasing                   |       | 2,814    |       | 3,008    |       | 2,964    |       |
| Advertising                  |       | 1,335    |       | 1,049    |       | 1,017    |       |
| Occupancy                    |       | 22,930   |       | 23,624   |       | 23,436   |       |
|                         |       | $        | 34,093     |     | $          | 34,727   |       | $ | 34,534 |   |

 

Fair Value Measurements

 

Fair value is defined as the amount that would be received upon sale ofan asset or paid to transfer a liability in the principal or most advantageousmarket for the asset or liability in an orderly transaction between marketparticipants on the measurement date.  Theauthoritative guidance establishes a fair value hierarchy which prioritizes thetypes of inputs to valuation techniques that companies may use to measure fairvalue.  The fair value hierarchy givesthe highest priority to quoted prices in active markets for identical assets orliabilities (Level 1).  The next highestpriority is given to inputs other than quoted prices included in Level 1 thatare observable for the asset or liability, either directly or indirectly (Level2).  The lowest priority is given tounobservable inputs in which there is little or no market data available andwhich 

 

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require the reporting entity to develop its own assumptions (Level3).  The fair value of the Company’sfinancial assets and liabilities measured on a recurring basis includesinvestments which appear under Assets on the Condensed Consolidated BalanceSheets.  The following table sets forththe fair value of investments as of January 2, 2010 and January 3,2009 including the input level used to determine fair value at the measurementdate.

 
| **(In  Thousands)**        | ** ** | **Level 1** | ** ** | **Level 2** | ** ** | **Level 3** | ** ** | **Total** | ** ** |
|----------------------------|------------|-------------|------------|-------------|------------|-------------|------------|-----------|------------|
|                       |       |        |       |        |       |        |       |      |       |
| As of January 2, 2010 |       | $           | 25,201     |        | $          | 0           |       | $         | 0          |   | $ | 25,201 |   |
|                       |       |        |       |        |       |        |       |      |       |
| As of January 3, 2009 |       | 5,077       |       | 3,581       |       | 0           |       | 8,658     |       |
|                            |            |             |            |             |            |             |            |           |            |  |  |  |  |

 

The carrying values of cash and cash equivalents, accounts receivable,accounts payable and accrued liabilities approximate fair value because of theshort-term maturity of these instruments. The fair value of the Company’s long-term debt closely approximates itscarrying value.  The Company estimatesthe fair value of long-term debt based upon the net present value of the futurecash flows using those interest rates that are currently available to theCompany for the issuance of debt with similar terms and remaining maturities.

 

Vendor Allowances

 

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

 

Occasionally, the Company receives rebate allowancesin the form of upfront lump-sum payments from vendors.  Under the terms of these long-term agreements(which typically extend for several months or years), the Company earns therebates as it purchases product from the vendor.  The upfront payments are recorded as aliability when they are received and are recorded as a reduction of inventorycost as the product is purchased.  In theevent the Company does not purchase the minimum amount of product specified inthe agreement, the upfront payments must be returned on a pro rata basis to thevendor.  If the contract does not specifythat the rebate is earned as product is purchased, then the upfront paymentsare recorded as a liability when received and recognized as a reduction of costof sales on a pro rata basis as the product is sold.

 

StockAppreciation Rights

 

TheCompany has outstanding stock appreciation rights (SARs) that have been grantedto non-employee directors and certain employees.  Each SAR entitles the holder to receive cashupon exercise equal to the excess of the fair market value of a share of theCompany’s Class A Common Stock (Class A), as determined in accordancewith the SARs agreement, on the date of exercise over the fair market value ofsuch share on the date granted.  SARsgranted prior to December 2007 vest25% each year beginning at the end of the first year and expire five years fromthe date of grant.  SARs granted in December 2007 or later vest 25% each year beginning at the end of the third year and expireseven years from the date of grant.

 

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

 

Theassumptions used in the Black-Scholes option-pricing model as of January 2,2010:

 
| Dividend  yield          | .674%   | - | .952%       |
|--------------------------|---------|---|-------------|
| Expected  volatility     | 26.737% | - | 43.540%     |
| Risk-free  interest rate | .194%   | - | 2.956%      |
| Expected  average term   | 3.19    | - | 5.45  years |

 

See Note 10 for furtherinformation related to SARs.

 

Rental Expense and Income

 

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

 

Income Taxes

 

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

 

Common Stock and NetIncome Per Share

 

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

 

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Use of Estimates

 

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

 

InFebruary 2008, the Financial Accounting Standards Board (FASB) issued guidancewhich is effective for specified fair value measures of nonfinancial assets andliabilities for financial statements issued for fiscal years beginning after November 15,2008.  Adoption of the guidance in thefirst quarter of 2009 did not have any impact on the Company’s consolidatedfinancial statements.

 

InApril 2009, the FASB issued guidance on how to determine the fair value ofassets and liabilities when the volume and level of activity for theasset/liability has significantly decreased and on identifying circumstancesthat indicate a transaction is not orderly. The guidance also requires disclosures about the fair value of financialinstruments on an interim basis in addition to the annual disclosure requirements.  The guidance was effective for interim andannual reporting periods ending after June 15, 2009.  Adoption of the guidance in the secondquarter of 2009 did not have any impact on the Company’s consolidated financialstatements.

 

InJune 2009, the FASB issued guidance establishing the Accounting StandardsCodification (ASC) which will serve as a single source of authoritative GAAPrecognized by the FASB to be applied by nongovernmental entities.  Rules and interpretive releases of theSecurities and Exchange Commission (SEC) under authority of federal securitieslaws are also sources of authoritative GAAP for SEC registrants.  On the effective date of the guidance, theASC superseded all then-existing non-SEC accounting and reporting standards.  All other nongrandfathered non-SEC accountingliterature not included in the ASC became nonauthoritative.  The guidance was effective for financialstatements issued for interim and annual periods ending after September 15,2009.  Adoption of the guidance did nothave an impact on the Company’s consolidated financial statements.

 

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2.       Investments

 

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

 
| **(In  Thousands)**          | ** ** | **Cost** | ** ** | **Unrealized  Gain (Loss)** | ** ** | **Fair Value** | ** ** |
|------------------------------|------------|----------|------------|-----------------------------|------------|----------------|------------|
|                         |       |     |       |                        |       |           |       |
| As  of January 2, 2010: |       |     |       |                        |       |           |       |
| Debt  Securities:            |       |     |       |                        |       |           |       |
| Government  sponsored        |       | $        | 5,010      |                        | $          | 1              |       | $ | 5,011 |   |
| State  government            |       | 3,895    |       | (3                          | )          | 3,892          |       |
| Corporate                    |       | 12,288   |       | (9                          | )          | 12,279         |       |
| Mutual  Funds                |       | 4,016    |       | 3                           |       | 4,019          |       |
| Total                        |       | $        | 25,209     |                        | $          | (8             | )          | $ | 25,201 |   |
|                         |       |     |       |                        |       |           |       |
| As  of January 3, 2009: |       |     |       |                        |       |           |       |
| Debt  Securities:            |       |     |       |                        |       |           |       |
| Corporate                    |       | $        | 8,643      |                        | $          | 15             |       | $ | 8,658 |   |
| Total                        |       | $        | 8,643      |                        | $          | 15             |       | $ | 8,658 |   |

 

Realized netlosses from the sale of investments were $0, $907,000and $0 in 2009, 2008 and 2007,respectively.  In addition, the Companyrecognized capital gain income from mutual funds of $0, $0 and $64,000 in 2009, 2008 and 2007, respectively.  Realized net gain or loss from the sale ofinvestments and capital gain income are included in other income (expense), neton the Consolidated Statements of Operations and Comprehensive Income.

 

3.       Accounts Receivable, Net

 
| ** **                             | ** ** | **January 2,** | ** ** | **January 3,** | ** ** |
|----------------------------------------|------------|---------------------|------------|---------------------|------------|
| **(In  Thousands)**                    | ** ** | **2010**            | ** ** | **2009**            | ** ** |
| Accounts  receivable, trade            |       | $                   | 2,559      |                | $          | 2,883 |   |
| Other  accounts receivable             |       | 3,164               |       | 2,685               |       |
|                                   |       | 5,723               |       | 5,568               |       |
| Less:  Allowance for doubtful accounts |       | (300                | )          | (297                | )          |
|                                   |       | $                   | 5,423      |                | $          | 5,271 |   |

 

The provision fordoubtful accounts in 2009, 2008 and 2007 was approximately $94,000, $169,000and $45,000 respectively.

 

4.       Inventories

 

Inventories valued by theLIFO method totaled $14,214,000 at January 2, 2010 and $15,031,000 at January 3,2009.  Inventory balances would have been$6,433,000 and $6,025,000 higher at the end of 2009 and 2008, respectively, ifthey had been stated at the lower of FIFO cost or market.

 

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5.       Significant Supplier

 

During 2009, the Companyprocured approximately 16% of its product through Unified Grocers, Inc.(Unified), a grocery wholesale cooperative. As a member-patron, the Company is required to provide Unified withcertain minimum deposits in order to purchase product from thecooperative.  As of January 2, 2010,the Company had approximately $1,628,000 on deposit with Unified in addition toapproximately $694,000 related to ownership of equity shares in Unified.  There is no established public trading marketfor Unified’s  shares.  The deposit and equity ownership are recordedunder other assets on the Consolidated Balance Sheets.

 

Unified pays dividendsannually in December of each year. Dividends are paid in arrears and are based on a percentage of theCompany’s qualifying purchases from Unified, which percentage is typicallyestablished by Unified at or after the end of each year.  The Company accrues patronage dividend incomeas a reduction of cost of sales ratably throughout the year based on a reviewof prior dividend history, projected purchase volume and an estimate of Unified’scurrent year patronage earnings.  Theaccrual is adjusted each year, as needed, based on the actual amount receivedfrom Unified in December.

 

6.       Property, Plant and Equipment

 
| ** **                                 | ** ** | **January 2,** | ** ** | **January 3,** | ** ** |
|--------------------------------------------|------------|---------------------|------------|---------------------|------------|
| **(In  Thousands)**                        | ** ** | **2010**            | ** ** | **2009**            | ** ** |
|                                       |       |                |       |                |       |
| Land                                       |       | $                   | 8,633      |                | $          | 8,633 |   |
| Buildings  and improvements                |       | 9,836               |       | 9,837               |       |
| Store  fixtures and office equipment       |       | 47,193              |       | 46,270              |       |
| Transportation  equipment                  |       | 4,060               |       | 4,134               |       |
| Machinery  and equipment                   |       | 1,982               |       | 1,930               |       |
| Leasehold  improvements                    |       | 50,376              |       | 50,875              |       |
| Leasehold  interests                       |       | 4,538               |       | 4,538               |       |
| Assets  under construction                 |       | 332                 |       | 975                 |       |
|                                       |       | 126,950             |       | 127,192             |       |
|                                       |       |                |       |                |       |
| Accumulated  depreciation and amortization |       | (85,969             | )          | (83,400             | )          |
|                                       |       | $                   | 40,981     |                | $          | 43,792 |   |

 

Depreciationand amortization expense was $5,599,000, $6,110,000 and $6,685,000 in 2009,2008 and 2007, respectively.

 

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7.       Other Current Liabilities

 
| ** **                      | ** ** | **January 2,** | ** ** | **January 3,** | ** ** |
|---------------------------------|------------|---------------------|------------|---------------------|------------|
| **(In  Thousands)**             | ** ** | **2010**            | ** ** | **2009**            | ** ** |
|                            |       |                |       |                |       |
| Employee  compensated absences  |       | $                   | 5,280      |                | $          | 5,426 |   |
| Taxes  (excluding income taxes) |       | 3,008               |       | 3,080               |       |
| Payroll                         |       | 2,326               |       | 1,733               |       |
| Employee  benefits              |       | 1,838               |       | 2,446               |       |
| Workers’  compensation     |       | 1,707               |       | 1,349               |       |
| Dividends  payable              |       | 790                 |       | 790                 |       |
| Rent                            |       | 571                 |       | 742                 |       |
| Stock  appreciation rights      |       | 227                 |       | 108                 |       |
| Other                           |       | 3,580               |       | 3,554               |       |
|                            |       | $                   | 19,327     |                | $          | 19,228 |   |

 

8.       Long-Term Debt

 
| ** **                                                    | ** ** | **Current**         | ** ** | **Non-Current**     | ** ** |
|---------------------------------------------------------------|------------|---------------------|------------|---------------------|------------|
| ** **                                                    | ** ** | **January 2,** | ** ** | **January 3,** | ** ** | **January 2,** | ** ** | **January 3,** | ** ** |
| **(In  Thousands)**                                           | ** ** | **2010**            | ** ** | **2009**            | ** ** | **2010** | ** ** | **2009** | ** ** |
| 7%  Subordinated Income Debentures due September 1, 2014 |       | $                   | 0          |                | $          | 0 |   | $ | 1,228 |   | $ | 1,228 |   |
|                                                               |            |                     |            |                     |            |  |  |  |  |  |  |  |  |

 

The Company hasrevolving lines of credit in the amount of $20,000,000 which expires in August 2010and $3,000,000 which expires in November 2010.  Borrowings bear interest at the bank’s primerate or at the adjusted London Interbank Offer Rate (LIBOR) plus a margin up to1.2%. At the end of 2009 and 2008, there were no amounts borrowed againsteither of the revolving lines of credit. The Company currently maintains four standby letters of credit aggregating$8,769,000 in connection with lease and self-insurance requirements.  The standby letters of credit reduce theavailable borrowings under its revolving lines of credit.

 

Debentures: The indenturerelating to the 7% Subordinated Income Debentures (7% Debentures), due September 1,2014, provides for interest payable semi-annually on March 1 and September 1to the extent that current annual net income is sufficient therefor, or at thediscretion of the Company, out of available retained earnings.  All interest due and payable as of January 2,2010 was paid.  The 7% Debentures arerecorded at face value which approximates its fair value.

 

9.       Capital Stock

 

Class A Common Stock:  The Company is authorized to issue 10,000,000shares of Class A, par value $.25 per share.  At January 2, 2010 and January 3,2009, the number of shares issued were 4,518,298,including 1,357,200 treasury shares.  In March 2007, the Company announced astock repurchase program, authorized by the Board of Directors, to purchasefrom time to time up to 200,000 shares ofits Class A in the open market or in private transactions.  This was in addition to 22,904 shares remaining under prior repurchaseauthorizations.  The timing, volume andprice of purchases are at the discretion of the management of the Company.  No stock was repurchased under this programin 2009, 2008 or 2007.

 

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During 2009 and 2008, the Company paid regularquarterly dividends of 25 cents per share of Class A for a total ofapproximately $3,161,000 in each year. In addition, on December 8, 2008, the Company paid a special cashdividend of twenty-five dollars ($25) per share on its outstanding Class Atotaling approximately $79,027,000 to stockholders of record at the close ofbusiness on November 20, 2008.  On January 20, 2010, the Company paid a regular quarterlycash dividend of 25 cents per share of Class A, aggregating approximately$790,000, to stockholders of record on December 31, 2009.

 

10.     Stock Appreciation Rights

 

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

 

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|                       |   | **SARs**         |   |
|----------------------------|--------|------------------|--------|
|                       |   | **Officers and** |   | **Non-Employee** |   |
|                       |   | **Employees**    |   | **Directors** |   |
|                       |   | ** **       |   | **Weighted** |   | ** ** |   | **Weighted** |   |
|                       |   | **SARs**         |   | **Average Price** |   | **SARs** |   | **Average Price** |   |
|                       |   |             |   |   |   |   |   |   |   |
| Outstanding as of 12/30/06 |   | 43,650           |   | $ | 58.46 |   | 47,500 |   | $ | 53.83 |   |
|                       |   |             |   |   |   |   |   |   |   |
| Granted                    |   | 72,000           |   | $ | 145.91 |   | 45,000 |   | $ | 140.79 |   |
| Exercised                  |   | 22,675           |   | $ | 54.97 |   | 35,000 |   | $ | 52.52 |   |
| Forfeited                  |   | 3,750            |   | $ | 86.22 |   | 0 |   | $ | 0.00 |   |
|                       |   |             |   |   |   |   |   |   |   |
| Outstanding as of 12/29/07 |   | 89,225           |   | $ | 128.75 |   | 57,500 |   | $ | 122.69 |   |
|                       |   |             |   |   |   |   |   |   |   |
| Granted                    |   | 0                |   | $ | 0.00 |   | 0 |   | $ | 0.00 |   |
| Exercised                  |   | 17,100           |   | $ | 58.40 |   | 15,000 |   | $ | 68.09 |   |
| Forfeited                  |   | 0                |   | $ | 0.00 |   | 0 |   | $ | 0.00 |   |
|                       |   |             |   |   |   |   |   |   |   |
| Outstanding as of 1/3/09   |   | 72,125           |   | $ | 145.42 |   | 42,500 |   | $ | 141.96 |   |
|                       |   |             |   |   |   |   |   |   |   |
| Granted                    |   | 3,500            |   | $ | 94.98 |   | 0 |   | $ | 0.00 |   |
| Exercised                  |   | 500              |   | $ | 57.00 |   | 0 |   | $ | 0.00 |   |
| Forfeited                  |   | 7,000            |   | $ | 146.44 |   | 0 |   | $ | 0.00 |   |
|                       |   |             |   |   |   |   |   |   |   |
| Outstanding as of 1/2/10   |   | 68,125           |   | $ | 143.38 |   | 42,500 |   | $ | 141.96 |   |
|                       |   |             |   |   |   |   |   |   |   |
| Exercisable as of 1/2/10   |   | 375              |   |   |   | 2,500 |   |   |   |

 

Theaggregate intrinsic value of fully vested SARs as of January 2, 2010 was $0.

 

Thefollowing table summarizes information about the Company’s SARs outstanding at January 2,2010:

 
| ** **                           | ** ** | **SARs Outstanding** | ** ** | **SARs Exercisable** | ** ** |
|--------------------------------------|------------|----------------------|------------|----------------------|------------|
| ** **                           | ** ** | ** **           | ** ** | **Weighted**         | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                           | ** ** | ** **           | ** ** | **Average**          | ** ** | **Weighted** | ** ** | ** ** | ** ** | **Weighted** | ** ** |
| ** **                           | ** ** | ** **           | ** ** | **Remaining**        | ** ** | **Average** | ** ** | ** ** | ** ** | **Average** | ** ** |
| ** **                           | ** ** | **Number**           | ** ** | **Contractual**      | ** ** | **Exercise** | ** ** | **Number** | ** ** | **Exercise** | ** ** |
| **Exercise  Price**                  | ** ** | **Outstanding**      | ** ** | **Life**             | ** ** | **Price** | ** ** | **Exercisable** | ** ** | **Price** | ** ** |
| SARs - Officers & Employees |       |                 |       |                 |       |   |   |   |   |   |   |
| $                                    | 121.03     |                 | 1,125      |                 | 2.2 years  |   | $ | 121.03 |   | 375 |   | $ | 121.03 |   |
| $                                    | 146.44     |                 | 63,500     |                 | 4.9 years  |   | $ | 146.44 |   | 0 |   | $ | 0.00 |   |
| $                                    | 94.98      |                 | 3,500      |                 | 6.9 years  |   | $ | 94.98 |   | 0 |   | $ | 0.00 |   |
|                                 |       | 68,125               |       | 5.0 years            |       | $ | 143.38 |   | 375 |   | $ | 121.03 |   |
|                                 |       |                 |       |                 |       |   |   |   |   |   |   |
| SARs - Non-Employee Directors        |       |                 |       |                 |       |   |   |   |   |   |   |
| $                                    | 121.03     |                 | 7,500      |                 | 2.2 years  |   | $ | 121.03 |   | 2,500 |   | $ | 121.03 |   |
| $                                    | 146.44     |                 | 35,000     |                 | 4.9 years  |   | $ | 146.44 |   | 0 |   | $ | 0.00 |   |
|                                 |       | 42,500               |       | 4.4 years            |       | $ | 141.96 |   | 2,500 |   | $ | 121.03 |   |

 

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SARscompensation expense is included in SG&A expense on the ConsolidatedStatements of Operations and Comprehensive Income.  Authoritative guidance requires the Companyto remeasure the fair value of SARs each reporting period until the award issettled.  Compensation expense must berecognized or reversed each reporting period for changes in fair value andvesting.  During 2009, the Companyreversed $273,000 of SARs compensation expense recognized in prior periods dueto a decrease in the fair value of SARs during the year partially offset byadditional vesting.  The Companyrecognized $1,823,000 and $2,908,000 of SARs compensation expense in 2008 and2007, respectively.

 

Asof January 2, 2010, assuming no change in the SARs fair value, there wasapproximately $1,046,000 of total unrecognized compensation cost related tooutstanding SARs which was expected to be recognized over a weighted averageperiod of 3.8 years were it not for the exchange discussed in Note 18.  The total intrinsic value of SARs exercisedduring 2009 was approximately $34,000. Intrinsic value represents the amount by which the current fair value ofSARs exceeds the grant price.

 

11.     Retirement Plans

 

The Companycontributes to multi-employer union pension plans, administered by varioustrustees, which may be deemed to be defined benefit plans.  Contributions to these plans are based uponnegotiated labor contracts.  Informationrelating to accumulated benefits and fund assets as they may be allocable tothe participants at January 2, 2010, is not available to the Company.  The Company records pension expense for theseplans as contributions are earned.  TheCompany’s total union pension expense for all plans for 2009, 2008 and 2007amounted to $4,730,000, $5,065,000 and $5,332,000,respectively.

 

The Arden Group, Inc.401(k) Retirement Savings Plan (401(k) Plan) covers all non-unionemployees of the Company and its subsidiaries who have attained the age of 18and have completed the applicable service requirement, as well as retirees andemployees who have terminated but remain participants in the 401(k) Plan.  On the first of the month following thecompletion of one month of service, the 401(k) Plan provides that, withcertain limitations, a qualifying employee may elect to contribute up to 100%of such employee’s annual compensation to the 401(k) Plan up to a maximumof $16,500 in 2009 on a tax-deferred basis. In addition, employees over the age of 50 may elect to make catch upcontributions up to a maximum of $5,500 in 2009.  The Company made discretionary contributionsto the 401(k) Plan of $295,000, $716,000 and $929,000 for 2009, 2008 and 2007, respectively.

 

Anemployment agreement with a key executive officer provides for annualpost-employment compensation equal to 25% of his average base salary and bonusearned in the last three fiscal years prior to the cessation of his employmentwith the Company.  The officer isentitled to monthly payments during his lifetime beginning with the terminationof his employment for any reason other than his breach of the employmentagreement or termination for cause.  TheCompany has accrued its obligation under the terms of the employment agreement.  The Company decreased the accrual during2009, 2008 and 2007 and recognized income of approximately $249,000, $45,000 and $44,000, respectively.  The decrease in the accrual is primarily dueto a change in estimate based on the refining of the assumptions and underlyingdata, including the estimated payout term.  This accrual is recorded under otherliabilities on the Consolidated Balance Sheets and totaled approximately$1,873,000 as of January 2, 2010.

 

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12.     Multi-Employer Union Health Care Plans

 

The Company contributesto multi-employer union health care plans, administered by various trustees, inaccordance with the provisions of various labor contracts.  Contributions to these plans are generallybased on the number of straight-time hours worked.  The Company’s expense for these plans totaled$8,815,000, $9,258,000 and $9,789,000 for 2009, 2008 and 2007,respectively.  The majority ofGelson’s employees are members of the United Food & Commercial WorkersInternational Union (UFCW).  The Companycontributes to a multi-employer health and welfare trust fund on behalf of itsemployees who are members of the UFCW. This fund was overfunded during 2007 contract negotiations.  Consequently, the employers negotiated asignificant reduction in the average hourly contribution rates for health carewhich was expected to substantially reduce the overfunded status of the fundduring the term of the new contract between the UFCW and the employers whichexpires March 6, 2011.  The Company’shealth and welfare contribution rate was scheduled to increase effective withhours worked during March 2009 and after; however, the Company wasnotified by the Southern California United Food & Commercial WorkersUnions and the Food Employers Joint Trust Funds (Trust), during the firstquarter of 2009, that the increase had been suspended.  The Trust is in the process of reviewingtheir health and welfare reserves.  Basedon informal discussions, the Company currently anticipates that it will benotified in April 2010 of an increase effective beginning with March 2010hours worked.  The Trust has indicatedthat the increase could be significant.  Except as discussed above, there were noemployer withdrawals, shortfall contributions, maintenance of benefit clausesor other material changes that affected the comparability of employer andmulti-employer contributions from year to year.

 

13.     Income Taxes

 

The composition of thefederal and state income tax provision (benefit) is as follows:

 
| **(In  Thousands)**           | ** ** | **2009** | ** ** | **2008** | ** ** | **2007** | ** ** |
|-------------------------------|------------|----------|------------|----------|------------|----------|------------|
|                          |       |     |       |     |       |     |       |
| Current:                      |       |     |       |     |       |     |       |
| Federal                       |       | $        | 11,369     |     | $          | 11,550   |       | $ | 14,702 |   |
| State                         |       | 3,198    |       | 3,239    |       | 3,671    |       |
| Total  current tax provision  |       | 14,567   |       | 14,789   |       | 18,373   |       |
|                          |       |     |       |     |       |     |       |
| Deferred:                     |       |     |       |     |       |     |       |
| Federal                       |       | 115      |       | 1,652    |       | 540      |       |
| State                         |       | (17      | )          | 399      |       | 364      |       |
| Total  deferred tax provision |       | 98       |       | 2,051    |       | 904      |       |
| Total  income tax provision   |       | $        | 14,665     |     | $          | 16,840   |       | $ | 19,277 |   |

 

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TheCompany’s deferred tax assets (liabilities) were attributable to the following:

 
| ** **                          | ** ** | **January 2,** | ** ** | **January 3,** | ** ** |
|-------------------------------------|------------|---------------------|------------|---------------------|------------|
| **(In  Thousands)**                 | ** ** | **2010**            | ** ** | **2009**            | ** ** |
|                                |       |                |       |                |       |
| Deferred tax assets:                |       |                |       |                |       |
| Deferred rent                       |       | $                   | 2,607      |                | $          | 2,566 |   |
| Accrued expenses                    |       | 1,819               |       | 1,749               |       |
| Self-insured reserves               |       | 1,679               |       | 1,860               |       |
| Property, plant and equipment       |       | 1,415               |       | 1,582               |       |
| State income taxes                  |       | 1,120               |       | 1,150               |       |
| Accrued vacation                    |       | 1,103               |       | 1,134               |       |
| Other                               |       | 805                 |       | 771                 |       |
| Deferred tax assets                 |       | 10,548              |       | 10,812              |       |
|                                |       |                |       |                |       |
| Deferred tax liabilities:           |       |                |       |                |       |
| Deferred gain on debenture exchange |       | (2,211              | )          | (2,372              | )          |
| Other                               |       | (1,122              | )          | (1,126              | )          |
| Deferred tax liabilities            |       | (3,333              | )          | (3,498              | )          |
| Deferred income taxes, net          |       | $                   | 7,215      |                | $          | 7,314 |   |

 

Reconciliation of thestatutory federal rate and effective rate is as follows:

 
| **(In  Thousands, Except**                      | ** ** | **2009**   | ** ** | **2008** | ** ** | **2007**   | ** ** |
|-------------------------------------------------|------------|------------|------------|----------|------------|------------|------------|
| **Percentage  Amounts)**                        | ** ** | **Amount** | ** ** | **Rate** | ** ** | **Amount** | ** ** | **Rate** | ** ** | **Amount** | ** ** | **Rate** | ** ** |
|                                            |       |       |       |     |       |       |       |   |   |   |   |   |   |
| Federal tax at statutory rate                   |       | $          | 12,701     |     | 35.0       | %          | $          | 14,527 |   | 35.0 | % | $ | 16,969 |   | 35.0 | % |
| State  income taxes, net of federal tax benefit |       | 2,085      |       | 5.7      | %          | 2,385      |       | 5.8 | % | 2,786 |   | 5.7 | % |
| Other                                           |       | (121       | )          | (.3      | )%         | (72        | )          | (.2 | )% | (478 | ) | (.9 | )% |
|                                            |       | $          | 14,665     |     | 40.4       | %          | $          | 16,840 |   | 40.6 | % | $ | 19,277 |   | 39.8 | % |

##### ** **

Onthe first day of its 2007 fiscal year, the Company adopted guidance related toaccounting for uncertainty in income taxes issued by the FASB.  This guidance prescribed a recognitionthreshold and measurement attribute for the financial statement recognition andmeasurement of a tax position taken or expected to be taken in a tax return,and provided guidance on derecognition, classification, interest and penalties,accounting in interim periods, disclosure and transition.  As of January 2, 2010 and January 3,2009, the Company had approximately $1,000 and $6,000, respectively, ofunrecognized tax benefits, all of which would have little impact on oureffective tax rate if recognized.  TheCompany does not believe that the unrecognized tax benefit will changesignificantly within the 2010 fiscal year. The following table reconciles the amount recorded for unrecognized taxbenefits for the year ended January 2, 2010:

 
| **(In  Thousands)**                                | ** ** | **2009** | ** ** |
|----------------------------------------------------|------------|----------|------------|
|                                               |       |     |       |
| Unrecognized tax benefits — beginning of year |       | $        | 6          |   |
| Decrease due to lapse of statute of limitations    |       | (5       | )          |
| Unrecognized tax benefits — end of year       |       | $        | 1          |   |

 

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TheCompany recognizes interest and penalties related to uncertain tax positions ininterest expense and SG&A expense, respectively, in the ConsolidatedStatements of Operations and Comprehensive Income.  A reversal of interest recognized in priorperiods of $58,000 and $2,000 wasrecorded in 2009 and 2008,respectively.  No interest was recognizedor reversed during 2007.  No penaltieswere recognized during 2009, 2008 or2007.  As of January 2, 2010 and January 3,2009, the Company had approximately $24,000 and $82,000 accrued for interest,respectively, and no accrual for penalties at the end of either period.  The interest accrual is net of the applicablefederal and state tax savings which would result if the interest were paid out.

 

TheCompany files income tax returns in the U.S. federal jurisdiction and theCalifornia state jurisdiction.  TheCompany is no longer subject to federal and state tax examinations for yearsbefore 2006 and 2005, respectively.

 

14.     Leases

 

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

 

All leases and subleaseswith an initial term greater than one year are accounted for as either capitalleases, operating leases or subleases, as appropriate, in accordance withauthoritative guidance.

 

Assets Under CapitalLeases:  Assets under capital leases arecapitalized using interest rates appropriate at the inception of eachlease.  Contingent rentals associated withcapital leases in 2009, 2008 and 2007 were $0, $0 and $231,000, respectively,and accordingly have been charged to expense as incurred.  There were no capital leases outstanding asof January 2, 2010 or January 3, 2009.

 

Operating Leases andSubleases:  The Company is obligatedunder operating leases, primarily for land and buildings, which expire atvarious dates through 2027.  Futureminimum lease payments for all noncancelable operating leases having aremaining term in excess of one year at January 2,2010 are as follows:

 
| ** **          | ** ** | ** **      | ** ** | **Deduct**   | ** ** | **Net**         | ** ** |
|---------------------|------------|-----------------|------------|--------------|------------|-----------------|------------|
| ** **          | ** ** | ** **      | ** ** | **Sublease** | ** ** | **Rental**      | ** ** |
| **(In  Thousands)** | ** ** | **Commitments** | ** ** | **Rentals**  | ** ** | **Commitments** | ** ** |
|                |       |            |       |         |       |            |       |
| 2010                |       | $               | 10,896     |         | $          | 664             |       | $ | 10,232 |   |
| 2011                |       | 10,233          |       | 689          |       | 9,544           |       |
| 2012                |       | 9,975           |       | 532          |       | 9,443           |       |
| 2013                |       | 9,318           |       | 78           |       | 9,240           |       |
| 2014                |       | 8,679           |       | 23           |       | 8,656           |       |
| Thereafter          |       | 72,300          |       | 0            |       | 72,300          |       |
|                |       | $               | 121,401    |         | $          | 1,986           |       | $ | 119,415 |   |

 

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Rent expense underoperating leases was as follows:

 
| **(In  Thousands)** | ** ** | **2009** | ** ** | **2008** | ** ** | **2007** | ** ** |
|---------------------|------------|----------|------------|----------|------------|----------|------------|
|                |       |     |       |     |       |     |       |   |   |   |
| Minimum  rent       |       | $        | 11,590     |     | $          | 11,324   |       | $ | 10,900 |   |
|                |       |     |       |     |       |     |       |
| Contingent  rent    |       | 1,030    |       | 1,356    |       | 1,122    |       |
|                |       |     |       |     |       |     |       |
|                |       | 12,620   |       | 12,680   |       | 12,022   |       |
|                |       |     |       |     |       |     |       |
| Sublease  rentals   |       | (2,027   | )          | (2,110   | )          | (1,963   | )          |
|                |       |     |       |     |       |     |       |   |   |   |
|                |       | $        | 10,593     |     | $          | 10,570   |       | $ | 10,059 |   |

 

15.     Related Party Transactions

 

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

 

16.     Commitments and Contingent Liabilities

 

The Company has anemployment agreement with a key executive officer and shareholder whichcurrently expires on January 1, 2012. In addition to a base salary, the agreement provides for a bonus basedon pre-tax earnings.  No maximumcompensation limit exists.  Total salaryand bonus expensed in 2009, 2008 and 2007 was approximately $1,709,000,$2,154,000 and $2,385,000,respectively.  The unpaid bonus at yearend is recorded under other current liabilities on the Consolidated BalanceSheets.  For fiscal 2009, this keyexecutive voluntarily reduced the bonus to which he was contractually entitledto 70% of his prior year bonus.  The officer isalso entitled to monthly payments during his lifetime beginning with thetermination of his employment for any reason other than his breach of theemployment agreement or termination for cause. The Company has accrued its obligation under the terms of the employmentagreement as discussed in Note 11.

 

The Company is primarily self-insured for losses related to general andauto liability claims and, for certain years prior to July 1, 2006, forworkers’ compensation as well.  TheCompany purchased a fully insured guaranteed cost workers’ compensationinsurance policy for losses occurring after June 30, 2006.  This policy replaced the high deductibleprogram for workers’ compensation and is currently effective through June 30,2010.  For claims prior to July 1,2006, the Company maintains stop-loss coverage to limit its loss exposure on aper claim basis.  Liabilities associatedwith the risks that are retained by the Company are estimated, in part, byconsidering historical claims experience and regression analysis.  Accruals are based on reported claims and anestimate of claims incurred but not reported. While the ultimate amount of claims incurred are dependent on futuredevelopments, the reserve represents the Company’s best estimate of futurepayments related to claims.  The Company’sliability reserve for unpaid claims and incurred but not reported claims at January 2,2010 and January 3, 2009 was approximately $4,577,000 and $5,101,000,respectively, and is recorded under other current liabilities and otherliabilities on the Consolidated Balance Sheets.

 

As of January 2,2010, management had authorized expenditures on incomplete projects for theconstruction and purchase of property, plant and equipment which totaledapproximately $1,489,000.

 

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

 

The Company or itssubsidiaries are defendants in a number of cases currently in litigation, beingvigorously defended, in which the complainants seek monetary damages.  As of the date hereof, no estimate ofpotential liability, if any, is possible. Based upon current information, management, after consultation withlegal counsel defending the Company’s interests in the cases, believes theultimate disposition thereof will have no material effect upon either theCompany’s consolidated financial position, results of operations or cash flows.

 

17.     Selected Quarterly Financial Data(Unaudited)

 

(In Thousands, Except Per Share Data)

 
| ** **  | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Basic and Diluted** | ** ** |
|-------------|------------|------------|------------|------------|------------|------------|------------|---------------------------------|------------|
| ** **  | ** ** | ** ** | ** ** | **Gross**  | ** ** | **Net**    | ** ** | **Net Income**             | ** ** |
| **Quarter** | ** ** | **Sales**  | ** ** | **Profit** | ** ** | **Income** | ** ** | **Per Share (1)**     | ** ** |
|        |       |       |       |       |       |       |       |                            |       |
| 2008        |       |       |       |       |       |       |       |                            |       |
| First       |       | $          | 118,816    |       | $          | 45,547     |       | $                               | 6,529      |   | $ | 2.07 |   |
| Second      |       | 116,616    |       | 44,925     |       | 6,614      |       | 2.09                            |       |
| Third       |       | 114,156    |       | 43,457     |       | 4,114      |       | 1.30                            |       |
| Fourth      |       | 129,529    |       | 50,571     |       | 7,410      |       | 2.34                            |       |
|        |       |       |       |       |       |       |       |                            |       |
| 2009        |       |       |       |       |       |       |       |                            |       |
| First       |       | $          | 108,847    |       | $          | 42,847     |       | $                               | 5,833      |   | $ | 1.85 |   |
| Second      |       | 107,851    |       | 41,361     |       | 4,671      |       | 1.48                            |       |
| Third       |       | 103,754    |       | 39,605     |       | 4,668      |       | 1.48                            |       |
| Fourth      |       | 110,718    |       | 42,426     |       | 6,452      |       | 2.03                            |       |

 

----

(1)     Earnings per share is calculated using the weightedaverage outstanding shares for thequarter. The fourth quarter of 2008 was a 14 week quarter compared to 13 weeks inthe fourth quarter of 2009.

 

18.     Subsequent Events

 

Dividends

 

OnJanuary 20, 2010, the Company paid a regular quarterly cash dividend of$0.25 per share on its Class A totaling approximately $790,000 tostockholders of record on December 31, 2009.

 

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Stock Appreciation Rights (Unaudited)

 

InJanuary 2010, current holders of the Company’s SARs with a grant date onor before December 6, 2007 were offered the opportunity to exchange theirthen outstanding SARs units for an equal number of new SARs units with a lowergrant price of $110 and a new vesting period. Existing grant prices for these units ranged from $121.03 to$146.44.  Ordinarily, the grant price isdetermined based upon the fair market value of a share of the Company’s Class Aon the date of grant.  On the date theexchange offer was made to these SARs holders, the Class A closing pricewas $95.98 per share. For those holders who accepted the Company’s exchangeoffer, the new SARs were granted effective January 15, 2010 and expire January 15,2017.  The fair market value of a shareof the Company’s Class A on the grant date was $108.71.  In the event that the SARs holder opted toexchange their SARs, they also agreed to start their vesting period over. Thenew SARs vest 25% each year beginning at the end of the third year and expireseven years from the date of grant.  Ofthe 110,625 SARs units outstanding at fiscal 2009 year end, 99,000 SARs unitswere exchanged.  The Company had accruedapproximately $830,000 related to the exchanged SARs as of January 2,2010.  These same SARs units were valuedat $817,000 as of January 15, 2010 just prior to the exchange.  After the exchange, the accrual of $817,000was reversed in fiscal 2010.  The Companywill continue to measure the fair value of the new SARs at the end of each reportingperiod going forward and will recognize compensation expense to reflect anyincrease in fair value and vesting if appropriate.

 

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

 

**INDEX TOEXHIBITS**

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

 

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| **Exhibit** | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                           |
|-------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|        |       |                                                                                                                                                                                                                                                                                                                                                                                                 |
| 10.2*       |       | Amendment  to Employment Agreement dated April 27, 1994, by and between Arden  Group, Inc., Arden-Mayfair, Inc., AMG Holdings, Inc. and  Gelson’s Markets and Bernard Briskin, filed as Exhibit 10.7 to the  Quarterly Report on Form 10-Q of Arden Group, Inc. for the quarter  ended April 2, 1994 and incorporated herein by reference.              |
|        |       |                                                                                                                                                                                                                                                                                                                                                                                                 |
| 10.3*       |       | Second  Amendment to Employment Agreement as of January 1, 1997, by and between  Arden Group, Inc., Arden-Mayfair, Inc., AMG Holdings, Inc. and  Gelson’s Markets and Bernard Briskin, filed as Exhibit 10.9 to the Annual  Report on Form 10-K of Arden Group, Inc. for the fiscal year ended  January 3, 1998 and incorporated herein by reference.   |
|        |       |                                                                                                                                                                                                                                                                                                                                                                                                 |
| 10.4*       |       | Third  Amendment to Employment Agreement as of December 31, 2008, by and  between Arden Group, Inc., Arden-Mayfair, Inc., AMG  Holdings, Inc. and Gelson’s Markets and Bernard Briskin, filed as  Exhibit 10.4 to the Annual Report on Form 10-K of Arden  Group, Inc. for the fiscal year ended January 3, 2009 and  incorporated herein by reference. |
|        |       |                                                                                                                                                                                                                                                                                                                                                                                                 |
| 10.5        |       | Form of  Indemnification Agreement between the Registrant and the Directors and  certain officers, filed as Exhibit 10.13 to the Annual Report on  Form 10-K of Arden Group, Inc. for the fiscal year ended  December 29, 1990 and incorporated herein by reference.                                                                                                        |
|        |       |                                                                                                                                                                                                                                                                                                                                                                                                 |
| 10.6*       |       | Arden  Group, Inc., Non-Officer and Non-Director Stock Option Plan filed as  Exhibit 10.15 to the Annual Report on Form 10-K of Arden  Group, Inc. for the fiscal year ended December 28, 2002 and  incorporated herein by reference.                                                                                                                                       |
|        |       |                                                                                                                                                                                                                                                                                                                                                                                                 |
| 10.7*       |       | Form of  Stock Option Plan Agreement filed as Exhibit 10.15.1 to the Annual  Report on Form 10-K of Arden Group, Inc. for the fiscal year ended  December 28, 2002 and incorporated herein by reference.                                                                                                                                                                    |
|        |       |                                                                                                                                                                                                                                                                                                                                                                                                 |
| 10.8*       |       | Form of  Non-Employee Director Phantom Stock Unit Agreement with M. Mark Albert dated  March 13, 2007, filed as Exhibit 10.1 to the Quarterly Report on  Form 10-Q of Arden Group, Inc. for the quarter ended March 31,  2007 and incorporated herein by reference.                                                                                                    |
|        |       |                                                                                                                                                                                                                                                                                                                                                                                                 |
| 10.9*       |       | Form of  Non-Employee Director Phantom Stock Unit Agreement with each of M. Mark  Albert, John G. Danhakl, Robert A. Davidow, Kenneth A. Goldman and Steven  Romick dated December 6, 2007, filed as Exhibit 10.10 to the Annual  Report on Form 10-K of Arden Group, Inc. for the fiscal year ended  December 29, 2007 and incorporated herein by reference.          |
|        |       |                                                                                                                                                                                                                                                                                                                                                                                                 |
| 21.         |       | Subsidiaries of  Registrant.                                                                                                                                                                                                                                                                                                                                                                         |
|        |       |                                                                                                                                                                                                                                                                                                                                                                                                 |
| 23.1        |       | Consent of Independent  Registered Public Accounting Firm.                                                                                                                                                                                                                                                                                                                                           |
|        |       |                                                                                                                                                                                                                                                                                                                                                                                                 |
| 31.1        |       | Certification  of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley  Act of 2002.                                                                                                                                                                                                                                                                                           |
|        |       |                                                                                                                                                                                                                                                                                                                                                                                                 |
| 31.2        |       | Certification  of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley  Act of 2002.                                                                                                                                                                                                                                                                                           |
|             |            |                                                                                                                                                                                                                                                                                                                                                                                                      |  |  |  |

 

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Tableof Contents

 
| **Exhibit** | ** ** | ** **                                                                                                 |
|-------------|------------|------------------------------------------------------------------------------------------------------------|
|        |       |                                                                                                       |
| 32.1        |       | Certification  of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley  Act of 2002. |
|        |       |                                                                                                       |
| 32.2        |       | Certification  of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley  Act of 2002. |

 

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

 

59

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