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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-K
(Mark One)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 (FEE REQUIRED)
For the fiscal year ended January 3, 1998
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from __________ to ___________
Commission file number 0-9904
ARDEN GROUP, INC.
(Exact name of registrant as specified in its charter)
Delaware 95-3163136
- -------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
2020 South Central Avenue, Compton, California 90220
- ----------------------------------------------- ---------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (310) 638-2842
--------------
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
None None
Securities registered pursuant to Section 12(g) of the Act:
Class A Common Stock
--------------------
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes /X/ No / /
Indicate by a check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. /X/
The aggregate market value of the voting stock held by non-affiliates of the
registrant based on the closing price of such stock on March 6, 1998 was:
Class A Common Stock $38,407,765
The number of shares outstanding of the registrant's classes of common stock
as of March 6, 1998 was:
554,134 of Class A Common Stock
342,246 of Class B Common Stock
This report, including the Exhibits, contains a total of 63 pages. An index
to the Exhibits appears on pages 46 and 47, inclusive.
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PART I
ITEM 1. BUSINESS;
ITEM 2. PROPERTIES; AND
ITEM 3. LEGAL PROCEEDINGS
GENERAL
The Registrant, Arden Group, Inc. (sometimes hereinafter referred to as the
"Company"), is a holding company with certain real estate holdings and
conducts other operations through its wholly-owned subsidiary, Arden-Mayfair,
Inc. ("Arden-Mayfair"). Arden-Mayfair's wholly-owned subsidiary, Gelson's
Markets ("Gelson's"), operates supermarkets in the greater Los Angeles,
California area. Another wholly-owned subsidiary of Arden-Mayfair, AMG
Holdings, Inc. ("AMG Holdings"), distributed and serviced facsimile and other
communications equipment and parts prior to the sale of its operating assets
and liabilities in 1993. See "Arbitration Proceedings" below and Note 14 of
Notes to Financial Statements.
Arden Group is headquartered at 2020 South Central Avenue, Compton,
California 90220 and its telephone number is (310) 638-2842.
BUSINESS AND PROPERTIES OF ARDEN-MAYFAIR AND GELSON'S
MARKET OPERATIONS
Gelson's currently operates 13 supermarkets in the greater Los Angeles,
California area; ten under the name "Gelson's" and three under the name
"Mayfair." Gelson's and Mayfair are self-service cash-and-carry markets and
offer a broad selection of local and national brands as well as a limited
number of private label items. The Gelson's supermarkets target the consumer
who values superior customer service and merchandise presentation, selection
and quality.
STORE FORMATS AND BUSINESS STRATEGY
Gelson's business strategy is to offer a comfortable shopping experience
which is superior to its competitors in terms of customer service and
merchandise selection and presentation. The goal of this strategy is to
continue to develop and maintain Gelson's loyal base of customers. Central
elements of this strategy are as follows:
MERCHANDISE. The merchandise offerings in the markets are tailored in
response to Gelson's customer profile. Gelson's stores, which range in size
from approximately 29,000 to approximately 40,000 square feet, typically
carry a wide range of items, including all of the traditional grocery
categories such as produce, dry groceries, meats, dairy, wine and liquor,
floral, sushi and health and beauty aids. Gelson's perishables are premium
products, which are rigorously maintained and culled as appropriate to assure
quality and freshness. Gelson's merchandising emphasizes specialty items such
as imported foods and unusual delicatessen items, and items found in service
departments such as seafood, sit-down coffee areas and bakeries.
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The three Mayfair stores, which are smaller than Gelson's stores
(approximately 18,000 to approximately 26,000 square feet), offer a
merchandise selection which is less broad than at Gelson's.
SERVICE. Gelson's emphasizes customer service by operating a variety of
departments offering personal service including seafood, delicatessen,
floral, sushi and bakery departments. Some Gelson's stores include
additional service departments such as fresh pizza and pasta preparation and
coffee bars. Additionally, the stores at Calabasas and Northridge offer
banking and pharmacy services through third parties. Stores are staffed so
that, even at peak times, customer checkout time is minimized. In addition
to checkers, there are personnel assigned to bagging and carrying out
purchases. All employees are encouraged to know customers by name and assist
them whenever possible. All stores offer Company credit cards to qualified
customers as well as allowing customers the option of paying for their
purchases with cash, checks or credit and debit cards. Stores are typically
open 12 hours to 18 hours per day, with hours of operation determined by
local code or lease provisions, or as appropriate for the business
characteristics of a specific area.
PRESENTATION. All stores are maintained in accordance with extremely high
standards. Personnel continuously fill and face shelves with groceries.
Produce and other perishables are aggressively trimmed and culled to maintain
quality and appearance.
PRICING. The pricing strategy at the stores is to be competitive within
their market niches, ranging from the more traditional to the more exotic,
specialty or high-end products.
EXPANSION AND STORE DEVELOPMENT. Management regularly evaluates the
feasibility of opening new stores and remodeling existing stores in order to
maximize their appeal to consumers and their profit potential. Total capital
expenditures for 1997, including the new Gelson's Market in Northridge, and
costs of remodeling, new equipment and leasehold improvements on existing
stores, were $7,896,000. The Company has entered into an option to ground
lease certain property which, if the option were exercised, would be
developed, in part, as a new market location. The exercise of the option and
the ultimate development of a supermarket there is subject to the Company's
or a possible developer's due diligence, fulfilling certain conditions and
the Company and the developer obtaining certain entitlements.
ADVERTISING AND PROMOTION. Gelson's advertises in newspapers on a limited
basis. Direct advertising is limited (primarily newsletters and direct mail)
and is typically "event" rather than "price" oriented; emphasizing, for
example, special holiday selections, specialty items and services, recipes
and new products.
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COMPETITION
The retail grocery business is very competitive nationwide. It is especially
intense in the greater Los Angeles area. Competition in the supermarket
business is based primarily upon price, merchandise quality, service and
location. The number of stores, market share and availability of capital are
also important competitive factors. Gelson's is in direct competition with
numerous local outlets of regional and national supermarket chains (most of
which have greater resources and a larger market share than Gelson's),
independent grocery stores, convenience stores, specialty and gourmet markets
and food departments in mass merchandise stores and club stores. Competition
also exists from many other types of retailers with respect to particular
products. Stores compete primarily by offering a combination of high-quality
products and superior customer service. The Company also believes that
Gelson's prime store locations and long-standing reputation add to its
competitive strength.
SEASONALITY
Gelson's business is somewhat seasonal, with sales tending to increase during
the last quarter of the year because of the holiday season.
SUPPORT AND OTHER SERVICES
Each store has an on-site stockroom, the size of which varies for each store.
In addition, Gelson's operates an 89,000 square foot warehouse in the City of
Commerce, California, which distributes fresh fruits and vegetables, liquor,
wine and a limited number of grocery, meat, delicatessen and supply items to
stores.
The bulk of all merchandise purchasing is accomplished through Gelson's
office in Encino, California. Approximately one third of the purchases are
distributed through the central warehouse; the remainder are delivered
directly to the stores from manufacturers or wholesalers. The central
purchasing and distribution operations are conducted based on electronic
in-store ordering systems. Stores place orders for merchandise an average of
five times per week, with perishable goods ordered more frequently.
The largest supplier for the stores is Certified Grocers, a cooperative
wholesaler which has been a supplier for over twenty years and which
accounted for approximately 21.5% of Gelson's purchases in 1997. No other
supplier accounts for a material percentage of Gelson's purchases. The
Company believes that the negative impact of a loss of Certified Grocers as a
supplier for Gelson's likely would be mitigated by a combination of events,
which could include: (i) purchasing certain items for direct store delivery,
thereby freeing warehouse capacity to allow other items to be purchased
through the warehouse, and (ii) purchasing certain products through other
wholesalers in the area. However, such a loss could have a short-term
adverse effect on the performance of Gelson's.
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EMPLOYEES
Gelson's has approximately 900 full-time and 770 part-time employees. Most
store level and warehouse employees of Gelson's are covered by collective
bargaining agreements that require union membership and establish rates of
pay, hours of work, working conditions and procedures for the orderly
settlement of disputes. In general, these agreements have been negotiated on
an area-wide and industry-wide basis. The Company believes that its employee
relations are good.
In addition, Arden-Mayfair has approximately 59 full-time employees at its
executive and headquarters offices, some of whom are covered by a collective
bargaining agreement.
GOVERNMENTAL REGULATION
Gelson's is subject to regulation by a variety of governmental agencies,
including the U.S. Food and Drug Administration, the California Department of
Alcoholic Beverage Control, and state and local health departments. The
Company believes that Gelson's and Mayfair store operations comply with all
federal, state and local health, environmental and other laws and
regulations. Although the Company cannot predict the effect of future laws
or regulations on the operations of Gelson's, expenditures for continued
compliance with current laws are not expected to have a material effect on
capital expenditures, earnings or Gelson's competitive position.
LEGAL PROCEEDINGS
The Company and certain of its subsidiaries are involved in a number of
pending legal and/or administrative proceedings. Such proceedings are not
expected individually or in the aggregate to have a material adverse effect
upon either the Company's consolidated financial position or results of
operations. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
PROPERTIES
The Company currently owns two of its freestanding supermarket properties and
a shopping center in which a Gelson's Market is located. The shopping center
owned by the Company, located in Calabasas, California, consists of
approximately 18,000 square feet of space leased to twelve tenants in
addition to the Gelson's Market. Ten supermarkets and the warehouse and
distribution facility which services its markets are leased. Supermarkets
are leased for terms which may include options of up to 20 years under leases
which generally stipulate a minimum rental against a percentage of gross
sales. The average term remaining on the supermarket leases, including
renewal options, is approximately 20 years. The 13 markets range in size
from approximately 18,000 to approximately 40,000 square feet. Gelson's
warehouse and distribution facility in the City of Commerce, California, is
approximately 89,000 square feet and the term of the lease expires in
September 2005.
After extensive site, demographic and competitive analysis the Company has
decided not to enter the Santa Barbara marketplace and has entered into
escrow to sell the property it purchased in 1996. The sale is expected to
finalize in the first quarter of 1998. In 1996 the Company entered into an
option for a long-term ground lease to develop, build and open a new Gelson's
market, the development, building and opening of which is subject to, among
other things, the Company's
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or a developer's due diligence, receipt of necessary governmental
entitlements and the developer fulfilling certain conditions. The Company
has entered into a confidentiality agreement and non-binding letter of intent
with a developer to assist in the development of the location.
The Company owns its 30,000 square foot corporate headquarters office
building in Compton, California. In addition, AMG Holdings leases a 64,000
square foot building in Los Angeles consisting of office and warehouse space,
which is subleased until the lease on the property expires in 2012 (including
renewal options).
ARBITRATION PROCEEDINGS
Pursuant to an Asset Purchase Agreement dated September 1, 1993 (the "Asset
Purchase Agreement"), by and among Telautograph Corporation (currently known
as AMG Holdings), the Company and Danka Industries, Inc. (the "Purchaser")
and Danka Business Systems PLC ("Danka"), on September 17, 1993 AMG Holdings
sold its communication equipment business and substantially all the operating
assets and certain liabilities of such business to the Purchaser, a
wholly-owned indirect subsidiary of Danka, for a cash purchase price of
approximately $45,780,000 (which included $1,000,000 received for a covenant
not-to-compete), subject to certain post-closing adjustments. In fiscal
1993, AMG Holdings booked a gain related to the sale of approximately
$620,000, net of income taxes of $424,000.
The purchase price and the gain were subject to adjustment after resolution
of disputes between AMG Holdings and Purchaser concerning the assets and
liabilities transferred to the Purchaser. In March 1997, the Company
received notice of a decision rendered in the arbitration proceedings
relating to the sale in 1993 of its communication equipment business to Danka
Business Systems PLC. The arbitrators upheld Arden's claim for approximately
$2,200,000 and awarded Danka on its counterclaims approximately $4,065,000.
As a result of this decision, the Company paid Danka approximately $1,865,000
in April 1997.
As the result of an earlier arbitration, Arden was awarded, in April 1994,
$1,750,000. No income or expenses related to that award and no expenses
related to the arbitration completed in 1997 were recognized in the 1994 and
1995 statements of operations of Arden. In the third and fourth quarters of
1996, arbitration costs, net of taxes, which exceeded the first arbitration
award ($311,000 and $145,000, respectively) were expensed as discontinued
operations.
In the concluding phase of the arbitration proceedings, the arbitrators
determined that neither party was a prevailing party and, therefore, neither
party was awarded costs and fees incurred by the other party with respect to
the proceedings.
The above arbitration awards, the associated expenses not expensed in 1996
and the resulting adjustments to the purchase price for the transaction
resulted in the Company recognizing a loss, net of taxes, from discontinued
operations of $2,738,000 in 1997.
5
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
(a) The Company's Class A Common Stock is traded over-the-counter in the NASDAQ
National Market System. During the past two years, the range of high and
low sales prices (not including markups, markdowns or commissions) for each
quarterly period was, according to NASDAQ, the following:
<TABLE>
<CAPTION>
1997 1996
---- ----
High Low High Low
---- --- ---- ----
<S> <C> <C> <C> <C>
1st Quarter 62 54 66 56-1/2
2nd Quarter 64-1/2 54 79 65
3rd Quarter 92 56-1/2 67-1/2 58
4th Quarter 109 80-1/2 62 54
</TABLE>
There is no established public trading market for the Company's Class B
Common Stock, which is subject to various restrictions on transfer.
Effective February 23, 1998 the listing and maintenance requirements of
the NASDAQ Stock Market for securities listed on the NASDAQ National
Market and the NASDAQ Small Cap Market were changed. The new
maintenance requirements for the NASDAQ National Market increased the
required amount of public float (shares held by the public, exclusive of
shares owned directly or indirectly by officers, directors and 10%
stockholders) to 750,000 shares and in February 1998 the Company was
informed that the Class A Common Stock would be delisted from the NASDAQ
National Market since it did not meet this new maintenance requirement.
The Company has requested a hearing before the NASDAQ Stock Market
seeking an extension of time within which to amend its Certificate of
Incorporation so as to allow it to accomplish a stock split which would
result in the Class A Common Stock being in compliance with the new
maintenance requirement for public float. Pending the completion of the
hearing, the Company has a temporary exception to the new maintenance
requirement for its Class A Common Stock. Subject to obtaining such
extension and stockholder approval at its Annual Meeting of Stockholders
presently scheduled for June 1998 of an Amendment to its Certificate of
Incorporation increasing the authorized number of shares of Class A
Common Stock and Class B Common Stock, the Company will effectuate a
four-for-one stock split of its Class A Common Stock and Class B Common
Stock. This proposed stock split would be accomplished by a stock
dividend of three additional shares of Class A Common Stock and three
additional shares of Class B Common Stock being distributed to holders
of Class A Common Stock and Class B Common Stock, respectively, for each
share of Class A Common Stock and each share of Class B Common Stock
held and would result in the public float of the Class A Common Stock
being in compliance with the new maintenance requirements for continued
listing on the NASDAQ National Market. If the Company is successful in
obtaining the requested extension, it is anticipated that it will
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distribute in July 1998 a stock dividend of three shares of Class A
Common Stock for each share of Class A Common Stock held and three
shares of Class B Common Stock for each share of Class B Common Stock
held. No assurance can be given that the Company will be successful in
obtaining the requested extension and if the Company is not successful
in obtaining the requested extension or reaching some other acceptable
arrangement with the NASDAQ Stock Market, the Company's Class A Common
Stock will be delisted from the NASDAQ National Market.
(b) As of January 3, 1998, there were 1,440 holders of record of the Company's
Class A Common Stock, with aggregate holdings of 554,134 shares of Class
A Common Stock. This does not include 339,300 shares of the Company's
Class A Common Stock owned by AMG Holdings. As of the same date, there
were 11 holders of record of the Company's Class B Common Stock, with
aggregate holdings of 342,246 shares of Class B Common Stock.
(c) No dividends have been paid on either Class A Common Stock or Class B
Common Stock during the past three years. Cash or property dividends on
Class B Common Stock are restricted to an amount equal to 90% of any
dividend paid on Class A Common Stock.
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Item 6. SELECTED FINANCIAL DATA OF ARDEN GROUP, INC.
(In Thousands, Except Per Share Data and Other Data)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
- ----------------------------------------------------------------------------------------------------------------
Operations For The Year:
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Sales $274,354 $252,019 $242,962 $246,199 $246,912
Gross profit 109,988 99,167 95,053 95,021 94,150
Operating income 12,861 5,922 8,212 8,305 6,411
Other income (expense), net 1,422 679 3,560 (183) 50
Income tax expense (5,586) (2,622) (4,661) (3,273) (2,623)
-------- -------- -------- -------- --------
Income from continuing operations,
net of income taxes 8,697 3,979 7,111 4,849 3,838
Income (loss) from discontinued
operations, net of income taxes (2,738) (456) 2,836
-------- -------- -------- -------- --------
Net income $5,959 $3,523 $7,111 $4,849 $6,674
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Depreciation on continuing operations $5,049 $4,642 $3,308 $3,576 $4,110
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Financial Position At Year End:
- ----------------------------------------------------------------------------------------------------------------
Total assets $88,126 $91,248 $89,478 $91,322 $112,471
Working capital $13,898 $23,142 $28,706 $36,506 $51,549
Long term debt $7,663 $6,663 $7,695 $6,465 $7,654
Stockholders' equity $48,260 $55,737 $53,827 $57,836 $67,535
Capital expenditures $7,896 $12,841 $10,731 $6,948 $6,406
- ----------------------------------------------------------------------------------------------------------------
Per Share Data:
- ----------------------------------------------------------------------------------------------------------------
Income from continuing operations, net of
income taxes $8.42 $3.57 $5.47 $3.18 $2.38
Income (loss) from discontinued
operations, net of income taxes (2.65) (.41) 1.76
-------- -------- -------- -------- --------
Net income $5.77 $3.16 $5.47 $3.18 $4.14
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
- ----------------------------------------------------------------------------------------------------------------
Weighted average shares outstanding 1,032,777 1,115,227 1,299,002 1,527,128 1,612,724
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
ALL YEARS ARE 52 WEEKS EXCEPT FOR 1997 WHICH IS 53 WEEKS.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The Company cautions readers that any forward-looking statements contained in
this Form 10-K or made by the management of the Company involve risks and
uncertainties, and are subject to change based on various important factors.
The following factors, among others, could affect the Company's financial
results and could cause the Company's financial performance to differ
materially from the expectations expressed in any forward-looking statement
made by or on behalf of the Company--the strength of the U.S. economy; the
effects of and changes in fiscal policies and laws, inflation and competition
from other supermarkets and retailers with a food presentation.
RESULTS OF OPERATIONS
1997 COMPARED TO 1996
During 1997, the Company had net income of $5,959,000 compared to net income
of $3,523,000 during 1996. Pretax income from continuing operations was
$14,283,000 for 1997 compared to pretax income of $6,601,000 for 1996.
During 1997, the Company's operating income was $12,861,000 compared to
operating income of $5,922,000 during 1996.
Sales from the Company's 13 supermarkets in the greater Los Angeles area were
$274,354,000 in 1997 (a 53 week fiscal year), an increase of 8.9% from 1996
(a 52 week fiscal year), when sales were $252,019,000. Same store sales for
a comparable 52 week period increased 5.0% in 1997 compared to the prior
year. The increase in sales is due to a number of factors including a more
robust economy in Southern California, the effect of product pricing
decisions and the positive impact of store remodel activity. Additionally,
the Calabasas store, opened in February 1996, has experienced higher sales
and lower expenses in 1997 compared to 1996. In November 1997, the Company
opened a Gelson's Market in Northridge, California, the sales of which are
significantly below management's projections. Sales at Northridge are
expected to improve as construction activity is completed and additional
tenants occupy the shopping center in which the store is located, although
there are no assurances that full occupancy of the center will increase store
sales to acceptable levels. The foregoing statement is a forward looking
statement and actual future sales are dependent on a number of factors which
may or may not occur including, among others, the timing and completion of
construction activity, the timing and occupancy of the other tenant spaces,
the success of the other tenants and competition from other supermarkets in
the trade area.
The Company's gross profit as a percentage of sales was 40.1% in 1997
compared to 39.3% in 1996. Added controls over product costs and increased
volume rebates, buying and promotional allowances were factors in increasing
margins.
Delivery, selling, general and administrative ("DSG&A") expenses as a
percentage of sales were 35.4% in 1997 compared to 36.9% for 1996. DSG&A
activity in 1997 reflects an improvement in labor efficiency at the stores,
improved purchasing of store services and supplies as well as
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lower liability and workers' compensation insurance costs, offset partially
by preopening costs at the Northridge store and expenses related to other
real estate projects. The higher expense in 1996 is due, in part, to
preopening expenses, promotional costs and higher than expected operating
costs associated with the Gelson's market in Calabasas which opened in
February 1996. Additionally, in 1996, certain costs relating to the sublease
of the former AMG Holdings headquarters facility were expensed. Included in
1996 DSG&A is a gain of $584,000 relating to the property sale of a former
Mayfair market and a $385,000 expense to settle a claim against the Company
for costs and damages relating to the alleged contamination of real property
previously owned by the Company.
Interest and dividend income was $1,536,000 in 1997 compared to $1,728,000
for 1996 primarily due to a decrease in earnings rates.
Interest expense decreased to $702,000 in 1997 from $879,000 in 1996
primarily due to 1996 interest expense resulting from a Federal income tax
audit and lower average levels of fixture financing debt in 1997 compared to
1996.
Other income (expense) includes realized gains on the sale of marketable
securities of $605,000 and $36,000 in 1997 and 1996, respectively.
Statement of Financial Accounting Standards No. ("SFAS") 115, "Accounting for
Certain Investments in Debt and Equity Securities" requires that unrealized
holding gains and losses for trading securities be included in the
determination of net income. All securities are defined as trading
securities or available-for-sale securities. Management determines the
appropriate classification of its investments in marketable securities at the
time of purchase and reevaluates such determination at each balance sheet
date. Securities that are bought and held principally for the purpose of
selling them in the near term are classified as trading securities and
unrealized holding gains and losses are included in earnings. Debt
securities for which the Company does not have the intent or ability to hold
to maturity and equity securities are classified as available-for-sale
securities. As a result, no net unrealized gains or losses related to
trading securities were recognized in 1997 compared to net unrealized losses
of $151,000 in 1996. Unrealized gains in 1997 on available-for-sale
securities were $416,000 (net of income tax expense of $275,000) and were
recorded as a separate component of shareholders' equity.
For an analysis of the Company's provision for income taxes, see Note 10 of
Notes to Financial Statements.
The loss on discontinued operations resulted from a decision in an
arbitration proceeding relating to the sale in 1993 of the Company's
communication equipment business and is reflected as an adjustment to the
purchase price. See Note 14 of Notes to Financial Statements.
Income per share from continuing operations and net income increased due to
increased income from continuing operations and net income for the period, as
well as from a reduction in the weighted average shares outstanding due to
the purchase of Class A Common Stock in August 1997. See Capital
Expenditures/Liquidity. See Note 1 of Notes to Financial Statements.
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1996 COMPARED TO 1995
During 1996, the Company had net income of $3,523,000 compared to net income
of $7,111,000 during 1995. Pretax income from continuing operations was
$6,601,000 for 1996 compared to pretax income of $11,772,000 for 1995. As
described below, included in 1996 income is $151,000 of net unrealized losses
related to marketable securities as compared to net unrealized gains of
$1,430,000 in 1995.
During 1996, the Company's operating income from its supermarket operations
was $5,922,000 compared to operating income of $8,212,000 during 1995.
Sales from the Company's 12 supermarkets in the greater Los Angeles area were
$252,019,000 in 1996, an increase of 3.7% from 1995, when sales were
$242,962,000 (1995 included sales from a Mayfair Market in West Hollywood
which was closed in October 1995). Chain wide same store sales increased
1.1% in 1996 compared to the prior year, even though sales of certain stores
have been negatively impacted by competitors opening new stores in Gelson's
trading areas. In January 1996, the Company opened a shopping center it
developed in Calabasas, California which includes a Gelson's market and
spaces for additional tenants. Although sales of the Calabasas market have
improved, they have not met projections. The Company has entered into leases
for most of the tenant spaces, some of which were unoccupied at the end of
the year. It is anticipated that supermarket sales will improve as Gelson's
and the other tenants become established in the trading area. The foregoing
statement is a forward looking statement and actual future sales are
dependent on a number of factors which may or may not occur including, among
others, the timing of the opening of the vacant spaces, the success of the
other tenants and competition from other supermarkets and shopping centers.
The Company's gross profit from supermarket operations as a percentage of
sales was 39.3% in 1996 compared to 39.1% in 1995 primarily due to a sales
mix in 1996 favoring higher gross margin categories.
Delivery, selling, general and administrative ("DSG&A") expenses as a
percentage of sales were 36.9% for 1996 compared to 35.7% for 1995. The
increase in 1996 is due, in part, to higher than anticipated operating costs
at Calabasas as well as preopening expenses associated with that market.
Also, an increase in real estate and remodel expenditures during the past
year resulted in $1,334,000 higher depreciation expense in 1996 compared to
1995 offset partially by a decrease in equipment rent. In 1996, the Company
expensed $385,000 to settle a claim against it for costs and damages relating
to the alleged contamination of real property previously owned by the
Company. In 1995, the Company recognized contractual credits of $966,000
against health and welfare payments due the retail clerks and meat cutters
unions. No such credits were received in 1996. Included in 1996 DSG&A is a
gain of $584,000 relating to the property sale of a former Mayfair market
located in West Hollywood, California.
Interest and dividend income was $1,728,000 in 1996 compared to $2,702,000 in
1995 due to decreased levels of investments and a decrease in earnings rates.
Interest expense increased to $879,000 in 1996 from $559,000 in 1995
primarily due to an increase in average fixture financing debt levels in 1996
versus 1995 and interest resulting from a Federal income tax audit.
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In 1996, the market value of the Company's aggregate holdings in marketable
securities decreased from the market value of such holdings at December 30,
1995. Pursuant to SFAS 115, net unrealized losses of $151,000 related to
marketable securities were reflected in income in 1996 compared to net
unrealized gains of $1,430,000 in 1995.
For an analysis of the Company's provision for income taxes, see Note 10 of
Notes to Financial Statements.
In 1996, the Company recognized in discontinued operations $456,000 of costs,
net of income tax benefits of $305,000, associated with an arbitration of
disputed items relating to the sale of its communication equipment business
in 1993. See Note 14 of Notes to Financial Statements.
Net income per share is based on the weighted average number of common shares
outstanding during the period.
LIQUIDITY AND CAPITAL RESOURCES
The Company has an ongoing program to remodel existing supermarkets and to
add new stores. In 1997, the Company had capital expenditures of
approximately $7,896,000. At January 3, 1998, there were no significant
capital expenditure commitments.
After extensive site, demographic and competitive analysis the Company has
decided not to enter the Santa Barbara marketplace and has negotiated the
sale of the property it purchased in 1996 for a pretax gain of approximately
$400,000. The sale is expected to finalize in the first quarter of 1998. In
1996, the Company entered into an option to lease on a long-term basis a
property on which a new Gelson's market would be built, the development and
opening of which is subject to, among other things, the Company's due
diligence, receipt of necessary governmental approvals and the developers
fulfilling certain conditions.
The Company and its subsidiaries are subject to a myriad of environmental
laws and regulations regarding air, water and land use, and the use, storage
and disposal of hazardous materials. The Company believes it substantially
complies, and has in the past substantially complied, with federal, state,
and local environmental laws and regulations. However, a claim has been made
against the Company in connection with a real property previously leased by a
subsidiary of the Company by the current owner of such property. The Company
has been asked to pay for a portion of the cost of remediation of hazardous
substances allegedly existing on such properties. The Company cannot at this
time estimate the expenses it ultimately may incur in connection with the
claim, however, it believes such expense will not be of a material amount.
Although unexpected violations may occur in the future and although the
Company cannot predict the effect of future laws or regulations on the
Company's operations, expenditures for continued compliance with current laws
are not expected to have a material impact on its capital expenditures,
earnings or competitive position.
The Company utilizes a significant number of computer software programs
including proprietary software. To the extent the Company's software
applications contain source codes that are unable to appropriately interpret
the upcoming calendar Year 2000, some level of modification, or even possibly
replacement of such applications, may be necessary. The Company has made an
12
<PAGE>
assessment of the impact of the Year 2000 issue on its internal operations
and has developed a plan to bring its computer systems into compliance before
the end of 1999. The plan addresses the modification or replacement of
applications and operating systems to achieve timely Year 2000 compliance and
also includes communication and analysis with outside vendors with whom the
Company interfaces electronically. Although it is not possible to quantify
the aggregate cost of such modifications, the Company does not anticipate the
cost will have a material adverse impact on its financial position or results
of operations. The Company may be adversely affected if its vendors and
service providers (included its banking relations) are unable to fully
correct any Year 2000 problems they may have.
The Company has a credit facility with a bank with a revolving line of credit
totaling $9,000,000 with a standby letter of credit subfacility in the amount
of $5,000,000, and a non-revolving term loan line of credit totaling
$10,000,000. In addition, the Company has a revolving line of credit with
another bank in the amount of $3,000,000. The Company borrowed $2,750,000
and $2,500,000 against the term loan line of credit on December 30, 1995 and
December 30, 1997, respectively, to finance store fixtures and equipment of
which $4,104,000 was outstanding at January 3, 1998. There were no
outstanding balances against either of the revolving lines as of January 3,
1998. The Company's current cash position including marketable securities,
the lines of credit and net cash provided by operating activities
(approximately $26,059,000 for 1997) are the primary sources of funds
available to meet the Company's current liquidity requirements. See Note 7 of
Notes to Financial Statements for a description of the Company's credit lines.
In August 1997, the Company completed a self tender offer pursuant to which
it purchased 212,619 shares of its Class A Common Stock for cash at $65 per
share. The Company funded the aggregate purchase price of $13,820,000 from
cash-on-hand, the liquidation of marketable securities and from a short-term
bank loan of $5,000,000 under the Company's revolving line of credit. By the
end of September 1997, the Company had repaid the $5,000,000 bank loan from
its working capital.
The Company's total liabilities to equity ratio increased to .82 at January
3, 1998 from .64 at December 28, 1996 due to the reduction in equity related
to the purchase of Class A Common Stock. The Class A Common Stock purchase
also negatively affected the Company's current ratio, which was 1.49 at
January 3, 1998 compared to 1.96 at December 28, 1996. The Company's current
assets at the end of 1997 were approximately $5,100,000 less than at the end
of 1996 primarily due to the use of funds for capital expenditures incurred
in 1997 and the purchase of stock through the self tender.
The Company's cash position, including marketable securities, at the end of
1997 was $22,722,000 compared to $26,829,000 at the end of 1996. Cash not
required for the immediate needs of the Company has been temporarily invested
in marketable securities. See Notes 1 and 2 of Notes to Financial
Statements. The Company is actively investigating opportunities for the use
of these funds, primarily for the expansion of its supermarket operations.
RECENT ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS
130, "Reporting Comprehensive Income", which established standards for
reporting and display of comprehensive income and its components. This
statement requires a separate statement to report the
13
<PAGE>
components of comprehensive income for each period reported. The provisions
of this statement are effective for fiscal years beginning after December 15,
1997. Management believes this statement may require expanded disclosure in
the Company's financial statements.
In June 1997, the FASB also issued SFAS 131, "Disclosures About Segments of
an Enterprise and Related Information". The standard requires that companies
disclose "operating segments" based on the way management disaggregates the
company for making internal operating decisions. The new rules will be
effective for the 1998 fiscal year. Abbreviated quarterly disclosure will be
required beginning first quarter of 1999, with both 1999 and 1998
information. The Company does not believe that the new standard will have a
material impact on the reporting of its segments.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Index to Consolidated Financial Statements, Supporting
Schedules and Supplemental Data.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
14
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Identification of Directors
Below is set forth certain information about each of the directors of
the Company as of March 6, 1998. Certain of this information has been
supplied by the persons shown.
<TABLE>
<CAPTION>
Principal Occupation (1) Director Term
Name Age and Other Directorships Since (2) Expires
---- --- ------------------------ --------- -------
<S> <C> <C> <C> <C>
Bernard Briskin 73 Chairman of the Board of Directors, President and Chief Executive 1970 1998
Officer of the Company and Arden-Mayfair, Inc., a subsidiary of
the Company, and Chairman of the Board of AMG Holdings, Inc. and
Gelson's Markets, both subsidiaries of Arden-Mayfair.
John G. Danhakl 41 Partner, Leonard Green & Partners since March 1995. Managing 1995 1998
Director of Donaldson Lufkin Jenrette Securities Corporation from
March 1990 to February 1995. Director of Big 5 Sporting Goods,
Inc., Communications Power and Industries, Inc. and Twin
Laboratories Corporation.
Robert A. Davidow 55 Director and Vice Chairman of WHX Corporation since April 1991; 1993 1999
private investor.
Stuart A. Krieger 80 Business Consultant, Director of American Rocket Co. 1978 2000
Daniel Lembark 73 Financial consultant and Certified Public Accountant. 1978 1998
Ben Winters 77 Business Consultant. 1978 2000
</TABLE>
(1) Unless otherwise indicated, principal occupation or occupations shown
have been such for a period of at least five years in the aggregate.
(2) Date shown for term of service indicates commencement of service as a
director of the Company or Arden-Mayfair.
15
<PAGE>
Identification of Executive Officers
Below is set forth certain information about each of the executive
officers of the Company as of March 6, 1998:
<TABLE>
<CAPTION>
Name Age Position(s)
---- --- -----------
<S> <C> <C>
Bernard Briskin 73 Chairman of the Board of Directors, President and
Chief Executive Officer of the Company and
Arden-Mayfair, and Chairman of the Board of AMG
Holdings and Gelson's Markets.
Ernest T. Klinger 62 Vice President Finance and Administration and Chief
Financial Officer of the Company and Arden-Mayfair,
and Secretary/Treasurer of AMG Holdings and
Gelson's Markets.
</TABLE>
Mr. Briskin served as Chairman of the Executive Committee of the Board of
Directors of Arden-Mayfair until August 1978, when he was elected President
and Chief Executive Officer of Arden-Mayfair. In November 1978, Mr. Briskin
was elected President and Chief Executive Officer of the Company and in June
1994 he was elected Chairman of the Board of the Company. Mr. Briskin serves
as Chairman of the Board, President and Chief Executive Officer of the
Company and Arden-Mayfair, and Chairman of the Board and Chief Executive
Officer of AMG Holdings and Gelson's Markets, pursuant to an employment
agreement which expires on January 1, 2004, although the term will be
automatically extended for successive one year periods unless certain
termination notices are given by either Mr. Briskin or the employers. See
"Item 11. Executive Compensation".
Mr. Klinger has been Vice President Finance and Administration and Chief
Financial Officer of the Company since October 1986. Between January 1983
and September 1986 he held the position of Vice President Finance and
Treasurer and Chief Financial Officer of the Company. In 1989, he was
appointed Secretary/Treasurer of Gelson's Markets and in 1993 was appointed
Secretary/Treasurer of AMG Holdings, Inc.
Except for Mr. Briskin, who has an employment agreement, all officers serve
at the pleasure of the Board of Directors.
16
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
General
The following table sets forth the total annual and long-term
compensation paid or accrued by the Company and its subsidiaries in
connection with all businesses of the Company and its subsidiaries to or
for the account of the Chief Executive Officer of the Company and each
other executive officer of the Company whose total annual salary and
bonus for the fiscal year ended January 3, 1998 exceeded in the
aggregate $100,000.
<TABLE>
<CAPTION>
---Long Term Compensation---
-------Annual Compensation-------- --------Awards--------- -Payouts-
Securities-
Other Annual Restricted Underlying All Other
Name and Compensation Stock Award(s) Options/ LTIP Compen-
Principal SARS Payouts sation
Position Year Salary ($) Bonus ($) ($) (4) (1) (#)(1) (1) ($)(2)(3)
- --------- ---- ---------- --------- ------- --- ------ --- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Bernard Briskin, 1997 500,000 496,780 (5) 12,800
Chief Executive 1996 450,177 191,632 9,000
Officer 1995 444,400 407,624 10,500
Ernest T. Klinger, 1997 190,000 40,000 12,800
CFO, VP Finance 1996 190,000 40,000 9,000
and Administration 1995 190,000 40,000 10,500
</TABLE>
(1) The Company did not grant to Mr. Briskin or Mr. Klinger any restricted
stock, stock options or stock appreciation rights ("SARs") and made no
payout to them on any long-term incentive plan in fiscal years 1997,
1996 or 1995.
(2) Includes the Company contribution to the Arden Group, Inc. 401(k)
Retirement Savings Plan and the Arden Group, Inc. Stock Bonus Plan. In
1997, Messrs. Briskin and Klinger were each allocated $9,600 to their
401(k) account and $3,200 to their Stock Bonus Plan account.
(3) Does not include retirement benefits from the Telautograph Pension Plan
(terminated in December 1993).
(4) Perquisites and other personal benefits did not exceed the lesser of
$50,000 or 10% of the compensation received by the named officers in any
of the years for which compensation information is reported.
(5) Payment of the bonus for 1997 is subject to stockholder approval of the
bonus arrangement contained in Mr. Briskin's Amended Employment
Agreement. If the arrangement is not approved by stockholders, the
amount of the bonus will be calculated and paid under the prior bonus
arrangement. See "Employment Agreement" below.
Employment Agreement
The compensation of Mr. Bernard Briskin, the Chief Executive Officer of
the Company, is established under an Employment Agreement dated May 13,
1988, as amended by
17
<PAGE>
Amendment to Employment Agreement dated April 27, 1994 (the "Employment
Agreement") which was further amended in January 1998, effective January
1, 1997 (the "Amended Employment Agreement"). The Amended Employment
Agreement extended the expiration date of the term of the Employment
Agreement from January 1, 2001 to January 1, 2004, increased Mr.
Briskin's base annual salary to $500,000 effective January 1, 1997,
excluded from the definition of Pre-Tax Profits upon which Mr. Briskin's
bonus is determined any arbitration award to Danka and the associated
expense in 1997 as a charge to discontinued operations which had the
effect of increasing the amount of Mr. Briskin's bonus in 1997 from
$344,871 to $496,780, increased the maximum annual reimbursement for
medical expenses for Mr. Briskin and his immediate family from $100,000
to $200,000 and provides for annual retirement compensation equal to
twenty-five percent of Mr. Briskin's average base salary and bonus
earned in the last three fiscal years prior to his retirement and
continuation of health insurance benefits and automobile allowance. Mr.
Briskin's bonus arrangement for 1997 and years following under the
Amended Employment Agreement is subject to stockholder approval. If Mr.
Briskin's bonus arrangement is not approved by the stockholders of the
Company, the bonus will be determined under the Employment Agreement and
Mr. Briskin will have the right to terminate the Employment Agreement as
amended by the Amended Employment Agreement on six months prior notice
to the Company. Pursuant to the terms of the Amended Employment
Agreement, Mr. Briskin's base salary will be increased on January 1 of
each year of the term of the Amended Employment Agreement commencing
January 1, 1998 based upon increases in the Consumer Price Index
subject, however, to a maximum annual increase. His annual bonus will
equal 2-1/2% of the Company's first $2,000,000 of Pre-Tax Profits (as
defined in the Amended Employment Agreement) plus 3-1/2% of Pre-Tax
Profits in excess of $2,000,000. The Amended Agreement also provides
for certain expense reimbursement and personal benefits, including
payment or reimbursement for uninsured medical expenses of Mr. Briskin
and his immediate family up to a maximum of $200,000 during any calendar
year. In addition, if he becomes permanently disabled, dies or his
employment is terminated prior to January 1, 2004, the cumulative unpaid
portion of two notes from Mr. Briskin to the Company, in the amount of
$255,000 as of March 6, 1998, will be forgiven. The maturity dates of
the two notes was extended to December 31, 2003 with equal annual
principal payments of $40,000 plus interest at 6% per annum.
Remuneration of Directors
Non-employee directors are compensated for their services as directors
at an annual rate of $18,000, plus $1,000 for each Board meeting
attended and $1,000 for attendance at each committee meeting.
Non-employee directors who serve as committee chairmen are entitled to
an additional $4,200 per year. In 1996, the Company awarded Frederick
A. Schnell, who had served as a Director of the Company through June 19,
1996, payment of $50,000 in recognition of his over 20 years of service
as a Director of the Company. Such sum is payable in three installments
of $8,000, $24,000 and $18,000 on September 1996, January 1997 and
January 1998, respectively. Mr. Briskin is an employee of the Company
and does not receive the compensation otherwise payable to directors.
18
<PAGE>
Compensation Committee Interlocks and Insider Participation
The Board of Directors has a Compensation Committee. In 1997 the
Compensation Committee was comprised of the following directors:
John G. Danhakl, Chairman
Robert A. Davidow
Daniel Lembark
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
(a) Security Ownership of Certain Beneficial Owners
The following table sets forth information as of March 6, 1998
relating to the stockholdings of persons known to the Company to be
the beneficial owner of more than 5% of any class of the Company's
voting securities: (1)
<TABLE>
<CAPTION>
Amount and
Name and Address of Nature of Percent of Percent of
Beneficial Owner Title of Class Beneficial Class Total Vote
---------------- -------------- Ownership ----- ----------
---------
<S> <C> <C> <C> <C>
City National Bank, as Trustee of the Class A Common Stock 64,385 11.6% 1.6%
Company's Stock Bonus Plan and Trust
(the "Stock Bonus Plan")
500 North Roxbury Drive, Suite 500
Beverly Hills, CA 90210
Bernard Briskin Class A Common Stock 166,666 (2) 30.1% 4.2%
Arden Group, Inc.
9595 Wilshire Blvd., Suite 411
Beverly Hills, CA 90212
Bernard Briskin Class B Common Stock 340,624 99.5% 85.7%
</TABLE>
(1) Unless otherwise indicated to the contrary, all beneficial owners have
sole investment and voting power. For purposes of this table, 339,300
shares of Company Class A Common Stock, which are held by AMG Holdings,
are not deemed to be outstanding.
(2) This amount includes the following shares: (i) 59,944 shares owned by
Mr. Briskin's wife; (ii) 46,524 shares held in trust (of which Mr.
Briskin is a trustee) for the benefit of Mr. Briskin, his children and
his mother; and (iii) 24,503 shares held in an Individual Retirement
Account by Mr. Briskin's wife. Mr. Briskin disclaims any beneficial
ownership of the shares set forth in clauses (i) and (iii) hereof. Mr.
Briskin shares voting and investment power with respect to the shares
referred to in clause (ii), shares voting power but denies that he has
or shares investment power with respect to the shares referred to in
clauses (i) and (iii). Nothing herein should be construed as an
admission that Mr. Briskin is in fact the beneficial owner of any of
these shares.
19
<PAGE>
If Mr. Briskin converted all of his Class B Common Stock to Class A Common
Stock (convertible on a share for share basis) his and his spouse's
beneficial ownership of Class A Common Stock would be increased to 507,290
shares or 56.6% of the total shares outstanding as of March 6, 1998.
(b) Security Ownership of Management
The following table shows, as of March 6, 1998, the beneficial
ownership of the Company's equity securities by each director,
executive officer and by all directors and executive officers as a
group: (1)
<TABLE>
<CAPTION>
Amount and Nature Percent
of Beneficial Percent of Total
Name of Beneficial Owner Title of Class Ownership of Class Vote
- ------------------------ -------------- --------- -------- ----
<S> <C> <C> <C> <C>
Bernard Briskin Class A Common Stock 166,666 (2) 30.1% 4.2%
Class B Common Stock 340,624 99.5% 85.7%
John G. Danhakl Class A Common Stock 0
Robert A. Davidow Class A Common Stock 0
Ernest T. Klinger Class A Common Stock 343 (3) (4) (5)
Stuart A. Krieger Class A Common Stock 0
Daniel Lembark Class A Common Stock 0
Ben Winters Class A Common Stock 100 (4) (5)
All directors and executive Class A Common Stock 167,109 (3) 30.2% 4.2%
officers as a group (7 persons) Class B Common Stock 340,624 99.5% 85.7%
</TABLE>
(1) Unless otherwise indicated to the contrary, all beneficial owners have
sole investment and voting power. The number of outstanding shares of
Company Class A Common Stock on which the percentages shown in this
table are based does not include 339,300 shares of Company Class A
Common Stock held by AMG Holdings.
(2) See note (2) to the table under "Security Ownership of Certain
Beneficial Owners" set forth above.
(3) Includes shares held in the Company Stock Bonus Plan for their accounts.
(4) Did not exceed 1% of the outstanding shares of the class.
(5) Did not exceed 1% of the total vote.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In connection with the purchase by Mr. Briskin of shares of the Company's
Class A Common Stock in 1979 and 1980, the Company loaned Mr. Briskin
$212,500 and $303,750, respectively. Effective January 1, 1997 the terms of
the notes were modified to extend the maturity date to December 31, 2003 from
December 31, 2000 and to reduce the annual principal payments to $40,000 from
$73,750 plus interest at 6% per annum. The highest cumulative outstanding
balance of the two loans was $369,000 during 1997 and was $255,000 as of
March 6, 1998.
20
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K
(a) Exhibits and Financial Statements and Schedules
(1) Financial Statements
See Index to Consolidated Financial Statements and Supplementary
Data
(2) Financial Statement Schedules
See Index to Consolidated Financial Statements and Supplementary
Data
(3) Exhibits
See Index to Exhibits
(b) Reports on Form 8-K
None
(c) Exhibits
See Index to Exhibits
(d) Other Financial Schedules
See Index to Consolidated Financial Statements and Supplementary Data
21
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
ARDEN GROUP, INC.
Date
----
By BERNARD BRISKIN 3/17/98
---------------------------------------------------
Bernard Briskin, Chairman of the Board,
President and Chief Executive Officer
By ERNEST T. KLINGER 3/17/98
---------------------------------------------------
Ernest T. Klinger, Vice President Finance and
Administration and Chief Financial Officer
(Principal Financial and Principal Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the date indicated. The undersigned
have also relied upon the reports of the registrant's independent accountants
at page 24.
Date
----
BERNARD BRISKIN 3/17/98
----------------------------------------------------
Bernard Briskin, Director and Chairman of the Board
JOHN G. DANHAKL 3/17/98
----------------------------------------------------
John G. Danhakl, Director
ROBERT A. DAVIDOW 3/17/98
----------------------------------------------------
Robert A. Davidow, Director
STUART A. KRIEGER 3/17/98
----------------------------------------------------
Stuart A. Krieger, Director
DANIEL LEMBARK 3/17/98
----------------------------------------------------
Daniel Lembark, Director
BEN WINTERS 3/17/98
----------------------------------------------------
Ben Winters, Director
22
<PAGE>
ARDEN GROUP, INC. AND CONSOLIDATED SUBSIDIARY
-----------------------------------------------
INDEX TO FINANCIAL STATEMENTS
AND SUPPLEMENTAL DATA
-------------------
PAGE
Report of Independent Accountants........................................ 24
Financial Statements:
Balance Sheets, January 3, 1998 and December 28, 1996............... 25
Statements of Operations for fiscal years 1997, 1996 and 1995....... 26
Statements of Stockholders' Equity for fiscal years 1997,
1996 and 1995....................................................... 27
Statements of Cash Flows for fiscal years 1997, 1996 and 1995....... 28
Notes to Financial Statements....................................... 30
The financial statements include the Registrant's subsidiary (Arden-
Mayfair, Inc.) and the subsidiaries of Arden-Mayfair, Inc.
Selected Quarterly Financial Data........................................ 45
Schedules are omitted because of the absence of the conditions under which they
are required.
23
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
---------------
To the Stockholders of
Arden Group, Inc.
We have audited the consolidated financial statements of Arden Group, Inc.
and its subsidiary listed in the index on page 23 of this Form 10-K. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Arden Group,
Inc. and its subsidiary at January 3, 1998 and December 28, 1996, and the
consolidated results of their operations and their cash flows for each of the
three fiscal years in the period ended January 3, 1998 in conformity with
generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Los Angeles, California
March 13, 1998
24
<PAGE>
ARDEN GROUP, INC. AND CONSOLIDATED SUBSIDIARY
---------------------------------------------
BALANCE SHEETS
(In Thousands, Except Share and Per Share Data)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
ASSETS January 3, 1998 December 28, 1996
- -------------------------------------------------------------------------------
<S> <C> <C>
Current assets:
Cash $ 7,099 $ 5,473
Marketable securities 15,623 21,356
Accounts and notes receivable, net 6,310 6,629
Inventories 11,552 10,728
Other current assets 1,626 3,102
- -------------------------------------------------------------------------------
Total current assets 42,210 47,288
Property for resale or sublease 4,051 1,440
Property, plant and equipment, net 39,163 39,875
Other assets 2,702 2,645
- -------------------------------------------------------------------------------
Total assets $88,126 $91,248
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
- -------------------------------------------------------------------------------
Current liabilities:
Accounts payable, trade $14,434 $11,357
Other current liabilities 12,409 11,816
Current portion of long-term debt 1,469 973
- -------------------------------------------------------------------------------
Total current liabilities 28,312 24,146
Long-term debt 7,663 6,663
Deferred income taxes 2,430 2,160
Other liabilities 1,461 2,542
- -------------------------------------------------------------------------------
Total liabilities 39,866 35,511
- -------------------------------------------------------------------------------
Commitments and contingent liabilities
Stockholders' equity:
Common stock, Class A, $ .25 par value;
893,434 and 1,106,053 shares
issued and outstanding,
respectively, including 339,300
treasury shares 223 276
Common stock, Class B, $ .25 par value;
342,246 shares issued and
outstanding 86 86
Capital surplus 4,793 5,617
Notes receivable from officer/director (255) (369)
Unrealized gain on available-for-sale
securities 416
Retained earnings 46,750 53,880
- -------------------------------------------------------------------------------
52,013 59,490
Less, treasury stock; 339,300
shares at cost 3,753 3,753
- -------------------------------------------------------------------------------
Total stockholders' equity 48,260 55,737
- -------------------------------------------------------------------------------
Total liabilities and stockholders'
equity $88,126 $91,248
- -------------------------------------------------------------------------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
25
<PAGE>
ARDEN GROUP, INC. AND CONSOLIDATED SUBSIDIARY
---------------------------------------------
STATEMENTS OF OPERATIONS
(In Thousands, Except Share and Per Share Data)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
1997 1996 1995
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Sales $274,354 $252,019 $242,962
Cost of sales 164,366 152,852 147,909
- -------------------------------------------------------------------------------------------------
Gross profit 109,988 99,167 95,053
Delivery, selling, general and administrative expenses 97,127 93,245 86,841
- -------------------------------------------------------------------------------------------------
Operating income 12,861 5,922 8,212
Interest and dividend income 1,536 1,728 2,702
Other income (expense), net 588 (19) (13)
Interest expense (702) (879) (559)
Net unrealized gain (loss) on marketable securities (151) 1,430
- -------------------------------------------------------------------------------------------------
Income from continuing operations, before
income taxes 14,283 6,601 11,772
Income tax provision 5,586 2,622 4,661
- -------------------------------------------------------------------------------------------------
Income from continuing operations, net of
income taxes 8,697 3,979 7,111
Loss from discontinued operations, net of income tax
benefits of $1,602 in 1997 and $305 in 1996 (2,738) (456)
- -------------------------------------------------------------------------------------------------
Net income $5,959 $3,523 $7,111
- -------------------------------------------------------------------------------------------------
Income per common share:
Income from continuing operations $8.42 $3.57 $5.47
Loss from discontinued operations (2.65) (.41)
- -------------------------------------------------------------------------------------------------
Net income $5.77 $3.16 $5.47
- -------------------------------------------------------------------------------------------------
Weighted average common shares outstanding 1,032,777 1,115,227 1,299,002
- -------------------------------------------------------------------------------------------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
26
<PAGE>
ARDEN GROUP, INC. AND CONSOLIDATED SUBSIDIARY
---------------------------------------------------
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
(In Thousands, Except Share Data)
- ------------------------------------------------------------------------------------------------
1997 1996 1995
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Common stock, Class A:
Balance, beginning of year $ 276 $ 283 $ 327
Purchase and retirement of stock (212,619,
25,884, and 179,229 shares, respectively) (53) (7) (44)
- ------------------------------------------------------------------------------------------------
Balance, end of year 223 276 283
- ------------------------------------------------------------------------------------------------
Common stock, Class B:
Balance, beginning and end of year 86 86 86
- ------------------------------------------------------------------------------------------------
Capital surplus:
Balance, beginning of year 5,617 5,718 6,413
Purchase and retirement of common stock (824) (101) (695)
- ------------------------------------------------------------------------------------------------
Balance, end of year 4,793 5,617 5,718
- ------------------------------------------------------------------------------------------------
Notes receivable from officer/director:
Balance, beginning of year (369) (369) (442)
Principal paid 114 73
- ------------------------------------------------------------------------------------------------
Balance, end of year (255) (369) (369)
- ------------------------------------------------------------------------------------------------
Unrealized gain (loss) on available-for-sale securities
Balance, beginning of year 0
Unrealized gain 416
- ------------------------------------------------------------------------------------------------
Balance, end of year 416
- ------------------------------------------------------------------------------------------------
Retained earnings:
Balance, beginning of year 53,880 51,862 55,205
Net income for the year 5,959 3,523 7,111
Purchase and retirement of common stock (13,089) (1,505) (10,454)
- ------------------------------------------------------------------------------------------------
Balance, end of year 46,750 53,880 51,862
- ------------------------------------------------------------------------------------------------
Stockholders' equity before treasury stock 52,013 59,490 57,580
Treasury stock, at cost (3,753) (3,753) (3,753)
- ------------------------------------------------------------------------------------------------
Total stockholders' equity $ 48,260 $55,737 $53,827
- ------------------------------------------------------------------------------------------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
27
<PAGE>
ARDEN GROUP, INC. AND CONSOLIDATED SUBSIDIARY
-------------------------------------------------
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
(In Thousands)
- ------------------------------------------------------------------------------------------------
1997 1996 1995
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Cash received from customers $274,683 $252,482 $243,589
Cash paid to suppliers and employees (254,622) (242,869) (231,614)
Purchases/sales of trading securities, net 8,851 (1,311) 1,014
Interest and dividends received 1,683 1,678 2,784
Interest paid (705) (878) (701)
Income taxes paid (3,831) (2,694) (4,085)
- ------------------------------------------------------------------------------------------------
Net cash provided by operating activities 26,059 6,408 10,987
- ------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Capital expenditures (7,896) (12,841) (10,731)
Deposits for property in escrow 2,664 (2,664)
Transfer to discontinued operations (2,575) (456)
Purchases of available-for-sale securities (3,202)
Sales of available-for-sale securities 1,380
Net cash from sale of GPS 2,511
Proceeds from the sale of property, plant and
equipment, liquor licenses and leasehold
interests 163 2,338 241
Payments received on notes from the sale of
property, plant and equipment and liquor
licenses 53 3 3
- ------------------------------------------------------------------------------------------------
Net cash used in investing activities (12,077) (8,292) (10,640)
- ------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Purchase and retirement of stock (13,966) (1,613) (11,193)
Principal payments on long-term debt (799) (752) (199)
Principal payments under capital lease obligations (205) (325) (917)
Loan payments from officer/director 114 73
Proceeds from equipment financing 2,500 2,750
Purchase of Company debentures (55)
- ------------------------------------------------------------------------------------------------
Net cash used in financing activities (12,356) (2,745) (9,486)
- ------------------------------------------------------------------------------------------------
Net increase (decrease) in cash $1,626 $(4,629) $(9,139)
Cash at beginning of year 5,473 10,102 19,241
- ------------------------------------------------------------------------------------------------
Cash at end of year $7,099 $5,473 $10,102
- ------------------------------------------------------------------------------------------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
28
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
1997 1996 1995
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
RECONCILIATION OF NET INCOME TO NET CASH PROVIDED
BY OPERATING ACTIVITIES:
Net income $5,959 $3,523 $7,111
Adjustments to reconcile net income to net cash
provided by operating activities:
Loss from discontinued operations 2,738 456
Depreciation and amortization 5,111 4,686 3,480
Unrealized (gain) loss on trading securities 151 (1,430)
Provision for losses on accounts and
notes receivable 62 55 94
Deferred income taxes 270 577 474
Net loss (gain) from the disposal of property,
plant and equipment, liquor licenses
and early lease terminations 731 (556) (33)
Realized gains on marketable securities, net (605)
Non-compete payment on sale of GPS (86)
Gain on purchase of 7% debentures (5)
Change in assets and liabilities net of effects from
noncash investment and financing activities:
(Increase) decrease in assets:
Marketable securities 8,851 (1,347) 970
Accounts and notes receivable 1,639 8 647
Inventories (824) (556) 493
Other current assets (274) (456) (465)
Other assets (90) (548) (325)
Increase (decrease) in liabilities:
Accounts payable and other accrued expenses 3,847 493 (507)
Deferred income taxes on unrealized gains (275)
Other liabilities (1,081) (73) 564
- ------------------------------------------------------------------------------------------------
$26,059 $6,408 $10,987
- ------------------------------------------------------------------------------------------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
29
<PAGE>
ARDEN GROUP, INC. AND CONSOLIDATED SUBSIDIARY
---------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
---------------
1. Accounting Policies:
The following is a summary of significant accounting policies followed in
the preparation of these consolidated financial statements.
BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION
The consolidated financial statements of Arden Group, Inc. (the "Company")
include the accounts of the Company and its direct and indirect
subsidiaries. All intercompany accounts and transactions are eliminated in
consolidation. The Company operates exclusively in the supermarket business
in the greater Los Angeles, California area.
FISCAL YEAR
The Company operates on a fiscal year ending on the Saturday closest to
December 31. Fiscal years for the financial statements included herein
ended on January 3, 1998 (fifty-three weeks), December 28, 1996 (fifty-two
weeks), and December 30, 1995 (fifty-two weeks).
CASH AND CASH EQUIVALENTS
The Statements of Cash Flows classify changes in cash or cash equivalents
(short-term, highly liquid investments readily convertible into cash with an
original maturity at date of purchase of three months or less) according to
operating, investing or financing activities. Financial instruments which
potentially subject the Company to concentrations of credit risk consist
principally of cash and temporary cash investments. At times, cash balances
held at financial institutions were in excess of federally insured limits.
The Company places its temporary cash investments with high-credit, quality
financial institutions and, by policy, limits the amount of credit exposure
to any one financial institution. The Company believes no significant
concentration of credit risk exists with respect to these cash investments.
MARKETABLE SECURITIES
Marketable securities consist of mutual funds, fixed-income securities,
preferred stock, common stock, mortgage backed government securities and
collateralized mortgage obligations. Marketable securities are stated at
market value as determined by the most recently traded price of each
security at the balance sheet date. By policy, the Company invests
primarily in high-grade marketable securities. All marketable securities
are defined as trading securities or available-for-sale securities under the
provisions of Statement of Financial Accounting Standards No. ("SFAS") 115,
"Accounting for Certain Investments in Debt and Equity Securities".
30
<PAGE>
Management determines the appropriate classification of its investments in
marketable securities at the time of purchase and reevaluates such
determination at each balance sheet date. Securities that are bought and
held principally for the purpose of selling them in the near term are
classified as trading securities and unrealized holding gains and losses are
included in earnings. Debt securities for which the Company does not have
the intent or ability to hold to maturity and equity securities are
classified as available-for-sale. Available-for-sale securities are carried
at fair value, with the unrealized gains and losses, net of tax, reported as
a separate component of stockholders' equity. The cost of investments sold
is determined on the specific identification or the first-in, first-out
method.
ACCOUNTS AND NOTES RECEIVABLE
The Company closely monitors extensions of credit and has not experienced
significant losses related to its receivables. At January 3, 1998, the
Company did not have significant credit risk concentrations. No single
group or customer represents greater than 2% of total accounts and notes
receivable. Issuance costs related to Gelson's charge cards are not
significant and are expensed as incurred.
INVENTORIES
The cost of supermarket nonperishable inventories is determined by the
retail inventory method using the last-in, first-out (LIFO) method, which is
lower than market. Perishable supermarket and other inventories are valued
at the lower of cost (first-in/first-out, or average) or market.
PROPERTY FOR RESALE OR SUBLEASE
It is the Company's policy to make available for sale or sublease property
considered by management as excess and no longer necessary for the
operations of the Company. The aggregate carrying values of such owned
property and property under capital leases are periodically reviewed and
adjusted downward to market, when appropriate.
PROPERTY, PLANT AND EQUIPMENT
Owned property, plant and equipment is valued at cost. Depreciation is
provided on the straight-line method at rates based on the estimated useful
lives of individual assets or classes of assets. Improvements to leased
properties or fixtures are amortized over their estimated useful lives or
lease period, whichever is shorter.
Leased property meeting certain criteria is capitalized and the present
value of the related lease payments is recorded as a liability.
Amortization of capitalized leased assets is computed on the straight-line
method over the term of the lease.
Normal repairs and maintenance are expensed as incurred. Expenditures which
materially increase values, change capacities or extend useful lives are
capitalized. Replacements are capitalized and the property, plant and
equipment accounts are relieved of the items being replaced. The related
costs and accumulated depreciation of disposed assets are eliminated and any
gain or loss on disposition is included in income.
31
<PAGE>
ENVIRONMENTAL COSTS
Costs incurred to investigate and remediate contaminated sites are expensed
as incurred.
STORE OPENING COSTS
Noncapital expenditures incurred in opening a new store are expensed as
incurred.
ADVERTISING AND SALES PROMOTION COSTS
Advertising and sales promotion costs are expensed as incurred and totaled
$1,496,000, $2,075,000 and $1,559,000 in 1997, 1996 and 1995, respectively.
INCOME TAXES
The Company accounts for income taxes under the provisions of SFAS 109,
"Accounting for Income Taxes". Under SFAS 109, deferred tax liabilities and
assets are determined based on the difference between the financial
statement and tax bases of assets and liabilities, using enacted tax rates
in effect for the year in which the differences are expected to reverse.
NET INCOME PER COMMON SHARE
SFAS 128, "Earnings Per Share", was adopted in the fourth quarter of 1997
and supersedes the Company's previous standards for computing net income per
share under Accounting Principles Board No. 15. The new standard requires
dual presentation of net income per common share and net income per common
share assuming dilution on the face of the income statement. Basic net
income per share is computed by dividing the net income attributable to
common stockholders by the weighted average number of common shares
outstanding during the period. The Company does not have any dilutive
shares for any of the three fiscal years in the period ended January 3,
1998. The financial statements present basic net income per share.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principals requires management to make estimates and
assumptions for the reporting period and as of the financial statement date.
These estimates and assumptions affect the reported amounts of assets and
liabilities, the disclosure of contingent liabilities and the reported
amounts of revenues and expenses. Actual results could differ from these
estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS 107, "Disclosure about Fair Value of Financial Instruments" requires
certain disclosures regarding the fair value of financial instruments. Cash
and cash equivalents, accounts receivable, accounts payable, accrued
liabilities and amounts due to and from affiliates are reflected in the
consolidated financial statements at fair value because of the short-term
maturity of these instruments. The fair value of long-term debt closely
32
<PAGE>
approximates its carrying value. The Company uses quoted market prices,
when available, or discounted cash flows to calculate these fair values.
LONG-LIVED ASSETS
In fiscal year 1996, the Company adopted SFAS 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
of." The adoption of SFAS 121 had no impact on the Company's financial
position or on its results of operations.
In accordance with SFAS 121, long-lived assets held and used by the Company
are reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. For
purposes of evaluating the recoverability of long-lived assets, the
recoverability test is performed using undiscounted net cash flows of the
individual stores and consolidated undiscounted net cash flows for long-
lived assets not identifiable to individual stores.
RECLASSIFICATIONS
Certain prior period amounts have been reclassified to conform to the
current year presentation.
NEW ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS
130, "Reporting Comprehensive Income", which established standards for
reporting and display of comprehensive income and its components. This
statement requires a separate statement to report the components of
comprehensive income for each period reported. The provisions of this
statement are effective for fiscal years beginning after December 15, 1997.
Management believes this statement may require expanded disclosure in the
Company's financial statements.
In June 1997, the FASB also issued SFAS 131, "Disclosures About Segments of
an Enterprise and Related Information". The standard requires that
companies disclose "operating segments" based on the way management
disaggregates the company for making internal operating decisions. The new
rules will be effective for the 1998 fiscal year. Abbreviated quarterly
disclosure will be required beginning first quarter of 1999, with both 1999
and 1998 information. The Company does not believe that the new standard
will have a material impact on the reporting of its segments.
33
<PAGE>
2. Marketable Securities:
Marketable securities are carried on the balance sheet at their market
value.
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------
Unrealized
(in thousands) Cost Gain (Loss) Market Value
------------------------------------------------------------------------------------------
<S> <C> <C> <C>
As of January 3, 1998:
Available-for-sale Securities:
Mutual funds 14,529 843 15,372
Equity securities 832 (581) 251
------- ------ -------
Total $15,361 $ 262 $15,623
------- ------ -------
------- ------ -------
As of December 28, 1996:
Trading Securities:
Mutual funds $10,997 $ 35 $11,032
Fixed income securities 7,707 (662) 7,045
Equity securities 1,413 114 1,527
Mortgage-backed government securities 1,419 7 1,426
Collateralized mortgage obligations 328 (2) 326
------- ------ -------
Total $21,864 $(508) $21,356
------- ------ -------
------- ------ -------
</TABLE>
Realized gains from sale of securities were $605,000, $36,000 and $31,000
in 1997, 1996 and 1995, respectively.
3. Accounts and Notes Receivable, Net:
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------
(in thousands) January 3, 1998 December 28, 1996
-------------------------------------------------------------------------------
<S> <C> <C>
Accounts receivable, trade $4,600 $4,677
Notes receivable 452 592
Other accounts receivable 1,882 2,070
------ ------
6,934 7,339
Less: Allowance for doubtful accounts and
notes receivable (624) (710)
------ ------
$6,310 $6,629
------ ------
------ ------
</TABLE>
34
<PAGE>
The provision for doubtful accounts and notes receivable in 1997, 1996, and
1995 was approximately $62,000, $55,000 and $94,000, respectively.
4. Inventories:
Inventories valued by the LIFO method ($9,545,000 in 1997, $9,271,000 in
1996 and $8,899,000 in 1995) would have been $2,570,000, $2,394,000 and
$2,282,000 higher at January 3, 1998, December 28, 1996 and December 30,
1995, respectively, if they had been stated at the lower of FIFO cost or
market. The LIFO effect on net income and income per share in 1997, 1996
and in 1995 was a decrease of approximately $105,000 ($.10 per share),
$67,000 ($.06 per share) and $81,000 ($ .06 per share), respectively.
5. Property, Plant and Equipment, Net:
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------
(in thousands) January 3, 1998 December 28, 1996
-------------------------------------------------------------------------------
<S> <C> <C>
Land $7,732 $ 8,775
Buildings and improvements 9,661 11,453
Store fixtures and office equipment 20,565 16,837
Transportation equipment 1,701 1,794
Machinery and equipment 874 879
Leasehold improvements 24,972 21,973
Assets under capital leases 3,058 3,058
Assets under construction 479 773
------- ------
69,042 65,542
Accumulated depreciation and amortization (29,879) (25,667)
------- -------
$39,163 $39,875
------- -------
------- -------
</TABLE>
As of January 3, 1998 approximately $8,900,000 of property, plant and
equipment (at cost) was fully depreciated.
6. Other Current Liabilities:
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------
(in thousands) January 3, 1998 December 28, 1996
-------------------------------------------------------------------------------
<S> <C> <C>
Compensated absences $ 3,032 $ 2,830
Taxes (including taxes collected from
others of $1,259 and $994, respectively) 3,689 2,991
Other 5,688 5,995
------- -------
$12,409 $11,816
------- -------
------- -------
</TABLE>
35
<PAGE>
7. Long-Term Debt:
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------
Current Non-Current
------------------------- -----------------------------
January 3, December 28, January 3, December 28,
(in thousands) 1998 1996 1998 1996
--------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Notes and contracts payable $1,239 $ 768 $3,062 $1,832
Obligations under capital
leases 230 205 3,348 3,578
7% Subordinated income
debentures due
September 1, 2014 1,253 1,253
------ ------ ------ ------
$1,469 $ 973 $7,663 $6,663
------ ------ ------ ------
------ ------ ------ ------
</TABLE>
At January 3, 1998, the approximate principal payments required on long-term
debt for each year are as follows (in thousands):
<TABLE>
<CAPTION>
1998 1999 2000 2001 2002 Subsequent
---- ---- ---- ---- ---- ----------
<S> <C> <C> <C> <C> <C>
$1,469 $1,311 $1,296 $823 $861 $3,372
</TABLE>
The Company has a 15 month loan agreement for a credit facility with a bank
establishing a revolving line of credit in the amount of $9,000,000 with a
standby letter of credit subfacility in the amount of $5,000,000, and a
$10,000,000 non-revolving line of credit providing for term loans. Major
provisions of the agreement include interest on the revolving loan at the
bank's reference rate or at the bank's adjusted LIBOR rate plus .8% or 1.0%
(depending on the Company's debt-to-equity ratio), and interest on the term
loan at .8% or .9% (depending on the debt-to-equity ratio) above either of
the bank's adjusted Treasuries rate or the bank's adjusted LIBOR rate.
Additionally, there are certain minimum requirements as to the Company's
equity, working capital and debt-to-equity relationships. The Company also
has a one year revolving line of credit with another bank in the amount of
$3,000,000 with interest at the bank's reference rate. At the end of 1997
and 1996 there were no amounts borrowed under either of the revolving lines
of credit.
Notes payable: In 1997 and 1995, the Company borrowed $2,500,000 (at 6.76%)
and $2,750,000 (at 6.18%), respectively, from its $10,000,000 non-revolving
line of credit to finance the purchase of supermarket equipment. In 1993,
the Company financed $1,021,000 (at an average interest rate 7.5%) of
supermarket equipment. All equipment financing borrowings are five year,
fully amortized notes. Only the obligations of the 1993 borrowings are
collateralized by the equipment.
Debentures: The indenture relating to the 7% (6% prior to November 7, 1978)
subordinated income debentures ("7% Debentures"), due September 1, 2014,
provides for interest payable semiannually on March 1 and September 1 to the
extent that current annual net income (consolidated net income before income
taxes and interest accrued on the 7% Debentures) is
36
<PAGE>
sufficient therefor, or at the discretion of the Company, out of available
retained earnings. No accrued interest was in arrears as of January 3, 1998.
The aggregate fair market value of long term debt approximates its carrying
value.
8. Capital Stock:
Class A Common Stock: The Company is authorized to issue 5,000,000 shares
of Class A common stock, par value $.25 per share. At January 3, 1998 and
December 28, 1996, shares issued were 893,434 and 1,106,053, respectively,
including 339,300 treasury shares at the end of each year. In the third
quarter of 1997, the Company completed a self-tender offer by purchasing
212,619 shares at $65.00 per share. In 1996, the Company purchased 25,884
shares at an average price of $62.29 per share. In 1995, the Company
purchased 179,229 shares at an average price of $62.46 per share. The Class
A common stock has one vote per share on all matters on which stockholders
are entitled to vote or consent.
Class B Common Stock: The Company is authorized to issue 500,000 shares of
Class B common stock, par value $.25 per share. At January 3, 1998 and
December 28, 1996 there were 342,246 shares issued and outstanding. The
Class B common stock has ten votes per share on virtually all matters on
which shareholders are entitled to vote or consent. Transfer of Class B
common stock is restricted to other Class B stockholders and certain other
classes of transferees. Class B common stock is convertible, at the option
of the holder, into Class A common stock on a share-for-share basis. The
Class B common stock is also automatically converted into Class A common
stock under certain circumstances, including upon the transfer of such stock
to a transferee other than another Class B stockholder and certain other
classes of transferees. There were 1,000 shares of Class B common stock
converted to Class A common stock in 1996. No shares were converted in 1997
or 1995. Cash or property dividends on Class B common stock are restricted
to an amount equal to 90% of any dividend paid on Class A common stock.
9. Retirement Plans:
The Company contributes to multi-employer union pension plans administered
by various trustees which may be deemed to be defined benefit plans.
Contributions to these plans are based upon negotiated wage contracts.
Information relating to accumulated benefits and fund assets as they may be
allocable to the participants at January 3, 1998 is not available. The
Company's total union pension expense for all plans for 1997, 1996 and 1995
amounted to $937,000, $906,000 and $891,000, respectively.
The Company has a noncontributory, trusteed stock bonus plan which is
qualified under Section 401 of the Internal Revenue Code of 1986, as
amended. All nonunion employees over 18 years of age who complete 1,000
hours of service within the year ending on the anniversary date of
employment are eligible to become participating employees in the plan.
Contributions to the plan for any fiscal year, as determined by the Board of
Directors, are discretionary, but in no event will they exceed 15% of the
annual aggregate salaries of those employees eligible for participation in
the plan. Contributions must be invested in the Company's Class A common
stock with excess cash being invested in certain government backed
securities. Contributions to the plan are allocated among eligible
participants in the
37
<PAGE>
proportions of their salaries to the salaries of all participants.
Contributions accrued for the plan in 1997, 1996 and 1995 were
$135,000, $133,000, and $130,000, respectively.
The Arden Group, Inc. 401(k) Retirement Savings Plan (the "Company Savings
Plan") covers all non-union employees of the Company and its subsidiaries
who have attained the age of 18 and have completed at least one year of
service with any of such companies. The Company Savings Plan provides that,
with certain limitations, a participating employee may elect to contribute
up to 15% of such employee's annual compensation to the Company Savings Plan
on a tax-deferred basis, subject to a limitation that the annual elective
contribution may not exceed an annual indexed dollar limit determined
pursuant to the Internal Revenue Code ($9,500 in 1997). Annual matching
contributions are made by the Company each year for those participants whose
annualized gross earnings for the previous year were $45,000 or less, and
such matching contribution was $10,000 in 1997, $8,000 in 1996 and $9,000 in
1995. An additional discretionary amount of $406,000 was accrued in 1997
and contributed to the plan in early 1998. Similarly, $263,000 was accrued
in 1996 and contributed in early 1997 and $317,000 was accrued in 1995 and
contributed in early 1996.
An employment agreement with a key executive officer provides for annual
retirement compensation equal to twenty-five percent of his average base
salary and bonus earned in the last three years prior to his retirement.
The obligation is being accrued over the seven year term of his agreement.
In 1997, the Company accrued $226,000 toward this benefit.
10.Income Taxes:
Income (loss) before income taxes and the related income tax expense
(benefit) are as follows:
<TABLE>
<CAPTION>
----------------------------------------------------------------------------
(in thousands) 1997 1996 1995
----------------------------------------------------------------------------
<S> <C> <C> <C>
Income (loss) before income tax:
Continuing operations $14,283 $ 6,601 $11,772
Discontinued operations (4,340) (761)
-------- -------- -------
Total $ 9,943 $ 5,840 $11,772
-------- -------- -------
-------- -------- -------
Income tax expense (benefit):
Continuing operations $ 5,586 $ 2,622 $ 4,661
Discontinued operations (1,602) (305)
-------- -------- -------
Total $ 3,984 $ 2,317 $ 4,661
-------- -------- -------
-------- -------- -------
</TABLE>
38
<PAGE>
The composition of federal and state income tax expense (benefit) is as
follows:
<TABLE>
<CAPTION>
----------------------------------------------------------------------------
(in thousands) 1997 1996 1995
----------------------------------------------------------------------------
<S> <C> <C> <C>
Current
Federal $2,701 $1,222 $3,242
State 1,013 517 945
-------- -------- -------
Total 3,714 1,739 4,187
Deferred
Federal 359 553 324
State (89) 25 150
-------- -------- -------
Total 270 578 474
-------- -------- -------
Total income tax expense $3,984 $2,317 $4,661
-------- -------- -------
-------- -------- -------
</TABLE>
The Company's deferred income taxes assets (liabilities) were attributable
to the following:
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------
January 3, December 28,
(in thousands) 1998 1996
------------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets
Debt under capital leases $1,547 $1,653
Book accruals not recognized for tax until paid 1,117 1,076
Unrealized loss on marketable securities 183 224
Excess of book over tax depreciation 520
State tax expense recognized in current period
for books but in following year for tax 279 175
Bad debt allowance not deductible for tax
until year of write-off 267 307
Other 439 360
-------- --------
Deferred tax assets $3,832 $4,315
Deferred tax liabilities
Deferred gain on debenture exchange $(4,480) $(4,694)
Deferred gain on sale of property (250) (253)
Property leased under capital leases, net of
accumulated depreciation (1,059) (1,147)
Excess of book over tax depreciation (141)
Other (332) (381)
-------- --------
Deferred tax liabilities (6,262) (6,475)
-------- --------
Deferred income taxes, net $(2,430) $(2,160)
-------- --------
-------- --------
</TABLE>
39
<PAGE>
The Company has not established a valuation allowance because its deferred
tax assets can be realized by offsetting taxable income in the carryback
period, and also against deferred tax liabilities and future taxable income,
which management believes will more likely than not be earned, based on the
Company's historical earnings record.
Reconciliation of the statutory federal rate and effective rate is as
follows:
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------
1997 1996 1995
(in thousands, except ------------- ------------ -------------
percentage amounts) Amount Rate Amount Rate Amount Rate
-----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Federal tax at statutory
rate $3,380 34.0% $1,986 34.0% $4,020 34.2%
State income taxes, net of
federal tax benefits 610 6.1% 354 6.0% 712 6.0%
Federal dividend exclusion (6) (0.1)% (23) (0.4%) (71) (0.6)%
------------- ------------ -------------
$3,984 40.0% $2,317 39.7% $4,661 39.6%
------------- ------------ -------------
------------- ------------ -------------
</TABLE>
The California Franchise Tax Board has rendered tax assessments against the
Company. The Company believes the assessments are without merit and has
filed an appeal. The Company believes that adequate reserves have been
provided for all years.
11. Leases:
The principal kinds of property leased by the Company and its subsidiaries
are supermarket buildings, fixtures and delivery equipment. The most
significant obligations assumed under the lease terms, other than rental
payments, are the upkeep of the facilities, insurance and property taxes.
Most supermarket leases contain contingent rental provisions based on sales
volume and have renewal options. The exercise of renewal options is
primarily dependent on the level of business conducted at the location.
All leases and subleases with an initial term greater than one year are
accounted for under SFAS 13, "Accounting for Leases". These leases are
classified as either capital leases, operating leases or subleases, as
appropriate.
Assets Under Capital Leases: Assets under capital leases are capitalized
using interest rates appropriate at the inception of each lease. Contingent
rentals associated with capital leases in 1997, 1996 and 1995 were $107,000,
$110,000 and $109,000, respectively, and accordingly have been charged to
expense as incurred. Following is an analysis of assets under capital
leases:
40
<PAGE>
<TABLE>
<CAPTION>
------------------------------------------------------------------------------
(in thousands) January 3, 1998 December 28, 1996
------------------------------------------------------------------------------
<S> <C> <C>
Buildings:
Cost $3,058 $3,058
Accumulated amortization (1,957) (1,844)
------------- -------------
$1,101 $1,214
------------- -------------
------------- -------------
</TABLE>
Also, included in property for sublease are two properties classified as
capital leases with aggregate net book values of $1,372,000 and $1,435,000
as of the end of 1997 and 1996, respectively.
Future minimum lease payments for the above assets under capital leases at
January 3, 1998 are as follows:
<TABLE>
<CAPTION>
---------------------------------------------------------------
(in thousands)
---------------------------------------------------------------
<S> <C>
1998 $ 637
1999 637
2000 637
2001 637
2002 637
Remainder 2,757
-------------
Total minimum obligations $5,942
Executory costs (46)
-------------
Net minimum obligations 5,896
Interest (2,318)
-------------
Present value of net minimum obligations 3,578
Current portions (230)
-------------
Long-term obligations at January 3, 1998 $3,348
-------------
-------------
</TABLE>
Minimum capital lease obligations have not been reduced by related minimum
future sublease rentals of $2,590,000.
Executory costs include such items as property taxes and insurance.
41
<PAGE>
Operating Leases and Subleases: Future minimum lease payments for all
noncancelable operating leases having a remaining term in excess of one
year at January 3, 1998 are as follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------
Deduct Net
Sublease Rental
(in thousands) Commitments Rentals Commitments
- ---------------------------------------------------------------------
<S> <C> <C> <C>
1998 $4,096 $456 $3,640
1999 4,102 469 3,633
2000 3,967 464 3,503
2001 3,826 382 3,444
2002 3,756 330 3,426
Remainder 47,961 3,848 44,113
-------- -------- --------
$67,708 $5,949 $61,759
-------- -------- --------
-------- -------- --------
</TABLE>
Rent expense under operating leases is as follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------
(in thousands) 1997 1996 1995
- ---------------------------------------------------------------------
<S> <C> <C> <C>
Minimum rent $4,361 $4,300 $4,484
Contingent rent 1,192 972 1,103
-------- -------- --------
5,553 5,272 5,587
Sublease rentals (975) (798) (1,450)
-------- -------- --------
$4,578 $4,474 $4,137
-------- -------- --------
-------- -------- --------
</TABLE>
12. Related Party Transactions:
At January 3, 1998, the Company held two notes receivable with balances
totaling $255,000 from an officer/director of the Company. These notes
arose from transactions in 1979 and 1980 whereby the Company loaned the
officer/director money to purchase an aggregate of 200,000 shares of the
Company's Class A common stock at the then fair market value. These notes,
which bear interest at the rate of 6% per annum, mature on December 31,
2003 with principal payments of $40,000 due annually prior thereto. If
the officer's employment is terminated prior to January 1, 2004, the
unpaid portion of the two notes would be forgiven. The loans are
collateralized by 180,000 shares of Class B common stock. The receivable
is shown on the balance sheets as a reduction in stockholder's equity.
13. Commitments and Contingent Liabilities:
The Company has an employment agreement with a key executive officer which
expires on January 1, 2004. In addition to a base salary, the agreement
provides for a bonus based on
42
<PAGE>
pre-tax earnings. No maximum compensation limit exists. The compensation
expensed in 1997, 1996 and 1995 was approximately $1,020,000, $673,000 and
$910,000, respectively.
The Company is contingently liable as a guarantor of certain leases which
it has either assigned or subleased. Any liability arising as a result of
these guarantees would have no significant effect on either the Company's
results of operations or consolidated financial position of the Company.
The Company and its subsidiaries are subject to a myriad of environmental
laws and regulations regarding air, water and land use, and the use,
storage and disposal of hazardous materials. The Company believes it
substantially complies, and has in the past substantially complied, with
federal, state, and local environmental laws and regulations. However, a
claim has been made against the Company in connection with real property
previously leased by a subsidiary of the Company by the current owner of
such property. The Company has been asked to pay for a portion of the
cost of remediation of hazardous substances allegedly existing on such
properties. The Company cannot at this time estimate the expense it
ultimately may incur in connection with the claim, however, it believes
such expense, or expenses related to violations which may occur in the
future, will not have a material impact on the Company's results of
operations or consolidated financial position.
The Company or its subsidiaries are defendants in a number of cases
currently in litigation, being vigorously defended, in which the
complainants pray for monetary damages. As of the date hereof, no
estimate of potential liability, if any, is possible. Based upon current
information, management, after consultation with legal counsel defending
the Company's interests in the cases, believes the ultimate disposition
thereof will have no material effect upon either the Company's results of
operations or the consolidated financial position.
14. Arbitration Proceedings:
Pursuant to an Asset Purchase Agreement dated September 1, 1993 (the
"Asset Purchase Agreement"), by and among Telautograph, the Company and
Danka Industries, Inc. (the "Purchaser") and Danka Business Systems PLC
("Danka"), on September 17, 1993 AMG Holdings sold its communication
equipment business and substantially all the operating assets and certain
liabilities of such business to the Purchaser, a wholly-owned indirect
subsidiary of Danka, for a cash purchase price of approximately
$45,780,000 (which includes $1,000,000 received for a covenant
not-to-compete), subject to certain post-closing adjustments. In fiscal
1993, AMG Holdings booked a gain related to the sale of approximately
$620,000, net of income taxes of $424,000.
The purchase price and the gain were subject to adjustment after
resolution of disputes between AMG Holdings and the Purchaser concerning
the assets and liabilities transferred to the Purchaser. In March 1997,
the Company received notice of a decision rendered in the arbitration
proceedings relating to the sale in 1993 of its communication equipment
business to Danka Business Systems PLC. The arbitrators upheld Arden's
claim for approximately $2,200,000 and awarded Danka on its counterclaims
approximately $4,065,000. As a result of this decision, the Company paid
Danka approximately $1,865,000 in April 1997.
43
<PAGE>
As the result of an earlier arbitration, Arden was awarded, in April 1994,
$1,750,000. No income or expenses related to that award and no expenses
related to the arbitration completed in 1997 were recognized in the 1994
and 1995 statements of operations of Arden. In the third and fourth
quarters of 1996, arbitration costs, net of taxes, which exceeded the
first arbitration award ($311,000 and $145,000, respectively) were
expensed as discontinued operations.
In the concluding phase of the arbitration proceedings, the arbitrators
determined that neither party was a prevailing party and, therefore,
neither party was awarded costs and fees incurred by the other party with
respect to the proceedings.
The above arbitration awards, the associated expenses not expensed in 1996
and the resulting adjustments to the purchase price for the transaction
resulted in the Company recognizing a loss, net of taxes, from
discontinued operations of $2,738,000 in 1997.
44
<PAGE>
ARDEN GROUP, INC. AND CONSOLIDATED SUBSIDIARY
-----------------------------------------------
SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
(In Thousands, Except Per Share Data)
- --------------------------------------------------------------------------------------------------------------------------
Continuing Operations Discontinued Operations
--------------------------------------------- ---------------------------
Gross Income Loss Net Net Income
Quarter Sales Profit Income Per Share(2) Loss Per Share Income Per Share(2)
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1995
First $59,941 $23,209 $1,425 $1.08 $1,425 $1.08
Second 60,317 23,742 2,246 1.71 2,246 1.71
Third 60,968 23,787 1,801 1.37 1,801 1.37
Fourth 61,736 24,315 1,639 1.31 1,639 1.31
- --------------------------------------------------------------------------------------------------------------------------
1996
First $60,616 $23,646 $ 134 $ .12 $ 134 $ .12
Second 62,864 24,649 895 .81 895 .81
Third 62,891 24,855 1,485 1.34 $ (311) $ (.28) 1,174 1.06
Fourth 65,648 26,017 1,465 1.32 (145) (.13) 1,320 1.19
- --------------------------------------------------------------------------------------------------------------------------
1997
First $64,961 $25,547 $1,785 $1.61 $(2,695) $(2.43) $ (910) $(.82)
Second 65,360 26,341 2,292 2.07 (43) (.04) 2,249 2.03
Third 65,897 26,445 2,349 2.29 2,349 2.29
Fourth (1) 78,136 31,655 2,271 2.53 2,271 2.53
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
Earnings per share is calculated on the weighted average outstanding
shares in the quarter.
(1) The fourth quarter of 1997 was a 14 week quarter compared to 13 weeks in the
fourth quarters of 1996 and 1995.
(2) The cumulative net income per share of the four quarters in 1997 will not
equal the net income per share for the year due to the Class A Common Stock
repurchase in the third quarter of 1997.
45
<PAGE>
ARDEN GROUP, INC. AND CONSOLIDATED SUBSIDIARY
-----------------------------------------------
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
- -------
<S> <C>
2.1 Asset Purchase Agreement dated September 1, 1993 by and among
Telautograph Corporation, Arden Group, Inc., Danka Industries, Inc. and
Danka Business Systems PLC filed as Exhibit 2.1 to the Form 8-K of Arden
Group, Inc. dated September 30, 1993 and incorporated herein by
reference.
3.1 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.
3.2 Amended and Restated By-Laws of Arden Group, Inc. (as amended and
restated as of June 25, 1991) filed as Exhibit 3.2 to the Annual Report
on Form 10-K of Arden Group, Inc. for the fiscal year ended January 2,
1993 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.
4.2 Loan Agreement dated December 23, 1993, as amended by a Second Amendment
thereto dated December 20, 1995, a Third Amendment thereto dated December
18, 1996 and a Fourth Amendment thereto dated January 13, 1997, between
Arden Group, Inc. and Union Bank. [filed as Exhibit 4.2 to the Annual
Report on Form 10-K of Arden Group, Inc. for the fiscal year ended
December 28, 1996 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.
46
<PAGE>
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* Extension Agreement dated January 4, 1981 regarding promissory notes held
by the Registrant between Arden Group, Inc. and Bernard Briskin, filed as
Exhibit 10.2 to the Quarterly Report on Form 10-Q of Arden Group, Inc.
for the quarter ended July 4, 1981 and incorporated herein by reference.
10.4* Extension Agreement dated January 1, 1984 regarding promissory notes held
by the Registrant between Arden Group, Inc. and Bernard Briskin filed as
Exhibit 19.1 to the Quarterly Report on Form 10-Q of Arden Group, Inc.
for the quarter ended September 29, 1984 and incorporated herein by
reference.
10.5* Extension Agreement dated May 13, 1988 regarding promissory notes held by
the Registrant between Arden Group, Inc. and Bernard Briskin filed as
Exhibit 10.11 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.
10.6* Modification and Fourth Extension Agreement dated as of January 1, 1994
regarding promissory notes held by the Registrant between Arden Group,
Inc. and Bernard Briskin, filed as Exhibit 10.8 to the Quarterly Report
on Form 10-Q of Arden Group, Inc. for the quarter ended April 2, 1994 and
incorporated herein by reference.
10.7 Form of Indemnification Agreement between the Registrant and the
Directors and certain officers, filed as Exhibit 10.13 to the Annual
Report on Form 10-K of Arden Group, Inc. for the year ended December 29,
1990 and incorporated herein by reference.
10.8* Amended Loan and Stock Pledge Agreement dated November 4, 1993 regarding
promissory notes held by the Registrant between Arden Group, Inc. and
Bernard Briskin, filed as Exhibit 10.6 to the Annual Report on Form 10-K
of Arden Group, Inc. for the year ended January 1, 1994 and incorporated
herein by reference.
10.9* 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.
10.10* Modification and Fifth Extension Agreement as of January 1, 1997
regarding promissory notes held by the Registrant between Arden Group,
Inc. and Bernard Briskin.
21. Subsidiaries of Registrant.
27. Financial Data Schedules.
* Indicates management contracts or compensatory plans or arrangements
required to be filed as an exhibit to this report.
</TABLE>
47
<PAGE>
EXHIBIT 10.9
SECOND
AMENDMENT TO EMPLOYMENT AGREEMENT
This Second Amendment to Employment Agreement (the "Second Amendment")
is made and entered into effective as of January 1, 1997 by and between Arden
Group, Inc., a Delaware corporation ("Arden Group"), Arden-Mayfair, Inc., a
Delaware corporation and a wholly-owned subsidiary of Arden Group
("Arden-Mayfair"), AMG Holdings, Inc., formerly known as Telautograph
Corporation, a Virginia corporation and a wholly-owned subsidiary of
Arden-Mayfair ("AMG"), Gelson's Markets, a California corporation and a
wholly-owned subsidiary of Arden-Mayfair ("Gelson's")(Arden Group,
Arden-Mayfair, AMG and Gelson's are herein sometimes referred to collectively
as the "Companies" and individually as a "Company"), and Bernard Briskin
("Employee"), with reference to the following facts:
A. The parties hereto are parties to that certain Employment Agreement
dated as of May 13, 1988, as amended by that certain Amendment to Employment
Agreement dated April 27, 1994 (collectively, the "Agreement").
B. Pursuant to Section 13 of the Agreement, the Boards of Directors of
the Companies have examined the terms of the Agreement, the duties and
performance of Employee and the future needs of the Companies and have made a
good faith determination that the terms of Employee's employment thereunder
should be revised. Accordingly, the parties desire to amend the Agreement,
effective January 1, 1997, to make certain changes to the Agreement,
including, but not limited to, an increase in the base salary payable to
Employee and an extension of the term thereof.
NOW, THEREFORE, for and in consideration of the promises, covenants and
agreements hereinafter set forth, the parties hereto agree as follows:
1. The first sentence of Section 2 of the Agreement is deleted and
replaced with the following:
"The Companies agree to and hereby do continue to employ Employee, and
Employee agrees to and hereby does continue in the employ of the
Companies, as president and chief executive officer of Arden Group and
Arden-Mayfair, and as chief executive officer of AMG and Gelson's; in
addition, Employee shall continue to serve as Chairman of the Board of
Directors of Arden Group. In the event that, during the term of this
Agreement, Arden Group fails to elect or appoint Employee as Chairman of
Arden Group's Board of Directors, as President of Arden Group and as Chief
Executive Officer of Arden Group, Employee shall have the right thereafter
upon ninety (90) days' written notice to terminate his employment by the
Companies and such termination shall be deemed to be a termination by the
Companies without cause."
48
<PAGE>
2. The first sentence of Section 3 of the Agreement is hereby amended
in its entirety to read as follows:
"The initial term of this Agreement, which commenced at 12:00 A.M. on
January 3, 1988 and was scheduled to expire at 12:00 A.M. on January 1,
2001, is hereby extended to 12:00 A.M. on January 1, 2004, subject to
termination or extension as hereinafter provided."
The remainder of Section 3 shall remain in full force and effect, in
accordance with its terms, and all references therein and in the rest of the
Agreement to the expiration of the term shall mean 12:00 A.M. on January 1,
2004.
3. Section 5 of the Agreement is hereby amended in its entirety to read
as follows:
"5. COMPENSATION.
"(a) IN GENERAL. All compensation payable to Employee hereunder
shall be paid to Employee by Arden Group, with such inter-company
adjustments in respect of such payments as the Companies deem appropriate.
Arden Group shall be primarily liable for the payment of all compensation
payable to Employee hereunder, and Arden-Mayfair, AMG and Gelson's shall
be liable to Employee for the payment of any such compensation only in the
event of non-payment thereof by Arden Group. All compensation shall be
subject to required withholding.
"(b) 1994-1996. During the period from January 1, 1994 through
December 31, 1996, but as to the Bonus for 1995 and thereafter contingent
upon the satisfaction of the requirements in Section 5(d) below, for all
services to be rendered by Employee hereunder, Employee shall be paid an
annual base salary (the "Base Salary"), payable in equal installments no
less frequently than twice monthly, as provided in subsection (1) below,
and incentive compensation consisting of a cash bonus (the "Bonus") for
each complete or partial fiscal year of Arden Group during 1994 through
and including 1996, as provided in subsection (2) below.
"(1) Employee's Base Salary for the period beginning on January
1, 1994 and ending on December 31, 1994 shall be $440,000. Employee's
Base Salary shall be adjusted effective as of January 1, 1995 and
effective as of January 1, 1996 (each such January 1 being the "Adjustment
Date") by the amount of the increase, if any, in the Consumer Price Index
for All Urban Wage Earners and Clerical Workers, Los Angeles-Anaheim-
Riverside Metropolitan Area (1982-84 = 100) published by the Bureau of
Labor Statistics of the United States Department of Labor (the "Index"),
calculated in accordance with this subsection (1); provided, however, that
on each Adjustment Date the Base Salary shall be adjusted for one hundred
percent (100%) of any increase in the Index up to three percent (3%) and
for fifty percent
49
<PAGE>
(50%) of any increase in the Index in excess of three percent (3%) up to
five percent (5%), but there shall be no adjustment for any increase in
the Index in excess of five percent (5%) (such adjustments for the
increase in the Index are hereinafter referred to as the "Allowable
Adjustments"). The amount of the increase in the Index shall be
calculated by dividing the Index for the month of October immediately
preceding the applicable Adjustment Date (the "Comparison Index") by the
Index for the October of the immediately preceding calendar year (the
"Base Index"). No carryover of any increase in the Index of more than
five percent (5%) shall be permitted.
"For example, the adjustment to the Base Salary on January 1,
1995 shall be determined as follows. First, calculate the increase in the
Index by dividing the Index for October 1994 by the Index for October
1993. By way of illustration only, if the Index in effect for October
1994 is 115.5 and the Index in effect for October 1993 was 110, the
increase in the Index would be 115.5/110 = 5%. Next, multiply the Base
Salary for 1994 by the Allowable Adjustments for the increase in the
Index, and add this amount to the Base Salary for 1994 to arrive at the
Base Salary on January 1, 1995. Continuing the foregoing illustration,
the Base Salary beginning on January 1, 1995 would be $440,000 + (3% x
$440,000) + (50% x 2% x $440,000), or $457,600. If the increase in the
Index had been 6% instead of 5%, the Base Salary beginning on January 1,
1995 would also be $457,600, since there is no adjustment for any increase
in the Index in excess of 5%. The adjustment to the Base Salary on
January 1, 1996 would be determined in a similar manner, with the
adjustment being made to the Base Salary for 1995.
"In no event shall the Base Salary on any January 1 be less than
the amount of the Base Salary during the preceding twelve-month period.
"In the event that publication of the Index is changed or
discontinued, the parties shall select a replacement index published by a
governmental agency. In the event that the references or techniques
employed in the calculation of the Index shall be modified and such
modification would have resulted in a different figure for the Base Index
to be used to calculate the increase in the Index, the parties agree that
the Base Index shall be appropriately adjusted and that the Index, as
modified, shall be used as provided hereunder.
"(2) Commencing January 1, 1994, the Bonus in respect of each
of Arden Group's fiscal years ending approximately December 31, 1994, 1995
and 1996 shall be an amount equal to the Applicable Percentage (as
hereinafter defined) of the Pre-Tax Profits (as hereinafter defined) for
such fiscal year. "Pre-Tax Profits" for each such fiscal year shall be
the amount shown on the audited Consolidated
50
<PAGE>
Statement of Operations of Arden Group for such fiscal year as "Income
Before Income Taxes and Extraordinary Items," adjusted so as to exclude
any charge, accrual or deduction for any Bonus paid or payable to
Employee. With respect to each such fiscal year, the Applicable
Percentage shall be as follows: with respect to the first $2,000,000 of
Pre-Tax Profits for the applicable fiscal year, the Applicable Percentage
shall be two and five-tenths percent (2.5%); with respect to all Pre-Tax
Profits in excess of $2,000,000 for the applicable fiscal year, the
Applicable Percentage shall be three and five-tenths percent (3.5%).
"No later than fifteen (15) days after the close of each such
fiscal year of Arden Group, a good faith estimate of the Bonus which will
be payable for said fiscal year shall be made and there shall be advanced
to Employee an amount equal to seventy five percent (75%) of said
estimate. All such sums so advanced for any such fiscal year shall be
credited against the Bonus for such fiscal year, and the amount of the
Bonus in excess of such amount so advanced shall be paid to Employee at
the conclusion of the audit for such fiscal year. If the amount so
advanced to Employee exceeds the amount of the Bonus to which he is
entitled for such fiscal year, such excess shall be returned within thirty
(30) days after Employee receives a written demand therefor.
"(c) 1997-2004. Commencing January 1, 1997, but as to the Bonus for
1997 and thereafter contingent upon the satisfaction of the requirements
in Section 5(d) below, for all services to be rendered by Employee
hereunder, Employee shall be paid an annual base salary (the "Base
Salary"), payable in equal installments no less frequently than twice
monthly, as provided in subsection (1) below, and incentive compensation
consisting of a cash bonus (the "Bonus") for each complete or partial
fiscal year of Arden Group from and after January 1, 1997 during
Employee's employment hereunder, as provided in subsection (2) below.
"(1) Employee's Base Salary for the period beginning on January
1, 1997 and ending on December 31, 1997 shall be $500,000. (Within ten
(10) days after execution of this Second Amendment, the Companies shall
pay to Employee any salary for calendar year 1997 which is owed and unpaid
to Employee based upon the Base Salary set forth in the preceding
sentence.) Employee's Base Salary shall be adjusted effective as of
January 1, 1998 and effective as of each January 1 thereafter (each such
January 1 also being an "Adjustment Date") during the term of this
Agreement by the amount of the increase, if any, in the Consumer Price
Index for All Urban Wage Earners and Clerical Workers, Los Angeles-Anaheim-
Riverside Metropolitan Area (1982-84 = 100) published by the Bureau of
Labor Statistics of the United States Department of Labor (the "Index"),
calculated in accordance with this subsection (1); provided, however, that
on each Adjustment Date the Base Salary shall be adjusted
51
<PAGE>
for one hundred percent (100%) of any increase in the Index up to three
percent (3%) and for fifty percent (50%) of any increase in the Index in
excess of three percent (3%) up to five percent (5%), but there shall be
no adjustment for any increase in the Index in excess of five percent
(5%) (such adjustments for the increase in the Index are hereinafter
referred to as the "Allowable Adjustments"). The amount of the increase
in the Index shall be calculated by dividing the Index for the month of
October immediately preceding the applicable Adjustment Date (the
"Comparison Index") by the Index for the October of the immediately
preceding calendar year (the "Base Index"). No carryover of any increase
in the Index of more than five percent (5%) shall be permitted.
"In no event shall the Base Salary on any January 1 be less than
the amount of the Base Salary during the preceding twelve-month period.
"In the event that publication of the Index is changed or
discontinued, the parties shall select a replacement index published by a
governmental agency. In the event that the references or techniques
employed in the calculation of the Index shall be modified and such
modification would have resulted in a different figure for the Base Index
to be used to calculate the increase in the Index, the parties agree that
the Base Index shall be appropriately adjusted and that the Index, as
modified, shall be used as provided hereunder.
"(2) Commencing January 1, 1997, the Bonus in respect of each
of Arden Group's fiscal years ending on or after January 3, 1998 shall be
an amount equal to the Applicable Percentage (as hereinafter defined) of
the Pre-Tax Profits (as hereinafter defined) for such fiscal year. "Pre-
Tax Profits" for each such fiscal year shall be the amount shown on the
audited Consolidated Statement of Operations of Arden Group for such
fiscal year as "Income Before Income Taxes and Extraordinary Items,"
adjusted so as to exclude any charge, accrual or deduction for (i) any
Bonus paid or payable to Employee and (ii) any arbitration award to Danka
and the associated expenses expensed in 1997 as a charge to discontinued
operations. With respect to each such fiscal year, the Applicable
Percentage shall be as follows: with respect to the first $2,000,000 of
Pre-Tax Profits for the applicable fiscal year, the Applicable Percentage
shall be two and five-tenths percent (2.5%); with respect to all Pre-Tax
Profits in excess of $2,000,000 for the applicable fiscal year, the
Applicable Percentage shall be three and five-tenths percent (3.5%).
"No later than fifteen (15) days after the close of each such
fiscal year of Arden Group, a good faith estimate of the Bonus which will
be payable for said fiscal year shall be made and there shall be advanced
to Employee an amount equal to seventy five percent (75%) of said
estimate. All such sums so advanced for any such fiscal
52
<PAGE>
year shall be credited against the Bonus for such fiscal year, and the
amount of the Bonus in excess of such amount so advanced shall be paid to
Employee at the conclusion of the audit for such fiscal year. If the
amount so advanced to Employee exceeds the amount of the Bonus to which
he is entitled for such fiscal year, such excess shall be returned within
thirty (30) days after Employee receives a written demand therefor.
"(d) It is the parties' intention that the provisions of subsection
5(b)(2) and subsection 5(c)(2) of this Agreement, which set forth the
formula for the annual Bonus payable to Employee, shall constitute "other
performance-based compensation" within the meaning of Section 162(m)(4)(C)
of the Internal Revenue Code of 1986, as amended (the "Code") and
"qualified performance-based compensation" within the meaning of Proposed
Treasury Regulation Section 1.162-27(e). Payment of the Bonus to Employee
for 1995 and thereafter is contingent upon (i) approval by the
shareholders of Arden Group of the material terms of the Bonus formula in
accordance with the requirements of Proposed Treasury Regulation
Section 1.162-27(e)(4), and (ii) prior to payment of the Bonus with respect
to each fiscal year, the Compensation Committee of Arden Group shall
certify in writing in accordance with the requirement of Proposed Treasury
Regulation Section 1.162-27(e)(5) that the performance goals were in fact
satisfied, i.e., the Pre-Tax Profits with respect to such fiscal year were
in fact achieved and that the other material terms of the Bonus formula
were in fact satisfied. Arden Group agrees to timely place before the
shareholders clause (i) (by asking the shareholders of Arden Group to
approve the payment of all bonuses) and to timely seek the certifications
required pursuant to clause (ii). In the event that Proposed Treasury
Regulation Section 1.162-27(e) is amended, superseded or replaced, the
payment of the Bonus with respect to each fiscal year shall, if required
by then applicable law or regulation (taking into account any grandfather
provisions) be subject to compliance with the applicable requirements of
any future Treasury Regulations, whether proposed, temporary or final,
with respect to "other performance-based compensation" within the meaning
of Code Section 162(m)(4)(C), in lieu of the foregoing provisions of this
subsection 5(d), and Arden Group agrees to use its best efforts to comply
with all such requirements. If in any year after 1994 the conditions for
paying a Bonus to Employee as set forth in this subsection (d) are not
satisfied, Employee may terminate the Agreement upon six (6) months' prior
written notice to the Companies."
4. Section 6 is hereby amended in its entirety to read as follows:
6. EXPENSES. In addition to the Base Salary and Bonus provided
for in Section 5 hereof and the retirement payment provided for in
Section 9 hereof, the Companies shall, in accordance with their past
53
<PAGE>
practices and upon submission of appropriate bills or vouchers, pay
or reimburse Employee for all ordinary and usual expenses incurred by
Employee in furtherance of or in connection with the business of the
Companies. In addition, the Company shall reimburse Employee (as a
working condition fringe benefit) for attorneys fees incurred by him
in connection with the negotiation and drafting of the Second
Amendment, up to a maximum reimbursement of twenty thousand dollars
($20,000)."
5. The first two (2) lines of Section 7 are amended to read as follows:
"In addition to the Base Salary and Bonus provided for in
Section 5 hereof and the retirement payment provided for in
Section 9."
Clause (b) of Section 7 is hereby amended in its entirety to read as follows:
"(b) pay or reimburse Employee for the uninsured medical
expenses of Employee and his immediate family (`immediate family'
being defined to include Employee, his spouse, and any children of
Employee who reside in his home or are full time students at an
accredited institution), up to a maximum reimbursement during any
calendar year of $200,000 and such reimbursement shall continue until
Employee's death; and."
The second to last sentence of Section 7 is deleted in its entirety and
replaced by the following: "All benefits referred to in this Section 7 shall
be in addition to any other compensation payable to Employee pursuant to the
terms of this Agreement."
6. Sections 8(a) and (b) of the Agreement are hereby deleted.
Employee shall continue to be entitled to participate in any group life
insurance program which the Companies may elect to maintain from time to time.
7. Section 9 (relating to Severance Pay) is hereby deleted in its
entirety and the following is substituted in its place:
"9. RETIREMENT COMPENSATION.
(a) Commencing on the date of Employee's Retirement (as said term is
hereinafter defined), the Company shall pay to Employee on a monthly basis
in arrears for so long as Employee shall be living an amount per annum
equal to twenty-five percent (25%) of Employee's average Base Salary and
Bonus (not including benefits, stock option rights or other employee
compensation) which Employee had earned and accrued with respect to the
last three (3) full fiscal years of the Company prior to Employee's
Retirement. By way of example only, assume that Employee retires on
June 1, 2001 and assume, for purposes of this example only, that the
54
<PAGE>
Company's fiscal years ending in 1998, 1999 and 2000 all ended on
December 31. The relevant years to determine Employee's retirement
payment would be the Company's fiscal years ending December 31, 1998,
December 31, 1999, and December 31, 2000. Assume that for the fiscal year
ending on December 31, 1998 Employee received a Base Salary of Five
Hundred Ten Thousand Dollars ($510,000) and a Bonus was accrued for that
fiscal year (regardless of whether the Bonus accrued for that fiscal year
was paid during the fiscal year or thereafter) in the amount of One
Hundred Thousand Dollars ($100,000). Assume that the Base Salary for the
next two fiscal years was Five Hundred Twenty Thousand Dollars ($520,000)
and Five Hundred Thirty Thousand Dollars ($530,000), respectively, and
that Employee's Bonus accrued with respect to those two fiscal years was
One Hundred Twenty Thousand Dollars ($120,000) and One Hundred Fifty
Thousand Dollars ($150,000), respectively. Employee's average annual
compensation for purposes of this paragraph 9 would thus be Six Hundred
Forty Three Thousand Three Hundred Thirty-Three Dollars ($643,333); and
pursuant to this paragraph 9, Employee's annual retirement payment due
under this paragraph 9 would be One Hundred Sixty Thousand Eight Hundred
Thirty-Three Dollars ($160,833) per annum which would commence to accrue
on June 1, 2001 and would be payable commencing July 1, 2001 in the
monthly amount of $13,402.75.
(b) In addition to the annual retirement payment payable to Employee
pursuant to subparagraph (a), the Company shall continue to provide
Employee with health insurance benefits and with an automobile allowance
equivalent to that which the Company grants to its senior executives from
time to time during Employee's Retirement; provided that he shall continue
to receive the uninsured medical expenses as provided in Section 7(b).
The Company may discharge its health insurance obligation hereunder by
paying or reimbursing Employee for a medical supplement policy. If for
any reason (whether it be pursuant to applicable law or by reason of the
Company's then health insurance contract), the Company cannot provide
Employee with health insurance coverage, then it shall pay to Employee,
annually, the annual premium which it would pay for health insurance
coverage for its average senior executive.
(c) For purposes of subparagraph (a) above, the Employee shall be
deemed to be "Retired" when Employee's Base Salary and Bonus no longer
accrue under this Agreement other than by reason of Employee's breach of
this Agreement or the Company's termination of this Agreement for cause."
8. Section 10 is amended as follows: (i) In the first sentence of
Section 10(a), the words "this Agreement" are replaced by the words "Employee's
employment hereunder"; (ii) Clauses (4), (5) and (8) of Section 10(a) are
deleted; (iii) Clause (3) of Section 10(a) is amended in its entirety to
55
<PAGE>
read as follows: "payment to Employee of the retirement payment, health
benefits and automobile allowance as provided in Section 9;" and (iv) Section
10(b) is deleted in its entirety.
9. Section 11(c) is hereby deleted.
10. Section 12 of the Agreement is deleted in its entirety and replaced
with the following:
"12. PRORATION OF BONUS. If Employee's employment is terminated
during the term hereof and thereafter Employee is entitled to no further
payment of Bonus, then the remainder of any Bonus payable to Employee for
the year in which such termination occurs, if any, shall be paid no later
than 45 days after the close of the then current fiscal quarter of Arden
Group (unless such termination occurs during the fourth quarter of Arden
Group's fiscal year, in which event it shall be paid no later than 90 days
after the close of such fiscal year), and shall be adjusted as follows:
For purposes of calculating the Bonus, Employee's employment shall be
deemed to terminate at the end of the calendar month in which his
employment is actually terminated. For purposes of Section 5(b)(2) and
5(c)(2), the $2,000,000 amount shall be prorated for the number of months
of Arden Group's fiscal year that have elapsed through the date of
termination (including the entire calendar month in which employment
actually terminated); and the Applicable Percentage of 2-1/2% shall be
applied to Pre-Tax Profits up to such prorated amount and the Applicable
Percentage of 3-1/2% shall be applied to Pre-Tax Profits in excess of such
prorated amount. By way of example only, if the termination of employment
occurred at any time during the month of May and if Arden Group's fiscal
year were the calendar year, then Employee's Bonus for said fiscal year
through the date of employment would equal 2-1/2% of $833,333 (that is,
5/12ths of $2,000,000) plus 3-1/2% of Pre-Tax Profits through the end of
May to the extent in excess of $833,333. Pre-Tax Profits shall be as
defined in Sections 5(b)(2) and 5(c)(2) hereof but shall be prorated to
the end of the calendar month in which such termination occurs and
calculated based upon the quarterly unaudited consolidated financial
statements filed with the Securities and Exchange Commission on Form 10-Q,
if the termination occurs during the first three quarters of any fiscal
year, and in all other cases, upon the audited Consolidated Statement of
Operations of Arden Group."
11. Section 13 is hereby amended in its entirety to read as follows:
"13. GOOD FAITH REEVALUATION OF COMPENSATION. The parties
agree that, during calendar year 2002, the Compensation Committee of
Arden Group and Employee shall meet to discuss in good faith whether,
based on the services being performed by Employee hereunder and the
needs of the Companies, there should be an
56
<PAGE>
adjustment to the Base Salary and/or Bonus structure payable to him
pursuant to Section 5 hereunder; provided, however, that the parties
acknowledge and agree that the Companies shall not have any legal
obligation to make such an adjustment."
12. A new Section 26 is added to read as follows:
"26. TERMINATION.
(a) TERMINATION BY COMPANIES FOR CAUSE. The
Companies may terminate the employment of Employee for "cause" by
written notice to Employee. For purposes of this Agreement, "cause"
shall mean only (i) conviction of a crime directly related to his
employment hereunder, (ii) conviction of a felony involving moral
turpitude, (iii) willful and gross mismanagement of the business and
affairs of Companies, or (iv) breach of any material provision of
this Agreement. In the event the employment of Employee is
terminated pursuant to this subsection 26(a), Companies shall have no
further liability to Employee other than for compensation accrued
through the date of termination but not yet paid.
In the event Companies contend that they have cause to
terminate Employee pursuant to clause (iii) or (iv) of the second
sentence of this subsection 26(a), Companies shall provide Employee
with written notice specifying in reasonable detail the services or
matters which they contend Employee has not been adequately
performing or the material provisions of this Agreement of which
Employee is in violation and the acts constituting such violation.
If the events can be cured and corrected and if, within ten (10) days
of receipt of the notice, Employee performs the required services or
modifies his performance to correct the matters complained of,
Employee's breach will be deemed cured, and Employee's employment
shall not be terminated. However, if the nature of the service not
performed by Employee or the matters complained of are curable but
more than ten (10) days are reasonably required to perform the
required service or to correct the matters complained of, then his
breach will be deemed cured if he commences to perform such service
or to correct such matters within the ten (10) day period and
thereafter diligently prosecutes such performance or correction to
completion within sixty (60) days after the Companies' original
notice (the "extension"). If Employee does not perform the required
services or modify his performance to correct the matter complained
of within the ten (10) day period or the extension thereof, Companies
shall have the right to terminate this Agreement at the end of the
ten (10) day period or extension thereof. It is understood that
Employee's performance hereunder shall not be deemed
57
<PAGE>
unsatisfactory solely on the basis of any economic performance of
Companies because this performance will depend in part on a variety
of factors.
(b) TERMINATION BY COMPANIES WITHOUT CAUSE. The
Companies may terminate the employment of Employee without "cause"
(as defined in subsection 26(a) above) at any time during the term
hereof by giving written notice to Employee specifying therein the
effective date of termination. In the event the employment of
Employee is terminated pursuant to this subsection 26(b) without
cause, Companies shall be obligated to pay to Employee his Base
Salary and his Bonus pursuant to Section 5 of this Agreement and all
other benefits payable to Employee under this Agreement for the
balance of the remaining term under Section 3 (without extension).
Employee shall have no duty to mitigate and Companies shall have no
right to offset any other compensation paid to Employee during the
applicable time period."
13. The effective date of this Amendment shall be January 1, 1997.
14. Except as expressly modified and amended by this Second Amendment,
the Agreement shall remain in full force and effect in accordance with its
terms.
IN WITNESS WHEREOF, the parties have executed this Amendment effective the
date first written above.
ARDEN GROUP, INC.
By: ERNEST T. KLINGER
----------------------
Title: VICE PRESIDENT
-------------------
ARDEN-MAYFAIR, INC.
By: ERNEST T. KLINGER
----------------------
Title: VICE PRESIDENT
-------------------
AMG HOLDINGS, INC.
By: ERNEST T. KLINGER
----------------------
Title: SECRETARY
-------------------
58
<PAGE>
GELSON'S MARKETS
By: ERNEST T. KLINGER
----------------------
Title: SECRETARY
-------------------
BERNARD BRISKIN
-------------------
Bernard Briskin
59
<PAGE>
EXHIBIT 10.10
MODIFICATION AND FIFTH EXTENSION AGREEMENT
This Modification and Fifth Extension Agreement (the "Agreement") is
made and entered into as of January 1, 1997 by and among Arden Group, Inc., a
Delaware corporation ("Arden Group"), Bernard Briskin ("Mr. Briskin") and
Judith Briskin, his wife ("Mrs. Briskin"), with reference to the following
facts:
A. Arden Group is the holder of a promissory note dated April 2, 1979,
in the original principal amount of $212,500, executed by Mr. Briskin in
favor of Arden Group (the "1979 Note"), and a second promissory note, dated
July 9, 1980, in the original principal amount of $303,750, executed by Mr.
Briskin in favor of Arden Group (the "1980 Note"). As of January 1, 1997,
the outstanding principal balance of the 1979 Note was $121,428.58 and the
outstanding principal balance of the 1980 Note was $173,571.42. The 1979
Note and the 1980 Note, as amended by an Extension Agreement dated as of
January 4, 1981, by and among Arden Group, Mr. Briskin and Mrs. Briskin, and
by an Extension Agreement made and entered into as of January 1, 1984 by and
among Arden Group, Mr. Briskin and Mrs. Briskin, and as amended by a Third
Extension Agreement made and entered into as of May 13, 1988 by and among
Arden Group, Mr. Briskin and Mrs. Briskin, and as amended by a Modification
and Fourth Extension Agreement made and entered into as of January 1, 1994 by
and among Arden Group, Mr. Briskin and Mrs. Briskin, are hereinafter
collectively referred to as the "Notes."
B. Each of the Notes is secured by an Amended Loan And Stock Pledge
Agreement dated August 24, 1993 among Mr. Briskin and Arden Group (the
"Security Agreement").
C. Concurrently with the execution and delivery of this Agreement,
Arden Group and certain of its subsidiaries and Mr. Briskin are entering into
a Second Amendment to Employment Agreement which amends the terms of his
Employment Agreement dated as of May 13, 1988, as previously amended. In
consideration of Mr. Briskin's entering into said Second Amendment to
Employment Agreement, Arden Group has agreed to extend and modify the terms
of each of the Notes.
NOW, THEREFORE, for and in consideration of the promises and covenants
and agreements hereinafter set forth, the parties agree as follows:
1. The interest rate on each of the Notes shall continue to be six
percent (6%) per annum and all accrued and unpaid interest on each Note shall
continue to be payable annually on or before December 31 of each year.
60
<PAGE>
2. Principal on the 1979 Note shall be paid in annual installments of
$16,464.89 commencing on December 31, 1997 and continuing each December 31
thereafter until December 31, 2003, at which time the entire unpaid principal
balance of the 1979 Note, together with all accrued and unpaid interest,
shall be due and payable.
3. Principal on the 1980 Note shall be paid in annual installments of
$23,535.11 commencing on December 31, 1997 and continuing each December 31
thereafter until December 31, 2003, at which time the entire unpaid principal
balance of the 1980 Note, together with all accrued and unpaid interest,
shall be due and payable.
4. The execution of this Agreement and the extension of the maturity
date of each of the Notes pursuant hereto shall be endorsed on the face of
each of the Notes. The Security Agreement shall continue to be applicable to
the Notes, as heretofore and as hereby amended.
5. Except as expressly modified by this Agreement, the Notes and the
Security Agreement shall remain in full force and effect in accordance with
their respective terms.
IN WITNESS WHEREOF, the parties have executed this Agreement effective
the date first set forth above.
ARDEN GROUP, INC.
By: ERNEST T. KLINGER
----------------------
Title: VICE PRESIDENT
----------------------
BERNARD BRISKIN
----------------------
Bernard Briskin
JUDITH BRISKIN
----------------------
Judith Briskin
61
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF REGISTRANT
The following are subsidiaries of the Registrant:
<TABLE>
<CAPTION>
State or Province
of Incorporation
-----------------
<S> <C>
Arden-Mayfair, Inc. Delaware
Gelson's Markets California
AMG Holdings, Inc.
(formerly Telautograph Corporation) Virginia
</TABLE>
Arden-Mayfair, Inc. is a wholly-owned subsidiary of the Registrant. Gelson's
Markets and AMG Holdings, Inc. are wholly-owned subsidiaries of
Arden-Mayfair, Inc. All of the subsidiaries listed above are included in the
consolidated financial statements of the Registrant.
62
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> OTHER
<FISCAL-YEAR-END> JAN-03-1998
<PERIOD-START> DEC-29-1996
<PERIOD-END> JAN-03-1998
<CASH> 7,099
<SECURITIES> 15,623
<RECEIVABLES> 6,934
<ALLOWANCES> 624
<INVENTORY> 11,552
<CURRENT-ASSETS> 42,210
<PP&E> 69,042
<DEPRECIATION> 29,879
<TOTAL-ASSETS> 88,126
<CURRENT-LIABILITIES> 28,312
<BONDS> 7,663
0
0
<COMMON> 309
<OTHER-SE> 47,951
<TOTAL-LIABILITY-AND-EQUITY> 88,126
<SALES> 274,354
<TOTAL-REVENUES> 274,354
<CGS> 164,366
<TOTAL-COSTS> 164,366
<OTHER-EXPENSES> 97,065
<LOSS-PROVISION> 62
<INTEREST-EXPENSE> 702
<INCOME-PRETAX> 14,283
<INCOME-TAX> 5,586
<INCOME-CONTINUING> 8,697
<DISCONTINUED> (2,738)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,959
<EPS-PRIMARY> 5.77
<EPS-DILUTED> 5.77
</TABLE>
