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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 (NO FEE REQUIRED)
For the fiscal year ended January 2, 1999
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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
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ARDEN GROUP, INC.
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(Exact name of registrant as specified in its charter)
Delaware 95-3163136
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
2020 South Central Avenue, Compton, California 90220
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (310) 638-2842
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Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
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None None
Securities registered pursuant to Section 12(g) of the Act:
Class A Common Stock
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(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 5, 1999 was:
Class A Common Stock $66,895,265
The number of shares outstanding of the registrant's classes of common stock as
of March 5, 1999 was:
2,216,488 of Class A Common Stock
1,368,984 of Class B Common Stock
<PAGE>
PART I
ITEM 1. BUSINESS;
ITEM 2. PROPERTIES; AND
ITEM 3. LEGAL PROCEEDINGS
GENERAL
The Registrant, Arden Group, Inc. (the "Company"), is a holding company with
certain real estate holdings which 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") formerly Telautograph
Corporation, distributed and serviced facsimile and other communications
equipment and parts prior to the sale of its operating assets and liabilities in
1993. See Note 15 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:
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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 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, vitamins, health and
natural food products 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.
The three Mayfair stores, which are smaller than Gelson's stores (approximately
18,000 to 25,000 square feet), offer a merchandise selection of equal quality,
but which is less broad than at Gelson's.
SERVICE Gelson's emphasizes customer service by offering a variety of personal
service departments 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 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 the
existing stores' appeal to consumers and their profit potential. Total capital
expenditures for 1998 were $4,244,000. In the second quarter of 1998, the
Company executed a long-term lease agreement with a developer to build a new
Gelson's Market in Beverly Hills, California. The development and actual opening
of the market is subject to, among other things, necessary governmental
approvals and the developer fulfilling certain conditions.
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.
2
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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 and an adjacent
4,000 square foot truck service facility in the City of Commerce, California.
The warehouse distributes fresh fruits and vegetables, liquor, wine, floral and
a limited number of grocery, meat, delicatessen, paper goods and supply items to
the 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 21.8% of Gelson's purchases in 1998. 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. However, such a
loss could have a short-term adverse effect on the performance of Gelson's.
3
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EMPLOYEES
Gelson's has approximately 974 full-time and 882 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 60 full-time employees at its
executive and headquarters offices, some of whom are covered by a collective
bargaining agreement.
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 the 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 19 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 93,000 square feet and the term of the
lease expires in September 2005.
After extensive site, demographic and competitive analysis, the Company decided
not to open a store at the Santa Barbara property it purchased in 1996 for
$3,100,000. In the first quarter of 1998, the Santa Barbara property was sold
and the Company recognized a pretax gain of approximately $437,000. In the
second quarter of 1998, the Company executed a long-term lease agreement with a
developer to build a new Gelson's market in Beverly Hills, California. The
development and actual opening of the market is subject to, among other things,
necessary governmental approvals and the developer fulfilling certain
conditions.
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).
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.
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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 impact upon either
the Company's consolidated financial position or results of operations. See Note
14 of Notes to Financial Statements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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 ("Class A") 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 (restated to reflect a four-for-one stock split distributed in
July 1998):
<TABLE>
<CAPTION>
1998 1997
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High Low High Low
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<S> <C> <C> <C> <C>
1st Quarter 37-1/4 23-11/16 15-1/2 13-1/2
2nd Quarter 43-3/4 35-13/16 16-1/8 13-1/2
3rd Quarter 60 27 23 14-1/8
4th Quarter 45 30-1/2 27-1/4 20-1/8
</TABLE>
There is no established public trading market for the Company's Class B
Common Stock ("Class B"), which is subject to various restrictions on
transfer.
(b) As of January 2, 1999, there were 1,351 holders of record of the Company's
Class A, with aggregate holdings of 2,216,488 shares of Class A. This does
not include 1,357,200 shares of the Company's Class A owned by AMG
Holdings. As of the same date, there were 13 holders of record of the
Company's Class B, with aggregate holdings of 1,368,984 shares of Class B.
(c) No dividends have been paid on either Class A or Class B during the past
three years. Cash or property dividends on Class B are restricted to an
amount equal to 90% of any dividend paid on Class A.
6
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ITEM 6. SELECTED FINANCIAL DATA OF ARDEN GROUP, INC.
<TABLE>
<CAPTION>
(In Thousands, Except Share and Per Share Data)
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1998 1997 1996 1995 1994
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Operations For The Year:
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<S> <C> <C> <C> <C> <C>
Sales $296,487 $274,354 $252,019 $242,962 $246,199
Gross profit 119,892 109,988 99,167 95,053 95,021
Operating income 16,010 12,861 5,922 8,212 8,305
Other income (expense), net 1,085 1,422 679 3,560 (183)
Income tax expense (7,014) (5,586) (2,622) (4,661) (3,273)
Income from continuing operations,
net of income taxes 10,081 8,697 3,979 7,111 4,849
Loss from discontinued operations,
net of income taxes (2,738) (456)
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Net income $ 10,081 $ 5,959 $ 3,523 $ 7,111 $ 4,849
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Depreciation and amortization on
continuing operations $ 5,618 $ 5,111 $ 4,686 $ 3,480 $ 3,659
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Financial Position At Year End:
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Total assets $ 93,126 $ 88,126 $ 91,248 $ 89,478 $ 91,322
Working capital 25,747 13,898 23,142 28,706 36,506
Long-term debt 6,369 7,663 6,663 7,695 6,465
Stockholders' equity 58,358 48,260 55,737 53,827 57,836
Capital expenditures 4,244 7,896 12,841 10,731 6,948
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Per Share Data:
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Income from continuing operations $2.81 $2.10 $ .89 $1.37 $ .79
Loss from discontinued operations ( .66) ( .10)
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Net income $2.81 $1.44 $ .79 $1.37 $ .79
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Weighted average shares outstanding 3,585,472 4,131,060 4,460,860 5,195,960 6,108,464
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ALL YEARS ARE 52 WEEKS EXCEPT FOR 1997 WHICH IS 53 WEEKS.
</TABLE>
7
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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, economic conditions in
Southern California, the effects of and changes in fiscal policies and laws,
inflation, consolidations in the supermarket industry, competition from other
supermarkets and retailers with a food presentation and the potential effects of
the Year 2000 issue (discussed later in this section).
RESULTS OF OPERATIONS
1998 COMPARED TO 1997
During 1998, the Company had net income of $10,081,000 compared to net income of
$5,959,000 during 1997. Pretax income from continuing operations was $17,095,000
for 1998 compared to pretax income of $14,283,000 for 1997.
During 1998, the Company's operating income was $16,010,000 compared to
operating income of $12,861,000 during 1997.
Sales from the Company's 13 supermarkets in the greater Los Angeles area were
$296,487,000 in 1998 (a 52-week fiscal year), an increase of 8.1% from 1997 (a
53-week fiscal year), when sales were $274,354,000. Same store sales for a
comparable 53-week period increased 7.2% in 1998 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 as a percent of
sales in 1998 compared to 1997. In November 1997, the Company opened a Gelson's
Market in Northridge, California, and although the Company is encouraged by the
sales increases since the store opened, they are still below management's
original projections. Sales at Northridge are expected to improve as additional
tenants occupy the center's vacant spaces and their store fronts are completed,
although there are no assurances that either of these events 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 occupancy of the other
tenant spaces, the nature and success of the other tenants' businesses, the
timing and completion of the other tenants' store fronts and competition from
other supermarkets in the trade area.
The Company's gross profit as a percentage of sales was 40.4% in 1998 compared
to 40.1% in 1997. Added controls over product costs, product pricing decisions
and increased volume rebates, buying and promotional allowances were factors in
increasing margins. Also, the sales mix in 1998 favored higher gross margin
categories than in 1997.
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Delivery, selling, general and administrative ("DSG&A") expenses as a percentage
of sales were 35.0% in 1998 compared to 35.4% for 1997. DSG&A activity in 1998
reflects continued cost containment efforts and a $437,000 pretax gain
recognized in 1998 on the sale of the Company's Santa Barbara property. The
lower expense in 1998 is partially offset by the reinstatement in April 1998 of
an average monthly union pension contribution of $275,000 which was not in
effect in 1997. The contribution was suspended again in September, but could be
reinstated in 1999. In addition, DSG&A is higher in 1998 due to the opening of
the Gelson's Market in Northridge, California in November 1997, as described
above.
Interest and dividend income was $1,453,000 in 1998 compared to $1,536,000 for
1997. The decrease is due to interest bearing investments being at lower average
levels in 1998 compared to 1997 and interest of $65,000 received in 1997 on a
federal income tax refund as a result of the Company filing an amended 1993
corporate income tax return.
Interest expense increased to $764,000 in 1998 from $702,000 in 1997 primarily
due to higher average levels of fixture financing debt.
Other income (expense) includes gains (losses) realized on investments in
marketable securities of $408,000 and $605,000 in 1998 and 1997, respectively.
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." 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 and any unrealized holding gains
and losses are included as a separate component of stockholders' equity.
Unrealized losses on available-for-sale securities were $23,000 (net of income
tax benefits of $9,000) compared to an unrealized gain of $416,000 (net of
income tax expense of $275,000) in 1998 and 1997, respectively.
For an analysis of the Company's provision for income taxes, see Note 11 of
Notes to Financial Statements.
The loss on discontinued operations in 1997 resulted from a decision in an
arbitration proceeding related to the sale in 1993 of the Company's
communication equipment business and is reflected as an adjustment to the
purchase price. See Note 15 of Notes to Financial Statements.
Basic net income per share from continuing operations for the current and prior
years has been restated to reflect the effect of the Company's four-for-one
stock split on July 15, 1998. The increase in basic net income per share from
continuing operations occurred due to increased income from continuing
operations for the period, as well as a reduction in weighted average shares
outstanding as a result of the Company's purchase of 212,619 shares of Class A
Common Stock (without giving effect to the 1998 stock split) in August 1997. See
Capital Expenditures/Liquidity. See Note 8 of Notes to Financial Statements.
9
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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 were significantly below management's
projections. (See "1998 Compared to 1997" above for a discussion of the status
of the Northridge store.)
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 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 related 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 related 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. Fiscal 1996
also includes net unrealized losses of
10
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$151,000 on trading securities. 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 stockholders' equity.
For an analysis of the Company's provision for income taxes, see Note 11 of
Notes to Financial Statements.
The loss on discontinued operations resulted from a decision in an arbitration
proceeding related to the sale in 1993 of the Company's communication equipment
business and is reflected as an adjustment to the purchase price. See Note
15 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
Company's purchase of Class A Common Stock in August 1997. See Capital
Expenditures/Liquidity. See Note 8 of Notes to Financial Statements.
LIQUIDITY AND CAPITAL RESOURCES
The Company has an ongoing program to remodel existing supermarkets and to add
new stores. In 1998, the Company had capital expenditures of approximately
$4,244,000. At January 2, 1999, capital expenditure commitments were
approximately $8,400,000.
After extensive site, demographic and competitive analysis, the Company decided
not to open a store at the Santa Barbara property it purchased in 1996 for
$3,100,000. In the first quarter of 1998, the Santa Barbara property was sold
and the Company recognized a pretax gain of approximately $437,000. In the
second quarter of 1998, the Company executed a long-term lease agreement with a
developer to build a new Gelson's Market in Beverly Hills, California. The
development and actual opening of the market is subject to, among other things,
necessary governmental approvals and the developer 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. The Company cannot at this time estimate the
expense it ultimately may incur in connection with any current or future
violations, however it believes any such claims will not have a material impact
on the Company's results of operations or consolidated financial position.
The Company has 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. 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 $3,100,000 was outstanding at January 2, 1999. There were no
outstanding balances against either of the revolving lines as of January 2,
1999. The Company's current cash position
11
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including marketable securities, the lines of credit and net cash provided by
operating activities (approximately $12,547,000 for 1998) 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 decreased to .60 at January 2,
1999 from .82 at January 3, 1998. The Company's current ratio was 2.01 at
January 2, 1999 compared to 1.49 at January 3, 1998. The Company's current
assets at the end of 1998 were approximately $9,076,000 more than at the end of
1997.
The Company's cash position, including marketable securities, at the end of 1998
was $33,171,000 compared to $22,722,000 at the end of 1997. 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.
YEAR 2000 ISSUE
The Year 2000 ("Y2K") readiness issue arises from the inability of information
systems, and other time and date sensitive products, equipment and systems, to
properly recognize and process date-sensitive information resulting in system
failures or miscalculations. The Company has made an assessment of the impact of
the Y2K issue on its internal operations and has developed a plan to minimize
any potential business interruption. The plan categorizes the key areas affected
by the Y2K issue as follows: information technology ("IT") systems, non-IT
systems, vendors and customers.
The Company's review of its IT systems (hardware and software) indicated the
need for modification, and in some cases, replacement of applications and
operating systems. The Company had approximately 80% of its critical IT systems
in compliance and the majority of the remaining systems were tested by the end
of the 1998 fiscal year. The Company anticipates that compliance of the
remaining IT systems will be completed early in the second quarter of 1999 and
additional testing will continue through the first half of 1999.
The Y2K issue could have an impact on non-IT systems (personal property) that
are not directly connected with its computer systems, such as physical
facilities including point of sale and other store equipment, security systems
and utilities. Although these issues are more difficult to identify and resolve,
the Company is actively engaged in identifying the areas concerning its products
and services as well as its physical locations. This review is expected to be
completed by the end of the second quarter of 1999. As these areas are
identified, management is formulating the necessary actions to ensure minimal
disruption to its business processes.
12
<PAGE>
The Company is also assessing the Y2K readiness of its key suppliers and
business partners in an effort to ensure the adequacy of product, supplies and
resources. This includes a review of and direct communication with the majority
of its product vendors and key suppliers. Completion of this part of the Y2K
readiness plan is scheduled to be finalized by mid year 1999.
The Company has determined, that due to the nature of its business, the
readiness of its customers is not within its control. Third party readiness
(financial institutions) may affect the customers' ability to purchase the
Company's products. The Company is not investigating this issue and the impact
is highly uncertain.
Costs incurred to date in addressing the Y2K issue have been approximately
$175,000 and are being funded through operating cash flows. Based on current
information, costs to complete the applicable adjustments and to test the
Company's IT systems are not expected to be material to the Company's
consolidated financial position and results of operations. Some of the equipment
and other personal property that the Company is currently replacing is in the
normal course of business and would have been replaced even though it may be
part of the Y2K analysis. Management does not believe the costs associated with
bringing the non-IT systems and equipment into compliance will have a material
negative impact on the Company's consolidated financial position and results of
operations, however, completion of this review will not be completed until the
end of the second quarter of 1999.
The Company does not believe its business will be interrupted due to Y2K issues,
however, this conclusion is based on the assumption that certain utilities and
financial institutions will be able to provide uninterrupted service. In a worst
case scenario, the Company believes the stores could still remain open even if
these services were not available, although the revenue volume could be
affected. To allow the stores to continue to function, the Company is purchasing
generators to serve as backup if the power fails. In addition, the Company's
ability to process transactions through its registers and accept debit and
credit card transactions would be impaired if financial institutions and
intermediaries cannot operate normally. However, the lack of this service would
not preclude the store(s) from operating. Finally, since the timing of a
potential Y2K problem would occur immediately after the holidays, and therefore,
after the Company's busiest time of year, any decline in revenue or other impact
on operations would be reduced.
The foregoing statements relative to the Y2K issue are forward looking
statements and actual compliance may be affected by a number of factors which
include the timing and compliance by the Company's outside vendors and suppliers
(including its banking relations). The Company may be adversely affected if its
vendors and service providers (including its banking relations) are unable to
fully correct any Y2K problems they may have.
This disclosure is a Year 2000 Readiness Disclosure under the Year 2000
Information and Readiness Disclosure Act, enacted by the 105th Congress on
October 19, 1998.
RECENT ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." This statement
requires that all derivative instruments be recorded on the balance sheet at
their fair value. Changes in the fair value of
13
<PAGE>
derivatives will be recorded each period in current earnings or other
comprehensive income, depending on whether a derivative is designated as part
of a hedge transaction and, if it is, the type of hedge transaction. The new
rules will be effective the first quarter of 2000. The Company does not
believe that the new standard will have a material impact on the Company's
financial statements.
ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risk from changes in interest rates on debt.
The Company's exposure to interest rate risk relates to its $9,000,000 and
$3,000,000 revolving lines of credit. Borrowings under the agreements bear
interest at the bank's reference rate or the bank's adjusted LIBOR rate plus
.9%. There were no borrowings outstanding under either agreement during 1998. A
hypothetical 1% interest rate change would not have a material impact on the
Company's results of operations. See Note 7 of Notes to Financial Statements.
A change in market prices also exposes the Company to market risk related to its
investments in marketable securities. At January 2, 1999 the Company held
$19,524,000 in marketable securities. A hypothetical 10% drop in the market
value of these investments would result in a $1,952,000 unrealized loss and a
corresponding loss of a like amount in the fair value of these instruments. This
hypothetical drop would not affect cash flow and would not have an impact on
earnings until the investments were disposed of. See Notes 1 and 2 of Notes to
Financial Statements.
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 5, 1999. 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 74 Chairman of the Board of Directors, 1970 2001
President and Chief Executive
Officer of the Company and
Arden-Mayfair, a subsidiary of
the Company, and Chairman of
the Board of AMG Holdings and
Gelson's Markets, both
subsidiaries of Arden-Mayfair.
John G. Danhakl 42 Partner, Leonard Green & Partners 1995 2001
since March 1995. Managing 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., Twin Laboratories Corporation,
Hechinger/BSQ, Diamond Auto Glass
Works, Liberty Group Publishing and
Leslie's Poolmart, Inc.
Robert A. Davidow 56 Director and Vice Chairman of WHX 1993 1999
Corporation; private investor.
Stuart A. Krieger 81 Business Consultant. 1978 2000
Daniel Lembark 74 Financial consultant and Certified 1978 2001
Public Accountant.
Ben Winters 78 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 5, 1999:
<TABLE>
<CAPTION>
Name Age Position(s)
---- --- -----------
<S> <C> <C>
Bernard Briskin 74 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 63 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.
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 2, 1999 exceeded in the
aggregate $100,000.
<TABLE>
<CAPTION>
Long Term
----Compensation---
----------Annual Compensation------------ ---Awards---
Securities-
Underlying All Other
Name and Options/ Compen-
Principal SARS sation
Position Year Salary ($) Bonus ($) (#)(1) ($)(2)(3)
--------- ---- ---------- --------- ------ ---------
<S> <C> <C> <C> <C> <C>
Bernard Briskin, 1998 507,000 599,297 12,800
Chief Executive 1997 500,000 496,780 12,800
Officer 1996 450,177 191,632 9,000
Ernest T. Klinger, 1998 190,000 40,000 7,000 12,800
CFO, VP Finance 1997 190,000 40,000 12,800
and Administration 1996 190,000 40,000 9,000
</TABLE>
(1) The Company did not grant to Mr. Briskin or Mr. Klinger any restricted
stock or stock options and made no payout to them on any long-term
incentive plan in fiscal years 1998, 1997 or 1996. The Company granted
units for stock appreciation rights ("SAR") covering 7,000 shares of Class
A Common Stock to Mr. Klinger in 1998. See Note 9 of Notes to Financial
Statements.
(2) Includes the Company contribution to the Arden Group, Inc. 401(k)
Retirement Savings Plan and the Arden Group, Inc. Stock Bonus Plan. In
1998, Messrs. Briskin and Klinger were each allocated $12,800 to their
401(k) account and $0 to their Stock Bonus Plan account.
(3) Perquisites and other personal benefits did not exceed the lesser of
$50,000 or 10% of the compensation received by the named officers in any of
the years for which compensation information is reported.
17
<PAGE>
The following table sets forth certain information on SAR grants in fiscal
1998 to the named executive officers:
<TABLE>
<CAPTION>
SAR GRANTS IN LAST FISCAL YEAR
Individual Grants Potential Realizable Value at
------------------------------------------------- Assumed Annual Rates of
Number of Percent of Stock Price Appreciation
Securities Total SARs For SAR Term
Underlying Granted to Exercise ----------------------------------
SARs Employees or Base
Granted in Fiscal Price Expiration
Name (#) Year ($/Sh) Date 0%($) 5%($) 10%($)
---- --- ---- ------ ---- ----- ----- ------
<S> <C> <C> <C> <C> <C> <C> <C>
Bernard Briskin 0 0% $0 N/A $0 $0 $0
Ernest T. Klinger 7,000 41.2% $40 11/17/2003 $7,000 $86,000 $182,000
</TABLE>
The following table provides information on the exercise of SARs by the named
executive officers in fiscal 1998 and the number of each officers' SARs that
were unexercised at January 2, 1999 (none of which were then in-the-money):
AGGREGATED SAR EXERCISES IN LAST FISCAL YEAR AND FISCAL
YEAR-END UNEXERCISED SARS
<TABLE>
<CAPTION>
Number of Securities
Underlying Unexercised
SARs at
Fiscal Year-End
(#)
Shares Acquired Value Realized Exercisable/
Name on Exercise (#) ($) Unexercisable
---- --------------- --- --------------
<S> <C> <C> <C>
Bernard Briskin 0 0 0/0
Ernest T. Klinger 0 0 0/7,000
</TABLE>
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 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 Industries, Inc. 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
18
<PAGE>
insurance benefits and automobile allowance. 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 of 4%. 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. 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 $215,000 as of
March 5, 1999, 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 $22,800, 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 was payable in three
installments of $8,000, $24,000 and $18,000 in 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.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Board of Directors has a Compensation Committee. In 1998 the Compensation
Committee was comprised of the following directors, none of whom are or have
been officers of the Company:
John G. Danhakl, Chairman
Robert A. Davidow
Daniel Lembark
19
<PAGE>
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 5, 1999
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:
<TABLE>
<CAPTION>
Amount and Nature
Name and Address of of Beneficial Percent of Percent of
Beneficial Owner Title of Class Ownership (1) Class Total Vote
---------------- -------------- ------------- ----- ----------
<S> <C> <C> <C> <C>
City National Bank, as Trustee of the Class A Common Stock 257,026 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 620,949 (2) 28.0% 3.9%
Arden Group, Inc.
9595 Wilshire Blvd., Suite 411
Beverly Hills, CA 90212
Bernard Briskin Class B Common Stock 1,362,496 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, 1,357,200 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) 186,096 shares held in trust
(of which Mr. Briskin is a trustee) for the benefit of Mr. Briskin, his
children and his mother; and (ii) 98,012 shares held in an Individual
Retirement Account by Mr. Briskin's wife. Mr. Briskin disclaims any
beneficial ownership of the shares set forth in clause (ii) hereof. Mr.
Briskin shares voting and investment power with respect to the shares
referred to in clause (i), and he has no voting or investment power with
respect to the shares referred to in clause (ii). Nothing herein should be
construed as an admission that Mr. Briskin is in fact the beneficial owner
of any of these shares.
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 1,983,445 shares or
55.3% of the total shares outstanding as of March 5, 1999.
20
<PAGE>
(b) Security Ownership of Management
The following table shows, as of March 5, 1999, the beneficial ownership of
the Company's equity securities by each director, executive officer and by
all directors and executive officers as a group:
<TABLE>
<CAPTION>
Amount and Nature of Percent
Beneficial Ownership Percent of Total
Name of Beneficial Owner Title of Class (1) of Class Vote
- ------------------------ -------------- -------------------- -------- ----
<S> <C> <C> <C> <C>
Bernard Briskin Class A Common Stock 620,949(2) 28.0% 3.9%
Class B Common Stock 1,362,496 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 1,372(3) (4) (5)
Stuart A. Krieger Class A Common Stock 0
Daniel Lembark Class A Common Stock 0
Ben Winters Class A Common Stock 500 (4) (5)
All directors and executive officers Class A Common Stock 622,821(2)(3) 28.1% 3.9%
as a group (7 persons) Class B Common Stock 1,362,496 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 1,357,200 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 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 $255,000 during 1998 and was $215,000 as of March 5, 1999.
21
<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
22
<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
----------------------------------------------------------- 3/25/99
Bernard Briskin, Chairman of the Board,
President and Chief Executive Officer
By ERNEST T. KLINGER
----------------------------------------------------------- 3/25/99
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 25.
Date
----
BERNARD BRISKIN
----------------------------------------------------------- 3/25/99
Bernard Briskin, Director and Chairman of the Board
JOHN G. DANHAKL
----------------------------------------------------------- 3/25/99
John G. Danhakl, Director
ROBERT A. DAVIDOW
----------------------------------------------------------- 3/25/99
Robert A. Davidow, Director
STUART A. KRIEGER
----------------------------------------------------------- 3/25/99
Stuart A. Krieger, Director
DANIEL LEMBARK
----------------------------------------------------------- 3/25/99
Daniel Lembark, Director
BEN WINTERS
----------------------------------------------------------- 3/25/99
Ben Winters, Director
23
<PAGE>
ARDEN GROUP, INC. AND CONSOLIDATED SUBSIDIARY
-------------------------------------------------------
INDEX TO FINANCIAL STATEMENTS
AND SUPPLEMENTAL DATA
---------------
Page
Report of Independent Accountants..........................................25
Financial Statements:
Balance Sheets, January 2, 1999 and January 3, 1998...............26
Statements of Operations and Comprehensive Income for fiscal
years 1998, 1997 and 1996.........................................27
Statements of Stockholders' Equity for fiscal years 1998,
1997 and 1996.....................................................28
Statements of Cash Flows for fiscal years 1998, 1997 and 1996.....29
Notes to Financial Statements.....................................31
The financial statements include the Registrant's
subsidiary (Arden-Mayfair, Inc.) and the subsidiaries of
Arden-Mayfair, Inc.
Selected Quarterly Financial Data (Unaudited)..............................47
Schedules are omitted because of the absence of the conditions under which they
are required.
24
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
------------
To the Stockholders of
Arden Group, Inc.
In our opinion, the consolidated financial statements listed in the index on
page 24 of this Form 10-K present fairly, in all material respects, the
financial position of Arden Group, Inc. and its subsidiary at January 2, 1999
and January 3, 1998, and the consolidated results of their operations and
comprehensive income, and their cash flows for each of the three fiscal years in
the period ended January 2, 1999, in conformity with generally accepted
accounting principles. 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 of these
statements in accordance with generally accepted auditing standards which
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, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
PRICEWATERHOUSECOOPERS LLP
Los Angeles, California
March 12, 1999
25
<PAGE>
ARDEN GROUP, INC. AND CONSOLIDATED SUBSIDIARY
-------------------------------------------------------
BALANCE SHEETS
<TABLE>
<CAPTION>
(In Thousands, Except Share and Per Share Data)
- --------------------------------------------------------------------------------------------------------------------
ASSETS January 2, 1999 January 3, 1998
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Current assets:
Cash $ 13,647 $ 7,099
Marketable securities 19,524 15,623
Accounts and notes receivable, net 5,454 6,310
Inventories 10,796 11,552
Other current assets 1,865 1,626
- --------------------------------------------------------------------------------------------------------------------
Total current assets 51,286 42,210
Property for resale or sublease 1,326 4,051
Property, plant and equipment, net 37,759 39,163
Other assets 2,755 2,702
- --------------------------------------------------------------------------------------------------------------------
Total assets $ 93,126 $ 88,126
- --------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
- --------------------------------------------------------------------------------------------------------------------
Current liabilities:
Accounts payable, trade $ 11,407 $ 14,434
Other current liabilities 12,825 12,409
Current portion of long-term debt 1,307 1,469
- --------------------------------------------------------------------------------------------------------------------
Total current liabilities 25,539 28,312
Long-term debt 6,369 7,663
Deferred income taxes 1,556 2,430
Other liabilities 1,304 1,461
- --------------------------------------------------------------------------------------------------------------------
Total liabilities 34,768 39,866
- --------------------------------------------------------------------------------------------------------------------
Commitments and contingent liabilities (Note 14)
Stockholders' equity:
Common stock, Class A, $ .25 par value;
3,573,688 shares issued and outstanding
including 1,357,200 treasury shares 894 894
Common stock, Class B, $ .25 par value;
1,368,984 shares issued and outstanding 342 342
Capital surplus 3,866 3,866
Notes receivable from officer/director (215) (255)
Unrealized gain on available-for-sale securities 393 416
Retained earnings 56,831 46,750
- --------------------------------------------------------------------------------------------------------------------
62,111 52,013
Less, treasury stock; 1,357,200 shares at cost 3,753 3,753
- --------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 58,358 48,260
- --------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 93,126 $ 88,126
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
26
<PAGE>
ARDEN GROUP, INC. AND CONSOLIDATED SUBSIDIARY
-------------------------------------------------------
STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
(In Thousands, Except Share and Per Share Data)
- --------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------
1998 1997 1996
<S> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------
Sales $296,487 $274,354 $252,019
Cost of sales 176,595 164,366 152,852
- --------------------------------------------------------------------------------------------------------------------
Gross profit 119,892 109,988 99,167
Delivery, selling, general and administrative expenses 103,882 97,127 93,245
- --------------------------------------------------------------------------------------------------------------------
Operating income 16,010 12,861 5,922
Interest and dividend income 1,453 1,536 1,728
Other income (expense), net 396 588 (170)
Interest expense (764) (702) (879)
- --------------------------------------------------------------------------------------------------------------------
Income from continuing operations, before income taxes 17,095 14,283 6,601
Income tax provision 7,014 5,586 2,622
- --------------------------------------------------------------------------------------------------------------------
Income from continuing operations, net of income taxes 10,081 8,697 3,979
Loss from discontinued operations, net of income tax benefits
of $1,602 in 1997 and $305 in 1996 (2,738) (456)
- --------------------------------------------------------------------------------------------------------------------
Net income $ 10,081 $ 5,959 $ 3,523
- --------------------------------------------------------------------------------------------------------------------
Other comprehensive income (loss), net of tax:
Unrealized gain (loss) from available-for-sale securities:
Unrealized holding gains (losses) arising during the period (89) 496
Reclassification adjustment for gains (losses) included
in net income 66 (80)
- --------------------------------------------------------------------------------------------------------------------
Net unrealized gain (loss), net of income tax expense
(benefits) of $(9) for 1998 and $275 for 1997 (23) 416
- --------------------------------------------------------------------------------------------------------------------
Comprehensive income $ 10,058 $ 6,375 $ 3,523
--------- --------- --------
--------- --------- --------
- --------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------
Basic net income per common share:
Income from continuing operations $ 2.81 $ 2.10 $ .89
Loss from discontinued operations (.66) (.10)
- --------------------------------------------------------------------------------------------------------------------
Net income $ 2.81 $ 1.44 $ .79
- --------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------
Weighted average common shares outstanding 3,585,472 4,131,060 4,460,860
- --------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
27
<PAGE>
ARDEN GROUP, INC. AND CONSOLIDATED SUBSIDIARY
-------------------------------------------------------
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
(In Thousands, Except Share Data)
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Common stock, Class A:
Balance, beginning of year $ 894 $ 1,106 $ 1,132
Purchase and retirement of stock (850,476
and 103,536 shares, respectively) (212) (26)
- ------------------------------------------------------------------------------------------------------------------
Balance, end of year 894 894 1,106
- ------------------------------------------------------------------------------------------------------------------
Common stock, Class B:
Balance, beginning and end of year 342 342 342
- ------------------------------------------------------------------------------------------------------------------
Capital surplus:
Balance, beginning of year 3,866 4,531 4,613
Purchase and retirement of common stock (665) (82)
- ------------------------------------------------------------------------------------------------------------------
Balance, end of year 3,866 3,866 4,531
- ------------------------------------------------------------------------------------------------------------------
Notes receivable from officer/director:
Balance, beginning of year (255) (369) (369)
Principal paid 40 114
- ------------------------------------------------------------------------------------------------------------------
Balance, end of year (215) (255) (369)
- ------------------------------------------------------------------------------------------------------------------
Unrealized gain (loss) on available-for-sale securities:
Balance, beginning of year 416
Unrealized gain (loss) (23) 416
- ------------------------------------------------------------------------------------------------------------------
Balance, end of year 393 416
- ------------------------------------------------------------------------------------------------------------------
Retained earnings:
Balance, beginning of year 46,750 53,880 51,862
Net income for the year 10,081 5,959 3,523
Purchase and retirement of common stock (13,089) (1,505)
- ------------------------------------------------------------------------------------------------------------------
Balance, end of year 56,831 46,750 53,880
- ------------------------------------------------------------------------------------------------------------------
Stockholders' equity before treasury stock 62,111 52,013 59,490
Treasury stock, at cost (3,753) (3,753) (3,753)
- ------------------------------------------------------------------------------------------------------------------
Total stockholders' equity $ 58,358 $ 48,260 $55,737
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
28
<PAGE>
ARDEN GROUP, INC. AND CONSOLIDATED SUBSIDIARY
-------------------------------------------------------
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
(In Thousands)
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
1998 1997 1996
<S> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Cash received from customers $ 296,751 $ 274,683 $ 252,482
Cash paid to suppliers and employees (278,213) (254,622) (242,869)
Sales (purchases) of trading securities, net 8,851 (1,311)
Interest and dividends received 1,449 1,683 1,678
Interest paid (751) (705) (878)
Income taxes paid (6,689) (3,831) (2,694)
- ------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 12,547 26,059 6,408
- ------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Capital expenditures (4,244) (7,896) (12,841)
Deposits for property in escrow 2,664
Transfer to discontinued operations (2,575) (456)
Purchases of available-for-sale securities (3,793) (3,202)
Sales of available-for-sale securities 268 1,380
Proceeds from the sale of property, plant and
equipment, liquor licenses and leasehold
interests 3,171 163 2,338
Payments received on notes from the sale of
property, plant and equipment and liquor
licenses 53 3
- ------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (4,598) (12,077) (8,292)
- ------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Purchase and retirement of stock (13,966) (1,613)
Principal payments on long-term debt (1,188) (799) (752)
Principal payments under capital lease obligations (230) (205) (325)
Loan payments received from officer/director 40 114
Proceeds from equipment financing 2,500
Purchase of Company debentures (23) (55)
- ------------------------------------------------------------------------------------------------------------------
Net cash used in financing activities (1,401) (12,356) (2,745)
- ------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash 6,548 1,626 (4,629)
Cash at beginning of year 7,099 5,473 10,102
- ------------------------------------------------------------------------------------------------------------------
Cash at end of year $ 13,647 $ 7,099 $ 5,473
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
29
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------
RECONCILIATION OF NET INCOME TO NET CASH PROVIDED
BY OPERATING ACTIVITIES:
<S> <C> <C> <C>
Net income $ 10,081 $ 5,959 $ 3,523
Adjustments to reconcile net income to net cash provided by operating
activities:
Loss from discontinued operations 2,738 456
Depreciation and amortization 5,618 5,111 4,686
Unrealized loss on trading securities 151
Provision for losses on accounts and
notes receivable 92 62 55
Deferred income taxes (865) 270 578
Net loss (gain) from the disposal of property,
plant and equipment, liquor licenses
and early lease terminations (409) 731 (556)
Realized gains on marketable securities, net (408) (605)
Gain on purchase of 7% debentures (2) (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)
Accounts and notes receivable 794 1,639 8
Inventories 756 (824) (556)
Other current assets (239) (274) (456)
Other assets (103) (90) (548)
Increase (decrease) in liabilities:
Accounts payable and other accrued expenses (2,611) 3,847 492
Deferred income taxes on unrealized gains (275)
Other liabilities (157) (1,081) (73)
- ------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities $ 12,547 $ 26,059 $ 6,408
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
30
<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 2, 1999 (52-weeks), January 3, 1998 (53-weeks) and
December 28, 1996 (52-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."
31
<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 2, 1999, 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 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 ranging from three to twenty
years 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.
32
<PAGE>
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 and accrued
liabilities 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 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 compared to the
related carrying value.
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
$1,504,000, $1,496,000 and $2,075,000 in 1998, 1997 and 1996, 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 Opinion 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
33
<PAGE>
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 2, 1999. The financial
statements present basic net income per share.
COMPREHENSIVE INCOME
SFAS No. 130, "Reporting Comprehensive Income," was adopted during the
first quarter of 1998. The standard establishes guidelines for the
reporting and display of comprehensive income and its components in
financial statements. Comprehensive income includes unrealized gains and
losses on debt and equity securities classified as available-for-sale and
included as a component of stockholders' equity.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles 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.
RECLASSIFICATIONS
Certain prior period amounts have been reclassified to conform to the
current year presentation.
SEGMENT INFORMATION
In fiscal year 1998, the Company adopted 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
Company operates exclusively in the supermarket business in the greater Los
Angeles, California area. Consequently, SFAS 131 does not result in any
additional reporting requirements for the Company.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." This
statement requires that all derivative instruments be recorded on the
balance sheet at their fair value. Changes in the fair value of derivatives
will be recorded each period in current earnings or other comprehensive
income, depending on whether a derivative is designated as part of a hedge
transaction and, if it is, the type of hedge transaction. The new rules
will be effective the first quarter of 2000. The Company does not believe
that the new standard will have a material impact on the Company's
financial statements.
34
<PAGE>
2. Marketable Securities
Marketable securities are carried on the balance sheet at their fair value.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Unrealized
(In Thousands) Cost Gain (Loss) Fair Value
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
As of January 2, 1999:
Available-for-sale securities:
Mutual funds $15,829 $ 625 $16,454
Equity securities 3,000 70 3,070
Debt securities 578 (578)
------- ------- -------
Total $19,407 $ 117 $19,524
------- ------- -------
------- ------- -------
As of January 3, 1998:
Available-for-sale securities:
Mutual funds $14,529 $ 843 $15,372
Equity securities 254 (3) 251
Debt securities 578 (578)
------- ------- -------
Total $15,361 $ 262 $15,623
------- ------- -------
------- ------- -------
</TABLE>
Realized gains/(losses) from sale of securities were ($4,000), $605,000
and $36,000 in 1998, 1997 and 1996, respectively.
3. Accounts and Notes Receivable, Net
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
(In Thousands) January 2, 1999 January 3, 1998
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
Accounts receivable, trade $4,238 $4,600
Notes receivable 392 452
Other accounts receivable 1,385 1,882
------ ------
6,015 6,934
Less: Allowance for doubtful accounts and
notes receivable (561) (624)
------ ------
$5,454 $6,310
------ ------
------ ------
</TABLE>
The provision for doubtful accounts and notes receivable in 1998, 1997 and
1996 was approximately $92,000, $62,000 and $55,000, respectively.
4. Inventories
Inventories valued by the LIFO method ($8,632,000 in 1998, $9,545,000 in
1997 and $9,271,000 in 1996) would have been $2,807,000, $2,570,000 and
$2,394,000 higher at January 2, 1999, January 3, 1998 and December 28,
1996, respectively, if they had been stated at the lower of FIFO cost or
market. The LIFO effect on net income and income per
35
<PAGE>
share in 1998, 1997 and 1996 was a decrease of approximately $143,000
($.04 per share), $105,000 ($.03 per share) and $67,000 ($.02 per
share), respectively.
5. Property, Plant and Equipment, Net
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
(In Thousands) January 2, 1999 January 3, 1998
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Land $ 8,058 $ 7,732
Buildings and improvements 9,637 9,661
Store fixtures and office equipment 21,299 20,565
Transportation equipment 1,544 1,701
Machinery and equipment 789 874
Leasehold improvements 25,186 24,972
Assets under capital leases 3,058 3,058
Assets under construction 1,677 479
-------- --------
71,248 69,042
Accumulated depreciation and amortization (33,489) (29,879)
-------- --------
$37,759 $39,163
-------- --------
-------- --------
</TABLE>
As of January 2, 1999, approximately $8,687,000 of property, plant and
equipment (at cost) was fully depreciated.
6. Other Current Liabilities
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
(In Thousands) January 2, 1999 January 3, 1998
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Compensated absences $ 3,194 $ 3,032
Taxes (including taxes collected from others
of $1,134 and $1,259, respectively) 3,965 3,689
Other 5,666 5,688
--------- ---------
$12,825 $12,409
--------- ---------
--------- ---------
</TABLE>
36
<PAGE>
7. Long-Term Debt
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
Current Non-Current
----------------------------- -----------------------------
January 2, January 3, January 2, January 3,
(In Thousands) 1999 1998 1999 1998
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Notes payable $ 1,050 $ 1,239 $ 2,050 $ 3,062
Obligations under capital
leases 257 230 3,091 3,348
7% Subordinated income
debentures due
September 1, 2014 1,228 1,253
------- ------- ------- -------
$ 1,307 $ 1,469 $ 6,369 $ 7,663
------- ------- ------- -------
------- ------- ------- -------
</TABLE>
At January 2, 1999, the approximate principal payments required on
long-term debt for each fiscal year are as follows (in thousands):
<TABLE>
<S> <C>
1999 $ 1,307
2000 1,338
2001 822
2002 862
2003 405
Thereafter 2,942
----------
$ 7,676
----------
----------
</TABLE>
The Company has a 24 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 .9% and
interest on the term loan at .9% or 1.30% above the bank's 5 year
Treasuries 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 1998 and 1997 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. Both
borrowings are five year, fully amortized notes.
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
37
<PAGE>
sufficient therefore, or at the discretion of the Company, out of
available retained earnings. No accrued interest was in arrears as of
January 2, 1999.
The aggregate fair market value of long-term debt approximates its carrying
value.
8. Capital Stock
A four-for-one stock split of each class of the Company's common stock in
the form of a stock dividend was distributed on July 15, 1998 to holders of
record on June 29, 1998. Stockholders received three additional shares of
Class A common stock ("Class A") for each share of Class A held and three
additional shares of Class B common stock ("Class B") for each share of
Class B held. The stock split allowed the Company to maintain compliance
with the public float requirements for continued listing on the NASDAQ
National Market System. Common stock, capital surplus, and all share and
per share data have been restated to reflect the stock split.
Class A Common Stock: The Company is authorized to issue 10,000,000 shares
of Class A common stock, par value $.25 per share. At January 2, 1999 and
January 3, 1998, shares issued were 3,573,688 including 1,357,200 treasury
shares. In the third quarter of 1997, the Company completed a self-tender
offer by purchasing 212,619 shares (before the stock split) at $65.00 per
share. In 1996, the Company purchased 25,884 shares (before the stock
split) at an average price of $62.29 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 1,500,000 shares
of Class B common stock, par value $.25 per share. At January 2, 1999 and
January 3, 1998 there were 1,368,984 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 1998 or 1997. 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. Stock Options
In 1998, the Company adopted a Non-Officer and Non-Director Stock Option
Plan (the "Stock Option Plan") which provides for the granting of stock
options to key employees to purchase up to 35,000 shares of the Company's
Class A common stock. The objective of this plan is to attract and retain
quality personnel and to promote the success of the Company by providing
employees the opportunity to share in its growth.
As of January 2, 1999, the Company had granted 30,000 stock options at an
exercise price of $40 per share. All of these options vest after the first
year at 25% each year over a four year
38
<PAGE>
period and expire 5 years from the date of grant. The exercise price of
stock options granted under the Stock Option Plan is equal to the fair
market value of the Company's Class A Common Shares on the date of grant.
The Company accounts for its Stock Option Plan using the intrinsic value
based method prescribed in Accounting Principles Board Opinion No. 25 ("APB
25"), "Accounting for Stock Issued to Employees." Accordingly, no
compensation cost has been recognized in the Company's Statement of
Operations and Comprehensive Income for the year ended January 2, 1999.
SFAS 123, "Accounting for Stock-Based Compensation," encourages adoption of
a fair value based method for valuing the cost of stock-based compensation.
However, it allows companies to use the intrinsic value based method
prescribed by APB 25 and disclose pro forma net earnings and earnings per
share in accordance with SFAS 123. Had compensation expense for the
Company's Stock Option Plan been determined under SFAS 123 using the fair
value based method, the Company's pro forma net earnings and net earnings
per share would not have been affected for the fiscal year ended January 2,
1999.
The fair value of options granted during 1998 estimated on the date of
grant using the Black-Scholes option-pricing model was $16.43. The fair
value was calculated using the following assumptions:
Risk-free interest rate 4.9%
Expected dividend yield 0%
Expected option life 4 yrs.
Expected stock price volatility 45.7%
The effects of applying SFAS 123 for the pro forma disclosures are not
necessarily indicative of the effects expected on current or future net
earnings and net earnings per share as the valuations are based on highly
subjective assumptions about the future, including stock price volatility
and exercise patterns.
In 1998, the Company also adopted a Phantom Stock Option Plan (the "Phantom
Plan") which provides for the granting of units covering up to 35,000
shares of the Company's Class A Common Stock to persons who are at the vice
president or higher level of the Company. Each unit entitles the holder to
receive upon exercise thereof the excess of the fair market value of a
share of Class A Common Stock on the date of exercise over the fair market
value of such share on the date specified by the committee administrating
the Phantom Plan at the time of grant. All of the units vest after the
first year at 25% each year over a four year period and expire five years
from the date of grant. During 1998, the Company granted units covering
17,000 shares of Class A Common Stock to certain officers of the Company
exercisable at $40 per share. For the year ended January 2, 1999 the
Company incurred no compensation expense.
10. 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
39
<PAGE>
fund assets as they may be allocable to the participants at January 2,
1999 is not available. The Company's total union pension expense for all
plans for 1998, 1997 and 1996 amounted to $2,127,000, $937,000 and
$906,000, respectively. The Company's 1998 expense is higher due to the
reinstatement in April 1998 of an average monthly union pension
contribution of $275,000 which was not in effect in 1997 or 1996. The
contribution was suspended again in September, but could be reinstated
in 1999.
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 proportions of their salaries to the salaries of all
participants. Contributions accrued for the plan in 1998, 1997 and 1996
were $0, $135,000 and $133,000, respectively.
The Arden Group, Inc. 401(k) Retirement Savings Plan (the "Company Savings
Plan") covers all nonunion 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 ($10,000 in 1998). 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 $7,000 in 1998, $10,000
in 1997 and $8,000 in 1996. An additional discretionary amount of $539,000
was accrued in 1998 and contributed to the plan in early 1999. Similarly,
$406,000 was accrued in 1997 and contributed to the plan in early 1998 and
$263,000 was accrued in 1996 and contributed in early 1997.
An employment agreement with a key executive officer provides for annual
retirement compensation equal to 25% of his average base salary and bonus
earned in the last three years prior to his retirement. The obligation
determined on an actuarial basis is being accrued over the seven year term
of his agreement. In 1998, the Company accrued $226,000 toward this
benefit.
40
<PAGE>
11. Income Taxes
Income (loss) before income taxes and the related income tax expense
(benefit) are as follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
(In Thousands) 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income (loss) before income tax:
Continuing operations $17,095 $14,283 $ 6,601
Discontinued operations (4,340) (761)
------- ------- -------
Total $17,095 $ 9,943 $ 5,840
------- ------- -------
------- ------- -------
Income tax expense (benefit):
Continuing Operations $ 7,014 $ 5,586 $ 2,622
Discontinued operations (1,602) (305)
------- ------- -------
Total $ 7,014 $ 3,984 $ 2,317
------- ------- -------
------- ------- -------
</TABLE>
The composition of federal and state income tax expense (benefit) is as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
(In Thousands) 1998 1997 1996
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current
Federal $6,358 $2,701 $1,222
State 1,521 1,013 517
------ ------ ------
Total 7,879 3,714 1,739
Deferred
Federal (760) 359 553
State (105) (89) 25
------ ------ ------
Total (865) 270 578
------ ------ ------
Total income tax expense $7,014 $3,984 $2,317
------ ------ ------
------ ------ ------
</TABLE>
41
<PAGE>
The Company's deferred income taxes assets (liabilities) were attributable
to the following:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
January 2, January 3,
(In Thousands) 1999 1998
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets
Debt under capital leases $ 1,482 $ 1,547
Book accruals not recognized for tax until paid 1,221 1,117
State tax expense recognized in current period
for books but in following year for tax 532 279
Bad debt allowance not deductible for tax
until year of write-off 246 267
Other 766 622
------- -------
Deferred tax assets $ 4,247 $ 3,832
Deferred tax liabilities
Deferred gain on debenture exchange $(4,416) $(4,480)
Deferred gain on sale of property (250)
Property leased under capital leases, net of
accumulated depreciation (1,002) (1,059)
Other (385) (473)
------- -------
Deferred tax liabilities (5,803) (6,262)
------- -------
Deferred income taxes, net $(1,556) $(2,430)
------- -------
------- -------
</TABLE>
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>
- ----------------------------------------------------------------------------------------------
1998 1997 1996
(In Thousands, Except ------------- ------------- -------------
Percentage Amounts) Amount Rate Amount Rate Amount Rate
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Federal tax at statutory
rate $5,983 35.0% $3,380 34.0% $1,986 34.0%
State income taxes, net of
federal tax benefits 983 5.8% 610 6.1% 354 6.1%
Other 48 .2% (6) (0.1)% (23) (.4%)
-------------- --------------- ---------------
$7,014 41.0% $3,984 40.0% $2,317 39.7%
-------------- --------------- ---------------
-------------- --------------- ---------------
</TABLE>
The California Franchise Tax Board has rendered tax assessments against the
Company. The Company believes the assessments are excessive and filed an
appeal which resulted in a proposed settlement which is in the review
process. The Company believes that any assessment will not be material and
that adequate reserves have been provided for all years.
42
<PAGE>
12. 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 1998, 1997 and 1996 were
$139,000, $107,000 and $110,000, respectively, and accordingly have been
charged to expense as incurred. Following is an analysis of assets under
capital leases:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------
(In Thousands) January 2, 1999 January 3, 1998
- ---------------------------------------------------------------------------------------
<S> <C> <C>
Buildings:
Cost $3,058 $3,058
Accumulated amortization (2,070) (1,957)
------- -------
$ 988 $1,101
------- -------
------- -------
</TABLE>
Also, included in property for sublease are two properties classified as
capital leases with aggregate net book values of $1,297,000 and $1,372,000
as of the end of 1998 and 1997, respectively.
43
<PAGE>
Future minimum lease payments for the above assets under capital leases at
January 2, 1999 are as follows (in thousands):
<TABLE>
<S> <C>
1999 $ 637
2000 637
2001 637
2002 637
2003 637
Thereafter 2,120
-------
Total minimum obligations 5,305
Executory costs (41)
-------
Net minimum obligations 5,264
Interest (1,916)
-------
Present value of net minimum obligations 3,348
Current portions (257)
-------
Long-term obligations $ 3,091
-------
-------
</TABLE>
Minimum capital lease obligations have not been reduced by related minimum
future sublease rentals of $2,318,000.
Executory costs include such items as property taxes and insurance.
Operating Leases and Subleases: Future minimum lease payments for all
noncancelable operating leases having a remaining term in excess of one
year at January 2, 1999 are as follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------
Deduct Net
Sublease Rental
(In Thousands) Commitments Rentals Commitments
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
1999 $ 4,044 $ 469 $ 3,575
2000 4,001 465 3,536
2001 3,860 382 3,478
2002 3,788 330 3,458
2003 3,930 337 3,593
Thereafter 44,258 3,510 40,748
-------- -------- --------
$63,881 $ 5,493 $58,388
-------- -------- --------
-------- -------- --------
</TABLE>
44
<PAGE>
Rent expense under operating leases is as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
(In Thousands) 1998 1997 1996
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Minimum rent $4,776 $4,361 $4,300
Contingent rent 1,222 1,192 972
------- ------- --------
5,998 5,553 5,272
Sublease rentals (1,203) (975) (798)
------- -------- --------
$4,795 $4,578 $4,474
------- -------- --------
------- -------- --------
</TABLE>
13. Related Party Transactions
At January 2, 1999, the Company held two notes receivable with balances
totaling $215,000 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 stockholders' equity.
14. 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 pre-tax earnings. No maximum compensation
limit exists. The compensation expensed in 1998, 1997 and 1996 was
approximately $1,122,000, $1,020,000 and $673,000, 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. The Company
cannot at this time estimate the expense it ultimately may incur in
connection with any current or future violations, however it believes any
such claims 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
45
<PAGE>
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 consolidated financial position.
15. 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.
As the result of an earlier arbitration, the Company 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 the Company. 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.
46
<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 (Loss)
Quarter Sales Profit Income Per Share(2) Loss Per Share Income (Loss) Per Share(2)
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1996
First $60,616 $23,646 $ 134 $ .03 $ 134 $ .03
Second 62,864 24,649 895 .20 895 .20
Third 62,891 24,855 1,485 .33 $ (311) $ ( .07) 1,174 .26
Fourth 65,648 26,017 1,465 .33 (145) ( .03) 1,320 .30
- -------------------------------------------------------------------------------------------------------------------
1997
First $64,961 $25,547 $1,785 $ .40 $(2,695) $ ( .61) $ (910) $ ( .21)
Second 65,360 26,341 2,292 .52 ( 43) ( .01) 2,249 .51
Third 65,897 26,445 2,349 .57 2,349 .57
Fourth (1) 78,136 31,655 2,271 .63 2,271 .63
- -------------------------------------------------------------------------------------------------------------------
1998
First $70,294 $28,214 $2,338 $ .65 $ 2,338 $ .65
Second 72,862 29,608 2,139 .60 2,139 .60
Third 74,120 30,374 2,854 .80 2,854 .80
Fourth 79,211 31,696 2,750 .76 2,750 .76
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
Earnings per share is calculated on the weighted average outstanding shares in
the quarter. All per share data has been restated to reflect the July 15, 1998
stock split.
(1) The fourth quarter of 1997 was a 14 week quarter compared to 13 weeks in
the fourth quarters of 1998 and 1996.
(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.
47
<PAGE>
ARDEN GROUP, INC. AND CONSOLIDATED SUBSIDIARY
-------------------------------------------------------
INDEX TO EXHIBITS
-----------------
EXHIBIT
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.
3.1.1 Restated Certificate of Incorporation of Arden Group, Inc. dated November
7, 1988 filed as Exhibit 3.1 to the Annual Report on Form 10-K of Arden
Group, Inc. for the fiscal year ended December 31, 1988 and incorporated
herein by reference.
3.1.2 Certificate of Amendment of Restated Certificate of Incorporation of
Arden Group, Inc. dated June 17, 1998.
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.
48
<PAGE>
EXHIBIT
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.
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, filed as Exhibit 10.9 to the Annual
Report on Form 10-K of Arden Group, Inc. for the year ended January 3,
1998 and incorporated herein by reference.
49
<PAGE>
EXHIBIT
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, filed as Exhibit 10.10 to the Annual Report on
Form 10-K of Arden Group, Inc. for the year ended January 3, 1998 and
incorporated herein by reference.
10.11* Phantom Stock Plan of Arden Group, Inc.
21. Subsidiaries of Registrant.
23. Consent of Independent Accountants.
27. Financial Data Schedules.
* Indicates management contracts or compensatory plans or arrangements
required to be filed as an exhibit to this report.
50
<PAGE>
EXHIBIT 3.1.2
CERTIFICATE OF AMENDMENT
OF
RESTATED CERTIFICATE OF INCORPORATION
OF
ARDEN GROUP, INC.
Arden Group, Inc., a corporation organized and existing under the General
Corporation Law of the State of Delaware (the "Corporation"), does hereby
certify as follows:
The amendment to the Corporation's Restated Certificate of Incorporation
set forth in the following resolution, which has been approved by the Board of
Directors and stockholders of the Corporation, was duly adopted in accordance
with the provisions of Sections 228 and 242 of the General Corporation Law of
the State of Delaware:
RESOLVED, that the second sentence of Article FOURTH of the
Restated Certificate of Incorporation of this Corporation be amended
to read in its entirety as follows:
"The aggregate number of shares the corporation is authorized to issue
is twelve million (12,000,000), divided into ten million (10,000,000)
shares of Class A Common Stock at a par value of Twenty-Five Cents
($0.25) each, one million five hundred thousand (1,500,000) shares of
Class B Common Stock at a par value of Twenty-Five Cents ($0.25) each,
and five hundred thousand (500,000) shares of Serial Preferred Stock
at a par value of Fifteen Dollars ($15.00) each."
IN WITNESS WHEREOF, this Certificate of Amendment of Restated Certificate
of Incorporation has been executed by its Vice President of Finance and
Administration this 17th day of June, 1998.
ARDEN GROUP, INC.
By: /s/ ERNEST T. KLINGER
---------------------
Ernest T. Klinger,
Vice President
Finance and
Administration
<PAGE>
EXHIBIT 10.11
PHANTOM STOCK PLAN
OF
ARDEN GROUP, INC.
1. PURPOSE
The purpose of this Phantom Stock Plan (the "Plan") of Arden Group,
Inc. (the "Company") is to provide to selected employees of the Company and its
subsidiary corporations, who hold the title of Vice-President or any superior
title of the Company and who are important to the success and the growth of the
business of the Company, with certain benefits and to help retain the services
of such persons. The Plan will provide a means whereby such persons will be
given an opportunity to share in the appreciation of the Common Stock of the
Company.
2. DEFINITIONS
"Act" means the Securities Act of 1933, as amended.
"Board" means the Board of Directors of the Company.
"Committee" means the Compensation Committee of the
Board.
"Company" shall have the meaning set forth in Section 1 hereof.
"Common Stock" means shares of the Company's Class A Common Stock,
$.25 par value.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
-1-
<PAGE>
"Fair Market Value" means (i) if the Common Stock is then listed on a
national securities exchange, the closing sales price of the Common Stock on the
day such value is determined on the principal securities exchange on which such
stock is then listed, or if there is no reported sale on that day, the average
of the bid and asked quotations on such exchange on that day, or (ii) if the
Common Stock is then publicly traded in the National Market System of the NASDAQ
Stock Market, the closing sales price of the Common Stock as reported in the
National Market System of the NASDAQ Stock Market on the day such value is
determined, or if there is no reported sale on that day, the average of the bid
and asked quotations on that day, or (iii) if the Common Stock is then publicly
traded in the over-the-counter market (other than in the National Market System
of the NASDAQ Stock Market), the mean between the closing bid and asked prices
of the Common Stock in the over-the-counter market on the day such value is
determined or, if no shares were traded that day, on the next preceding day on
which there was such a trade, or (iv) if the Common Stock is not then separately
quoted or publicly traded, the fair market value on the date such value is to be
determined, as determined in good faith by the Committee.
"Grantee" means an employee of the Company or its subsidiary
corporations to whom a Unit is granted.
-2-
<PAGE>
"Internal Revenue Code" means the Internal Revenue Code of 1986, as
amended.
"Plan" shall have the meaning set forth in Section 1 hereof.
"Subsidiary corporation" shall have the definition of a subsidiary
corporation contained in section 424 of the Internal Revenue Code.
"Successor" means the legal representative of the estate of a deceased
Grantee or the person or persons who shall acquire the right to receive payment
for a Unit by bequest or inheritance or by reason of the death of the Grantee.
"Term" means the period during which a particular Unit may be
exercised.
"Unit" means the right to receive, on the terms set forth in the Plan
and during the Term and subject to such other limitations and restrictions as
the Committee may set forth in the related Unit Agreement, an amount equal to
the excess of the Fair Market Value of a share of the Common Stock on the date
upon which the Grantee exercises his or her right to receive such payment over
the Fair Market Value of a share of the Common Stock on the date specified by
the Committee at the time of grant of the Unit (the "Base Value").
-3-
<PAGE>
"Unit Agreement" means a written agreement in a form approved by the
Committee to be entered into by the Company and the Grantee.
3. ADMINISTRATION OF THE PLAN
(a) The Plan shall be administered by the Committee.
(b) The Committee shall adopt such rules of procedure as it may deem
proper; provided, however, that it may only take action upon the agreement of a
majority of the whole Committee. Any action which the Committee shall take
through a written instrument signed by all of its members shall be as effective
as though taken at a meeting duly called and held.
(c) The powers of the Committee shall include plenary authority to
interpret the Plan, and, subject to the provisions hereof, to determine when and
to whom Units shall be granted, at the time of grant of a Unit the date upon
which the Base Value is to be determined, the number of Units to be granted
under a Unit Agreement to a specified person and the Term thereof.
(d) The Committee's determinations under the Plan need not be uniform
and may be made by it selectively among persons who receive, or are eligible to
receive, grants under the Plan (whether or not such persons are similarly
situated). Without limiting the generality of the foregoing, the
-4-
<PAGE>
Committee shall be entitled, among other things, to make non-uniform and
selective determinations, and to enter into non-uniform and selective Unit
Agreements as to the persons to receive Units under the Plan.
4. GRANT OF UNITS; NUMBER SUBJECT TO THE PLAN; TERM
(a) The Committee may from time to time grant up to 35,000 Units
under the Plan (subject to adjustment as provided in Section 12 hereof).
(b) The date of grant of any Unit shall be the date specified by the
Committee which date shall not be earlier than the date the Committee action is
final.
(c) Any outstanding Units which shall for any reason be terminated
without exercise shall be restored to the total number of Units available under
the Plan.
(d) No Unit granted hereunder shall be for a Term exceeding five (5)
years.
5. PERSONS ELIGIBLE TO RECEIVE UNITS
Units may be granted under the Plan to selected employees of the
Company who are vice presidents (or a superior officer) of the Company.
Eligibility shall be determined by the Committee and such determination shall be
final and conclusive upon all persons. For purposes of the Plan, the term "vice
president (or superior officer)" includes executive officers of the Company as
defined under the Act or
-5-
<PAGE>
the Exchange Act and vice presidents (or superior officers) of the Company
who are not deemed to be executive officers of the Company under the Act or
the Exchange Act.
6. VESTING OF UNITS
(a) No Units granted under a Unit Agreement pursuant to the Plan
shall vest during the first year from the date the Units were granted;
thereafter Units shall vest as to (i) no more than twenty-five percent (25%) of
the total number of Units subject to the applicable Unit Agreement during the
second year from the date the Units were granted, (ii) no more than fifty
percent (50%) of the total number of Units subject to the applicable Unit
Agreement during the third year from the date the Units were granted, (iii) no
more than seventy-five percent (75%) of the total number of Units subject to the
applicable Unit Agreement during the fourth year from the date the Units were
granted and (iv) all Units subject to the applicable Unit Agreement from and
after the fourth anniversary of the date the Units were granted.
(b) Subsequent to the grant of any Unit, the Committee may
accelerate, at any time before such Unit becomes fully vested, the time or times
at which such Unit may be exercised.
(c) Unless the Committee, in its sole discretion, permits otherwise,
Units granted under the Plan shall be
-6-
<PAGE>
nontransferable other than by will or by the laws of descent and distribution
and a Unit may be exercised during the lifetime of the Grantee only by the
Grantee.
(d) A Unit Agreement may contain such other terms, provisions and
conditions not inconsistent with the Plan as may be determined by the Committee.
7. TERMINATION OF A UNIT
Any Unit granted under the Plan which has not been exercised shall
automatically and without notice terminate and become null and void at the time
of the earliest to occur of the following:
(a) The expiration of five (5) years from the date on which such Unit
was granted;
(b) The expiration of thirty (30) days from the date of termination
(other than a termination described in Section 7(c) or on account of death or
disability, as hereinafter defined, of Grantee while employed by the Company) of
the Grantee's employment with the Company or its subsidiary corporations (or
such shorter period as may be determined by the Committee upon the granting
thereof) or if the Grantee shall die during such thirty-day (or shorter) period,
the expiration of one (1) year (or such shorter period as may be determined by
the Committee upon the granting thereof) following the date of the Grantee's
death; provided that,
-7-
<PAGE>
unless otherwise determined by the Committee upon the granting of such Units,
no additional Units shall vest or become exercisable during the thirty (30)
day (or shorter) or one (1) year (or shorter) period, as the case may be;
(c) Unless otherwise determined by the Committee upon the granting
thereof, the date of termination of the Grantee's employment with the Company or
its subsidiary corporations, if such termination constitutes or is attributable
to a breach by the Grantee of an employment agreement with the Company or its
subsidiary corporations or if the Grantee is discharged for cause (the Committee
shall have the right to determine whether the Grantee has been discharged for
cause and the date of such discharge, such determination of the Committee to be
final and conclusive); and
(d) The expiration of such period of time or the occurrence of such
event as the Committee in its sole discretion may provide upon the granting
thereof.
8. RIGHT TO TERMINATE EMPLOYMENT OR OTHER RELATIONSHIP
Nothing contained in the Plan or in any Unit Agreement shall obligate
the Company or its subsidiary corporations to continue to employ or engage any
employee in such or in any other capacity with the Company or its subsidiary
corporations, nor confer upon any employee, any
-8-
<PAGE>
right to continue in the employ of or in any other capacity with the Company
or its subsidiary corporations, nor limit in any way the right of the Company
or its subsidiary corporations to amend, modify or terminate any person's
compensation or employment agreement, if any, at any time.
9. EXERCISE OF UNITS
A Grantee shall have the right and option to elect to be paid for any
then vested Units at any time or from time to time prior to the termination
thereof by the Grantee timely delivering a written notice signed by the Grantee
to the Company at the Company's principal executive office stating therein that
he or she has elected to exercise such right and option and the number of vested
Units for which the Grantee is electing to be paid. The date of exercise shall
be the date the written notice is received by the Company. The Company shall
thereafter pay such Grantee in complete satisfaction of each Unit with respect
to which such right and option has been exercised an amount equal to: (a) the
Fair Market Value of a share of Common Stock on the date of exercise of such
right and option minus (b) the Base Value. Such payment shall be made to the
Grantee within 30 days after the exercise of such right and option.
-9-
<PAGE>
10. PAYMENT OF UNITS
Upon the termination of the employment of a Grantee due to the death
or disability (within the meaning of Section 22(e)(3) of the Internal Revenue
Code) of such Grantee while employed by the Company, (a) the Company shall pay
such Grantee or his or her Successor, as the case may be, in complete
satisfaction of all fully vested and unexercised Units held by such Grantee on
the date of termination of his or her employment, an amount determined in the
manner set forth in Section 9 as if the Grantee had exercised the right and
option to be paid for all then fully vested and unexercised Units held by such
Grantee on the date of such termination of the employment of such Grantee, and
(b) all other Units held by the Grantee on the date of such termination of
employment of the Grantee shall terminate and shall become null and void. Such
payment shall be made by the Company to the Grantee or his or her Successor, as
the case may be, within thirty (30) days after the date of such termination of
employment. The Committee shall have the right to determine whether the
Grantee's termination is attributable to a disability of the Grantee within the
meaning of Section 22(e)(3) of the Internal Revenue Code, such determination of
the Committee to be final and conclusive.
-10-
<PAGE>
11. STOCKHOLDERS' RIGHTS
No person shall have any rights of a stockholder by virtue of the
grant, vesting or exercise of a Unit.
12. ADJUSTMENTS
In the event that the shares of Common Stock shall be changed into or
exchanged for a different number or kind of shares of stock or other securities
of the Company or of another corporation (whether by reason of merger,
consolidation, recapitalization, reclassification, split-up, combination of
shares, or otherwise) or if the number of such shares of stock shall be
increased solely through the payment of a stock dividend, then there shall be
made an appropriate adjustment in the number of Units then available under the
Plan, in the number of Units then held by each Grantee under the Plan, in the
Base Value (for purposes of Section 9 and Section 10 of all then outstanding
Units) and to the other terms under the Plan or outstanding Unit Agreements as
may be necessary to reflect the foregoing events. In the event there shall be
any other change in the number or kind of the outstanding shares of Common Stock
of the Company, then if the Committee, in its sole discretion, determines that
such change equitably requires an adjustment in any Unit theretofore granted or
which may be granted under the Plan or the terms, such adjustments shall be made
in accordance with such
-11-
<PAGE>
determination. The foregoing adjustments shall be made in a manner that will
cause the relationship between the aggregate appreciation in a share of
Common Stock and the increase in value of each Unit granted hereunder to
remain unchanged as a result of the applicable transaction.
The Committee shall have the power, in the event of any merger or
consolidation of the Company with or into any other corporation, the merger or
consolidation of any other corporation into the Company, or the sale of all or
substantially all of the assets and business of the Company to another
corporation, to amend all outstanding Units so as to provide that (i) all Units
not then fully vested and exercisable shall become fully vested and exercisable
immediately prior to the effectiveness of any such merger, consolidation or sale
of assets and to terminate all Units upon the effectiveness of any such merger,
consolidation or sale of assets, and (ii) upon the effectiveness of any such
merger, consolidation or sale of assets, each Grantee shall be paid the amount
provided in Section 9 above for all unexercised Units then held by him or her in
the manner provided in said Section 9 as if such Grantee had exercised his or
her right and option to be paid for all of such Units on the date of such
effectiveness. In such event, the Company shall give written notice of such
amendment and termination to
-12-
<PAGE>
the Grantees of such Units prior to the effectiveness of any such merger,
consolidation or sale of assets. If the Committee shall exercise such power
and such merger, consolidation or sale of assets is consummated, all Units
then outstanding and subject to such requirement shall be deemed to have been
amended to provide for the vesting thereof prior to the effectiveness of such
merger, consolidation or sale of assets and such Units shall be deemed to be
exercised in full and shall terminate as of such date.
13. WITHHOLDING. The Company shall have the right to deduct from all
amounts payable pursuant to the Plan any taxes required by law to be withheld
with respect to such payment.
14. PLAN UNFUNDED. The Plan at all times shall be entirely unfunded and
no provision shall at any time be made with respect to segregating assets of the
Company for payment of any benefits hereunder. No Grantee or other person shall
have any interest in any particular asset of the Company by reason of the right
to receive a benefit under the Plan and any such Grantee or other person shall
have only the rights of a general unsecured creditor of the Company with respect
to rights under the Plan.
15. TERMINATION, SUSPENSION OR MODIFICATION OF PLAN
The Board may at any time terminate, suspend, or modify the Plan. No
termination, suspension, or modification
-13-
<PAGE>
of the Plan shall adversely affect any right acquired by any Grantee or any
Successor under the terms of a Unit granted before the date of such
termination, suspension, or modification, unless such Grantee or Successor
shall consent; but it shall be conclusively presumed that any adjustment for
changes in capitalization as provided in Section 11 shall not adversely
affect any such right.
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<PAGE>
EXHIBIT 21
SUBSIDIARIES OF REGISTRANT
--------------------------
The following are subsidiaries of the Registrant:
State or Province
of Incorporation
----------------------
Arden-Mayfair, Inc. Delaware
Gelson's Markets California
AMG Holdings, Inc.
(formerly Telautograph Corporation) Virginia
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.
<PAGE>
EXHIBIT 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the Registration Statement of
Arden Group, Inc. on Form S-8 (File No. 333-69787) of our report dated March 12,
1999, on our audits of the consolidated financial statements of Arden Group,
Inc. as of January 2, 1999 and January 3, 1998, and for each of the three fiscal
years in period ended January 2, 1999, which report is included in this Annual
Report on Form 10-K.
PRICEWATERHOUSECOOPERS LLP
Los Angeles, California
March 25, 1999
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