10-Q 1 arden_10q-092912.htm FORM 10-Q arden_10q-092912.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 
Washington, D.C. 20549
___________________

FORM 10-Q
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended September 29, 2012
 
OR
 
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _______  to  _______

Commission file number 0-9904

ARDEN GROUP, INC.
(Exact name of registrant as specified in its charter)
 
 Delaware    95-3163136
 (State or other jurisdiction of incorporation or organization)    (I.R.S. Employer Identification No.)
 
2020 South Central Avenue, Compton, California  90220
(Address of principal executive offices including zip code)

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

No Change
Former name, former address and former fiscal year, if changed since last report.

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 check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes x No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer o Accelerated filer x Non-accelerated filer o Smaller reporting company o
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). 
Yes ¨ No x
The number of shares outstanding of the registrant’s class of common stock as of November 2, 2012 was:

3,071,000 shares of Class A Common Stock
 
 
 

 

PART I.  FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ARDEN GROUP, INC. AND CONSOLIDATED SUBSIDIARIES
 

 
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
 
(In Thousands, Except Share and Per Share Data)
             
   
September 29,
2012
   
December 31,
2011
 
Assets
           
Current assets:
           
Cash and cash equivalents
  $ 21,742     $ 30,675  
Investments
    54,378       30,413  
Accounts receivable, net of allowance for doubtful accounts, of $208 and $226 as of September 29, 2012 and December 31, 2011, respectively
    4,639       4,908  
Income taxes receivable
    0       1,522  
Inventories, net
    17,081       19,008  
Deferred income taxes
    1,446       1,451  
Other current assets
    3,804       3,147  
Total current assets
    103,090       91,124  
Property, plant and equipment, net
    36,960       37,475  
Deferred income taxes
    3,531       3,531  
Other assets
    2,915       2,933  
Total assets
  $ 146,496     $ 135,063  
                 
Liabilities and Stockholders’ Equity
               
Current liabilities:
               
Accounts payable, trade
  $ 14,466     $ 14,694  
Income taxes payable
    1,945       0  
Other current liabilities
    17,931       16,391  
Total current liabilities
    34,342       31,085  
Long-term debt
    1,228       1,228  
Deferred rent
    5,682       6,287  
Other liabilities
    2,895       4,704  
Total liabilities
    44,147       43,304  
Commitments and contingent liabilities (Note 6)
               
Stockholders’ equity:
               
Common Stock, Class A, $.25 par value; authorized 10,000,000 shares; 3,071,000 shares issued and outstanding as of September 29, 2012 and December 31, 2011, respectively, excluding 1,357,200 treasury shares
    1,107       1,107  
Capital surplus
    5,271       5,271  
Unrealized gain (loss) on investments, net of tax
    1       (6 )
Retained earnings
    99,723       89,140  
      106,102       95,512  
Treasury stock, 1,357,200 shares at cost
    (3,753 )     (3,753 )
Total stockholders’ equity
    102,349       91,759  
Total liabilities and stockholders’ equity
  $ 146,496     $ 135,063  
 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
 
 
1

 
 
ARDEN GROUP, INC. AND CONSOLIDATED SUBSIDIARIES
 

 
CONDENSED CONSOLIDATED STATEMENTS OF
COMPREHENSIVE INCOME
(UNAUDITED)

(In Thousands, Except Share and Per Share Data)
   
Thirteen Weeks Ended
   
Thirty-Nine Weeks Ended
 
   
September 29,
2012
   
October 1,
2011
   
September 29,
2012
     
October 1,
2011
 
Sales
  $ 108,150     $ 104,706     $ 323,076     $ 314,980  
Cost of sales
    66,396       66,049       199,614       196,100  
Gross profit
    41,754       38,657       123,462       118,880  
Selling, general and administrative expenses
    33,207       33,011       99,876       99,727  
Loss from exit activity
    6       0       1,912       0  
Operating income
    8,541       5,646       21,674       19,153  
Interest and dividend income
    47       42       138       88  
Interest expense
    (22 )     (14 )     (65 )     (57 )
Other income (expense), net
    0       0       0       2,207  
Income before income taxes
    8,566       5,674       21,747       21,391  
Income tax provision
    3,491       2,313       8,861       8,717  
Net income
  $ 5,075     $ 3,361     $ 12,886     $ 12,674  
                                 
Other comprehensive gain (loss), net of tax:
                               
Net unrealized holding gain (loss) from available-for-sale securities, net of income tax expense (benefit) of $7 and $5 for 2012 and $4 and $0 for 2011, respectively
    10       7       7       1  
Comprehensive income
  $ 5,085     $ 3,368     $ 12,893     $ 12,675  
                                 
                                 
Basic and diluted net income per common share
  $ 1.65     $ 1.09     $ 4.20     $ 4.09  
Basic and diluted weighted average common shares outstanding
    3,071,000       3,071,000       3,071,000       3,101,693  
 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
 
 
2

 
 
ARDEN GROUP, INC. AND CONSOLIDATED SUBSIDIARIES
 

 
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
 
(In Thousands)
   
Thirty-Nine Weeks Ended
 
   
September 29,
2012
   
October 1,
2011
 
Cash flows from operating activities:
           
Cash received from customers
  $ 323,383     $ 315,379  
Cash paid to suppliers and employees
    (295,045 )     (290,489 )
Interest and dividends received
    367       411  
Interest paid
    (86 )     (86 )
Income taxes paid
    (5,394 )     (10,891 )
Cash paid for exit activity
    (2,243 )     0  
Net cash provided by operating activities
    20,982       14,324  
Cash flows from investing activities:
               
Capital expenditures
    (3,386 )     (2,599 )
Purchases of investments
    (102,516 )     (55,427 )
Sales of investments
    78,266       24,797  
Proceeds from the sale of property, plant and equipment
    24       2,187  
Net cash used in investing activities
    (27,612 )     (31,042 )
Cash flows from financing activities:
               
Purchase and retirement of Company stock
    0       (6,684 )
Cash dividends paid
    (2,303 )     (2,348 )
Net cash used in financing activities
    (2,303 )     (9,032 )
Net decrease in cash and cash equivalents
    (8,933 )     (25,750 )
Cash and cash equivalents at beginning of period
    30,675       52,591  
Cash and cash equivalents at end of period
  $ 21,742     $ 26,841  
 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
 
 
3

 
 
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS, Continued

(In Thousands)
       
   
Thirty-Nine Weeks Ended
 
   
September 29,
2012
   
 October 1,
2011
 
Reconciliation of Net Income to Net Cash Provided by Operating Activities:
           
                 
Net income
  $ 12,886     $ 12,674  
                 
Adjustments to reconcile net income to net cash provided by operating activities:
               
Depreciation and amortization
    3,728       3,722  
Provision for losses on accounts receivable
    31       26  
Net (gain) loss from the disposal of property, plant and equipment
    149       (2,099 )
Realized gain on investments, net
    0       (78 )
Amortization of premium on investments
    297       331  
Stock appreciation rights compensation expense (income)
    (234 )     149  
                 
Change in assets and liabilities net of effects from noncash investing and financing activities:
         
           
(Increase) decrease in assets:
               
Accounts receivable
    238       212  
Inventories
    1,927       1,090  
Other current assets
    (657 )     (780 )
Other assets
    18       39  
                 
Increase (decrease) in liabilities:
               
Accounts payable, trade and other current liabilities
    1,145       1,435  
Income taxes payable
    3,467       (2,174 )
Deferred rent
    (605 )     (49 )
Other liabilities
    (1,408 )     (174 )
                 
Net cash provided by operating activities
  $ 20,982     $ 14,324  
 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
 
 
4

 

ARDEN GROUP, INC. AND CONSOLIDATED SUBSIDIARIES
 

 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

1.       Summary of Significant Accounting Policies

Basis of Presentation and Principles of Consolidation

The condensed consolidated financial statements of Arden Group, Inc. (Company or Arden) include the accounts of the Company and its direct and indirect wholly-owned subsidiaries.  All intercompany accounts and transactions are eliminated in consolidation.  The Company currently operates 17 full-service supermarkets in Southern California through its wholly-owned subsidiary, Gelson’s Markets (Gelson’s) which carries both perishable and other grocery products.

The accompanying condensed consolidated financial statements for the thirteen and thirty-nine weeks ended September 29, 2012 and October 1, 2011 have been prepared in accordance with the instructions to Form 10-Q, Article 10 of Regulation S-X and generally accepted accounting principles in the United States (GAAP) for interim financial information.  These financial statements have not been audited by an independent registered public accounting firm but include all adjustments which, in the opinion of management of the Company, are necessary for a fair statement of the financial position and the results of operations for the periods presented.  Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been omitted pursuant to Securities and Exchange Commission (SEC) regulations.  Accordingly, the accompanying condensed consolidated financial statements should be read in conjunction with the Company’s fiscal 2011 Annual Report on Form 10-K.  The results of operations for the thirty-nine week period ended September 29, 2012 are not necessarily indicative of the results to be expected for the full year ending December 29, 2012.

Revenue Recognition

The Company recognizes revenue at the time of sale.  Revenue is recorded net of sales tax.  Discounts given to customers are recorded at the point of sale as a reduction of revenue.  The Company maintains a bad debt allowance for receivables from vendors and Gelson’s charge card users.  Valuation reserves are adjusted periodically based on historical recovery rates.  The Company records income from licensing arrangements, subleases, leases and finance charges as they are earned.  Income from all licensing arrangements, rental income and finance charges represents less than 1% of sales for all periods presented and, therefore, is not disclosed separately on the Condensed Consolidated Statements of Comprehensive Income.

Cost of Sales

Cost of sales includes product costs (net of discounts and allowances) and inbound freight charges, as well as warehouse, transportation, purchasing, advertising and occupancy costs.  Warehouse and transportation costs include receiving costs, internal transfer costs, labor, building rent, utilities, depreciation, repairs and maintenance and fuel for the Company’s distribution center.  Purchasing costs include both labor and administrative expense associated with the purchase of the Company’s products for resale.  Advertising costs, net of vendor reimbursements, are expensed as incurred.  Occupancy costs consist of rent, common area charges (where applicable), depreciation and utilities related to Gelson’s operations.  The following table summarizes warehouse, transportation, purchasing, advertising, net of vendor reimbursements, and occupancy costs for the thirteen and thirty-nine weeks ended September 29, 2012 and October 1, 2011:

 
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Thirteen Weeks Ended
   
Thirty-Nine Weeks Ended
 
   
September 29,
2012
   
October 1,
2011
    September 29,
2012
    October 1,
2011
 
Warehouse and Transportation
  $ 1,849     $ 1,770     $ 5,301     $ 5,040  
Purchasing
    665       673       2,053       2,030  
Advertising
    386       608       1,372       1,494  
Occupancy
    5,614       5,978       16,215       16,970  
    $ 8,514     $ 9,029     $ 24,941     $ 25,534  
 
Fair Value Measurements

The fair value of the Company’s financial assets and liabilities which are measured on a recurring basis includes Investments which appear under Assets on the Condensed Consolidated Balance Sheets.  As of September 29, 2012 and December 31, 2011, all of the Company’s investments were valued using Level 1 inputs as the investment portfolio consists of investment securities that are actively traded in the marketplace.  Level 1 inputs are based on quoted prices in active markets for identical assets or liabilities.

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

Vendor Allowances

The Company receives a variety of allowances from its vendors whose products are sold in Gelson’s stores.  Typically, the vendors are paying the Company to promote their products.  The promotion may be a temporary price reduction, a feature in a print advertisement or newsletter, placement of the vendor’s product in a preferred location in a store or introduction of a new product.  The promotions range from approximately two weeks to six months and are recognized as a reduction of cost of sales as they are earned.
 
Occasionally, the Company receives allowances in the form of upfront lump-sum payments from vendors.  Under the terms of these long-term agreements (which typically extend for several months or years), the Company earns these allowances as it purchases product from the vendor.  The upfront payments are recorded as a liability when they are received and are recorded as a reduction of inventory cost as the product is purchased.  In the event the Company does not purchase the minimum amount of product specified in the agreement, the upfront payments must be returned on a pro rata basis to the vendor.  If the contract does not specify that the rebate is earned as product is purchased, then the upfront payments are recorded as a liability when received and recognized as a reduction of cost of sales on a pro rata basis as the product is sold.

2.       Multi-Employer Pension and Health Care Plans

The Company contributes to several multi-employer union pension and health care plans, administered by various trustees, in accordance with the provisions of various labor contracts.  Pension and health care costs are generally based on the number of straight-time hours worked and the contribution rate per hour as stipulated in the Company’s various collective bargaining agreements.  Union pension and health care plan expense totaled approximately $5,117,000 and $4,664,000 in the third quarter of 2012 and 2011, respectively.  Contributions were approximately $15,383,000 for the first nine months of 2012 compared to $13,623,000 in the same period of the prior year.

The Arden Group, Inc. 401(k) Retirement Savings Plan (Plan) covers all nonunion employees of the Company and its subsidiaries who have attained the age of 18 and have completed the applicable service requirement. The Plan provides that, with certain limitations, an employee with at least one month of service may elect to contribute up to 100% of such employee’s annual compensation to the Plan up to a maximum of $17,000 in 2012 on a tax-deferred basis, in addition to catch up contributions up to a maximum of $5,500 for employees over the age of 50.  Employees are eligible to participate in the Company’s discretionary contributions beginning on January 1 or July 1 following the completion of one year of service.  The Company accrued $95,000 and $68,000 during the third quarter of 2012 and 2011, respectively, for anticipated contributions.  The Company accrued $281,000 and $249,000 during the first nine months of 2012 and 2011, respectively.
 
 
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3.       Stock Appreciation Rights

The Company has outstanding stock appreciation rights (SARs) that have been granted to non-employee directors and certain employees.  Each SAR entitles the holder to receive cash upon exercise equal to the excess of the fair market value of a share of the Company’s Class A Common Stock (Class A), as determined in accordance with the SARs agreement, on the date of exercise over the grant price.  All currently outstanding SARs vest 25% each year beginning at the end of the third year and expire seven years from the date of grant.

The fair value of each SAR is estimated on the date of grant and, subsequently, at the end of each reporting period using the Black-Scholes option-pricing model which relies on the use of various highly subjective assumptions.  The assumptions used in the Black-Scholes option-pricing model for the third quarter ended September 29, 2012 were as follows:
 
Dividend yield
    .97%   -   1.05%  
Expected volatility
    25.4%   -   35.5%  
Risk-free interest rate
    .3%   -   .6%  
Expected average term (years)
    5.29   -   5.45  
 
SARs compensation expense must be recognized each reporting period for changes in fair value and vesting.  During the third quarter of 2012, the Company recognized $200,000 of SARs compensation expense reflecting an increase in the fair value of SARs during the quarter and additional vesting.  During the third quarter of 2011, the Company reversed $142,000 of SARs compensation expense recognized in prior periods.  SARs compensation expense is recorded in Selling, General and Administrative (SG&A) Expense on the Condensed Consolidated Statements of Comprehensive Income.  During the first nine months of 2012, 7,000 SARs units were forfeited and 1,125 SARs units expired.  No SAR units were exercised during the first nine months of 2012.  As of September 29, 2012, assuming no forfeitures or change in the SARs fair value, there was $570,000 of total unrecognized compensation cost related to SARs which is expected to be recognized over a weighted average period of approximately 3.4 years.  As of September 29, 2012, there were 118,500 SARs units outstanding.

4.       Net Income Per Common Share

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

5.       Exit Activity

Gelson’s closed its store located in Northridge, California after the close of business on February 25, 2012.  Gelson’s decision to close the store was based on the lack of profitability of the Northridge location for the past several years.  Effective March 6, 2012, Gelson’s reached an agreement with the landlord and a third party to assign the lease of the Northridge store to the third party.  Gelson’s rent and all other obligations under the lease agreement ended May 1, 2012.  In accordance with the assignment of the lease, various items of equipment were transferred by Gelson’s to the assignee and Gelson’s paid the assignee a lease assignment fee of $1,850,000 during the second quarter of 2012.  In addition, Gelson’s has incurred other closing costs of approximately $393,000 to transfer excess product and supplies to other Gelson’s locations, to write off product which could not be transferred, to shut down and relocate or write off equipment and to maintain the store until Gelson’s was released from its lease obligation.  All anticipated exit activity costs have been recorded on the Condensed Consolidated Statement of Comprehensive Income for the first nine months of 2012 in the line item titled Loss from Exit Activity and are net of the reversal of a deferred rent liability of $331,000 previously recorded for the Northridge location.
 
 
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6.       Commitments and Contingent Liabilities

The Company and its subsidiaries are subject to a myriad of environmental laws, regulations and lease covenants with its landlords regarding air, water and land use, products for sale, and the use, storage and disposal of hazardous materials.  The Company believes it substantially complies, and has in the past substantially complied, with federal, state and local environmental laws and regulations and private covenants.  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 effect upon either the Company’s consolidated financial position, results of operations or cash flows.

The Company and its subsidiaries are defendants in a number of cases currently in litigation, being vigorously defended, in which the complainants seek monetary damages.  As of the date hereof, no estimate of potential liability, if any, is possible.  Based upon current information, management, after consultation with legal counsel defending the Company’s interests in the cases, believes the ultimate disposition thereof will have no material effect upon either the Company’s consolidated financial position, results of operations or cash flows.

In September 2012, Gelson’s entered into a lease for a supermarket location in Long Beach, California.  The terms of the lease require Gelson’s to extensively remodel the existing store in 2013.

7.       Recent Accounting Standards

In May 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2011-04, “Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and International Financial Reporting Standards (IFRS).”  This pronouncement was issued to provide a consistent definition of fair value and ensure that the fair value measurement and disclosure requirements are similar between U.S. GAAP and IFRS.  ASU 2011-04 changes certain fair value measurement principles and enhances the disclosure requirements particularly for level three fair value measurements.  This pronouncement was effective for reporting periods beginning on or after December 15, 2011.  The adoption of ASU 2011-04 had no impact on the Company’s consolidated financial position or results of operations.

In September 2011, the FASB issued ASU 2011-09, “Compensation – Retirement Benefits – Multiemployer Plans (Subtopic 715-80).”  ASU 2011-09 provides guidance on disclosure requirements for employers participating in multiemployer pension and other postretirement benefit plans to improve transparency and increase awareness of the commitments and risks involved with participation in multiemployer plans.  The new guidance requires employers participating in multiemployer plans to provide additional quantitative and qualitative disclosures to provide users with more detailed information regarding an employer’s involvement in multiemployer plans.  The new guidance was effective for the Company’s fiscal year ended December 31, 2011.  The adoption of ASU 2011-09 did not have an impact on the Company’s consolidated financial position or results of operations.

In December 2011, the FASB issued ASU 2011-12, “Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05.”  The amendments in ASU 2011-12 defer the changes in ASU 2011-05, “Presentation of Comprehensive Income” that relate to the presentation of reclassifications from other comprehensive income to net income.  The Company early adopted ASU 2011-05 using the single statement approach in the second quarter of 2011 on a retrospective basis for all periods presented.  The adoption of ASU 2011-05 had no impact on the Company’s consolidated financial position or results of operations.

 
8

 

8.       Subsequent Events

On October 19, 2012, the Company paid a regular quarterly cash dividend of $0.25 per share on Class A totaling approximately $768,000 to stockholders of record on September 28, 2012.

ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements made by or on behalf of the Company.  Certain statements contained in Management’s Discussion and Analysis of Financial Condition and Results of Operations, other parts of this report and other Company filings are forward-looking statements.  These statements discuss, among other things, future sales, operating results, cash flows and financial condition.  Such statements may be identified by such words as “anticipate,” “expect,” “may,” “believe,” “could,” “estimate,” “project,” “maybe,” “appears,” “intend,” “plan” and similar words or phrases.  Forward-looking statements reflect the Company’s current plans and expectations regarding important risk factors and are based on information currently available to us.  The Company cautions readers that any forward-looking statements contained in this report or made by the management of the Company involve risks and uncertainties, and are subject to change based on various important factors.  In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors,” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011.  The risks described in the Company’s Annual Report on Form 10-K are not the only risks it faces.  Additional risks and uncertainties not currently known to the Company or that it currently deems to be not material could also have an adverse effect on the Company’s future sales, operating results, cash flows or financial position.  The Company does not undertake any obligation to update forward-looking statements.

Critical Accounting Policies

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions about future events that may affect the reported amounts of assets, liabilities, revenues and expenses, as well as the disclosure of contingent assets and liabilities.  Management has established accounting policies that they believe are appropriate in order to reflect the accurate reporting of the Company’s operating results, financial position and cash flows.  The Company applies these accounting policies in a consistent manner.  Management bases their estimates on historical experience, current and expected economic conditions and various other factors that management believes to be reasonable under the circumstances.  These estimates and assumptions form the basis for making judgments about various aspects of the Company’s business, including the carrying values of assets and liabilities that are not readily apparent from other sources.  The Company reevaluates these significant factors and makes adjustments where facts and circumstances dictate.  Future events and their effects cannot be determined with absolute certainty, and therefore actual results may differ from estimates.  As discussed in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2011, management considers its policies on accounting for inventories and cost of sales, impairment of long-lived assets, insurance reserves, vendor allowances and share-based compensation to be the most critical in the preparation of the Company’s financial statements because they involve the most difficult, subjective or complex judgments about the effect of matters that are inherently uncertain.

Overview

Arden is a holding company which conducts operations through its first and second tier wholly-owned subsidiaries, Arden-Mayfair, Inc. and Gelson’s, respectively, as well as owning and managing its own real estate through Mayfair Realty, Inc. which is wholly-owned by the Company and Arden-Mayfair, Inc.  As of December 31, 2011, Gelson’s operated 18 full-service supermarkets in Southern California.  As described below, on February 25, 2012, the Gelson’s store in Northridge was closed, reducing the number of supermarkets operated by Gelson’s to 17.

Gelson’s caters to those customers who expect superior quality, service and merchandise selection.  In addition to the customary supermarket offerings, Gelson’s offers specialty items such as imported foods, unusual delicatessen items, prepared foods and organic and natural food products.  Gelson’s stores include the typical service departments such as meat, seafood, service deli, floral, sushi, cheese and bakery.  In addition, some stores offer further services including fresh pizza, coffee bars, self-service hot and cold food cases, gelato bars and carving carts offering cooked meats.
 
 
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The Company’s management focuses on a number of performance indicators in evaluating financial condition and results of operations.  Same store sales, gross profit and labor costs are some of the key factors that management considers.  Both sales and gross profit are significantly influenced by competition in our trade area.  Gelson’s faces competition from regional and national supermarket chains (most of which have greater resources and a larger market share than Gelson’s), stores specializing in natural and organic foods, specialty and gourmet markets and grocery departments in mass merchandise and club stores.  Weak economic conditions have led to even greater competition in the grocery industry in recent years.  As discretionary income has declined, some consumers have reduced their spending and are making more price conscious decisions which has caused us to compete for fewer customer dollars and offer more promotional discounts as our competitors have also done.

Labor and other related payroll costs are the second largest expense (after product cost) incurred by Gelson’s and thus is a financial measure which is monitored by management.  As of fiscal 2011 year-end, Gelson’s had approximately 1,168 full-time and 966 part-time store, warehouse and office employees.  The majority of Gelson’s employees are members of the United Food & Commercial Workers International Union (UFCW).  Gelson’s current contract with the UFCW, which expires on March 2, 2014, provided for bonuses in lieu of wage increases within 30 days following ratification in October 2011 and again in March 2013 for employees at certain experience levels.  The contract also provided for wage increases for certain classes of employees in March 2012.  The agreement that the three major grocery retailers in our trade area – Vons, Ralphs and Albertsons grocery chains (Majors) – reached with the UFCW provides for hourly wage rates based on job classification and experience that, in some cases, are less than those agreed to by Gelson’s.

The Company contributes to multi-employer health care and pension plan trusts on behalf of its employees who are members of the UFCW.  All employers who participate in the UFCW multi-employer plans are required to contribute at the same hourly rate based on straight-time hours worked in order to fund the plans.  The Company’s health and welfare contribution rate increased effective the beginning of February 2011, September 2011 and March 2012 in accordance with the UFCW collective bargaining agreement.  As a result, average weekly health and welfare expense increased on these dates by approximately $11,000, $28,000 and $15,000, respectively.  An additional health and welfare increase will be effective at the beginning of March 2013.  A one-time surcharge of approximately $136,000 was paid in March 2012 and additional surcharges of $136,000 and $272,000 are also due in March 2013 and February 2014, respectively.  With respect to the pension plan, a rate increase became effective January 2012 resulting in an increase in expense of approximately $5,000 per week.  The increase in health and welfare and pension costs, as well as the labor cost issue discussed above, has negatively impacted the Company’s profitability and will continue to unless the Company is able to continue offsetting the increased expense through a combination of sales growth, increased gross margin, reduced labor hours and cost savings in other areas.  In addition, the most recently available certified zone status provided by the pension plan trust indicates that the pension plan was in critical status (less than 65 percent funded) as defined by the Pension Protection Act of 2006 for the year ended March 31, 2010.  A rehabilitation plan has been implemented by the plan trustee which includes a schedule of benefit cuts and contribution rate increases that allows for projected emergence from critical status at the end of the rehabilitation period on March 31, 2024.  However, if the funded status of the plan deteriorates or if the rehabilitation plan is unsuccessful or if any of the participating employers in the plan withdraws from the plan due to insolvency and is not able to contribute an amount sufficient to cover the underfunded liabilities associated with its participants, the Company may be required to make additional contributions which could also negatively impact the Company’s financial condition and results of operations.

The Company’s current and prior quarterly results have frequently reflected fluctuations in operating income as a result of adjustments recorded to reflect the change in the fair value of SARs that have been granted to non-employee directors and certain employees.  Each SAR entitles the holder to receive cash upon exercise equal to the excess of the fair market value of a share of the Company’s Class A, as determined in accordance with the SARs agreement, on the date of exercise over the grant price.  Fluctuations in the market price of the Company’s Class A impact the recognition or reversal of SARs compensation expense in the period being reported upon.  Since the Company cannot predict future fluctuations in the market price of its stock, it also cannot forecast future SARs compensation expense adjustments and the extent to which operating income will be impacted.  Volatility in the stock market makes this difficult to predict.
 
 
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Gelson’s closed its store located in Northridge, California after the close of business on February 25, 2012.  Gelson’s decision to close the store was based on the lack of profitability of the Northridge location for the past several years.  Effective March 6, 2012, Gelson’s reached an agreement with the landlord and a third party to assign the lease of the Northridge store to the third party.  Gelson’s rent and all other obligations under the lease agreement ended May 1, 2012.  In accordance with the assignment of the lease, various items of equipment were transferred by Gelson’s to the assignee and Gelson’s paid the assignee a lease assignment fee of $1,850,000 during the second quarter of 2012.  In addition, Gelson’s has incurred other closing costs to transfer excess product and supplies to other Gelson’s locations, to write off product which could not be transferred, to shut down and relocate or write off equipment and to maintain the store until Gelson’s was released from its lease obligation.  Other closing costs totaled approximately $393,000.  All anticipated exit activity costs have been recorded on the Condensed Consolidated Statement of Comprehensive Income in the line item titled Loss from Exit Activity and are net of the reversal of a deferred rent liability of $331,000 previously recorded for the Northridge location.

In September 2012, Gelson’s entered into a lease for a supermarket location in Long Beach, California.  Gelson’s is scheduled to take possession of the property on March 1, 2013.  Gelson’s plans to extensively remodel the site and anticipates opening a new Gelson’s supermarket at that location in late 2013.  The development and actual opening of the location, and the costs of remodeling, are subject to necessary governmental approvals among other things.

Results of Operations

Third Quarter Analysis

Same store sales from the Company’s 17 supermarkets (which excludes the Northridge location which was closed February 25, 2012), were $107,189,000 during the third quarter of 2012 compared to $101,288,000 in the third quarter of 2011.  The 5.8% increase in sales is primarily the result of, among other things, an increase in the number of transactions in the third quarter of 2012 compared to the same period of the prior year.  Sales were also somewhat impacted by the shifting of the Yom Kippur holiday which occurred in the third quarter of 2012 versus the fourth quarter of 2011.
 
The Company’s gross profit as a percent of sales was 38.6% in the third quarter of 2012 compared to 36.9% in the same period of 2011.  The increase in gross profit as a percent of sales reflects a reduction in shrink and a change in sales mix towards higher gross margin items partially offset by the impact of an aggressive marketing and retail pricing strategy implemented by the Company in an effort to retain and increase sales.  In calculating gross profit, the Company deducts product costs (net of discounts and allowances) and inbound freight charges, as well as warehouse, transportation, purchasing, advertising and occupancy costs.  Gross profit as a percent of sales for the Company may not be comparable to those of other companies in the grocery industry since there may be differences in recording certain costs as cost of sales or as SG&A expense.

SG&A expense as a percent of sales was 30.7% in the third quarter of 2012 compared to 31.5% in the same period of 2011.  The decrease in SG&A expense as a percent of sales is due to an increase in sales without a comparable increase in expense, as well as the closing of the Northridge location partially offset by an increase in the health and welfare and pension contribution rates as discussed above and an increase in SARs compensation expense.  The Company recorded SARs compensation expense of $200,000 in the third quarter of 2012 as the result of an increase in SARs fair value since the beginning of the quarter and additional vesting.   In comparison, during the third quarter of 2011, the Company reversed $142,000 of SARs compensation expense recognized in prior periods.

Year-To-Date Analysis

Same store sales from the Company’s 17 supermarkets (which excludes the Northridge location which was closed February 25, 2012), were $318,438,000 during the first nine months of 2012.  This represents an increase of 4.5% from the same period of the prior year, when sales were $304,657,000.  The increase in sales is the result of inflation as well as an increase in the number of transactions in the first nine months of 2012 compared to the same period of the prior year.
 
 
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The Company’s gross profit as a percent of sales was 38.2% in the first nine months of 2012 compared to 37.7% in the same period of 2011.  In calculating gross profit, the Company deducts product costs (net of discounts and allowances) and inbound freight charges, as well as warehouse, transportation, purchasing, advertising and occupancy costs.  Gross profit as a percent of sales for the Company may not be comparable to those of other companies in the grocery industry since there may be differences in recording certain costs as cost of sales or as SG&A expense.

SG&A expense, excluding the Loss from Exit Activity discussed above, as a percent of sales was 30.9% in the first nine months of 2012 compared to 31.7% in the same period of 2011.  The decrease in SG&A expense as a percent of sales is due to an increase in sales without a comparable increase in expense, as well as the closing of the Northridge location.  In addition, SARs compensation expense decreased, as the Company reversed SARs compensation expense of $234,000 in the first nine months of 2012 due to a decrease in the fair value of SARs since the beginning of the year partially offset by additional vesting.  In comparison, the Company recognized $149,000 of SARs compensation expense in the first nine months of 2011.  The decrease in SG&A expense as a percent of sales was partially offset by an increase in the health and welfare and pension contribution rates as discussed above.

Other income (expense), during the first nine months of 2011, reflects a gain of approximately $2,129,000 from the sale of an undeveloped parcel of land owned by the Company.

In April 2011, the Company purchased 90,098 shares of its Class A in an unsolicited private transaction which had the effect of reducing weighted average common shares outstanding and increasing basic and diluted net income per common share for the first nine months of 2012 as compared to the first nine months of 2011.

CAPITAL EXPENDITURES/LIQUIDITY

The Company’s current cash position, including short-term investments and net cash provided by operating activities, is the primary source of funds available to meet the Company’s capital expenditure and liquidity requirements.  The Company’s cash position, including short-term investments, at the end of the third quarter of 2012 was $76,120,000.  During the thirty-nine weeks ended September 29, 2012, the Company generated $20,982,000 of cash from operating activities compared to $14,324,000 in the same period of 2011.  The increase in cash from operating activities reflects a decrease in income taxes paid and an increase in operating income partially offset by the cash payout related to the closing of the Northridge location.  Income taxes paid were lower in the first nine months of 2012 compared to the same period of 2011 primarily due to accelerated deductions among other things.

Cash not required for the immediate needs of the Company is temporarily invested in U.S. Treasuries, certificates of deposit, money market funds, commercial paper, mutual funds and corporate and government securities.  The Company is continually investigating opportunities for the use of these funds including new locations and the expansion and remodel of existing stores.  In September 2012, Gelson’s entered into a lease for a Gelson’s supermarket location in Long Beach, California.  Gelson’s plans to extensively remodel the site and anticipates opening a new supermarket at that location in late 2013.

The Company has an unsecured revolving line of credit facility available for standby letters of credit, funding operations and expansion.  The credit agreement provides for borrowings and/or letters of credit up to an aggregate principal amount at any one time of $25,000,000 and expires on June 1, 2014.  There were no outstanding borrowings against the revolving line of credit as of September 29, 2012.  The Company currently maintains four standby letters of credit aggregating $7,644,000 as of October 5, 2012 in connection with lease and self-insurance requirements.
 
 
12

 
 
The following table sets forth the Company’s contractual cash obligations and commercial commitments as of September 29, 2012:
 
   
Contractual Cash Obligations (In Thousands)
 
   
Total
   
Less Than 1 Year
   
1-3 Years
   
4-5 Years
   
After 5 Years
 
7% Subordinated Income Debentures Due September 2014 Including Interest
  $ 1,400     $ 86     $ 1,314     $ 0     $ 0  
Operating Leases
    115,005       10,483       20,837       17,988       65,697  
Total Contractual Cash Obligations (1)
  $ 116,405     $ 10,569     $ 22,151     $ 17,988     $ 65,697  
 
   
Other Commercial Commitments (In Thousands)
 
   
Total
   
Less Than 1 Year
   
1-3 Years
   
4-5 Years
   
After 5 Years
 
Standby Letters of Credit (2)   $ 7,994     $ 7,994     $ 0     $ 0     $ 0  
 
 
(1)
Other Contractual Obligations
 
 
The Company had the following other contractual cash obligations at September 29, 2012.  The Company is unable to include these liabilities in the tabular disclosure of contractual cash obligations as the exact timing and amount of payments are unknown.
 
 
Self-Insurance Reserves
 
The Company is primarily self-insured for losses related to general and auto liability claims and for all open years prior to July 1, 2006 for workers’ compensation.  The Company maintains stop-loss coverage to limit its loss exposure on a per claim basis.  Effective July 1, 2006, the Company purchased a fully insured guaranteed cost workers’ compensation insurance policy for losses occurring after June 30, 2006.  This policy replaced the high deductible program for workers’ compensation.  Liabilities associated with the risks that are retained by the Company under the high deductible programs are estimated, in part, by considering historical claims experience and regression analysis.  Accruals are based on undeveloped reported claims and an estimate of claims incurred but not reported.  While the ultimate amount of claims incurred is dependent on future developments, in management’s opinion recorded reserves are adequate to cover the future payment of claims.  The Company’s reserve for unpaid and incurred but not reported claims at September 29, 2012 was approximately $1,391,000.

 
Property, Plant and Equipment Purchases
 
The Company has an ongoing program to remodel existing supermarkets and to add new stores.  During the first nine months of 2012, capital expenditures were $3,386,000.  As of September 29, 2012, management had authorized expenditures on incomplete projects for the purchase and remodel of property, plant and equipment which totaled approximately $12,075,000 which includes remodeling expenditures required under our lease agreement for the new store in Long Beach, California, as discussed above.

 
(2)
Standby Letters of Credit

 
The Company’s letters of credit renew automatically each year unless the issuer notifies the Company otherwise.  The amount of each outstanding letter of credit held pursuant to the Company’s workers’ compensation and general and auto liability insurance programs is adjusted annually based upon the outstanding claim reserves as of the renewal date.  Each letter of credit obligation related to insurance will cease when all claims for the particular policy year are closed or the Company negotiates a release.  The amount of another letter of credit related to one of the Company’s leases is adjusted periodically in accordance with the lease.

 
13

 
 
The Company has a stock repurchase program, authorized by the Board of Directors, to purchase shares of its Class A in the open market or in private transactions from time to time.  The timing, volume and price of purchases are at the discretion of the management of the Company.  In April 2011, the Company purchased and retired 90,098 shares of its Class A for an aggregate purchase price of approximately $6,684,000 in an unsolicited private transaction.  After taking into account this purchase and purchases in prior years, up to 132,806 shares of Class A remain authorized for repurchase.  No stock was repurchased under this program during the first nine months of 2012.

On October 19, 2012, the Company paid a regular quarterly cash dividend of $0.25 per share of Class A totaling approximately $768,000 to stockholders of record as of September 28, 2012.

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company currently has no outstanding bank debt or fixture financing.  If the Company should borrow in the future, the Company could then be exposed to market risk related to interest fluctuations.

A change in market prices exposes the Company to market risk related to its investments.  As of September 29, 2012, all investments were classified as available-for-sale securities and totaled $54,378,000.  A hypothetical 10% drop in the market value of these investments would result in a $5,438,000 unrealized loss and a corresponding decrease 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 Company sold the investments.

The Company has employed what it believes to be a conservative investment strategy.  The Company chooses what it believes are low risk investments with high credit, quality institutions.

ITEM 4.  CONTROLS AND PROCEDURES

An evaluation was carried out by the Company’s Chief Executive Officer and the Chief Financial Officer of the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) as of September 29, 2012.  Based upon that evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that these disclosure controls and procedures were effective.

Management, with the participation of the Chief Executive Officer and the Chief Financial Officer of the Company, has evaluated any changes in the Company’s internal control over financial reporting that occurred during the most recent fiscal quarter.  Based on that evaluation, management, the Chief Executive Officer and the Chief Financial Officer of the Company have concluded that there has been no change in the Company’s internal control over financial reporting during the Company’s fiscal quarter ended September 29, 2012 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
 
 
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PART II.  OTHER INFORMATION

ITEM 1A.  RISK FACTORS

There have been no material changes in our risk factors from those disclosed in our 2011 Annual Report on Form 10-K.

ITEM 6.  EXHIBITS

3.1.1
Restated Certificate of Incorporation of Arden Group, Inc. dated November 7, 1988, filed as Exhibit 3.1 to the Annual Report on Form 10-K of Arden Group, Inc. for the fiscal year ended December 31, 1988 and incorporated herein by reference.
 
3.1.2
Certificate of Amendment of Restated Certificate of Incorporation of Arden Group, Inc. dated June 17, 1998, filed as Exhibit 3.1.2 to the Annual Report on Form 10-K of Arden Group, Inc. for the fiscal year ended January 2, 1999 and incorporated herein by reference.
 
3.1.3
Certificate of Retirement of Class B Common Stock of Arden Group, Inc. dated August 23, 2012.
 
31.1
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
31.2
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
32.1
Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
32.2
Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
101.INS*
XBRL Instance
 
101.SCH*
XBRL Taxonomy Extension Schema
 
101.CAL*
XBRL Taxonomy Extension Calculation
 
101.DEF*
XBRL Taxonomy Extension Definition
 
101.LAB*
XBRL Taxonomy Extension Labels
 
101.PRE*
XBRL Taxonomy Extension Presentation
 
*
XBRL information is furnished and not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections.
 

SIGNATURES
 
Pursuant to the requirements 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.
 
  Registrant  
     
Date:  November 6, 2012 /s/ Laura J. Neumann  
 
Laura J. Neumann
 
 
Chief Financial Officer
(Authorized Signatory)
 
     

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