ITEM 1. BUSINESS;
ITEM 2.
ITEM 2. PROPERTIES; AND
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
GENERAL
The Registrant, Arden Group, Inc. (sometimes hereinafter referred to as the "Company"), is a holding company with certain real estate holdings and with 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 known as Telautograph Corporation ("Telautograph"), was engaged primarily in the distribution and servicing in the United States and Canada of facsimile and other communication equipment, and the sale of parts and consumables related thereto. On September 17, 1993, AMG Holdings sold its communication equipment business and substantially all of the operating assets and certain of the liabilities of such business. See "Disposition of Assets of Discontinued Operations" below and Note 15 of Notes to Financial Statements. AMG Holdings' wholly-owned subsidiary, GPS Pool Supply, Inc. ("GPS"), which processes and distributes chemicals and equipment and supplies for the maintenance of swimming pools, was sold on May 27, 1994. See Note 16 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 operates 12 supermarkets in the greater Los Angeles, California area; eight under the name "Gelson's" and four 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 number of private label items. Gelson's is an upscale supermarket chain targeted at both the discriminating and trend-conscious customer, while the Mayfair markets offer a more traditional selection of goods. The Company believes that all of the Gelson's and Mayfair stores are distinguished by their superior customer service and merchandise presentation, selection and quality.
The first Gelson's store was opened in Burbank, California in 1946. Gelson's was incorporated in California in 1959 and in 1965, Gelson's, which then consisted of three stores, was acquired by Arden-Mayfair. Arden-Mayfair became a wholly-owned subsidiary of the Company in a corporate restructuring completed in December 1978.
The Mayfair markets were acquired in 1929 by Arden Farms, a dairy operation founded in 1925. In 1964 and 1965 Arden Farms underwent a corporate restructuring, and the name of the
surviving corporation was changed to Arden-Mayfair, Inc. By the mid-1970's, Arden-Mayfair owned or leased 190 grocery stores located in five states. In the late 1970's and the 1980's, Arden- Mayfair undertook a strategic review of its supermarket operations and began divesting and closing stores, particularly those located outside of the Southern California region. Although the last phase of this plan of divestiture was completed with the closing or sale of six Mayfair markets in 1988, two in 1989 and one in 1992, the Company continues to evaluate each store's operation and financial contribution.
All of the stores currently operated by Gelson's are located in the greater Los Angeles, California area. Management practices and operating philosophies at the remaining Mayfair markets have been shifted towards the Gelson's approach. Two new market locations are planned, one of which is subject to the developer fulfilling certain conditions.
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 and committed base of customers. Central elements of this strategy are as follows:
MERCHANDISE. The merchandise offerings in the Gelson's and Mayfair markets are tailored in response to each store's customer profile, while seeking economic efficiencies through centralized purchasing, marketing and accounting operations. Gelson's stores, which range in size from approximately 29,000 to approximately 37,000 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, 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 items such as imported foods and unusual delicatessen items, and service departments such as seafood, delicatessens, sit-down coffee areas and bakeries. Some Gelson's stores include additional service departments such as flower departments, coffee bars and outside seating areas. The two new stores are planning on offering banking and pharmacy services.
Mayfair stores which, on average, are smaller than Gelson's stores (approximately 18,000 to approximately 26,000 square feet), offer a merchandise selection which is somewhat narrower than at Gelson's. Produce and other perishables are purchased along with Gelson's and therefore are of high quality.
SERVICE. Gelson's emphasizes customer service by operating a variety of departments offering personal service including seafood, delicatessen and bakery departments. Stores are staffed so that even at peak times customer waiting in checkout lines is minimized. In addition to checkers, there are personnel dedicated full-time to bagging and carryout. All employees are encouraged to know customers by name, develop a personal rapport with them and assist them whenever possible. Both Gelson's and Mayfair stores offer their own credit cards to qualified customers as well as allowing customers the option of paying for their purchases with bank credit and debit cards. Stores are typically open as few as 12 hours to as many as 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. Both Gelson's and Mayfair stores are maintained in accordance with extremely high standards. Personnel continuously fill and face shelves. Produce and other perishables are aggressively culled to maintain appearance.
PRICING. The pricing strategy at both Gelson's and Mayfair is to be competitive within their market niches on most products, ranging from the more traditional or commodity in nature to the more exotic, specialty or high-end items.
EXPANSION AND STORE DEVELOPMENT. Management regularly evaluates the feasibility of opening new stores and remodeling existing stores in order to maximize their appeal to consumers and their profit potential. Total capital expenditures for market operations in 1994, including the purchase of two existing Mayfair Market locations, was $6,382,000. This amount also includes remodeling costs, new equipment and leasehold improvements.
ADVERTISING AND PROMOTION. Gelson's advertises only on a limited basis in newspapers and on radio. 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.
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. Competition also exists from many other types of retailers with respect to particular products. Gelson's and Mayfair competes 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 Gelson's and Mayfair store has on-site stockroom capacity, however, the amount of which varies for each store. In addition, Gelson's operates an 89,000 square foot warehouse in the City of Commerce, California, which distributes fresh fruits and vegetables, liquor, and a limited number of grocery, meat and delicatessen items to both Gelson's and Mayfair stores.
The bulk of all merchandise purchasing is accomplished through Gelson's office in Encino, California. Approximately one third of the purchases are executed 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 daily.
The largest supplier for the Gelson's and Mayfair stores is Certified Grocers, a cooperative wholesaler which has been a supplier for over twenty years and which accounted for approximately 22% of Gelson's purchases in 1994. No other supplier accounts for a material percentage of Gelson's purchases. The Company believes that the impact of a loss of Certified Grocers as a supplier for Gelson's likely would be minimized by a combination of events, which could include: (i) purchasing for direct store delivery certain items currently purchased through Gelson's warehouse, thereby freeing warehouse capacity to allow new items to be purchased through that warehouse, and (ii) purchasing certain products through other wholesalers in the area. However, such a loss could have a short term adverse effect on the performance of Gelson's.
EMPLOYEES
Gelson's has approximately 945 full-time and 615 part-time employees. Most store level, warehouse and distribution employees of Gelson's are covered by industry 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 employee relations are good.
In addition, Arden-Mayfair has approximately 65 full-time employees at its executive and headquarters offices of which approximately 61 are in administration and four are in executive officer positions.
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 materially comply with all federal, state and local health, environmental and other laws and regulations. Although the Company cannot predict the effect of future laws or regulations on the operations of Gelson's, expenditures for continued compliance with current laws are not expected to have a material effect on capital expenditures, earnings or Gelson's competitive position.
LEGAL PROCEEDINGS
The Company and certain of its subsidiaries are involved in a number of pending legal and/or administrative proceedings. Such proceedings are not expected individually or in the aggregate to have a material adverse effect upon either the Company's consolidated financial position or results of operations. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." In addition, the Company is involved in arbitration proceedings related to the sale of its communication equipment business in fiscal 1993. See "Disposition of Assets of Discontinued Operations" (Note 15 of Notes to Financial Statements).
PROPERTIES
The Company currently owns three and leases nine of its supermarkets. Also leased is the warehouse and distribution facility which services its markets. Supermarkets are leased for terms which may include options of up to 40 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 21 years. The 12 markets range in size from approximately 18,000 to approximately 37,000 square feet. Gelson's warehouse and distribution facility in the City of Commerce, California, consists of approximately 89,000 square feet. The term of the lease for this facility, including renewal options, expires on September 30, 1995 (recently extended to September 30, 2005).
In November 1993, the Company purchased a neighborhood shopping center in Calabasas, California and plans, in 1995, to develop a new neighborhood shopping center on the site which will include a Gelson's store. In March 1994, the Company purchased the real estate occupied by two of its Mayfair stores. The Company has also signed a long-term lease to open a new Gelson's market subject to the developer fulfilling certain conditions.
The Company also 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 currently vacant. The lease on this property expires in 2012, including renewal options. The Company intends to sublease the property.
BUSINESS OF GPS
The stock of GPS, a wholly-owned subsidiary of AMG Holdings, was sold to Pioneer Chlor Alkali Investments, Inc. ("Pioneer") for $3,515,000 on May 27, 1994, a substantial portion of which was represented by a promissory note of Pioneer. The promissory note was paid in full in March 1995. The Company recognized a pretax gain on the sale of GPS, net of related expenses, of $9,000. GPS processes, manufactures and distributes chemicals, primarily chlorine and acid, manufactures and distributes equipment and supplies for the maintenance of swimming pools and distributes related chemical products to the industrial market. Revenues generated by GPS constituted 1.9% and 4.3% of the Company's total revenue in 1994 and 1993, respectively.
DISPOSITION OF ASSETS OF DISCONTINUED OPERATIONS
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 Telautograph (now known as 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 are subject to adjustment after resolution of disputes which have arisen between AMG Holdings and Purchaser concerning the assets and liabilities transferred to the Purchaser. As a result of an arbitration hearing, in April 1994 the Company was awarded $1,750,000 for parts inventory which was purchased by Purchaser as part of the sale of the Company's communication equipment business in 1993. The valuation of such inventory on the balance sheet at the date of sale had been in dispute. No amount with respect to this inventory had been included in the 1993 gain from the sale of such business. Expenses related to the arbitration have not exceeded and will be netted against the award. Additionally, there is a second arbitration with regard to certain items on the closing balance sheet of the communication equipment business which are being disputed. The Company does not believe adjustments resulting from the second arbitration, if any, will have a material adverse impact on its financial position. However, due to the uncertainty of the outcome of this arbitration, no income or expenses related to the first arbitration award and no expenses related to the second arbitration have been recognized in the 1994 statement of operations of the Company.
Excluded from the assets sold by Telautograph to the Purchaser were, among other items, all the capital stock of GPS, cash and cash equivalents, investments in the Class A Common Stock of the Company, the real property lease at 8700 Bellanca, Los Angeles, California and intercompany accounts.
The results of operations for the communication equipment business of AMG Holdings has been presented separately as discontinued operations.
PART II
ITEM 5.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
(a) The Company's Class A Common Stock is traded over-the- counter in the NASDAQ National Market System. During the past two years, the range of high and low sales prices (not including markups, markdowns or commissions) for each quarterly period was, according to NASDAQ, the following:
There is no established public trading market for the Company's Class B Common Stock, which is subject to various restrictions on transfer.
(b) As of December 31, 1994, there were 1,839 holders of record of the Company's Class A Common Stock, with aggregate holdings of 970,866 shares of Class A Common Stock. This does not include 339,300 shares of the Company's Class A Common Stock which are owned by AMG Holdings. As of the same date, there were 13 holders of record of the Company's Class B Common Stock, with aggregate holdings of 343,246 shares of Class B Common Stock.
(c) No dividends have been paid on either Class A Common Stock or Class B Common Stock during the past three years. Cash or property dividends on Class B Common Stock are restricted to an amount equal to 90% of any dividend paid on Class A Common Stock.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA OF ARDEN GROUP, INC. (in thousands, except per share data and other data)
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
During 1993, the Company sold its communication equipment business. See Note 15 of Notes to Financial Statements for a discussion of the disposition of assets of discontinued operations. The following Management's Discussion and Analysis of Financial Condition and Results of Operations is a discussion of the continuing operations of the Company.
RESULTS OF OPERATIONS
1994 COMPARED TO 1993
During 1994, the Company had net income from continuing operations net of income taxes of $4,849,000 compared to $3,838,000 during 1993. Pretax income from continuing operations was $8,122,000 for 1994 compared to $6,461,000 for 1993.
During 1994, the Company's operating income from its market operations was $8,492,000 compared to $6,243,000 during 1993 representing an increase of approximately 36%. Sales from the Company's 12 supermarkets were $241,587,000 in 1994, an increase of 3.2% from 1993 when sales were $234,209,000. Many supermarket chains operating in Southern California have reported same store sales decreases in 1994 compared to 1993 due to the continuing recession, low levels of inflation and increased competition.
The Company operates supermarkets in the greater Los Angeles area and periodically reviews the operations and contribution of each store as part of the continuing business. The Company is continually searching for additional store locations and is in varying stages of discussions on various new locations. In November 1993, the Company purchased a neighborhood shopping center in Calabasas, California and plans, in 1995, to develop a new neighborhood shopping center on the site which will include a Gelson's market. The Company has also signed a long-term lease to open a new Gelson's market subject to the developer fulfilling certain conditions.
The Company's gross profit from market operations as a percentage of sales was 38.9% in 1994 compared to 38.7% in 1993. Union wage and benefit cost increases was one of the considerations which resulted in the Company increasing its product pricing in 1994 and which also contributed to the increase in operating income.
Delivery, selling, general and administrative ("DSG&A") expenses for the market operations were $85,451,000 in 1994 compared to $84,380,000 in 1993. Expenses as a percentage of sales were 35.4% in 1994 compared to 36.0% in 1993. As a result of negotiations for new collective bargaining agreements completed in 1993 covering retail clerks and meat cutters, Gelson's recognized $2,500,000 and $724,000 in credits in 1994 and 1993, respectively, against health and welfare payments otherwise payable. A charge to operations of $1,300,000 in the first quarter of 1994 for the estimated uninsured portion of losses related to the January 17 earthquake centered in Northridge, California was offset in the fourth quarter of 1994 with the recognition of anticipated earthquake cost recoveries of $1,300,000. Additional recoveries have been claimed and may be realized in 1995. The Company's claim for earthquake damage is being reviewed by the insurer, however, the exact amount of any recoveries is uncertain at this time. In 1994 the Company recognized charges of $1,080,000 to terminate a vacant store lease and to reserve for
the remaining lease costs of two vacant stores located in Arizona. Improved claims history resulted in lower workers' compensation expense in 1994 compared to 1993.
The swimming pool chemical processing and distribution operations, conducted by GPS, posted an operating loss of $187,000 on sales of $4,612,000 prior to the sale of GPS on May 27, 1994. A pretax gain of $9,000 on the sale of GPS stock is recorded as other income and is net of a $144,000 charge to remediate soil contamination at GPS's facility in the City of Industry. This compares to 1993 operating income of $168,000 on sales of $12,703,000.
The Company's interest and dividend income was $3,050,000 in 1994 compared to $1,404,000 for the same period in 1993. This increase in interest income was the result of an increased level of short-term investments and marketable securities and an increase in earnings rates on investments.
Interest expense for the Company was $946,000 in 1994 compared to $1,486,000 for 1993. In 1994, the Company retired approximately $5,310,000 in mortgage debt and reduced capital lease and fixture financing debt by approximately $1,710,000.
In 1994, the market value of the Company's holdings in marketable securities declined. Pursuant to Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities", net unrealized losses of $1,786,000 related to marketable securities were reflected in earnings. Net realized losses on the sale of securities were $663,000 in 1994. No realized or unrealized losses on marketable securities occurred in 1993.
For an analysis of the Company's provision for income taxes, see Note 10 of Notes to Financial Statements. The adoption of Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes", in 1993 did not have a material effect on either the Company's results of operations or financial position.
Net income per share is based on the weighted average number of common shares outstanding during the period. Due to the purchase of Class A shares in 1994 the weighted average number of shares will be reduced in the future resulting in an increase in earnings per share.
1993 COMPARED TO 1992
During 1993, the Company had income from continuing operations of $3,838,000 compared to $3,868,000 during 1992. Pretax income from continuing operations was $6,461,000 compared to pretax income of $6,527,000 for 1992.
During 1993, the Company's operating income from its market operations was $6,243,000 compared to $7,316,000 during 1992. Sales during the 52 week period of 1993 were $234,209,000, a decrease of 1.0% from the 53 week period of 1992 when sales were $236,597,000. In May 1992, the Company sold its Mayfair market located in Malibu, California. On a comparable 52 week basis, same store sales increased 1.9% in 1993 compared to 1992. Many supermarket chains operating in Southern California have reported significant same store sales decreases in 1993 compared to 1992 due to the continuing recession, low levels of inflation and increased competition.
The Company's gross profit from market operations as a percentage of sales was 38.7% in 1993 compared to 38.1% in 1992. Union wage and benefit cost increases was one of the considerations which resulted in an overall increase in product pricing in 1993.
Delivery, selling, general and administrative ("DSG&A") expenses for the market operations were $84,380,000 in 1993 compared to $82,754,000 in 1992. Expenses as a percentage of sales were 36.0% in 1993 compared to 35.0% in 1992. A claim by a union pension plan trustee to satisfy an alleged withdrawal liability associated with Arizona was settled for a lower amount than accrued in 1991 resulting in an expense adjustment reducing DSG&A expense in 1992 by $657,000. Additionally, a pretax gain of $500,000 in 1992 on the sale of the Malibu store fixtures and leasehold interest reduced 1992 DSG&A expense. Increased workers' compensation and general liability insurance expense, union pension costs and bank credit card service fees in 1993 was partially offset by a reduction in union health and welfare expense. As a result of negotiations for new collective bargaining agreements completed in 1993 covering retail clerks and meat cutters, Gelson's took $724,000 in credits against health and welfare payments otherwise payable in 1993.
The swimming pool chemical processing and distribution operations, conducted by GPS, posted operating income of $168,000 in 1993 compared to an operating income of $467,000 for 1992. GPS's sales during the 52 week period of 1993 were $12,703,000, down 7.8% from $13,771,000 in the 53 week period of 1992. On a comparative 52 week basis, sales decreased 6.9% in 1993 compared to 1992. The sales decrease is due, in part, to an increased competitive environment in 1993 compared to 1992. Also, Southern California experienced a cooler spring and summer in 1993 compared to 1992. The pool supply business is strongly affected by seasonal factors, with most sales generated during the spring and summer months.
GPS's gross profit as a percentage of sales was 27.8% for 1993 compared to 27.0% for 1992 due to productivity improvements in its processing operations and lower costs on raw materials used in producing liquid chlorine.
DSG&A expense for GPS was $3,359,000 for 1993, compared to $3,257,000 for 1992. Higher administrative expenses were partially offset by lower warehousing and selling expenses.
Interest and dividend income for the Company was $1,404,000 in 1993 compared to $879,000 for 1992. The increase in interest income was the result of an increased level of short-term investments and marketable securities due to the sale of the Company's communication equipment business, offset partially by a decline in interest rates in 1993 compared to 1992.
Interest expense for the Company was $1,486,000 in 1993 compared to $1,541,000 for 1992. On March 1, 1992 the Company used cash- on-hand to redeem, at face value, all of its 13% Debentures due September 1, 1997. Interest expense relating to the 13% Debentures was $400,000 in 1992. The debenture redemption resulted in an extraordinary loss due to the write-off of the remaining debt discount of $683,000.
LIQUIDITY AND CAPITAL RESOURCES
The Company has an ongoing program to remodel existing supermarket locations and to add new locations, although it has not opened a new store since 1989. In November 1993, the Company purchased a neighborhood shopping center in Calabasas, California and plans, in 1995, to build a new shopping center on the site which will include a Gelson's market. At December 31, 1994, store capital expenditure commitments, including the costs of developing the Calabasas center and fixture costs of the new Calabasas Gelson's store, are approximately $9,000,000, with additional projects anticipated for commencement during 1995.
The Company and its subsidiaries are subject to a myriad of environmental laws and regulations regarding air, water and land use, and the use, storage and disposal of hazardous materials. The Company believes it substantially complies, and has in the past substantially complied, with federal, state, and local environmental laws and regulations. However, three claims have been made against the Company in connection with real properties previously owned or leased by the Company or a subsidiary thereof by the current owner of such properties. In each such instance, the Company has been asked to pay for a portion of the cost of remediation of hazardous substances allegedly existing on such properties. The Company cannot at this time estimate the expenses it ultimately may incur in connection with these claims, however, it believes such expenses will not be of a material amount. Although unexpected violations may occur in the future and although the Company cannot predict the effect of future laws or regulations on the Company's operations, expenditures for continued compliance with current laws are not expected to have a material impact on its capital expenditures, earnings or competitive position.
The Company has a revolving loan agreement with a bank totaling $9,000,000, and a revolving line of credit with another bank in the amount of $3,000,000, none of which had been utilized as of December 31, 1994. The Company's current cash position including marketable securities, the lines of credit and net cash provided by operating activities (approximately $9,000,000 for 1994) are the primary resources of funds available to maintain the Company's current liquidity requirements. See Note 7 of Notes to Financial Statements for a description of the Company's credit lines.
In the first quarter of 1994, the Company used approximately $3,000,000 of cash on hand to purchase the properties upon which two existing Mayfair markets are located. Additionally, the Company paid off at maturity the $634,000 balance of the mortgage on its headquarters facility in Compton. In the second quarter of 1994, the Company used approximately $4,663,000 of cash
on hand to pay off, at maturity, the balance of the mortgage on its Pacific Palisades Gelson's location.
In September 1994, the Company used approximately $14,829,000 to purchase 285,172 shares of its Class A Common Stock. In the fourth quarter, the Company purchased an additional 13,437 shares for approximately $659,000.
The Company's total liabilities to equity ratio improved to .58 at December 31, 1994 compared to .66 at January 1, 1994. The Company's current ratio was 2.53 at December 31, 1994 and 2.61 at January 1, 1994.
The Company's cash position, including marketable securities, at the end of 1994 was $38,941,000 as compared to $62,564,000 at the end of 1993. Cash not required for the immediate needs of the Company has been temporarily invested in high-grade marketable securities. See Note 1 of Notes to Financial Statements. The Company is actively investigating opportunities for the use of these funds, including the expansion of its supermarket operations.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Index to Consolidated Financial Statements, Supporting Schedules and Supplemental Data.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
(a) Identification of Directors
Below is set forth certain information about each of the directors of the Company as of March 10, 1995. Certain of this information has been supplied by the persons shown.
(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.
(b) Identification of Executive Officers
Below is set forth certain information about each of the executive officers of the Company as of March 10, 1995:
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, 2001, 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.
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 December 31, 1994 exceeded in the aggregate $100,000.
Compensation Pursuant to Plans
Due to the sale of the communications business in fiscal 1993, the Telautograph Defined Benefit Retirement Income Plan ("the Plan"), which covered certain eligible nonunion former employees of Telautograph, was terminated and all of the assets of the Plan were distributed to the participants in December 1993. Each Plan participant was given a choice of receiving the distribution in the form of a lump sum payment with a rollover option or an annuity to begin at retirement age (as defined by the Plan). The plan was fully funded at the termination date. The only executive officers of the Company who were entitled to participate in the Plan were Messrs. Briskin and Klinger. As a result of the termination of the Plan, Mr. Briskin elected to receive a joint survivor annuity of $178,092 per year and Mr. Klinger elected a lump sum payment of $172,630.
The compensation of Mr. Bernard Briskin, the Chief Executive Officer of the Company, is established under an Employment Agreement dated May 13, 1988 (the "Employment Agreement") which was amended in April 1994, effective January 1, 1994 (the "Amended Employment Agreement"). The Amended Employment Agreement provides, in pertinent part, that Mr. Briskin will retain the same positions and would become Chairman of the Board not later than January 1, 1995. The term of the Amended Employment Agreement expires January 1, 2001. Effective January 1, 1994, his base salary was increased from $350,000 per year to $440,000 per year. The base salary was increased effective January 1, 1995 to $444,400 and will be increased on January 1 of each succeeding year of the term of the Amended Employment Agreement based upon increases in the Consumer Price Index subject, however to a maximum annual increase. His annual bonus will equal 2-1/2% of the Company's first $2,000,000 of Pre-Tax Profits (as defined in the Amended Employment Agreement) plus 3-1/2% of Pre-Tax Profits in excess of $2,000,000. The Amended Agreement also provides for certain expense reimbursement and personal benefits, including payment or reimbursement for uninsured medical expenses of Mr. Briskin and his immediate family up to a maximum of $100,000 during any calendar year. In addition, if he becomes permanently disabled, dies or his employment is terminated prior to January 1, 2001, the unpaid portion of two notes from Mr. Briskin to the Company in the amounts of $182,143 and $260,357, respectively (see Item 13), will be forgiven. In addition, the maturity dates of the two notes were extended to December 31, 2000 with approximately equal repayments of principal annually prior thereto, plus interest at 6% per annum, which is also payable annually.
Remuneration of Directors
Non-employee directors are compensated for their services as directors at an annual rate of $12,000, plus $750 for each Board meeting attended and $750 for attendance at each committee meeting. Non-employee directors who serve as committee chairmen are entitled to an additional $3,000 per year. Mr. Briskin and Mr. Palmer are employees of the Company and do not receive the compensation otherwise payable to directors.
Compensation Committee Interlocks and Insider Participation
The Board of Directors has a Compensation Committee. In 1994 the Compensation Committee was comprised of the following directors:
Daniel Lembark, Chairman Robert A. Davidow Frederick A. Schnell Ben Winters
ITEM 12.
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 10, 1995 relating to the stockholdings of persons known to the Company to be the beneficial owner of more than 5% of any class of the Company's voting securities: (1)
Except as set forth in the notes to the table, the beneficial owners hold sole investment and voting power with respect to the shares listed in the above table.
(b) Security Ownership of Management
The following table shows, as of March 10, 1995, the beneficial ownership of the Company's equity securities by each director, executive officer and by all directors and executive officers as a group: (1)
ITEM 13.
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. The notes mature on December 31, 2000 with approximately equal repayment of principal annually prior thereto with interest at 6% per annum also payable annually. The cumulative outstanding balance of the two loans as of December 31, 1994 was $442,500.
PART IV
ITEM 14.
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, Supporting Schedules and Supplementary Data
(2) Financial Statement Schedules See Index to Consolidated Financial Statements, Supporting Schedules and Supplementary Data
(3) Exhibits See Index to Exhibits
(b) Reports on Form 8-K
No reports were filed on Form 8-K during the last quarter of the period covered by this report.
(c) Exhibits
See Index to Exhibits
(d) Other Financial Schedules
See Index to Consolidated Financial Statements, Supporting Schedules and Supplementary Data
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.
By BERNARD BRISKIN 3/28/95 --------------------------------------------------- ------- Bernard Briskin, President, Chief Executive Officer Date
By ERNEST T. KLINGER 3/28/95 --------------------------------------------------- ------- Ernest T. Klinger, Vice President Finance and Date Administration and Chief Financial Officer (Principal Financial and Principal Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated. The undersigned have also relied upon the reports of the registrant's independent accountants at page 24.
By BERNARD BRISKIN 3/28/95 --------------------------------------------------- ------- Bernard Briskin, Director and Chairman of the Board Date
By ROBERT A. DAVIDOW 3/28/95 --------------------------------------------------- ------- Robert A. Davidow, Director Date
By STUART A. KRIEGER 3/28/95 --------------------------------------------------- ------- Stuart A. Krieger, Director Date
By DANIEL LEMBARK 3/28/95 --------------------------------------------------- ------- Daniel Lembark, Director Date
By --------------------------------------------------- ------- Curtis H. Palmer, Director Date
By FREDERICK A. SCHNELL 3/28/95 --------------------------------------------------- ------- Frederick A. Schnell, Director Date
By BEN WINTERS 3/28/95 --------------------------------------------------- ------- Ben Winters, Director Date
ARDEN GROUP, INC. AND CONSOLIDATED SUBSIDIARY
INDEX TO FINANCIAL STATEMENTS, SUPPORTING SCHEDULES AND SUPPLEMENTAL DATA _______________ Page
Report of Independent Accountants..................................... 24
Financial Statements: Balance Sheets, December 31, 1994 and January 1, 1994............ 25 Statements of Operations for fiscal years 1994, 1993 and 1992.... 27 Statements of Stockholders' Equity for fiscal years 1994, 1993 and 1992.................................................... 28 Statements of Cash Flows for fiscal years 1994, 1993 and 1992.... 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..................................... 47
Financial Statement Schedule:
VIII Valuation and Qualifying Accounts and Reserves for the...... 48 fiscal years ended December 31, 1994, January 1, 1994 and January 2, 1993
Schedules other than those listed above are omitted because of the absence of the conditions under which they are required.
REPORT OF INDEPENDENT ACCOUNTANTS ____________
To the Stockholders of Arden Group, Inc.
We have audited the consolidated financial statements and the financial statement schedule of Arden Group, Inc. and its subsidiary listed in the index on page 23 of this Form 10-K. These financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Arden Group, Inc. and its subsidiary at December 31, 1994 and January 1, 1994, and the consolidated results of their operations and their cash flows for each of the three fiscal years in the period ended December 31, 1994 in conformity with generally accepted accounting principles. In addition, in our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, present fairly, in all material respects, the information required to be included therein.
As discussed in Note 1 to the consolidated financial statements, the Company changed its method of accounting for certain investments in debt and equity securities in 1994.
COOPERS & LYBRAND L.L.P.
Los Angeles, California March 24, 1995
ARDEN GROUP, INC. AND CONSOLIDATED SUBSIDIARY
BALANCE SHEETS (IN THOUSANDS, EXCEPT PER SHARE DATA)
A S S E T S
The accompanying notes are an integral part of these statements.
LIABILITIES AND STOCKHOLDERS' EQUITY
The accompanying notes are an integral part of these statements.
ARDEN GROUP, INC. and consolidated subsidiary
STATEMENTS OF OPERATIONS (In Thousands, Except Per Share Data)
The accompanying notes are an integral part of these statements.
ARDEN GROUP, INC. and consolidated subsidiary
STATEMENTS OF STOCKHOLDERS' EQUITY (In Thousands)
The accompanying notes are an integral part of these statements.
ARDEN GROUP, INC. and consolidated subsidiary
STATEMENTS OF CASH FLOWS (In Thousands)
The accompanying notes are an integral part of these statements.
Reconciliation of net income to net cash provided by operating activities:
The accompanying notes are an integral part of these statements.
ARDEN GROUP, INC. and consolidated subsidiary
NOTES TO FINANCIAL STATEMENTS _____________
1. Accounting Policies:
The following is a summary of significant accounting policies followed in the preparation of these 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 except for Telautograph Corporation, an indirect wholly-owned subsidiary of the Company ("Telautograph"), which was carried at equity in net assets of discontinued operations through September 17, 1993 when the communications business was sold. Intercompany balances and transactions are eliminated. On May 27, 1994, the Company sold GPS Pool Supply, Inc. ("GPS") (see Note 16). As a result, after the sale of GPS, the Company operates exclusively in the supermarket business.
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 December 31, 1994, January 1, 1994 and January 2, 1993.
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 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 FDIC insurance 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 fixed-income securities having maturities of up to three years, preferred stock, convertible preferred stock, common stock, mortgage backed government securities and collateralized mortgage obligations. Marketable securities are stated at market value. By policy, the Company invests primarily in high-grade marketable securities. All marketable securities are defined as trading securities under the provisions of
Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities" (SFAS 115) and unrealized holding gains and losses are reflected in earnings.
Market value is determined by the most recently traded price of the security at the balance sheet date. Net realized gains or losses are determined on the specific identification cost method.
Prior to December 31, 1994, marketable securities were carried at cost, which approximated market value.
INVENTORIES
The cost of supermarket nonperishable inventories is determined by the retail inventory method using the last-in, first-out (LIFO) method, which is lower than market. Perishable supermarket and other inventories are valued at the lower of cost (first-in/first-out, or average) or market.
PROPERTY FOR RESALE OR SUBLEASE
It is the Company's policy to make available for sale or sublease property considered by management as excess and no longer necessary for the operations of the Company. The aggregate carrying values of such owned property and property under capital leases are periodically reviewed and adjusted downward to market, when appropriate.
PROPERTY, PLANT AND EQUIPMENT
Owned property, plant and equipment is valued at cost. Depreciation is provided on the straight-line method at rates based on the estimated useful lives of individual assets or classes of assets. Improvements to leased properties or fixtures are amortized over the estimated useful life or period of lease, 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 reserves for depreciation of disposed assets are eliminated and any gain or loss on disposition is included in income.
ENVIRONMENTAL COSTS
Costs incurred to investigate and remediate contaminated sites are expensed.
INCOME TAXES
Effective January 3, 1993, the Company changed its method of accounting for income taxes by adopting the provisions of Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109"). The new statement supersedes the Company's previous accounting practice of accounting for income taxes under Accounting Principles Board Opinion No. 11, "Accounting for Income Taxes" ("APB 11"). Under APB 11, deferred income taxes were provided in recognition of timing differences in reporting certain items of income and expense for income tax and financial statement purposes (principally capitalization of costs of inventory, depreciation, lease costs, valuation and self-insurance reserves and gain on debenture exchanges). 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. The adoption of this statement did not have a material effect on either the Company's results of operations or financial position.
NET INCOME PER SHARE
Net income per share is based on the weighted average number of common shares outstanding during the period.
2. Marketable Securities:
As of December 31, 1994:
Investments held at January 1, 1994 were $23,038,000, and were stated at cost, which approximated market value.
3. Notes and Accounts Receivable:
The provision for doubtful notes and accounts receivable in 1994, 1993 and 1992 was approximately $348,000, $560,000 and $190,000, respectively.
4. Inventories:
Inventories valued by the LIFO method ($9,461,000 in 1994, $8,910,000 in 1993, $9,433,000 in 1992) would have been $2,147,000, $2,116,000 and $2,121,000 higher at December 31, 1994, January 1, 1994 and January 2, 1993, respectively, if they had been stated at the lower of FIFO cost or market. The effect on net income and income per share in 1994 was a decrease of approximately $31,000 ($ .02 per share), and in 1993 and 1992 was an increase of approximately $6,000 (no change per share) and $17,000 ($.01 per share), respectively.
5. Property, Plant, Equipment and Accumulated Depreciation:
6. Other Current Liabilities:
7. Long-Term Debt:
At December 31, 1994, the approximate principal payments required on long-term debt for each year are as follows (in thousands):
During 1994 the Company entered into a one year 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. Major provisions of the agreement include interest on the revolving loan at the bank's cost of funds rate plus 1% or at the LIBOR rate plus 1% and 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. There were no amounts borrowed under either of the revolving lines of credit in 1994 or 1993.
Notes and contracts payable: At January 1, 1994 this caption includes $5,309,000 for mortgages on two Company-owned properties. Interest rates were 9% and 9-1/4%, respectively. In 1994, the Company paid the outstanding debt on both of these properties. In 1993, the Company financed $1,021,000 of supermarket equipment with five year, fully amortized notes bearing an average interest rate of 7.5%. The obligations are collateralized by the equipment. The balance of the equipment notes at December 31, 1994 was $801,000.
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 sufficient therefor, or at the discretion of the Company, out of available retained earnings. No accrued interest was in arrears as of December 31, 1994.
In December 1991, the Company elected to redeem at face value all of the issued and outstanding 13% debentures on March 2, 1992. The transaction resulted in an extraordinary loss due to the write-off of the remaining debt discount of $683,000 at March 2, 1992.
8. Capital Stock:
Class A Common Stock: The Company is authorized to issue 5,000,000 shares of Class A common stock, par value $.25 per share. At December 31, 1994 and January 1, 1994, shares issued were 1,310,166 and 1,608,708, respectively, including 339,300 treasury shares at the end of each year. On September 16, 1994 the Company completed a self-tender offer by purchasing 285,172 shares of its Class A common stock at $52 per share in cash. Another 13,440 shares were purchased at various prices, ranging from $48 to $52 per share, and retired during the fourth quarter of 1994. The Class A common stock has one vote per share on all matters on which stockholders are entitled to vote or consent.
Class B Common Stock: The Company is authorized to issue 500,000 shares of Class B common stock, par value $.25 per share. At December 31, 1994 and January 1, 1994 there were 343,246 and 343,316 shares, respectively, 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. The number of shares of Class B common stock converted to Class A common stock were 84 shares in 1991, none in 1992, 100 shares in 1993 and 70 shares in 1994. Cash or property dividends on Class B common stock are restricted to an amount equal to 90% of any dividend paid on Class A common stock.
9. Retirement Plans:
The Company contributes to multi-employer union pension plans administered by various trustees. Contributions to these plans are based upon negotiated wage contracts. These plans may be deemed to be defined benefit plans. Information relating to accumulated benefits and fund assets as they may be allocable to the participants at December 31, 1994 is not available. The Company's total union pension expense for all plans for 1994, 1993 and 1992 amounted to $1,208,000, $1,696,000 and $455,000, respectively. Through all of 1992 and the first part of 1993 the Retail Clerks and Meatcutters Unions contractually suspended employer contributions to their pension plans. Although the contributions were reinstituted in May 1993, they were again suspended as of April 1994, which suspension continued through the remainder of 1994.
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 1994 and 1992 were $328,000 and $383,000, respectively. No contribution was accrued for the plan in 1993.
Effective January 1, 1992, the Company's Board adopted the Arden Group, Inc. 401(k) Retirement Savings Plan (the "Company Savings Plan"). All non-union employees of the Company and its subsidiaries (except employees of Telautograph) who have attained the age of 18 and have completed at least one year of service with any of such companies are entitled to participate in the Company Savings Plan. 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 ($8,994 in 1993). Annual matching contributions are made by the Company in a discretionary amount as determined by the Company each year for those participants whose annualized gross earnings for the previous year were $45,000 or less, and such matching contribution was $10,000 in 1994 and 1993 and $9,000 in 1992. An additional $130,000 was accrued in 1994 to be contributed to the plan in early 1995. Similarly $329,000 was accrued in 1993 and contributed in early 1994.
10. Income Taxes:
Income (loss) before income taxes and the related income tax expense (benefit) are as follows:
The composition of federal and state income tax expense (benefit) is as follows:
The Company's deferred income taxes liabilities (assets) were attributable to the following:
Reconciliation of the statutory federal rate and effective rate is as follows:
11. Leases:
The principal kinds of property leased by the Company and its subsidiaries are supermarket buildings, fixtures and delivery equipment. The most significant obligations assumed under the lease terms, other than rental payments, are the upkeep of the facilities, insurance and property taxes. Most supermarket leases contain contingent rental provisions based on sales volume.
All leases and subleases with an initial term greater than one year are accounted for under Statement of Financial Accounting Standards No. 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 rents associated with capital leases in 1994, 1993 and 1992 were $143,000, $167,000 and $170,000, respectively, and accordingly have been charged to expense as incurred. Following is an analysis of assets under capital leases:
Future minimum lease payments for the above assets under capital leases at December 31, 1994 are as follows:
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 December 31, 1994 are as follows:
Rent expense under operating leases is as follows:
12. Fourth Quarter Adjustments:
The Company recognized in the fourth quarter 1994 insured cost recoveries of $1,300,000 related to the January 17, 1994 earthquake centered in Northridge, California. Additional recoveries have been claimed and may be realized in 1995. The Company's claim for earthquake damage is being reviewed by the insurer, however, the exact amount of any recoveries is uncertain at this time. The Company also recognized fourth quarter charges of $762,000 to reserve for the remaining lease costs of two vacant stores located in Arizona.
13. Related Party Transactions:
A former director of the Company is associated with a law firm that rendered various legal services for the Company. The Company and its subsidiaries paid the firm, during the term of the director, approximately $166,000 and $717,000 during 1993 and 1992, respectively, for legal services.
At January 1, 1994, the Company held three notes receivable for a total of $1,516,250 from an officer/director of the Company. Two 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, are due in full on December 31, 2000 with approximately equal repayment of principal annually prior thereto. If the officer's employment is terminated prior to January 1, 2001, the unpaid portion of the two notes would be forgiven. A third loan for $1,000,000 made to the officer/director in 1992 and related to his exercise in 1991 of 100,000 shares of the Company's Class A common stock, which were granted to him under a stock option, was repaid in 1994. The loans are collateralized by 180,000 shares of Class B common stock. The amount of the receivable is shown on the balance sheets as a reduction in equity, and reflects the above amount discounted for the difference between the face value interest rate and the market rate at the transaction dates.
14. Commitments and Contingent Liabilities:
The Company has an employment agreement with a key executive officer which expires on January 1, 2001. 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 1994, 1993 and 1992 was $730,000, $3,012,000 and $577,000, respectively.
The Company is contingently liable as a guarantor of certain leases which it has either assigned or subleased. Any liability arising as a result of these guarantees would have no significant effect on either the Company's results of operations or consolidated financial position of the Company.
The Company and its subsidiaries are subject to a myriad of environmental laws and regulations regarding air, water and land use, and the use, storage and disposal of hazardous materials. The Company believes it substantially complies, and has in the past substantially complied, with federal, state, and local environmental laws and regulations. However, three claims have been made against the Company in connection with real properties previously owned or leased by the Company or a subsidiary thereof by the current owner of such properties. In each such instance, the Company has been asked to pay for a portion of the cost of remediation of hazardous substances allegedly existing on such properties. The Company cannot at this time estimate the expenses it ultimately may incur in connection with these claims, however, it believes such expenses will not be of a material amount. Although unexpected violations may occur in the future and although the Company cannot predict the effect of future laws or regulations on the Company's operations, expenditures for continued compliance with current laws are not expected to have a material impact on its capital expenditures, earnings or competitive position.
The Company or its subsidiaries are defendants in a number of cases currently in litigation, being vigorously defended, in which the complaints pray for monetary damages. As of the date hereof, no estimate of potential liability, if any, is possible. Based upon current information, management, after consultation with legal counsel defending the Company's interests in the cases, believes the ultimate disposition thereof will have no material effect upon either the Company's results of operations or the consolidated financial position.
15. Disposition of Assets of Discontinued Operations:
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 Telautograph (now known as 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 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 are subject to adjustment after resolution of disputes which have arisen between AMG Holdings and Danka concerning the assets and liabilities transferred to the Purchaser. As a result of an arbitration hearing in April 1994, the Company was awarded $1,750,000 for parts inventory which was purchased by Danka Industries, Inc. as part of the sale of the Company's communication equipment business in 1993. The valuation of such inventory on the balance sheet at the date of sale had been in dispute. No amount with respect to this inventory had been included in the 1993 gain from the sale of such business. Expenses related to the arbitration have not exceeded and will be netted against the award. Additionally, there is a second arbitration with regard to certain items on the closing balance sheet of the communication equipment business which are being disputed. The Company does not believe adjustments resulting from the second arbitration, if any, will have a material adverse impact on its financial position. However, due to the uncertainty of the outcome of this arbitration, no income or expenses from the first arbitration award and no expenses related to the second arbitration have been recognized in the 1994 statement of operations of the Company.
In connection with the transaction, the Purchaser paid severance payments to various employees of Telautograph. Included among these payments was a payment of $100,000 to the Vice President Finance and Administration and Chief Financial Officer of the Company on account of his past services to Telautograph.
Excluded from the assets sold by Telautograph to the Purchaser were, among other items, all the capital stock of GPS, cash and cash equivalents, investments in the Class A common stock of the Company, the real property lease at the headquarters/warehouse facility in Los Angeles, California and intercompany accounts.
As a result of the consummation of this transaction, the previously announced spin-off of the communication equipment business of Telautograph and all the capital stock of GPS to the stockholders of the Company was abandoned.
The results of operations for the communication equipment business of AMG Holdings has been presented separately as discontinued operations and the book value of the Company's net assets in such business is disclosed on the balance sheet on January 2, 1993.
Summarized financial information of the Company's communication equipment business follows:
The increase in income in 1993 compared to 1992 is primarily attributable to a reduction of general and administrative expenses at Telautograph's headquarters office and a $550,000 favorable adjustment to income to correct an overaccrual in pension liability.
The components of the gain on sale of the communication equipment business follows:
16. Sale of GPS:
On May 27, 1994, the Company sold all of the outstanding shares of capital stock of GPS to Pioneer Chlor Alkali Investments, Inc. ("Pioneer") for approximately $3,515,000, of which a substantial portion was represented by a promissory note of Pioneer. The promissory note, secured by the assets of GPS and by a pledge of the GPS stock, was paid in full in March 1995. In 1994, the Company recognized a pretax gain on the sale of GPS stock, net of related expenses, of $9,000.
In addition, the Company recorded additional consideration from Pioneer of $217,000 in 1994 for a covenant not to compete, the amount of which was based on revenue of GPS.
ARDEN GROUP, INC. and consolidated subsidiary
SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) (In Thousands, Except Per Share Data)
ARDEN GROUP, INC. and consolidated subsidiary
SCHEDULE VIII - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES (In Thousands)
ARDEN GROUP, INC. and consolidated subsidiary
INDEX TO EXHIBITS