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Article by DailyStocks_admin    (04-21-08 09:39 AM)

The Daily Magic Formula Stock for 04/21/2008 is Arden Group Inc. According to the Magic Formula Investing Web Site, the ebit yield is 12% and the EBIT ROIC is >100 %.

Dailystocks.com only deals with facts, not biased journalism. What is a better way than to go to the SEC Filings? It's not exciting reading, but it makes you money. We cut and paste the important information from SEC filings for you to get started on your research on a specific company.


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BUSINESS OVERVIEW

General

The Registrant, Arden Group, Inc. (Company), is a holding company which conducts operations through its wholly-owned subsidiary, Arden-Mayfair, Inc. (Arden-Mayfair) and Arden-Mayfair’s wholly-owned subsidiary, Gelson’s Markets (Gelson’s) which operates supermarkets in Southern California. The Company also owns certain real estate properties through its indirect wholly-owned subsidiary, Mayfair Realty, Inc.

Arden Group, Inc. is headquartered at 2020 South Central Avenue, Compton, California 90220 and its telephone number is (310) 638-2842.

Market Operations

As of December 30, 2006, Gelson’s operated 18 full-service supermarkets in Southern California, which carry both perishable and grocery products, 17 under the name “Gelson’s” and one under the name “Mayfair.” Gelson’s and Mayfair are self-service cash-and-carry markets which offer a broad selection of local and national brands as well as a limited number of private label items. Gelson’s targets the consumer who values superior customer service, merchandise, presentation and selection.

Store Formats and Business Strategy

Gelson’s business strategy is to offer a comfortable upscale shopping experience which is superior to its competitors in terms of customer service and merchandise quality, selection and presentation. The goal of this strategy is to continue to develop and maintain Gelson’s loyal base of customers and appeal to potential new customers. Central elements of this strategy are as follows:

Merchandise The merchandise offerings in the markets are tailored in response to Gelson’s customer profile. Gelson’s stores, which range in size from approximately 18,000 to 40,000 square feet, typically carry a wide range of items, including traditional grocery categories such as dry groceries, produce, meat, seafood, bakery, dairy, wine and liquor, floral, sushi, vitamins, health and natural food products, health and beauty aids and a selection of organic products. Gelson’s perishables are premium products, which are rigorously maintained and culled as appropriate to assure quality and freshness. Gelson’s merchandising emphasizes specialty items such as imported foods and unusual delicatessen items, and items found in service departments such as seafood, sit-down coffee areas, bakeries and service deli. The Mayfair store offers a merchandise selection which is equal in quality to a Gelson’s but is generally less broad.

Service Gelson’s emphasizes customer service by offering a variety of service departments including meat, seafood, delicatessen, floral, sushi and bakery departments. All sushi and most bakery departments are operated by third parties. Some Gelson’s stores include additional service departments such as fresh pizza, coffee bars, gelato bars and carving carts offering cooked meats. Additionally, selected stores offer banking and pharmacy services through third parties. Stores are staffed so that, even at peak times, customer checkout time is minimized. In addition to checkers, there are personnel assigned to bagging and carrying out purchases. All employees are encouraged to know customers by name and assist them whenever possible. All stores offer a Company credit card to qualified customers in addition to the option of paying for their purchases with cash, checks or credit and debit cards. Stores are typically open 14 to 17 hours per day, with hours of operation determined by local code, lease provisions or as appropriate for the business characteristics of each community.

Presentation All stores are maintained in accordance with extremely high standards. Personnel continually fill and face shelves with product. Produce and other perishables are trimmed and culled to maintain quality and appearance.

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

Expansion and Store Development Management regularly evaluates the feasibility of opening new stores in and outside its existing trade areas and remodeling existing stores in order to maximize the existing stores’ appeal to consumers and their profit potential. In 2006, capital expenditures totaled $4,868,000, which included costs of approximately $1,027,000 related to the remodeling and expansion of the Century City store.

Advertising and Promotion Gelson’s advertises in newspapers on a limited basis. Direct advertising is very limited (primarily newsletters and direct mail) and is typically event rather than price oriented, emphasizing, for example, special holiday selections, specialty items, services, recipes and new products. In addition, Gelson’s maintains a website at www.gelsons.com which allows customers to learn more about the Company and to read about food related topics that may be of interest to them. The website also provides an opportunity for customers to request a newsletter, offer feedback and to place catering and holiday meal orders online. The Company reevaluates its strategy regularly in an effort to identify the most effective means of attracting and retaining customers.

Competition

The retail grocery business is highly competitive. Competition in the supermarket business is based upon price, merchandise variety and quality, service and location. The number of stores, market share and brand awareness 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 and grocery departments in mass merchandise and club stores. The stores of the national and regional chains are generally larger than Gelson’s stores which, in some cases, enables them to offer more products. Competition also exists from other types of retailers with respect to particular products. Gelson’s 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.

Certain competitors of the Company offer home delivery, in-store banks and pharmacies in addition to their existing retail store operations. The Company continues to monitor and evaluate opportunities for home delivery, but has elected not to do so at this time. A few of the Company’s stores offer in-store banks and pharmacies; most of the Company’s stores are not large enough for such additional facilities.

Seasonality

Gelson’s business is somewhat seasonal with sales tending to increase during the last quarter of the year due to the holiday season.

Support and Other Services

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

The bulk of all merchandise purchasing takes place at Gelson’s headquarters in Encino, California. Approximately 47% of the purchases for 2006 were distributed through the central warehouse; the remainder was delivered directly to the stores from manufacturers, distributors or wholesalers. The central purchasing and distribution operations are conducted based on electronic in-store ordering systems. Stores can place and receive orders up to six days per week. Perishables are ordered more frequently than other goods.

The largest supplier for the stores is Unified Western Grocers, Inc. (Unified) (formerly Certified Grocers), a grocery wholesale cooperative, which has been a supplier to the Company for approximately thirty-two years and which accounted for approximately 18% of Gelson’s purchases in fiscal 2006. No other supplier accounts for more than 3% of Gelson’s purchases. The Company believes that there would be a negative short-term impact if the Company were to lose Unified as a supplier for Gelson’s, but that such impact would likely be mitigated by a combination of events, which could include: (i) purchasing certain items for direct store delivery, thereby freeing warehouse capacity to allow other items to be purchased through the warehouse and (ii) purchasing certain products through other wholesalers. However, such a loss could have an adverse effect on the performance of Gelson’s.

Employees

Gelson’s had approximately 1,316 full-time and 1,052 part-time store, warehouse and office employees at December 30, 2006. Most Gelson’s employees are covered by union collective bargaining agreements that establish rates of pay, benefits and procedures for the orderly settlement of disputes. In general, these agreements have been negotiated on a local industry-wide basis.

The Company recently completed negotiating a new union contract for its Retail Clerks and Meatcutters with the United Food & Commercial Workers International Union (UFCW) to replace the contract which expired on March 5, 2007. The new contract which expires March 5, 2010 discontinues the use of a two-tier wage structure and provides for, among other things, wage increases and modifications to the pension and health and welfare plans. The Company contributes to multi-employer health care and pension plans for the UFCW, and therefore, the rates paid by all employers participating in the trust funds must be equal. Consequently, the benefit contribution rates that the Company negotiated with the UFCW may change based on the outcome of the union’s negotiations with the three major grocery retailers. The Company’s employees who are members of the UFCW voted to ratify the new contract in a vote held on February 21 and 23, 2007.

In addition to employees at Gelson’s, Arden-Mayfair had approximately 78 full-time and 3 part-time employees at its executive and headquarters offices at December 30, 2006, some of whom are covered by a collective bargaining agreement.

Governmental Regulation

Gelson’s is subject to regulation by a variety of governmental agencies, including the U.S. Food and Drug Administration, the California Department of Alcoholic Beverage Control, and state and local health departments. The Company believes that Gelson’s and Mayfair store operations comply with federal, state and local health, environmental and other laws and regulations. Although the Company cannot predict the effect of future laws or regulations on its operations, expenditures for continued compliance with current laws are not expected to have a material adverse impact on Gelson’s competitive position or the Company’s consolidated financial position, results of operations or cash flows.

Available Information

The Company does not have an internet website to make its filings with the Securities and Exchange Commission (SEC) available. However, it will provide free of charge upon written request to Assistant Secretary, Arden Group, Inc., P.O. Box 512256, Los Angeles, California 90051-0256 paper copies of its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, as soon as reasonably practicable after electronically filing such material with the SEC. This information is also available at www.sec.gov. The reference to this website address does not constitute incorporation by reference of the information contained on the website and should not be considered part of this document.

Item 1A. Risk Factors

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 this Item 1A, Item 7. 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 growth, operating results and financial condition. Forward-looking statements reflect the Company’s current plans and expectations regarding important risk factors and are based on information currently known to the Company.

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. The Company does not undertake any obligation to update forward-looking statements. The factors listed below, among others, could affect the
Company’s financial results and could cause the Company’s financial performance to differ materially from the expectations expressed in any forward-looking statement made by or on behalf of the Company:

Changes in Economic, Political or Social Conditions

Our profitability may be impacted by overall economic conditions, particularly in Southern California. Changes in economic conditions such as inflation, employment levels, interest rates and tax rates may reduce consumer spending or influence our customers to shift their spending to our competitors. In addition, our business may be subject to interruption from acts of terrorism, national emergencies or natural disasters.

Competition in the Grocery Business

The retail grocery business is intensely competitive with respect to price, food quality and selection, service and location. During the past several years, there has been a consolidation in the supermarket industry. We are in direct competition with numerous local outlets of regional and national supermarket chains, independent grocery stores, convenience stores, specialty and gourmet markets and food and grocery departments in mass merchandise and club stores. There are a number of well established competitors with substantially greater financial, marketing, personnel and other resources than ours, some of which are also nonunion. We frequently face the opening of a new or remodeled competitor’s store in our trade area. Competition also requires us to periodically remodel our existing stores, at ever-increasing costs, in order to maintain their appeal. An inability to successfully compete with other grocery retailers in our trade areas could prevent us from increasing or sustaining our revenues and profitability.

Changes in Laws or Regulations or Failure to Comply

We are subject to various federal, state and local laws, regulations and licensing requirements which regulate health and sanitation standards, food labeling and handling, the sale of alcoholic beverages, employment, working conditions, citizenship requirements and public accommodations. Changes to such laws or regulations may adversely affect our profitability by increasing our costs or affecting the sale of certain items. In addition, we must comply with state and local fire, zoning, land use and environmental regulations. Failure to comply with these regulations could adversely affect the operation of our existing stores or could delay or prevent the opening of a new store.

Changes in Accounting Standards, Policies and Practices

The issuance of new pronouncements or changes to existing accounting policies and practices could have a significant impact on our reported results or change the way we account for various transactions. New policies and changes to existing rules may adversely affect our reported financial results.

Availability and Retention of Retail Space

We currently lease the majority of our store locations. Typically, our supermarket leases have initial 20-year lease terms and may include options for up to an additional 20 years. The average term remaining on our supermarket leases, including renewal options, is approximately 21 years.

Our revenues and profitability would be negatively impacted if we are unable to renew these leases at reasonable rates.

Our continued growth depends to a significant degree on our ability to open or acquire new stores in existing and new trade areas and to operate these stores successfully. Our expansion strategy is dependent on finding suitable locations, and we face intense competition from other retailers for such sites. We may not be able to find suitable locations that meet our demographic requirements at a reasonable cost.

The Ability of our Vendors to Supply Products and Services in a Timely Manner

Our business is dependent on our ability to purchase products from a large wholesaler and numerous smaller vendors in a timely manner and at competitive prices. The largest supplier for our stores is Unified, a grocery wholesale cooperative, which has provided product for our stores for thirty-two years. We currently procure approximately 18% of our product from Unified. Any disruption in the business of Unified or any of our other principal suppliers could negatively impact our sales and profitability. Even where we have access to alternative sources of supply, the failure of a supplier to meet our demands may temporarily disrupt store level merchandise selection.

Ability to Control Insurance Coverage Costs and Claims Experience

We use a combination of insurance and self-insurance plans to provide for coverage associated with losses related to workers’ compensation, general and auto liability, property damage, directors and officers liability, fiduciary, employment practices liability, business interruption, crime, earthquake and health care. If insurance costs increase, it could have a negative impact on our profitability if we are not able to offset the effect of such increases with plan modifications, cost control measures, sales increases or by improving our operating efficiency.

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

The Outcome of Current and Future Legal Proceedings

From time to time we are the subject of complaints or litigation from customers alleging injury, food quality or operational concerns. We may be adversely affected by publicity resulting from such allegations, regardless of whether such allegations are valid or whether we are liable. We are also subject to complaints or allegations from former or current employees, claims concerning hazardous substances on our current or previously owned properties, class action suits concerning warning labels and other claims. A lawsuit or claim could result in a decision against us that could have an adverse effect on our business. Additionally, the cost of defending ourselves against lawsuits and claims, regardless of merit, could have a negative impact on our profitability.


Impact of Local Projects in the Vicinity of our Supermarkets

From time to time, local events or projects take place in the vicinity of our stores that may have a negative impact on our sales and profitability. Major road construction on Santa Monica Boulevard near our Century City store began in March 2003 and was completed during the fourth quarter of 2006. At times during the project, construction occured directly in front of, or very close to, the shopping center in which our store is located. This construction, together with a major remodel of the shopping center, resulted in a significant decline in sales and profitability for the store. See Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations for further information.

New Labor Contracts and Labor Stoppages

The majority of our employees belong to unions with which we have signed labor agreements which establish rates of pay, benefits and procedures for the orderly settlement of disputes. In order to continue to attract and retain quality personnel, we may accept terms that increase our operating costs, which in turn, may negatively impact our profitability. If contract negotiations are not successful, the union could vote to strike our stores, distribution center and offices.

The Company recently completed negotiations with the UFCW to renew the contract covering the majority of our employees which expired on March 5, 2007. The new contract discontinues the use of a two-tier wage structure and provides for, among other things, wage increases and modifications to the pension and health and welfare plans. Our new contract expires March 5, 2010.

The UFCW has not yet reached an agreement with the three largest grocery retailers in the Company’s trade area. Their current agreement expires March 5, 2007. If the UFCW is unable to negotiate a new contract with these grocery companies, the union could vote to strike one or more of them. The decision to strike one or more of our competitors could result in a temporary increase in sales and labor and related costs similar to what the Company experienced during the 2003-2004 labor dispute. If the UFCW reaches an agreement with the other participating employers in our trade area under terms that are more favorable to the employers than those agreed to by Gelson’s, this could affect our ability to compete with grocery retailers whose labor costs are less than our own. In addition, if the three major grocery retailers in our trade area agree to the wage rates that Gelson’s has negotiated under its new contract with the UFCW, then Gelson’s has agreed to further increase its hourly wage rate for experienced level employees by an additional $.05 per hour in the second and third years of the new contract. The elimination of the two-tier wage structure and increases in wage and benefit costs provided under the new contract could negatively impact the Company’s profitability unless it is able to offset the increased costs through a combination of sales growth, increased prices, management of labor hours and cost savings in other areas. The Company contributes to multi-employer health care and pension plans for the UFCW, and therefore, the rates paid by all employers participating in the trust funds must be equal. Consequently, the benefit contribution rates that the Company negotiated with the UFCW may change based on the outcome of the union’s negotiations with the three major grocery retailers.

Retention of Key Personnel

Our success is dependent on our key employees. We must continue to attract, retain and motivate a sufficient number of qualified management and operating personnel including the replacement of senior management upon retirement. Individuals of this caliber are historically in short supply and this shortage may limit our ability to hire and retain qualified personnel, and thus, may hinder our ability to operate effectively.

Stock Price Volatility

The market price of our Class A Common Stock (Class A) could be subject to significant fluctuation in response to various market factors and events including general economic and market conditions, variations in our earnings results, publicity regarding us and our competitors and the grocery business in general. The stock market in recent years has experienced extreme price and volume fluctuations that often have been unrelated or disproportionate to the operating performance of companies. Furthermore, there is not a significant volume of trading in our Class A which subjects our stock price to a higher level of volatility and may adversely impact the liquidity of the stock. Under the new congressionally mandated diversification requirements, stock currently held for the benefit of participants in the Company’s Stock Bonus Plan could be sold which may have a negative effect on the price of Class A. Fluctuations in our Class A price also impact compensation expense as it relates to our outstanding stock appreciation rights (SARs). See Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations for further information.

CEO BACKGROUND

Bernard Briskin at the age of 82 is Chairman of the Board of Directors, President and Chief Executive Officer of the Company, and President and Chief Executive Officer of Arden-Mayfair, Inc. and Mayfair Realty, Inc., both subsidiaries of the Company, and Chairman of the Board, President, Chief Executive Officer and Chief Operating Officer of AMG Holdings, Inc. and Chairman of the Board and Chief Executive Officer of Gelson’s Markets, both subsidiaries of Arden-Mayfair, Inc.

Director Since 1970


John G. Danhakl at the age of 51 is Managing Partner, Leonard Green & Partners, L.P. (private equity firm), since March 1995. Managing Director of Donaldson Lufkin Jenrette Securities Corporation from March 1990 to February 1995. Director of Leslie’s Poolmart, Inc., Horseshows in the Sun, Inc. (HITS), The Neiman Marcus Group, Inc., Petco Animal Supplies, Inc., Rite Aid Corporation, Sagittarius Brands, Inc. and The Tire Rack, Inc.

Director Since 1995


Kenneth A. Goldman at the age of 64 is the Attorney and Partner with Reed Smith LLP (law firm) since January 2003, Attorney and Director with Crosby, Heafey, Roach & May, A Professional Corporation from September 2000 to December 2002. For more than five years prior thereto, Attorney and Principal of Sanders, Barnet, Goldman, Simons & Mosk, A Professional Corporation.

Director Since 2001


M. Mark Albert at the age of 45 is the Managing Director of TCW/Crescent Mezzanine (mezzanine firm) since August 2006. Managing Director of Legacy Partners Group, LLC from February 2005 to July 2006. Partner of AV Advisor, LLC from July 2004 to February 2005. Managing Director of CIBC World Markets from March 2002 to June 2004.


Director Since 2007



Robert A. Davidow at the age of 65 is Private investor.

Director Since 1993


Steven Romick at the age of 44 Investment Advisor, Member of First Pacific Advisors, LLC (investment advisors).

Director Since 2003

COMPENSATION

The Company’s Compensation Objectives

The Company’s general objective in setting executive compensation is to meet industry standards of base compensation, while providing an incentive program as part of the overall compensation package to reward named executive officers and other executives who have made a contribution to the Company in the applicable period; to recognize, when applicable, the Company’s financial performance in bonus or other incentive type payments; to reward those named executive officers and others who have performed up to and beyond the Company’s expectations for them; and to attract new executives who have the self-assurance of good job performance to recognize that a part of their overall compensation will be in a discretionary bonus structure.

Elements of the Company’s Compensation Program for Executives

The Company’s compensation packages for its named executives include elements of (1) a base salary; (2) a discretionary or formula bonus; (3) a Company contribution to the employee’s account in the Arden Group, Inc. 401(k) Retirement Savings Plan (401(k) Plan); (4) a medical benefits program; (5) possible participation in the Company’s SARs program; and (6) other minor benefits.

Reasons for Including Each Element of Executive Compensation

It is the Company’s philosophy to reward its named executives at a level commensurate with executives at other companies in the upscale supermarket industry in Southern California including a significant portion of performance-based compensation. All executives other than the Company’s Chief Executive Officer (CEO) are employed on an at-will basis. The CEO is the only executive with an employment agreement as described below.

The Company currently has no stock options outstanding and does not presently plan on granting stock options. Instead, it provides incentives to certain named executive officers and other executives with participation in the Company’s SARs program. Typically, the Company’s CEO or certain other executives will periodically make a request for the Company to consider awarding SARs to certain employees. The request(s) are typically brought before the Board of Directors to consider. In awarding SARs units, the Board takes into account the balance between the executive’s base salary level, past bonuses and the more long-term nature of the SARs program. Overall, the Company believes that the majority of the compensation package should be in current compensation, but that there should be a meaningful level of longer term rewards, such as contributions to the 401(k) Plan and the SARs program. Each case is discussed on a case by case, individual basis. Also taken into account are the executive’s performance, the Company’s performance and any other SARs units the particular executive in question may have. SARs issued to date entitle the holder to receive upon exercise thereof the excess of the fair market value of a share of Class A, as determined in accordance with the SARs agreement, on the date of exercise over the fair market value of such share on the date granted. The SARs vest 25% each year beginning at the end of the first year and expire five years from the date of grant. The CEO has never participated in the SARs program.

Named Executive Officers’ Compensation

Bernard Briskin, Chairman of the Board of Directors, President and CEO of the Company has an employment agreement (Employment Agreement) with the Company dating back to 1988. The term of the Employment Agreement currently expires on January 1, 2009 and is automatically extended for successive periods of one fiscal year unless either the Company and its subsidiaries, which are parties to the Employment Agreement, or Mr. Briskin gives notice of termination no less than fifteen months and no more than eighteen months prior to the date upon which the then current term of the Employment Agreement will expire.

The Employment Agreement presently provides for 2007 base compensation of $647,282 which is adjusted each year based on the increase in the Consumer Price Index, subject to a maximum annual increase of 4%, together with incentive formula based compensation predicated upon the Company’s pre-tax profits. In addition, it provides for participation in the Company’s medical plan, the use of a Company-owned car and an annual uninsured medical expense reimbursement of up to $200,000 for Mr. Briskin and his immediately family. In 2006, Mr. Briskin’s overall compensation was $2,082,516 which included a base salary of $635,837 and incentive formula based compensation of $1,398,088. Accordingly, 67% of Mr. Briskin’s overall compensation is primarily incentive based. Mr. Briskin’s Employment Agreement also provides that at such time as his base salary and bonus cease to accrue under the Employment Agreement for any reason other than his breach of the Employment Agreement or termination of his employment for cause, the Company will thereafter pay him on a monthly basis in arrears, as long as he lives, an amount per annum equal to 25% of his average base salary and bonus earned in the last three full fiscal years prior to the cessation of his employment. The Company would also continue to provide Mr. Briskin during his lifetime with health insurance benefits and an automobile allowance equivalent to that which the Company then grants to its senior executives and an annual uninsured medical expense reimbursement of up to $200,000 for Mr. Briskin and his immediate family. At each time that modifications were made to Mr. Briskin’s Employment Agreement, the Company carefully evaluated the effects of Internal Revenue Code Section 162(m). The terms of the Employment Agreement were subject to review during the 2003 fiscal year by the Compensation Committee of the Board of Directors. During the review, discussions took place between Mr. Briskin and the Committee concerning amendments to certain provisions of the Employment Agreement, but no amendments have yet been effected.

The Company’s other named executive officer, Ms. Laura J. Neumann, received total compensation of $258,387 in 2006, consisting of a base salary of $136,620, a bonus of $25,000, option awards in the form of SARs of $75,647 and other benefits amounting to $21,120. The $75,647 of option awards compensation represents the expense recognized for financial statement reporting purposes with respect to fiscal 2006 for the fair value of SARs granted in previous years in accordance with Statement of Financial Accounting Standards No. (SFAS) 123(R) (revised 2004), “Share-Based Payment.” For information regarding valuation assumptions used, refer to Note 1 of the Arden Group, Inc. financial statements in the Form 10-K for the year ended December 30, 2006, as filed with the SEC. This amount reflects compensation expense recorded in the Company’s financial statements for these awards as a result of an increase in the fair value of the SARs and additional vesting during fiscal 2006, and does not necessarily correspond to the actual value that will be recognized by Ms. Neumann. Ms. Neumann presently holds 1,750 units of SARs which were awarded to her in 2003. No additional units were awarded to her in 2006 and she exercised SARs covering 875 units in 2006.

How Amounts and Formulas are Determined by the Company

Toward the end of each year, the Company’s CEO and certain executives recommend to the Compensation Committee bonuses for each named executive officer (other than the CEO of the Company who is the only executive with an employment agreement) and other executives for the year then being completed and salaries for each for the upcoming year. Those recommendations are then reviewed by the Compensation Committee of the Company’s Board of Directors. In reviewing and finalizing bonuses and salary adjustments, the CEO and the Compensation Committee review individual performance and results, as well as the performance of the Company overall.

MANAGEMENT DISCUSSION FROM LATEST 10K

Overview



Arden is a holding company which conducts operations through its first and second tier wholly-owned subsidiaries, Arden-Mayfair and Gelson’s, respectively. Gelson’s operates 18 full-service supermarkets in Southern California. Gelson’s caters to the upscale customer who expects 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 and organic and natural food products. All Gelson’s stores include the typical service departments such as meat, seafood, delicatessen, floral, sushi, cheese and bakery. In addition, some stores offer further services including fresh pizza, coffee bars, gelato bars and carving carts offering cooked meats.



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 already 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. We anticipate having increased competition from new competitors moving into our trade area. In addition, if the merger trend among our competitors continues, this may impact our ability to compete, as the newly formed larger competitors may possess stronger bargaining power with vendors and suppliers and have greater market recognition among consumers.



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 carefully monitored by management. As of fiscal 2007 year end, Gelson’s had approximately 1,328 full-time and 1,001 part-time store, warehouse and office employees. The majority of Gelson’s employees are members of the UFCW. In February 2007, the Company completed negotiation of a new union contract with the UFCW to replace the contract which expired on March 5, 2007. The three major grocery retailers in our trade area had not reached an agreement by this date. The new Gelson’s contract starts the elimination process of the two-tier wage configuration and returns it to a single wage structure and provides for, among other things, wage increases and modifications to the Company’s pension and health and welfare contribution rates. The Company’s employees who are members of the UFCW voted to ratify the new contract in a vote held on February 21 and 23, 2007. The new contract expires March 5, 2010.



The Company contributes to a multi-employer health care and pension plan trust on behalf of its employees who are members of the UFCW. All employers who participate in a multi-employer plan are required to contribute at the same hourly rate based on straight time hours worked in order to fund the plan. Consequently, the benefit contribution rates that the Company negotiated with the UFCW effective March 2007 were subject to change retroactively based on the outcome of the union’s negotiations with the three major grocery retailers in our trade area which were completed in July 2007. The employees of the three major grocery retailers voted to ratify their contract on July 22, 2007. The new agreement expires March 6, 2011, one year after Gelson’s contract with the UFCW expires. If no extension agreement is reached and Gelson’s contract expires prior to the others’, it is possible that Gelson’s will be required to negotiate separately and suffer a job action if an agreement cannot be reached.



The agreement reached with the UFCW and the three major grocery retailers resulted in a substantial reduction in the average hourly contribution rates for pension and health care. The majority of the reduction relates to the health and welfare fund which, as of the first quarter of 2007, was overfunded in total, for all employers, by approximately $500,000,000. The reduction in the health and welfare contribution rate is expected to substantially reduce the overfunded status of the fund during the term of the new contract between the UFCW and the three major grocery retailers. The change in contribution rates for both pension and health care were retroactive to the beginning of March 2007. The reduction in the contribution rates has and will continue to result in a substantial decrease in the Company’s selling, general and administrative (SG&A) expense when comparing periods covered by the current and the expired contracts.



The agreement that the majors reached with the UFCW also provides for hourly wage rates based on job classification and experience that, in some cases, are less than those agreed to by Gelson’s. This could affect our ability to compete with grocery retailers whose hourly rates are less than our own. Increases in wages provided under the new contract will increase the Company’s payroll costs unless it is able to offset the increased expense through a combination of sales growth, increased gross margin, management of labor hours, decreased labor turnover and cost savings in other areas.



Another component of labor related expense is the cost of workers’ compensation. For claims incurred prior to July 1, 2006, the Company is primarily self-insured through the use of a high deductible policy which provides the Company with stop-loss coverage to limit its exposure on a per claim basis and provides coverage for qualifying costs in excess of per claim limits. Effective July 2006, the Company purchased a one-year fully insured guaranteed cost workers’ compensation insurance policy to replace the high deductible program for losses occurring after June 30, 2006. The guaranteed cost program eliminates the Company’s risk against claims occurring after June 30, 2006 and has resulted in a decrease in workers’ compensation expense. Effective July 2007, the Company entered into another one-year fully insured guaranteed cost workers’ compensation insurance policy at a significantly lower rate compared to the previous policy year which will further reduce SG&A expense through June 30, 2008. The Company continues to maintain an accrual for claims incurred prior to July 2006 under the high deductible program. That accrual is based on both undeveloped reported claims and an estimate of claims incurred but not reported. While the Company devotes substantial time and commitment to maintaining a safe work environment, the ultimate cost of workers’ compensation is highly dependent upon legal and legislative trends, the inflation rate of health care costs and the Company’s ability to manage claims.



In the past, the Company’s quarterly results have reflected significant 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 fair market value of such share on the date granted. Fluctuations in the market price of the Company’s Class A from the end of the previous fiscal year impact the recognition or reversal of SARs compensation expense in the year 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.



Results of Operations



2007 Compared to 2006



Net income in 2007 increased 25.8% to $29,207,000 compared to $23,224,000 during 2006. Operating income increased 23.2% to $45,177,000 in 2007 compared to $36,680,000 in 2006.



Sales from the Company’s 18 supermarkets (all of which are located in Southern California), including revenue from licensing arrangements, subleases, leases and finance charges, were $485,939,000 in 2007. This represents an increase of .7% from 2006, when sales were $482,737,000. The Company has experienced sales growth due to product pricing decisions (primarily due to product cost increases) partially offset by a decrease in customer count. Sales during 2007 were influenced by increased competition in our trade area from new competitors entering our market. In addition, the merger trend amongst our competitors resulted in larger companies that possess stronger market recognition.



The Company’s gross profit as a percent of sales was 38.7% in 2007 compared to 38.6% in 2006. 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 in cost of sales. 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 29.4% in 2007 compared to 31.0% in 2006 . The Company’s provision for all union pension and health care plans decreased 31.4% to $15,120,000 in 2007 compared to $22,032,000 in 2006 due to a reduction in the average hourly contribution rates for pension and health care as discussed above as well as a slight decrease in the number of hours eligible for contributions. Workers’ compensation expense also decreased 39.5% to $2,992,000 in 2007 compared to $4,945,000 in 2006 as discussed above. Finally, lower SARs compensation expense in 2007 compared to the prior year also contributed to the decrease in SG&A expense as a percent of sales. During 2007, the Company recognized $2,908,000 of SARs compensation expense compared to $3,671,000 in 2006. The decrease in SG&A expense was partially offset by an increase in labor costs as a result of the new contract with the UFCW as discussed above.



The Company contributes to several multi-employer union pension and health care plans. Pension and health care payments are determined based on straight-time hours worked and the contribution rate as stipulated in the Company’s various collective bargaining agreements. The Company recognized union pension expense of $5,332,000 in 2007 compared to $6,801,000 in 2006. Union health care expense was $9,788,000 in 2007 compared to $15,231,000 in 2006. C osts decreased due to a reduction in the average hourly contribution rate and the number of hours eligible for contributions as discussed above.



The Company is primarily self-insured for losses related to general and auto liability claims as well as for workers’ compensation in some prior years. The Company has stop-loss insurance coverage to limit its exposure on a per claim basis and is insured for covered costs in excess of per claim limits. Accruals are based on 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 for general and auto liability claims and workers’ compensation are adequate to cover the future payment of claims.



In addition to high deductible coverage for workers’ compensation and general and auto liability claims, the Company also carries property, business interruption, fiduciary, directors and officers, crime, earthquake, special event and employment practices liability insurance. Management believes, based on recent and past experience, that current insurance coverage meets the reasonable requirements of the Company.



Stock-based compensation under the SARs program was previously subject to variable accounting in accordance with Financial Accounting Standards Board Interpretation No. (FIN) 28, “Accounting for Stock Appreciation Rights and Other Variable Stock Option or Award Plans,” an interpretation of Accounting Principles Board Opinion No. (APB) 25, “Accounting for Stock Issued to Employees.” Under FIN 28, compensation expense was recognized as the SARs vested using the graded-vesting method. In addition, changes in the market price of the Company’s Class A impacted the recognition of SARs expense.



Effective January 1, 2006, the Company adopted Statement of Financial Accounting Standards No. (SFAS) 123(R) (revised 2004), “Share-Based Payment,” which requires the measurement and recognition of compensation expense based on the fair value of SARs. The Company adopted SFAS 123(R) using the modified prospective transition method, and therefore prior period results were not restated. As of January 1, 2006, the cumulative effect of adopting SFAS 123(R) resulted in the recognition of $288,000 in compensation expense as well as additional expense of $3,383,000 related to an increase in the fair value of SARs since the end of fiscal 2005 and the additional vesting of SARs. Compensation expense is recorded under SG&A expense on the Consolidated Statements of Operations and Comprehensive Income.



SFAS 123(R) requires the Company to remeasure the fair value of SARs each reporting period until the award is settled. Compensation expense must be recognized each reporting period for changes in fair value and vesting. During 2007, the Company recorded $2,908,000 of compensation expense related to the increase in the fair value of SARs and additional vesting during the period. As of December 29, 2007, assuming no change in the SARs fair value, there was approximately $4,541,000 of total unrecognized compensation cost related to SARs which is
expected to be recognized over a weighted average period of 4.6 years. The total intrinsic value of SARs exercised during 2007 and 2006 was approximately $5,643,000 and $1,305,000, respectively. Intrinsic value represents the amount by which the fair value of SARs on the date of exercise exceeds the grant price.



During 2007, the Company procured approximately 17% of its product through Unified, a grocery wholesale cooperative. As a member-patron, the Company is required to provide Unified with certain minimum deposits and credit in order to purchase product from the cooperative. As of December 29, 2007, the Company had approximately $1,659,000 on deposit with Unified, in addition to approximately $503,000 related to ownership of equity shares in Unified. In 2007 and 2006, the Company recorded approximately $207,000 and $323,000, respectively, in patronage dividend income received in the form of cash and Unified equity shares as a reduction of cost of sales.



Interest and dividend income was $3,340,000 in 2007 compared to $2,560,000 for 2006 primarily due to increased cash levels and higher interest rates in 2007.



SFAS 115, “Accounting for Certain Investments in Debt and Equity Securities,” requires that unrealized holding gains and losses from available-for-sale securities be included as a component of stockholders’ equity. Unrealized gains on investments were $153,000 (net of income tax expense of $106,000) in 2007 compared to unrealized losses of $39,000 (net of income tax benefit of $28,000) in 2006. Management does not believe any of these losses are other-than-temporary.

MANAGEMENT DISCUSSION FOR LATEST QUARTER

Results of Operations

Second Quarter Analysis

Net income in the second quarter of 2007 increased 39.6% to $6,501,000 compared to $4,658,000 during the second quarter of 2006. Operating income increased 38.6% to $10,188,000 in the second quarter of 2007 compared to $7,353,000 in the same period of the prior year.

Same store sales from the Company’s 18 supermarkets (all of which are located in Southern California and were open in both periods presented) in the second quarter of 2007 increased 0.6% compared to sales in the second quarter of 2006. The first quarter of 2007 included Passover sales which occurred in the second quarter of 2006 resulting in a lower year over year increase in same store sales for the second quarter of 2007. The Company does not believe that inflation contributed significantly to the increase in sales.

The Company’s gross profit as a percent of sales was 38.8% in both the second quarter of 2007 and 2006. The Company includes product costs, net of discounts and allowances, and inbound freight charges, as well as warehouse, transportation, purchasing, advertising and occupancy costs in cost of sales, thereby reducing gross profit by these amounts. As discussed under Note 1 of Notes to Condensed Consolidated Financial Statements, the gross profit percentage for 2006 has been revised to reflect the reclassification of certain costs previously recorded under SG&A expense to cost of sales. 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 30.3% in the second quarter of 2007 compared to 32.6% in the same period of the prior year. Labor and other related payroll expense as a percent of sales during the second quarter of 2007 decreased compared to the same period of the prior year due to increased sales dollars which did not require a similar increase in labor hours. However, this decrease was completely offset by an increase in the average rate per hour as a result of the Company’s new UFCW contract which was effective on March 5, 2007 as discussed above.

Workers’ compensation expense decreased 40.0% to $1,038,000 in the second quarter of 2007 compared to $1,730,000 in the second quarter of 2006 contributing to the decrease in SG&A expense as a percent of sales. As discussed above, the savings results from the switch from a high deductible program to a guaranteed cost insurance policy. The Company continues to maintain an accrual for claims incurred prior to July 2006 under the former program which is based on both reported claims and an estimate of claims incurred but not reported. While the Company devotes substantial time and commitment to maintaining a safe work environment, the ultimate cost of workers’ compensation is highly dependent upon legal and legislative trends, the inflation rate of health care costs and the Company’s ability to limit and manage submitted claims.

SG&A expense also decreased due to lower SARs expense in the second quarter of 2007 compared to the prior year. The Company has outstanding SARs that have been granted to non-employee directors and certain employees. During the second quarter of 2007, the Company recognized $433,000 of SARs compensation expense due to an increase in the fair value of SARs since the end of the previous quarter and the additional vesting of SARs. During the second quarter of 2006, the Company recognized $1,832,000 of SARs compensation expense. As of June 30, 2007, assuming no change in the SARs fair value, there was approximately $672,000 of total unrecognized compensation cost related to unvested SARs which is expected to be recognized over a weighted average period of approximately 11 months.

The Company contributes to several multi-employer union pension and health care plans. Pension and health care costs are determined based on total straight-time hours worked and the contribution rate per hour as stipulated in the Company’s various collective bargaining agreements. The Company’s provision for all union pension and health care plans decreased 7.3% to $5,232,000 in the second quarter of 2007 compared to $5,643,000 in the second quarter of 2006 due to a reduction in the average hourly contribution rate and the number of hours eligible for pension and health care contributions.

Interest and dividend income was $809,000 in the second quarter of 2007 compared to $540,000 for the same period in 2006 due to increased cash levels and higher interest rates in 2007.

SFAS 115, “Accounting for Certain Investments in Debt and Equity Securities,” requires that unrealized holding gains and losses from available-for-sale securities be included as a component of stockholders’ equity. Unrealized losses on available-for-sale securities were $101,000 (net of income tax benefit of $70,000) in the second quarter of 2007 compared to unrealized losses of $5,000 (net of income tax benefit of $5) in the second quarter of 2006. As of June 30, 2007, net unrealized losses totaled $327,000 compared to $332,000 as of December 30, 2006. Management does not believe any of these losses are other-than-temporary.

During December 2006, the Company purchased 68,331 shares of Class A Common Stock in unsolicited private transactions with unrelated parties for an aggregate purchase price of approximately $7,518,000. As a result of this purchase, the weighted average shares outstanding of Class A Common Stock used in computing net income per common share was 3,161,098 during the second quarter of 2007 compared to 3,229,429 during the second quarter of 2006 which had the effect of increasing net income per common share on a comparative basis.

Year-To-Date Analysis

Net income in the first six months of 2007 increased 31.2% to $12,967,000 compared to $9,881,000 during the first six months of 2006. Operating income increased 25.6% to $19,814,000 for the first half of 2007 compared to $15,779,000 in the prior year.

Same store sales from the Company’s 18 supermarkets (all of which are located in Southern California and were open in both periods presented) in the first six months of 2007 increased 1.3% compared to sales in the first six months of 2006. The Company does not believe that inflation contributed significantly to the increase in sales.

The Company’s gross profit as a percent of sales was 39.0% in the first half of 2007 compared to 38.7% in the same period of 2006. The Company includes product costs, net of discounts and allowances, and inbound freight charges, as well as warehouse, transportation, purchasing, advertising and occupancy costs in cost of sales, thereby reducing gross profit by these amounts. As discussed under Note 1 of Notes to Condensed Consolidated Financial Statements, the gross profit percentage for 2006 has been revised to reflect the reclassification of certain costs previously recorded under SG&A expense to cost of sales. 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 30.8% in the first six months of 2007 compared to 32.1% in the same period of 2006 . Labor and other related payroll expense as a percent of sales during the first half of 2007 decreased compared to the same period of the prior year due to increased sales dollars which did not require a similar increase in labor hours. This decrease was partially offset by an increase in the average rate per hour as a result of the new UFCW contract which was effective on March 5, 2007 as discussed above. In addition, workers’ compensation expense decreased 26.3% to $2,133,000 in the first half of 2007 compared to $2,894,000 in the first half of 2006, as discussed above.

Lower SARs compensation expense in the first half of 2007 compared to the prior year also contributed to the decrease in SG&A expense as a percent of sales. During the first six months of 2007, the Company recognized $1,254,000 of SARs compensation expense due to an increase in the fair value of SARs since the end of fiscal 2006 and the additional vesting of SARs. During the first six months of 2006, the Company recognized $2,420,000 of SARs compensation expense of which $288,000 resulted from the adoption of SFAS 123(R) as discussed in Note 3 of Notes to Condensed Consolidated Financial Statements. As of June 30, 2007, assuming no change in the SARs fair value, there was approximately $672,000 of total unrecognized compensation cost related to unvested SARs which is expected to be recognized over a weighted average period of approximately 11 months.

The Company contributes to several multi-employer union pension and health care plans. Pension and health care costs are determined based on total straight-time hours worked and the contribution rate per hour as stipulated in the Company’s various collective bargaining agreements. The Company’s provision for all union pension and health care plans decreased 7.4% to $10,495,000 in the first half of 2007 compared to $11,337,000 in the first half of 2006 due to a reduction in both the average hourly contribution rate and the number of hours eligible for pension and health care contributions.

Interest and dividend income was $1,414,000 in the first six months of 2007 compared to $962,000 for the same period in 2006 due to increased cash levels and higher interest rates in 2007.

SFAS 115, “Accounting for Certain Investments in Debt and Equity Securities,” requires that unrealized holding gains and losses from available-for-sale securities be included as a component of stockholders’ equity. Unrealized gains on available­­-for­­­­-sale securities were $5,000 (net of income tax expense of $4,000) in the first six months of 2007 compared to unrealized gains of $1,000 (net of income tax expense of $0) in the same period of 2006.

During the first quarter of 2006, the Company purchased 149,573 shares of Class A Common Stock in unsolicited private transactions with unrelated parties for an aggregate purchase price of approximately $12,481,000. As a result of these purchases and a purchase in December 2006 of 68,331 shares for approximately $7,518,000, the weighted average shares outstanding of Class A Common Stock used in computing net income per common share was 3,161,098 during the first half of 2007 compared to 3,254,932 during the first half of 2006 which had the effect of increasing net income per common share on a comparative basis.

CAPITAL EXPENDITURES/LIQUIDITY

The Company’s current cash position, including investments and net cash provided by operating activities, are the primary sources of funds available to meet the Company’s capital expenditure and liquidity requirements. The Company’s cash position, including investments, at the end of the second quarter 2007 was $71,133,000. During the twenty-six weeks ended June 30, 2007, the Company generated approximately $18,938,000 of cash from operating activities compared to $15,539,000 in the same period of 2006 primarily due to the increase in sales .

Cash not required for the immediate needs of the Company is temporarily invested in commercial paper and marketable securities. Currently, all temporary investments are highly liquid. The Company is continually investigating opportunities for the use of these funds including new locations and the expansion and remodel of existing stores.

The Company also has two revolving lines of credit totaling $23,000,000 available for standby letters of credit, funding operations and expansion. There were no outstanding borrowings against either of the revolving lines as of June 30, 2007. The Company currently maintains four standby letters of credit aggregating $9,569,000 pursuant to the Company’s lease requirements and general and auto liability and workers’ compensation self-insurance programs. The standby letters of credit reduce the available borrowings under its revolving lines.

The Company had the following other contractual cash obligations at June 30, 2007. 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, in addition to workers’ compensation claims which occurred prior to July 2006. The Company maintains stop-loss coverage to limit its loss exposure on a per claim basis. Liabilities associated with the risks that are retained by the Company are estimated, in part, by considering historical claims experience and regression analysis. Accruals are based on 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 workers’ compensation and liability insurance reserves for reported claims and an estimate of claims incurred but not reported at June 30, 2007 totaled approximately $7,619,000. For claims incurred after June 30, 2006, the Company is fully insured for workers’ compensation purposes under a guaranteed cost insurance policy.

Employment Agreement

The Company has an employment agreement with a key executive officer that provides for annual retirement compensation equal to 25% of his average base salary and bonus earned in the last three full fiscal years prior to the cessation of his employment. The Company had accrued $2,131,000 under the terms of the employment agreement as of June 30, 2007.

Property, Plant and Equipment Purchases

As of June 30, 2007, management had authorized expenditures on incomplete projects for the purchase of property, plant and equipment which totaled approximately $960,000. The Company has an ongoing program to remodel existing supermarkets and to add new stores. During the first half of 2007, capital expenditures were $1,625,000.

(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 letter of credit held pursuant to the Company’s workers’ compensation and general and auto liability insurance programs will be adjusted annually based upon the outstanding claim reserves as of the renewal date. Each letter of credit obligation will cease when all claims for the particular policy year are closed or the Company negotiates a release.

On July 20, 2007, the Company paid a regular quarterly cash dividend of $0.25 per share of Class A Common Stock totaling approximately $790,000 to stockholders of record on June 29, 2007.

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