Arden Group, Inc. Business Information, Profile, and History

History of Arden Group, Inc.

The Arden Group, Inc. is a holding company whose main subsidiary, Arden-Mayfair, Inc., operates 13 supermarkets in and around Los Angeles, California. Ten markets operate under the name Gelson's and three under the name Mayfair. The stores serve the upper end of the consumer spectrum. In addition to traditional groceries, they stock a wide range of specialty and gourmet items: imported foods, sushi, unusual produce, fresh seafood and meat, wine and liquor, flowers, delicatessen and bakery items, and health and natural food products. Some Gelson's stores provide fresh pizza and pasta preparation and coffee bars and even offer banking and pharmacy services through third parties. Mayfair markets are smaller than Gelson's and their variety is not as broad. Customer service is a high priority at both stores. Staff are scheduled to keep waiting times to a minimum; they assist customers in finding and carrying out their purchases. Gelson's and Mayfair credit cards are available to qualified customers. The Arden Group had total sales of $296.48 million in 1998, up from $274.35 million in 1997, a 53-week fiscal year.

Origins

The company's history may be traced as far back as the 1933 incorporation of Western Dairies, Inc., a small California dairy operation that gradually expanded its geographic scope and product line to become a grocery retailer known as the Arden Farm Company beginning in 1940. By 1964, Arden Farms was ready for growth through acquisition.

In October of that year Arden acquired Mayfair Markets, a chain of supermarkets in Los Angeles, creating Arden-Mayfair, Inc., later a subsidiary of the Arden Group. At the same time, Arden acquired a small chain of supermarkets from the Gelson Brothers. The Gelsons had opened their first store in North Hollywood in the late 1940s. The new company enjoyed $455 million in sales in 1965. In April 1966 it made a preliminary application for listing on the New York Stock Exchange, and management predicted that trading would begin on October first of the same year. In April 1967 an innocuously worded statement to the press announced that J. Earl Garrett, Arden-Mayfair president and chief executive officer for less than a year, had asked to retire from all company positions, effective at month's end.

In April 1967 scandal struck Arden-Mayfair. L. David Callahan, a stockholder and company director, brought suit in federal court to prevent the company's annual meeting from being held. Callahan charged that company executives had been involved in serious conflicts of interest and that the annual proxy statement issued by the company withheld information about them, in violation of Securities and Exchange Commission (SEC) rules. A federal district judge denied the request to postpone the meeting, but acknowledged that the company's proxy statement was "insufficient as required by law." Instead, the Arden-Mayfair board postponed the meeting on its own, telling the Wall Street Journal it was "in order to enable the company to set the record straight and to give shareholders all available information in view of the publicity given this litigation."

In the wake of Callahan's suit it was revealed that Garrett's abrupt request to resign had been occasioned by a meeting Callahan had with another company director, Luther Anderson, in August 1966. Callahan had described nine potential conflicts of interest in which Garrett was involved. Anderson believed that if the allegations were true they warranted Garrett's removal. About six weeks after Callahan's revelations, Garrett wrote to the New York Stock Exchange (NYSE) asking that the company's application for listing on the exchange be put on hold, citing an expected drop in Arden-Mayfair earnings and questions regarding the voting rights of holders of Arden-Mayfair preferred stock. In the meantime company directors formed a conflict of interest committee and, in January 1967, voted in favor of Garrett's resignation. As planned by the board, Garrett would resign in stages: first he would take a six-month leave-of-absence, then quietly resign--after the annual shareholders' meeting in April. The board also decided to require Garrett to repay the funds from at least one of the questionable transactions. When Garrett finally did ask to resign, he did not specify the date he meant to leave. In response, Callahan brought his suit.

Arden-Mayfair's revised proxy statement detailed nine conflicts of interest, a number the Wall Street Journal claimed was not exhaustive. They included questionable sales to Garrett, the leasing of buildings owned by Garrett to Arden-Mayfair, and real estate commissions on Arden-Mayfair transactions paid to Garrett's sons. When the proxy statement was issued, the Journal reported that the company intended to press charges against Garrett.

The 1967 meeting eventually was held in late June. After assuring stockholders that it was doing everything possible to clear up the conflicts of interest, the new president, Luther Anderson, announced that the company finally had turned the corner after a difficult period with earnings in 1966 of approximately $4.24 million. Company expansion would be trimmed back to 16 new store openings from 21 the previous year, and as soon as the situation had stabilized, the company would renew its application for a NYSE listing.

The company suffered a loss of more than $600,000 for the first half of 1967 but rebounded in the second half and was able to report net income of about $400,000 for the entire year. As a result, it suspended dividend payments to shareholders in summer 1967. They were not resumed until early 1969 after Arden-Mayfair's strong performance in 1968 with a net profit of $2.73 million. In May 1968 President and CEO Luther Anderson announced that the company was reactivating its application for listing on the NYSE.

Financial and Legal Woes in the 1970s

Arden-Mayfair entered the 1970s falling afoul of the Federal Trade Commission (FTC). In January 1970 the FTC accused the company of receiving illegal brokerage services, from the Chambosse Brokerage Co. Arden-Mayfair purchased grocery products from Chambosse that were then marketed under the company's own brands. According to the Wall Street Journal, "a substantial portion of [Chambosse's] business consists of arranging sales of such products to Arden-Mayfair." The FTC maintained that Arden-Mayfair had accepted the services without paying a brokerage fee. Chambosse had passed the cost onto its own suppliers, according to the FTC, "when in fact it is acting for Arden-Mayfair or had been or is now subject to the control of Arden-Mayfair." In April Arden-Mayfair agreed to a FTC consent order barring the company from accepting illegal brokerage services.

One year later, in January 1971, TelAutograph Corporation, a manufacturer of message transmission equipment, announced that it was going to purchase 85,000 shares of Arden-Mayfair, bringing its stake to 300,900 shares in all and making it the largest single Arden-Mayfair shareholder. In July 1971 TelAutograph and Arden-Mayfair agreed to merge the two companies. Under the terms of the agreement, TelAutograph became a fully owned subsidiary of Arden-Mayfair. In December 1971, after the shareholders of both companies had approved the deal, the Arden-Mayfair board of directors elected Bernard Briskin company CEO and chairman of its board's executive committee. Briskin was the former president and CEO of TelAutograph.

In September 1971, while the merger was being ironed out, a federal grand jury accused Arden-Mayfair and three other dairies of violating antitrust laws by conspiring to fix prices in Washington State and Alaska. According to the indictment, the companies, which sold more than $70 million of dairy products annually in the two states, allegedly had maintained prices at artificial and noncompetitive levels since before 1965. The suit was resolved when the Justice Department recommended a consent decree that barred the four companies from conspiring to fix prices. Arden-Mayfair called the consent decree "a satisfactory conclusion," according to the Wall Street Journal.

Arden-Mayfair's financial performance was disappointing in the decade of the 1970s. Following its profit in 1969, the company had a net loss of $2.82 million in 1971, a net income of $42.12 million in 1971, a net loss of $1.1 million in 1972, a net income of $2.38 million in 1974 (in part the result of the sale of 16 stores to the Lucky chain), another loss of about $1.5 million in 1975, and a loss of $3.5 million in 1976. Briskin left his position as CEO during this period and was replaced by Bruce Krysiak.

Arden-Mayfair's financial woes came to a head in 1976 with a stockholder revolt led by the Louart Corporation, the major shareholder in the company, with 18 percent of Arden-Mayfair stock. Before the annual shareholders' meeting, Louart fielded its own slate of candidates for the board, charging that Arden-Mayfair's management was responsible for $18 million in losses between 1970 and 1976. Arden-Mayfair management laid the blame at the door of past directors and the former president, Bruce Krysiak. Krysiak had resigned in 1976 after only two years on the job, according to him because of policy differences with other directors and according to the board because of $1.5 million in losses. After the meeting one director revealed that the board considered liquidating the company at one point. Eventually, they concluded that the operation could be salvaged, in part by aggressively closing many of the nonperforming Mayfair markets in southern California. The Louart challenge ultimately was defeated by a 72.4 percent margin.

In July 1977 the Arden-Mayfair board announced a restructuring plan that would create a brand new company, with Arden-Mayfair as its subsidiary. Later that summer, however, two suits were brought against Arden-Mayfair, by the SEC and the Louart Corporation. Both charged the company and 14 past and current directors with fraud and waste. According to a report in the Wall Street Journal, Louart maintained that Arden-Mayfair directors had wasted company assets to "maintain themselves in their positions of power and financial advantage." It also accused directors of conspiring to sell 560,000 unissued shares of Arden-Mayfair stock to friendly investors to maintain control of the company during the power struggle at the annual meeting the previous year. Louart claimed that it had not been informed of the stock offering.

The suits dragged on through 1977. Arden-Mayfair held no annual meeting that year because the corporation counsel in California had failed to approve the company's restructuring plan. In May 1978 it presented a brand new restructuring proposal, one similar to the earlier plan in that it created a new holding company, called Arden Group Inc., which would be the parent company of Arden-Mayfair. It differed from the original plan in the way it redistributed common and preferred shares and bonuses. Louart, however, opposed the revised plan for reorganization as well and, before the 1978 annual meeting, it again mounted an alternative slate of candidates for the board of directors. Summer 1978 saw a round of suits and countersuits. By late July, though, it was clear that Louart would not prevail. A superior court judge rejected a Louart motion to bar holders of recently issued stock from voting at the meeting; the judge also refused to interfere with Arden-Mayfair's revised restructuring proposal. At the meeting on August 1, 1978, Arden-Mayfair shareholders supported company management completely, electing its slate of directors and approving the formation of Arden Group. A year later, in July 1979, Arden Group and Louart reached an agreement under which Arden agreed to buy shares held by Louart for $2.6 million and to pay an additional $650,000 in exchange for Louart's dropping all suits against Arden.

Turnaround in the 1980s

Arden's financial situation improved during the 1980s. After a record net income of $15.83 million in 1979, the company turned a profit every year through 1991, including $4.2 million in 1981, $4.2 million in 1982, $5.2 million in 1985, $5.6 million in 1986, $4.6 million in 1986, $7.37 million in 1987, $10.2 million in 1989, $11.8 million in 1990, and $11.5 million in 1991. By 1984, Arden's seven-store chain, Gelson's, had sales of $120 million and was called "one of the most prosperous small grocers in the United States," by Chain Store Age Executive. One cause of Arden's turnaround in the 1980s was its aggressive paring away of unprofitable stores. In 1986 the company put 17 of its 39 stores on the sales block, and by 1993 it had disposed of all but 12, five Mayfair Markets and seven Gelson's.

In June 1986 Arden became involved in a new controversy when it announced a plan to create two separate classes of common stock. The new Class A common stock would pay higher dividends; Class B would have super-voting powers, with ten votes per share instead of one. Almost immediately the plan was attacked by stockholders as undemocratic. Two shareholders brought suit in Delaware court, claiming that the plan would concentrate control of the company in the hands of Bernard Briskin, Arden's president and CEO, and its largest shareholder, with a 21.1 percent stake. The Delaware Chancery Court issued a preliminary injunction that blocked the implementation of the plan. Arden finally settled the lawsuit by agreeing to purchase the plaintiffs' shares for a total of about $7.4 million. The plaintiffs agreed not to purchase Arden voting stock for 18 months, and no more than ten percent of Arden's voting stock for eight years. The day after the suit was settled, Arden applied to the SEC for permission to introduce the new class of common stock. In August 1987 344,000 Class A shares were exchanged for the new Class B shares.

Growth in the 1990s

In December 1992 Arden announced plans to spin off TelAutograph and GPS Pool Supply, its communications and swimming pool supply subsidiaries, which accounted for about $77 million of the company's $315.9 million in annual sales. Arden CFO Ernest Klinger told the Wall Street Journal, "It's been confusing to existing shareholders, potential shareholders and analysts to look at a company whose results include retail operations, communications equipment and pool supplies." GPS Pool Supply was sold in May 1994 for $4.6 million. TelAutograph had been sold to Danka Business Systems in September 1993 for $35.5 million. In May 1997, however, an arbitrator adjusted the purchase price because the valuation of certain parts of TelAutograph's inventory had been incorrect. As a result Arden was required to pay Danka nearly $1.9 million.

In November 1993 Arden purchased a neighborhood shopping center in Calabasas, California. It built and developed a shopping center on the site and opened a new Gelson's in January 1996. The store extended the services already offered by Gelson's--gourmet food, produce, deli products, coffee bars, fine bakeries--and introduced third-party banking and pharmacy services. The store was expensive and depressed Arden profits in 1995 while it was being built. But once completed the store proved a bigger success than the company had hoped. In both 1997 and 1998 the store saw sales rise and expenses as a percent of sales drop. Encouraged by the results, Arden opened a similar store in Northridge, California in November 1997. That store, unfortunately, did not perform up to company projections. In 1998 Arden canceled plans for a similar store on a site in Santa Barbara. That same year Arden signed a long-term deal with a developer for a Gelson's in Beverly Hills.

Arden's net income remained healthy throughout the latter half of the 1990s. It rose from $3.52 million in 1996, to $5.95 million in 1997, to $10 million in 1998. In July 1998 the Arden board of directors executed a four-for-one stock split, raising the number of Class A common shares from five million to ten million, and the Class B common shares from 500,000 to 1.5 million.

Principal Subsidiaries: Arden-Mayfair, Inc.