UNITED STATES


SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549





FORM 10-K


x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


For the Fiscal Year Ended March 27, 2010


OR




o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934




Commission file number 1-11735





99¢ Only Stores





(Exact name of registrant as specified in its charter)





California
95-2411605(State or other Jurisdiction of Incorporation or Organization)
(I.R.S. Employer Identification No.)4000 Union Pacific Avenue,
90023City of Commerce, California
(zip code)(Address of Principal Executive Offices)





Registrant's telephone number, including area code: (323) 980-8145


Securities registered pursuant to Section 12(b) of the Act:





Title of Each Class
Name of Each Exchange On Which RegisteredCommon Stock, no par value
New York Stock Exchange





Securities registered pursuant to Section 12(g) of the Act: None





Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 the Securities Act.  Yes o  No x





Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o  No x





Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x  No o





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





Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter)  is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o





Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.





Large accelerated filer  o
Accelerated filer x
Non-accelerated filer o
Smaller reporting company o





Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes  ̈  No x





The aggregate market value of Common Stock held by non-affiliates of the Registrant on September 25, 2009 was $608,747,612 based on a $13.38 closing price for the Common Stock on such date. For purposes of this computation, all executive officers and directors have been deemed to be affiliates. Such determination should not be deemed to be an admission that such executive officers and directors are, in fact, affiliates of the Registrant.





Indicate the number of shares outstanding of each of the registrant’s classes of common stock as of the latest practicable date.


Common Stock, No Par Value, 69,635,381 Shares as of May 21, 2010




DOCUMENTS INCORPORATED BY REFERENCE




Portions of the Registrant’s Proxy Statement for its 2010 Annual Meeting of Shareholders are incorporated by reference into Part III of this Annual Report on Form 10-K.










Table of Contents





Part I
PageItem 1.

Business
3Item 1A.

Risk Factors
11Item 1B.

Unresolved Staff Comments
18Item 2.

Properties
18Item 3.

Legal Proceedings
19Item 4.

(Removed and Reserved)
19Part IIItem 5.

Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
20Item 6.

Selected Financial Data
23Item 7.

Management's Discussion and Analysis of Financial Condition and Results of Operations
25Item 7A.

Quantitative and Qualitative Disclosures About Market Risk
37Item 8.

Financial Statements and Supplementary Data
38Item 9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
69Item 9A.

Controls and Procedures
69Item 9B.

Other Information
70Part IIIItem 10.

Directors, Executive Officers and Corporate Governance
72Item 11.

Executive Compensation
72Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
72Item 13.

Certain Relationships and Related Transactions, and Director Independence
72Item 14.

Principal Accounting Fees and Services
72Part IVItem 15.

Exhibits, Financial Statement Schedules
73Signatures
76Exhibit Index


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SPECIAL NOTE REGARDING FORWARD-LOOKING INFORMATION




This Report contains statements that constitute “forward-looking statements” within the meaning of Section 21E of the Securities Exchange Act and Section 27A of the Securities Act. The words “expect,” “estimate,” “anticipate,” “predict,” “believe” and similar expressions and variations thereof are intended to identify forward-looking statements. Such statements appear in a number of places in this filing and include statements regarding the intent, belief or current expectations of 99¢ Only Stores (the “Company”) and its directors or officers with respect to, among other things, (a) trends affecting the financial condition or results of operations of the Company, and (b) the business and growth strategies of the Company (including the Company’s store opening growth rate). Readers are cautioned not to put undue reliance on such forward-looking statements. Such forward-looking statements are not guarantees of future performance and involve risks and uncertainties, and actual results may differ materially from those projected in this Annual Report, for the reasons, among others, discussed in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Risk Factors.” sections. The Company undertakes no obligation to publicly revise these forward-looking statements to reflect events or circumstances that arise after the date hereof. Readers should carefully review the risk factors described in this annual report on Form 10-K and other documents the Company files from time to time with the Securities and Exchange Commission, including the quarterly reports on Form 10-Q and any current reports on Form 8-K.





Fiscal Periods





On February 1, 2008, the Company changed its fiscal year end from March 31 to the Saturday nearest March 31 of each year. The Company now follows a fiscal calendar consisting of four quarters with 91 days, each ending on the Saturday closest to the calendar quarter-end and a 52-week fiscal year with 364 days, with a 53-week year every five to six years. The Company’s fiscal year 2011 (“fiscal 2011”) which began on March 28, 2010 and will end on April 2, 2011, will consist of 53 weeks.  The Company’s fiscal year 2010 (“fiscal 2010”) began on March 29, 2009 and ended March 27, 2010, its fiscal year 2009 (“fiscal 2009”) began on March 30, 2008 and ended on March 28, 2009, and its fiscal year 2008 (“fiscal 2008”) began on April 1, 2007 and ended on March 29, 2008.





PART I




Item 1. Business




99¢ Only Stores (the “Company”) is an extreme value retailer of primarily consumable general merchandise with an emphasis on name-brand products.  The Company’s stores offer a wide assortment of regularly available consumer goods as well as a broad variety of first-quality closeout merchandise.  As of March 27, 2010, the Company operated 275 retail stores with 206 in California, 32 in Texas, 25 in Arizona, and 12 in Nevada.  These stores averaged approximately 21,300 gross square feet.  In fiscal 2010, the Company’s stores open for the full year averaged net sales of $4.8 million per store and $289 per estimated saleable square foot, which the Company believes is the highest among all dollar store chains.  In fiscal 2010, 235 non-Texas stores open for the full year averaged net sales of $5.0 million per store and $305 per estimated saleable square foot and the 31 Texas stores open for the full year averaged net sales of $3.4 million per store and $180 per estimated saleable square foot.




The Company opened its first 99¢ Only Stores location in 1982 and believes that it operates the nation’s oldest existing general merchandise chain where items are primarily priced at 99.99¢ or less.  For fiscal 2010, the Company opened nine new stores. Of these newly opened stores, eight stores are located in California, and one Texas store re-opened which was closed due to a hurricane. The Company closed 12 stores in Texas and one store in California during fiscal 2010.  In fiscal 2011, the Company plans to increase its store count by approximately 5%, with the majority of new stores expected to be opened in California during the second half of fiscal 2011.





The Company also sells merchandise through its Bargain Wholesale division at prices generally below normal wholesale levels to retailers, distributors and exporters. Bargain Wholesale complements the Company’s retail operations by exposing the Company to a broader selection of opportunistic buys and generating additional sales with relatively small incremental operating expenses and sometimes at prices higher than those customary at the Company’s retail stores.  Bargain Wholesale represented 3.0% of the Company’s total sales in fiscal 2010.


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Industry




The Company participates primarily in the extreme value retail industry, with its 99¢ Only Stores. Extreme value retail is distinguished from other retail formats in that substantial portions of purchases are acquired at prices substantially below original wholesale cost through closeouts, manufacturer overruns, and other special-situation merchandise transactions.  As a result, a substantial portion of the product mix is comprised of a frequently changing selection of specific brands and products.  Special-situation merchandise is complemented by re-orderable merchandise which is also often purchased below normal wholesale prices. Extreme value retail is also distinguished by offering this merchandise to customers at prices significantly below typical retail prices.




The Company considers closeout merchandise as any item that is not generally re-orderable on a regular basis. Closeout or special-situation merchandise becomes available for a variety of reasons, including a manufacturer’s over-production, discontinuance due to a change in style, color, size, formulation or packaging, the inability to move merchandise effectively through regular channels, reduction of excess seasonal inventory, discontinuation of test-marketed items, products close to their “best when used by” date, and the financial needs of the supplier.





Most extreme value retailers also sell merchandise that can be purchased from a manufacturer or wholesaler on a regular basis. Although this merchandise can often be purchased at less than normal wholesale and sold below normal retail, the discount, if any, is generally less than with closeout merchandise. Extreme value retailers sell regularly available merchandise to provide a degree of consistency in their product offerings and to establish themselves as a reliable source of basic goods.





The Company also sells merchandise through its Bargain Wholesale division, which is generally obtained through the same or shared purchases of the retail operations.  The Company maintains showrooms at its main distribution facility in the City of Commerce, California and at the Company’s distribution facility in the Houston, Texas area. Additionally, the Company has a showroom located in Chicago, Illinois. Advertising of wholesale merchandise is conducted primarily at trade shows and by catalog mailings to past and potential customers. Wholesale customers include a wide and varied range of major retailers, as well as smaller retailers, distributors, and wholesalers.





Business Strategy




The Company’s business strategy is to provide a primary shopping destination for price-sensitive consumers and a fun treasure-hunt shopping experience for other value conscious consumers for food and other basic household items. The Company’s core strategy is to offer good to excellent values on a wide selection of quality food and basic household items with a focus on name brands and an exciting assortment of surprises, primarily at a price point of 99.99¢ or less, in attractively merchandised, clean and convenient stores.  The Company’s strategies to accomplish this include the following:





Focus on “Name-Brand” Consumables. The Company strives to exceed its customers’ expectations of the range and quality of name-brand consumable merchandise that are in most cases priced at 99.99¢ or less. During fiscal 2010, the Company purchased merchandise from more than 999 suppliers, including 3M, Colgate-Palmolive, Con Agra, Dole, Energizer Battery, Frito-Lay, General Mills, Georgia Pacific, Hasbro, Heinz, Hershey Foods, Johnson & Johnson, Kellogg’s, Kraft, Nestle, Procter & Gamble, Quaker, Revlon, and Unilever.





Broad Selection of Regularly Available Merchandise. The Company offers consumer items in each of the following staple product categories: food (including frozen, refrigerated, and produce items), beverages, health and beauty care, household products (including cleaning supplies, paper goods, etc.), housewares (including glassware, kitchen items, etc.), hardware, stationery, party goods, seasonal goods, baby products, toys, giftware, pet products, plants and gardening, clothing, electronics and entertainment. The Company carries name-brand merchandise, off-brands and its own private-label items. The Company believes that by consistently offering a wide selection of basic household consumable items, the Company encourages customers to shop at the stores for their everyday household needs, which the Company believes leads to an increased frequency of customer visits.  The Company’s total retail sales by product category for fiscal years 2010, 2009 and 2008 are set forth below:


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Years EndedMarch 27, 2010


March 28, 2009


March 29, 2008Product Category:Food and grocery


54
%


56
%


52
%Household and housewares


14
%


14
%


15
%Health and beauty care


10
%


9
%


9
%Hardware


3
%


3
%


3
%Stationery and party


5
%


5
%


5
%Seasonal


4
%


3
%


4
%Other


10
%


10
%


12
%100
%


100
%


100
%





Fun Treasure-Hunt Shopping Experience.The Company’s practices of buying closeouts and other opportunistic purchases and pricing them primarily at 99.99¢ or less, typically dramatically below retail prices, helps to create a sense of fun and excitement.  The constantly changing selection of these special extreme values, often in limited quantities, helps to create a sense of urgency when shopping and increase shopping frequency, while generating customer goodwill, loyalty and awareness via word-of-mouth.





Attractively Merchandised and Well-Maintained Stores. The Company strives to provide its customers an exciting shopping experience in customer-service-oriented and friendly stores that are attractively merchandised, brightly lit and well maintained. The Company’s stores are laid out with items in the same category grouped together. The shelves are generally restocked throughout the day. The Company believes that offering merchandise in an attractive, convenient and familiar environment creates stores that are appealing to a wide demographic of customers.




Strong Long-Term Supplier Relationships. The Company believes that it has developed a reputation as a leading purchaser of name-brand, re-orderable, and closeout merchandise at discounted prices.  A number of consistent behaviors have contributed to building the Company’s reputation, including its willingness and consistent practice over many years to take on large volume purchases and take possession of merchandise immediately, its ability to pay cash or accept abbreviated credit terms, its commitment to honor all issued purchase orders, and its willingness to purchase goods close to a target season or out of season. The Company’s experienced buying staff, with the ability to make immediate buying decisions, also enhances its strong supplier relationships. The Company believes its relationships with suppliers are further enhanced by its ability to minimize channel conflict for the manufacturer.  Additionally, the Company believes it has well-maintained, attractively merchandised stores that have contributed to a reputation among suppliers for protecting their brand image.





Savvy Purchasing.The Company purchases merchandise at substantially discounted prices as a result of its buyers’ knowledge and experience in their respective categories, its negotiating ability, and its established reputation among its suppliers. The Company applies its negotiating ability to its purchasing of corporate supplies, construction and services.




Store Location and Size.The Company’s 99¢ Only Stores are conveniently located in freestanding buildings, neighborhood shopping centers, regional shopping centers or downtown central business districts, all of which are locations where the Company believes consumers are likely to do their regular household shopping. As of March 27, 2010, the Company’s 275 existing 99¢ Only Stores averaged approximately 21,300 gross square feet and the Company currently targets new store locations between 15,000 and 19,000 gross square feet. The Company believes its larger store size versus that of other typical “dollar store” chains allows it to more effectively display a wider assortment of merchandise, carry deeper stock positions, and provide customers with a more inviting environment that the Company believes encourages customers to shop longer and buy more. In the past, as part of its strategy to expand retail operations, the Company has at times opened larger new stores in close proximity to existing smaller stores where the Company determined that the trade area could support a larger store. In some of these situations, the Company retained its existing store.





Complementary Bargain Wholesale Operation. Bargain Wholesale complements the Company’s retail operations by allowing the Company to be exposed to a broader selection of opportunistic buys and generate additional sales with relatively small incremental operating expense. The Bargain Wholesale division sells to local, regional, national, and international accounts. The Company maintains showrooms in the City of Commerce, California where it is based, as well as in Houston, Texas and Chicago, Illinois.


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Growth Strategy




The Company’s long-term growth plan is to become a premier nationwide extreme value retailer. Management believes that short-term growth will primarily result from new store openings in its existing markets of California, Arizona, Nevada and Texas.




Growth in Existing Markets. By continuing to develop new stores in its current markets, the Company believes it can leverage its brand awareness in these regions and take advantage of its existing warehouse and distribution facilities, regional advertising and other management and operating efficiencies.  This focus on growth through existing distribution facilities will help management to focus on implementing scaleable systems.




Long-Term Geographic Expansion.The Company’s long-term plan is to become a nationwide retailer by opening clusters of stores in densely populated geographic regions across the country. The Company believes that its strategy of consistently offering a broad selection of name-brand consumables at value pricing in a convenient store format is portable to other densely populated areas of the United States. In 1999, the Company opened its first 99¢ Only Stores location outside the state of California in Las Vegas, Nevada; Arizona followed in 2001 and Texas in 2003.




Real Estate Acquisitions.The Company considers both real estate lease and purchase opportunities, and may consider for future expansion the acquisitions of a chain, or chains, of retail stores in existing markets or other regions, primarily for the purpose of acquiring favorable locations.




Retail Operations




The Company’s stores offer customers a wide assortment of regularly available consumer goods, as well as a broad variety of quality, closeout merchandise, generally at a significant discount from standard retail prices. Merchandise sold in the Company’s 99¢ Only Stores is priced primarily at or below 99.99¢ per item.




The following table sets forth certain relevant information with respect to the Company’s retail operations (dollar amounts in thousands, except sales per square footage):





Years EndedMarch 27, 2010


March 28, 2009


March 29, 2008


March 31, 2007


March 31, 2006Net retail sales

$
1,314,214


$
1,262,119


$
1,158,856


$
1,064,518


$
984,293Annual net sales growth rate


4.1
%


8.9
%


8.9
%


8.2
%


5.8
%Store count at beginning of year


279



265



251



232



219
(h)New stores


9



19



16



19



15Stores closed


13
(a)


5
(c)


2
(e)


—



2
(i)Total store count at year-end


275



279



265



251



232Average net sales per store open the full years(k)

$
4,848
(b)

$
4,642
(d)

$
4,547
(f)

$
4,421
(g)

$
4,347
(j)Estimated store saleable square foot


4,606,728



4,703,630



4,521,091



4,337,974



4,040,096Average net sales per estimated saleable square foot(h)

$
289
(b)

$
273
(d)

$
263
(f)

$
254
(g)

$
250
(j)Change in comparable net sales(l)


3.9
%


3.7
%


4.0
%


2.4
%


0.3
%





(a) 12 underperforming stores in Texas were closed in fiscal 2010 and one California store was closed due to the expiration of its lease.  See Note 10 to the Consolidated Financial Statements for additional information regarding the Texas Market.





(b) Includes 31 Texas stores open for a full year. Texas stores open for the full year had average sales of $3.4 million per store and average sales per estimated saleable square foot of $180. All non-Texas stores open for the full year had average sales of $5.0 million per store and $305 of average sales per estimated saleable square foot.


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(c) Four underperforming stores in Texas were closed in fiscal 2009 and one additional Texas store was closed due to a hurricane which was re-opened in May 2009.  The leases had expired for two of the four stores that were closed in fiscal 2009.





(d) Includes 39 Texas stores open for a full year. Texas stores open for the full year had average sales of $2.7 million per store and average sales per estimated saleable square foot of $142. All non-Texas stores open for the full year had average sales of $5.0 million per store and $301 of average sales per estimated saleable square foot.




(e) Two underperforming stores closed in Houston, Texas.





(f) Includes 39 Texas stores open for a full year. Texas stores open for the full year had average sales of $2.6 million per store and average sales per estimated saleable square foot of $128. All non-Texas stores open for the full year had average sales of $4.9 million per store and $291 of average sales per estimated saleable square foot.





(g) Includes 36 Texas stores open for a full year. Texas stores open for the full year had average sales of $2.4 million per store and average sales per saleable square foot of $120. All non-Texas stores open for the full year had average sales of $4.8 million per store and $284 of average sales per estimated saleable square foot.





(h) Store count includes store activity from January 1, 2005 through March 31, 2006 due to the change in fiscal year. The Company operated 223 stores as of March 31, 2005.





(i) One store closed due to relocation and one due to an eminent domain action for the construction of a light railway project.





(j) Includes 36 Texas stores open for a full year. Texas stores open for the full year had average sales of $2.3 million per store and average sales per estimated saleable square foot of $111. All non-Texas stores open for the full year had average sales of $4.7 million per store and $283 of average sales per estimated saleable square foot.





(k) For stores open for the entire fiscal year.





(l) Change in comparable store net sales compares net sales for all stores open at least 15 months.





Merchandising.All of the Company’s stores offer a broad variety of first-quality, name-brand and other closeout merchandise as well as a wide assortment of regularly available consumer goods. The Company also carries private-label consumer products made for the Company. The Company believes that the success of its 99¢ Only Stores concept arises in part from the value inherent in pricing consumable items primarily at 99.99¢ or less per item, many of which are name-brands, and most of which typically retail elsewhere at higher prices.




Approximately half of the merchandise purchased by the Company is available for reorder including many branded consumable items. The mix and the specific brands of merchandise frequently change, depending primarily upon the availability of closeout and other special-situation merchandise at suitable prices. Since commencing its closeout purchasing strategy for its stores, the Company has been able to obtain sufficient name-brand closeouts as well as re-orderable merchandise at attractive prices. Management believes that the frequent changes in specific name-brands and products found in its stores from one week to the next, encourage impulse and larger volume purchases, result in customers shopping more frequently, and help to create a sense of urgency, fun and excitement. Unlike many discount retailers, the Company rarely imposes limitations on the quantity of specific value-priced items that may be purchased in a single transaction.




The Company targets value-conscious consumers from a wide range of socio-economic backgrounds with diverse demographic characteristics. Purchases are by cash, credit card, debit card or EBT (electronic benefit transfers). The Company’s stores currently do not accept checks or manufacturer’s coupons. The Company’s stores are open every day except Christmas, with operating hours designed to meet the needs of families.





Store Size, Layout and Locations.The Company strives to provide stores that are attractively merchandised, brightly lit, well-maintained, “destination” locations. The layout of each of the Company’s stores is customized to the configuration of the individual location. The interior of each store is designed to reflect a generally uniform format, featuring attractively displayed products in windows, consistent merchandise display techniques, bright lighting, lower shelving height that allows visibility throughout the store, customized check-out counters and a distinctive color scheme on its interior and exterior signage, price tags, baskets and shopping bags. The Company emphasizes a strong visual presentation in all key traffic areas of each store. Merchandising displays are maintained throughout the day, changed frequently, and often incorporate seasonal themes. The Company believes that the frequently changing value priced name-brands, convenient and inviting layout, and the lower shelving height, help encourage the typical customer to shop more of the whole store.


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Advertising. Advertising expenditures were $4.1 million, $4.4 million and $5.4 million or 0.3%, 0.4% and 0.5% of net retail sales for fiscal 2010, 2009 and 2008, respectively.  The Company allocates the majority of its advertising budget to print advertising. The Company’s advertising strategy emphasizes the offering of nationally recognized, name-brand merchandise at significant savings. The Company manages its advertising expenditures by an efficient implementation of its advertising program combined with word-of-mouth publicity, locations with good visibility, and efficient signage. Because of the Company’s distinctive grand opening promotional campaign, which usually includes the pricing of nine iPods and other high value items at only 99.99¢ each, grand openings often attract long lines of customers and receive media coverage.




Purchasing




The Company believes a primary factor contributing to its success is its ability to identify and take advantage of opportunities to purchase merchandise with high customer appeal and interest at prices lower than regular wholesale. The Company purchases most merchandise directly from the manufacturer. Other sources of merchandise include wholesalers, manufacturers’ representatives, importers, barter companies, auctions, professional finders and other retailers. The Company develops new sources of merchandise primarily by attending industry trade shows, advertising, distributing marketing brochures, cold calling, and obtaining referrals.





The Company seldom has continuing contracts for the purchase of merchandise and must continuously seek out buying opportunities from both its existing suppliers and new sources. No single supplier accounted for more than 5% of the Company’s total purchases in fiscal 2010. During fiscal 2010, the Company purchased merchandise from more than 999 suppliers, including 3M, Colgate-Palmolive, Con Agra, Dole, Energizer Battery, Frito-Lay, General Mills, Georgia Pacific, Hasbro, Heinz, Hershey Foods, Johnson & Johnson, Kellogg’s, Kraft, Nestle, Procter & Gamble, Quaker, Revlon, and Unilever. Many of these companies have been supplying products to the Company for over twenty years.





A significant portion of the merchandise purchased by the Company in fiscal 2010 was closeout or special-situation merchandise. The Company has developed strong relationships with many manufacturers and distributors who recognize that their special-situation merchandise can be moved quickly through the Company’s retail and wholesale distribution channels. The Company’s buyers search continuously for closeout opportunities. The Company’s experience and expertise in buying merchandise has enabled it to develop relationships with many manufacturers that frequently offer some or all of their closeout merchandise to the Company prior to attempting to sell it through other channels. The key elements to these supplier relationships include the Company’s (i) ability to make immediate buying decisions, (ii) experienced buying staff, (iii) willingness to take on large volume purchases and take possession of merchandise immediately, (iv) ability to pay cash or accept abbreviated credit terms, (v) commitment to honor all issued purchase orders and (vi) willingness to purchase goods close to a target season or out of season. The Company believes its relationships with its suppliers are further enhanced by its ability to minimize channel conflict for a manufacturer.





The Company’s strong relationships with many manufacturers and distributors, along with its ability to purchase in large volumes, also enable the Company to purchase re-orderable name-brand goods at discounted wholesale prices. The Company focuses its purchases of re-orderable merchandise on a limited number of stock keeping units (“SKU’s”) per product category, which allows the Company to make purchases in large volumes.





The Company utilizes and develops private label consumer products to broaden the assortment of merchandise that is consistently available. The Company also imports merchandise in product categories such as kitchen items, housewares, toys, seasonal products, party, pet-care and hardware which the Company believes are not brand sensitive to consumers.


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Warehousing and Distribution




An important aspect of the Company’s purchasing strategy involves its ability to warehouse and distribute merchandise quickly and with flexibility. The Company’s distribution centers are strategically located to enable quick turnaround of time-sensitive products as well as to provide long-term warehousing capabilities for one-time closeout purchases and seasonal or holiday items. A large majority of the merchandise sold by the Company is received, processed for retail sale and then distributed to the retail locations from Company-operated warehouse and distribution facilities.





The Company utilizes its internal fleet and outside carriers for both outbound shipping and a backhaul program.  The Company also receives merchandise shipped by rail to its City of Commerce, California distribution center which has a railroad spur on the property. The Company has primarily used common carriers or owner-operators to deliver to stores outside of Southern California including its stores in Northern and Central California, Texas, Arizona and Nevada. The Company believes that its current California and Texas distribution centers will be able to support its anticipated growth throughout fiscal 2011. However, there can be no assurance that the Company’s existing warehouses will provide adequate storage space for the Company’s long-term storage needs or to support sales levels at peak seasons for perishable products, that high levels of opportunistic purchases may not temporarily pressure warehouse capacity, or that the Company will not make changes, including capital expenditures, to expand or otherwise modify its warehousing and distribution operations.





The Company arranges with vendors of certain merchandise to ship directly to its store locations. The Company's primary distribution practice, however, is to have merchandise delivered from its vendors to the Company's warehouses, where it is stored for timely shipment to its store locations.





Information pertaining to warehouse and distribution facilities is described under Item 2. Properties.





Information Systems





Over the last two fiscal years, the Company continued to make significant investments in a variety of infrastructure, data management, and process improvement projects.  Infrastructure investments enabled the Company to achieve level one compliance with Payment Card Industry (PCI) standards, which were certified by a qualified third party IT security firm.  Additionally, store network upgrades including high speed wireless data backup lines were installed to assure a high level of availability and speed for credit card processing and delivery of critical item information to the stores, and wireless network upgrades and hardware capacity improvements improved availability and reliability for warehouse operations to support a successful migration to a perpetual inventory system in fiscal 2010.





The Company currently operates financial, accounting, human resources, and payroll data processing using Lawson Software’s Financial and Human Resource Suites on an SQL database running on a Windows operating system.  The Company completed a major upgrade to its Lawson financial and human resources management systems during fiscal 2009 and is now running Lawson version 9.  This upgrade addressed both security and performance concerns from the prior release and converted many customized features to a standard interface approach, laying a foundation to leverage additional Lawson functionality in the coming years.  In fiscal 2010, a standard sales audit package from Epicor systems was implemented with an enhancement to support short-interval intra-day polling of store systems.





The Company also implemented system improvements to support the reengineering of the processes and information flow in the main Commerce Distribution Center.  Primary amongst these improvements were completion of racking systems, real time pallet movement tracking through wireless command and tracking systems, a perpetual warehouse inventory system that is now updated via periodic cycle counting, and improvements in truck utilization.  In the second half of fiscal 2010, cycle counts and test counts replaced and eliminated the semi-annual physical counts in the Company’s main Commerce distribution center.  These changes helped to reduce transportation costs, improve DC labor productivity and throughput, and enhance DC inventory accounting and expiration date control.





The Company also operates several proprietary systems which accommodate the Company’s unique flexibility requirements in product sourcing and acquisition that are tightly coupled with HighJump warehouse solutions.  These proprietary systems include an IBM UNIX-based purchase order and inventory control system, a store ordering system that utilizes radio frequency hand-held scanning devices in each store, and a back office personal computer system at each store that collects and transmits a variety of operational data to central processing systems.  The Company utilizes a proprietary Point of Sale (“POS’’) barcode scanning system to record and process retail sales in each of its stores and electronic polling to collect sales data for analysis, reporting and processing.


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During fiscal 2009 and fiscal 2010, the Company focused its efforts on business process improvement, enhanced data structures, and improved data integrity through modifications to its proprietary systems and upgrades of existing vendor systems.  The first stage of these improvements was to centralize and normalize more of the Company’s critical data in standard, high speed database platforms.  This data integrity and normalization will continue in fiscal 2011.  Over the next 2-3 years, the Company intends to differentiate and isolate proprietary systems from those functions which can be more cost effectively managed on industry standard platforms.  An example of a conversion from the proprietary core to an industry standard platform in fiscal 2010 was the conversion of the sales audit function to an industry leading Epicor package solution. In fiscal 2011, the Company is beginning the process of converting to industry leading packages for Master Data Management and Point-of-Sale systems and enhancing its use of Data Warehouse and proprietary systems for purchasing and store merchandise ordering.





Competition




The Company faces competition in both the acquisition of inventory and the sale of merchandise from other discount stores, single-price-point merchandisers, mass merchandisers, food markets, drug chains, club stores, wholesalers, and other retailers. Industry competition for acquiring closeout merchandise also includes a large number of retail and wholesale companies and individuals. In some instances these competitors are also customers of the Company’s Bargain Wholesale division. There is increasing competition with other wholesalers and retailers, including other extreme value retailers, for the purchase of quality closeout and other special-situation merchandise. Some of these competitors have substantially greater financial resources and buying power than the Company. The Company’s ability to compete will depend on many factors, including the success of its purchase and resale of such merchandise at lower prices than its competitors.  In addition, the Company may face intense competition in the future from new entrants in the extreme value retail industry that could have an adverse effect on the Company’s business and results of operations.




Employees




At March 27, 2010, the Company had approximately 11,700 employees including approximately 10,500 in its retail operations, 800 in its warehousing and distribution operations and 400 in its corporate offices. The Company considers relations with its employees to be good. The Company offers certain benefits to benefit-eligible employees, including life, health and disability insurance, paid time off (vacation, holidays, and sick leave), a 401(k) plan with a Company match and a deferred compensation plan for certain key management employees of the Company.





None of the Company’s employees are party to a collective bargaining agreement and none are represented by a labor union.





Trademarks and Service Marks




“99¢ Only Stores,” “Rinso,” and “Halsa” are among the Company’s service marks and trademarks, and are listed on the United States Patent and Trademark Office Principal Register. “Bargain Wholesale” is among the fictitious business names used by the Company. Management believes that the Company’s trademarks, service marks, and fictitious business names are an important but not critical element of the Company’s merchandising strategy. The Company routinely undertakes enforcement efforts against certain parties whom it believes are infringing upon its “99¢” family of marks and its other intellectual property rights, although the Company believes that simultaneous litigation against all persons everywhere whom the Company believes to be infringing upon these marks is not feasible.





Seasonality





For information regarding the seasonality of the Company’s business, see “Item 6. Selected Financial Data.  Seasonality and Quarterly Fluctuations,” which is incorporated by reference in this Item 1.


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Environmental Matters




In the ordinary course of business, the Company handles or disposes of commonplace household products that are classified as hazardous materials under various environmental laws and regulations. Under various federal, state, and local environmental laws and regulations, current or previous owners or occupants of property may face liability associated with hazardous substances. These laws and regulations often impose liability without regard to fault.  In the future the Company may be required to incur substantial costs for preventive or remedial measures associated with hazardous materials. The Company has several storage tanks at its warehouse facilities, including: an aboveground and an underground diesel storage tank at the City of Commerce, California warehouse; ammonia storage at the Southern California cold storage facility and the Texas warehouse; aboveground diesel and propane storage tanks at the Texas warehouse; an aboveground propane storage tank at the main Southern California warehouse; and an aboveground propane tank located at the warehouse the Company owns in Eagan, Minnesota, which is currently being marketed for sale.  The Company has not been notified of, and is not aware of, any material current environmental liability, claim or non-compliance, concerning its owned or leased real estate.





Available Information




The Company makes available free of charge its annual report on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K through a hyperlink from the "Investor Relations" portion of its website, www.99only.com, to the Securities and Exchange Commission's website, www.sec.gov.  Such reports are available on the same day that they are electronically filed with or furnished to the Securities and Exchange Commission by the Company.





Item 1A. Risk Factors





Inflation may affect the Company’s ability to keep pricing almost all of its merchandise at 99.99¢ or less




The Company’s ability to provide quality merchandise for profitable resale primarily at a price point of 99.99¢ or less is subject to certain economic factors, which are beyond the Company’s control. Inflation could have a material adverse effect on the Company’s business and results of operations, especially given the constraints on the Company’s ability to pass on incremental costs due to price increases or other factors. A sustained trend of significantly increased inflationary pressure could require the Company to abandon its customary practice of not pricing its merchandise at more than a dollar, which could have a material adverse effect on its business and results of operations.  The Company can pass price increases on to customers to a certain extent, such as by selling smaller units for the same price and increasing the price of merchandise presently sold at less than 99.99¢ (e.g., the Company currently prices some items at 29.99¢, 59.99¢, and the like, and also sells other items at two at 99.99¢, three at 99.99¢, and so forth, but there are limits to the ability to effectively increase prices on a sufficiently wide range of merchandise in this manner while not exceeding a dollar).  In certain circumstances, the Company has dropped and may continue to drop some items from its offerings due to vendor wholesale price increases or availability, which may adversely affect sales.  In September 2008, the Company increased its primary price point to 99.99¢ from 99¢, and also added 99/100¢ to its price points on almost all items. See also “The Company is vulnerable to uncertain economic factors, changes in the minimum wage, and increased workers’ compensation and healthcare costs” for a discussion of additional risks attendant to inflationary conditions.





The Company is dependent primarily on new store openings for future growth




The Company’s ability to generate growth in sales and operating income depends in part on its ability to successfully open and operate new stores outside of its core market of Southern California and to manage future growth profitably. The Company’s strategy depends on many factors, including its ability to identify suitable markets and sites for new stores, negotiate leases or purchases with acceptable terms, refurbish stores, successfully compete against local competition and the increasing presence of large and successful companies entering or expanding into the markets that the Company operates in, upgrade its financial and management information systems and controls, gain brand recognition and acceptance in new markets, and manage operating expenses and product costs. In addition, the Company must be able to hire, train, motivate, and retain competent managers and store personnel at increasing distances from the Company’s headquarters. Many of these factors are beyond the Company’s control or are difficult to manage. As a result, the Company cannot assure that it will be able to achieve its goals with respect to growth. Any failure by the Company to achieve these goals on a timely basis, differentiate itself and obtain acceptance in markets in which it currently has limited or no presence, attract and retain management and other qualified personnel, appropriately upgrade its financial and management information systems and controls, and manage operating expenses could adversely affect its future operating results and its ability to execute the Company’s business strategy.


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A variety of factors, including store location, store size, local demographics, rental terms, competition, the level of store sales, availability of locally sourced as well as intra-Company distribution of merchandise, locally prevailing wages and labor pools, distance and time from existing distribution centers, local regulations, and the level of initial advertising, influence if and when a store becomes profitable. Assuming that planned expansion occurs as anticipated, the store base will include a portion of stores with relatively short operating histories. New stores may not achieve the sales per estimated saleable square foot and store-level operating margins historically achieved at existing stores. If new stores on average fail to achieve these results, planned expansion could produce a further decrease in overall sales per estimated saleable square foot and store-level operating margins. Increases in the level of advertising and pre-opening expenses associated with the opening of new stores could also contribute to a decrease in operating margins. New stores opened in existing and in new markets have in the past and may in the future be less profitable than existing stores in the Company’s core Southern California market and/or may reduce retail sales of existing stores, negatively affecting comparable store sales.  As the Company expands beyond its base in the Southwestern United States, differences in the available labor pool and potential customers could adversely impact the Company.





The Company’s operations are concentrated in California





As of March 27, 2010, 206 of the Company’s 275 stores were located in California (with 32 stores in Texas, 25 stores in Arizona and 12 stores in Nevada). The Company expects that it will continue to open additional stores in as well as outside of California. For the foreseeable future, the Company’s results of operations will depend significantly on trends in the California economy. Further declines in retail spending on higher margin discretionary items and continuing trends of increasing demand for lower margin food products due to continuing poor economic conditions in California may negatively impact our operations and profitability.  California has also historically enacted minimum wages that exceed federal standards (and certain of its cities have enacted “living wage” laws that exceed State minimum wage laws) and California typically has other factors making compliance, litigation and workers’ compensation claims more prevalent and costly.  Additional local regulation in certain California cities may further pressure margins.




The Company has restructured its Texas market and could be impacted by further restructuring costs





The Company has historically experienced, and currently continues to experience, lower sales per store and sales per estimated saleable square foot in its Texas stores compared to its non-Texas stores.  Although the Company’s operating results in Texas have improved in recent periods, there can be no assurance that such improvements will continue or that the Company’s Texas operations can have any sustained positive impact on the Company’s profitability.  The Company currently has 32 stores in Texas and plans to open several additional stores in fiscal 2011. The Company has incurred cash and non-cash charges in connection with its recent store closings in Texas, and may incur additional charges in connection with the Texas market, as discussed in Note 10 to the Consolidated Financial Statements.  We cannot predict with certainty the amount of these potential charges and the Company could be impacted by additional costs.





Material damage to, or interruptions to, the Company’s information systems as a result of external factors, staffing shortages and difficulties in updating its existing software or developing or implementing new software could have a material adverse effect on its business or results of operations




The Company depends on information technology systems for the efficient functioning of its business. Such systems are subject to damage or interruption from power outages, computer and telecommunications failures, computer viruses, security breaches and natural disasters. Any material interruptions or the cost of replacements may have a material adverse effect on its business or results of operations.




The Company also relies heavily on its information technology staff. If the Company cannot meet its staffing needs in this area, the Company may not be able to maintain or improve its systems in the future.  Further, the Company still has certain legacy systems that are not generally supportable by outside vendors, and should those of its information technology team who are conversant with such systems leave, these legacy systems could be without effective support.


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The Company relies on certain software vendors to maintain and periodically upgrade many of these systems. The software programs supporting many of the Company’s systems are maintained and supported by independent software companies. The inability of these companies to continue to maintain and upgrade these information systems and software programs might disrupt or reduce the efficiency of its operations if the Company was unable to convert to alternate systems in an efficient and timely manner. In addition, costs and potential interruptions associated with the implementation of new or upgraded systems and technology could also disrupt or reduce the efficiency of the Company’s operations.





Natural disasters, unusually adverse weather conditions, pandemic outbreaks, terrorist acts, and global political events could cause permanent or temporary distribution center or store closures, impair the Company’s ability to purchase, receive or replenish inventory, or decrease customer traffic, all of which could result in lost sales and otherwise adversely affect the Company’s financial performance





The occurrence of natural disasters, such as hurricanes, fires, floods, and earthquakes, unusually adverse weather conditions, pandemic outbreaks, terrorist acts or disruptive global political events, such as civil unrest in countries in which the Company’s suppliers are located, or similar disruptions could adversely affect the Company’s operations and financial performance. These events result in the closure of one or more of the Company’s distribution centers or a significant number of stores, the temporary or long-term disruption in the supply of products from some local and overseas suppliers, the temporary disruption in the transport of goods from overseas, delay in the delivery of goods to the Company’s distribution centers or stores, the temporary reduction in the availability of products in its stores, and disruption to its information systems.





The Company’s current insurance program may expose the Company to unexpected costs and negatively affect its financial performance





The Company’s insurance coverage reflects deductibles, self-insured retentions, limits of liability and similar provisions that the Company believes are prudent. However, there are types of losses the Company may incur but against which it cannot be insured or which the Company believes are not economically reasonable to insure, such as losses due to employment practices, acts of war, employee and certain other crime and some natural disasters, including earthquakes. If the Company incurs these losses and they are material, the Company’s business could suffer. In addition, the Company self-insures a significant portion of expected losses under our workers' compensation and general liability programs. Unanticipated changes in any applicable actuarial assumptions and management estimates underlying the Company’s recorded liabilities for these losses could result in materially different amounts of expense than expected under these programs, which could have a material adverse effect on the Company’s financial condition and results of operations. Although the Company continues to maintain property insurance for catastrophic events, the Company is effectively self-insured for property losses up to the amount of its deductibles. If the Company experiences a greater number of these losses than it anticipates, the Company’s financial performance could be adversely affected.





The Company could experience disruptions in receiving and distribution





The Company’s success depends upon whether receiving and shipments are processed timely, accurately and efficiently. As the Company continues to grow, it may face increased or unexpected demands on warehouse operations, as well as unexpected demands on its transportation network. In addition, new store locations receiving shipments from distribution centers that are increasingly further away will increase transportation costs and may create transportation scheduling strains. The very nature of the Company’s closeout business makes it uniquely susceptible to periodic and difficult to foresee warehouse/distribution center overcrowding caused by spikes in inventory resulting from opportunistic closeout purchases.  Such demands could cause delays in delivery of merchandise to and from warehouses and/or to stores. The Company periodically evaluates new warehouse distribution and merchandising systems and could experience interruptions during implementations of new facilities and systems. A fire, earthquake, or other disaster at the Company’s warehouses could also hurt the Company’s business, financial condition and results of operations, particularly because much of the merchandise consists of closeouts and other irreplaceable products. The Company also faces the possibility of future labor unrest that could disrupt the Company’s receiving, processing, and shipment of merchandise.


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The Company depends upon its relationships with suppliers and the availability of closeout and other special-situation merchandise




The Company’s success depends in large part on its ability to locate and purchase quality closeout and other special-situation merchandise at attractive prices. This supports a changing mix of name-brand and other merchandise primarily within the 99.99¢ price point. The Company cannot be certain that such merchandise will continue to be available in the future at prices consistent with the Company business plan and/or historical costs. Further, the Company may not be able to find and purchase merchandise in necessary quantities, particularly as it grows and therefore requires a greater availability of such merchandise at competitive prices. Additionally, suppliers sometimes restrict the advertising, promotion and method of distribution of their merchandise. These restrictions in turn may make it more difficult for the Company to quickly sell these items from inventory. Although the Company believes its relationships with suppliers are good, the Company typically does not have long-term agreements or pricing commitments with any suppliers. As a result, the Company must continuously seek out buying opportunities from existing suppliers and from new sources. There is increasing competition for these opportunities with other wholesalers and retailers, discount and deep-discount stores, mass merchandisers, food markets, drug chains, club stores, and various other companies and individuals as the extreme value retail segment continues to expand outside and within existing retail channels. There is also a growth in consolidation among vendors and suppliers of merchandise targeted by the Company. A disruption in the availability of merchandise at attractive prices could impair the Company’s business.





The Company purchases in large volumes and its inventory is highly concentrated




To obtain inventory at attractive prices, the Company takes advantage of large volume purchases, closeouts and other special situations. As a result, inventory levels are generally higher than other discount retailers and from time to time this can result in an over-capacity situation in the warehouses and place stress on the Company’s warehouse and distribution operations as well as the back rooms of its retail stores.  This can also result in shrink due to spoilage if merchandise cannot be sold in anticipated timeframes.  The Company’s short-term and long-term store and warehouse inventory approximated $176.0 million and $156.2 million at March 27, 2010 and March 28, 2009, respectively. The Company periodically reviews the net realizable value of its inventory and makes adjustments to its carrying value when appropriate. The current carrying value of inventory reflects the Company’s belief that it will realize the net values recorded on the balance sheet. However, the Company may not do so, and if it does not, this may result in overcrowding and supply chain difficulties. If the Company sells large portions of inventory at amounts less than their carrying value or if it writes down or otherwise disposes of a significant part of inventory, cost of sales, gross profit, operating income, and net income could decline significantly during the period in which such event or events occur. Margins could also be negatively affected should the grocery category sales become a larger percentage of total sales in the future, and by increases in shrinkage and spoilage from perishable products.





If the Company fails to protect its brand name, competitors may adopt trade names that dilute the value of the Company’s brand name





The Company may be unable or unwilling to strictly enforce its trademark in each jurisdiction in which it does business. Also, the Company may not always be able to successfully enforce its trademarks against competitors or against challenges by others. The Company’s failure to successfully protect its trademarks could diminish the value and efficacy of its brand recognition, and could cause customer confusion, which could, in turn, adversely affect the Company’s sales and profitability.





The Company faces strong competition




The Company competes in both the acquisition of inventory and sale of merchandise with other wholesalers and retailers, discount and deep-discount stores, single price point merchandisers, mass merchandisers, food markets, drug chains, club stores and other retailers. It also competes for retail real estate sites. In the future, new companies may also enter the extreme value retail industry. It is also becoming more common for superstores to sell products competitive with the Company’s product offerings. Additionally, the Company currently faces increasing competition for the purchase of quality closeout and other special-situation merchandise, and some of these competitors are entering or may enter the Company’s traditional markets.  Also, as it expands, the Company will enter new markets where its own brand is weaker and established brands are stronger, and where its own brand value may have been diluted by other retailers with similar names appearances and/or business models. Some of the Company’s competitors have substantially greater financial resources and buying power than the Company does, as well as nationwide name-recognition and organization. The Company’s ability to compete will depend on many factors including the ability to successfully purchase and resell merchandise at lower prices than competitors and the ability to differentiate itself from competitors that do not share the Company’s price and merchandise attributes, yet may appear similar to prospective customers. The Company also faces competition from other retailers with similar names and/or appearances. The Company cannot assure that it will be able to compete successfully against current and future competitors in both the acquisition of inventory and the sale of merchandise.


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The Company is vulnerable to uncertain economic factors, changes in the minimum wage, and increased workers’ compensation and healthcare costs




The Company’s future results of operations and ability to provide quality merchandise constrained by our price points that are primarily 99.99¢ or less could be hindered by certain economic factors beyond its control, including but not limited to:




-
future inflation both in the United States as well as in other countries in which the products it sells are manufactured or from which parts and materials are sourced;


-
increases in prices from our merchandise, supply and service vendors;


-
increases in employee health and other benefit costs and the impact of new federal health care laws and regulations;


-
increases in minimum and prevailing wage levels, as well as “living wage” pressures;


-
increases in government regulatory compliance costs;


-
decreases in consumer confidence levels;


-
increases in transportation and fuel costs, which affect both the Company, as it ships over longer distances, and its customers and suppliers;


-
increases in unionization efforts, including campaigns at the store and warehouse levels;


-
increases in workers’ compensation costs and self-insured workers’ compensation liabilities due to increased claims costs, as well as political and legislative pressure or judicial rulings.





The Company faces risks associated with international sales and purchases




International sales historically have not been important to the Company’s overall net sales. However, some of the Company’s inventory is manufactured outside the United States and there are many risks associated with doing business internationally. International transactions may be subject to risks such as:




-
political instability;


-
lack of knowledge by foreign manufacturers of or compliance with applicable federal and state product, content,packaging and other laws, rules and regulations;


-
foreign currency exchange rate fluctuations;


-
uncertainty in dealing with foreign vendors and countries where the rule of law is less established;


-
risk of loss due to overseas transportation;


-
import and customs review can delay delivery of products as could labor disruptions at ports;


-
changes in import and export regulations, including “trade wars” and retaliatory responses;


-
changes in tariff, import duties and freight rates;


-
testing and compliance.





The United States and other countries have at times proposed various forms of protectionist trade legislation. Any resulting changes in current tariff structures or other trade policies could result in increases in the cost of and/or reduction in the availability of certain merchandise and could adversely affect the Company’s ability to purchase such merchandise.





The Company has potential risks regarding its store physical inventories




The Company had a material weakness in its internal control over financial reporting related to its inventory accounts for a number of years.  Although the Company remediated this material weakness as of March 27, 2010, there still are Company processes and procedures surrounding store physical inventories that the Company believes need to be improved. In particular, the Company has identified that certain personnel managing or performing physical inventories need additional training in order to consistently follow the Company’s physical inventory processes and procedures, and properly document the physical inventory results.


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If these physical inventory processes and procedures are not improved, this could have an adverse affect on the Company’s physical inventory results, shrinkage and margins.  See “Item 9A. Controls and Procedures.” for more information regarding the status of the Company’s disclosure controls and procedures and internal control over financial reporting.





The Company could encounter risks related to transactions with affiliates





The Company leases 13 of its stores and a parking lot for one of those stores from the Gold family and their affiliates, of which 12 stores are leased on a month to month basis.  Under current policy, the Company only enters into real estate transactions with affiliates for the renewal or modification of existing leases and on occasions where it determines that such transactions are in the Company’s best interests. Moreover, the independent members of the Board of Directors must unanimously approve all real estate transactions between the Company and its affiliates. They must also determine that such transactions are no less favorable than a negotiated arm’s-length transaction with a third party. The Company cannot guarantee that it will reach agreements with the Gold family on renewal terms for the properties it currently leases from them. Also, even if terms were negotiated that were acceptable to the Company, it cannot be certain that such terms would meet the standard required for approval by the independent directors. If the Company fails to renew one or more of these leases, it would be forced to relocate or close the leased stores. Any relocations or closures could potentially result in significant closure expense and could adversely affect the Company’s net sales and operating results.





The Company relies heavily on its executive management team




The Company relies heavily on the continued service of its executive management team.  With the exception of Robert Kautz, the Company’s Executive Vice President and Chief Financial Officer, the Company has not entered into employment agreements with any of its Executive Officers.   Also, the Company does not maintain key person life insurance on any of its officers.  The Company’s future success will depend on its ability to identify, attract, hire, train, retain and motivate other highly skilled management personnel. Competition for such personnel is intense, and the Company may not successfully attract, assimilate or sufficiently retain the necessary number of qualified candidates.





The Company’s operating results may fluctuate and may be affected by seasonal buying patterns




Historically, the Company’s highest net sales and highest operating income have occurred during the quarter ended on or near December 31, which includes the Christmas and Halloween selling seasons. During fiscal 2010 and 2009, the Company generated approximately 26.5% and 26.9%, respectively of its net sales during this quarter. If for any reason the Company’s net sales were to fall below norms during this quarter, it could have an adverse impact on profitability and impair the results of operations for the entire fiscal year. Transportation scheduling, warehouse capacity constraints, supply chain disruptions, adverse weather conditions, labor disruptions or other disruptions during the peak holiday season could also affect net sales and profitability for the fiscal year.




In addition to seasonality, many other factors may cause the results of operations to vary significantly from quarter to quarter. These factors, some beyond the Company’s control, include the following:




-
the number, size and location of new stores and timing of new store openings;


-
the distance of new stores from existing stores and distribution sources;


-
the level of advertising and pre-opening expenses associated with new stores;


-
the integration of new stores into operations;


-
the general economic health of the extreme value retail industry;


-
changes in the mix of products sold;


-
increases in fuel, shipping merchandise and energy costs;


-
the ability to successfully manage inventory levels and product mix across its multiple distribution centers and its stores;


-
changes in personnel;


-
the expansion by competitors into geographic markets in which they have not historically had a strong presence;


-
fluctuations in the amount of consumer spending; and


-
the amount and timing of operating costs and capital expenditures relating to the growth of the business and the Company’s ability to uniformly capture such costs.


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The Company could be exposed to product liability or packaging violation claims




The Company purchases many products on a closeout basis, some of which are manufactured or distributed by overseas entities, and some of which are purchased by the Company through brokers or other intermediaries as opposed to directly from their manufacturing or distribution sources. Many products are also sourced directly from manufacturers.  The closeout nature of certain of these products and transactions may impact the Company’s opportunity to investigate all aspects of these products. The Company attempts to ensure compliance, and to test products when appropriate, as well as to procure product insurance from its vendors and to be listed as an additional insured for certain products and/or by certain product vendors, and it does not purchase merchandise when it is cognizant of or foresees a problem, but there can be no assurance that the Company will consistently succeed in these efforts.  The Company has or has had, and in the future could face, labeling, environmental, or other claims, from private litigants as well as from governmental agencies, including, without limitation, the Environmental Protection Agency, Consumer Product Safety Commission, and California Air Resources Board.





The Company faces risks related to protection of customers’ credit card data





In connection with credit card sales, the Company transmits confidential credit card information.  Third parties may have the technology or know-how to breach the security of this customer information, and the Company’s security measures and those of our technology vendors may not effectively prohibit others from obtaining improper access to this information.  Any security breach could expose the Company to risks of data loss, litigation and liability and could seriously disrupt our operations and any resulting negative publicity could significantly harm our reputation.





The Company is subject to environmental regulations





Under various federal, state and local environmental laws and regulations, current or previous owners or occupants of property may face liability associated with hazardous substances. These laws and regulations often impose liability without regard to fault. In the future, the Company may be required to incur substantial costs for preventive or remedial measures associated with hazardous materials. The Company has several storage tanks at its warehouse facilities, including: an aboveground and an underground diesel storage tank at the City of Commerce, California warehouse; ammonia storage tanks at the Southern California cold storage facility and the Texas warehouse; aboveground diesel and propane storage tanks at the Texas warehouse; an aboveground propane storage tank at the main Southern California warehouse; and an aboveground propane tank located at the warehouse the Company owns in Eagan, Minnesota, which is currently being marketed for sale. Although the Company has not been notified of, and is not aware of, any material current environmental liability, claim or non-compliance, it could incur costs in the future related to owned properties, leased properties, storage tanks, or other business properties and/or activities. In the ordinary course of business, the Company handles or disposes of commonplace household products that are classified as hazardous materials under various environmental laws and regulations. The Company has adopted policies regarding the handling and disposal of these products, but the Company cannot be assured that its policies and training are comprehensive and/or are consistently followed, and the Company is still potentially subject to liability under, or violations of, these environmental laws and regulations in the future even if its policies are consistently followed.





Anti-takeover effect; Concentration of ownership by existing officers and principal stockholders




In addition to some governing provisions in the Company’s Articles of Incorporation and Bylaws, the Company is also subject to certain California laws and regulations which could delay, discourage or prevent others from initiating a potential merger, takeover or other change in control, even if such actions would benefit both the Company and its shareholders. Moreover, David Gold, the Chairman of the Board of Directors and members of his family (including Eric Schiffer, Chief Executive Officer, Jeff Gold, President and Chief Operating Officer and Howard Gold, Executive Vice President of Special Projects) and certain of their affiliates and the Company’s other directors and executive officers beneficially own as of March 27, 2010, an aggregate of 23,655,774, or 33.9%, of the Company’s outstanding common shares. As a result, they have the ability to influence the Company’s policies and matters requiring a shareholder vote, including the election of directors and other corporate action, and potentially to prevent a change in control. This could adversely affect the voting and other rights of other shareholders and could depress the market price of the Company’s common stock.


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The Company’s common stock price could decrease and fluctuate significantly





Trading prices for the Company’s common stock could decrease and fluctuate significantly due to many factors, including:





-
the depth of the market for the Company’s common stock;


-
changes in expectations of future financial performance, including financial estimates by securities analysts;


-
variations in operating results;


-
conditions or trends in the industry or industries of any significant vendors or other stakeholders;


-
the conditions of the market generally or the extreme value or retail industries;


-
additions or departures of key personnel;


-
future sales of common stock by the Company, its officers and the principal shareholders;


-
government regulation affecting the business;


-
increased competition;


-
increases in minimum wages;


-
workers’ compensation costs and new laws and regulations;


-
the Company’s ability to control shrink;


-
consolidation of consumer product companies;


-
municipal regulation of “dollar” stores;


-
future determinations of compliance or noncompliance with Sarbanes Oxley and related requirements; and


-
other risk factors as disclosed herein.





Item 1B. Unresolved Staff Comments





None.





Item 2. Properties




As of March 27, 2010, the Company owned 54 stores and leased 221 of its 275 store locations. Additionally, as of March 27, 2010, the Company owned three parcels of land and one building for potential store sites.




The Company’s leases generally provide for a fixed minimum rental, and some leases require additional rental based on a percentage of sales once a minimum sales level has been reached. Management believes that the Company’s stable operating history, excellent credit record, and ability to generate substantial customer traffic give the Company leverage when negotiating lease terms. Certain leases include cash reimbursements from landlords for leasehold improvements and other cash payments received from landlords as lease incentives. The Company currently leases 13 store locations and a parking lot associated with one of these stores from the Gold family and their affiliates, of which 12 stores are leased on a month to month basis.  The Company enters into real estate transactions with affiliates only for the renewal or modification of existing leases, and on occasions where it determines that such transactions are in the Company’s best interests. Moreover, the independent members of the Board of Directors must unanimously approve all real estate transactions between the Company and its affiliates. They must also determine that such transactions are not less favorable to the Company than a negotiated arm’s-length transaction with a third party. The Company cannot guarantee that it will reach agreements with the Gold family on renewal terms for the properties the Company currently leases from them. In addition, even if the Company reaches agreement on such terms, it cannot be certain that the independent directors will approve them. If the Company fails to renew one of these leases, it would be forced to relocate or close the leased store.





The following table sets forth, as of March 27, 2010, information relating to the calendar year expiration dates of the Company’s current stores leases:





Expiring

2010

Expiring

2011-2013

Expiring

2014-2016

Expiring

2017 and beyond22(a)

82

77

40





(a)
Includes 15 stores leased on a month-to-month basis.


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The large majority of the Company’s store leases were entered into with multiple renewal options of typically five years per option. Historically, the Company has exercised the large majority of the lease renewal options as they arise, and anticipates continuing to do so for the majority of leases for the foreseeable future.  The number of stores expiring with no additional options for renewal is set forth below:





Expiring Without

Renewal Options

2010

Expiring Without

Renewal Options

2011-2013

Expiring Without

Renewal Options

2014-2016

Expiring Without

Renewal Options

2017 and beyond18(a)

4

12

187





(a)
Includes 15 stores leased on a month-to-month basis.





The Company owns its main warehouse, distribution and executive office facility, located in the City of Commerce, California.  The Company also owns an additional warehouse storage space nearly adjacent to its main distribution facility.




The Company owns a warehouse/distribution center in the Houston area to service its Texas operations.




The Company also owns a cold storage warehouse/distribution center and leases additional warehouse facilities located near the City of Commerce, California.  As the Company’s needs change, it may relocate, expand, and/or otherwise increase/decrease the size and/or costs of its distribution/warehouse facilities.





The Company also owns a warehouse in Eagan, Minnesota.  The Company commenced marketing this warehouse for sale during the fourth quarter of fiscal 2008, and it is reflected in assets held for sale in the Company’s consolidated balance sheets.  Although the Company anticipates a sale of this warehouse in excess of its book value, no assurance can be given as to how much the warehouse will be sold for.





Item 3. Legal Proceedings





The Company is subject to private lawsuits, administrative proceedings and claims that arise in the ordinary course of business.  A number of these lawsuits, proceedings and claims may exist at any given time.  While the resolution of a lawsuit, proceeding or claim may have an impact on our financial results for the period in which it is resolved, and litigation is inherently unpredictable, in management’s opinion, none of these matters arising in the ordinary course of business are expected to have a material adverse effect on the Company’s financial position, results of operations, or overall liquidity.  Material pending legal proceedings (other than ordinary routine litigation incidental to our business) and material proceedings known to be contemplated by governmental authorities are reported in our Securities Exchange Act reports.  In accordance with ASC 450 “Accounting for Contingencies” (“ASC 450”), previously referred to as SFAS No. 5, the Company records a liability when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated.





The district attorneys of two California counties and one city attorney have notified the Company that they are planning a possible civil action against the Company alleging that its .99 cent pricing policy, adopted in September 2008, constitutes false advertising and/or otherwise violates California's pricing laws.  In response to this notification and an associated invitation from these governmental entities, the Company provided a detailed position statement with respect to its pricing structure.  If such an action is brought, we cannot predict the outcome of such an action or the amount of potential loss, if any.  We believe our pricing structure is lawful, and that our .99 cent pricing policy has an established precedent to the similar .9 cent pricing policy used for decades by gas stations across the country. We believe our .99 cent pricing policy has been well publicized with items properly price signed in the stores such that it would not cause a reasonable consumer to be deceived, and, if such an action is brought, we intend to vigorously defend it.





Item 4. (Removed and Reserved)


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 Table of Contents


PART II





Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities





The Company’s common stock is traded on the New York Stock Exchange under the symbol “NDN.” The following table sets forth, for the fiscal periods indicated, the high and low closing prices per share of the common stock as reported by the New York Stock Exchange.




Price RangeHigh


LowFiscal Year ended March 27, 2010:First Quarter

$
13.68


$
8.94Second Quarter


14.94



12.84Third Quarter


14.12



11.37Fourth Quarter


17.25



12.71Fiscal Year ended March 28, 2009:First Quarter

$
10.20


$
6.77Second Quarter


11.11



5.85Third Quarter


12.66



9.34Fourth Quarter


10.93



7.11





As of April 23, 2010, the Company had 396 shareholders of record and approximately 13,900 beneficial holders of its common stock.





The Company has not paid cash dividends with respect to its common stock since it became a public company in 1996. The Company presently intends to retain future earnings to finance continued system improvements, store development, and other expansion and therefore does not anticipate the payment of any cash dividends for the foreseeable future. Payment of future dividends, if any, will depend upon future earnings and capital requirements of the Company and other factors, which the Board of Directors considers appropriate.





The Company has one plan that provides for stock-based compensation (the 1996 Stock Option Plan, as amended). The plan is a fixed plan, which provides for the granting of non-qualified and incentive stock options as well as other types of equity-based awards.  An aggregate of 17,000,000 shares of the Company’s common stock may be issued pursuant to all awards under the plan, of which 2,606,000 are available as of March 27, 2010 for future option grants. Awards may be granted to officers, employees, non-employee directors and consultants. All grants are made at fair market value at the date of grant, either based on the closing price of our stock on the date of grant or, in the case of grants to members of the Board of Directors, based on a formula set forth in the plan. Stock options typically vest over a three-year period, one-third one year from the date of grant and one-third per year thereafter.  Stock options typically expire ten years from the date of grant.  In January 2008, the Compensation Committee approved a long-term incentive program under this plan.  The program included the awarding of both stock options and newly adopted performance stock units to members of management and other key employees as a long-term, stock-based pay for performance award designed to focus the Company’s management on achieving improved operating results and delivering value to shareholders.  Prior to April 1, 2006, the Company accounted for its stock option plan under APB Opinion No. 25 under which no compensation cost has been recognized in fiscal 2006.  In fiscal 2007, the Company adopted ASC 718, “Share-Based Payment” previously referred to as SFAS 123(R).  In fiscal 2010 and 2009 the Company recognized $7.7 million and $3.1 million, respectively, in shared-based compensation expense (see Note 8 to Consolidated Financial Statements for detailed discussion).  The Company’s 1996 Stock Option plan will expire in 2011.


20
 Table of Contents


Securities Authorized for Issuance Under Equity Compensation Plans




The following table provides information as of March 27, 2010 about the Company’s common stock that may be issued upon the exercise of options granted to employees or members of the Company’s Board of Directors under the Company’s existing 1996 Stock Option Plan.





EQUITY COMPENSATION PLAN INFORMATIONNumber of securities to be issued upon exercise of outstanding options, warrants and rights


Weighted-average exercise price of outstanding options, warrants and rights


Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))Plan category

(a)


(b)


(c)Equity compensation plans approved by security holders


5,124,000
(1)

$
17.23
(2)


2,606,000Equity compensation plans not approved by security holders


—



—



—Total


5,124,000


$
17.23



2,606,000




(1)
This amount includes 993,000 shares potentially issuable pursuant to outstanding performance stock units granted under the Company’s 1996 Stock Option Plan. The actual number of shares of Company common stock to be issued depends on the Company’s financial performance over a period of time.


(2)
Performance stock units do not have an exercise price and thus they have been excluded from the weighted average exercise price calculation in column (b).





Stock Repurchase Program





For information on common stock repurchases, see Note 9 to Consolidated Financial Statements, which is incorporated by reference in this Item 2.


21
 Table of Contents


Performance Graph





The following graph sets forth the percentage change in cumulative total shareholder return of the Company’s common stock during the period from March 31, 2005 to March 27, 2010, compared with the cumulative returns of the S&P Mid Cap 400 Index and the Russell 2000 Index.  The comparison assumes $100 was invested on March 31, 2005 in the common stock and in each of the foregoing indices shown. The stock price performance on the following graph is not necessarily indicative of future stock price performance.










22
 Table of Contents





Item 6. Selected Financial Data




The following table sets forth selected financial and operating data of the Company for the periods indicated. The data set forth below should be read in conjunction with the consolidated financial statements and notes thereto.




Years EndedMarch 27, 2010


March 28, 2009


March 29, 2008


March 31, 2007


March 31, 2006(Amounts in thousands, except per share and operating data)Statements of Income Data:Net Sales:99¢ Only Stores

$
1,314,214


$
1,262,119


$
1,158,856


$
1,064,518


$
984,293Bargain Wholesale


40,956



40,817



40,518



40,178



39,296Total sales


1,355,170



1,302,936



1,199,374



1,104,696



1,023,589Cost of sales (excluding depreciation and amortization expense as shown separately below)


797,748



791,121



738,499



672,101



640,140Gross profit


557,422



511,815



460,875



432,595



383,449Selling, general and administrative expenses:Operating expenses


436,608



464,635



433,940



393,351



340,371Depreciation and amortization


27,398



34,266



33,321



32,675



31,424Total operating expenses


464,006



498,901



467,261



426,026



371,795Operating income (loss)


93,416



12,914



(6,386
)


6,569



11,654Other (income), net


(135
)


(993
)


(6,674
)


(7,432
)


(5,084
)Income before provision for income taxes and income attributed to noncontrolling interest


93,551



13,907



288



14,001



16,738Provision (benefit) for income taxes


33,104



4,069



(2,605
)


4,239



5,316Net income including noncontrolling interest


60,447



9,838



2,893



9,762



11,422Net income attributable to noncontrolling interest


—



(1,357
)


—



—



—Net income attributable to 99¢ Only Stores

$
60,447


$
8,481


$
2,893


$
9,762


$
11,422Earnings per common share attributable to 99¢ Only Stores:Basic

$
0.88


$
0.12


$
0.04


$
0.14


$
0.16Diluted

$
0.87


$
0.12


$
0.04


$
0.14


$
0.16Weighted average number of common shares outstanding:Basic


68,641



69,987



70,044



69,862



69,553Diluted


69,309



70,037



70,117



70,017



69,737Company Operating Data:Sales Growth:99¢ Only Stores


4.1
%


8.9
%


8.9
%


8.2
%


5.8
%Bargain Wholesale


0.3
%


0.7
%


0.8
%


2.2
%


(7.1
)%Total sales


4.0
%


8.6
%


8.6
%


7.9
%


5.3
%Gross margin


41.1
%


39.3
%


38.4
%


39.2
%


37.5
%Operating margin


6.9
%


1.0
%


(0.5
)%


0.6
%


1.1
%Net income


4.5
%


0.7
%


0.2
%


0.9
%


1.1
%


23
 Table of Contents





March 27, 2010


March 28, 2009


March 29, 2008


March 31, 2007


March 31, 2006(Amounts in thousands, except per share and operating data)Retail Operating Data (a):99¢ Only Stores at end of period


275



279



265



251



232Change in comparable stores net sales(b)


3.9
%


3.7
%


4.0
%


2.4
%


0.3
%Average net sales per store open the full year

$
4,848


$
4,642


$
4,547


$
4,421


$
4,347Average net sales per estimated saleable square foot(c)

$
289
(d)

$
273
(e)

$
263
(f)

$
254
(g)

$
250
(h)Estimated saleable square footage at year end


4,606,728



4,703,630



4,521,091



4,337,974



4,040,096Balance Sheet Data:Working capital

$
271,261


$
192,365


$
170,581


$
209,890


$
201,475Total assets

$
745,986


$
662,873


$
649,410


$
643,135


$
628,708Capital lease obligation, including current portion

$
519


$
584


$
643


$
699


$
774Long-term debt, including current portion

$
—


$
—


$
7,319


$
7,299


$
6,174Total shareholders' equity

$
600,422


$
523,857


$
526,491


$
519,227


$
501,526





(a)
Includes retail operating data solely for the Company’s 99¢ Only Stores.


(b)
Change in comparable stores net sales compares net sales for all stores open at least 15 months.


(c)
Computed based upon estimated total saleable square footage of stores open for the full year.


(d)
Includes 31 Texas stores open for a full year. Texas stores open for the full year had average sales of $3.4 million per store and average sales per estimated saleable square foot of $180. All non-Texas stores open for the full year had average sales of $5.0 million per store and $305 of average sales per estimated saleable square foot.


(e)
Includes 39 Texas stores open for a full year. Texas stores open for the full year had average sales of $2.7 million per store and average sales per estimated saleable square foot of $142. All non-Texas stores open for the full year had average sales of $5.0 million per store and $301 of average sales per estimated saleable square foot.


(f)
Includes 39 Texas stores open for a full year. Texas stores open for the full year had average sales of $2.6 million per store and average sales per estimated saleable square foot of $128. All non-Texas stores open for the full year had average sales of $4.9 million per store and $291 of average sales per estimated saleable square foot.


(g)
Includes 36 Texas stores open for a full year. Texas stores open for the full year had average sales of $2.4 million per store and average sales per estimated saleable square foot of $120. All non-Texas stores open for the full year had average sales of $4.8 million per store and $284 of average sales per estimated saleable square foot.


(h)
Includes 36 Texas stores open for a full year. Texas stores open for the full year had average sales of $2.3 million per store and average sales per estimated saleable square foot of $111. All non-Texas stores open for the full year had average sales of $4.7 million per store and $283 of average sales per estimated saleable square foot.


24
 Table of Contents


Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations





This Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in connection with “Item 6. Selected Financial Data” and “Item 8. Financial Statements and Supplementary Data” of this Form 10-K.




General




In fiscal 2010, 99¢ Only Stores had net sales of $1,355.2 million, operating income of $93.4 million and net income of $60.4 million.  Net sales increased 4.0% over fiscal 2009 primarily due to the nine new store openings since the end of fiscal 2009 and a 3.9% increase in same-store sales.  Average sales per store open the full year increased to $4.8 million in fiscal 2010 from $4.6 million, in fiscal 2009.  Average net sales per estimated saleable square foot (computed for stores open for the full year) increased to $289 per square foot at March 27, 2010 from $273 per square foot at March 28, 2009. This increase reflects the Company’s opening of smaller locations for new store development and increases in same-store sales. Existing stores at March 27, 2010 average approximately 21,300 gross square feet.  The Company currently is targeting locations between 15,000 and 19,000 gross square feet.





In fiscal 2010, the Company continued to expand its store base, opening nine new stores. Of these newly opened stores, eight stores are located in California, and one Texas store re-opened which was closed due to a hurricane.  The Company closed 12 stores in Texas and one store in California during fiscal 2010.  In fiscal 2011, the Company plans to increase its store count by approximately 5%, with the majority of new stores expected to be opened in California during the second half of fiscal 2011, and the Company believes that near term growth in fiscal 2011 will primarily result from new store openings in its existing territories and increases in same-store sales.




On February 1, 2008, the Company changed its fiscal year end from March 31 to the Saturday nearest March 31 of each year. The Company now follows a fiscal calendar consisting of four quarters with 91 days, each ending on the Saturday closest to the calendar quarter-end and a 52-week fiscal year with 364 days, with a 53-week year every five to six years. The Company’s fiscal year 2011 (“fiscal 2011”) which began on March 28, 2010 and will end on April 2, 2011, will consist of 53 weeks.  The Company’s fiscal year 2010 (“fiscal 2010”) began on March 29, 2009 and ended March 27, 2010, its fiscal year 2009 (“fiscal 2009”) began on March 30, 2008 and ended on March 28, 2009, and its fiscal year 2008 (“fiscal 2008”) began on April 1, 2007 and ended on March 29, 2008.





Critical Accounting Policies and Estimates





The preparation of financial statements requires management to make estimates and assumptions that affect reported earnings. These estimates and assumptions are evaluated on an on-going basis and are based on historical experience and other factors that management believes are reasonable. Estimates and assumptions include, but are not limited to, the areas of inventories, long-lived asset impairment, legal reserves, self-insurance reserves, leases, taxes and share-based compensation.





The Company believes that the following represent the areas where more critical estimates and assumptions are used in the preparation of our financial statements:




Inventory valuation:Inventories are valued at the lower of cost (first in, first out) or market. Valuation allowances for obsolete and excess inventory and shrinkage are also recorded. Shrinkage is estimated as a percentage of sales for the period from the last physical inventory date to the end of the applicable period. Such estimates are based on experience and the most recent physical inventory results. The valuation allowances for obsolete and excess inventory in many locations (including various warehouses, store backrooms, and sales floors of all its stores) require management judgment and estimates that may impact the ending inventory valuation as well as gross margins.  The Company does not believe that there is a reasonable likelihood that there will be a material change in the future estimates or assumptions that the Company uses to calculate these inventory valuation reserves.  As an indicator of the sensitivity of this estimate, a 10% increase in our estimates of expected losses from excess and obsolete inventory and the shrinkage provision at March 27, 2010, would have increased these reserves by approximately $0.4 million and $1.5 million, respectively and reduced fiscal 2010 pre-tax earnings by the same amounts.


25
 Table of Contents


Long-lived asset impairment: In accordance with ASC 360 “Accounting for the Impairment or Disposal of Long-lived Assets” (“ASC360”), previously referred to as SFAS No. 144, the Company assesses the impairment of long-lived assets annually or when events or changes in circumstances indicate that the carrying value may not be recoverable. Recoverability is measured by comparing the carrying amount of an asset to expected future net cash flows generated by the asset. If the carrying amount of an asset exceeds its estimated undiscounted future cash flows, the carrying amount is compared to its fair value and an impairment charge is recognized to the extent of the difference. Factors that the Company considers important which could individually or in combination trigger an impairment review include the following: (1) significant underperformance relative to expected historical or projected future operating results; (2) significant changes in the manner of the Company’s use of the acquired assets or the strategy for the Company’s overall business; and (3) significant changes in the Company’s business strategies and/or negative industry or economic trends. On a quarterly basis, the Company assesses whether events or changes in circumstances occur that potentially indicate that the carrying value of long-lived assets may not be recoverable.The primary factor that could impact the outcome of an impairment evaluation is the estimate of future cash flows expected to be generated by the asset being evaluated. Considerable management judgment is necessary to estimate the cash flows.  Accordingly, if actual results fall short of such estimates, significant future impairments could result. In fiscal 2010, due to the underperformance of one California store, the Company concluded that the carrying value of its long-lived asset was not recoverable and accordingly recorded an asset impairment charge of $0.4 million.  In fiscal 2009, the Company recorded impairment charges of $10.4 million because it concluded that the carrying value of certain long-lived assets was not recoverable.  These charges primarily consisted of a leasehold improvement impairment charge of approximately $10.1 million related to the Company’s Texas market plan and an impairment charge of approximately $0.2 million related to the underperformance of a store in California.  See Note 10 to Consolidated Financial Statements for further information regarding the charges related to the Company’s Texas operations.  In fiscal 2008, the Company recorded an asset impairment charge of $0.5 million related to one underperforming store in Texas. The Company has not made any material changes to its long-lived asset impairment methodology during fiscal 2010.





Legal reserves:The Company is subject to private lawsuits, administrative proceedings and claims that arise in the ordinary course of business.  A number of these lawsuits, proceedings and claims may exist at any given time.  While the resolution of a lawsuit, proceeding or claim may have an impact on our financial results for the period in which it is resolved, and litigation is inherently unpredictable, in management’s opinion, none of these matters arising in the ordinary course of business are expected to have a material adverse effect on the Company’s financial position, results of operations, or overall liquidity.  Material pending legal proceedings (other than ordinary routine litigation incidental to our business) and material proceedings known to be contemplated by governmental authorities are reported in our Exchange Act reports.  In accordance with ASC 450 “Accounting for Contingencies” (“ASC 450”), previously referred to as SFAS No. 5, the Company records a liability when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated.





There were no material changes in the estimates or assumptions used to determine legal reserves during fiscal 2010 and a 10% change in legal reserves will not be material to the Company’s consolidated financial position or results of operations.





Self-insured workers’ compensation liability: The Company self-insures for workers’ compensation claims in California and Texas. The Company establishes a reserve for losses of both estimated known claims and incurred but not reported insurance claims. The estimates are based on reported claims and actuarial valuations of estimated future costs of reported and incurred but not yet reported claims. Should the estimates fall short of the actual claims paid, the liability recorded would not be sufficient and additional workers’ compensation costs, which may be significant, would be incurred. The Company does not discount the projected future cash outlays for the time value of money for claims and claim related costs when establishing its workers’ compensation liability.  As an indicator of the sensitivity of this estimate, at March 27, 2010, a 10% increase in our estimate of expected losses from workers compensation claims would have increased this reserve by approximately $4.7 million and reduced fiscal 2010 pre-tax earnings by the same amount.





Operating leases: The Company recognizes rent expense for operating leases on a straight-line basis (including the effect of reduced or free rent and rent escalations) over the applicable lease term. The difference between the cash paid to the landlord and the amount recognized as rent expense on a straight-line basis is included in deferred rent. Cash reimbursements received from landlords for leasehold improvements and other cash payments received from landlords as lease incentives are recorded as deferred tenant improvements. Deferred rent related to landlord incentives is amortized as an offset to rent expense using the straight-line method over the applicable lease term.


26
 Table of Contents


For store closures where a lease obligation still exists, the Company records the estimated future liability associated with the rental obligation on the cease use date (when the store is closed) in accordance with ASC 420 “Accounting for Exit or Disposal Cost Obligations” (“ASC420”), previously referred to as SFAS No. 146.  Liabilities are established at the cease use date for the present value of any remaining operating lease obligations, net of estimated sublease income, and at the communication date for severance and other exit costs, as prescribed by ASC 420. Key assumptions in calculating the liability include the timeframe expected to terminate lease agreements, estimates related to the sublease potential of closed locations, and estimation of other related exit costs. If actual timing and potential termination costs or realization of sublease income differ from our estimates, the resulting liabilities could vary from recorded amounts. These liabilities are reviewed periodically and adjusted when necessary.





During fiscal 2010, the Company closed 12 of its Texas stores and accrued approximately $3.0 million in lease termination costs associated with the closing of seven out of the 12 Texas stores.  Of the $3.0 million lease termination costs accrual, the Company recognized a net expense of $2.5 million as these costs were partially offset by a reduction in expenses of $0.5 million due to the reversal of deferred rent and tenant improvements related to these stores during fiscal 2010.  During fiscal 2009, the Company accrued approximately $1.3 million in lease termination costs associated with the closing of four of its Texas stores during fourth quarter of fiscal 2009 and lease termination costs for one contracted store. See Note 10 to Consolidated Financial Statements for further information regarding the lease termination charges related to Company’s Texas operations.





Tax Valuation Allowances and Contingencies:The Company accounts for income taxes in accordance with ASC 740 “Accounting for Income Taxes” (“ASC 740”), previously referred to as SFAS No. 109, which requires that deferred tax assets and liabilities be recognized using enacted tax rates for the effect of temporary differences between the book and tax bases of recorded assets and liabilities. ASC 740-10-55 also requires that deferred tax assets be reduced by a valuation allowance if it is more likely than not that some portion or all of the net deferred tax assets will not be realized. The Company had approximately $70.9 million and $68.5 million in net deferred tax assets that are net of tax valuation allowances of $5.8 million and $3.9 million for the year ended March 27, 2010 and March 28, 2009, respectively. Management evaluated the available evidence in assessing the Company’s ability to realize the benefits of the net deferred tax assets at March 27, 2010 and concluded it is more likely than not that the Company will not realize a portion of its net deferred tax assets. The remaining balance of the net deferred tax assets should be realized through future operating results and the reversal of taxable temporary differences.  Income tax contingencies are accounted for in accordance with ASC 740-10-50, previously referred to as FIN 48, and may require significant management judgment in estimating final outcomes.  The Company had approximately $1.4 million at March 28, 2009 of unrecognized tax benefits related to uncertain tax positions.  The statutes of limitations have expired for the periods related to these uncertain tax positions at the end of fiscal 2010.  Accordingly, in fiscal 2010, the Company has derecognized these liabilities. See Note 5 “Income Tax Provision” to Consolidated Financial Statements for further discussion of income taxes.





Share-Based Compensation: The Company has a stock incentive plan in effect under which the Company grants stock options and Performance Stock Units (“PSUs”).  The Company accounts for stock-based compensation expense under the fair value recognition provisions of ASC 718, “Shared-based compensation” (“ASC 718”), previously referred to as SFAS 123(R).  ASC 718 requires companies to estimate the fair value of share-based payment awards on the date of grant using an option-pricing model.  The value of the portion of the award that is ultimately expected to vest is recognized as an expense ratably over the requisite service periods.  The Company estimates the fair value for each option award as of the date of grant using the Black-Scholes option pricing model.  The Black-Scholes model considers, among other factors, the expected life of the award and the expected volatility of the Company’s stock price.  Stock options are granted to employees at exercise prices equal to the fair market value of the Company’s stock at the dates of grant.  The Company recognizes the stock-based compensation expense ratably over the requisite service periods, which is generally a vesting term of three years.  Stock options typically have a term of 10 years.  The fair value of the PSUs is based on the stock price on the grant date.  The compensation expense related to PSUs is recognized only when it is probable that the performance criteria will be met.   During fiscal 2010, expected stock price volatility and the assumed risk free rate decreased slightly based upon recent historical trends. These changes are not material to the Company’s consolidated financial position or results of operations.  There were no other material changes in the estimates or assumptions used to determine stock-based compensation during fiscal 2010.


27
 Table of Contents


Results of Operations





The following discussion defines the components of the statement of income and should be read in conjunction with “Item 6. Selected Financial Data.”




Net Sales: Revenue is recognized at the point of sale for retail sales. Bargain Wholesale sales revenue is recognized on the date merchandise is shipped. Bargain Wholesale sales are primarily shipped free on board shipping point.





Cost of Sales:Cost of sales includes the cost of inventory, freight in, inter-state warehouse transportation costs, inventory shrinkage (obsolescence, spoilage and shrink), and is net of discounts and allowances. The Company receives various cash discounts, allowances and rebates from its vendors. Such items are included as a reduction of cost of sales as merchandise is sold. The Company does not include purchasing, receiving, distribution, warehouse costs and transportation to and from stores in its cost of sales, which totaled $66.3 million, $74.1 million and $72.1 million as of fiscal 2010, 2009 and 2008, respectively.  Due to this classification, the Company's gross profit rates may not be comparable to those of other retailers that include costs related to their distribution network in cost of sales.





Selling, General, and Administrative Expenses: Selling, general, and administrative expenses include purchasing, receiving, inspection and warehouse costs, the costs of selling merchandise in stores (payroll and associated costs, occupancy and other store-level costs), distribution costs (payroll and associated costs, occupancy, transportation to and from stores, and other distribution-related costs), and corporate costs (payroll and associated costs, occupancy, advertising, professional fees, stock-based compensation expense and other corporate administrative costs).  Selling, general, and administrative expenses also include depreciation and amortization expense.





Other (Income) Expense:Other (income) expense relates primarily to the interest income on the Company’s marketable securities, net of interest expense on the Company’s capitalized leases and the impairment charge related to the Company’s marketable securities.


28
 Table of Contents


The following table sets forth for the periods indicated, certain selected income statement data, including such data as a percentage of net sales (percentages may not add up due to rounding):





Year EndedMarch 27, 2010


% of Net Sales


March 28, 2009


% of Net Sales


March 29, 2008


% of Net Sales(Amounts in thousands)Net Sales:99¢ Only Stores

$
1,314,214


97.0
%

$
1,262,119


96.9
%

$
1,158,856



96.6
%Bargain Wholesale


40,956



3.0



40,817



3.1



40,518



3.4Total sales

$
1,355,170



100.0


$
1,302,936



100.0


$
1,199,374



100.0Cost of sales


797,748



58.9



791,121



60.7



738,499



61.6Gross profit


557,422



41.1



511,815



39.3



460,875



38.4Selling, general and administrative expenses:Operating expenses


436,608



32.2



464,635



35.7



433,940



36.2Depreciation and amortization


27,398



2.0



34,266



2.6



33,321



2.8Total operating expenses


464,006



34.2



498,901



38.3



467,261



39.0Operating income (loss)


93,416



6.9



12,914



1.0



(6,386
)


(0.5
)Other income, net


(135
)


(0.0
)


(993
)


(0.1
)


(6,674
)


(0.6
)Income before provision for income taxes and income attributed to noncontrolling interest


93,551



6.9



13,907



1.1



288



0.0Provision (benefit) for income taxes


33,104



2.4



4,069



0.3



(2,605
)


(0.2
)Net income attributable to noncontrolling interest


—



—



(1,357
)


(0.1
)


—



—Net income attributable to 99¢ Only Stores

$
60,447



4.5
%

$
8,481



0.7
%

$
2,893



0.2
%


29
 Table of Contents


Fiscal Year Ended March 27, 2010 Compared to Fiscal Year Ended March 28, 2009





Net sales. Total net sales increased $52.2 million, or 4.0%, to $1,355.2 million in fiscal 2010 from $1,302.9 million in fiscal 2009. Net retail sales increased $52.1 million, or 4.1%, to $1,314.2 million in fiscal 2010 from $1,262.1 million in fiscal 2009.  Of the $52.1 million increase in net retail sales, $47.6 million was due to a 3.9% increase in comparable stores net sales for all stores open at least 15 months in fiscal 2010 and 2009.  The comparable stores net sales increase was attributable to a 4.0% increase in transaction counts and decrease in average ticket size by 0.1% to $9.59 from $9.60.  The full year fiscal 2010 effect of stores opened in fiscal 2009 increased sales by $19.5 million and the effect of nine new stores opened during fiscal 2010 increased net retail sales by $19.7 million.  The increase in sales was partially offset by a decrease in sales of approximately $34.7 million due to the effect of the closing of 17 stores in Texas and one in California during fiscal 2010 and fiscal 2009. Bargain Wholesale net sales increased $0.1 million, or 0.3%, to $41.0 million in fiscal 2010 from $40.8 million in fiscal 2009.





During fiscal 2010, the Company added nine stores: eight in California and re-opened one store in Texas, which was closed due to a hurricane. The Company closed 12 stores in Texas and one in California during fiscal 2010.  At the end of fiscal 2010, the Company had 275 stores compared to 279 as of the end of fiscal 2009. Gross retail square footage at the end of fiscal 2010 and fiscal 2009 was 5.86 million and 5.99 million, respectively.  For 99¢ Only Stores open all of fiscal 2010, the average net sales per estimated saleable square foot was $289 and the average annual net sales per store were $4.8 million, including the Texas stores open for the full year. Non-Texas stores net sales averaged $5.0 million per store and $305 per square foot. Texas stores open for a full year averaged net sales of $3.4 million per store and $180 per square foot.




Gross profit. Gross profit increased $45.6 million, or 8.9%, to $557.4 million in fiscal 2010 from $511.8 million in fiscal 2009.  As a percentage of net sales, overall gross margin increased to 41.1% in fiscal 2010 from 39.3% in fiscal 2009.  The increase in gross profit margin was primarily due to a decrease in cost of products sold to 56.1% of net sales for fiscal 2010 compared to 57.1% of net sales for fiscal 2009 due to a favorable shift in product mix and new buying and merchandising initiatives to drive sales of higher margin items. In addition, an increase in gross profit margin was also due to a decrease in spoilage/shrinkage to 2.6% of net sales in fiscal 2010 compared to 3.2% in fiscal 2009.  This reduction in shrinkage is primarily due to a one time reduction in shrink reserves of approximately $1.8 million for Texas based on the shrink analysis performed at the end of fiscal 2010 and lower overall shrink as a result of the trend of physical inventories taken during fiscal 2010 as well as a decrease in recorded scrap from perishables.  The remaining change was made up of increases and decreases in other less significant items included in cost of sales.




Operating expenses. Operating expenses decreased by $28.0 million, or 6.0%, to $436.6 million in fiscal 2010 from $464.6 million in fiscal 2009. As a percentage of net sales, operating expenses decreased to 32.2% for fiscal 2010 from 35.7% for fiscal 2009.  Of the 340 basis points decrease in operating expenses as a percentage of net sales, retail operating expenses decreased by 150 basis points, distribution and transportation costs decreased by 80 basis points, corporate expenses decreased by 70 basis points, and other items decreased by 40 basis points as described below.





Retail operating expenses for fiscal 2010 decreased as a percentage of net sales by 150 basis points to 22.9% of net sales, compared to 24.4% of net sales for fiscal 2009. The majority of the decrease as a percentage of net sales was due to lower payroll-related expenses as a result of improvement in labor productivity, lower rent expenses and the implementation of new cost control methods resulting in lower utilities and supplies costs.





Distribution and transportation expenses for fiscal 2010 decreased as a percentage of net sales by 80 basis points to 4.9% of net sales, compared to 5.7% of net sales for fiscal 2009.  The decrease as a percentage of net sales was primarily due to improvements in labor efficiencies, improved processing methods, lower fuel costs and improved trailer utilization.





Corporate operating expenses for fiscal 2010 decreased as a percentage of net sales by 70 basis points to 3.5% of net sales, compared to 4.2% of net sales for fiscal 2009.  The decrease as a percentage of net sales was primarily due to lower payroll and payroll related expenses, consulting and professional fees, and legal costs.





The remaining operating expenses for fiscal 2010 decreased as a percentage of net sales by 40 basis points to 1.0% of net sales, compared to 1.4% for fiscal 2009.  The decrease in other operating expenses compared to the fiscal 2009 was primarily due to a reduction in an asset impairment charge of $9.9 million, and a severance charge of approximately $1.4 million related to the Company’s Texas operations, as well as the recording of a $0.8 million loss on a foreclosure sale of a shopping center owned by the La Quinta Partnership, partially offset by the recording of the Company’s share of a gain on a sale of the primary asset of the Reseda Partnership of approximately $0.2 million and consolidation of the partner’s gain of the Reseda Partnership of approximately $1.4 million during fiscal 2009.


30
 Table of Contents


The decreases in fiscal 2010 operating expenses compared to fiscal 2009 were partially offset by an increase of $4.6 million in stock-based compensation expense primarily related to performance stock unit expense, and lease termination and closing costs of approximately $1.2 million related to the closure of some Texas stores in fiscal 2010.  The remaining change of $0.3 million was made up of increases and decreases in other less significant items included in other operating expenses.





Depreciation and amortization.Depreciation and amortization decreased $6.9 million, or 20.0%, to $27.4 million in fiscal 2010 from $34.3 million in fiscal 2009. The decrease was primarily a result of closing 17 stores in Texas and one store in California and also due to the assets that became fully depreciated in existing stores compared to the amount of new depreciable assets added as a result of new store openings.   Depreciation as a percentage of net sales decreased to 2.0% from 2.6% of net sales for the reasons discussed above as well as due to sales improvements.





Operating income. Operating income was $93.4 million for fiscal 2010 compared to operating income of $12.9 million for fiscal 2009. Operating income as a percentage of net sales was 6.9% in fiscal 2010 compared to operating income as a percentage of net sales of 1.0% in fiscal 2009.  This was primarily due to the changes in gross margin and operating expenses discussed above.




Other income, net. Other income decreased $0.9 million to $0.1 million in fiscal 2010 compared to $1.0 million in fiscal 2009.  The decrease in other income was primarily due to lower interest income which decreased to $1.1 million for fiscal 2010 from $3.5 million for fiscal 2009, primarily due to lower interest rates.  The decrease in other income for fiscal 2010 was partially offset by a decrease of $0.9 million for an investment impairment charge related to the Company’s available for sale securities.  The Company recorded an investment impairment charge related to credit losses of approximately $0.8 million for fiscal 2010 compared to an investment impairment charge of $1.7 million for fiscal 2009 related to the Company’s available for sale securities.  The decrease was also offset by lower interest expense which was $0.2 million for fiscal 2010 compared to interest expense of $0.9 million for fiscal 2009.





Provision for income taxes. The income tax provision in fiscal 2010 was $33.1 million compared to $4.1 million in fiscal 2009, due to the increase in pre-tax income.  The effective tax rate for fiscal 2010 was 35.4% compared to an effective tax rate of 29.3% for fiscal 2009.   In fiscal 2009, the Company wrote off approximately $1.4 million of Texas net operating loss credits due to the Company’s decision to exit the Texas market. The effective combined federal and state income tax rates are less than the statutory rates in each period due to tax credits and the effect of certain revenues and/or expenses that are not subject to taxation.





Net income.As a result of the items discussed above, net income increased $52.0 million, or 612.7%, to $60.4 million in fiscal 2010 from $8.5 million in fiscal 2009. Net income as a percentage of net sales increased to 4.5% in fiscal 2010 from 0.7% in fiscal 2009.





Fiscal Year Ended March 28, 2009 Compared to Fiscal Year Ended March 29, 2008





Net sales. Total net sales increased $103.5 million, or 8.6%, to $1,302.9 million in fiscal 2009 from $1,199.4 million in fiscal 2008. Net retail sales increased $103.2 million, or 8.9%, to $1,262.1 million in fiscal 2009 from $1,158.9 million in fiscal 2008.  Of the $103.2 million increase in net retail sales, $41.7 million was due to a 3.7% increase in comparable stores net sales for all stores open at least 15 months in fiscal 2009 and 2008.  The comparable stores net sales increase was attributable to a 0.1% increase in transaction counts as well as an increase in average ticket size by 3.6% to $9.79 from $9.45.  The full year fiscal 2009 effect of stores opened in fiscal 2008 increased sales by $16.6 million and the effect of 19 new stores opened during fiscal 2009 increased net retail sales by $44.9 million.  Bargain Wholesale net sales increased $0.3 million, or 0.7%, to $40.8 million in fiscal 2009 from $40.5 million in fiscal 2008.





During fiscal 2009, the Company added 19 stores: 13 in California, three in Arizona, two in Texas and one in Nevada. The Company closed five stores in Texas during fiscal 2009, including one store due to the hurricane which was re-opened in May 2009.  At the end of fiscal 2009, the Company had 279 stores compared to 265 at the end of fiscal 2008. Gross retail square footage at the end of fiscal 2009 and fiscal 2008 was 5.99 million and 5.76 million, respectively.  For 99¢ Only Stores open all of fiscal 2009, the average net sales per estimated saleable square foot was $273 and the average annual net sales per store were $4.6 million, including the Texas stores open for the full year. Non-Texas stores net sales averaged $5.0 million per store and $301 per square foot. Texas stores open for a full year averaged net sales of $2.7 million per store and $142 per square foot.


31
 Table of Contents


Gross profit. Gross profit increased $50.9 million, or 11.0%, to $511.8 million in fiscal 2009 from $460.9 million in fiscal 2008.  As a percentage of net sales, overall gross margin increased to 39.3% in fiscal 2009 from 38.4% in fiscal 2008.  The increase in gross profit margin was primarily due to a decrease in spoilage/shrinkage to 3.2% of net sales in fiscal 2009 compared to 3.6% in fiscal 2008.  Shrinkage decreased due to lower losses in inventory as a percentage of sales which was partially offset by slightly higher spoilage primarily due to a shift in sales mix for grocery items which have a higher spoilage rate than other categories.  In addition, an increase in gross profit was also due to a decrease in cost of products sold to 57.1% for fiscal 2009 compared to 57.7% for fiscal 2008 due to the full year effect of new pricing strategies including variable pricing that were implemented in the second half of fiscal 2008, and an increase in all of its price points by adding 99/100 of one cent to every price point (e.g. 99¢ increased to 99.99¢) implemented in September 2008.  The pricing strategies increased gross profit, but were partially offset by a shift in the sales mix towards lower margin categories. The remaining change was made up of increases and decreases in other less significant items included in cost of sales.




Operating expenses. Operating expenses increased $30.7 million, or 7.1%, to $464.6 million in fiscal 2009 from $433.9 million in fiscal 2008. As a percentage of net sales, operating expenses decreased to 35.7% for fiscal 2009 from 36.2% for fiscal 2008.  Of the 50 basis points decrease in operating expenses as a percentage of sales, retail operating expenses decreased by 90 basis points, distribution and transportation costs decreased by 30 basis points, and corporate expenses decreased by 10 basis points. These decreases were offset by an 80 basis points increase in other items primarily related to the Company’s Texas market plan as discussed further below.





Retail operating expenses decreased as a percentage of sales by 90 basis points to 24.4% of net sales, increasing by $15.1 million for fiscal 2009 compared to fiscal 2008. The decrease as a percentage of sales was primarily due to lower payroll-related expenses as a result of improvement in labor productivity despite increased minimum wage rates, and also due to leveraging the increases in same-stores sales as well as lower advertising expenses during fiscal 2009.  These decreases were partially offset by slight increases in costs related to various services and fees as well as repairs and maintenance as a percentage of net sales.





Distribution and transportation expenses decreased as a percentage of sales by 30 basis points to 5.7% of net sales, increasing by $2.0 million for fiscal 2009 compared to fiscal 2008.  The decrease as a percentage of sales, despite year over year increases in minimum wage and freight rates, was primarily due to improvements in labor efficiencies, improved processing methods and increased efficiencies in transportation.





Corporate operating expenses decreased as a percentage of sales by 10 basis points to 4.2% of net sales, increasing $3.0 million for fiscal 2009 compared to fiscal 2008.  The decrease as a percentage of sales was primarily due to lower outside services and consulting and professional fees.  These decreases were partially offset by slight increases in salaries, benefits, and legal costs as a percentage of net sales.





The remaining operating expenses increased as a percentage of sales by 80 basis points to 1.4% of net sales, increasing by $10.5 million for fiscal 2009.  The increase was primarily due to an impairment charge of approximately $10.4 million in fiscal 2009 compared to $0.5 million in fiscal 2008. The impairment charge of approximately $10.4 million in fiscal 2009 primarily consisted of a leasehold improvement impairment charge of approximately $10.1 million related to the Company’s Texas market plan and an impairment charge of approximately $0.2 million related to the underperformance of a store in California.During fiscal year 2008, the Company recorded an asset impairment charge of $0.5 million related to one underperforming store in Texas.  The Company also recorded in fiscal 2009 a charge of approximately $1.3 million related to lease termination and store closing costs and a $1.4 million severance charge all in the Texas market.   See Note 10 to Consolidated Financial Statements for further discussion of our Texas market.  In addition, the increase was also due to a loss on a sale of the primary asset of the La Quinta Partnership of approximately $0.5 million and inclusion of the partner’s loss of approximately $0.3 million during fiscal 2009.  These increases are partially offset by the non-recurring gains related to a sale of the primary asset of the Reseda Partnership of approximately $0.2 million and consolidation of the partner’s gain of approximately $1.4 million during fiscal 2009.  The Company has included $1.4 million of minority interest in its Consolidated Statements of Income related to the aforementioned gain in fiscal 2009. See Note 4 to Consolidated Financial Statements for further discussion of gains and losses related to the Company’s partnerships during fiscal 2009.  In addition, there was a reduction in stock based compensation expense of $1.0 million for fiscal 2009 compared to fiscal 2008.  The remaining change of $0.3 million was made up of increases and decreases in other less significant items included in other operating expenses.


32
 Table of Contents


Depreciation and amortization.Depreciation and amortization increased $1.0 million, or 2.6%, to $34.3 million in fiscal 2009 from $33.3 million in fiscal 2008 primarily as a result of the opening of 19 new stores during fiscal 2009, the full year effect of fiscal 2008 store additions, and additions to existing stores and distribution centers. The increase was partially offset by fully depreciated assets in existing stores and the disposal of certain fixed assets.





Operating income/loss. Operating income was $12.9 million for fiscal 2009 compared to operating loss of $6.4 million for fiscal 2008. Operating income as a percentage of net sales was 1.0% in fiscal 2009 compared to operating loss as a percentage of net sales of negative 0.5% in fiscal 2008.  This was primarily due to changes in gross margin and operating expenses as discussed above.




Other income, net. Other income decreased $5.7 million to $1.0 million in fiscal 2009 compared to $6.7 million in fiscal 2008.  Interest income earned on the Company’s investments decreased to $3.5 million in fiscal 2009 from $7.2 million in fiscal 2008, primarily as a result of decreases in interest rates and slightly lower investment balances.  The decrease was also due to an impairment charge of approximately $1.7 million related to certain available for sale securities in fiscal 2009.  The remaining decrease of $0.3 million in other income is due to increases and decreases in other less significant items included in other income.





Provision (benefit) for income taxes. The income tax provision in fiscal 2009 was $4.1 million compared to an income tax benefit of $2.6 million in fiscal 2008, due to the increase in pre-tax income.  The effective tax rate for fiscal 2009 was 29.3% compared to a tax benefit for fiscal 2008.   Additionally, in fiscal 2009, the Company wrote off approximately $1.4 million of Texas net operating loss credits due to the Company’s decision to exit the Texas market, compared to a discrete tax benefit recorded in fiscal 2008 related to prior year tax credits of approximately $1.4 million. The effective combined federal and state income tax rates are less than the statutory rates in each period due to tax credits and the effect of certain revenues and/or expenses that are not subject to taxation.





Net income.As a result of the items discussed above, net income increased $5.6 million, or 193.1%, to $8.5 million in fiscal 2009 from $2.9 million in fiscal 2008. Net income as a percentage of net sales increased to 0.7% in fiscal 2009 from 0.2% in fiscal 2008.





Effects of Inflation





The Company experienced small increases in vendor prices, labor, energy, and transportation and fuel costs during fiscal 2010.  The Company also experienced such increases during the first half of fiscal 2009 which the Company believes were due to inflation.  However, the economic downturn in the second half of fiscal 2009 reversed some inflation factors with respect to energy, transportation and fuel costs.  The Company has benefited from the economic downturn and believes inflation had a minimal impact on the Company’s overall operations during fiscal 2010 and the second half of fiscal 2009.  However, increases in various costs due to future inflation may adversely impact the Company’s operating results to the extent that such increases cannot be passed along to its customers.  See Item 1A, “Risk Factor – Inflation may affect the Company’s ability to keep pricing almost all of its merchandise at 99.99¢ or less.”





Liquidity and Capital Resources




The Company funds its operations principally from cash provided by operations, short-term investments and cash on hand, and has generally not relied upon external sources of financing. The Company’s capital requirements result primarily from purchases of inventory, expenditures related to new store openings, including purchases of land, and working capital requirements for new and existing stores.  The Company takes advantage of closeout and other special-situation opportunities, which frequently result in large volume purchases, and as a consequence its cash requirements are not constant or predictable during the year and can be affected by the timing and size of its purchases.


33
 Table of Contents


Net cash provided by operating activities in fiscal 2010, 2009, and 2008 was $74.9 million, $62.9 million, and $45.2 million, respectively, consisting primarily of $89.9 million, $47.9 million, and $30.2 million, respectively of net income adjusted for depreciation and other non-cash items. Net cash used in working capital activities was $12.6 million in fiscal 2010.  Net cash provided by working capital activities was $23.2 million and $11.4 million in fiscal 2009 and 2008, respectively.  Net cash used by working capital activities in fiscal 2010 primarily reflects the increases in inventories and income taxes receivable, which were partially offset by the increases in accounts payable, accrued expenses and workers’ compensation liability.  Net cash provided by working capital activities in fiscal 2009 primarily reflects increases in accounts payable and other accrued expenses, partially offset by increases in inventories.  Net cash provided by working capital activities in fiscal 2008 primarily reflects decreases in inventories, partially offset by decreases in accounts payable.  In fiscal 2010, the Company’s inventories increased by $19.3 million compared to fiscal 2009, primarily due to the increase in sales and the Easter selling season.  In fiscal 2009, the Company’s inventories increased by $11.6 million compared to fiscal 2008, primarily due to increases in inventory levels for the Easter selling season.





Net cash used in investing activities during fiscal 2010, 2009, and 2008 was $83.6 million, $37.6 million and $37.6 million, respectively. In fiscal 2010, 2009, and 2008 the Company used $34.8 million, $34.2 million and $54.4 million, respectively, for the purchase of property and equipment due to new store openings.  In addition, during fiscal 2009, the Company paid $4.6 million for the purchase of assets related to its partnerships.  In fiscal 2010, 2009 and 2008, the Company received cash inflows of $31.5 million, $59.2 million and $168.1 million, respectively, from the sale and maturity of available for sale securities, and paid $81.1 million, $60.7 million, and $151.4 million, respectively, for the purchase of investments. The investing activities in fiscal 2010 also reflect the proceeds of $0.8 million from the disposal and sale of fixed assets during fiscal 2010. The investing activities in fiscal 2009 also reflect the proceeds of $2.2 million from the sale of the assets of the Company’s partnerships as well as $0.5 million from the disposal of fixed assets.




Net cash provided by financing activities during fiscal 2010 was $6.7 million, which is composed primarily of proceeds of $7.8 million from the exercise of stock options partially offset by payments of $2.7 million to satisfy employees tax obligations related to the issuance of performance stock units as part of the Company’s equity incentive plan.  The Company also paid approximately $0.3 million to acquire the remaining noncontrolling interest in a partnership during fiscal 2010.  Net cash used in financing activities during fiscal 2009 was $12.9 million, which consisted primarily of repurchases of the Company’s common stock.   Net cash provided by financing activities during fiscal 2008 was $0.9 million, which consisted primarily of proceeds from the exercise of stock options.





The Company estimates that total capital expenditures in fiscal year 2011 will be approximately $54.0 million and relate principally to property acquisitions of approximately $24.0 million, $14.0 million for leasehold and fixtures and equipment for new store openings, and $16.0 million for other capital projects. In addition, the Company will also consider additional opportunistic real estate purchases primarily to reduce its rental expense. The Company intends to fund its liquidity requirements in fiscal 2011 from net cash provided by operations, short-term investments, and cash on hand.





In June 2008, based on the Company’s outlook, cash position, and stock price relative to potential value, the Company's Board of Directors authorized a share repurchase program for the purchase of up to $30 million of the Company's common stock. Under the authorization, the Company may purchase shares from time to time in the open market or in privately negotiated transactions in compliance with the applicable rules and regulations of the Securities and Exchange Commission.  However, the timing and amount of such purchases will be at the discretion of management, and will depend on market conditions and other considerations which may change. As of March 28, 2009, the Company had repurchased a total of 1,660,296 shares of common stock at an average price of $7.76 per share, for a total of $12.9 million.  The Company has approximately $17.1 million that remains authorized and available to repurchase shares of Company’s common stock under this program. The Company had no share purchases during fiscal 2010.





The Company issues performance stock units as part of our equity incentive plan.  The number of shares issued on the date the performance stock units vest is net of the statutory withholding requirements that the Company pays in cash to the appropriate taxing authorities on behalf of the employees.  During fiscal 2010, the Company withheld approximately 187,510 shares to satisfy $2.7 million of employee tax obligations.  Although shares withheld are not issued,they are treated as common stock repurchases in the Company’s Consolidated Financial Statements, as they reduce the number of shares that would have been issued upon vesting.


34
 Table of Contents


Off-Balance Sheet Arrangements





As of March 27, 2010, the Company had no off-balance sheet arrangements.





Contractual Obligations





The following table summarizes the Company’s consolidated contractual obligations (in thousands) as of March 27, 2010.





Contractual obligations

Total


Less than 1 year


1-3 years


3-5 years


More than 5 yearsCapital lease obligations

$
519


$
70


$
156


$
182


$
111Operating lease obligations


193,607



42,548



64,390



45,393



41,276Deferred compensation liability


4,274



—



—



—



4,274Total

$
198,400


$
42,618


$
64,546


$
45,575


$
45,661





The Company does not have any liabilities related to uncertain tax positions as of March 27, 2010.  See Note 5, “Income Tax Provision” to Consolidated Financial Statements.





Lease Commitments




The Company leases various facilities under operating leases (except for one location that is classified as a capital lease), which will expire at various dates through fiscal year 2031. Most of the lease agreements contain renewal options and/or provide for fixed rent escalations or increases based on the Consumer Price Index. Total minimum lease payments under each of these lease agreements, including scheduled increases, are charged to operations on a straight-line basis over the term of each respective lease. Most leases require the Company to pay property taxes, maintenance and insurance. Rental expense charged to operations in fiscal 2010, 2009, and 2008 were approximately $60.7 million, $60.6 million and $54.1 million, respectively.  The Company typically seeks leases with a five-year to ten-year term and with multiple five-year renewal options. See “Item 2. Properties”. The large majority of the Company’s store leases were entered into with multiple renewal periods, which are typically five years and occasionally longer.





Variable Interest Entities





At March 27, 2010 and March 28, 2009, the Company no longer has any variable interest entities.





The Company was the primary beneficiary of a variable interest entity known as the La Quinta Partnership to develop a shopping center in La Quinta, California, where the Company leased a store.  In January 2008, the Company received a buy-sell offer from the managing member of the La Quinta Partnership.  The Company accepted the offer to sell its interest to the noncontrolling partner on January 30, 2008.  After the timeline for completion of this offer passed, the Company notified the managing member that the managing member was in default of closing the transaction within the agreed-upon timeframe.  In addition, the partnership had a $7.5 million loan, including principal of $7.3 million and accrued interest of $0.2 million, due to a bank on June 1, 2008, on which the partnership was in default.  In December 2008, the bank foreclosed on the shopping center.   Eighty-nine percent of the land and all of the buildings were sold in the foreclosure sale for $9.3 million.  The proceeds of $9.3 million included the Company’s purchase of the land and building related to its store for approximately $2.9 million and the rest of the center was sold for $6.4 million to a third party, except for a small parcel of undeveloped land which remains in the partnership at this time.  As a result of the foreclosure, the bank received $7.9 million, including principal, interest and penalties.  The partnership’s loss from the foreclosure sales of the shopping center was $0.8 million.  Of the $0.8 million loss, the Company recognized its share of the loss of approximately $0.5 million in the third quarter of fiscal 2009.  In accordance with ASC 810, the Company included the partner’s share of the loss of approximately $0.3 million in its operating expenses during the third quarter of fiscal 2009.  As a result of the foreclosure of the shopping center, the Company became the managing partner of the partnership.  The Company consolidated this partnership as of March 28, 2009.  The Company purchased its noncontrolling partner’s share of the partnership which consisted of the small parcel of land described above, for approximately $0.3 million during the third quarter of fiscal 2010.  The acquisition was recorded as an equity transaction in accordance with the guidance of ASC 810-10-45.  Due to the purchase of the noncontrolling partner’s share of the partnership, the Company became the sole owner of the partnership.


35
 Table of Contents


The Company also had an interest in another partnership known as the Wilshire Alvarado Partnership, which the Company consolidated at March 29, 2008 in accordance with ASC 810. The assets of the partnership consisted of real estate with a carrying value of approximately $1.5 million, and there was no mortgage debt or other significant liabilities associated with the entity, other than notes payable to the Company.  In November 2008, the Company purchased its partner’s share of this partnership, consisting of one of the Company’s leased stores with an approximate carrying value of $1.5 million. The Company paid approximately $1.6 million, including estimated selling costs, to acquire its partner’s share in the partnership. The Company increased its building and land value by approximately $1.6 million as result of this purchase. Due to the purchase of the primary asset of the partnership, the Company became the sole owner of the partnership.





At March 29, 2008, the Company had an interest in an additional partnership known as the Reseda Partnership, the assets of which consisted of real estate with a carrying value of approximately $1.2 million.  The balance sheet effect of consolidating this entity at March 29, 2008 was a reclassification of approximately $1.2 million from investments to assets held for sale with no corresponding impact on the Company’s recorded liabilities.  In April 2008, the partnership sold its primary asset, with an approximate carrying value of $1.2 million, to a third party.  The Company's lease for the store in this partnership continued after the sale and the Company's operation of that store was unaffected by the transaction.  Net proceeds to the Company of the sale were $2.2 million.  The transaction was recorded as a sale leaseback in the first quarter of fiscal 2009.  The partnership’s gain from the sale of real estate was approximately $2.4 million, of which the Company’s net gain was approximately $1.0 million. Of the $1.0 million net gain, the Company recognized approximately $0.2 million in the first quarter of fiscal 2009 and approximately $0.8 million is being recognized over the remaining lease term of 46 months. In accordance with ASC 810, the Company had included the partner’s share of the gain of approximately $1.4 million in its operating expenses during the first quarter of fiscal 2009.  Additionally, the proceeds of the sale were distributed to the partners in April 2008, and the Company had included $1.4 million of minority interest in its Consolidated Statements of Operations for the first quarter of fiscal 2009.  As a result of the sale of the primary asset of the partnership, the Company is no longer a primary beneficiary and therefore has not consolidated the remaining immaterial assets of the partnership as of March 27, 2010 and March 28, 2009.





Seasonality and Quarterly Fluctuations




The Company has historically experienced and expects to continue to experience some seasonal fluctuations in its net sales, operating income, and net income. The highest sales periods for the Company are the Christmas, Halloween and Easter seasons. A proportionately greater amount of the Company’s net sales and operating and net income is generally realized during the quarter ended on or near December 31. The Company’s quarterly results of operations may also fluctuate significantly as a result of a variety of other factors, including the timing of certain holidays such as Easter, the timing of new store openings and the merchandise mix.




New Authoritative Pronouncements





Information regarding new authoritative pronouncements is contained in Note 1 to the Consolidated Financial Statements for the year ended March 27, 2010, which is incorporated herein by this reference.


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 Table of Contents


Item 7A. Quantitative and Qualitative Disclosures About Market Risk




The Company is exposed to interest rate risk for its investments in marketable securities but management believes the risk is not material. At March 27, 2010, the Company had $170.4 million in securities maturing at various dates through May 2046, with approximately 91.3% maturing within one year.  At March 28, 2009, the Company had $119.4 million in securities maturing at various dates through May 2047, with approximately 77.9% maturing within one year. The Company’s investments are comprised primarily of marketable investment grade government and municipal bonds, corporate bonds, auction rate securities, asset-backed securities, commercial paper, and money market funds.  Because the Company generally invests in securities with terms of one year or less, the Company generally holds investments until maturity, and therefore should not bear any interest risk due to early disposition.  The Company does not enter into any derivative or interest rate hedging transactions. The Company’s investment portfolio has certain perpetual preferred stocks with periodic recurring dividend payments that were approximately 1.0% of the Company’s investment portfolio in fiscal 2010.  At March 27, 2010, the fair value of investments approximated the carrying value. Based on the investments outstanding at March 27, 2010, a 1% increase in interest rates would reduce the fair value of the Company’s total investment portfolio by approximately $0.3 million or 0.2%.  The Company has no outstanding debt as of March 27, 2010.


37
 Table of Contents


Item 8. Financial Statements and Supplementary Data




INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE




99¢ Only Stores





Report of Independent Registered Public Accounting Firm, BDO Seidman, LLP
39Consolidated Balance Sheets as of March 27, 2010 and March 28, 2009
40Consolidated Statements of Income for the years ended March 27, 2010, March 28, 2009 and March 29, 2008
41Consolidated Statements of Shareholders’ Equity for the years ended March 27, 2010, March 28, 2009 and March 29, 2008
42Consolidated Statements of Cash Flows for the years ended March 27, 2010,  March 28, 2009 and March 29, 2008
43Notes to Consolidated Financial Statements
44Schedule II – Valuation and Qualifying Accounts
73


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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM




Board of Directors and Shareholders


99¢ Only Stores


City of Commerce, California






We have audited the accompanying consolidated balance sheets of the 99¢ Only Stores and consolidated entities (the “Company”) as of March 27, 2010 and March 28, 2009 and the related consolidated statements of income, shareholders’ equity, and cash flows for the years ended March 27, 2010, March 28, 2009 and March 29, 2008. We also have audited the schedule as listed in the accompanying index. These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements and schedule based on our audits.





We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and schedule are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements and schedule, 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 consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company at March 27, 2010 and March 28, 2009, and the results of its operations and its cash flows for the years ended March 27, 2010, March 28, 2009 and March 29, 2008 in conformity with accounting principles generally accepted in the United States of America.





Also, in our opinion, the schedule presents fairly, in all material respects, the information set forth therein for the years ended March 27, 2010, March 28, 2009 and March 29, 2008.





We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of the Company’s internal control over financial reporting as of March 27, 2010, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and our report dated May 27, 2010 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.





/s/ BDO Seidman, LLP


Los Angeles, California


May 27, 2010


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 Table of Contents


99¢ Only Stores


CONSOLIDATED BALANCE SHEETS


(Amounts in thousands, except share data)





March 27, 2010


March 28, 2009ASSETSCurrent Assets:Cash

$
19,877


$
21,930Short-term investments


155,657



93,049Accounts receivable, net of allowance for doubtful accounts of $501 and $44 as of March 27, 2010 and March 28, 2009, respectively


2,607



2,490Income taxes receivable


4,985



1,161Deferred income taxes


36,419



32,861Inventories, net


171,198



151,928Assets held for sale


—



397Other


4,978



4,038Total current assets


395,721



307,854Property and equipment, net


278,858



271,286Long-term deferred income taxes


34,483



35,685Long-term investments in marketable securities


14,774



26,351Assets held for sale


7,356



7,356Deposits and other assets


14,794



14,341Total assets

$
745,986


$
662,873LIABILITIES AND SHAREHOLDERS’ EQUITYCurrent Liabilities:Accounts payable

$
42,593


$
36,009Payroll and payroll-related


15,097



13,731Sales tax


5,635



5,334Other accrued expenses


21,398



23,342Workers’ compensation


47,023



44,364Current portion of capital lease obligation


70



65Total current liabilities


131,816



122,845Deferred rent


8,844



10,318Deferred compensation liability


4,274



2,995Capital lease obligation, net of current portion


449



519Other liabilities


181



2,339Total liabilities


145,564



139,016Commitments and contingencies (Note 6 and 7)Shareholders’ Equity:Preferred stock, no par value – authorized, 1,000,000 shares; no shares issued or outstanding


—



—Common stock, no par value – authorized, 200,000,000 shares; issued and outstanding, 69,556,930 shares at March 27, 2010 and 68,407,486  shares at March 28, 2009


246,353



231,867Retained earnings


354,528



294,081Other comprehensive loss


(459
)


(2,091
)Total shareholders’ equity


600,422



523,857Total liabilities and shareholders’ equity

$
745,986


$
662,873





The accompanying notes are an integral part of these financial statements.


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99¢ Only Stores


CONSOLIDATED STATEMENTS OF INCOME


(Amounts in thousands, except per share data)





Years EndedMarch 27, 2010


March 28, 2009


March 29, 2008Net Sales:99¢ Only Stores

$
1,314,214


$
1,262,119


$
1,158,856Bargain Wholesale


40,956



40,817



40,518Total sales


1,355,170



1,302,936



1,199,374Cost of sales (excluding depreciation and amortization expense shown separately below)


797,748



791,121



738,499Gross profit


557,422



511,815



460,875Selling, general and administrative expenses:Operating expenses (includes asset impairment of $431, $10,335 and $531 for the years ended March 27, 2010, March 28, 2009 and March 29, 2008


436,608



464,635



433,940Depreciation and amortization


27,398



34,266



33,321Total selling, general and administrative expenses


464,006



498,901



467,261Operating income (loss)


93,416



12,914



(6,386
)Other (income) expense:Interest income


(1,117
)


(3,508
)


(7,182
)Interest expense


174



937



953Other-than-temporary investment impairment due to credit loss


843



—



—Other


(35
)


1,578



(445
)Total other (income), net


( 135
)


( 993
)


(6,674
)Income before provision for income taxes and income attributed to noncontrolling interest


93,551



13,907



288Provision (benefit) for income taxes


33,104



4,069



(2,605
)Net income including noncontrolling interest


60,447



9,838



2,893Net income attributable to noncontrolling interest


—



(1,357
)


—Net income attributable to 99¢ Only Stores

$
60,447


$
8,481


$
2,893Earnings per common share attributable to 99¢ Only Stores:Basic

$
0.88


$
0.12


$
0.04Diluted

$
0.87


$
0.12


$
0.04Weighted average number of common shares outstanding:Basic


68,641



69,987



70,044Diluted


69,309



70,037



70,117




The accompanying notes are an integral part of these financial statements.


41
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99¢ Only Stores


CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY


YEARS ENDED MARCH 27, 2010, MARCH 28, 2009 and MARCH 29, 2008


(Amounts in thousands)





Common Stock


Accumulated Other Comprehensive Income


Retained


Shareholders’Shares


Amount


(Loss)


Earnings


EquityBALANCE, March 31, 2007


69,942


$
223,414


$
228


$
295,585


$
519,227Net income


—



—



—



2,893



2,893Net unrealized investment losses


—



—



(888
)


—



(888
)Total comprehensive income (loss)


—



—



(888
)


2,893



2,005Tax benefit from exercise of stock options


—



263



—



—



263Proceeds from exercise of stock options


118



812



—



—



812Stock-based compensation expense


—



4,184



—



—



4,184BALANCE, March 29, 2008


70,060



228,673



(660
)


298,478



526,491Net income


—



—



—



8,481



8,481Net unrealized investment losses


—



—



(1,431
)


—



(1,431
)Total comprehensive income (loss)


—



—



(1,431
)


8,481



7,050Tax deficiency from exercise of stock options


—



(10
)


—



—



(10
)Proceeds from exercise of stock options


7



68



—



—



68Stock-based compensation expense


—



3,136



—



—



3,136Repurchase of common stock


(1,660
)


—



—



(12,878
)


(12,878
)BALANCE, March 28, 2009


68,407



231,867



(2,091
)


294,081



523,857Net income


—



—



—



60,447



60,447Net unrealized investment gains


—



—



1,632



—



1,632Total comprehensive income


—



—



1,632



60,447



62,079Tax benefit from exercise of stock options and Performance Stock Units


—



1,885



—



—



1,885Exercise of stock options and issuance of Performance Stock Units, net


1,149



5,123



—



—



5,123Stock-based compensation expense


—



7,739



—



—



7,739Acquisition of noncontrolling interest of a partnership


—



(261
)


—



—



(261
)BALANCE, March 27, 2010


69,556


$
246,353


$
(459
)

$
354,528


$
600,422




The accompanying notes are an integral part of these financial statements.


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99¢ Only Stores


CONSOLIDATED STATEMENTS OF CASH FLOWS


(Amounts in thousands)





Years EndedMarch 27, 2010


March 28, 2009


March 29, 2008Cash flows from operating activities:Net income including noncontrolling interest

$
60,447


$
9,838


$
2,893Adjustments to reconcile net income to net cash provided by operating activities:Depreciation and amortization


27,400



34,266



33,321Loss on disposal of fixed assets


149



791



124Gain on sale of partnership assets


—



(706
)


—Long-lived assets impairment


431



10,355



531Investments impairment


843



1,677



—Excess tax deficiency (benefit) from share-based payment arrangements


(1,885
)


10



(130
)Deferred income taxes


(5,190
)


(11,419
)


(11,024
)Stock-based compensation expense


7,739



3,136



4,184Tax benefit from exercise of non qualified employee stock options


—



—



263Changes in assets and liabilities associated with operating activities:Accounts receivable


(117
)


(346
)


543Inventories


(19,270
)


(11,617
)


13,750Deposits and other assets


272



(435
)


3,031Accounts payable


5,482



10,619



(5,676
)Accrued expenses


3,368



11,678



1,644Accrued workers’ compensation


2,659



1,550



(673
)Income taxes


(3,824
)


1,551



72Deferred rent


(1,474
)


(345
)


2,343Other long-term liabilities


(2,158
)


2,339



—Net cash provided by operating activities


74,872



62,942



45,196Cash flows from investing activities:Purchases of property and equipment


(34,842
)


(34,222
)


(54,388
)Proceeds from sale of fixed assets


806



508



—Purchases of investments


(81,104
)


(60,739
)


(151,377
)Proceeds from sale of investments


31,547



59,205



168,142Proceeds from sale of partnership assets


—



2,218



—Acquisition of partnership assets


—



(4,565
)


—Net cash used in investing activities


(83,593
)


(37,595
)


(37,623
)Cash flows from financing activities:Repurchases of common stock


—



(12,878
)


—Repurchases of common stock related to issuance of Performance Stock Units


(2,667
)


—



—Acquisition of noncontrolling interest of a partnership


(275
)


—



—Payments of capital lease obligation


(65
)


(59
)


(56
)Proceeds from exercise of stock options


7,790



68



812Proceeds from the consolidation of construction loan


—



—



20Excess tax benefit (deficiency) from share-based payment arrangements


1,885



(10
)


130Net cash (used in) provided by financing activities


6,668



(12,879
)


906Net increase (decrease) in cash


(2,053
)


12,468



8,479Cash - beginning of period


21,930



9,462



983Cash - end of period

$
19,877


$
21,930


$
9,462




The accompanying notes are an integral part of these financial statements.


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99¢ Only Stores


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS




Fiscal Years Ended March 27, 2010, March 28, 2009 and March 29, 2008





1.
Basis of Presentation and Summary of Significant Accounting Policies




Nature of Business




The Company is incorporated in the State of California.  The Company is an extreme value retailer of primarily consumable and general merchandise with an emphasis on name-brand products. As of March 27, 2010, the Company operated 275 retail stores with 206 in California, 32 in Texas, 25 in Arizona, and 12 in Nevada. The Company is also a wholesale distributor of various consumer products.





Principles of Consolidation




The consolidated financial statements include the accounts of the Company and its subsidiaries and variable interest entities required to be consolidated in accordance with accounting principles generally accepted in the United States of America (“GAAP”). Intercompany accounts and transactions between the consolidated companies have been eliminated in consolidation.





Fiscal Periods





On February 1, 2008, the Company changed its fiscal year end from March 31 to the Saturday nearest March 31 of each year. The Company now follows a fiscal calendar consisting of four quarters with 91 days, each ending on the Saturday closest to the calendar quarter-end and a 52-week fiscal year with 364 days, with a 53-week year every five to six years. The Company’s fiscal year 2011 (“fiscal 2011”) which began on March 28, 2010 and will end on April 2, 2011, will consist of 53 weeks.  The Company’s fiscal year 2010 (“fiscal 2010”) began on March 29, 2009 and ended March 27, 2010, its fiscal year 2009 (“fiscal 2009”) began on March 30, 2008 and ended on March 28, 2009, and its fiscal year 2008 (“fiscal 2008”) began on April 1, 2007 and ended on March 29, 2008.





Use of Estimates




The preparation of the financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.





Reclassifications





Certain prior year amounts have been reclassified to conform to the current year presentation.




Cash




For purposes of reporting cash flows, cash includes cash on hand and at the stores and cash in financial institutions. Cash balances held at financial institutions are generally in excess of federally insured limits. The Company has not experienced any losses in such accounts. These accounts are only insured by the Federal Deposit Insurance Corporation (FDIC) up to $250,000.  The Company’s cash balances held at financial institutions and exceeding FDIC insurance totaled $29.3 million and $31.7 million, respectively as of March 27, 2010 and March 28, 2009. The Company places its temporary cash investments with what it believes to be high credit, quality financial institutions and limits the amount of credit exposure to any one financial institution.


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Allowance for Doubtful Accounts





In connection with its wholesale business, the Company evaluates the collectability of accounts receivable based on a combination of factors.  In cases where the Company is aware of circumstances that may impair a specific customer’s ability to meet its financial obligations subsequent to the original sale, the Company will record an allowance against amounts due and thereby reduce the net recognized receivable to the amount the Company reasonably believes will be collected.  For all other customers and tenants, the Company recognizes allowances for doubtful accounts based on the length of time the receivables are past due, industry and geographic concentrations, the current business environment and the Company’s historical experiences.





Investments




The Company’s investments in debt and equity securities are classified as available for sale and are comprised primarily of marketable investment grade government and municipal bonds, corporate bonds and equity securities, auction rate securities, asset-backed securities, commercial paper and money market funds.  The Company has included its auction rate securities in non-current assets on the Company’s consolidated balance sheets as of March 27, 2010 and March 28, 2009.  See Note 3, “Investments.”





Investment securities are recorded as required by Accounting Standard Codification (“ASC”) 320, “Accounting for Certain Investments in Debt and Equity Securities” (“ASC 320”), previously referred to as Statement of Financial Accounting Standards (“SFAS”) No. 115.  Investments are adjusted for the amortization of premiums or discounts to maturity and such amortization is included in interest income.  The Company follows ASC 320-10-35,  “Subsequent Measurement of Investments in Debt and Equity”  (“ASC 320-10-35”), previously discussed in FASB Staff Position (“FSP”) 115-1/124-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments”,  to assess whether its investments with unrealized loss positions are other than temporarily impaired.  The Company complies with the presentation and disclosure requirements of the other-than-temporary impairment for debt securities as discussed in ASC 320-10-65, “Transition Related to Recognition and Presentation of Other-Than-Temporary Impairments” (“ASC 320-10-65”), previously referred to as FSP FAS 115-2 and FAS 124-2, “Recognition and Presentation of Other-Than-Temporary Impairments”.  Realized gains and losses and declines in values judged to be other-than-temporary are determined based on the specific identification method and are reported in the statements of income.





Available for sale securities are initially recorded at cost and periodically adjusted to fair value with any changes in fair value during a period excluded from earnings and reported as a charge or credit, net of tax effects, to other comprehensive income or loss in the Consolidated Statements of Shareholders’ Equity.  A decline in the fair value of any available for sale security below cost deemed to be other-than-temporary will be reported as a reduction of the carrying amount to fair value.  The impairment is charged to earnings and a new cost basis of the security is established.  Cost basis is established and maintained utilizing the specific identification method.





Inventories




Inventories are valued at the lower of cost (first in, first out) or market. Valuation allowances for obsolete and excess inventory and shrinkage are also recorded. Shrinkage is estimated as a percentage of sales for the period from the last physical inventory date to the end of the applicable period. Such estimates are based on experience and the most recent physical inventory results. The valuation allowances for obsolete and excess inventory in many locations (including various warehouses, store backrooms, and sales floors of all its stores), require management judgment and estimates that may impact the ending inventory valuation and valuation allowances that may affect the reported gross margin for the period.





At times, the Company also makes large block purchases of inventory that it plans to sell over a period of longer than twelve months.  As of March 27, 2010 and March 28, 2009, the Company held inventory of specific products identified that it expected to sell over a period that exceeds twelve months of approximately $4.8 million and $4.2 million, respectively, which is included in deposits and other assets in the consolidated financial statements.


45
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Property and Equipment




Property and equipment are carried at cost and are depreciated or amortized on a straight-line basis over the following useful lives:





Owned buildings and improvements

Lesser of 30 years or the estimated useful life of the improvementLeasehold improvements

Lesser of the estimated useful life of the improvement or remaining lease termFixtures and equipment

5 yearsTransportation equipment

3-5 yearsInformation technology systems

For major corporate systems, estimated useful life up to 7 years; for functional stand alone systems, estimated useful life up to 5 years





The Company’s policy is to capitalize expenditures that materially increase asset lives and expense ordinary repairs and maintenance as incurred.





Long-Lived Assets




In accordance with ASC 360 “Accounting for the Impairment or Disposal of Long-lived Assets” (“ASC360”), previously referred to as SFAS No. 144, the Company assesses the impairment of long-lived assets quarterly or when events or changes in circumstances indicate that the carrying value may not be recoverable. Recoverability is measured by comparing the carrying amount of an asset to expected future net cash flows generated by the asset. If the carrying amount of an asset exceeds its estimated undiscounted future cash flows, the carrying amount is compared to its fair value and an impairment charge is recognized to the extent of the difference. Factors that the Company considers important which could individually or in combination trigger an impairment review include the following: (1) significant underperformance relative to expected historical or projected future operating results; (2) significant changes in the manner of the Company’s use of the acquired assets or the strategy for the Company’s overall business; and (3) significant changes in the Company’s business strategies and/or negative industry or economic trends. On a quarterly basis, the Company assesses whether events or changes in circumstances occur that potentially indicate that the carrying value of long-lived assets may not be recoverable. Considerable management judgment is necessary to estimate projected future operating cash flows.  Accordingly, if actual results fall short of such estimates, significant future impairments could result.  During fiscal 2010, due to the underperformance of one store in California, the Company concluded that the carrying value of its long-lived assets was not recoverable and accordingly recorded an asset impairment charge of $0.4 million.  During fiscal 2009, the Company recorded impairment charges of $10.4 million because it concluded that the carrying value of certain long-lived assets was not recoverable.  These charges primarily consisted of a leasehold improvement impairment charge of approximately $10.1 million related to the Company’s Texas market plan and an impairment charge of approximately $0.2 million related to the underperformance of a store in California.  See Note 10 to Consolidated Financial Statements for further information regarding the charges related to Company’s Texas operations.  In fiscal 2008, the Company recorded an asset impairment charge of $0.5 million related to one underperforming store in Texas. The Company has not made any material changes to its long-lived asset impairment methodology during fiscal 2010.





Lease Acquisition Costs




The Company follows the policy of capitalizing allowable expenditures that relate to the acquisition and signing of its retail store leases. These costs are amortized on a straight-line basis over the applicable lease term.





Income Taxes




The Company utilizes the liability method of accounting for income taxes as set forth in ASC 740 “Accounting for Income Taxes” (“ASC 740”), previously referred to as SFAS No. 109.  Under the liability method, deferred tax assets and liabilities are recognized using enacted tax rates for the effect of temporary differences between the book and tax bases of recorded assets and liabilities. ASC 740 also requires that deferred tax assets be reduced by a valuation allowance if it is more likely than not that some portion or all of the net deferred tax assets will not be realized. The Company’s ability to realize deferred tax assets is assessed throughout the year and a valuation allowance is established accordingly. On April 1, 2007, the Company adopted ASC 740-10, which requires the Company to recognize in the consolidated financial statements the impact of a tax position only if it is more likely than not to be sustained upon examination based on the technical merits of the position. The Company recognizes potential interest and penalties related to uncertain tax positions in income tax expense.   Refer to Note 5 “Income Tax Provision” for further discussion of income taxes and the impact of adopting ASC 740-10.


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 Table of Contents


Earnings Per Share Attributed to 99¢ Only Stores




“Basic” earnings per share are computed by dividing net income by the weighted average number of shares outstanding for the year. “Diluted” earnings per share are computed by dividing net income by the total of the weighted average number of shares outstanding plus the dilutive effect of outstanding equity awards (applying the treasury stock method).




A reconciliation of the basic and diluted weighted average number of shares outstanding for the years ended March 27, 2010, March 28, 2009 and March 29, 2008 is as follows:





Years EndedMarch 27, 2010


March 28, 2009


March 29, 2008(Amounts in thousands, except per share data)Net income attributable to 99¢ Only Stores

$
60,447


$
8,481


$
2,893Weighted average number of common shares outstanding-basic


68,641



69,987



70,044Dilutive effect of outstanding stock options and performance stock units


668



50



73Weighted average number of common shares outstanding-diluted


69,309



70,037



70,117Basic earnings per share attributable to 99¢ Only Stores

$
0.88


$
0.12


$
0.04Diluted earnings per share attributable to 99¢ Only Stores

$
0.87


$
0.12


$
0.04





Potentially dilutive stock options of 2.4 million, 4.9 million and 3.5 million shares for the years ended March 27, 2010, March 28, 2009 and March 29, 2008, respectively, were excluded from the calculation of the weighted average number of common shares outstanding because they were anti-dilutive.





Stock-Based Compensation





The Company has a stock incentive plan in effect under which the Company grants stock options and performance stock units (“PSUs”).  The Company accounts for stock-based compensation expense under the fair value recognition provisions of ASC 718, “Share-based compensation” (“ASC 718”), previously referred to as SFAS 123(R)   ASC 718 requires companies to estimate the fair value of share-based payment awards on the date of grant using an option-pricing model.  The value of the portion of the award that is ultimately expected to vest is recognized as an expense ratably over the requisite service periods.  The Company estimates the fair value for each option award as of the date of grant using the Black-Scholes option pricing model.  The Black-Scholes model considers, among other factors, the expected life of the award and the expected volatility of the Company’s stock price.  Stock options are granted to employees at exercise prices equal to the fair market value of the Company’s stock at the dates of grant.  The Company recognizes the stock-based compensation expense ratably over the requisite service periods, which is generally a vesting term of three years.  Stock options typically have a term of 10 years.  The fair value of the PSUs is based on the stock price on the grant date.  The compensation expense related to PSUs is recognized only when it is probable that the performance criteria will be met.


47
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Cost of Sales




Cost of sales includes the cost of inventory, freight in, inter-state warehouse transportation costs, obsolescence, spoilage, scrap and inventory shrinkage, and is net of discounts and allowances.  The Company receives various cash discounts, allowances and rebates from its vendors.  Such items are included as reductions of cost of sales as merchandise is sold.  The Company does not include purchasing, receiving, and distribution warehouse costs in its cost of sales.  Due to this classification, the Company's gross profit rates may not be comparable to those of other retailers that include costs related to their distribution network in cost of sales.





Operating Expenses




Selling, general and administrative expenses include purchasing, receiving, inspection and warehouse costs, the costs of selling merchandise in stores (payroll and associated costs, occupancy and other store-level costs), distribution costs (payroll and associated costs, occupancy, transportation to and from stores and other distribution-related costs) and corporate costs (payroll and associated costs, occupancy, advertising, professional fees, and other corporate administrative costs).




Leases





The Company recognizes rent expense for operating leases on a straight-line basis (including the effect of reduced or free rent and rent escalations) over the applicable lease term.  The difference between the cash paid to the landlord and the amount recognized as rent expense on a straight-line basis is included in deferred rent.  Cash reimbursements received from landlords for leasehold improvements and other cash payments received from landlords as lease incentives are recorded as deferred rent.  Deferred rent related to landlord incentives is amortized as an offset to rent expense using the straight-line method over the applicable lease term.





For store closures where a lease obligation still exists, the Company records the estimated future liability associated with the rental obligation on the cease use date (when the store is closed) in accordance with ASC 420, “Accounting for Exit or Disposal Cost Obligations” (“ASC 420”), previously referred to as SFAS 146. Liabilities are established at the cease use date for the present value of any remaining operating lease obligations, net of estimated sublease income, and at the communication date for severance and other exit costs, as prescribed by ASC 420. Key assumptions in calculating the liability include the timeframe expected to terminate lease agreements, estimates related to the sublease potential of closed locations, and estimation of other related exit costs. If actual timing and potential termination costs or realization of sublease income differ from the Company’s estimates, the resulting liabilities could vary from recorded amounts. These liabilities are reviewed periodically and adjusted when necessary.





During fiscal 2010, the Company closed 12 of its Texas stores and accrued approximately $3.0 million in lease termination costs associated with the closing of seven out of the 12 Texas stores. Of the $3.0 million lease termination costs accrual, the Company recognized a net expense of $2.5 million as these costs were partially offset by a reduction in expenses of $0.5 million due to the reversal of deferred rent and tenant improvements related to these stores during fiscal 2010.  The Company also accrued approximately $1.3 million in lease termination costs associated with the closing of four of its Texas stores and lease termination costs for one contracted store during fiscal 2009.  See Note 10 to Consolidated Financial Statements for further information regarding the lease termination charges related to Company’s Texas operations.





Revenue Recognition




The Company recognizes retail sales in its retail stores at the time the customer takes possession of merchandise. All sales are net of discounts and returns and exclude sales tax.  Wholesale sales are recognized in accordance with the shipping terms agreed upon on the purchase order. Wholesale sales are typically recognized free on board ("FOB") origin where title and risk of loss pass to the buyer when the merchandise leaves the Company's distribution facility.





The Company has a gift card program.  The Company records the sale of gift cards as a current liability and recognizes a sale when a customer redeems a gift card.  The liability for outstanding gift cards is recorded in accrued expenses.  The Company has not recorded any breakage income related to its gift card program.


48
 Table of Contents


Self-insured Workers’ Compensation





The Company self-insures for workers’ compensation claims in California and Texas. The Company establishes a reserve for losses of both estimated known claims and incurred but not reported insurance claims. The estimates are based on reported claims and actuarial valuations of estimated future costs of reported and incurred but not yet reported claims. Should the estimates fall short of the actual claims paid, the liability recorded would not be sufficient and additional workers’ compensation costs, which may be significant, would be incurred. The Company has not discounted the projected future cash outlays for the time value of money for claims and claim related costs when establishing its workers’ compensation liability.





Pre-Opening Costs




The Company expenses, as incurred, all pre-opening costs related to the opening of new retail stores.





Advertising




The Company expenses advertising costs as incurred, except the costs associated with television advertising, which are expensed the first time the advertising takes place.  Advertising expenses were $4.1 million, $4.4 million and $5.4 million for the fiscal years ended March 27, 2010, March 28, 2009 and March 29, 2008, respectively.




Statements of Cash Flows





Cash payments for income taxes were $40.8 million, $10.7 million and $7.8 million in fiscal 2010, 2009, and 2008, respectively.  There were no interest payments in fiscal 2010.  Interest payments totaled approximately $0.2 million and $0.7 million in fiscal 2009 and 2008, respectively.  Non-cash investing activities included $1.1 million, $0.3 million and $1.8 million in fixed assets purchase accruals for fiscal 2010, 2009 and 2008, respectively.  In fiscal 2009, non-cash investing activities also include $9.3 million of the La Quinta Partnership foreclosure trustee sale proceeds.  Additionally, in fiscal 2009, non-cash financing activities included a $7.3 million loan payment to payoff the outstanding loan of the foreclosed assets of the La Quinta Partnership.  See Note 4 to the Consolidated Financial Statements for further information.




Fair Value of Financial Instruments





The Company’s financial instruments consist principally of cash and cash equivalents, short-term and long-term marketable securities, accounts receivable, accounts payable, accruals and other liabilities.  Cash and cash equivalents, short-term and long-term marketable securities are measured and recorded at fair value. Accounts receivable and other receivables are financial assets with carrying values that approximate fair value.  Accounts payable and other accrued expenses are financial liabilities with carrying values that approximate fair value.  The Company believes all of the financial instruments’ recorded values approximate fair market value because of their nature and respective durations.





The Company complies with the provisions of ASC 820, “Fair Value Measurements and Disclosures” (“ASC 820”), previously referred to as SFAS No. 157.  ASC 820 defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements required under other accounting pronouncements. ASC 820-10-35, “Fair Value Measurements and Disclosures- Subsequent Measurement” (“ASC 820-10-35”), clarifies that fair value is an exit price, representing the amount that would be received from the sale of an asset or paid to transfer a liability in an orderly transaction between market participants. ASC 820-10-35 also requires that a fair value measurement reflect the assumptions market participants would use in pricing an asset or liability based on the best information available. Assumptions include the risks inherent in a particular valuation technique (such as a pricing model) and/or the risks inherent in the inputs to the model.  The Company also follows ASC 825 “Interim Disclosures about Fair Value of Financial Instruments”, previously referred to as FAS 107-1, to expand required disclosures.




ASC 820-10-35 establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1 measurements) and the lowest priority to unobservable inputs (level 3 measurements). The three levels of the fair value hierarchy under ASC 820-10-35 are described below:


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Level 1: Defined as observable inputs such as quoted prices in active markets for identical assets or liabilities.





Level 2: Defined as observable inputs other than Level 1 prices.  These include quoted prices for similar assets or liabilities in an active market, quoted prices for identical assets and liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.





Level 3: Defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions.




The Company utilizes the best available information in measuring fair value. The following table summarizes, by level within the fair value hierarchy, the financial assets and liabilities recorded at fair value on a recurring basis as of March 27, 2010 (in thousands):


Total


Level 1


Level 2


Level 3ASSETSCommercial paper and money market

$
118,831


$
118,831


$
—


$
—Auction rate securities


10,019



—



—



10,019Municipal bonds


35,171



—



35,171



—Asset-backed securities


3,086



—



3,086



—Corporate securities


3,324



1,658



1,666



—Total available for sale securities

$
170,431


$
120,489


$
39,923


$
10,019Other assets – assets that fund deferred compensation

$
4,274


$
4,274



—



—LIABILITESOther Long-term liabilities – deferred compensation

$
4,274


$
4,274



—



—




Level 1 investments include money market funds and perpetual preferred stocks of $118.8 million and $1.7 million, respectively.  The fair value of money market funds and perpetual preferred stocks are based on quoted market prices in an active market and there are no restrictions on the redemption of money market funds or perpetual preferred stocks.  Level 1 also includes deferred compensation liabilities and the assets that fund the Company’s deferred compensation, including investments in trust funds.  These investments were classified as Level 1.  The fair values of these funds are based on quoted market prices in an active market.




Level 2 investments include municipal bonds, asset-backed securities and corporate bonds of $35.2 million, $3.1 million and $1.7 million, respectively.  The fair value of municipal bonds, asset-backed securities and corporate bonds are based on quoted prices for similar assets or liabilities in an active market.





Level 3 investments include auction rate securities of $10.0 million.  The fair value of auction rate securities is based on the valuation from an independent securities valuation firm by using applicable methods and techniques for this class of security.





The Company did not have any transfers of investments in and out of Levels 1 and 2 during fiscal 2010.





The valuation of the auction rate securities is based on Level 3 unobservable inputs which consist of recommended fair values provided by Houlihan Smith & Company, an independent securities valuation firm.  These securities are held as “available-for-sale” in the Company’s consolidated balance sheet.  Based on their estimated fair value, the Company recorded an unrealized gain in the valuation of these securities of $1.0 million in fiscal 2010 and an unrealized gain of $0.6 million, net of tax, related to these securities is included in other comprehensive income in fiscal 2010.  Also, based on the estimated fair value, an other-than-temporary impairment related to credit losses of $0.6 million was recognized in earnings for fiscal 2010 for the Company’s auction rate securities.  Due to the uncertainty surrounding liquidity in the auction rate securities market, the Company has classified these auction rate securities as long-term assets on its consolidated balance sheets as of March 27, 2010.  The auction rate securities represent less than 2% of the Company’s total assets.


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The following table summarizes, by level within the fair value hierarchy, the financial assets and liabilities recorded at fair value on a recurring basis as of March 28, 2009 (in thousands):





Total


Level 1


Level 2


Level 3ASSETSCommercial paper and money market

$
73,564


$
73,564


$
—


$
—Auction rate securities


10,722



—



—



10,722Municipal bonds


20,493



—



20,493



—Asset-backed securities


8,456



—



8,456



—Corporate securities


6,165



600



5,565



—Total available for sale securities

$
119,400


$
74,164


$
34,514


$
10,722Other assets – assets that fund deferred compensation

$
2,995


$
2,995



—



—LIABILITESOther Long-term liabilities – deferred compensation

$
2,995


$
2,995



—



—




Level 1 investments include money market funds and perpetual preferred stocks of $73.6 million and $0.6 million, respectively.  Other assets and other liabilities of $3.0 million are comprised of a rabbi trust related to deferred compensation.  Level 2 investments include municipal bonds, asset-backed securities and corporate bonds of $20.5 million, $8.5 million and $5.5 million, respectively.  Level 3 investments include auction rate securities of $10.7 million.





The valuation of the auction rate securities is based on Level 3 unobservable inputs which consist of recommended fair values provided by Houlihan Smith & Company.  Based on their estimated fair value, the Company recorded a temporary reduction in the valuation of these securities of $1.6 million in fiscal 2009 and an unrealized loss of $1.0 million, net of tax, related to these securities is included in other comprehensive income in fiscal 2009.  Due to the uncertainty surrounding liquidity in the auction rate securities market, the Company has classified these auction rate securities as long-term assets on its consolidated balance sheets as of March 28, 2009.   The auction rate securities represent less than 2% of the Company’s total assets.





The following table summarizes the activity for the period of changes in fair value of the Company’s Level 3 investments (in thousands):




Auction Rate Securities

Fair Value Measurements Using Significant Unobservable Inputs

(Level 3)Year Ended

March 27, 2010


Year Ended

March 28, 2009DescriptionBeginning balance

$
10,722


$
—Transfers into Level 3


—



15,492Total realized (loss)/unrealized gains:Included in earnings


(555
)


—Included in other comprehensive income


977



(1,626
)Purchases, redemptions and settlements:Purchases


—



—Redemptions


(1,125
)


(3,144
)Ending balance

$
10,019


$
10,722Total amount of unrealized gains (losses) for the period included in other comprehensive income attributable to the change in fair market value relating to assets still held at the reporting date

$
977


$
(1,626
)


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Comprehensive Income




ASC 220, “Reporting Comprehensive Income”, previously referred to as SFAS No. 130, establishes standards for reporting and displaying comprehensive income and its components in the consolidated financial statements.  The following table sets forth the calculation of comprehensive income, net of tax effects for the years indicated (in thousands):





Years EndedMarch 27, 2010


March 28, 2009


March 29, 2008(Amounts in thousands)Net income attributable to 99¢Only Stores

$
60,447


$
8,481


$
2,893Unrealized holding gains (losses) on marketable securities, net of tax effects of $758 in fiscal 2010, $1,448 in fiscal 2009 and $469 in fiscal 2008

$
1,136


$
(2,172
)

$
(704
)Reclassification adjustment, net of tax effects of $330 in fiscal 2010, $493 in fiscal 2009 and $122 in fiscal 2008


496



741



(184
)Total unrealized holding gains (losses), net


1,632



(1,431
)


(888
)Total comprehensive income

$
62,079


$
7,050


$
2,005





New Authoritative Pronouncements




In September 2006, the FASB issued ASC 820.  ASC 820 establishes a framework for measuring fair value, and expands disclosure about such fair value measurements. The Company adopted this guidance at the beginning of the first quarter of fiscal 2009, except for those non-recurring measurements for non-financial assets and non-financial liabilities subject to partial deferral. The adoption of this guidance did not have an impact on the Company’s financial position or operating results.   The Company adopted non-recurring measurements for non-financial assets and non-financial liabilities at the beginning of fiscal 2010.  The adoption of this guidance for non-financial assets and liabilities did not have a material impact on the Company’s consolidated financial position or results of operations.





In December 2007, the FASB issued ASC 805 “Business Combinations” (“ASC 805”), previously referred to as   SFAS No. 141 (revised 2007),  This guidance changes the requirements for an acquirer’s recognition and measurement of the assets acquired and liabilities assumed in a business combination.  The Company adopted this guidance at the beginning of fiscal 2010.  The adoption of this guidance did not have a material impact on the Company’s consolidated financial position or results of operations.





In December 2007, the FASB issued ASC No. 810 “Transition Related to Noncontrolling Interests in Consolidated Financial Statements” (“ASC 810”), previously referred to as  SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements — an amendment of Accounting Research Bulletin (“ARB”) No. 51.  The guidance requires that noncontrolling (minority) interests be reported as a component of equity, that net income attributable to the parent and to the non-controlling interest be separately identified in the income statement, that changes in a parent’s ownership interest while the parent retains its controlling interest be accounted for as equity transactions, and that any retained noncontrolling equity investment upon the deconsolidation of a subsidiary be initially measured at fair value.  The Company adopted this guidance at the beginning of fiscal 2010.  Other than the change in presentation of noncontrolling interests, the adoption of this guidance had no impact on the Company’s consolidated financial position or results of operations.





In April 2008, the FASB issued ASC 350 “Determination of the Useful Life of Intangible Assets” (“ASC 350”), previously referred to as FSP SFAS No. 142-3.  This guidance amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset. The intent of this guidance is to improve the consistency between the useful life of a recognized intangible asset and the period of expected cash flows used to measure the fair value of the asset in a business combination.  The Company adopted this guidance at the beginning of fiscal 2010.  The adoption of this guidance did not have a material impact on the Company’s consolidated financial position or results of operations.


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In June 2009, the FASB issued ASC 105 “FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles” (“ASC 105”) concerning the organization of authoritative guidance under U.S. GAAP.  This is a replacement of The Hierarchy of GAAP (formally SFAS 162).  The Codification has become the source of authoritative U.S. GAAP recognized by the FASB to be applied by nongovernmental entities.  Rules and interpretive releases of the SEC under authority of federal securities laws are also sources of authoritative U.S. GAAP for SEC registrants.  On the effective date, the Codification superseded all then-existing non-SEC accounting and reporting standards.  All other non-grandfathered non-SEC accounting literature not included in the Codification will become non-authoritative.  The Codification became effective for the Company in its second quarter of fiscal 2010.  As the Codification is not intended to change or alter existing U.S. GAAP, it did not have any impact on the Company’s consolidated financial statements.





In April 2009, the FASB issued ASC 825 “Disclosure About Fair Value of Financial Instruments” (“ASC 825”), previously referred to as FSP FAS No. 107-1.  This guidance extends the disclosure requirements to interim period financial statements, in addition to the existing requirements for annual periods, and reiterates the requirement to disclose the methods and significant assumptions used to estimate fair value. The Company adopted this guidance in the first quarter of fiscal 2010.  The adoption of this guidance did not have a material impact on the Company’s consolidated financial position or results of operations.





In April 2009, the FASB issued ASC 320-10-65.  This guidance modifies the requirements for recognizing other-than-temporarily impaired debt securities and changes the existing impairment model for such securities. This guidance also requires additional disclosures for both annual and interim periods with respect to both debt and equity securities. Under the guidance, impairment of debt securities will be considered other-than-temporary if an entity (1) intends to sell the security, (2) more likely than not will be required to sell the security before recovering its cost, or (3) does not expect to recover the security’s entire amortized cost basis (even if the entity does not intend to sell). The guidance further indicates that, depending on which of the above factor(s) causes the impairment to be considered other-than-temporary, (1) the entire shortfall of the security’s fair value versus its amortized cost basis or (2) only the credit loss portion would be recognized in earnings while the remaining shortfall (if any) would be recorded in other comprehensive income. This guidance requires entities to initially apply the provisions of the standard to previously other-than-temporarily impaired debt securities existing as of the date of initial adoption by making a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. The cumulative-effect adjustment potentially reclassifies the noncredit portion of a previously other-than-temporarily impaired debt security held as of the date of initial adoption from retained earnings to accumulated other comprehensive income.  The Company adopted this guidance in the first quarter of fiscal 2010.  The adoption of this statement resulted in the recognition of approximately $0.6 million and $0.3 million of other-than-temporary impairment charges related to credit losses on its auction rate securities and Bank of America perpetual preferred stock, respectively, during the first three quarters of fiscal 2010.





In April 2009, the FASB issued ASC 820-10-35.  This guidance requires (1) estimating the fair value of an asset or liability when the volume and level of activity for the asset or liability have significantly declined and (2) identifying transactions that are not orderly.  This guidance also amends certain disclosure to require, among other things, disclosures in interim periods of the inputs and valuation techniques used to measure fair value. The Company adopted this guidance in the first quarter of fiscal 2010.  The adoption of this guidance did not have a material impact on the Company’s consolidated financial position or results of operations.





In May 2009, the FASB issued ASC 855 “Subsequent Events” (“ASC 855”), previously referred to as SFAS No. 165.   This guidance is intended to establish general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued.  It requires the disclosure of the date through which an entity has evaluated subsequent events and the basis for that date—that is, whether that date represents the date the financial statements were issued or were available to be issued.  The Company adopted this guidance in the first quarter of fiscal 2010.  The adoption of this guidance did not have any impact on the Company’s consolidated financial position or results of operations.





In June 2009, the FASB issued ASC 860 “Accounting for Transfers of Financial Assets” (“ASC 860”), previously referred to as SFAS No. 166.   The guidance eliminates the concept of a “qualifying special-purpose entity” and changes the requirements for derecognizing financial assets. The Company will adopt Statement No. 166 at beginning of fiscal 2011. The adoption of this statement is not expected to have a material impact on the Company’s consolidated financial position or results of operations.


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In June 2009, the FASB issued ASC 810 “Consolidation of Variable Interest Entities” (“VIE”) (“ASC 810”), previously referred to as SFAS No. 167.  This guidance amends current U.S. GAAP by: requiring ongoing reassessments of whether an enterprise is the primary beneficiary of a VIE; amending the quantitative approach previously required for determining the primary beneficiary of the VIE; modifying the guidance used to determine whether an entity is a VIE; adding an additional reconsideration event (e.g. troubled debt restructurings) for determining whether an entity is a VIE; and requiring enhanced disclosures regarding an entity’s involvement with a VIE.  The Company will adopt this guidance at the beginning of fiscal 2011. The adoption of this guidance is not expected to have a material impact on the Company’s consolidated financial position or results of operations.





In August 2009, the FASB released new Accounting Standard Update (“ASU”) 2009-05 under ASC 820 “Fair Value Measurement” concerning measuring liabilities at fair value.  The new guidance provides clarification that in circumstances in which a quoted price in an active market for the identical liability is not available, a reporting entity is required to measure fair value using certain valuation techniques.  Additionally, it clarifies that a reporting entity is not required to adjust the fair value of a liability for the existence of a restriction that prevents the transfer of the liability.  This new guidance is effective for the first reporting period after its issuance, but earlier application is permitted.  The Company adopted this new guidance in the third quarter of fiscal 2010.  The adoption of this guidance did not have any impact on the Company’s consolidated financial position or results of operations.





In December 2009, the FASB released ASU 2009-17 under ASC 810 “Consolidation of Variable Interest Entities”.  This update consists of amendments to the FASB Statement No. 167, which was issued by the Board in June 2009.  The amendments are intended to improve financial reporting by enterprises involved with variable interest entities.  This update is effective for fiscal years, and interim periods within those fiscal years, beginning on or after November 15, 2009.  The Company will adopt this update at the beginning of fiscal 2011.  The adoption of this guidance is not expected to have a material impact on the Company’s consolidated financial position or results of operations.





In January 2010, the FASB released ASU 2010-06 under ASC 820 “Fair Value Measurements and Disclosures”.  This update provides amendments to subtopic 820-10 that require new disclosures regarding the significant transfers in and out of Levels 1 and 2 of fair value measurements and the reasons for the transfer.  In addition, activity in Level 3 should be presented with separate information about purchases, sales, issuances and settlements on a gross basis.  This update is effective for the first reporting period (including interim periods) beginning after the issuance.  The Company adopted this update in the fourth quarter of fiscal 2010.  The adoption of this update did not have any impact on the Company’s consolidated financial position or results of operations.





In February 2010, the FASB released ASU 2010-09 under ASC 855 “Subsequent Events”.  This update provides amendments to subtopic 855-10 to remove the requirement for an SEC filer to disclose a date in both issued and revised financial statements.  This update is effective upon issuance of the final update, except for the use of the issued date for conduit debt obligors.  The Company adopted this update in the fourth quarter of fiscal 2010.  The adoption of this update did not have any impact on the Company’s consolidated financial position or results of operations.


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2.
Property and Equipment, net





The following table provides details of property and equipment (in thousands):





Years EndedMarch 27, 2010


March 28, 2009Property and equipmentLand

$
78,836


$
69,162Buildings


96,196



85,860Buildings improvements


70,015



61,438Leasehold improvements


122,087



118,634Fixtures and equipment


121,420



115,866Transportation equipment


5,718



5,297Construction in progress


12,086



17,752Total property and equipment


506,358



474,009Less: accumulated depreciation and amortization


(227,500
)


(202,723
)Property and equipment, net

$
278,858


$
271,286





3.
Investments





The following tables summarize the investments in marketable securities (in thousands):





March 27, 2010Cost or Amortized Cost


Gross Unrealized Gains


Gross Unrealized Losses


Fair ValueAvailable for sale:Commercial paper and money market

$
118,831


$
—


$
—


$
118,831Auction rate securities


10,668



47



(696
)


10,019Municipal bonds


35,171



—



—



35,171Asset-backed securities


3,231



3



(148
)


3,086Corporate securities


3,296



92



(64
)


3,324Total

$
171,197


$
142


$
(908
)

$
170,431Reported as:Short-term investments













$
155,657Long-term investments in marketable securities














14,774Total













$
170,431


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March 28, 2009Cost or Amortized Cost


Gross Unrealized Gains


Gross Unrealized Losses


Fair ValueAvailable for sale:Commercial paper and money market

$
73,564


$
—


$
—


$
73,564Auction rate securities


12,348



—



(1,626
)


10,722Municipal bonds


20,457



47



(11
)


20,493Asset-backed securities


8,822



11



(377
)


8,456Corporate securities


7,693



—



(1,528
)


6,165Total

$
122,884


$
58


$
(3,542
)

$
119,400Reported as:Short-term investments













$
93,049Long-term investments in marketable securities














26,351Total













$
119,400





The auction rate securities the Company holds generally are short-term debt instruments that provide liquidity through a Dutch auction process in which interest rates reset every 7 to 35 days.  Beginning in February 2008, auctions of the Company’s auction rate securities failed to sell all securities offered for sale.  Consequently, the principal associated with these failed auctions will not be accessible until a successful auction occurs, a buyer is found outside of the auction process, the issuers redeem the securities, the issuers establish a different form of financing to replace these securities or final payments come due to long-term contractual maturities.  For each unsuccessful auction, the interest rate moves to a rate defined for each security.  Currently, the Company is uncertain when the liquidity issues related to its remaining auction rate securities will improve. Accordingly, the Company has included $10.0 million and $10.7 million of its auction rate securities in non-current assets on the Company’s balance sheet as of March 27, 2010 and March 28, 2009 respectively.





The following table summarizes maturities of marketable fixed-income securities classified as available for sale as of March 27, 2010 (in thousands):





Amortized Cost


Fair ValueDue within one year

$
36,746


$
36,836Due after one year through five years


171



175Due after five years


13,728



12,930$
50,645


$
49,941





Realized gains from the sale of marketable securities were less than $0.1 million, $0.3 million and $0.4 million for the fiscal years ended March 27, 2010, March 28, 2009 and March 29, 2008, respectively.  The Company recorded an investment impairment charge related to credit losses of approximately $0.8 million for fiscal 2010.  The Company recognized $1.7 million in impairment charges primarily related to a Lehman Brothers corporate bond of $0.6 million and a Lehman Brothers perpetual preferred stock of $1.0 million in fiscal 2009.  There was no impairment charge in fiscal 2008.





Non-tax effected net unrealized losses relating to securities that were recorded as available for sale securities were $0.8 million as of March 27, 2010.  Non-tax effected net unrealized losses relating to securities that were recorded as available for sale securities were $3.5 million as of March 28, 2009.   The tax effected unrealized gains and losses are included in other comprehensive income or loss in the Consolidated Statements of Shareholders’ Equity.


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The following table presents the length of time securities were in continuous unrealized loss positions, but were not deemed to be other-than-temporarily impaired (in thousands):





Less than 12 Months


12 Months or GreaterFair Value


Gross Unrealized Losses


Fair Value


Gross Unrealized LossesMarch 27, 2010Municipal bonds

$
—


$
—


$
—


$
—Asset-backed securities


1,078



(12
)


1,645



(136
)Corporate securities


—



—



1,655



(64
)Auction rate securities


—



—



9,173



(696
)$
1,078


$
(12
)

$
12,473


$
(896
)





As of March 27, 2010, there were less than $0.1 million of unrealized losses for less than twelve months, and $0.9 million of losses for twelve months or greater for 26 securities that primarily were caused by interest rate fluctuations and changes in current market conditions.





During fiscal 2010, the Company recorded approximately $0.6 million and $0.3 million of other-than-temporary impairment charges related to credit losses on its auction rate securities and Bank of America perpetual preferred stock, respectively.  During this period, the Company did not have any non-credit related other-than-temporary losses on any of its securities.  Accordingly, the Company’s other comprehensive income does not include any charges related to the other-than-temporary non-credit portion of its securities.





The following table sets forth a reconciliation of the changes in credit losses recognized in earnings during fiscal 2010 (in thousands):





For the Year EndedMarch 27, 2010Total gross unrealized losses on other-than-temporary impaired securities

$
843Portion of losses recognized in comprehensive income (before taxes)


—Net other-than-temporary impairment losses recognized in net earnings

$
843





4.
Variable Interest Entities




At March 27, 2010 and March 28, 2009, the Company no longer has any variable interest entities.





The Company was the primary beneficiary of a variable interest entity known as the La Quinta Partnership to develop a shopping center in La Quinta, California, where the Company leased a store.  In January 2008, the Company received a buy-sell offer from the managing member of the La Quinta Partnership.  The Company accepted the offer to sell its interest to the minority partner on January 30, 2008.  After the timeline for completion of this offer passed, the Company notified the managing member that the managing member was in default of closing the transaction within the agreed-upon timeframe.  In addition, the partnership had a $7.5 million loan, including principal of $7.3 million and accrued interest of $0.2 million, due to a bank on June 1, 2008, on which the partnership was in default.  In December 2008, the bank foreclosed on the shopping center.   Eighty-nine percent of the land and all of the buildings were sold in the foreclosure sale for $9.3 million.  The proceeds of $9.3 million included the Company’s purchase of the land and building related to its store for approximately $2.9 million and the rest of the center was sold for $6.4 million to a third party, except for a small parcel of undeveloped land which remains in the partnership at this time.  As a result of the foreclosure, the bank received $7.9 million, including principal, interest and penalties.  The partnership’s loss from the foreclosure sales of the shopping center was $0.8 million.  Of the $0.8 million loss, the Company recognized its share of the loss of approximately $0.5 million in the third quarter of fiscal 2009.  In accordance with ASC 810, the Company included the partner’s share of the loss of approximately $0.3 million in its operating expenses during the third quarter of fiscal 2009.  As a result of the foreclosure of the shopping center, the Company became the managing partner of the partnership.  The Company consolidated this partnership as of March 28, 2009.  The Company purchased its noncontrolling partner’s share of the partnership which consisted of the small parcel of land described above, for approximately $0.3 million during the third quarter of fiscal 2010.  The acquisition was recorded as an equity transaction in accordance with the guidance of ASC 810-10-45.  Due to the purchase of the noncontrolling partner’s share of the partnership, the Company became the sole owner of the partnership.


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The Company also had an interest in another partnership known as the Wilshire Alvarado Partnership, which the Company consolidated at March 29, 2008 in accordance with ASC 810. The assets of the partnership consisted of real estate with a carrying value of approximately $1.5 million, and there was no mortgage debt or other significant liabilities associated with the entity, other than notes payable to the Company.  In November 2008, the Company purchased its partner’s share of this partnership, consisting of one of the Company’s leased stores with an approximate carrying value of $1.5 million. The Company paid approximately $1.6 million, including estimated selling costs, to acquire its partner’s share in the partnership. The Company increased its building and land value by approximately $1.6 million as result of this purchase. Due to the purchase of the primary asset of the partnership, the Company became the sole owner of the partnership.





At March 29, 2008, the Company had an interest in an additional partnership known as the Reseda Partnership, the assets of which consisted of real estate with a carrying value of approximately $1.2 million.  The balance sheet effect of consolidating this entity at March 29, 2008 was a reclassification of approximately $1.2 million from investments to assets held for sale with no corresponding impact on the Company’s recorded liabilities.  In April 2008, the partnership sold its primary asset, with an approximate carrying value of $1.2 million, to a third party.  The Company's lease for the store in this partnership continued after the sale and the Company's operation of that store was unaffected by the transaction.  Net proceeds to the Company of the sale were $2.2 million.  The transaction was recorded as a sale leaseback in the first quarter of fiscal 2009.  The partnership’s gain from the sale of real estate was approximately $2.4 million, of which the Company’s net gain was approximately $1.0 million. Of the $1.0 million net gain, the Company recognized approximately $0.2 million in the first quarter of fiscal 2009 and approximately $0.8 million is being recognized over the remaining lease term of 46 months. In accordance with ASC 810, the Company had included the partner’s share of the gain of approximately $1.4 million in its operating expenses during the first quarter of fiscal 2009.  Additionally, the proceeds of the sale were distributed to the partners in April 2008, and the Company had included $1.4 million of minority interest in its Consolidated Statements of Operations for the first quarter of fiscal 2009.  As a result of the sale of the primary asset of the partnership, the Company is no longer a primary beneficiary and therefore has not consolidated the remaining immaterial assets of the partnership as of March 27, 2010 and March 28, 2009.





5.
Income Tax Provision




The provision for income taxes consists of the following:





Years Ended(Amounts in thousands)March 27, 2010


March 28, 2009


March 29, 2008Current:Federal

$
31,349


$
11,761


$
5,703State


6,217



2,703



1,18837,566



14,464



6,891Deferred - federal and state


(4,462
)


(10,395
)


(9,496
)Provision (benefit) for income taxes

$
33,104


$
4,069


$
(2,605
)


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Differences between the provision for income taxes and income taxes at the statutory federal income tax rate are as follows:




Years Ended(Amounts in thousands)March 27, 2010


March 28, 2009


March 29, 2008Amount


Percent


Amount


Percent


Amount


PercentIncome taxes at statutory federal rate

$
32,743



35.0
%

$
4,868



35.0
%

$
100



35.0
%State income taxes, net of federal income tax effect


3,532



3.8



(129
)


(0.9
)


(229
)


(79.9
)Effect of permanent differences


(47
)


(0.1
)


(201
)


(1.5
)


(420
)


(146.3
)Texas NOL tax credits expense/(benefit)


(109
)


(0.1
)


1,431



10.3



(1,341
)


(466.8
)Welfare to work, LARZ, and other job credits


(1,022
)


(1.1
)


(1,052
)


(7.6
)


(672
)


(234.0
)Other


(1,993
)


(2.1
)


(848
)


(6.0
)


(43
)


(15.2
)$
33,104



35.4
%

$
4,069



29.3
%

$
(2,605
)


(907.2
)%





The fiscal year 2008 tax provision includes a benefit for the Texas NOL tax credit to account for a Texas tax law change. In fiscal 2009, the Texas NOL tax credit was adjusted to reflect anticipated store closures. The fiscal 2010 tax provision reflects a small benefit related to the Texas NOL tax credits due to the Company’s decision to continue operations in Texas.





The Company’s net deferred tax assets are as follows:


Years Ended(Amounts in thousands)March 27, 2010


March 28, 2009CURRENT ASSETS (LIABILITIES)Inventory

$
7,944


$
6,796Uniform inventory capitalization


5,209



5,296Prepaid expenses


(1,589
)


(1,575
)Accrued expenses


2,571



2,882Workers’ compensation


20,125



18,986State taxes


(90
)


(1,014
)Other, net


2,249



1,490Total Current Assets (Liabilities)


36,419



32,861NON-CURRENT ASSETS (LIABILITIES)Depreciation and amortization


21,990



23,282Net operating loss carry-forwards


4,346



4,772Deferred rent


2,150



1,970Share-based compensation


6,058



5,772Other, net


5,738



3,789Valuation allowance


(5,798
)


(3,900
)Total Non-Current Assets (Liabilities)


34,484



35,685Net Deferred Tax Assets

$
70,903


$
68,546





As of March 27, 2010, the Company had federal net operating loss carryforwards of approximately $12.4 million which can be used to offset future taxable income.  The utilization of these net operating loss carryforwards is limited and the carryforwards expire at various dates through 2018.  The Company also has approximately $6.1 million of California Enterprise Zone credits that can be carried forward indefinitely. In addition, pursuant to the Company’s decision in August 2009 to continue operations in Texas, the Company has recorded a deferred tax asset of approximately $2.2 million related to Texas NOL credits in fiscal 2010.  Based on the current estimate of future benefit utilization of these credits, the Company has also recorded a related valuation allowance of $1.9 million.  The Company maintains a valuation allowance to reduce certain deferred tax assets to amounts that are, in management’s estimation, more likely than not to be realized.  The valuation allowance as of March 27, 2010, relates to the deferred tax assets acquired in the acquisition of Universal International, Inc. and Texas NOL credits.


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The Company adopted the provisions of ASC 740-10 on April 1, 2007.  The implementation of ASC 740-10 did not result in a change in the estimated liabilities for unrecognized tax benefits at April 1, 2007.  The Company had approximately $1.4 million at March 28, 2009 of unrecognized tax benefits related to uncertain tax positions.  The statutes of limitations have expired for the periods related to these uncertain tax positions at the end of fiscal 2010.  Accordingly, at March 27, 2010, the Company has derecognized these liabilities. This did not have a material impact on the effective tax rate.





The following table provides a reconciliation of the beginning and ending amount of unrecognized tax benefit (in thousands):





Balance at April 1, 2007

$
1,381Additions based on tax positions related to the current year


—Additions for tax positions of prior years


—Reductions for tax positions of prior years


—Settlements


—Balance at March 28, 2008

$
1,381Additions based on tax positions related to the current year


—Additions for tax positions of prior years


35Reductions for tax positions of prior years


—Settlements


—Balance at March 28, 2009

$
1,416Additions based on tax positions related to the current year


—Additions for tax positions of prior years


—Reductions for tax positions of prior years


—Settlements


—Lapse of statutes of limitation


(1,416
)Balance at March 27, 2010

$
—





The Company files income tax returns in the U.S. federal jurisdiction and in various states.  The Company is subject to examinations by the major tax jurisdictions in which it files for the tax years 2004 through 2009.





6.
Related-Party Transactions





The Company leases certain retail facilities from its significant shareholders and their affiliates.  Rental expense for these facilities was approximately $2.1 million in each of fiscal years 2010, 2009 and 2008.





7.
Commitments and Contingencies





Credit Facilities





The Company has no debt outstanding as of March 27, 2010 and March 28, 2009 and does not maintain any credit facilities with any financial institutions.





Lease Commitments





The Company leases various facilities under operating leases (except for one location which is classified as a capital lease) expiring at various dates through fiscal year 2031. Most of the lease agreements contain renewal options and/or provide for fixed rent escalations or increases based on the Consumer Price Index.  Total minimum lease payments under each of these lease agreements, including scheduled increases, are charged to operating expenses on a straight-line basis over the term of each respective lease.  Certain leases require the payment of property taxes, maintenance and insurance.  Rental expense charged to operating expenses in fiscal 2010, 2009 and 2008 was approximately $60.7 million, $60.6 million and $54.1 million, respectively, of which $0.3 million, $0.2 million and $0.2 million was paid as percentage rent based on sales volume for each of the years then ended, respectively.  Sub-lease income earned in fiscal 2010, 2009 and 2008 was approximately $0.7 million, $1.0 million and $0.9 million, respectively.


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As of March 27, 2010, the minimum annual rentals payable and future minimum sub-lease income under all non-cancelable operating leases were as follows: (amounts in thousands):




Fiscal Year:

Operating leases


Capital leases


Future Minimum Sub-lease Income2011

$
42,548


$
106


$
7352012


35,451



106



5802013


28,939



106



3902014


25,654



106



3772015


19,739



106



188Thereafter


41,276



118



162Future minimum lease payments

$
193,607


$
648


$
2,432Less amount representing interest






(129
)Present value of future lease payments





$
519





The capital lease relates to a building for one of the Company’s stores.  The gross asset amount recorded under the capital lease was $1.0 million each as of March 27, 2010 and March 28, 2009.  Accumulated depreciation was $0.6 million and $0.5 million each as of March 27, 2010 and March 28, 2009.




Workers’ Compensation




The Company self-insures its workers' compensation claims in California and Texas and provides for losses of estimated known and incurred but not reported insurance claims.  The Company does not discount the projected future cash outlays for the time value of money for claims and claim related costs when establishing its workers’ compensation liability.





At March 27, 2010 and March 28, 2009, the Company had recorded a liability $46.9 million and $44.3 million respectively, for estimated workers’ compensation claims in California.  The Company has limited self-insurance exposure in Texas and had recorded a liability of approximately $0.1 million at each of March 27, 2010 and March 28, 2009 for workers’ compensation claims in Texas.  The Company purchases workers’ compensation insurance coverage in Arizona and Nevada.





Legal Matters





The Company is subject to private lawsuits, administrative proceedings and claims that arise in our ordinary course of business.  A number of these lawsuits, proceedings and claims may exist at any given time.  While the resolution of a lawsuit, proceeding or claim may have an impact on our financial results for the period in which it is resolved, and litigation is inherently unpredictable, in management’s opinion, none of these matters arising in the ordinary course of business are expected to have a material adverse effect on the Company’s financial position, results of operations, or overall liquidity.  Material pending legal proceedings (other than ordinary routine litigation incidental to our business) and material proceedings known to be contemplated by governmental authorities are reported in our Exchange Act reports.  In accordance with ASC 450 “Accounting for Contingencies” (“ASC 450”), previously referred to as SFAS No. 5, the Company records a liability when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated; no liability has been recorded for the matter disclosed below.





The district attorneys of two California counties and one city attorney have notified the Company that they are planning a possible civil action against the Company alleging that its .99 cent pricing policy, adopted in September 2008, constitutes false advertising and/or otherwise violates California's pricing laws.  In response to this notification and an associated invitation from these governmental entities, the Company provided a detailed position statement with respect to its pricing structure.  If such an action is brought, we cannot predict the outcome of such an action or the amount of potential loss, if any.  We believe our pricing structure is lawful, and that our .99 cent pricing policy has an established precedent to the similar .9 cent pricing policy used for decades by gas stations across the country. We believe our .99 cent pricing policy has been well publicized with items properly price signed in the stores such that it would not cause a reasonable consumer to be deceived, and, if such an action is brought, we intend to vigorously defend it.


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 Table of Contents


8.
Stock-Based Compensation Plans




The Company has one stock incentive plan that provides for stock-based compensation (the 1996 Stock Option Plan, as amended). The plan is a fixed plan, which provides for the granting of non-qualified and incentive stock options as well as other types of equity-based awards.  An aggregate of 17,000,000 shares of the Company’s common stock may be issued pursuant to all awards under the plan, of which 2,606,000 were available as of March 27, 2010 for future awards.  Awards may be granted to officers, employees, non-employee directors and consultants of the Company. All grants are made at fair market value at the date of grant or at a price determined by the Compensation Committee of the Company’s Board of Directors, which consists exclusively of independent members of the Board of Directors.  The plan will expire in 2011.





The following table summarizes stock awards available for grant:





Years EndedMarch 27, 2010


March 28, 2009


March 29, 2008Beginning balance


2,055,000



976,000



2,870,000Authorized


—



—



—Granted


(101,000
)(a)


(249,000
)(c)


(2,435,000
)(e)Cancelled


652,000
(b)


1,328,000
(d)


541,000
(f)Available for future grant


2,606,000



2,055,000



976,000





(a) This amount includes 65,000 performance stock units granted under the Company’s 2008 PSU Plan. The actual number of performance stock units (and ultimately shares of Company common stock) to be issued depends on the Company’s financial performance over a period of time.





(b) This amount includes 99,000 performance stock units.





(c) This amount includes 127,000 performance stock units potentially issuable under the Company’s 1996 Stock Option Plan. The actual number of performance stock units (and ultimately shares of Company common stock) to be issued depends on the Company’s financial performance over a period of time.





(d) This amount includes 191,000 performance stock units.





(e) This amount includes 1,627,000 performance stock units potentially issuable under the Company’s 1996 Stock Option Plan. The actual number of performance stock units (and ultimately shares of Company common stock) to be issued depends on the Company’s financial performance over a period of time.





(f) This amount includes 7,000 performance stock units.





In fiscal 2010, fiscal 2009 and fiscal 2008, the Company incurred total non-cash stock-based compensation expense of $7.7 million, $3.1 million and $4.2 million recorded as operating expense, before the income tax benefit of $3.1 million, $1.3 million and $1.7 million, respectively.





Stock Options





Stock options typically vest over a three-year period, one-third one year from the date of grant and one-third per year thereafter. Stock options typically expire ten years from the date of grant.


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The weighted average fair values per share of stock options granted have been estimated using the Black-Scholes pricing model with the following assumptions:





Years EndedMarch 27, 2010


March 28, 2009


March 29, 2008Weighted-average fair value of options granted

$
5.93


$
4.93


$
3.82Risk free interest rate


2.44
%


2.97
%


3.29
%Expected life (in years)


5.0



5.0



4.9Expected stock price volatility


47.2
%


55.1
%


54.0
%Expected dividend yield

None


None


None





The risk-free interest rate is based on the U.S. treasury yield curve in effect at the time of grant with an equivalent remaining term.  Expected life represents the estimated period of time until exercise and is based on historical experience of similar options, giving consideration to the contractual terms and expectations of future employee behavior.  Expected stock price volatility is based on a combination of the historical volatility of the Company’s stock and the implied volatility of actively traded options of the Company’s stock.  The Company has not paid dividends in the past and does not anticipate the payment of any cash dividends for the foreseeable future.  Compensation expense is recognized only for those options expected to vest, with forfeitures estimated based on the Company’s historical experience and future expectations.





Option activity under the Company’s stock option plan during the year ended March 27, 2010 is set forth below:




Number of Shares


Weighted Average Exercise Price


Weighted Average Remaining Contractual Life (Years)


Aggregate Intrinsic ValueOptions outstanding at the beginning of the period


5,450,000


$
16.15Granted


36,000


$
13.52Exercised


(800,000
)

$
9.73Cancelled


(553,000
)

$
17.23Outstanding at the end of the period


4,133,000


$
17.23



4.33


$
13,942,710Exercisable at the end of the period


3,819,000


$
17.92



4.02


$
11,306,058Exercisable and expected to vest at the end of the period


4,121,000


$
17.24



4.32


$
13,910,526





The aggregate pre-tax intrinsic values of options outstanding, exercisable, and exercisable and expected to vest were calculated based on the Company’s closing stock price on the last trading day of fiscal 2010.  These amounts change based upon changes in the fair market value of the Company’s common stock.  The aggregate pre-tax intrinsic value of options exercised in fiscal 2010 and 2009 was $4.2 million and less than $0.1 million, respectively. The aggregate pre-tax intrinsic value of options exercised represents the difference between the fair market value of the Company’s common stock on the date of exercise and the exercise price of each option.  The total fair value of shares vested during fiscal 2010, 2009 and 2008 was $2.4 million, $4.9 million and $6.8 million, respectively.




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The weighted average remaining contractual life and the weighted average per share exercise price of options outstanding and of options exercisable as of March 27, 2010 were as follows:




Options Outstanding


Options ExercisableRange of Exercise Prices


Number of Shares


Weighted Average Remaining Contractual Life in Years


Weighted Average Exercise Price


Number of Shares


Weighted Average Exercise Price$5.50 —$10.50



1,201,000



6.73


$
8.86



981,000


$
9.26$10.51 — $16.50



639,000



6.59


$
11.31



545,000


$
11.04$16.51 — $20.50



924,000



2.77


$
17.67



924,000


$
17.67$20.51 — $28.50



399,000



1.09


$
20.52



399,000


$
20.52$28.51 — $35.50



970,000



2.67


$
29.72



970,000


$
29.724,133,000



4.32


$
17.23



3,819,000


$
17.92





As of March 27, 2010, there was $0.9 million of total unrecognized compensation cost related to non-vested share-based compensation arrangements granted under the Company’s stock option plan. That cost is expected to be recognized over a weighted-average period of 1.0 years.




Performance Stock Units





During the fourth quarter of fiscal 2008, the Compensation Committee of the Company's Board of Directors granted performance stock units (“PSUs”) to certain officers and other key personnel of the Company as a long-term, stock-based performance incentive award.  The PSUs will be eligible for conversion, on a one-for-one basis, to shares of the Company’s common stock based on (1) attainment of one or more of eight specific performance goals during the performance period (consisting of fiscal 2008 through 2012), (2) continuous employment with the Company, and (3) certain vesting requirements.  The performance period began on March 29, 2008 and ends on the date upon which the Company files its annual financial statement for fiscal year 2012. As of March 27, 2010, the Company had one million PSUs issued and outstanding.The following table summarizes the PSU activity in fiscal 2010:





Number of Shares


Weighted Average Fair ValuePSUs outstanding at the beginning of the period


1,563,000


$
6.86Granted


65,000


$
14.13Forfeited


(99,000
)

$
8.17Issued


(536,000
)

$
7.01Outstanding at the end of the period


993,000


$
7.12Vested at the end of the period


67,000



7.47





The fair value of the PSUs is based on the stock price on the grant date.  The compensation expense related to PSUs is recognized only when it is probable that the performance criteria will be met.  Based on the Company’s financial results, the Company started to recognize compensation expense related to PSUs starting with the first quarter of fiscal 2010 as this was the first quarter that it appeared probable that certain performance conditions would be met.  For fiscal year 2010, the Company incurred non-cash stock-based compensation expense related to PSUs of $6.5 million, which was recorded as operating expense. The Company did not incur non-cash stock-based compensation expense related to PSUs during fiscal 2009 and 2008.  There were 0.6 million PSUs vested during the fiscal 2010 of which 0.5 million PSUs were issued during fiscal 2010.  As of March 27, 2010, the unvested future compensation expense, assuming all the performance criteria will be met for the performance period through fiscal year 2012, was $4.2 million.  There were no PSUs vested during fiscal 2009.




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 Table of Contents


9.
Stock Repurchase Program





On June 11, 2008, the Company announced that its Board of Directors had approved a share repurchase program for the purchase of up to $30 million of shares of its common stock.  Under the authorization, the Company may purchase shares from time to time in the open market or in privately negotiated transactions in compliance with the applicable rules and regulations of the SEC.  However, the timing and amount of such purchases will be at the discretion of management, and will depend on market conditions and other considerations which may change.  The Company has used and plans to continue to use existing cash to fund any repurchases under this program.  As of March 27, 2010, the Company had approximately $17.1 million that remained authorized and available to repurchase shares of Company’s common stock under this program.  The Company did not make any common stock repurchases for fiscal 2010.





The Company issues performance stock units as part of its equity incentive plans.  The number of shares issued on the date the performance stock units vest is net of the statutory withholding requirements that the Company pays in cash to the appropriate taxing authorities on behalf of its employees.  During fiscal 2010, the Company withheld approximately 187,510 shares to satisfy $2.7 million of employee tax obligations.  Although shares withheld are not issued, they are treated as common stock repurchases in the Company’s Consolidated Financial Statements, as they reduce the number of shares that would have been issued upon vesting.





10.
Texas Market





As announced on September 17, 2008, the Company’s Board of Directors, together with its management team, made a decision to exit the Texas market.  The Company’s exit plan anticipated that it would cease all Texas operations and complete the sale of its assets within one year.  The determination to take this action resulted after a thorough review of sales and profit performance of the Company’s Texas stores and net recovery of capital based on the state of the real estate market at that time.  As a result of the decision to close its Texas operations, the Company recognized an impairment charge of approximately $10.1 million related to leasehold improvements associated with leased stores during fiscal 2009.  This non-cash charge was recorded within selling, general and administrative expenses in the consolidated statements of operations.  During fiscal 2009, the Company also recognized and paid severance expenses of approximately $1.4 million related to Texas operations.





On September 29, 2008, the Company announced that in response to a proposal by the Company’s Chairman, Dave Gold, to acquire the Company’s Texas operations, the Company’s Board of Directors formed a special committee of independent board members to consider this proposal as well as other proposals or alternatives to accomplish the exit plan.  On January 31, 2009, following evaluation of Dave Gold’s proposal by the special committee, the Board adopted the recommendation of the special committee to decline to further pursuethe proposal.





In the course of the Board’s deliberations, the Board noted that same-store sales in Texas had increased at a rate of 8.6% during the four-week period ended January 24, 2009, compared to a rate of 0.8% during the five-week period ended December 27, 2008.  In light of this significant improvement in sales results and the state of the economy, the Board concluded it would be prudent to continue to observe sales and other financial results in Texas for a limited period before taking permanent actions that would effectively close off any opportunity to continue the Texas operations.  After additional discussions following the January 31, 2009 Board meeting, the Board voted on February 2, 2009 to continue operations in approximately two thirds of its Texas stores, and continue to operate its Texas distribution center to support these stores, in order to allow the Board to continue to monitor sales trends and other financial results in those stores. As a result, the Company closed four of its Texas stores during the fourth quarter of fiscal 2009. During fiscal 2009, the Company accrued approximately $1.3 million in lease termination costs associated with the closing of four of its Texas stores and lease termination costs for one contracted store.  In fiscal 2010, the Company also closed 12 of its Texas stores, 11 in the first quarter of fiscal 2010 and one additional store during the second quarter of fiscal 2010.  During fiscal 2010, the Company accrued approximately $3.0 million in lease termination costs associated with the closing of seven out of the 12 stores. There were no lease terminations costs associated with the other five stores. During fiscal 2010, the Company paid approximately $1.4 million related to the above mentioned lease termination costs.  As of March 27, 2010, the Company had an estimated lease termination costs accrual of approximately $2.9 million.  The Company expects to pay the remainder of lease termination costs by the end of fiscal 2011.  The actual amount of non-cash and cash charges incurred by the Company in connection with the closing of these Texas stores during fiscal 2009 and fiscal 2010 may be different than the amounts estimated by the Company, and there can be no assurance that satisfactory agreements with landlords can be achieved to keep all the Company’s remaining Texas stores open.


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 Table of Contents


Following a six-month period during which the Company’s management and its Board of Directors monitored sales trends and other financial results of the Company’s remaining Texas operations, the Board of Directors analyzed such trends and results, as well as other data related to the potential long-term financial implications of such trends and results, including the fact that, since February 2009, the year-over-year same-store sales of the Company’s Texas stores increased substantially, to 23.6% for the first quarter of fiscal 2010.  On August 4, 2009, the Board voted to continue operations in Texas and that the Board’s prior decision announced on September 17, 2008 to wind down and close the Company’s Texas operations, would be of no further force or effect.  As of March 27, 2010, the Company operated 32 stores in Texas.





11.
Operating Segments





The Company historically presented Bargain Wholesale as a separate operating segment.  Bargain Wholesale is not material to the Company’s consolidated financial statements; therefore, in accordance with ASC 280, “Disclosures about Segments of an Enterprise and Related Information,” Bargain Wholesale is not presented as a separate operating segment in fiscal 2010.





The Company had no customers representing more than 10 percent of net sales. Substantially all of the Company’s net sales were to customers located in the United States.





12.
Employee Benefit Plans





401(k) Plan




In 1998, the Company adopted a 401(k) Plan (the “Plan”).  All full-time employees are eligible to participate in the Plan after 30 days of service and are eligible to receive matching contributions from the Company after one year of service.  The Company contributed approximately $1.6 million in each of fiscal years 2010, 2009 and 2008, in matching cash contributions to the Plan.  The Plan was amended in fiscal 2007 and currently the Company matches 100% of the first 3% of compensation that an employee contributes and 50% of the next 2% of compensation that the employee contributes with immediate vesting.





Deferred Compensation Plan




The Company has a deferred compensation plan to provide certain key management employees the ability to defer a portion of their base compensation and/or bonuses.  The plan is an unfunded nonqualified plan.  The deferred amounts and earnings thereon are payable to participants, or designated beneficiaries, at specified future dates, upon retirement or death.  The Company does not make contributions to this plan or guarantee earnings.  Funds in the plan are held in a rabbi trust. In accordance with ASC 710-05-8, “Accounting for Deferred Compensation Arrangements Where Amounts Earned are Held in a Rabbi Trust,” the assets and liabilities of a rabbi trust must be accounted for as if they are assets and liabilities of the Company. The assets held in the rabbi trust are not available for general corporate purposes.  The rabbi trust is subject to creditor claims in the event of insolvency. The deferred compensation liability and related long-term asset was $4.3 million and $3.0 million as of March 27, 2010 and March 28, 2009, respectively.




13.
Assets Held for Sale





Assets held for sale consist of the Company’s warehouse in Eagan, Minnesota.  The book value of the warehouse at March 27, 2010 was $7.4 million.   Due to market conditions and the size of the warehouse, the Company has classified the warehouse as long-term asset on its consolidated balance sheets. Although the Company anticipates selling the warehouse in excess of its book value, no assurance can be given as to how much the warehouse will be sold for. In October 2009, the Company sold a small property for $0.3 million which was classified as an asset held for sale at March 28, 2009.


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 Table of Contents


14.
Other Current Liabilities





Other current liabilities as of March 27, 2010 and March 28, 2009 are as follows:





Years EndedMarch 27, 2010


March 28, 2009(Amounts in thousands)Accrued legal reserves and fees

$
1,309


$
2,421Accrued property taxes


3,130



3,148Accrued utilities


2,728



3,808Accrued rent and related expenses


6,794



4,641Accrued accounting fees


823



1,205Accrued advertising


470



405Accrued outside services


866



1,628Other


5,278



6,086Total other current liabilities

$
21,398


$
23,342





15.
Quarterly Financial Information (Unaudited)




The following table sets forth certain unaudited results of operations for each quarter during fiscal years 2010 and 2009. The unaudited information has been prepared on the same basis as the audited financial statements and includes all adjustments which management considers necessary for a fair presentation of the financial data shown. The operating results for any quarter are not necessarily indicative of the results to be attained for any future period.





Fiscal Year 2010 ( March 29, 2009 to March 27, 2010)(Amounts in thousands, except per share data)(Unaudited)First Quarter


Second Quarter


Third Quarter


Fourth QuarterNet sales:99¢ Only Stores

$
321,845


$
314,821


$
348,902


$
328,646Bargain Wholesale


10,265



9,866



10,217



10,608Total


332,110



324,687



359,119



339,254Gross profit


133,578



129,593



154,901



139,350Operating income


15,386



14,984



38,599



24,447Net income attributable to 99¢ Only Stores

$
9,508


$
9,600


$
24,485


$
16,854Earnings per common share attributable to 99¢ Only Stores:Basic

$
0.14


$
0.14


$
0.36


$
0.24Diluted

$
0.14


$
0.14


$
0.35


$
0.24Weighted average shares outstanding:Basic


68,583



68,686



68,788



68,814Diluted


68,962



69,483



69,728



69,765


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Fiscal Year 2009 ( March 30, 2008 to March 28, 2009)(Amounts in thousands, except per share data)(Unaudited)First Quarter


Second Quarter


Third Quarter


Fourth QuarterNet sales:99¢ Only Stores

$
294,717


$
307,400


$
340,988


$
319,014Bargain Wholesale


10,207



10,376



10,093



10,141Total


304,924



317,776



351,081



329,155Gross profit


116,880



122,683



142,833



129,419Operating income (loss)


(1,966
)


(11,773
)


16,889



9,764Net income (loss) attributable to 99¢ Only Stores

$
(1,511
)

$
(9,414
)

$
12,453


$
6,953Earnings (loss) per common share attributable to 99¢ Only Stores:Basic

$
(0.02
)

$
(0.13
)

$
0.18


$
0.10Diluted

$
(0.02
)

$
(0.13
)

$
0.18


$
0.10Weighted average shares outstanding:Basic


70,060



70,016



69,985



69,887Diluted


70,060



70,016



70,177



69,895





During the fourth quarter of fiscal 2010, the Company recognized an additional charge of approximately $1.1 million related to lease termination costs and stores closing costs associated with some of the closed Texas stores.


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Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure




None.





Item 9A. Controls and Procedures




Evaluation of Disclosure Controls and Procedures





The Company evaluated the effectiveness of its disclosure controls and procedures as of the end of the period covered by this Report, under the supervision and with the participation of the Company’s management, pursuant to Rule 13a-15(b) of the Securities Exchange Act of 1934, as amended (the "Securities Exchange Act"). Based on this evaluation, the Company’s Chief Executive Officer and Chief Financial Officer each concluded that the Company’s disclosure controls and procedures were effective as of March 27, 2010.





Management’s Report on Internal Control Over Financial Reporting





Management is responsible for establishing and maintaining an adequate system of internal control over financial reporting, pursuant to Rule 13a-15(c) of the Securities Exchange Act. This system is intended to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States.





A company’s internal control over financial reporting includes policies and procedures that: (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company, (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company, and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a material effect on the financial statements.





Management uses the framework in Internal Control - Integrated Framework, issued by the Committee of Sponsoring Organizations (“COSO”) of the Treadway Commission, for evaluating the effectiveness of the Company’s internal control over financial reporting.  Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements, and projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with policies or procedures may deteriorate.





Based on its assessment, management concluded that the Company’s internal control over financial reporting was effective as of March 27, 2010.  The Company’s independent registered public accounting firm, BDO Seidman LLP, has audited the Company’s consolidated financial statements and has issued an attestation report on the effectiveness of the Company’s internal control over financial reporting, which is included in this report.





Remediation of Material Weakness





As of March 28, 2009, there was a material weakness in the Company’s internal control surrounding its inventory accounts, which was first identified by the Company as a material weakness in connection with its 2004 year-end closing and financial reporting process.  See “Item 9A.  Controls and Procedures --  Management’s Report on Internal Control Over Financial Reporting” and “Item 9A.  Controls and Procedures -- Remediation Plan for Material Weakness in Inventory” in the Company’s Annual Report on Form 10-K for the fiscal year ended March 28, 2009, and “Item 4.  Controls and Procedures” contained in the Company’s subsequent quarterly reports on Form 10-Q during fiscal 2010, for disclosure of information about remediation of this material weakness.  As disclosed in the Company’s Form 10-Q for the third quarter of fiscal 2010, the Company carried out additional remediation activities, and as of March 27, 2010, the Company’s remediation plans were successfully tested and the material weakness was remediated.


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 Table of Contents


Changes in Internal Control Over Financial Reporting





During the fourth quarter of fiscal 2010, the Company did not make changes that materially affected or are reasonably likely to materially affect its internal control over financial reporting, although the Company continued testing a number of controls, including significant testing of its inventory controls.





Item 9B. Other Information





None.


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Report of Independent Registered Public Accounting Firm








The Board of Directors and Shareholders


99¢ Only Stores


City of Commerce, California







We have audited 99¢ Only Stores’ (the “Company”) internal control over financial reporting as of March 27, 2010, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying “Item 9A, Management’s Report on Internal Control Over Financial Reporting”. Our responsibility is to express an opinion on the company’s internal control over financial reporting based on our audit.




We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.




A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.




Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.




In our opinion, 99¢ Only Stores maintained, in all material respects, effective internal control over financial reporting as of March 27, 2010, based on the COSO criteria.




We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of 99¢ Only Stores as of March 27 2010 and March 28, 2009, and the related consolidated statements of income, stockholders’ equity, and cash flows for the years ended March 27, 2010, March 28, 2009 and March 29, 2008 and our report dated May 27, 2010 expressed an unqualified opinion thereon.








/s/ BDO Seidman, LLP


Los Angeles, California


May 27, 2010


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 Table of Contents


PART III




Item 10. Directors, Executive Officers and Corporate Governance





Information  regarding Directors and Executive Officers of the registrant required by Item 401 of Regulation S-K, information regarding Directors and Executive Officers of the registrant required by Item 405 of Regulation S-K,  information regarding Directors and Executive Officers of the registrant required by Item 406 of Regulation S-K, and information regarding Directors and Executive Officers of the registrant required by Item 407 (c)(3), (d)(4) and (d)(5) of Regulation S-K is presented under the captions "Election of Directors," "Information with Respect to Nominees and Executive Officers," "Code of Business Conduct and Ethics," "Further Information Concerning the Board of Directors" and "Section 16(a) Beneficial Ownership Reporting Compliance" in the definitive Proxy Statement for the Company's 2010 Annual Meeting of Shareholders, which will be filed with the Commission no later than 120 days after the end of the Company’s 2010 fiscal year and which is incorporated  herein by reference.





Item 11. Executive Compensation





The information required by Item 402 of Regulation S-K and paragraphs (e)(4) and (e)(5) of Item 407 of Regulation S-K is presented under the captions "Executive Compensation", “Compensation Committee Interlocks and Insider Participation,” and “Compensation Committee Report” in the definitive Proxy Statement for the Company's 2010 Annual Meeting of Shareholders, and is incorporated herein by reference.





Item 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters





The information required by Item 403 of Regulation S-K is presented under the captions "Principal Shareholders" in the definitive Proxy Statement for the Company's 2010 Annual Meeting of Shareholders, and is incorporated herein by reference.





See “Part II, Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities” for information regarding the securities authorized for issuance under the Company’s equity compensation plans.





Item 13. Certain Relationships and Related Transactions, and Director Independence




The information required by Item 404 of Regulation S-K and Item 407(a) of Regulation S-K is presented under the captions "Related Person Transactions" and “Further Information Concerning the Board of Directors” in the definitive Proxy Statement for the Company's 2010 Annual Meeting of Shareholders, and is incorporated herein by reference.





Item 14. Principal Accountant Fees and Services




The information required by Item 9(e) of Schedule 14A is presented under the caption "Independent Registered Public Accountants" in the definitive Proxy Statement for the Company's 2010 Annual Meeting of Shareholders, and is incorporated herein by reference.


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 Table of Contents


PART IV




Item 15. Exhibits, Financial Statement Schedules




a)     Financial Statements. Reference is made to the Index to the Financial Statements set forth in item 8 on page 38 of this Form 10-K.




Financial Statement Schedules. All Schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are included herein.




b)    The Exhibits listed on the accompanying Index to Exhibits are filed as part of, or incorporated by reference into, this report.




99¢ Only Stores


SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS


(Amounts in thousands)





Beginning of Period


Addition


Reduction


End of

PeriodFor the year ended March 27, 2010Allowance for doubtful accounts

$
44



541



84


$
501Inventory reserve

$
2,666



1,525



465


$
3,726Tax valuation allowance

$
3,900



1,900



—


$
5,800For the year ended March 28, 2009Allowance for doubtful accounts

$
159



65



180


$
44Inventory reserve

$
2,085



2,221



1,640


$
2,666Tax valuation allowance

$
3,900



—



—


$
3,900For the year ended March 29, 2008Allowance for doubtful accounts

$
252



81



174


$
159Inventory reserve

$
3,750



683



2,348


$
2,085Tax valuation allowance

$
3,960



—



60


$
3,900


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 Table of Contents




Exhibit Index
Exhibit Description3.1
Amended and Restated Articles of Incorporation of the Registrant.(2)3.2
Amended and Restated Bylaws of the Registrant.(10)4.1
Specimen certificate evidencing Common Stock of the Registrant.(3)10.1
Form of Amended and Restated Indemnification Agreement and Schedule of Indemnified Parties.(10)10.2
Indemnification Agreement with David Gold.(4)10.3
Form of Tax Indemnification Agreement, between and among the Registrant and the Existing Shareholders.(3)10.4
1996 Stock Option Plan, as Amended. (8)10.5
1996 Stock Option Plan: Performance Stock Unit Award – Fiscal 2008 to 2012 (9)10.6
Lease for 13023 Hawthorne Boulevard, Hawthorne, California, dated April 1, 1994, by and between the Registrant as Tenant and HKJ Gold, Inc. as Landlord, as amended.(1)10.7
Lease for 6161 Atlantic Boulevard, Maywood, California, dated November 11, 1985, by and between the Registrant as Lessee and David and Sherry Gold, among others, as Lessors (“6161 Atlantic Blvd. Lease”).(1)10.8
Lease for 14139 Paramount Boulevard, Paramount, California, dated as of March 1 1996, by and between the Registrant as Tenant and 14139 Paramount Properties as Landlord, as amended.(1)10.9
[Reserved]10.10
Lease for 6124 Pacific Boulevard, Huntington Park, California, dated January 31, 1991, by and between the Registrant as Tenant and David and Sherry Gold as the Landlord, as amended.(1)10.11
Lease for 14901 Hawthorne Boulevard, Lawndale, California, dated November 1, 1991, by and between Howard Gold, Karen Schiffer and Jeff Gold, dba 14901 Hawthorne Boulevard Partnership as Landlord and the Registrant as Tenant, as amended.(1)10.12
Lease for 5599 Atlantic Avenue, North Long Beach, California, dated August 13, 1992, by and between the Registrant as Tenant and HKJ Gold, Inc. as Landlord, as amended.(1)10.13
Lease for 1514 North Main Street, Santa Ana, California, dated as of November 12, 1993, by and between the Registrant as Tenant and Howard Gold, Jeff Gold, Eric J. Schiffer and Karen R. Schiffer as Landlord, as amended.(1)10.14
Lease for 6121 Wilshire Boulevard, Los Angeles, California, dated as of July 1, 1993, by and between the Registrant as Tenant and HKJ Gold, Inc. as Landlord, as amended; and lease for 6101 Wilshire Boulevard, Los Angeles, California, dated as of December 1, 1995, by and between the Registrant as Tenant and David and Sherry Gold as Landlord (“6121 Wilshire Blvd. Lease”), as amended.(1)10.15
Lease for 8625 Woodman Avenue, Arleta, California, dated as of July 8, 1993, by and between the Registrant as Tenant and David and Sherry Gold as Landlord (“8625 Woodman Avenue Lease”).(1)10.16
Lease for 2566 East Florence Avenue, Walnut Park, California, dated as of April 18, 1994, by and between HKJ Gold, Inc. as Landlord and the Registrant as Tenant (“2566 East Florence Avenue Lease”), as amended.(1)10.17
Lease for 3420 West Lincoln Avenue, Anaheim, California, dated as of March 1, 1996, by and between the Registrant as Tenant and HKJ Gold, Inc. as Landlord, as amended.(1)10.18
[Reserved]10.19
Lease for 12123-12125 Carson Street, Hawaiian Gardens, California dated February 14, 1995, as amended.(7)10.20
North Broadway Indemnity Agreement, dated as of May 1, 1996, by and between HKJ Gold, Inc. and the Registrant.(6)10.21
Lease for 2606 North Broadway, Los Angeles, California, dated as of May 1, 1996, by and between HKJ Gold, Inc. as Landlord and the Registrant as Tenant.(6)10.22
Agreement with Gold family and affiliates related to nonpayment of rent increases.(7)10.23
Grant Deed concerning 8625 Woodman Avenue, Arleta, California, dated May 2, 1996, made by David Gold and Sherry Gold in favor of Au Zone Investments #2, L.P., a California limited partnership.(3)10.24
Grant Deed concerning 6101 Wilshire Boulevard, Los Angeles, California, dated May 2, 1996, made by David Gold and Sherry Gold in favor of Au Zone Investments #2, L.P., a California limited partnership.(3)10.25
Grant Deed concerning 6124 Pacific Boulevard, Huntington Park, California, dated May 2, 1996, made by David Gold and Sherry Gold in favor of Au Zone Investments #2, L.P., a California limited partnership.(3)10.26
Grant Deed concerning 14901 Hawthorne Boulevard, Lawndale, California, dated May 2, 1996, made by Howard Gold, Karen Schiffer and Jeff Gold in favor of Au Zone Investments #2, L.P., a California limited partnership.(3)10.27
[Reserved]10.28
1996 Stock Option Plan: Stock Option Award Agreement (9)10.29
Robert Kautz Employment Agreement(5)10.30
Second Amendment to 6161 Atlantic Blvd. Lease, dated January 1, 2005. (7)


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 Table of Contents





21.0
Subsidiaries*23.1
Consent of BDO Seidman, LLP*23.2
Consent of Independent Valuation Firm*31(a)
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*31(b)
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*32(a)
Certification of Chief Executive Officer pursuant to section 906 of the Sarbanes-Oxley Act of 2002.*32(b)
Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. ** Filed herewith(1) Incorporated by reference from the Company’s Registration Statement on Form S-1 as filed with the Securities and Exchange Commission on March 26, 1996.(2) Incorporated by reference from the Company’s 2002 Annual Report on Form 10-K as filed with the Securities and Exchange Commission on March 31, 2003.(3) Incorporated by reference from the Company’s Amendment No. 2 to Registration Statement on Form S-1/A as filed with the Securities and Exchange Commission on May 21, 1996.(4) Incorporated by reference from the Company’s 2004 Annual Report on Form 10-K as filed with the Securities and Exchange Commission on September 9, 2005.(5) Incorporated by reference from the Company’s Current Report on Form 8-K as filed with Securities and Exchange Commission on November 17, 2005.(6) Incorporated by reference from the Company’s Amendment No. 1 to Registration Statement on Form S-1/A as filed with the Securities and Exchange Commission on May 3, 1996.(7) Incorporated by reference from the Company’s 2006 Annual Report on Form 10-K as filed with the Securities and Exchange Commission on April 2, 2007.(8) Incorporated by reference from the Company’s Quarterly Report on Form 10-Q as filed with the Securities and Exchange Commission on February 11, 2008.(9) Incorporated by reference from the Company’s Current Report on Form 8-K as filed with Securities and Exchange Commission on January 16, 2008.(10) Incorporated by reference from the Company’s 2009 Annual Report on Form 10-K as filed with Securities and Exchange Commission on June 10, 2009.


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 Table of Contents


SIGNATURES




Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this annual report Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized.




99¢ Only Stores/s/ Eric SchifferBy:  Eric SchifferChief Executive Officer




Pursuant to the requirements of the Securities Exchange Act of 1934 this Annual Report on Form 10-K has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.




Signature

Title

Date/s/ David GoldDavid Gold

Chairman of the Board

May 27, 2010/s/ Eric SchifferEric Schiffer

Chief Executive Officer and Director (principal executive officer)

May 27, 2010/s/ Jeff GoldJeff Gold

President, Chief Operating Officer and Director

May 27, 2010/s/ Howard GoldHoward Gold

Executive Vice President of Special Projects

May 27, 2010/s/ Robert KautzRobert Kautz

Executive Vice President and Chief Financial Officer (principal financial officer and principal accounting officer)

May 27, 2010/s/ Eric FlamholtzEric Flamholtz

Director

May 27, 2010/s/ Lawrence GlascottLawrence Glascott

Director

May 27, 2010/s/ Marvin L. HolenMarvin L. Holen

Director

May 27, 2010/s/ Peter WooPeter Woo

Director

May 27, 2010






76