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 29, 2008


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





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  ̈  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 x  No  ̈





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 last 90 days. Yes x  No  ̈





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. x





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
definition of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.





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





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 28, 2007 was $482, 393,947 based on a $10.27 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, 70,060,491 Shares as of May 29, 2008





DOCUMENTS
INCORPORATED BY REFERENCE





Portions
of the Registrant’s Proxy Statement for its 2008 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
            17Item
      2.
            Properties
            17Item
      3.
            Legal Proceedings
            18Item
      4.
            Submission of Matters to a Vote of Security
      Holders
            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
            35Item
      8.
            Financial Statements and Supplementary
Data
            36Item
      9.
            Changes in and Disagreements with Accountants on
      Accounting and Financial Disclosure
            63Item
      9A.
            Controls and Procedures
            63Item
      9B.
            Other Information
            70Part
      IIIItem
      10.
            Directors, Executive Officers and Corporate
      Governance
            71Item
      11.
            Executive Compensation
            71Item
      12.
            Security Ownership of Certain Beneficial Owners and Management
      and Related Stockholder Matters
            71Item
      13.
            Certain Relationships and Related Transactions, and Director
      Independence
            71Item
      14.
            Principal Accounting Fees and Services
            71Part
      IVItem
      15.
            Exhibits, Financial Statement
    Schedules
            72Signatures
            75Exhibit Index
            73





2
 Table of Contents





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”), 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.





EXPLANATORY
NOTE REGARDING CHANGE IN FISCAL YEAR





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 will now follow 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 2008 fiscal
year began on April 1, 2007 and ended March 29, 2008. The Company’s 2009
fiscal year began on March 30, 2008 and will end on March 28, 2009. Unless
specifically indicated otherwise, any reference to “2006” or “fiscal 2006”
relates to as of, or for the year ended, March 31, 2006. References to “fiscal
2007” refer to the period from April 1, 2006 to March 31, 2007 and “fiscal 2008”
refers to the period from April 1, 2007 to March 29, 2008, and so
forth.





PARTI




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 selling at 99¢ or
less.  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 29, 2008, the Company operated 265 retail
stores with 186 in California, 46 in Texas, 22 in Arizona, and 11 in
Nevada. These stores averaged approximately 21,722 gross square feet. In fiscal
2008, the Company’s stores open for the full year generated average net sales
per estimated saleable square foot of $263, which the Company believes is among
the highest in the extreme value retail industry, and average net sales per
store of $4.5 million, which the Company believes is the highest among all
dollar store chains. In fiscal 2008, 210 non-Texas stores open for the full year
averaged net sales of $4.9 million per store and $291 per estimated saleable
square foot and the 39 Texas stores open for the full year averaged net sales of
$2.6 million per store and $128 per estimated saleable square foot. The Company
entered the Texas market in June 2003.




The
Company competes in the extreme value retail industry, also known as the deep
discount industry, which it believes is one of the fastest growing retail
sectors in the United States. The Company opened its first 99¢ Only Store in
1982 and believes that it operates the nation’s oldest existing general
merchandise chain where no item is sold for more than 99¢.  For fiscal
2008, the Company expanded its store base, opening 16 stores and closing two
Texas stores.  Of these newly opened stores, nine stores are located
in California and seven in Texas.  In fiscal 2009, the Company plans
to open approximately 19 new stores with about 13 expected to be in California,
2-3 in Texas, and 2-3 in Arizona and one in Nevada.





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 99¢.  Bargain Wholesale represented
3.4% of the Company’s total sales in fiscal 2008.  Further information
on the Company’s two business segments, retail operations and wholesale
distribution, is provided below in Item 8.  Financial Statements and
Supplementary Data.





3
 Table of Contents





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, changes in nutritional label guidelines, 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 wholesale merchandise, which is generally obtained through
the same or shared purchases of the retail operations, through its Bargain
Wholesale division.  The Company maintains showrooms at its main
distribution facility in California and at the Company’s distribution facility
outside Houston, Texas. Additionally, the Company has a showroom located in
Chicago. 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.





Wholesale
sales are recognized in accordance with the shipping terms agreed upon on the
sales order. Wholesale sales are generally recognized under FOB origin where
title and risk of loss pass to the buyer when the merchandise leaves the
Company’s distribution facility.





Business
Mission and Strategy




The
Company’s mission 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 only 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, all for 99¢ or less, in attractively
merchandised, clean and convenient stores.  The Company’s strategies
to achieve its mission 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 can be purchased
for 99¢ or less. During fiscal 2008, the Company purchased merchandise from more
than 999 suppliers, including 3M, Colgate-Palmolive, Con Agra, Dole, Energizer
Battery, General Mills, Georgia Pacific, Hasbro, Heinz, Hershey Foods, Johnson
& Johnson, Kellogg’s, Kraft, Nestle, Procter & Gamble, 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 2008, 2007 and 2006 are set forth below:





4
 Table of Contents




Years
      EndedMarch
      29, 2008
            
            
            March
      31, 2007
            
            
            March
      31, 2006Product
      Category:Food
      and grocery
            
            
            52
            %
            
            
            51
            %
            
            
            48
            %Household
      and housewares
            
            
            15
            %
            
            
            15
            %
            
            
            16
            %Health
      and beauty care
            
            
            9
            %
            
            
            9
            %
            
            
            9
            %Hardware
            
            
            3
            %
            
            
            5
            %
            
            
            6
            %Stationery
      and party
            
            
            5
            %
            
            
            5
            %
            
            
            5
            %Seasonal
            
            
            4
            %
            
            
            4
            %
            
            
            3
            %Other
            
            
            12
            %
            
            
            11
            %
            
            
            13
            %100
            %
            
            
            100
            %
            
            
            100
            %





Fun Treasure-Hunt Shopping
Experience.The
Company’s practices of buying closeouts and other opportunistic purchases and
selling them for 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.





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 to 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 Los
Angeles, where it is based, as well as Houston, and Chicago.





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 aggressive negotiating approach to its purchasing of corporate supplies,
construction, and services and strives to maintain a lean operating environment
to reinforce its negotiating posture with suppliers.




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 29, 2008, the Company’s 265
existing 99¢ Only Stores averaged approximately 21,722 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.





5
 Table of Contents





Growth
Strategy




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




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.  The Company will not expand substantially in Texas
unless it confirms the viability of its business model in the Texas
market.




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 in line with its expansion plans.




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. All merchandise
sold in the Company’s 99¢ Only Stores sells for 99¢ per item, two or more items
for 99¢ and items priced from 9¢ up to 99¢, as long as the price ends in a
9.





6
 Table of Contents





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








Years
      EndedMarch 29,
              2008
            
            
            March 31,
              2007
            
            
            March 31,
              2006
            
            
            December 31,
              2004
            
            
            December 31,
              2003Net
      retail sales
            
            $
            1,158,856
            
            
            $
            1,064,518
            
            
            $
            984,293
            
            
            $
            929,896
            
            
            $
            816,348Annual
      net sales growth rate
            
            
            8.9
            %
            
            
            8.2
            %
            
            
            5.8
            %
            
            
            13.9
            %
            
            
            22.9
            %Store
      count at beginning of year
            
            
            251
            
            
            
            232
            
            
            
            219
            (d)
            
            
            189
            
            
            
            151New
      stores
            
            
            16
            
            
            
            19
            
            
            
            15
            
            
            
            33
            
            
            
            38Stores
      closed
            
            
            2
            (a)
            
            
            —
            
            
            
            2
            (e)
            
            
            3
            (h)
            
            
            —Total
      store count at year-end
            
            
            265
            
            
            
            251
            
            
            
            232
            
            
            
            219
            
            
            
            189Average
      net sales per store open the full years(f)
            
            $
            4,547
            (b)
            
            $
            4,421
            (c)
            
            $
            4,347
            (g)
            
            $
            4,603
            (i)
            
            $
            4,957Estimated
      store saleable square foot
            
            
            4,521,091
            
            
            
            4,337,974
            
            
            
            4,040,096
            
            
            
            3,796,153
            
            
            
            3,190,528Average
      net sales per estimated saleable square foot(f)
            
            $
            263
            (b)
            
            $
            254
            (c)
            
            $
            250
            (g)
            
            $
            270
            (i)
            
            $
            308Change
      in comparable net sales(j)
            
            
            4.0
            %
            
            
            2.4
            %
            
            
            0.3
            %
            
            
            (1.8
            )%
            
            
            4.5
            %





(a) Two
underperforming stores closed in Houston, Texas due to lease
expiration.





(b)
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 for 12 months ended March 29,
2008 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.





(c)
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 for 12 months ended March 31,
2007 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.





(d) 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.





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




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





(g)
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 for 12 months ended March 31,
2006 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.




(h) Two
smaller stores closed due to the presence of larger nearby 99¢ Only Stores and
one store closed due to eminent domain for the construction of a new public
school.





(i)
Includes 17 Texas stores open for a full year. Texas stores open for the full
year had average sales of $2.2 million per store in 2004 and average sales per
estimated saleable square foot of $101. All non-Texas stores open for the full
year had average sales of $4.8 million per store and $293 of average sales per
estimated saleable square foot.





(j)
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 selling consumable items for only 99¢ or less
per item, many of which are name-brands, and most of which typically retail
elsewhere from $1.19 to $9.99.




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 upon the availability of closeout and
other special-situation merchandise at suitable prices. Since commencing its
closeout purchasing strategy for its stores, which first opened in 1982, 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
by a single transaction.





7
 Table of Contents





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.




Advertising. Advertising
expenditures were $5.4 million, $5.0 million and $4.4 million or 0.5%, 0.5% and
0.4% of net retail sales for fiscal 2008, 2007 and 2006,
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 sale
of nine iPods and other high value items for only 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 2008. During fiscal 2008, the Company purchased
merchandise from more than 999 suppliers, including 3M, Colgate-Palmolive, Con
Agra, Dole, Energizer Battery, General Mills, Georgia Pacific, Hasbro, Heinz,
Hershey Foods, Johnson & Johnson, Kellogg’s, Kraft, Nestle, Procter &
Gamble, 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 2008
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.





8
 Table of Contents





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, especially in product categories such as kitchen items,
housewares, toys, seasonal products, pet-care and hardware which the Company
believes are not brand sensitive to consumers.




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 product as well as to provide long-term warehousing capabilities
for one-time closeout purchases and seasonal or holiday items. The large
majority of the merchandise sold by the Company is received, processed for
retail sale if necessary, and then distributed to the retail locations from
Company-operated warehouse and distribution facilities.





The
Company utilizes its internal fleet, outside carriers, and contracted or
owner-operated trucks for both outbound shipping and a backhaul
program.  The Company also receives merchandise shipped by rail to its
Commerce, California distribution center which has a railroad spur on the
property. Historically, the Company primarily used common carriers or
owner-operators to deliver to stores outside of Southern California including
its stores in 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 2009. 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 maximum sales levels at peak
seasons for perishable products, that an opportunistic purchase 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





During
fiscal 2008, the Company continued to make significant investments in a variety
of infrastructure and process areas. These improvements included upgrades to its
data center, networking infrastructure, and Wide Area Network (“WAN”) intended
to improve security and reliability of processing.





Also
during this timeframe, the Company implemented Aspect’s Elite exception- based
loss prevention system to help reduce theft and shrink at the store
level.  Aspect is an exception-based software program specifically
designed for loss prevention and can also be used for investigations related to
POS transactions.  The software package helps loss prevention detect
anomalies through the POS system for transactions such as line voids, post
voids, transaction voids, employee purchases, gift card fraud, etc.  The
Company also implemented Business Objects’ Financial Planning and Analysis
(FP&A) tool.  The FP&A tool has increased the accuracy and
flexibility of our planning and analysis functions by allowing a more detailed
level  forecast and the ability for timely reporting on variances to
plan.





9
 Table of Contents





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. Various upgrades and
deployments of new functionality are in progress using the Lawson system,
primarily intended to streamline financial data gathering and
reporting.





The
Company also operates an in-house developed proprietary IBM UNIX-based inventory
control system. The Company uses an in-house developed proprietary store
ordering system, which utilizes radio frequency hand-held scanning devices in
each store. This system is processed using a back office personal computer
system at each store.





During
fiscal 2008 the Company continued its work on migrating to a new Core
Merchandising System (CMS) and Warehouse Management System
(WMS).  During the design phases of these projects it became apparent
that in order to migrate to and receive the benefit from these systems it would
be necessary to change processes and data structures using modifications to our
proprietary systems before the implementation of the CMS and WMS.  The
Company has made considerable progress in the data remediation phase and will
continue this phase through fiscal 2009.





The
Company utilizes an in-house developed proprietary Point of Sale (“POS’’)
barcode scanning system to record and process retail sales in each of its stores
and in-house developed electronic polling to collect sales data for analysis,
reporting and processing.





Competition




The
Company faces competition in both the acquisition of inventory and sale of
merchandise from other wholesalers, 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
29, 2008, the Company had approximately 11,700 employees including 10,500 in its
retail operations, 800 in its warehousing and distribution operations, 350 in
its corporate offices and 30 in its Bargain Wholesale division. 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 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 is involved in litigation
against certain of those whom it believes are infringing upon its “99¢” family
of marks, although the Company believes that simultaneous litigation against all
persons everywhere whom the Company believes to be infringing upon these marks
is not feasible.





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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 main Southern 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, which could cause the Company to incur costs in the future related
to its owned properties, leased properties, storage tanks, or other business
properties and/or activities.





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.





Item1A. Risk Factors





Inflation
may affect the Company’s ability to sell merchandise at the 99¢ price
point




The
Company’s ability to provide quality merchandise for profitable resale within
the 99¢ price point 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 99¢ price point, which could
have a material adverse effect on its business and results of operations.
However, the Company can pass price increases on to customers to a degree, such
as by selling smaller units for the same price and by selling fewer units for
$0.99 or at higher price points below $0.99 ending in a 9 in the case of items
sold at two or more for $0.99.  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.   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.




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.





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The
Company’s operations are concentrated in California; natural disaster and
similar risks in its markets





As of
March 29, 2008, all but 79 of the Company’s 265 stores were located in
California (with 46 stores in Texas, 22 stores in Arizona and 11 stores in
Nevada). The Company expects that it will continue to open additional stores in
California, as well as in its other current states. For the foreseeable future,
the Company’s results of operations will depend significantly on trends in the
California economy. If retail spending declines due to an economic slow-down or
recession in California, the Company’s operations and profitability may be
negatively impacted. 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, such as newly enacted recycling laws and limitations on bags
that may be used, can further pressure margins.




In
addition, the Company historically has been vulnerable to certain natural
disasters and other risks, such as earthquakes, fires, floods, tornados,
hurricanes, and civil disturbances. At times, these events have disrupted the
local economy. These events could also pose physical risks to the Company’s
properties. Furthermore, although the Company maintains standard property and
business interruption insurance, the Company does not maintain earthquake
insurance on its facilities and business or insure other risks which are not
normally insured such as acts of war.  In addition, because of the
closeout nature of many of the Company’s products, a loss of inventory due to
such a disaster would likely take the Company longer to remediate than if the
Company only relied upon re-orderable merchandise.





The
Company is evaluating strategic alternatives for its Texas market and could be
impacted by a decrease in revenue and restructuring costs





The
Company will not expand substantially in Texas unless it confirms the viability
of its business model in the Texas market.  The Company has
experienced substantially lower sales per store and sales per estimated saleable
square foot in Texas stores in comparison to its non-Texas
stores.  While the annual average sales per Texas store has grown from
approximately $2.2 million in calendar 2004 to approximately $2.6 million in
fiscal 2008, there can be no guarantee that the Company will achieve an
acceptable level of profitability in its Texas market.  The Company is
currently evaluating strategic alternatives for its Texas market.To date, the Company’s
Texas performance has not been acceptable and if a sufficient profitable
business model is not achieved, the Company could be impacted by a decrease in
revenue and restructuring costs.





The
Company could experience disruptions in receiving and distribution




The
Company’s success depends upon whether receiving and shipments are organized and
well managed. 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 is also in the process of
evaluating new warehouse distribution and merchandising systems and has
experienced problems with the warehousing, distribution and merchandising
systems being replaced. 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 special-situation merchandise




The
Company’s success depends in large part on its ability to locate and purchase
quality closeout and special-situation merchandise at attractive prices. This
results in a mix of name-brand and other merchandise within the 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 $140.3
million and $155.8 million at March 29, 2008 and March 31, 2007, 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, 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.





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 own. 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.  In addition, 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 capability 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 it
will be able to compete successfully against current and future competitors in
both the acquisition of inventory and the sale of merchandise.





13
 Table of Contents





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 within the 99¢ price point could be hindered by certain economic
factors beyond its control, including but not limited to:




-
            inflation
      and increases in the rate of 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;


-
            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 frequent political
      and legislative pressure or judicial rulings easing or rolling back the
      recent tightening of certain California workers’ compensation
      provisions.





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 product 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 identified a material weakness in internal control over financial
reporting




The
Company reported an adverse opinion on the effectiveness of its internal control
over financial reporting as of March 29, 2008 because of a material weakness
identified in management’s assessment of the effectiveness of its internal
controls related to inventory accounting as of that date. This material
weakness, if not remediated, could create an increased risk of misstatement of
financial results, which, if material, may require future restatement
thereof.  A failure to implement improved internal controls, or
difficulties encountered in their implementation or execution, could cause the
Company future delays in its reporting obligations and could have a negative
effect on the Company and the trading price of the Company’s common stock. See
“Item 9A. Controls and Procedures,” for more information on the status of the
Company’s internal control over financial reporting.




14
 Table of Contents




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 11 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 operating income have occurred during the
quarter ended December 31, which includes the Christmas and Halloween selling
seasons. During fiscal 2008 and 2007, the Company generated approximately 27.1%
and 27.3%, 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;


-
            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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 Table of Contents




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. Certain of these
purchases must be consummated on very short notice.  The closeout
nature of certain of these products may limit the Company’s opportunity to more
fully investigate all aspects of these products. The Company attempts to procure
product insurance from its vendors and to be listed as an additional insured for
certain products and/or by certain product vendors, but cannot always
successfully negotiate this term.  This could result in future losses
on product liability, labeling, environmental, or other claims.  For
example, the Environmental Protection Agency, Consumer Product Safety
Commission, and California Air Resources Board are investigating the Company’s
sale of products they assert to be in violation of the rules they enforce, which
may result in future action by the agencies, such as the imposition of actions,
fines, or penalties against the Company.




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 main Southern
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 29, 2008, an aggregate of 23,276,601, or
33.1%, 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.




16
 Table of Contents




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


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




-
            the
      depth of the market for 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.





Item2. Properties




As of
March 29, 2008, the Company owned 44 stores and leased 221 of its 265 store
locations. Additionally, as of March 29, 2008, the Company owned four parcels of
land for potential store sites. The Company had an interest in three variable
interest entities, in which it leases stores.  See Part II, Item 7,
“Variable Interest Entities.”  The Company also has an undivided 50%
interest in another property which includes a leased store site.




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 11 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 29, 2008, information relating to the
calendar year expiration dates of the Company’s current stores
leases:







Expiring
              2008
            
            Expiring
              2009-2011
            
            Expiring
              2012-2014
            
            Expiring
              2015
      and beyond18(a)
            
            92
            
            63
            
            48





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





17
 Table of Contents





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 are set forth below:




Expiring
      Without Renewal Options 2008
            
            Expiring
      Without
              Renewal
      Options 2009-2011
            
            Expiring
      Without
              Renewal
      Options 2012-2014
            
            Expiring
      Without
              Renewal
      Options 2015 and beyond13(a)
            
            2
            
            6
            
            200





(a)
            Includes
      13 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 purchased an
additional warehouse storage space nearly adjacent to its main distribution
facility for $9.7 million in July 2005.




The
Company owns a warehouse/distribution center in the Houston area to service its
Texas operation. See “Growth Strategy - Expansion in Texas.”




The
Company also owns a cold storage warehouse/distribution center and leases from
time to time additional warehouse facilities located near the City of Commerce,
California.





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.  The Company anticipates selling the warehouse in
excess of the book value.  No assurance can be given as to when and
for how much the warehouse will be sold.





Item 3. Legal Proceedings





Vargas vs. 99¢ Only Stores;
Washington vs. 99¢ Only Stores (coordinated in Ventura County Superior
Court).  On June 19, 2006, plaintiff Joanna Vargas filed a
putative class action lawsuit against the Company seeking to represent its
California retail non-exempt employees.  The Vargas lawsuit alleges
non-payment of wages, non-payment of overtime wages, failure to provide or pay
for meal or rest breaks and associated claims.  The Vargas lawsuit seeks
compensatory, special and punitive damages in unspecified amounts, penalties,
attorney fees and injunctive relief.  The Company responded to the Vargas
complaint and denied all material allegations therein.  On October 31,
2006, plaintiff Chantelle Washington filed a putative class action lawsuit
against the Company seeking to represent its California retail non-exempt
cashier employees with respect to similar claims, alleging the failure to
provide or pay for meal or rest breaks and associated claims.  The
Washington lawsuit seeks compensatory damages and/or penalties in unspecified
amounts, as well as equitable relief, attorney fees and interest.  The
Vargas and Washington actions were coordinated in Ventura County Superior
Court.





In
November 2007, the Company and both plaintiffs entered into a settlement
agreement providing for a maximum settlement payment of $3.2 million (including
attorneys’ fees).  On November 30, 2007, the court granted preliminary
approval for the settlement and authorized the parties to provide a notice to
class members about the settlement.  The notice and claims process is
now complete, and the parties have filed a motion for final approval of the
settlement.  Because of the claims-made aspect of the settlement and
the fact that many class members did not submit valid claim forms for their
portion of the settlement, if the settlement is approved in its current form, a
significant portion of the total settlement amount will go unclaimed and remain
the property of the Company, thereby causing it to pay less than $3.2 million
under the settlement.  Based upon the results of the final notice and
claims process, the Company reduced its previous reserve for potential liability
in these cases of $1.5 million as of March 31, 2007 to $1.1 million as of March
29, 2008.





This
settlement, if it is approved by the Court, will result in the dismissal of all
rest and meal period claims and all related claims for non-exempt California
employees that accrued through September 1, 2007 (except for those class members
who opt out of the settlement).   If this settlement is rejected by
the Court, the parties will likely return to the litigation of both lawsuits,
and, in such event, the Company cannot predict the outcome of these matters, and
cannot predict whether or not the outcome will have a material adverse effect on
the Company’s financial condition or results of operations.





18
 Table of Contents





Others.The Company is named as a
defendant in numerous other legal matters arising in the normal course of
business. In management’s opinion, none of these matters are expected
to have a material adverse effect on either the Company’s financial
position, results of operations, or overall liquidity.





Item 4. Submission of Matters to a Vote of Security
Holders





None.





19
 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 29, 2008:First
      Quarter
            
            $
            15.31
            
            
            $
            12.44Second
      Quarter
            
            
            14.77
            
            
            
            9.73Third
      Quarter
            
            
            12.23
            
            
            
            7.19Fourth
      Quarter
            
            
            10.96
            
            
            
            6.23Fiscal Year ended
      March 31, 2007:First
      Quarter
            
            $
            13.32
            
            
            $
            10.00Second
      Quarter
            
            
            12.92
            
            
            
            10.04Third
      Quarter
            
            
            12.71
            
            
            
            10.70Fourth
      Quarter
            
            
            16.13
            
            
            
            12.22





As of May
29, 2008, the Company had 396 shareholders of record and approximately 14,600
beneficial holders of its common stock.





The
Company has never paid any 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 976,000 are available as of March 29, 2008 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,
though an exception was made by the Company’s Compensation Committee on June 6,
2006, when it granted options that vested in equal halves over a two year
period.  Stock options typically expire ten years from the date of
grant.  In January 2008, the Compensation Committee approved a
long-term incentive program under its existing 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 2004 and the three months ended March 31,
2005.  The Company recognized $0.2 million in option related
compensation expense during fiscal 2006.  In fiscal 2007, the Company
adopted SFAS No. 123(R), “Share-Based Payment.”  In fiscal 2008 and
2007 the Company recognized $4.2 million and $5.2 million, respectively, in
option related compensation expense (see Note 7 to Consolidated Financial
Statements for detailed discussion).  The 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 29, 2008 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
            
            
            8,098,000
            (1)
            
            $
            16.01
            
            
            
            976,000Equity
      compensation plans not approved by security holders
            
            
            —
            
            
            
            —
            
            
            
            —Total
            
            
            8,098,000
            
            
            $
            16.01
            
            
            
            976,000





(1) 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
to be issued, if any, depends on the Company’s financial performance over a
period of time. Performance shares do not have an exercise price and thus they
have been excluded from the weighted average exercise price calculation in
column (b).





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 December 31, 2002 to
March 29, 2008, 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 December 31, 2002  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.




Graph





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
      29,
              2008
            
            
            March
      31,
              2007
            
            
            March
      31,
              2006
            
            
            December
      31,
              2004
            
            
            December
      31,
              2003(Amounts
      in thousands, except per share and operating data)Statements
      of Income Data (a):Net
      Sales:99¢
      Only Stores
            
            $
            1,158,856
            
            
            $
            1,064,518
            
            
            $
            984,293
            
            
            $
            929,896
            
            
            $
            816,348Bargain
      Wholesale
            
            
            40,518
            
            
            
            40,178
            
            
            
            39,296
            
            
            
            42,277
            
            
            
            46,112Total
      sales
            
            
            1,199,374
            
            
            
            1,104,696
            
            
            
            1,023,589
            
            
            
            972,173
            
            
            
            862,460Cost
      of sales (excluding depreciation and amortization expense as shown
      separately below)
            
            
            738,499
            
            
            
            672,101
            
            
            
            640,140
            
            
            
            592,575
            
            
            
            516,686Gross
      profit
            
            
            460,875
            
            
            
            432,595
            
            
            
            383,449
            
            
            
            379,598
            
            
            
            345,774Selling,
      general and administrative expense:Operating
      expenses
            
            
            433,940
            
            
            
            393,351
            
            
            
            340,371
            
            
            
            312,263
            
            
            
            235,428Depreciation
      and amortization
            
            
            33,321
            
            
            
            32,675
            
            
            
            31,424
            
            
            
            28,246
            
            
            
            19,391Total
      operating expenses
            
            
            467,261
            
            
            
            426,026
            
            
            
            371,795
            
            
            
            340,509
            
            
            
            254,819Operating
      income (loss)
            
            
            (6,386
            )
            
            
            6,569
            
            
            
            11,654
            
            
            
            39,089
            
            
            
            90,955Other
      (income), net
            
            
            (6,674
            )
            
            
            (7,432
            )
            
            
            (5,084
            )
            
            
            (3,263
            )
            
            
            (4,457
            )Income
      before provision for income taxes
            
            
            288
            
            
            
            14,001
            
            
            
            16,738
            
            
            
            42,352
            
            
            
            95,412Provision
      (benefit) for income taxes
            
            
            (2,605
            )
            
            
            4,239
            
            
            
            5,316
            
            
            
            14,521
            
            
            
            36,710Net
      income
            
            $
            2,893
            
            
            $
            9,762
            
            
            $
            11,422
            
            
            $
            27,831
            
            
            $
            58,702Earnings
      per common shares:Basic
            
            $
            0.04
            
            
            $
            0.14
            
            
            $
            0.16
            
            
            $
            0.39
            
            
            $
            0.82Diluted
            
            $
            0.04
            
            
            $
            0.14
            
            
            $
            0.16
            
            
            $
            0.39
            
            
            $
            0.81Weighted
      average number of common shares outstanding:Basic
            
            
            70,044
            
            
            
            69,862
            
            
            
            69,553
            
            
            
            70,627
            
            
            
            71,348Diluted
            
            
            70,117
            
            
            
            70,017
            
            
            
            69,737
            
            
            
            71,016
            
            
            
            72,412Company
      Operating Data:Sales
      Growth:99¢
      Only Stores
            
            
            8.9
            %
            
            
            8.2
            %
            
            
            5.8
            %
            
            
            13.9
            %
            
            
            22.9
            %Bargain
      Wholesale
            
            
            0.8
            %
            
            
            2.2
            %
            
            
            (7.1
            )%
            
            
            (8.3
            )%
            
            
            (7.7
            )%Total
      sales
            
            
            8.6
            %
            
            
            7.9
            %
            
            
            5.3
            %
            
            
            12.7
            %
            
            
            20.8
            %Gross
      margin
            
            
            38.4
            %
            
            
            39.2
            %
            
            
            37.5
            %
            
            
            39.0
            %
            
            
            40.1
            %Operating
      margin
            
            
            (0.5
            )%
            
            
            0.6
            %
            
            
            1.1
            %
            
            
            4.0
            %
            
            
            10.6
            %Net
      income
            
            
            0.2
            %
            
            
            0.9
            %
            
            
            1.1
            %
            
            
            2.9
            %
            
            
            6.8
            %





23
 Table of Contents








March
      29,
              2008
            
            
            March
      31,
              2007
            
            
            March
      31,
              2006
            
            
            December
      31,
              2004
            
            
            December
      31,
              2003(Amounts
      in thousands, except per share and operating data)Retail
      Operating Data (b):99¢
      Only Stores at end of period
            
            
            265
            
            
            
            251
            
            
            
            232
            
            
            
            219
            
            
            
            189Change
      in comparable stores net sales(c)
            
            
            4.0
            %
            
            
            2.4
            %
            
            
            0.3
            %
            
            
            (1.8
            )%
            
            
            4.5
            %Average
      net sales per store open the full year
            
            $
            4,547
            
            
            $
            4,421
            
            
            $
            4,347
            
            
            $
            4,603
            
            
            $
            4,957Average
      net sales per estimated saleable square foot(d)
            
            $
            263
            (e)
            
            $
            254
            (f)
            
            $
            250
            (g)
            
            $
            270
            (h)
            
            $
            308Estimated
      saleable square footage at year end
            
            
            4,521,091
            
            
            
            4,337,974
            
            
            
            4,040,096
            
            
            
            3,796,153
            
            
            
            3,190,528Balance
      Sheet Data:Working
      capital
            
            $
            170,581
            
            
            $
            209,890
            
            
            $
            201,475
            
            
            $
            184,778
            
            
            $
            217,825Total
      assets
            
            $
            649,410
            
            
            $
            643,135
            
            
            $
            628,708
            
            
            $
            600,204
            
            
            $
            563,714Capital
      lease obligation, including current portion
            
            $
            643
            
            
            $
            699
            
            
            $
            774
            
            
            $
            811
            
            
            $
            1,593Long-term
      debt, including current portion
            
            $
            7,319
            
            
            $
            7,299
            
            
            $
            6,174
            
            
            $
            —
            
            
            $
            —Total
      shareholders' equity
            
            $
            526,491
            
            
            $
            519,227
            
            
            $
            501,526
            
            
            $
            488,284
            
            
            $
            496,954




(a)
              The
      financial statements were audited by BDO Seidman, LLP, the Company’s
      external auditor for fiscal 2008, 2007, and 2006, by Deloitte & Touche
      LLP for 2004, and by PricewaterhouseCoopers for
  2003.
 (b)
              Includes
      retail operating data solely for the Company’s 99¢ Only
      Stores.
 (c)
              Change
      in comparable stores net sales compares net sales for all stores open at
      least 15 months.
 (d)
              Computed
      based upon estimated total saleable square footage of stores open for the
      entire period.
 (e)
              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 for 12 months ended March 29,
      2008 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.
 (f)
              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 for fiscal 2007 and average
      sales per estimated saleable square foot of $120. All other 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.
 (g)
              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 for fiscal 2006 and average
      sales per estimated saleable square foot of $111. All other 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.
 (h)
              Includes
      17 Texas stores open for a full year. Texas stores open for the full year
      had average sales of $2.2 million per store for 2004 and average sales per
      estimated saleable square foot of $101.  All other stores open
      for the full year had average sales of $4.8 million per store and $293 of
      average sales per estimated saleable square
  foot.




24
 Table of Contents





The
following table sets forth selected financial data for the transition three
months ended March 31, 2005 and comparable three month period ended March 31,
2004 (amounts in thousands, except for per share data):





Three
      Months Ended March 31, 2005
            
            
            Three
      Months Ended March 31, 2004(Unaudited)Net
      sales:99¢
      Only Stores
            
            $
            231,899
            
            
            $
            218,812Bargain
      Wholesale
            
            
            10,731
            
            
            
            11,238Total
            
            
            242,630
            
            
            
            230,050Gross
      profit
            
            
            90,339
            
            
            
            92,229Operating
      income
            
            
            803
            
            
            
            15,169Net
      income
            
            $
            799
            
            
            $
            10,204Earnings
      per common share:Basic
            
            $
            0.01
            
            
            $
            0.14Diluted
            
            $
            0.01
            
            
            $
            0.14Shares
      outstanding:Basic
            
            
            69,533
            
            
            
            72,064Diluted
            
            
            69,787
            
            
            
            72,717





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
2008, 99¢ Only Stores had net sales of $1,199.4 million, operating loss of $6.4
million and net income of $2.9 million.  Sales increased 8.6% over
fiscal 2007 primarily due to the 16 new store openings since the end of fiscal
2007 and a 4.0% increase in same-store sales.  Average sales per store
open the full year increased to $4.5 million in fiscal 2008 from $4.4 million,
in fiscal 2007.  Average net sales per estimated saleable square foot
(computed for 99¢ Only Stores open for the full year) increased to $263 per
square foot at March 29, 2008 from $254 per square foot at March 31, 2007. This
increase reflects the Company’s opening of smaller locations for new store
development and improving performance of the Texas stores. Existing stores at
March 29, 2008 average approximately 21,722 gross square feet.  The
Company is targeting locations between 15,000 and 19,000 gross square
feet.  Despite the increase in average store sales and average net
sales per estimated saleable square foot, operating income and net income in
fiscal 2008 were negatively impacted primarily by a decrease in gross profit
margin as compared to fiscal 2007.





In fiscal
2008, the Company continued to expand its store base with 16 store openings in
California, Texas, Nevada and Arizona, while closing two Texas
stores.  During fiscal 2009, the Company plans to open approximately
19 new stores and believes that near term growth in fiscal 2009 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 will now follow 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 2008 fiscal
year began on April 1, 2007 and ended March 29, 2008.  The Company’s 2009
fiscal year began on March 30, 2008 and will end on March 28,
2009.  Unless specifically indicated otherwise, any reference to
“2006” or “fiscal 2006” relates to as of, or for the year ended, March 31, 2006.
References to “fiscal 2007” refer to the period from April 1, 2006 to March 31,
2007 and “fiscal 2008” refers to the period from April 1, 2007 to March 29,
2008, and so forth.





25
 Table of Contents





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 the 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.  A 10% increase in our estimate of
expected losses from inventory obsolescence and excess inventory at March 29,
2008, would have increased this reserve by approximately $0.2 million and
reduced fiscal 2008 pre-tax earnings by the same amount.





Long-lived asset impairment:
In accordance with Statement of Financial Accounting Standards (“SFAS”) No. 144,
“Accounting for the Impairment or Disposal of Long-lived Assets,” 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 2008, the Company recorded an asset
impairment charge of $0.5 million related to one underperforming store in
Texas.The Company
concluded that there were no such events or changes in circumstances during
fiscal 2007.  In fiscal 2006, the Company recorded an asset impairment
charge of $0.8 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 2008.





Legal reserves:In the
ordinary course of its business, the Company is subject to various legal actions
and claims. In connection with such actions and claims, the Company must make
estimates of potential future legal obligations and liabilities, which requires
management’s judgment on the outcome of various issues. Management also relies
on outside legal counsel in this process. The ultimate outcome of various legal
issues could be materially different from management’s estimates and adjustments
to income could be required. The assumptions used by management are based on the
requirements of SFAS No. 5, “Accounting for Contingencies”. The Company will
record, if material, a liability when it has determined that the occurrence of a
loss contingency is probable and the loss amount can be reasonably estimated,
and it will disclose the related facts in the notes to its financial statements.
If the Company determines that the occurrence of a loss contingency is
reasonably possible or that it is probable but the loss cannot be reasonably
estimated, the Company will, if material, disclose the nature of the loss
contingency and the estimated range of possible loss, or include a statement
that no estimate of loss can be made.  There were no material changes
in the estimates or assumptions used to determine legal reserves during fiscal
2008.





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.  At March
29, 2008, a 10% increase in our estimate of expected losses from workers
compensation claims would have increased this reserve by approximately $ 4.2
million and reduced fiscal 2008 pre-tax earnings by the same
amount.





26
 Table of Contents





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 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. The closing of stores in the future may result in the
immediate write-off of associated deferred rent balances, if any.  As
of the end of fiscal 2008, the Company had not recorded any reserves for any
potential future store closings.





Tax Valuation Allowances and
Contingencies:The Company accounts for income taxes in accordance with
SFAS No. 109, “Accounting for Income Taxes”(“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. SFAS No. 109 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 $57.1 million and $46.1 million in net deferred tax
assets that are net of tax valuation allowances of $3.9 million and $4.0 million
at March 29, 2008 and March 31, 2007, respectively. Management evaluated the
available evidence in assessing the Company’s ability to realize the benefits of
the net deferred tax assets at March 29, 2008 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 FASB Interpretation No. 48, “Accounting for Uncertainty in Income
Taxes” (“FIN 48”), and may require significant management judgment in estimating
final outcomes.   The Company had approximately $1.4 million of
unrecognized tax benefits related to uncertain tax positions at both March 29,
2008 and March 31, 2007.  The Company believes it has adequately provided
for any reasonably foreseeable outcome related to these matters.  To the
extent that the expected tax outcome of these matters changes, such changes in
estimate will impact the income tax provision in the period in which such
determination is made. See Note 5 “Income Tax Provision” to Consolidated
Financial Statements.





Share-Based Compensation: In
the first quarter of fiscal 2007, the Company adopted SFAS No. 123(R),
“Share-Based Payment,” (“SFAS No. 123(R)”), which requires the measurement at
fair value and recognition of compensation expense for all share-based payment
awards.  The determination of the fair value of the Company’s stock
options at the grant date requires judgment. The Company uses the
Black-Scholes option pricing model to estimate the fair value of these
share-based awards consistent with the provisions of SFAS No. 123(R). Option
pricing models, including the Black-Scholes model, also require the use of input
assumptions, including expected volatility, expected life, expected dividend
rate, and expected risk-free rate of return.  If factors change and
the Company employs different assumptions in the application of SFAS 123(R) in
future periods, the compensation expense recorded under SFAS 123(R) may differ
significantly from the amount recorded in the current period.  A 10%
increase in the Company’s share-based compensation expense for the fiscal year
ended March 29, 2008 would have affected pre-tax earnings by approximately $0.4
million.  During fiscal 2008, expected stock price volatility
increased significantly and the assumed risk free rate decreased significantly
based upon recent historical trends. There were no other material changes in the
estimates or assumptions used to determine stock-based compensation during
fiscal 2008.





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 shipped free on board shipping point.





27
 Table of Contents





Cost of Sales: Cost of sales
includes the cost of inventory, freight in, inter-state warehouse transportation
costs, obsolescence, spoilage 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 a reduction of cost of
sales as merchandise is sold. The Company does not include purchasing, receiving
and distribution warehouse costs in its cost of sales, which totaled $71.7
million, $60.2 million and $44.8 million as of fiscal 2008, 2007 and 2006,
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, 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 construction loan.





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
      29,
              2008
            
            
            %
      of
              Net
      Sales
            
            
            March
      31,
              2007
            
            
            %
      of
              Net
      Sales
            
            
            March
      31,
              2006
            
            
            %
      of
              Net
      Sales(Amounts
      in thousands)Net
      Sales:99¢
      Only Stores
            
            $
            1,158,856
            
            
            
            96.6
            %
            
            $
            1,064,518
            
            
            
            96.4
            %
            
            $
            984,293
            
            
            
            96.2
            %Bargain
      Wholesale
            
            
            40,518
            
            
            
            3.4
            
            
            
            40,178
            
            
            
            3.6
            
            
            
            39,296
            
            
            
            3.8Total
      sales
            
            $
            1,199,374
            
            
            
            100.0
            
            
            
            1,104,696
            
            
            
            100.0
            
            
            
            1,023,589
            
            
            
            100.0Cost
      of sales
            
            
            738,499
            
            
            
            61.6
            
            
            
            672,101
            
            
            
            60.8
            
            
            
            640,140
            
            
            
            62.5Gross
      profit
            
            
            460,875
            
            
            
            38.4
            
            
            
            432,595
            
            
            
            39.2
            
            
            
            383,449
            
            
            
            37.5Selling,
      general and administrative expense:Operating
      expenses
            
            
            433,940
            
            
            
            36.2
            
            
            
            393,351
            
            
            
            35.6
            
            
            
            340,371
            
            
            
            33.3Depreciation
      and amortization
            
            
            33,321
            
            
            
            2.8
            
            
            
            32,675
            
            
            
            3.0
            
            
            
            31,424
            
            
            
            3.1Total
      operating expenses
            
            
            467,261
            
            
            
            39.0
            
            
            
            426,026
            
            
            
            38.6
            
            
            
            371,795
            
            
            
            36.4Operating
      income (loss)
            
            
            (6,386
            )
            
            
            (0.5
            )
            
            
            6,569
            
            
            
            0.6
            
            
            
            11,654
            
            
            
            1.1Other
      income, net
            
            
            (6,674
            )
            
            
            (0.6
            )
            
            
            (7,432
            )
            
            
            (0.7
            )
            
            
            (5,084
            )
            
            
            (0.5
            )Income
      before provision for income taxes
            
            
            288
            
            
            
            0.0
            
            
            
            14,001
            
            
            
            1.3
            
            
            
            16,738
            
            
            
            1.6Provision
      (benefit) for income taxes
            
            
            (2,605
            )
            
            
            (0.2
            )
            
            
            4,239
            
            
            
            0.4
            
            
            
            5,316
            
            
            
            0.5Net
      income
            
            $
            2,893
            
            
            
            0.2
            %
            
            $
            9,762
            
            
            
            0.9
            %
            
            $
            11,422
            
            
            
            1.1
            %





Fiscal
Year Ended March 29, 2008 Compared to Fiscal Year Ended March 31,
2007





Net sales. Total net sales
increased $94.7 million, or 8.6%, to $1,199.4 million in fiscal 2008 from
$1,104.7 million in fiscal 2007. 99¢ Only Stores’ net retail sales increased
$94.4 million, or 8.9%, to $1,158.9 million in fiscal 2008 from $1,064.5 million
in fiscal 2007.  Of the $94.4 million increase in net retail sales,
$41.8 million was due to a 4.0% increase in comparable stores net sales for all
stores open at least 15 months in fiscal 2008 and 2007.  The
comparable stores net sales increase was attributable to a 3.0% increase in
transaction counts as well as an increase in average ticket size by 1.0% to
$9.45 from $9.36.  The full year fiscal 2008 effect of stores opened
in fiscal 2007 increased sales by $32.5 million and the effect of 16 new stores
opened since the end of fiscal 2007 increased net retail sales by $23.6 million.
Offsetting these increases was a $3.5 million decrease in net retail sales due
to one less day in fiscal 2008 compared to fiscal 2007 as a result of the change
in the Company’s fiscal year.  Bargain Wholesale net sales increased
$0.3 million, or 0.9%, to $40.5 million in fiscal 2008 from $40.2 million in
fiscal 2007.





28
 Table of Contents





Since the
end of fiscal 2007, the Company added 16 stores; seven stores were opened in
Texas and nine in California. At the end of fiscal 2008, the Company had 265
stores compared to 251 as of the end of fiscal 2007. Gross retail square footage
at the end of fiscal 2008 and fiscal 2007 was 5.76 million and 5.52 million,
respectively. For 99¢ Only Stores open all of fiscal 2008, the average net sales
per estimated saleable square foot was $263 and the average annual net sales per
store were $4.5 million, including the Texas stores open for the full year.
Non-Texas stores net sales averaged $4.9 million per store and $291 per square
foot. Texas stores open for a full year averaged net sales of $2.6 million per
store and $128 per square foot.




Gross profit. Gross profit
increased $28.3 million, or 6.5%, to $460.9 million in fiscal 2008 from $432.6
million in fiscal 2007.  As a percentage of net sales, overall gross
margin decreased to 38.4% in fiscal 2008 from 39.2% in fiscal
2007.  As a percentage of retail sales, retail gross margin decreased
to 39.0% in fiscal 2008 from 39.9% in fiscal 2007.  The decrease in
gross profit margin was primarily due to an increase in spoilage/shrink to 3.8%
of retail sales in fiscal 2008 compared to 3.0% in fiscal
2007.  Spoilage increased primarily due to a shift in sales mix for
grocery items which have a higher spoilage rate and shrink increased due to
higher than expected losses in inventory.  These items were partially
offset by a decrease in cost of products sold to 56.9% for fiscal 2008 compared
to 57.4% for fiscal 2007 due to changes in pricing strategy that were
implemented in the second half of fiscal 2008.  The remaining change
was made up of increases and decreases in other less significant items included
in cost of sales.  The Bargain Wholesale margin increased to 21.3% in
fiscal 2008 versus 20.0% in fiscal 2007, primarily due to price increases and
product mix changes.




Operating expenses. Operating
expenses increased $40.5 million, or 10.3%, to $433.9 million in fiscal 2008
from $393.4 million in fiscal 2007. As a percentage of net sales, operating
expenses increased to 36.2% for fiscal 2008 from 35.6% for fiscal
2007.  Of the 60 basis points increase in operating expenses as a
percentage of sales,  retail operating expenses increased by 9 basis
points, distribution and transportation costs increased by 53 basis points, and
corporate expenses decreased by 11 basis points. The remaining 9 basis points
increase was primarily related to a one-time gain as a result of an eminent
domain action in fiscal 2007 and other less significant items included in other
operating expenses.





Retail
operating expenses increased as a percentage of sales by 9 basis points to 25.3%
of net sales, increasing by $24.9 million for fiscal 2008 compared to fiscal
2007. This is primarily as a result of an increase in retail store labor and
related costs of $15.2 million associated with the opening of 16 new stores in
fiscal 2008, and the full year effect of stores opened in fiscal 2007 as well as
minimum wage increases.  The remaining increases in retail operating
expenses included rent, supplies, repairs and maintenance and other store
operating expenses, primarily as a result of the increase in number of
stores.  Finally, retail operating expenses for fiscal 2008 also
included an asset impairment charge of $0.5 million relating to one
underperforming store in Texas.





Distribution
and transportation costs increased as a percentage of sales by 53 basis points
to 6.0% of net sales, increasing by $11.5 million for fiscal 2008 compared to
fiscal 2007.  This increase was primarily due to $4.9 million in
increased labor costs to operate the warehouses, including labor to service the
increased sales volume, impact of minimum wage increases and handling increased
inventory levels.  In addition, there were $4.1 million in increased
delivery costs due to additional new store locations, increased perishable
product sales and higher fuel costs and higher freight rates from our outside
carriers.





Corporate
operating expenses decreased as a percentage of sales by 11 basis points to 4.7%
of net sales, increasing $3.3 million for fiscal 2008 compared to fiscal 2007,
primarily due to higher salaries, benefits and legal costs, which were partially
offset by lower consulting and professional fees.





The
remaining 9 basis points increase was primarily related to a one-time gain as a
result of an eminent domain action in fiscal 2007 and other less significant
items included in other operating expenses.





Depreciation and amortization.Depreciation and amortization increased $0.6 million, or 2.0%, to $33.3
million in fiscal 2008 from $32.7 million in fiscal 2007 as a result of the 16
new stores opening since the end of fiscal 2007, the full year effect of fiscal
2007 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.





29
 Table of Contents





Operating loss. Operating
loss was $6.4 million for fiscal 2008 compared to operating income of $6.6
million for fiscal 2007. Operating loss as a percentage of net sales was
negative 0.5% in fiscal 2008 compared to operating income as percentage of net
sales of 0.6% in fiscal 2007.  This was primarily due to changes in
gross margin and operating expenses  as discussed above.




Other income, net. Other
income decreased $0.7 million to $6.7 million in fiscal 2008 compared to $7.4
million in fiscal 2007.  Interest income earned on the Company’s
investments decreased to $7.2 million in fiscal 2008 from $7.9 million in fiscal
2007, primarily as a result of lower investment balances and decreases in
interest rates.  Interest expense which primarily relates to
consolidated partnership line of credit with a bank was $1.0 million in fiscal
2008 compared to $1.2 million in fiscal 2007.





Provision (benefit) for income
taxes. The income tax benefit in fiscal 2008 was $2.6 million compared to
income tax expense of $4.2 million in fiscal 2007, due to the decrease in
pre-tax income and a lower overall effective tax rate.  The effective
tax rate for fiscal 2008 was a benefit compared to the effective tax rate of
30.3% for fiscal 2007.   Additionally, in fiscal 2008, the
Company recorded a discrete tax benefit of approximately $1.3 million related to
a change in the Texas net operating loss carry forward rules, compared to a
discrete tax benefit recorded in fiscal 2007 related to prior year tax credits
of approximately $0.3 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 decreased $6.9 million, or 70.3%, to $2.9
million in fiscal 2008 from $9.8 million in fiscal 2007. Net income as a
percentage of net sales declined to 0.2% in fiscal 2008 from 0.9% in fiscal
2007.





Fiscal
Year Ended March 31, 2007 Compared to Fiscal Year Ended March 31,
2006





Net sales. Total net sales
increased $81.1 million, or 7.9%, to $1,104.7 million in fiscal 2007 from
$1,023.6 million in fiscal 2006. 99¢ Only Stores’ net retail sales increased
$80.2 million, or 8.2%, to $1,064.5 million in fiscal 2007 from $984.3 million
in fiscal 2006. Of the $80.2 million increase in net retail sales, $23.0 million
was due to a 2.4% increase in comparable stores net sales for all stores open at
least 15 months in fiscal 2007 and 2006.  The comparable stores net
sales increase was attributable to a 0.5% increase in transaction counts
(primarily attributable to the Company’s Texas stores, due to additional
operational improvements made in fiscal 2007 and where sales continued to
benefit from an anniversary advertising campaign held in the fourth quarter of
fiscal 2006), as well as an increase in average ticket size by 1.9% to $9.34
from $9.17.  The effect of 19 new stores opened since the end of
fiscal 2006 increased net retail sales by $38.8 million and the full year fiscal
2007 effect of stores opened in fiscal 2006 increased sales by $18.4 million.
Bargain Wholesale net sales increased $0.9 million, or 2.2%, to $40.2 million in
fiscal 2007 from $39.3 million in fiscal 2006, primarily due to new
customers.





Since the
end of fiscal 2006, the Company added 19 stores; five stores were opened in
Texas, one in Arizona and 13 in California. At the end of fiscal 2007, the
Company had 251 stores compared to 232 as of fiscal 2006. Gross retail square
footage at the end of fiscal 2007 and fiscal 2006 was 5.52 million and 5.15
million, respectively. For 99¢ Only Stores open all of fiscal 2007, the average
net sales per estimated saleable square foot was $254 and the average annual net
sales per store were $4.4 million, including the Texas stores open for the full
year. Non-Texas stores net sales averaged $4.8 million per store and $284 per
square foot. Texas stores open for a full year averaged net sales of $2.4
million per store and $120 per square foot.




Gross profit. Gross profit
increased $49.1 million, or 12.8%, to $432.6 million in fiscal 2007 from $383.4
million in fiscal 2006. As a percentage of net sales, overall gross margin
increased to 39.2% in fiscal 2007 from 37.5% in fiscal 2006. As a percentage of
retail sales, retail gross margin increased to 39.9% in fiscal 2007 from 38.2%
in fiscal 2006.  The increase in gross profit was primarily due to a
reduction in excess and obsolete inventory reserves of 0.5% of retail sales in
fiscal 2007 due to the sales of items previously reserved as excess and obsolete
inventory following a more focused approach to merchandising those items
compared to an increase in these reserves of 0.1% of retail sales in fiscal
2006, and due to a reduction of spoilage/shrink to 3.0% for fiscal 2007 from
3.7% for fiscal 2006.  In addition, the increase in gross profit was
due to a decrease in cost of products sold to 57.4% for fiscal 2007 compared to
57.6% for fiscal 2006 due to product cost changes.  The remaining
change was made up of increases and decreases in other less significant items
included in cost of sales. The Bargain Wholesale margin increased to 20.0% in
fiscal 2007 versus 19.6% in fiscal 2006, primarily due to product cost
changes.





30
 Table of Contents





Operating expenses. Operating
expenses increased $53.0 million, or 15.6%, to $393.4 million in fiscal 2007
from $340.4 million in 2006. As a percentage of net sales, operating expenses
increased to 35.6% for fiscal 2007 from 33.3% for fiscal 2006.  Of the
230 basis points increase in operating expenses as a percentage of
sales,  retail operating expenses increased by 8 basis points,
distribution and transportation costs increased by 107 basis points, and
corporate expenses increased by 87 basis points. The remaining 28 basis points
increase was primarily related to a one time gain as a result of an eminent
domain action in fiscal 2006.





Retail
operating expenses increased as a percentage of sales by 8 basis points to 25.2%
of net sales, increasing by $21.3 million for fiscal 2007 compared to fiscal
2006, primarily as a result of an increase in retail store labor and related
costs of $13.0 million associated with the opening of 19 new stores in fiscal
2007 and the full year effect of stores opened in fiscal 2006. Retail store
labor also increased due to costs associated with training and implementing new
inventory control procedures in the stores, but were partially offset by lower
workers’ compensation expenses primarily driven by the stabilization of reserve
requirements and improvements in claims management and accident
reporting.  The remaining increases in retail operating expenses
included rent, utilities and other store operating expenses.





Distribution
and transportation costs increased as a percentage of sales by 107 basis points
to 5.5% of net sales, increasing by $15.4 million for fiscal 2007 compared to
fiscal 2006.  This increase was primarily due to $7.7 million in
increased labor costs to operate the warehouses, including labor to service the
increased sales volume and implement various internal control initiatives, and
$3.9 million in increased delivery costs due to additional new store locations
and higher fuel costs.





Corporate
operating expenses increased as a percentage of sales by 87 basis points to 4.8%
of net sales, increasing $12.8 million for fiscal 2007 compared to fiscal 2006,
primarily due to an increase in consulting and professional fees of $5.4 million
as a result of costs associated with completing the fiscal year 2006 annual
audit and in connection with implementing Sarbanes-Oxley requirements, an
increase of $5.0 million for stock-based compensation, and an increase of $3.8
million for personnel added at the executive, management and staff levels to
support the Company’s infrastructure and growth requirements.  These
were partially offset by lower legal costs. The increase in stock-based
compensation expense is due to the adoption of SFAS No. 123(R) at the beginning
of fiscal 2007, which requires the Company to recognize expense related to the
estimated fair value of stock-based compensation awards.  Stock-based
compensation recognized in fiscal 2007 was $5.2 million compared to $0.2 million
in fiscal 2006.





The
remaining operating expenses increased by 28 basis points, which was primarily
related to a difference in gains from consideration received in eminent domain
actions in each of fiscal 2007 and fiscal 2006.  Fiscal 2007 operating
expense was reduced by $0.7 million by the gain from consideration for a store
closure due to an eminent domain action.  Fiscal 2006 operating
expense was reduced by $4.2 million by a gain from consideration for a forced
store closure due to a local government eminent domain action for the
construction of a new public school.





Depreciation and amortization.Depreciation increased $1.3 million, or 4.0%, to $32.7 million in fiscal
2007 from $31.4 million in fiscal 2006 as a result of the net 19 new stores
operating since the end of the fiscal 2006, the full year effect of fiscal 2006
store additions, and additions to existing stores and distribution centers. The
increase was partially offset due to the disposal of certain fixed assets and
fully depreciated assets.





Operating income. Operating
income decreased $5.1 million, or 43.6%, to $6.6 million in fiscal 2007 from
$11.7 million in fiscal 2006. Operating income as a percentage of net sales
decreased to 0.6% in fiscal 2007 from 1.1% in fiscal 2006 primarily due to
increases in operating expenses discussed above partially offset by the increase
in the gross margin percentage on sales.  Operating income in fiscal
2007 and 2006 benefited from net gains of $0.7 million and $4.2 million,
respectively, for forced store closures due to local government eminent domain
actions, which are included as an offset to selling, general, and administrative
expenses.




Other income, net. Other
income increased $2.3 million to $7.4 million in fiscal 2007 compared to $5.1
million in fiscal 2006.  Interest income earned on the Company’s
investments increased to $7.9 million in fiscal 2007 from $5.1 million in fiscal
2006, primarily as a result of increased interest rates.  Interest
expense which primarily relates to consolidated partnership line of credit with
a bank was $1.2 million in fiscal 2007 compared to $0.1 million in fiscal
2006.





31
 Table of Contents





Provision for income taxes.
The provision for income taxes in fiscal 2007 was $4.2 million compared to $5.3
million in fiscal 2006, due to the decrease in pre-tax income and a lower
overall effective tax rate.  The provision for income taxes had
effective combined federal and state income rates of 30.3% and 31.8% in fiscal
2007 and 2006, respectively. Additionally, in fiscal 2007, the Company recorded
a discrete tax benefit of approximately $0.3 million, due to additional prior
period income tax credits that were identified during the first quarter of
fiscal 2007. The effective combined federal and state tax income rates are less
than the statutory rates in each period and were calculated to reflect estimated
income tax rates after giving effect for 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 decreased $1.6 million, or 14.5%, to $9.8
million in fiscal 2007 from $11.4 million in fiscal 2006. Net income as a
percentage of net sales declined to 0.9% in fiscal 2007 from 1.1% in fiscal
2006.





Effects
of inflation





The
Company experienced material increases in vendor prices, labor, energy,
transportation and fuel costs during fiscal 2008 which the Company believes
was due to inflation.  The Company believes inflation had a minimal
impact on the Company’s overall operations during fiscal 2007 and
2006.   Continued increases in such costs could 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 sell merchandise at the 99¢ price
point.”





Liquidity
and Capital Resources




Since
inception, the Company has funded its operations principally from cash provided
by operations 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, continued system improvements 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.




Net cash
provided by operating activities in fiscal 2008, 2007, and 2006 was $45.2
million, $28.5 million, and $82.5 million, respectively, consisting primarily of
$30.2 million, $42.3 million, and $38.5 million of net income, respectively,
adjusted for depreciation and other non-cash items. Net cash provided by working
capital activities was $11.4 million and $6.1 million in fiscal 2008 and 2006,
respectively.  The Company used $10.8 million in working capital in
fiscal 2007.  Net cash provided by working capital activities in
fiscal 2008 primarily reflects decreases in inventories, partially offset by
decreases in accounts payable.  Net cash used by working capital
activities in fiscal 2007 primarily reflects the increase in inventories,
decrease in accounts payable and workers’ compensation liability partially
offset by the increase in accrued expenses and decreases in income taxes
receivable. Net cash provided by working capital activities in fiscal 2006
primarily reflects increases in accounts payable and workers’ compensation
partially offset by increases in inventories and a decrease in income tax
payable in fiscal 2006.  In fiscal 2008, the Company’s inventories
decreased by $14.6 million compared to fiscal 2007, primarily due to decreases
in warehouse inventory levels as a result of timing of the Easter selling
season, as well as a temporary reduction in purchases to provide for space
related to the commencement of a project to install additional racking in the
Company’s primary warehouse.  Cash used for growth in inventories was
$11.9 million and $7.2 million in fiscal 2007 and 2006,
respectively.





The
Company sold $36.0 million of its trading securities in fiscal
2006.  After fiscal 2006, the Company no longer carried trading
securities in its investments.





Net cash
used in investing activities during fiscal 2008, 2007, and 2006 was $37.6
million, $35.6 million, and $85.6 million, respectively. In fiscal 2008, 2007,
and 2006 the Company used $54.4 million, $47.0 million, and $47.6 million,
respectively, for the purchase of property and equipment due to new store
openings as well as the purchase of a warehouse in Commerce, California for $9.7
million in fiscal 2006.  In fiscal 2008, 2007 and 2006, the Company
received cash inflow of $168.1 million, $137.4 million and $96.9 million,
respectively, from the sale and maturity of available for sale securities, some
of which was offset by $151.4 million, $126.0 million and $135.0 million,
respectively, for the purchase of investments.





32
 Table of Contents





Net cash
provided by financing activities during fiscal 2008, 2007, and 2006 was $0.9
million, $3.2 million and $6.0 million, respectively.  Net cash
provided by financing activities during fiscal 2008 and 2007 consisted primarily
of proceeds from exercise of stock options.  Net cash provided by
financing activities during fiscal 2006 consisted primarily of the proceeds of a
consolidated partnership’s construction loan.





The
Company estimates that total capital expenditures in fiscal year 2009 will be
approximately $56.5 million and relate principally to property acquisitions of
approximately $12.7 million, $27.5 million for leasehold and fixtures and
equipment for new store openings, and $16.3 million for other capital projects.
The Company intends to fund its liquidity requirements in fiscal 2009 out of net
cash provided by operations, short-term investments, and cash on
hand.





Contractual
Obligations





The
following table summarizes the Company’s consolidated contractual obligations
(in thousands) as of March 29, 2008.





Contractual
      obligations
            
            Total
            
            
            Less
      than 1 year
            
            
            1-3
      years
            
            
            3-5
      years
            
            
            More
      than 5 yearsCapital
      lease obligations
            
            $
            643
            
            
            $
            60
            
            
            $
            135
            
            
            $
            156
            
            
            $
            292Operating
      lease obligations
            
            
            208,219
            
            
            
            41,174
            
            
            
            66,539
            
            
            
            41,572
            
            
            
            58,934Deferred
      compensation liability
            
            
            4,213
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            4,213Construction
      loan
            
            
            7,319
            
            
            
            7,319
            
            
            
            —
            
            
            
            —
            
            
            
            —Interest
      on Construction loan
            
            
            160
            
            
            
            160
            
            
            
            —
            
            
            
            —
            
            
            
            —Total
            
            $
            220,554
            
            
            $
            48,713
            
            
            $
            66,674
            
            
            $
            41,728
            
            
            $
            63,439





Liabilities
related to uncertain tax positions of approximately $1.8 million, including
interest and penalties, are not included in the table above because the Company
is not able to make reasonably reliable estimates of the period of cash
settlement.  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 2024. 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 2008, fiscal 2007 and fiscal 2006 was approximately $54.1
million, $49.3 million and $45.7 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




The
Company is the primary beneficiary of a variable interest entity to develop a
shopping center in La Quinta, California, in which the Company leases a
store.  As of March 31, 2008, this entity has $9.0 million in assets
and $7.4 million in liabilities, including a bank loan for $7.3 million, which
is shown on the Company’s fiscal 2008 year-end consolidated balance sheet. 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.  The timeline
for completion of this offer has passed, and the Company has notified the
managing member that the managing member is in default of closing the
transaction within the agreed-upon timeframe.  Management does not
believe now that it is likely that the sale transaction will
close.  In addition, the partnership has 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, in which the partnership is in default.  The
Company is not a guarantor of this debt. The Company also has an option to
purchase the land and building related to its store. The Company's lease for the
store in the shopping center related to the La Quinta Partnership will continue
regardless of potential sale or default of the partnership and management
believes that the Company's operation of its store will be unaffected by any
potential transaction.





33
 Table of Contents





The
Company had an interest in two additional partnerships which the Company
consolidated at March 29, 2008, March 31, 2007 and March 31, 2006 in accordance
with Financial Accounting Standards Board (“FASB”) Interpretation No. 46(R),
“Consolidation of Variable Interest Entities - an Interpretation of ARB No. 51,
Consolidated Financial Statements”.  The assets of
the partnerships consist of real estate with a carrying value of approximately
$3.1 million and there is no mortgage debt or other significant liabilities
associated with the entities, other than notes payable to the
Company.





In April
2008, the primary asset of one of the Company’s partnerships with an approximate
carrying value of $1.2 million was sold to a third party and is classified as
assets held for sale in Company’s consolidated balance sheets.  The
Company's lease for the store in this partnership will continue after the sale
and the Company's operation of that store will be unaffected by the
transaction.  See Note 12 “Assets Held for Sale” and Note 15
“Subsequent Events” to Consolidated Financial Statements.




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




In
September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements”
(“SFAS No. 157”).  This statement clarifies the definition of fair
value, establishes a framework for measuring fair value, and expands the
disclosures on fair value measurements. The provisions of SFAS No. 157 are
effective for fiscal years beginning after November 15, 2007 for financial
assets and liabilities, as well as for any other assets and liabilities that are
carried at fair value on a recurring basis.  The FASB provided for a
one-year deferral of the implementation of this standard for other non-financial
assets and liabilities. The Company does not expect the impact of this statement
to have a material effect on the Company’s consolidated financial position or
results of operations.





In February 2007, the FASB issued
SFAS No. 159, "The Fair Value Option for Financial Assets and Financial
Liabilities—Including an amendment of FASB
Statement No. 115" (“SFAS No. 159”).  SFAS No. 159 permits
companies to choose to measure many financial instruments and certain other
items at fair value at specified election dates. Upon adoption, an entity shall
report unrealized gains and losses on items for which the fair value option has
been elected in earnings at each subsequent reporting date. Most of the
provisions apply only to entities that elect the fair value option. However, the
amendment to SFAS No. 115, "Accounting for Certain Investments in Debt and
Equity Securities," applies to all entities with available for sale and trading
securities. SFAS No. 159 is effective as of the beginning of an entity's
first fiscal year that begins after November 15,
2007.The
Company does not expect the impact of this statement to have a material effect
on the Company’s consolidated financial position or results of
operations.





In
December 2007, the FASB issued SFAS No. 141 (revised 2007),
“Business Combinations” (“SFAS No. 141(R)”).  SFAS
No. 141(R) changes the requirements for an acquirer’s recognition and
measurement of the assets acquired and liabilities assumed in a business
combination. SFAS No. 141(R) replaces SFAS No. 141, “Business
Combinations.” SFAS No. 141(R) is effective in fiscal years beginning
after December 15, 2008.  The Company has not determined the
effect, if any, the adoption of this statement will have on the Company’s
consolidated financial position or results of operations.





34
 Table of Contents





In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling
Interests in Consolidated Financial Statements”
(“SFAS No. 160”).  SFAS No. 160 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.  SFAS No. 160 is an amendment of Accounting
Research Bulletin No. 51, “Consolidated Financial Statements” and related
interpretations. SFAS No. 160 is effective for fiscal years beginning
on or after December 15, 2008. The Company has not determined the effect,
if any, the adoption of this statement will have on the Company’s consolidated
financial position or results of operations.





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 29, 2008,
the Company had $122.2 million in securities maturing at various dates through
May 2047, with approximately 65.8% maturing within one year.  At March
31, 2007, the Company had $140.9 million in securities maturing at various dates
through May 2046, with approximately 83.0% maturing within one year. The Company
is susceptible to market value fluctuations with regard to its long-term
securities and experienced increased volatility in its long-term investments
during fiscal 2008 compared to fiscal 2007.  The Company’s investments
are comprised primarily of marketable investment grade federal and municipal
bonds, corporate bonds and equity securities, 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. At March 29, 2008, the
fair value of investments approximated the carrying value. Based on the
investments outstanding at March 29, 2008, a 1.0% increase in interest rates
would reduce the fair value of the Company’s total investment portfolio by
approximately $2.2 million or 1.8%.  Interest rates on the Company’s
debt are fixed and not subject to interest rate volatility risk.





35
 Table of Contents





Item8. 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
            37Consolidated
      Balance Sheets as of March 29, 2008 and March 31, 2007
            38Consolidated
      Statements of Income for years ended March 29, 2008 , March 31, 2007 and
      March 31, 2006
            39Consolidated
      Statements of Shareholders’ Equity for the years ended March 29, 2008,
      March 31, 2007 and March 31, 2006
            40Consolidated
      Statements of Cash Flows for the years ended March 29,
      2008,  March 31, 2007 and March 31, 2006
            41Notes
      to Consolidated Financial Statements
            42Schedule
      II – Valuation and Qualifying Accounts
            72




36
 Table of Contents





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 29, 2008 and March 31, 2007
and the related consolidated statements of income, shareholders’
equity, and cash flows for the years ended March 29, 2008 and March 31,
2007 and 2006. We also have audited the schedule as listed in the accompanying
index. These consolidated 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
presentation of the financial statements and schedule. 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 29,
2008 and March 31, 2007, and the results of its operations and its cash flows
for the years ended March 29, 2008 and March 31, 2007 and 2006, 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 29, 2008 and March 31,
2007 and 2006.





As
discussed in the notes to the consolidated financial statements the Company: (1)
effective April 1, 2005 the Company adopted the dual method of evaluating
errors, as required by SEC Staff Accounting Bulletin No. 108, “Considering the Effects of Prior
Year Misstatements when Quantifying Misstatements in Current Year Financial
Statements.”, (2) effective April 1, 2006, the Company adopted the
provisions of Statement of Financial Accounting Standard No. 123(R) – An
Amendment of FASB Statement No. 123, and (3) effective April 1, 2007, the
Company adopted the provisions of FASB Interpretation No. 48, “Accounting for
Uncertainty in Income Taxes, an Interpretation of FASB Statement No.
109.”





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 29, 2008, 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 June 10,
2008 expressed an adverse opinion on the effectiveness of the Company’s internal
control over financial reporting.







/s/
      BDO Seidman, LLPLos
      Angeles, CaliforniaJune
      10, 2008





37
 Table of Contents





99¢
Only Stores


CONSOLIDATED
BALANCE SHEETS


(Amounts
in thousands, except share data)





March 29,
              2008
            
            
            March
      31,
              2007ASSETSCurrent
      Assets:Cash
            
            $
            9,462
            
            
            $
            983Short-term
      investments
            
            
            80,393
            
            
            
            117,013Accounts
      receivable, net of allowance for doubtful accounts of $159 and $252 as of
      March 29, 2008 and March 31, 2007, respectively
            
            
            2,144
            
            
            
            2,687Income
      taxes receivable
            
            
            2,712
            
            
            
            2,784Deferred
      income taxes
            
            
            29,221
            
            
            
            28,343Inventories,
      net
            
            
            138,167
            
            
            
            152,793Assets
      held for sale
            
            
            8,724
            
            
            
            —Other
            
            
            7,217
            
            
            
            8,931Total
      current assets
            
            
            278,040
            
            
            
            313,534Property
      and equipment, net
            
            
            287,082
            
            
            
            273,566Long-term
      deferred income taxes
            
            
            27,906
            
            
            
            17,760Long-term
      investments in marketable securities
            
            
            41,852
            
            
            
            23,873Deposits
      and other assets
            
            
            14,530
            
            
            
            14,402Total
      assets
            
            $
            649,410
            
            
            $
            643,135LIABILITIES
      AND SHAREHOLDERS’ EQUITYCurrent
      Liabilities:Accounts
      payable
            
            $
            25,048
            
            
            $
            28,934Payroll
      and payroll-related
            
            
            10,181
            
            
            
            9,361Sales
      tax
            
            
            5,527
            
            
            
            4,519Other
      accrued expenses
            
            
            16,511
            
            
            
            17,275Workers’
      compensation
            
            
            42,814
            
            
            
            43,487Current
      portion of capital lease obligation
            
            
            59
            
            
            
            55Construction
      loan, current
            
            
            7,319
            
            
            
            13Total
      current liabilities
            
            
            107,459
            
            
            
            103,644Deferred
      rent
            
            
            10,663
            
            
            
            8,320Deferred
      compensation liability
            
            
            4,213
            
            
            
            4,014Capital
      lease obligation, net of current portion
            
            
            584
            
            
            
            644Construction
      loan, non-current
            
            
            —
            
            
            
            7,286Total
      liabilities
            
            
            122,919
            
            
            
            123,908Commitments
      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, 70,060,491 shares at March 29, 2008 and 69,941,719 shares at
      March 31, 2007
            
            
            228,673
            
            
            
            223,414Retained
      earnings
            
            
            298,478
            
            
            
            295,585Other
      comprehensive (loss) income
            
            
            (660
            )
            
            
            228Total
      shareholders’ equity
            
            
            526,491
            
            
            
            519,227Total
      liabilities and shareholders’ equity
            
            $
            649,410
            
            
            $
            643,135





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





38
 Table of Contents





99¢
Only Stores


CONSOLIDATED
STATEMENTS OF INCOME


(Amounts
in thousands, except per share data)





Years
      EndedMarch
      29,
              2008
            
            
            March
      31,
              2007
            
            
            March
      31,
              2006Net
      Sales:99¢
      Only Stores
            
            $
            1,158,856
            
            
            $
            1,064,518
            
            
            $
            984,293Bargain
      Wholesale
            
            
            40,518
            
            
            
            40,178
            
            
            
            39,296Total
      sales
            
            
            1,199,374
            
            
            
            1,104,696
            
            
            
            1,023,589Cost
      of sales (excluding depreciation and amortization expense shown separately
      below)
            
            
            738,499
            
            
            
            672,101
            
            
            
            640,140Gross
      profit
            
            
            460,875
            
            
            
            432,595
            
            
            
            383,449Selling,
      general and administrative expenses:Operating
      expenses (includes asset impairment of $531, $0 and $800 for the years
      ended March 29, 2008, March 31, 2007 and March 31, 2006,
      respectively)
            
            
            433,940
            
            
            
            393,351
            
            
            
            340,371Depreciation
      and amortization
            
            
            33,321
            
            
            
            32,675
            
            
            
            31,424Total
      selling, general and administrative expenses
            
            
            467,261
            
            
            
            426,026
            
            
            
            371,795Operating
      income (loss)
            
            
            (6,386
            )
            
            
            6,569
            
            
            
            11,654Other
      (income) expense:Interest
      income
            
            
            (7,182
            )
            
            
            (7,948
            )
            
            
            (5,059
            )Interest
      expense
            
            
            953
            
            
            
            1,181
            
            
            
            122Other
            
            
            (445
            )
            
            
            (665
            )
            
            
            (147
            )Total
      other (income), net
            
            
            (6,674
            )
            
            
            (7,432
            )
            
            
            (5,084
            )Income
      before provision for income taxes
            
            
            288
            
            
            
            14,001
            
            
            
            16,738Provision
      (benefit) for income taxes
            
            
            (2,605
            )
            
            
            4,239
            
            
            
            5,316Net
      income
            
            $
            2,893
            
            
            $
            9,762
            
            
            $
            11,422Earnings
      per common share:Basic
            
            $
            0.04
            
            
            $
            0.14
            
            
            $
            0.16Diluted
            
            $
            0.04
            
            
            $
            0.14
            
            
            $
            0.16Weighted
      average number of common shares outstanding:Basic
            
            
            70,044
            
            
            
            69,862
            
            
            
            69,553Diluted
            
            
            70,117
            
            
            
            70,017
            
            
            
            69,737





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





39
 Table of Contents





99¢
Only Stores


CONSOLIDATED
STATEMENTS OF SHAREHOLDERS’ EQUITY


YEARS
ENDED MARCH 29, 2008, MARCH 31, 2007 and MARCH 31, 2006


(Amounts
in thousands)





Common
      Stock
            
            
            Accumulated
      Other Comprehensive
            
            
            Retained
            
            
            Shareholders’Shares
            
            
            Amount
            
            
            Income (Loss)
            
            
            Earnings
            
            
            EquityBALANCE,
      March 31, 2005
            
            
            69,549
            
            
            $
            212,938
            
            
            $
            (7
            )
            
            $
            276,477
            
            
            $
            489,408SAB
      No. 108 cumulative effect (Note 14)
            
            
            —
            
            
            
            2,445
            
            
            
            —
            
            
            
            (2,076
            )
            
            
            369BALANCE,
      April 1, 2005, as adjusted
            
            
            69,549
            
            
            
            215,383
            
            
            
            (7
            )
            
            
            274,401
            
            
            
            489,777Net
      income
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            11,422
            
            
            
            11,422Net
      unrealized investment gains
            
            
            —
            
            
            
            —
            
            
            
            8
            
            
            
            —
            
            
            
            8Total
      comprehensive income
            
            
            —
            
            
            
            —
            
            
            
            8
            
            
            
            11,422
            
            
            
            11,430Tax
      benefit from exercise of stock options
            
            
            —
            
            
            
            57
            
            
            
            —
            
            
            
            —
            
            
            
            57Proceeds
      from exercise of stock options
            
            
            20
            
            
            
            89
            
            
            
            —
            
            
            
            —
            
            
            
            89Stock-based
      compensation expense
            
            
            —
            
            
            
            173
            
            
            
            —
            
            
            
            —
            
            
            
            173BALANCE,
      March 31, 2006
            
            
            69,569
            
            
            
            215,702
            
            
            
            1
            
            
            
            285,823
            
            
            
            501,526Net
      income
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            9,762
            
            
            
            9,762Net
      unrealized investment gains
            
            
            —
            
            
            
            —
            
            
            
            227
            
            
            
            —
            
            
            
            227Total
      comprehensive income
            
            
            —
            
            
            
            —
            
            
            
            227
            
            
            
            9,762
            
            
            
            9,989Tax
      benefit from exercise of stock options
            
            
            —
            
            
            
            1,032
            
            
            
            —
            
            
            
            —
            
            
            
            1,032Proceeds
      from exercise of stock options
            
            
            373
            
            
            
            1,456
            
            
            
            —
            
            
            
            —
            
            
            
            1,456Stock-based
      compensation expense
            
            
            —
            
            
            
            5,224
            
            
            
            —
            
            
            
            —
            
            
            
            5,224BALANCE,
      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
            
            
            —
            
            
            
            —
            
            
            
            (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
            
            
            $
            526,491





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





40
 Table of Contents





99¢
Only Stores


CONSOLIDATED
STATEMENTS OF CASH FLOWS


(Amounts
in thousands)





Years
      EndedMarch
      29,
              2008
            
            
            March
      31,
              2007
            
            
            March
      31,
              2006Cash
      flows from operating activities:Net
      income
            
            $
            2,893
            
            
            $
            9,762
            
            
            $
            11,422Adjustments
      to reconcile net income to net cash provided by operating
      activities:Depreciation
      and amortization
            
            
            33,321
            
            
            
            32,675
            
            
            
            31,424Loss
      on disposal and impairment of fixed assets
            
            
            655
            
            
            
            171
            
            
            
            999Excess
      tax benefit from share-based payment arrangements
            
            
            (130
            )
            
            
            (645
            )
            
            
            —Deferred
      income taxes
            
            
            (11,024
            )
            
            
            (5,934
            )
            
            
            (5,589
            )Stock-based
      compensation expense
            
            
            4,184
            
            
            
            5,224
            
            
            
            173Tax
      benefit from exercise of non qualified employee stock
    options
            
            
            263
            
            
            
            1,032
            
            
            
            57Changes
      in assets and liabilities associated with operating
      activities:Sales
      of short-term investments, net
            
            
            —
            
            
            
            —
            
            
            
            36,040Accounts
      receivable
            
            
            543
            
            
            
            506
            
            
            
            1,558Inventories
            
            
            13,750
            
            
            
            (11,887
            )
            
            
            (7,232
            )Deposits
      and other assets
            
            
            3,031
            
            
            
            (3,533
            )
            
            
            2,639Accounts
      payable
            
            
            (5,676
            )
            
            
            (9,398
            )
            
            
            16,415Accrued
      expenses
            
            
            1,644
            
            
            
            4,672
            
            
            
            1,006Accrued
      workers’ compensation
            
            
            (673
            )
            
            
            (738
            )
            
            
            5,867Income
      taxes
            
            
            72
            
            
            
            6,013
            
            
            
            (11,540
            )Deferred
      rent
            
            
            2,343
            
            
            
            586
            
            
            
            (731
            )Net
      cash provided by operating activities
            
            
            45,196
            
            
            
            28,506
            
            
            
            82,508Cash
      flows from investing activities:Purchases
      of property and equipment
            
            
            (54,388
            )
            
            
            (47,007
            )
            
            
            (47,600
            )Purchase
      of investments
            
            
            (151,377
            )
            
            
            (125,991
            )
            
            
            (134,984
            )Sale
      and maturity of available for sale securities
            
            
            168,142
            
            
            
            137,366
            
            
            
            96,944Net
      cash used in investing activities
            
            
            (37,623
            )
            
            
            (35,632
            )
            
            
            (85,640
            )Cash
      flows from financing activities:Payments
      of capital lease obligation
            
            
            (56
            )
            
            
            (75
            )
            
            
            (289
            )Proceeds
      from exercise of stock options
            
            
            812
            
            
            
            1,456
            
            
            
            89Proceeds
      from the consolidation of construction loan
            
            
            20
            
            
            
            1,125
            
            
            
            6,174Excess
      tax benefit from share-based payment arrangements
            
            
            130
            
            
            
            645
            
            
            
            —Net
      cash provided by financing activities
            
            
            906
            
            
            
            3,151
            
            
            
            5,974Net
      increase (decrease) in cash
            
            
            8,479
            
            
            
            (3,975
            )
            
            
            2,842Cash
      - beginning of period
            
            
            983
            
            
            
            4,958
            
            
            
            2,116Cash
      - end of period
            
            $
            9,462
            
            
            $
            983
            
            
            $
            4,958




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





41
 Table of Contents





99¢
Only Stores


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS




Fiscal
Years Ended March 29, 2008, March 31, 2007 and March 31, 2006





1.
            Basis
      of Presentation and Summary of Significant Accounting
    Policies




Nature
of Business




99¢ Only
Stores (“the Company”) is incorporated in the State of California. The Company’s
primary business is the sale of various consumer products through its retail
stores at price points of 99¢ or less. As of March 29, 2008, the Company
operated 265 retail stores with 186 in California, 46 in Texas, 22 in
Arizona, and 11 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.





Change
in Fiscal Year





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 will now follow 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 2008 fiscal
year began on April 1, 2007 and ended March 29, 2008.  The Company’s 2009
fiscal year began on March 30, 2008 and will end on March 28,
2009.  Unless specifically indicated otherwise, any reference to
“2006” or “fiscal 2006” relates to as of, or for the period ended, March 31,
2006.  References to “fiscal 2007” refer to the period from April 1,
2006 to March 31, 2007 and “fiscal 2008” refers to the period from April 1, 2007
to March 29, 2008, and so forth.  This change in fiscal year end did
not have a material effect on the comparability of the Company’s consolidated
statements of income for the years ended March 31, 2007 and 2006 and 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 $100,000.  The
Company’s cash balances held at financial institutions and exceeding FDIC
insurance totaled $23.6 million and $1.6 million, respectively as of March 29,
2008 and March 31, 2007. The Company places its temporary cash investments with
high credit, quality financial institutions and limits the amount of credit
exposure to any one financial institution. The Company believes no significant
concentration of credit risk exists with respect to these cash
investments.





42
 Table of Contents





Allowance
for Doubtful Accounts





In
connection with its wholesale business, the Company evaluates the collectibility
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, 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
municipal bonds, corporate bonds and equity securities, auction rate securities,
asset-backed securities, commercial paper and money market funds.  The
auction rate securities have stated interest rates, which typically reset to
prevailing market rates every 35 days or less.  The Company has
reclassified its auction rate securities from current assets to non-current
assets on the Company’s consolidated balance sheets as of March 29,
2008.  See Note 3, “Investments.”  Investment securities are
recorded as required by SFAS No. 115, “Accounting for Certain Investments in
Debt and Equity Securities.” Investments are adjusted for amortization of
premiums or discounts to maturity and such amortization is included in interest
income. 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 that is deemed to be other than temporary will be reported
as a reduction of the carrying amount to fair value.  Such an
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 as well as gross margins.





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 29, 2008
and March 31, 2007, the Company held inventory of specific products identified
that it expected to sell over a period that exceeds twelve months of
approximately $2.1 million and $3.0 million, respectively, which is included in
deposits and other assets in the consolidated financial statements.




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 & 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
            3-5
      yearsTransportation
      equipment
            3-5
      years





43
 Table of Contents





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 Statement of Financial Accounting Standards (“SFAS”) No. 144,
“Accounting for the Impairment or Disposal of Long-lived Assets”, 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.
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 year
2008, the Company recorded an asset impairment charge of $0.5 million related to
one underperforming store in Texas.  No asset impairment charges were
recorded in fiscal 2007.  During fiscal year 2006, the Company
recorded an asset impairment charge of $0.8 million related to one
underperforming store in Texas.





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 SFAS No. 109, “Accounting for Income Taxes,” (“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.
SFAS No. 109 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 the provisions of Financial Accounting Standards
Board, (“FASB”) Interpretation No. 48, “Accounting for Uncertainty in Income
Taxes—an interpretation of FASB Statement No. 109” (“FIN 48”), 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 FIN 48.





Earnings Per
Share




“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).




44
 Table of Contents





A
reconciliation of the basic and diluted weighted average number of shares
outstanding for the years ended March 29, 2008, March 31, 2007 and March 31,
2006 is as follows:


Years
      EndedMarch
      29,
              2008
            
            
            March
      31,
              2007
            
            
            March
      31,
              2006(Amounts
      in thousands, except per share data)Net
      income
            
            $
            2,893
            
            
            $
            9,762
            
            
            $
            11,422Weighted
      average number of common shares outstanding-basic
            
            
            70,044
            
            
            
            69,862
            
            
            
            69,553Dilutive
      effect of outstanding equity awards
            
            
            73
            
            
            
            155
            
            
            
            184Weighted
      average number of common shares outstanding-diluted
            
            
            70,117
            
            
            
            70,017
            
            
            
            69,737Basic
      earnings per share
            
            $
            0.04
            
            
            $
            0.14
            
            
            $
            0.16Diluted
      earnings per share
            
            $
            0.04
            
            
            $
            0.14
            
            
            $
            0.16





Potentially dilutive stock options of
3.5 million, 3.4 million and 3.6 million shares for the years ended March 29,
2008, March 31, 2007 and March 31, 2006, respectively, were excluded from the
calculation of the weighted average number of common shares outstanding because
they were anti-dilutive.




Stock-Based
Compensation




On April
1, 2006, the Company adopted SFAS No. 123 (revised 2004), “Share-Based Payment”
(“SFAS No. 123(R)”). SFAS No. 123(R) requires the Company to recognize expense
related to the estimated fair value of stock-based compensation
awards.  SFAS No. 123(R) supersedes Accounting Principles Board
Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”). SFAS No.
123(R) does not allow the previously permitted pro forma disclosure-only method
as an alternative to financial statement recognition. In March 2005, the
Securities Exchange Commission (“SEC”) issued SAB No. 107, “Share-Based Payment”
(“SAB 107”), which provides guidance regarding the interaction of SFAS No.
123(R) and certain SEC rules and regulations. The Company has applied the
provision of SAB 107 in its adoption of SFAS No. 123(R).





The
Company elected to use the modified prospective transition method as permitted
by SFAS No. 123(R) and therefore has not restated its financial results for
prior periods.  Under the transition method, stock-based compensation
expense includes compensation expense for all stock-based compensation awards
granted prior to, but not vested as of, April 1, 2006 based on the grant date
fair value estimated in accordance with the original provisions of SFAS No. 123,
“Accounting for Stock-Based Compensation” (“SFAS No.
123”).  Stock-based compensation expense for all stock-based awards
granted subsequent to April 1, 2006 was based on the grant date fair value
estimated in accordance with the provisions of SFAS No. 123(R).  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.





SFAS No.
123(R) 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
has estimated the fair value for each 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. Although the Black-Scholes model meets the requirement of
SFAS No. 123(R) and SAB 107, the fair values generated by the model may not be
indicative of the actual fair values of the Company’s awards, as it does not
consider other factors important to those share-based payment awards, such as
continued employment and periodic vesting requirements.  The Company
recognizes the stock-based compensation expense ratably over the requisite
service periods, which is generally a vesting term of 3 years. Stock options
typically have a term of 10 years.





Prior to
the adoption of SFAS No. 123(R), the Company accounted for share-based payment
awards to employees in accordance with APB 25 and related interpretations, and
had adopted the disclosure-only alternative of SFAS No. 123 and SFAS No. 148,
“Accounting for Stock-Based Compensation—Transition and Disclosure.” In
accordance with APB 25, stock-based compensation expense was not recorded in
connection with share-based payment awards granted with exercise prices equal to
or greater than the fair market value of the Company’s common stock on the date
of grant, unless certain modifications were subsequently made.





45
 Table of Contents





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.  The
closing of stores in the future may result in the immediate write-off of
associated deferred rent balances, if any.





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.




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 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.




Pre-Opening
Costs




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





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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 $5.4 million, $5.0 million and $4.4
million for the fiscal years ended March 29, 2008, March 31, 2007 and March 31,
2006, respectively.




Statements
of Cash Flows




Cash
payments for income taxes were $7.8 million, $3.1 million and $22.4 million in
fiscal 2008, 2007 and 2006, respectively.  Interest payments totaled
approximately $0.7 million, $0.8 million and $0.3 million in fiscal 2008, 2007
and 2006, respectively.  Non-cash investing activities included $1.8
million, $0.1 million and $1.6 million in fixed assets purchase accruals for
fiscal 2008, 2007 and 2006, respectively.





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 borrowings. The Company believes all
of the financial instruments’ recorded values approximate fair market value
because of their nature and respective durations. The fair value of marketable
securities is determined using quoted market prices for those securities or
similar financial instruments.





Comprehensive
Income (Loss)




SFAS No.
130, “Reporting Comprehensive Income,” establishes standards for reporting and
displaying comprehensive income/(loss) and its components in the consolidated
financial statements.  Accumulated other comprehensive income/(loss)
includes unrealized gains or losses on investments.  Activity in other
comprehensive income relating to unrealized gain and losses on investments were
as follows:





Years
      EndedMarch
      29,
              2008
            
            
            March
      31,
              2007
            
            
            March
      31,
              2006(Amounts
      in thousands)Net
      unrealized gains (losses) on investments:Net
      unrealized gains (losses), net of tax effect of $469 in fiscal 2008, $141
      in 2007 and $5 in fiscal 2006
            
            $
            (704
            )
            
            $
            227
            
            
            $
            8Reclassification
      adjustment for gains included in net income, net of tax effect of $122 in
      fiscal 2008, $0 in fiscal 2007 and $0 in fiscal 2006
            
            
            (184
            )
            
            
            —
            
            
            
            —Net
      unrealized gains (losses) on investments
            
            $
            ( 888
            )
            
            $
            227
            
            
            $
            8





New
Authoritative Pronouncements




In
September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements”
(“SFAS No. 157”).  This statement clarifies the definition of fair
value, establishes a framework for measuring fair value, and expands the
disclosures on fair value measurements. The provisions of SFAS No. 157 are
effective for fiscal years beginning after November 15, 2007 for financial
assets and liabilities, as well as for any other assets and liabilities that are
carried at fair value on a recurring basis.  The FASB provided for a
one-year deferral of the implementation of this standard for other non-financial
assets and liabilities. The Company does not expect the impact of this statement
to have a material effect on the Company’s consolidated financial position or
results of operations.





In
February 2007, the FASB issued SFAS No. 159, "The Fair Value Option
for Financial Assets and Financial Liabilities—Including an amendment of FASB
Statement No. 115" (“SFAS No. 159”).  SFAS No. 159 permits
companies to choose to measure many financial instruments and certain other
items at fair value at specified election dates. Upon adoption, an entity shall
report unrealized gains and losses on items for which the fair value option has
been elected in earnings at each subsequent reporting date. Most of the
provisions apply only to entities that elect the fair value option. .


47
 Table of Contents




In
December 2007, the FASB issued SFAS No. 141 (revised 2007),
“Business Combinations” (“SFAS No. 141(R)”).  SFAS
No. 141(R) changes the requirements for an acquirer’s recognition and
measurement of the assets acquired and liabilities assumed in a business
combination. SFAS No. 141(R) replaces SFAS No. 141, “Business
Combinations.” SFAS No. 141(R) is effective in fiscal years beginning
after December 15, 2008.  The Company has not determined the
effect, if any, the adoption of this statement will have on the Company’s
consolidated financial position or results of operations.





In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling
Interests in Consolidated Financial Statements”
(“SFAS No. 160”).  SFAS No. 160 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.  SFAS No. 160 is an amendment of Accounting
Research Bulletin No. 51, “Consolidated Financial Statements” and related
interpretations. SFAS No. 160 is effective for fiscal years beginning
on or after December 15, 2008. The Company has not determined the effect,
if any, the adoption of this statement will have on the Company’s consolidated
financial position or results of operations.





2.
            Property
      and Equipment, net





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





Years
      EndedMarch
      29,
              2008
            
            
            March
      31,
              2007Property
      and equipmentLand
            
            $
            64,442
            
            
            $
            65,916Buildings
            
            
            86,970
            
            
            
            87,528Buildings
      improvements
            
            
            46,938
            
            
            
            41,935Leasehold
      improvements
            
            
            136,366
            
            
            
            125,021Fixtures
      and equipment
            
            
            108,357
            
            
            
            98,710Transportation
      equipment
            
            
            3,625
            
            
            
            2,129Construction
      in progress
            
            
            32,886
            
            
            
            15,691Total
      property and equipment
            
            
            479,584
            
            
            
            436,930Less:
      accumulated depreciation and amortization
            
            
            (192,502
            )
            
            
            (163,364
            )Property
      and equipment, net
            
            $
            287,082
            
            
            $
            273,566




48
 Table of Contents





3.
            Investments





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





March
      29, 2008Cost
      or Amortized Cost
            
            
            Gross
      Unrealized Gains
            
            
            Gross
      Unrealized Losses
            
            
            Fair
      ValueAvailable
      for sale:Commercial
      paper and money market
            
            $
            54,938
            
            
            $
            —
            
            
            $
            —
            
            
            $
            54,938Auction
      rate securities
            
            
            18,202
            
            
            
            —
            
            
            
            —
            
            
            
            18,202Municipal
      bonds
            
            
            24,158
            
            
            
            23
            
            
            
            (5
            )
            
            
            24,176Asset-backed
      securities
            
            
            18,338
            
            
            
            37
            
            
            
            (249
            )
            
            
            18,126Corporate
      securities
            
            
            7,708
            
            
            
            276
            
            
            
            (1,181
            )
            
            
            6,803Total
            
            $
            123,344
            
            
            $
            336
            
            
            $
            (1,435
            )
            
            $
            122,245Reported
      as:Short-term
      investments
            
            
            
            
            
            
            
            
            
            
            
            
            
            $
            80,393Long-term
      investments in marketable securities
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            41,852Total
            
            
            
            
            
            
            
            
            
            
            
            
            
            $
            122,245





March
      31, 2007Cost
      or Amortized Cost
            
            
            Gross
      Unrealized Gains
            
            
            Gross
      Unrealized Losses
            
            
            Fair
      ValueAvailable
      for sale:Commercial
      paper and money market
            
            $
            27,520
            
            
            $
            —
            
            
            $
            —
            
            
            $
            27,520Auction
      rate securities
            
            
            41,966
            
            
            
            1
            
            
            
            —
            
            
            
            41,967Municipal
      bonds
            
            
            31,420
            
            
            
            43
            
            
            
            (31
            )
            
            
            31,432Asset-backed
      securities
            
            
            19,086
            
            
            
            30
            
            
            
            (196
            )
            
            
            18,920Corporate
      securities
            
            
            20,725
            
            
            
            399
            
            
            
            (77
            )
            
            
            21,047Total
            
            $
            140,717
            
            
            $
            473
            
            
            $
            (304
            )
            
            $
            140,886Reported
      as:Short-term
      investments
            
            
            
            
            
            
            
            
            
            
            
            
            
            $
            117,013Long-term
      investments in marketable securities
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            23,873Total
            
            
            
            
            
            
            
            
            
            
            
            
            
            $
            140,886





The
auction rate securities we hold generally are long-term debt instruments that
provide liquidity through a Dutch auction process in which interest rates reset
every 7 to 35 days.  Given the historical liquidity created by these
auctions, the Company’s auction rate securities were presented as current assets
under short-term investments on its consolidated balance sheets in prior
periods.  Beginning in February 2008, some auctions of the Company’s
auction rate securities failed.  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 maximum 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’s has reclassified
$15.5 million of its auction rate securities from current to non-current assets
on the Company’s balance sheet as of March 29, 2008. The Company has not
recognized any impairment charges related to these securities.





Non-tax
effected net unrealized losses relating to securities that were recorded as
available for sale securities were $1.1 million as of March 29,
2008.  Non-tax effected net unrealized gains relating to securities
that were recorded as available for sale securities were $0.4 million as of
March 31, 2007.   The tax effected unrealized gains and losses
are included in other comprehensive income or loss in the Consolidated
Statements of Shareholders’ Equity.





Gross
realized gains from sales of available for sale securities were $0.4 million,
$0.3 million and $25,000 for the fiscal years ended March 29, 2008, March 31,
2007 and March 31, 2006, respectively.  Gross realized losses from
sales of available for sale securities during fiscal 2008 and 2007 were
approximately $3,000 and $2,000, respectively.  There were no gross
realized losses from sales of available for sale securities for the twelve
months ended March 31, 2006.





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The
following table summarizes maturities of marketable fixed-income securities
classified as available for sale as of March 29, 2008 (in
thousands):





Amortized
      Cost
            
            
            Fair
      ValueDue
      within one year
            
            $
            25,197
            
            
            $
            25,470Due
      after one year through five years
            
            
            17,739
            
            
            
            17,763Due
      after five years
            
            
            19,715
            
            
            
            19,500$
            62,651
            
            
            $
            62,733








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 29,
      2008Municipal
      bonds
            
            $
            2,053
            
            
            $
            (5
            )
            
            $
            —
            
            
            $
            —Asset-backed
      securities
            
            
            5,475
            
            
            
            (14
            )
            
            
            9,408
            
            
            
            (235
            )Corporate
      securities
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —Equity
            
            
            1,092
            
            
            
            (942
            )
            
            
            —
            
            
            
            —$
            8,620
            
            
            $
            (961
            )
            
            $
            9,408
            
            
            $
            (235
            )





The gross
unrealized losses of $0.9 million for less than twelve months and the $0.2
million losses for twelve months or greater as of March 29, 2008 pertain to 17
securities and primarily were caused by interest rate
increases.  Since the Company has the ability and intent to hold these
securities until a recovery of fair value, which may be at maturity, and because
the unrealized losses were primarily due to higher interest rates, the Company
does not consider these securities to be other-than-temporarily
impaired.  Therefore there were no realized losses recorded for
available for sale securities for other-than-temporary impairments during the
fiscal year ended March 29, 2008.





4.
            Variable Interest
      Entities




The
Company is the primary beneficiary of a variable interest entity to develop a
shopping center in La Quinta, California, in which the Company leases a
store.  As of March 29, 2008, this entity has $9.0 million in assets
and $7.4 million in liabilities, including a bank loan for $7.3 million. As of
March 31, 2007, this entity had $9.0 million in assets and $7.4 million in
liabilities, including a bank loan for $7.3 million. These amounts are shown on
the Company’s consolidated balance sheets as of March 29, 2008 and March 31,
2007.  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.  The timeline for completion of the sale has passed, and the
Company has notified the managing member that the managing member is in default
of closing the transaction within the agreed-upon timeframe. Management does not
now believe it is likely that the sale will close.  In addition, the
partnership has 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, in which the
partnership is in default.  The Company is not a guarantor of this
debt. The Company also has an option to purchase the land and building related
to its store. The Company's lease for the store in the shopping center related
to the La Quinta Partnership will continue regardless of potential sale or
default of the partnership and management believes that  the Company's
operation of that store will be unaffected by any potential
transaction.





The
Company had an interest in two additional partnerships which the Company
consolidated at March 29, 2008 and March 31, 2007 in accordance with FIN 46(R).
The assets of the partnerships consist of real estate with a carrying value of
approximately $3.1 million and there is no mortgage debt or other significant
liabilities associated with the entities, other than notes payable to the
Company. The balance sheet effect of consolidating these entities at both March
29, 2008 and March 31, 2007 is a reclassification of approximately $2.7 million
from investments to property and equipment with no corresponding impact on the
Company’s recorded liabilities.





50
 Table of Contents





In April
2008, the primary asset of one of the Company’s partnerships with an approximate
carrying value of $1.2 million was sold to a third party and is classified as
assets held for sale in Company’s consolidated balance sheets.  The
Company's lease for the store in this partnership will continue after the sale
and the Company's operation of that store will be unaffected by the
transaction.  See Note 12 “Assets Held for Sale” and Note 15
“Subsequent Events.”





5.
            Income
      Tax Provision




The
provision for income taxes consists of the following:




Years
      Ended(Amounts
      in thousands)March
      29,
              2008
            
            
            March
      31,
              2007
            
            
            March
      31,
              2006Current:Federal
            
            $
            5,703
            
            
            $
            8,231
            
            
            $
            9,373State
            
            
            1,188
            
            
            
            1,929
            
            
            
            1,9036,891
            
            
            
            10,160
            
            
            
            11,276Deferred
      - federal and state
            
            
            (9,496
            )
            
            
            (5,921
            )
            
            
            (5,960
            )Provision
      (benefit) for income taxes
            
            $
            (2,605
            )
            
            $
            4,239
            
            
            $
            5,316







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
      29, 2008
            
            
            March
      31, 2007
            
            
            March
      31, 2006Amount
            
            
            Percent
            
            
            Amount
            
            
            Percent
            
            
            Amount
            
            
            PercentIncome
      taxes at statutory federal rate
            
            $
            100
            
            
            
            35.0
            %
            
            $
            4,901
            
            
            
            35.0
            %
            
            $
            5,858
            
            
            
            35.0
            %State
      income taxes, net of federal income tax effect
            
            
            (229
            )
            
            
            (79.9
            )
            
            
            231
            
            
            
            1.7
            
            
            
            (101
            )
            
            
            (0.6
            )Effect
      of permanent differences
            
            
            (420
            )
            
            
            (146.3
            )
            
            
            (816
            )
            
            
            (5.8
            )
            
            
            (1,298
            )
            
            
            (7.8
            )Texas
      NOL tax credit
            
            
            (1,341
            )
            
            
            (466.8
            )
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —Welfare
      to work, LARZ, and other job credits
            
            
            (672
            )
            
            
            (234.0
            )
            
            
            (601
            )
            
            
            (4.3
            )
            
            
            (755
            )
            
            
            (4.5
            )Valuation
      allowance
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            751
            
            
            
            4.5Other
            
            
            (43
            )
            
            
            (15.2
            )
            
            
            524
            
            
            
            3.7
            
            
            
            861
            
            
            
            5.2$
            (2,605
            )
            
            
            (907.2
            )%
            
            $
            4,239
            
            
            
            30.3
            %
            
            $
            5,316
            
            
            
            31.8
            %





The
fiscal year 2008 tax provision includes a benefit for the Texas NOL tax credit
to account for a Texas tax law change.





51
 Table of Contents





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





Years
      Ended(Amounts
      in thousands)March
      29,
              2008
            
            
            March
      31,
              2007CURRENT
      ASSETS (LIABILITIES)Inventory
            
            $
            3,823
            
            
            $
            2,592Uniform
      inventory capitalization
            
            
            4,253
            
            
            
            5,999Prepaid
      expenses
            
            
            (938
            )
            
            
            (1,847
            )Accrued
      expenses
            
            
            3,083
            
            
            
            2,314Workers’
      compensation
            
            
            18,323
            
            
            
            18,611State
      taxes
            
            
            (1,338
            )
            
            
            (1,255
            )Other,
      net
            
            
            2,015
            
            
            
            1,929Valuation
      allowance
            
            
            —
            
            
            
            —Total
      Current Assets (Liabilities)
            
            
            29,221
            
            
            
            28,343NON-CURRENT
      ASSETS (LIABILITIES)Depreciation
      and amortization
            
            
            17,754
            
            
            
            11,267Net
      operating loss carry-forwards
            
            
            5,198
            
            
            
            5,625Deferred
      rent
            
            
            1,690
            
            
            
            1,652FAS
      123(R)
            
            
            4,430
            
            
            
            2,704Other,
      net
            
            
            2,734
            
            
            
            472Valuation
      allowance
            
            
            (3,900
            )
            
            
            (3,960
            )Total
      Non-Current Assets (Liabilities)
            
            
            27,906
            
            
            
            17,760Net
      Deferred Tax Assets
            
            $
            57,127
            
            
            $
            46,103





As of
March 29, 2008, the Company had federal net operating loss carryforwards of
approximately $14.8 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 $2.9 million of California Enterprise Zone
credits that can be carried forward indefinitely, in addition to $2.3 million of
Texas NOL tax credit carryforwards that begin to expire in
2023.   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.  This allowance primarily relates to
the deferred tax assets acquired in the acquisition of Universal International,
Inc.




The
Company adopted the provisions of FIN No 48 on April 1, 2007.  The
implementation of FIN 48 did not result in a change in the estimated liabilities
for unrecognized tax benefits at April 1, 2007.  At March 29, 2008,
the Company had gross unrecognized tax benefits of approximately $1.4 million,
of which, $0.1 million, if recognized, would not have a material impact on the
effective tax rate.





The
Company recognizes interest and penalties for uncertain tax positions in income
tax expense.  In the year ended March 29, 2008, the Company did not
recognize a material amount of interest and penalties.  The Company
has approximately $0.4 million accrued for interest and penalties at March 29,
2008, all of which is included in income taxes payable.





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 29,
      2008
            
            $
            $ 1,381





The
Company files income tax returns in the U.S. federal jurisdiction and various
states.  The Company is subject to examinations by the major tax
jurisdictions for the tax years 2003 through 2007.





52
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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 2008, 2007 and
2006.




7.
            Commitments
      and Contingencies




Credit
Facilities





The
Company recognizes a bank construction loan of $7.3 million in a partnership as
a result of the consolidation of a variable interest partnership
entity.  In May of 2005, the partnership entered into a construction
bank loan with a financial institution to finance the construction of a shopping
center.  See Note 4 to the Consolidated Financial Statements for
further information.





The
partnership can draw construction funds up to $7.5 million as required under
certain terms and conditions during the construction period. The loan bears
interest at the bank prime rate plus 0.5% (5.75% at March 29, 2008), and was to
mature on May 31, 2007. On May 23, 2007, the partnership entered into an
agreement to extend the loan through June 1, 2008.  During fiscal 2008
and 2007, the partnership paid interest costs in the amount of $0.7 million and
$0.8 million, respectively, and no interest was capitalized in each of those
years.  During fiscal 2006, the partnership paid interest costs in the
amount of $0.2 million of which $0.1 million was capitalized. The minority
partner has guaranteed the bank loan, and the Company has not made any
guarantees or incurred direct liability outside the partnership for this
loan.  The assets of the partnership are collateralized under the
construction loan.





The
Company does not maintain any other 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 2031. Some 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
2008, 2007, and 2006 as approximately $54.1 million, $49.3 million, and $45.7
million, respectively, of which $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 2008, 2007, and 2006
was approximately $0.9 million, $0.9 million, and $0.7 million,
respectively.  As of March 29, 2008, 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 Income2009
            
            $
            41,174
            
            
            $
            106
            
            
            $
            7852010
            
            
            36,040
            
            
            
            106
            
            
            
            7292011
            
            
            30,499
            
            
            
            106
            
            
            
            4302012
            
            
            23,871
            
            
            
            106
            
            
            
            3212013
            
            
            17,701
            
            
            
            106
            
            
            
            202Thereafter
            
            
            58,933
            
            
            
            330
            
            
            
            195Future
      minimum lease payments
            
            $
            208,219
            
            
            $
            860
            
            
            $
            2,662Less
      amount representing interest
            
            
            
            
            
            
            (217
            )Present
      value of future lease payments
            
            
            
            
            
            $
            643





The gross
asset amount recorded under the capital leases was $1.0 million as of March 29,
2008 and March 31, 2007.  Accumulated depreciation was $0.5 million
and $0.4 million as of March 29, 2008 and March 31, 2007,
respectively.





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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
29, 2008 and March 31, 2007, the Company had recorded a liability $42.7 million
and $43.5 million respectively, for estimated workers’ compensation claims in
California.  The Company has limited self-insurance exposure and had
recorded a liability less than $0.1 million at each of March 29, 2008 and 2007
for workers’ compensation claims in Texas, and purchases workers’ compensation
insurance coverage in Arizona and Nevada.





Legal
Matters





In
accordance with SFAS No. 5,Accounting for
Contingencies, 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. These provisions are reviewed at least quarterly and adjusted to
reflect the impacts of negotiations, settlements, rulings, advice of legal
counsel and other information and events pertaining to a particular case.
Litigation is inherently unpredictable. The status of legal matters and reserves
for such matters have been estimated through the date of this
report.




Vargas vs. 99¢ Only Stores;
Washington vs. 99¢ Only Stores (coordinated in Ventura County Superior
Court). On June 19, 2006, plaintiff Joanna Vargas filed a putative class
action lawsuit against the Company seeking to represent its California retail
non-exempt employees.  The Vargas lawsuit alleges non-payment of wages,
non-payment of overtime wages, failure to provide or pay for meal or rest breaks
and associated claims.  The Vargas lawsuit seeks compensatory, special and
punitive damages in unspecified amounts, penalties, attorney fees and injunctive
relief.  The Company responded to the Vargas complaint and denied all
material allegations therein.  On October 31, 2006, plaintiff Chantelle
Washington filed a putative class action lawsuit against the Company seeking to
represent its California retail non-exempt cashier employees with respect to
similar claims, alleging the failure to provide or pay for meal or rest breaks
and associated claims.  The Washington lawsuit seeks compensatory damages
and/or penalties in unspecified amounts, as well as equitable relief, attorney
fees and interest.  The Vargas and Washington actions were coordinated in
Ventura County Superior Court.




In
November 2007, the Company and both plaintiffs entered into a settlement
agreement providing for a maximum settlement payment of $3.2 million (including
attorneys’ fees).  On November 30, 2007, the court granted preliminary
approval for the settlement and authorized the parties to provide a notice to
class members about the settlement.  The notice and claims process is
now complete, and the parties have filed a motion for final approval of the
settlement.  Because of the claims-made aspect of the settlement and
the fact that many class members did not submit valid claim forms for their
portion of the settlement, if the settlement is approved in its current form, a
significant portion of the total settlement amount will go unclaimed and remain
the property of the Company, thereby causing it to pay less than $3.2 million
under the settlement.  Based upon the results of the final notice and
claims process, the Company reduced its previous reserve for potential liability
in these cases of $1.5 million as of March 31, 2007 to $1.1 million as of March
29, 2008.




This
settlement, if it is approved by the Court, will result in the dismissal of all
rest and meal period claims and all related claims for non-exempt California
employees that accrued through September 1, 2007 (except for those class members
who opt out of the settlement).   If this settlement is rejected by
the Court, the parties will likely return to the litigation of both lawsuits,
and, in such event, the Company cannot predict the outcome of these matters, and
cannot predict whether or not the outcome will have a material adverse effect on
the Company’s financial condition or results of operations.




Others.The Company is named as a
defendant in numerous other legal matters arising in the normal course of
business. In management’s opinion, none of these matters are expected
to have a material adverse effect on either the Company’s financial
position, results of operations, or overall liquidity.





54
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8.
            Stock-Based
      Compensation Plans




The
Company has one stock plan (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 up to 17,000,000
shares of common stock, of which 976,000 are available as of March 29, 2008 for
future grants.  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, 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
      29,
              2008
            
            
            March
      31,
              2007
            
            
            March
      31,
              2006Beginning
      balance
            
            
            2,870,000
            
            
            
            5,035,000
            
            
            
            4,588,000Authorized
            
            
            —
            
            
            
            —
            
            
            
            —Granted
            
            
            (2,435,000
            )(a)
            
            
            (2,856,000
            )
            
            
            (175,000
            )Cancelled
            
            
            541,000
            (b)
            
            
            691,000
            
            
            
            622,000Available
      for future grant
            
            
            976,000
            
            
            
            2,870,000
            
            
            
            5,035,000





(a) 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
to be issued, if any, depends on the Company’s financial performance over a
period of time.


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




Prior to
April 1, 2006, the Company accounted for this plan under APB Opinion No. 25
under which the Company recognized $0.2 million in stock-based compensation cost
during fiscal 2006. On April 1, 2006, the Company adopted SFAS No. 123(R) using
the modified-prospective method of recognition of compensation expense related
to share-based payments. The Company’s consolidated statements of income for the
twelve months ended March 29, 2008 and March 31, 2007 reflect the impact of
adopting SFAS No. 123(R). In accordance with the modified prospective transition
method, the Company’s consolidated statements of income for the prior periods
have not been restated to reflect, and do not include, the impact of SFAS No.
123(R).  In fiscal 2008 and fiscal 2007, the Company incurred non-cash
stock-based compensation expense of $4.2 million and $5.2 million recorded as
operating expense, before the income tax benefit of $1.7 million and $2.1
million, respectively.




55
 Table of Contents




Pro
Forma Information Under SFAS No. 123 for Periods Prior to Fiscal
2007




Set forth
below is a pro forma illustration of the effect on net income and net income per
share computed as if the Company had valued stock-based awards to employees
using the Black-Scholes option pricing model instead of applying the guidelines
provided by APB 25 (amounts in thousands, except per share data):




Year
      EndedMarch
      31,
              2006Net
      income, as reported
            
            $
            11,422Add:
      Total stock-based employee compensation expense included in reported net
      income, net of related tax effects
            
            
            173Deduct:
      Total stock-based employee compensation expense determined under fair
      value based method for all awards, net of related tax
    effects
            
            
            3,295Pro
      forma net income
            
            $
            8,300Earnings
      per share:Basic-as
      reported
            
            $
            0.16Basic-pro
      forma
            
            $
            0.12Diluted-as
      reported
            
            $
            0.16Diluted-pro
      forma
            
            $
            0.12





Stock
Options





Options
typically vest over a three-year period, one-third one year from the date of
grant and one-third per year thereafter, though an exception was made by the
Company’s Compensation Committee in fiscal 2006, when it granted options that
vested in equal halves over a two year period. Options typically expire ten
years from the date of grant.





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
      29,
              2008
            
            
            March
      31,
              2007
            
            
            March
      31,
              2006Weighted-average
      fair value of options granted
            
            $
            3.82
            
            
            $
            4.36
            
            
            $
            4.41Risk
      free interest rate
            
            
            3.29
            %
            
            
            4.93
            %
            
            
            4.72
            %Expected
      life (in years)
            
            
            4.9
            
            
            
            4.6
            
            
            
            4.6Expected
      stock price volatility
            
            
            54.0
            %
            
            
            41.0
            %
            
            
            42.0
            %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.  Prior to fiscal
2007, the Company used only historical price volatility for the purposes of the
Company’s pro forma information. The Company has not paid dividends in the past
and does not currently plan to pay dividends in the near
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.




56
 Table of Contents








Number
      of Shares
            
            
            Weighted
      Average Exercise Price
            
            
            Weighted
      Average Remaining Contractual Life (Years)
            
            
            Aggregate
      Intrinsic ValueOptions
      outstanding at the beginning of the period
            
            
            6,324,000
            
            
            $
            16.80Granted
            
            
            800,000
            
            
            $
            7.97Exercised
            
            
            (118,000
            )
            
            $
            6.85Cancelled
            
            
            (535,000
            )
            
            $
            15.26Outstanding
      at the end of the period
            
            
            6,471,000
            
            
            $
            16.02
            
            
            
            6.05
            
            
            $
            2,016,000Exercisable
      at the end of the period
            
            
            4,356,000
            
            
            $
            19.21
            
            
            
            4.73
            
            
            $
            27,000Exercisable
      and expected to vest at the end of the period
            
            
            6,335,000
            
            
            $
            16.13
            
            
            
            6.01
            
            
            $
            1,679,000





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 2008.  These amounts
change based upon changes in the fair market value of the Company’s
stock.  The aggregate pre-tax intrinsic value of options exercised in
fiscal 2008 and 2007 was $0.8 million and $2.6 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 2008 and 2007 was $6.8 million and $6.2 million,
respectively.




The
weighted average remaining contractual life, and the weighted average per share
exercise price of options outstanding and of options exercisable as of March 29,
2008 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$  6.50
      — $ 9.50
            
            
            611,000
            
            
            
            9.79
            
            
            $
            6.58
            
            
            
            —
            
            
            $
            —$  9.51
      —
    $14.50
            
            
            2,713,000
            
            
            
            7.50
            
            
            $
            10.58
            
            
            
            1,209,000
            
            
            $
            10.56$
      14.51 —
      $18.75
            
            
            1,505,000
            
            
            
            3.87
            
            
            $
            17.63
            
            
            
            1,505,000
            
            
            $
            17.63$
      18.76 —
      $25.75
            
            
            455,000
            
            
            
            3.08
            
            
            $
            20.52
            
            
            
            455,000
            
            
            $
            20.52$
      25.76 —
      $35.00
            
            
            1,187,000
            
            
            
            4.68
            
            
            $
            29.53
            
            
            
            1,187,000
            
            
            $
            29.536,471,000
            
            
            
            6.05
            
            
            $
            16.02
            
            
            
            4,356,000
            
            
            $
            19.21





As of
March 29, 2008, there was $4.8 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 1.3 years.




Performance
Stock Units




During
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, (2) continuous employment with the Company, and (3) certain
vesting requirements.  The performance period begins 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 29, 2008, the Company had 1.6 million PSUs
issued and outstanding.The following
table summarizes the PSUs activity in fiscal 2008:





57
 Table of Contents




Number
      of Shares
            
            
            Weighted
      Average Fair ValuePSUs
      outstanding at the beginning of the period
            
            
            —
            
            
            
            —Granted
            
            
            1,634,000
            
            
            $
            6.75Forfeited
            
            
            (7,000
            )
            
            $
            6.58Outstanding
      at the end of the period
            
            
            1,627,000
            
            
            $
            6.75Vested
      at the end of the period
            
            
            —
            
            
            
            —





For PSUs,
compensation expense is recognized only when it is probable that the performance
criteria will be met.The fair value of the PSUs
is based on the stock price on the grant date. No PSUs vested during fiscal
2008.  As of March 29, 2008 the unvested future compensation expense
was $11.0 million should all the performance criteria be met within the
specified time frames.




9.
            Operating
      Segments




The
Company has two business segments: retail operations and wholesale distribution.
The wholesale segment, Bargain Wholesale, sells primarily the same merchandise
as the retail segment at prices generally below normal wholesale levels to
local, regional and national distributors and exporters.




The
accounting policies of the segments are the same as those described above in the
summary of significant accounting policies. The Company evaluates segment
performance based on the net sales and gross profit of each segment. Management
does not track segment data or evaluate segment performance on additional
financial information. As such, there are no separately identifiable segment
assets or separately identifiable statements of income data (below gross profit)
to be disclosed. The Company accounts for inter-segment transfers at cost
through its inventory accounts.




The
Company had no customers representing more than 10% of net sales. Substantially
all of the Company’s net sales were to customers located in the United States.
Reportable segment information for the year ended March 29, 2008, March 31, 2007
and 2006 are as follows (amounts in thousands):




Years
      EndedNet
      Sales
            
            March
      29,
              2008
            
            
            March
      31,
              2007
            
            
            March
      31,
              2006Retail
            
            $
            1,158,856
            
            
            $
            1,064,518
            
            
            $
            984,293Wholesale
            
            
            40,518
            
            
            
            40,178
            
            
            
            39,296Total
      sales
            
            $
            1,199,374
            
            
            $
            1,104,696
            
            
            $
            1,023,589Gross
      ProfitRetail
            
            $
            452,243
            
            
            $
            424,555
            
            
            $
            375,756Wholesale
            
            
            8,632
            
            
            
            8,040
            
            
            
            7,693Total
      gross profit
            
            
            460,875
            
            
            
            432,595
            
            
            
            383,449Operating
      expenses
            
            
            433,940
            
            
            
            393,351
            
            
            
            340,371Depreciation
      and amortization
            
            
            33,321
            
            
            
            32,675
            
            
            
            31,424Interest
      income
            
            
            (7,182
            )
            
            
            (7,948
            )
            
            
            (5,059
            )Interest
      expense
            
            
            953
            
            
            
            1,181
            
            
            
            122Other
      expense (income)
            
            
            (445
            )
            
            
            (665
            )
            
            
            (147
            )Income
      before provision for income taxes
            
            $
            288
            
            
            $
            14,001
            
            
            $
            16,738




58
 Table of Contents





10.
            Employee
      Benefit Plans





401(k)
Plan




In 1998,
the Company adopted a 401(k) Plan (the “Plan”).  All full-time
employees were eligible to participate in the Plan after one year of
service.  For the years ended March 29, 2008 and March 31, 2007, the
Company contributed approximately $1.6 million and $0.4 million in matching cash
contributions to the Plan.  For the year ended March 31, 2006, no
matching or discretionary contributions were made.  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.  Prior to fiscal
2007, the Company could elect to match employee contributions or make a
discretionary contribution to the Plan, but historically had elected not to do
so.





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 EITF No. 97-14, “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 $4.2 million and $4.0 million as of March 29,
2008 and March 31, 2007, respectively.




11.
            Quarterly
      Financial Information (Unaudited)




The
following table sets forth certain unaudited results of operations for each
quarter during fiscal years 2008 and 2007. 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 2008 (April 1, 2007 to March 29, 2008)(Amounts
      in thousands, except per share data)(Unaudited)(April
      –
              June)
              1st
      Quarter
            
            
            (July
      –
              September)
              2nd
      Quarter
            
            
            (October
      –
              December)
              3rd
      Quarter
            
            
            (January
      –
              March)
              4th
      QuarterNet
      sales:99¢
      Only Stores
            
            $
            282,857
            
            
            $
            280,617
            
            
            $
            314,630
            
            
            $
            280,752Bargain
      Wholesale
            
            
            10,119
            
            
            
            10,289
            
            
            
            10,345
            
            
            
            9,765Total
            
            
            292,976
            
            
            
            290,906
            
            
            
            324,975
            
            
            
            290,517Gross
      profit
            
            
            114,113
            
            
            
            108,118
            
            
            
            130,505
            
            
            
            108,139Operating
      income (loss)
            
            
            604
            
            
            
            (9,781
            )
            
            
            12,187
            
            
            
            (9,396
            )Net
      income (loss)
            
            $
            2,964
            
            
            $
            (5,171
            )
            
            $
            9,522
            
            
            $
            (4,422
            )Earnings
      (loss) per common share:Basic
            
            $
            0.04
            
            
            $
            (0.07
            )
            
            $
            0.14
            
            
            $
            (0.06
            )Diluted
            
            $
            0.04
            
            
            $
            (0.07
            )
            
            $
            0.14
            
            
            $
            (0.06
            )Weighted
      average shares outstanding:Basic
            
            
            69,999
            
            
            
            70,054
            
            
            
            70,060
            
            
            
            70,060Diluted
            
            
            70,260
            
            
            
            70,054
            
            
            
            70,060
            
            
            
            70,060





59
 Table of Contents




Fiscal
      Year 2007 (April 1, 2006 to March 31, 2007)(Amounts
      in thousands, except per share data)(Unaudited)(April
      –
              June)
              1st
      Quarter
            
            
            (July
      –
              September)
              2nd
      Quarter
            
            
            (October
      –
              December)
              3rd
      Quarter
            
            
            (January
      –
              March)
              4th
      QuarterNet
      sales:99¢
      Only Stores
            
            $
            254,001
            
            
            $
            251,769
            
            
            $
            291,595
            
            
            $
            267,153Bargain
      Wholesale
            
            
            9,613
            
            
            
            9,333
            
            
            
            10,456
            
            
            
            10,776Total
            
            
            263,614
            
            
            
            261,102
            
            
            
            302,051
            
            
            
            277,929Gross
      profit
            
            
            99,890
            
            
            
            101,968
            
            
            
            121,114
            
            
            
            109,623Operating
      income (loss)
            
            
            141
            
            
            
            (1,712
            )
            
            
            10,632
            
            
            
            (2,492
            )Net
      income (loss)
            
            $
            1,857
            
            
            $
            (5
            )
            
            $
            8,944
            
            
            $
            (1,034
            )Earnings
      (loss) per common share:Basic
            
            $
            0.03
            
            
            $
            0.00
            
            
            $
            0.13
            
            
            $
            (0.01
            )Diluted
            
            $
            0.03
            
            
            $
            0.00
            
            
            $
            0.13
            
            
            $
            (0.01
            )Weighted
      average shares outstanding:Basic
            
            
            69,684
            
            
            
            69,914
            
            
            
            69,919
            
            
            
            69,933Diluted
            
            
            69,877
            
            
            
            69,914
            
            
            
            69,986
            
            
            
            69,933





During
the fourth quarter of fiscal 2008, the Company recorded higher than expected
inventory shrink of $5.5 million based on the physical inventory
counts.





12.
            Assets
      Held for Sale





Assets
held for sale consist primarily of the Company’s warehouse in Eagan, Minnesota,
and a primary asset of one of the Company’s partnerships.  The book
value of the warehouse at March 29, 2008 was $7.4 million and the book value of
the primary asset of one of the Company’s partnerships was approximately $1.2
million.  Company commenced marketing the sale of the warehouse during
the fourth quarter of fiscal 2008 and anticipates selling the warehouse in
excess of the book value.  No assurance can be given as to when and
for how much the warehouse will be sold.  The primary asset of one the
Company’s partnerships was sold in April 2008 detail of which is discussed in
Note 15 “Subsequent Events”.





13.
            Other
      Current Liabilities





Other
current liabilities as of March 29, 2008 and March 30, 2007 are as
follows:





Years
      EndedMarch
      29,
              2008
            
            
            March
      31,
              2007(Amounts
      in thousands)Accrued
      legal reserves and fees
            
            $
            3,049
            
            
            $
            2,956Accrued
      property taxes
            
            
            2,814
            
            
            
            3,081Accrued
      utilities
            
            
            2,255
            
            
            
            2,145Accrued
      rent and related expenses
            
            
            2,167
            
            
            
            2,225Accrued
      accounting fees
            
            
            942
            
            
            
            1,346Accrued
      advertising
            
            
            575
            
            
            
            577Other
            
            
            4,709
            
            
            
            4,945Total
      other current liabilities
            
            $
            16,511
            
            
            $
            17,275





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14.
            Cumulative
      Effect Adjustment Under SAB No. 108





In
September 2006, the SEC staff issued Staff Accounting Bulletin No. 108,
"Considering the Effects of Prior Year Misstatements when Quantifying
Misstatements in Current Year Financial Statements." SAB 108 was issued in order
to eliminate the diversity of practice surrounding how public companies quantify
financial statement misstatements.




SAB 108
permits existing public companies to initially apply its provisions either by
(i) restating prior financial statements as if the "dual approach" had always
been applied or (ii) recording the cumulative effect of initially applying the
"dual approach" as adjustments to the carrying values of assets and liabilities
with an offsetting adjustment recorded to the opening balance of retained
earnings. The Company elected to record the effects of applying SAB 108 using
the cumulative effect transition method. The Company early adopted SAB 108 as of
April 1, 2005, the first day of fiscal 2006.  The following table
summarizes the effects (up to March 31, 2005) of applying the guidance in SAB
108 (in thousands):




Period
      in which the
              Misstatement
      Originated (1)Cumulative
      Prior to
              December
      31,
            
            
            Year
      Ended
              December
      31,
            
            
            Three
      Months Ended
              March
      31,
            
            
            Adjustment
      Recorded as of April 1,2002
            
            
            2003
            
            
            2004
            
            
            2005
            
            
            2005Non-cash
      stock compensation (2)
            
            $
            1,780
            
            
            $
            369
            
            
            $
            243
            
            
            $
            53
            
            
            $
            2,445Long-term
      deferred income tax assets (3)
            
            
            (389
            )
            
            
            71
            
            
            
            (50
            )
            
            
            (1
            )
            
            
            (369
            )Impact
      on net income (4)
            
            $
            1,391
            
            
            $
            440
            
            
            $
            193
            
            
            $
            52Retained
      earnings (5)
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            $
            2,076





(1) The
Company quantified these errors under the roll-over method and concluded that
they were immaterial.





(2) The
Company noted certain deficiencies in the process of granting and documenting
stock options. The Company noted 6 instances from 1996 to 2004 relating to
annual stock option grants where a difference existed between the Compensation
Committee Board approval date and the measurement date actually used resulting
in a total error of $1.9 million. The Company also noted certain errors relating
to option grants to newly hired employees where the grant date was a few days
before or after the employee start dates. Total error relating to these grants
was approximately $50,000. Finally, the Company noted errors relating to seven
non-employees where the Company incorrectly used APB 25 as opposed to SFAS No.
123 “Accounting for Stock-Based Compensation” to value their grants resulting in
an error of $0.5 million. Measurement dates for non-employee grants were
determined based on EITF Issue No. 96-18, “Accounting for Equity Instruments
that are Issued to Other Than Employees for Acquiring, or in Conjunction with
Selling, Goods or Services.” As a result of the errors mentioned above, the
Company’s selling, general and administrative expenses were understated by $1.8
million in years 1996 to 2002, $0.4 million in 2003, $0.2 million in 2004 and
$0.1 million for the three months ended March 31, 2005. The Company recorded a
$2.4 million increase in common stock as of April 1, 2005 with a corresponding
reduction in retained earnings to correct these misstatements.





(3) As a
result of the misstatements described above, the Company’s provision for income
taxes was overstated by $0.4 million. The Company recorded an increase in its
long-term deferred income tax assets in the amount of $0.4 million as of April
1, 2005 with a corresponding increase in the retained earnings.





(4)
Represents the net overstatement of net income for the indicated periods
resulting from these misstatements.





(5)
Represents the net reduction to retained earnings recorded as of April 1, 2005
to record the initial application of SAB 108.





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15.          Subsequent
Event





In April
2008, the primary asset of one of the Company’s real estate partnerships with an
approximate carrying value of $1.2 million was sold to a third
party.  The Company's lease for the store in this partnership will
continue after the sale and the Company's operation of that store will be
unaffected by the transaction.  Net proceeds to the partnership of the
sale were $3.4 million.  The transaction will be recorded as a sale
leaseback in the first quarter of fiscal 2009.





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





None.





Item9A. 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 due to the material weakness in inventory
accounting, the Company’s disclosure controls and procedures were not
effective.





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. The
COSO framework summarizes each of the components of a company’s internal control
system, including the: (i) control environment, (ii) risk assessment, (iii)
information and communication, and (iv) monitoring (collectively, the
“entity-level controls”), as well as a company’s control activities
(“process-level controls”). In addition to utilizing substantial internal
resources, management also engaged outside consulting firms to assist in various
aspects of its evaluation and compliance efforts.





In fiscal
2008, management completed its documentation and evaluation of the design of the
Company’s internal control over financial reporting. Management then commenced
testing to evaluate the operating effectiveness of controls in the following
areas: (a) control environment, (b) legal, (c) income taxes, (d) treasury, (e)
fixed assets, (f) workers’ compensation, (g) financial reporting and close, (h)
revenue, (i) human resources/payroll, (j) procure to pay, (k) inventory
management, and (l) information technology.  Based on this evaluation
and testing, management concluded that there was a material weakness in
inventory accounting, as described more fully below.  Due to this
material weakness, management concluded that the Company’s internal control over
financial reporting was not effective as of March 29, 2008.





A
"material weakness" is defined as a significant deficiency or combination of
significant deficiencies that results in more than a remote likelihood that a
material misstatement of the annual or interim financial statements will not be
prevented or detected. A “significant deficiency” is defined as a control
deficiency, or combination of control deficiencies, that adversely affects the
Company’s ability to initiate, authorize, record, process, or report external
financial information reliably in accordance with generally accepted accounting
principles such that there is more than a remote likelihood that a misstatement
of the Company’s annual or interim financial statements that is more than
inconsequential will not be prevented or detected.





Management
identified the following material weakness in the Company’s internal control
over financial reporting as of March 29, 2008:





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As of
March 29, 2008, there was an internal control weakness surrounding the Company’s
inventory accounts.  The Company did not maintain accurate records of
specific item quantity and location of its inventory and therefore relied
primarily on physical counting of inventory and its existing transactional
controls.  The nature, size and number of locations make it infeasible
to physically count the entire inventory every quarter.  These factors
in combination with control deficiencies surrounding inventory accounts related
to store receiving and store returns result in more than a remote likelihood
that a material misstatement of the annual or interim financial statements will
not be prevented or detected.





Changes
in Internal Control Over Financial Reporting





During
the fourth quarter of fiscal 2008, the Company did not make any change in its
internal control over financial reporting that has materially affected, or is
reasonably likely to materially affect, its internal control over financial
reporting.





Although
the Company implemented a number of remediation initiatives during the second
and third quarters of fiscal 2008, and is continuing to improve the Company’s
internal control over financial reporting in fiscal 2009, there can be no
assurance that the Company will eliminate the aforementioned material weakness
in fiscal 2009.  A summary of fiscal 2009 remediation plans, and
remediation of prior material weaknesses reported in fiscal 2007 and calendar
2004 are provided below.





Planned
Remediation of Fiscal 2008 Material Weakness





To
partially remediate the Company’s material weakness surrounding its inventory
accounts, the Company has carried out the following remediation
activities:


·
              Designed
      and developed systems and procedures for tracking inventory movements
      between stores, stores and warehouses, and between
    warehouses.
 ·
              Implemented
      accounting procedures to reconcile and monitor inventory costs and
      balances by location each month, and report exceptions and trends in
      account balances.
 ·
              Enhanced
      store physical inventory count procedures to ensure more accurate physical
      counts.
 ·
              Recruited
      an adequate number of experienced permanent accounting
    staff.
 ·
              Developed
      and improved standard operating procedures and job descriptions to support
      accounting and field operations training and implementation of key
      controls.
 ·
              Implemented
      perpetual inventory systems in all warehouse locations except the Commerce
      warehouse.
 ·
              Improved
      change controls for information technology systems development and
      implementation.
  The
Company plans to continue its remediation efforts and believes that it will
remediate its remaining inventory material weakness by completing the following
remediation activities:


·
              Complete
      implementation and operational effectiveness of transaction level
      tracking, monitoring, and exception reporting for all inventory
      movements.
 ·
              Implementation
      of inventory accounting systems and procedures enhancements to establish
      near real-time cutoffs, roll-forwards reports of theoretical inventory
      balances, and daily and weekly exception reporting for reconciliation of
      certain key accounting controls.
 ·
              Completion
      of inventory racking and real-time tracking of inventory movements within
      the Commerce warehouse.
 ·
              Implementation
      of enhanced store inventory physical counts and account balances by
      category of merchandise to support interim cycle counts of departments and
      investigation of inventory buildups between physical
    counts.
 ·
              Further
      enhancement of store level training and operational effectiveness of
      systems and procedures for store receiving and store-to-store transfers of
      inventory.


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Remediation
of Fiscal 2007 Material Weakness





As of
March 31, 2007, a material weakness was identified that specifically related to
the area of construction-in-progress reconciliations of new stores. The controls
which had been implemented in prior years failed to operate for the final
quarter of the fiscal year ended March 31, 2007. In particular, there were
several stores whose assets had not been reclassified from
construction-in-progress to fixed assets, and the Company was unable to provide
a reconciliation between its fixed asset sub-ledgers and general ledger in a
timely fashion to address this issue.





To
address the material weakness relating to construction-in-progress, the
following remediation activities were carried out during the first three
quarters of fiscal 2008:


·
              The
      Company implemented physical inventories of certain
      construction-in-progress assets.
 ·
              The
      Company reconciled its fixed assets sub-ledgers to its general ledger on a
      timely basis.
 ·
              The
      Company reconciled its construction-in-progress accounts on a timely basis
      to mitigate any material errors.
 ·
              The
      Company improved the recently implemented detailed management review
      controls of its construction-in-progress accounts, including the transfer
      of fixed assets in use from construction-in-progress to the fixed assets
      sub-ledgers to mitigate any material
errors.


Management
concluded that the above control enhancements implemented in fiscal 2008,
successfully remediated the material weakness related to
construction-in-progress reconciliations of new stores as of March 29,
2008.





Remediation
of 2004 Material Weaknesses





In our
2004 annual report on Form 10-K, we disclosed material weaknesses in our
internal control over financial reporting as they existed as of December 31,
2004. These material weaknesses, as they existed in December 31, 2004, and the
corresponding subsequent remediation measures undertaken by management, are as
follows:





Material
weaknesses related to the control environment.Management concluded that
it did not maintain a control environment that fully emphasized the
establishment of, adherence to, or adequate communication regarding appropriate
internal control for all aspects of its operations. Specifically, management
concluded that the Company did not have adequate controls in the following areas
for the purposes of establishing, maintaining and communicating its control
environment: (i) a sufficient number of or appropriate depth of experience
for its accounting and finance, inventory management, real estate management,
information technology, or internal audit personnel, (ii) a robust risk
assessment or adequate compliance function, (iii) adequate segregation of
duties, supervisory controls or information system controls in certain
departments, (iv) adequate records storage and retention in the accounts
payable, fixed assets, human resources, inventory pick ticketing, and real
estate departments, where some records were missing or lost, (v) an adequate
process to identify, record and disclose all appropriate and significant
financial information and transactions, or (vi) an adequate monitoring program,
including full testing of its internal control systems and a comprehensive
internal audit function. These weaknesses increased the likelihood of potential
material errors in our financial reporting.





To
address the material weakness discussed above, the following remediation
activities were undertaken:


·
              The
      Audit Committee of the Board of Directors and the Company’s management
      hired an experienced third party risk management firm that guided
      management in the remediation of prior weaknesses and now operates as our
      internal audit function.
 ·
              Management
      conducted an annual enterprise wide risk assessment, and developed an
      internal audit plan which monitors management’s performance as it pertains
      to financial, operational and compliance control
    activities.
 ·
              Management
      invested in full time and temporary personnel to eliminate prior disclosed
      voids in the following areas: accounting and finance, information systems,
      accounts payable, fixed assets, human resources, inventory management,
      real estate, and legal, amongst other areas. Management developed a
      process to train these employees on the importance of internal controls
      and has continued to refine the processes and systems which enhance
      segregation of duties.





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 Table of Contents





Material
weaknesses related to the identification, evaluation, design, documentation and
application of accounting policies and procedures.During 2004, the
Company identified the following significant deficiencies, which were considered
a material weakness when aggregated. Management identified areas where internal
control was missing, including inadequate documentation of accounting policies
and procedures, inadequate cutoff procedures and a lack of properly documented
management review controls. Management also concluded that its policies and
procedures for the summarization and resolution of unusual or complex accounting
matters were not adequate. These deficiencies increased the likelihood of
potential material errors in our financial reporting.





During
the 2004 year-end financial closing and reporting process, management also
discovered that certain of the Company’s accounting policies and procedures were
not applied properly. The Company did not calculate depreciation of building
improvements for its owned and leased stores in accordance with appropriate
economic lives or its disclosed accounting policies. Also, for certain store
leasing transactions, the Company did not properly account for rent holidays and
tenant improvement allowances. Additionally, the Company determined that its
presentation of cash flows from the purchase and sale of investments in the
consolidated statements of cash flows should be presented as operating cash
flows rather than investing cash flows as was previously reported. These
material weaknesses resulted in restatement of the Company’s prior annual and
quarterly financial statements, and adjustments to present the Company’s
financial statements for the year ended December 31, 2004 in accordance with
generally accepted accounting principles.





To
address the material weaknesses discussed above, the following remediation
activities were undertaken:


·
              Management
      developed accounting policies and procedures which provide the framework
      for accounting close processes, internal controls and related aspects of
      GAAP. These policies were rolled out to related personnel during in-house
      training sessions.
 ·
              Management
      hired an experienced third party consulting firm to redirect its close
      processes such that critical tasks were distributed more evenly across the
      broader group of accounting personnel with the consideration of the time
      needed to enhance the quality of output. The project concluded with the
      development of a new close schedule and task list which includes key
      management review and related internal controls over financial
      reporting.
  Management
concluded that the above control enhancements implemented subsequent to 2004
successfully remediated the material weaknesses relating to identification,
evaluation, design, documentation and application of accounting policies and
procedures, as of March 31, 2007.





Material weakness
related to preparation of account analyses, account summaries and account
reconciliations.
During the 2004 year-end closing and financial reporting process, the Company
identified the following significant deficiencies, which were considered a
material weakness when aggregated. In some cases, inaccurate or incomplete
account analyses, account summaries and account reconciliations were prepared
during the year-end financial closing and reporting process in the areas of
accounts receivable, inventory, other current assets, fixed assets, other
assets, accrued expenses, deferred rent and stock options. These deficiencies
increased the likelihood of potential material errors in our financial
reporting.





To
address the material weakness discussed above, the following remediation
activities were undertaken:


·
              Management
      developed accounting policies and procedures, and re-engineered its
      accounting function, tactical closing activities and internal controls
      such as account analysis, account reconciliations and trial balance
      reviews by appropriate levels of
management.
  Management
concluded that the above control enhancements implemented subsequent to 2004,
successfully remediated the material weakness relating topreparation of account
analyses, account summaries and account reconciliations, as of March 31,
2006.





Material weakness
related to significant deficiencies in merchandise inventory
management.During 2004, the Company
identified the following significant deficiencies, which were considered a
material weakness when aggregated. Formal buying limits and purchase approval
thresholds were not finalized or implemented for merchandise purchasing.
Merchandise shipped from the warehouses to the stores was not adequately spot
checked. Also, the store inventory transfer reports and inventory scrap reports
were not consistently utilized. Additionally, there was no formal review of
certain processes associated with the corporate inventory management system.
Specifically, there was: (i) no formal review of input of new product data,
including merchandise costs and retail selling prices, (ii) no formal review of
certain changes to the inventory master data file, and (iii) no periodic review
of the inventory master data file. Furthermore, the warehouse perpetual
inventory records in the inventory master data file were not reconciled to the
general ledger. These deficiencies increased the likelihood of potential
material errors in our financial reporting.





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 Table of Contents





Material weakness
related to merchandise inventory costing and valuation procedures.During
the 2004 year-end financial closing and reporting process, management concluded
that certain merchandise inventory costs were not accurate due to inventory
master file data not being updated or lack of proper inventory pricing data
review. Consequently, due to these inventory costing errors, the Company
materially increased cost of sales and reduced the inventory balance.
Additionally, as of December 31, 2004, the Company’s inadequately supported
inventory shrinkage allowance and book-to-physical inventory reserves had to be
adjusted, resulting in a material increase in the inventory balance and a
corresponding reduction in cost of sales.





To
address the material weaknesses discussed above, the following remediation
activities were undertaken:


·
              Management
      has invested, and will continue to invest, significantly in the
      remediation of the internal controls over financial reporting that exist
      at the point of data entry (vendor and item master file), to inventory
      movement transactions (receiving, storage, shipping), as well as inventory
      accounting practices (cycle counts, full physicals, and related
      reserves).
 ·
              Management
      implemented controls over all of the areas previously identified as
      representing significant deficiencies in merchandise inventory management
      with the exception of store receiving controls and discrepancy reporting.
      Management plans to implement controls over store receiving and
      discrepancy reporting in fiscal
2009.
 ·
              Management
      implemented controls in the distribution center that include an additional
      out-bound audit control which spot checks the accuracy of inventory
      movement and has found that the error rate is
  immaterial.
 ·
              Management
      implemented controls around the item master file which require an
      independent review and approval of all changes made to the costing file in
      order to increase the accuracy of the underlying data. In addition, a
      robust pricing test was performed by management to validate the accuracy
      of the inventory values used in the determination of its cost of
      sales.
  Notwithstanding
the implementation of each of the above-described controls prior to the end of
fiscal 2007, management concluded that it had not remediated the material
weakness relating to its inventory accounts.  The inventory material
weakness is believed to be driven by: (a) control deficiencies surrounding
inventory accounts related to store receiving and store returns that result in
more than a remote likelihood that a material misstatement of the annual or
interim financial statements will not be prevented or detected in combination
with (b) the non-existence of a perpetual inventory system within all of the
distribution facilities that permit a real-time synchronization between the
on-hand inventory balance in the sub-ledger and the general
ledger.  As discussed above, the Company plans to remediate the
remaining inventory control deficiencies.





Material weakness
related to significant deficiencies in property and equipment
management.During 2004, the Company
identified the following significant deficiencies, which were considered a
material weakness when aggregated. There was no formal purchasing system or
asset disposal system to help manage property and equipment. Additionally, there
was no formal review of certain processes associated with the corporate fixed
asset management system. Specifically, there was: (i) no review of input of new
acquisitions of property and equipment, (ii) no review of changes to the fixed
asset master data file, and (iii) no periodic review of the fixed asset master
data file. Furthermore, certain leases were not evaluated properly for capital
or operating lease treatment, and there was no comprehensive impairment
calculation prepared for all long-term assets. These deficiencies increased the
likelihood of potential material errors in our financial reporting.





Material weakness
related to recording and classification of property and equipment.During
the 2004 year-end financial closing and reporting process, a material weakness
was identified regarding the improper recording and classification of certain
property and equipment, including year-end purchasing cutoff errors and
inappropriate classification of certain assets. During this process, certain
fixed assets had to be recorded that were purchased prior to the end of the
year, and were not previously recorded as of December 31, 2004. Also, a
significant amount of acquired property and equipment was identified that was
improperly classified as prepaid escrow deposits as of December 31, 2004. Upon
discovery, this amount was reclassified primarily to land and buildings.
Additionally, certain construction in progress had to be reclassified to other
categories of property and equipment because the assets had been placed in
service and depreciation expense had to be recorded.





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 Table of Contents





To
address the material weaknesses discussed above, the following remediation
activities were undertaken:


·
              Management
      implemented fixed asset controls relating to the acquisition of new
      products and services (via a purchasing system), as well as the tracking
      and disposal of those assets.
 ·
              Management
      performed a review of all existing assets as listed in the sub-ledger for
      accuracy at the store-by-store level. Furthermore, an ongoing audit was
      implemented to reconcile store assets to the asset
    sub-ledger.
  Management
concluded that the above control enhancements implemented subsequent to 2004
successfully remediated the material weaknesses relating to property and
equipment, as of March 31, 2006.





Material weakness
related to significant deficiencies in management information systems and
information technology. During 2004, the Company identified the following
significant deficiencies, which were considered a material weakness when
aggregated. Management concluded that the Company’s management information
systems and information technology internal control design was deficient because
the potential for unauthorized access to certain information systems and
software applications existed during 2004 in several departments, including
corporate accounting, accounts payable, fixed assets, human resources, inventory
management, payroll and the retail stores. Additionally, certain key controls
for maintaining the overall integrity of systems and data processing were not
properly designed and operating effectively. These deficiencies increased the
likelihood of potential material errors in our financial reporting.





To
address the material weakness discussed above, the following remediation
activities were undertaken:


·
              Management
      hired consulting resources to advise the existing management team as to
      what practices should be enhanced to improve controls over our information
      technology function.
 ·
              Management
      hired full time resources at the executive, management and execution level
      to continue the evaluation, enhancement and upgrade of the Company’s
      systems. Specifically as it pertains to internal controls over financial
      reporting, management assessed and implemented controls relating to: (i)
      physical and logical security; (ii) system development; (iii) backup and
      recovery; (iv) data center operations; and (v) change management testing
      and controls.
  Management
concluded that the above control enhancements implemented subsequent to 2004
successfully remediated the material weakness relating tomanagement information
systems and information technology as of March 31, 2006.





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Report
of Independent Registered Public Accounting Firm








The Board
of Directors and Stockholders


99¢ Only
Stores


Commerce,
California








We have
audited 99¢ Only Stores’ (the “Company”) internal control over financial
reporting as of March 29, 2008, 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.





A
material weakness is a deficiency, or a combination of deficiencies, in internal
control over financial reporting, such that there is a reasonable possibility
that a material misstatement of the company’s annual or interim financial
statements will not be prevented or detected on a timely basis. The following
material weakness has been identified and included in management’s
assessment:





As of March 29, 2008, there was
internal control weakness surrounding the Company’s inventory
accounts.  The Company did not maintain accurate records of specific
item quantity and location of its inventory and therefore relied primarily on
physical counting of inventory and its existing transactional
controls.  The nature, size and number of locations make it infeasible
to physically count the entire inventory every quarter.  These factors
in combination with control deficiencies surrounding inventory accounts related
to store receiving and store returns result in more than a remote likelihood
that a material misstatement of the annual or interim financial statements will
not be prevented or detected.





This
material weakness was considered in determining the nature, timing, and extent
of audit tests applied in our audit of the 2008 financial statements, and this
report does not affect our report dated June 10, 2008 on those financial
statements.





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In our
opinion, 99¢ Only Stores did not maintain, in all material respects, effective
internal control over financial reporting as of March 29, 2008, 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 29, 2008 and March 31, 2007 and the related consolidated
statements of income, stockholders’ equity, and cash flows for the years ended
March 29, 2008 and March 31, 2007 and 2006 and our report dated June 10, 2008
expressed an unqualified opinion thereon.








/s/
      BDO Seidman, LLPLos
      Angeles, CaliforniaJune
      10, 2008








Item
9B. Other
Information




On June
9, 2008, the Board of Directors of the Company amended and restated the
Company's Amended and Restated Bylaws to: (i) adopt new provisions requiring
advance notice of shareholder nominations of board candidates and other business
to be brought by shareholders before an annual or special meeting of
shareholders, (ii) amend the provisions related to voting for directors to
conform with changes in California law, including to provide for a majority vote
requirement in an uncontested election and a plurality vote requirement in a
contested election, (iii) amend the provisions related to officers of the
Company to distinguish between the positions of Chief Executive Officer and
President, and (iv) remove the provisions requiring the mailing of annual
reports and annual financial statements to shareholders in light of the federal
e-proxy rules and pending changes to California law which would remove these
requirements, as well as to make related conforming and mechanical changes and
other minor revisions to conform with changes in California law since the
Company's bylaws were last amended and restated. The foregoing description of
the amendments to the Company's Amended and Restated Bylaws is qualified in its
entirety by the text of the Amended and Restated Bylaws, which is attached
hereto as Exhibit 3.2 and is incorporated herein by reference.





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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 2008 Annual Meeting of Shareholders, which
will be filed with the Commission no later than 120 days after the end of the
Company’s 2008 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 2008 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 2008 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 2008 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 2008 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 36 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 29, 2008Allowance
      for doubtful accounts
            
            $
            252
            
            
            
            81
            
            
            
            174
            
            
            $
            159Inventory
      reserve
            
            $
            3,750
            
            
            
            683
            
            
            
            2,348
            
            
            $
            2,085Tax
      valuation allowance
            
            $
            3,960
            
            
            
            —
            
            
            
            60
            
            
            $
            3,900For
      the year ended March 31, 2007Allowance
      for doubtful accounts
            
            $
            137
            
            
            
            254
            
            
            
            139
            
            
            $
            252Inventory
      reserve
            
            $
            8,764
            
            
            
            1,702
            
            
            
            6,716
            
            
            $
            3,750Tax
      valuation allowance
            
            $
            5,517
            
            
            
            —
            
            
            
            1,557
            
            
            $
            3,960For
      the year ended March 31, 2006Allowance
      for doubtful accounts
            
            $
            189
            
            
            
            77
            
            
            
            129
            
            
            $
            137Inventory
      reserve
            
            $
            6,849
            
            
            
            2,840
            
            
            
            925
            
            
            $
            8,764Tax
      valuation allowance
            
            $
            4,766
            
            
            
            751
            
            
            
            —
            
            
            $
            5,517





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Exhibit Index
            Exhibit
      Description3.1
            Amended
      and Restated Articles of Incorporation of the
    Registrant.(2)3.2
            Amended
      and Restated Bylaws of the Registrant. *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. *10.2
            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*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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21.0
            Subsidiaries*23.1
            Consent
      of BDO Seidman, LLP*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.




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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 10K 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
              
              June
      10, 2008/s/
      Eric SchifferEric
      Schiffer
              
              Chief
      Executive Officer and Director (principal executive
    officer)
              
              June
      10, 2008/s/
      Jeff GoldJeff
      Gold
              
              President,
      Chief Operating Officer and Director
              
              June
      10, 2008/s/
      Howard GoldHoward
      Gold
              
              Executive
      Vice President of Special Projects and Director
              
              June
      10, 2008/s/
      Robert KautzRobert
      Kautz
              
              Executive
      Vice President and Chief Financial Officer (principal financial officer
      and principal accounting officer)
              
              June
      10, 2008/s/
      Eric FlamholtzEric
      Flamholtz
              
              Director
              
              June
      10, 2008/s/
      Lawrence GlascottLawrence
      Glascott
              
              Director
              
              June
      10, 2008/s/
      Marvin L. HolenMarvin
      L. Holen
              
              Director
              
              June
      10, 2008/s/
      Jennifer Holden DunbarJennifer
      Holden Dunbar
              
              Director
              
              June
      10, 2008/s/
      Peter WooPeter
      Woo
              
              Director
              
              June
      10, 2008






75