MILBERG WEISS BERSHAD & SCHULMAN LLP 2 JEFF S. WESTERMAN (94559) ELIZABETH P. LIN (174663) 3 KRISTEN MCCULLOCH (177558) 355 S. Grand Ave., Suite 4170 ORI 41 Los An eles CA 90071-3172 GI NAL Tele hone : (213) 617-1200 U 5 (213) 617-1975 (fax) ^-'!^^ email: jwesterman milbergweiss . com F1 1 .p 6 email: elin @Trilbergweiss . com CLERK , U.S. DI T. !CT COURT email : [email protected] 7 MUCH SHELIST FREED DENENBERG 4AP29 2005 8 AMENT & RUBENSTEIN, P.C. CAROL V. GILDEN CALIFORNIA 9 JOSEPH D. AMENT DEPUTY CONOR R. CROWLEY 10 191 North Wacker Drive. , Suite 1800 Chicago, IL 60606 1 1 Tele hone: (312) 521-2000 (312 521 -2100 (fax) 12 Co-Lead Counsel for the Class 13 UNITED STATES DISTRICT COURT 14 CENTRAL DISTRICT OF CALIFORNIA 15 WESTERN DIVISON 16

17 JOSEPH BOODAIE, MOJGAN No. CV 04-04273 PA (CTx) BOODAIE and SAMUEL TOOVY 18 Plaintiffs SECOND AMENDED 19 CONSOLIDATED COMPLAINT FOR v. VIOLATIONS OF THE FEDERAL 20 SECURITIES LAWS 99 CENTS ONLY STORES, DAVID 21 GOLD, ERIC SCHIFFER ANDREW CLASS A. FARINA, HOWARD GOLD and ACTION 22 JEFF GOLD 23 Defendants. DEMAND FOR JURY TRIAL 24 25 IN RE 99 CENTS ONLY STORES SECURITIES LITIGATION 26 27 28

DOCS\279669v1 44 N

Lead Plaintiffs, individually and on behalf of all others similarly 1 situated, by their attorneys, make the following allegations for their 2 Consolidated Class Action Complaint. These allegations are based on Lead 3 Plaintiffs' personal knowledge as to themselves and their purchases of 99 4 Cents Only Stores ("99 Cents" or the "Company") securities, and on 5 information and belief derived from investigation by their counsel as to all 6 other matters. The investigation by counsel included review of public filings 7 by 99 Cents with the United States Securities and Exchange Commission 8 ("SEC"), press releases, conference call transcripts, media reports about the 9 Company, reports by securities analysts about the Company, and other public 10 statements issued or made by the Company and its officers. Counsel's 11 investigation also included consultation with a forensic accountant and 12 interviews with persons having knowledge about the Company's activities 13 during the relevant time period. 14 SUMMARY AND OVERVIEW 15 1. This is a securities class action on behalf of all persons who 16 purchased, or otherwise acquired, the securities of 99 Cents between July 22, 17 2003 and June 10, 2004 (the "Class Period"), against 99 Cents and certain of 18 its officers and directors for violations of the Securities Exchange Act of 19 1934 (the "1934 Act"). 20 2. 99 Cents is a deep-discount retailer of primarily name brand and 21 consumable general merchandise in the United States. The Company's 22 stores offer an assortment of regularly available consumer goods, as well as a 23 variety of close-out merchandise. As of March 12, 2004, the Company 24 operated approximately 194 retail stores, with 150 stores in California, 19 in 25 Texas, 15 in Arizona and 10 in Nevada. 99 Cents also sells merchandise 26 27 28

DOCS\279669v1 1 1 through its Bargain Wholesale division at prices generally below normal 2 wholesale levels to retailers, distributors and exporters. 3 3. Since its inception, the Company has been run by the Gold 4 family. David Gold founded 99 Cents and served as the CEO and the 5 Chairman of the Board. His son-in-law, Eric Schiffer, served as its 6 President. Eric Schiffer is married to David Gold's daughter, Karen, a senior 7 buyer for 99 Cents. David Gold's son, Howard Gold, served as 99 Cents' 8 Senior Vice President of Distribution. David Gold's other son, Jeff Gold, 9 served as the Company's Senior Vice President of Real Estate and 10 Information Systems. David Gold dominated the Company and, together 11 with his family members Eric Schiffer, Howard Gold and Jeff Gold, who 12 also served as directors, controlled the Board. According to a former 13 employee, the Gold family members were "controlling micromanagers" who 14 had their hands in the details of every aspect of the business because they 15 trusted very few people outside of the Gold family circle. The Gold Family, 16 and in particular David Gold, ran the company "like a mom and pop shop" 17 and disregarded the fact that there were public shareholders to whom they 18 were accountable. 19 4. The Company's core market has traditionally been Southern 20 California. The Company's headquarters are located in its main distribution 21 center in the City of Commerce, California, in Los Angeles County. Prior to 22 the start of the Class Period, defendants recognized that in order to fuel in 23 the Company's growth, expansion into other key markets was necessary. In 24 January 2003, defendants completed the purchase of a new distribution 25 center in Texas and embarked on a rapid expansion of 99 Cents stores into 26 the state, which expansion continued into the Class Period. As of March 12, 27 28

DOCS\279669v 1 2 1 2004, the Company had opened 18 new stores in the Houston area and one in 2 Dallas. 3 5. The Company did not conduct any real market research before 4 expanding into Texas, and its expansion efforts into Texas were not going 5 well due to the competitiveness of the market. Furthermore, the problems in 6 Texas exacerbated the serious problems defendants were already having with 7 the Company's core operations. Defendants grew increasingly concerned 8 that if the Company appeared to falter, there would be a shareholder revolt to 9 replace members of the Gold family with outside management, the Gold 10 family would lose control of the Company they had built, and the Gold 11 family's business transactions and personal dealings with the Company 12 would be scrutinized. To prevent this from occurring, defendants embarked 13 on a scheme to defraud the investing public by overstating the Company's 14 financial results, in an effort to create the illusion that the Company was 15 continuing its previous success and growth. 16 6. During the Class Period, defendants released financial results 17 that made the Company's performance appear stronger than it was by failing 18 to timely account for inventory loss due to theft and spoiled, expired or 19 obsolete goods, known as "shrinkage." At the time of its expansion into 20 Texas, the Company was shipping products to all of its stores from its Los 21 Angeles distribution center, which consisted of a large warehouse physically 22 attached to the Company's corporate offices and a smaller adjacent storage 23 area. The Los Angeles distribution center was the heart of the Company. 24 Not only did it store massive amounts of inventory, but it was responsible for 25 receiving and distributing the products to all of the Company's retail stores. 26 During the Class Period, aside from a very small deli and frozen distribution 27 I facility, the Los Angeles distribution center was the only one servicing the 28

DOCS\279669v1 3 1 Company's stores because the Texas distribution center was not operational 2 until near the end of the Class Period. The smooth function of the Los 3 Angeles distribution center was crucial because "[99 Cents'] success 4 depend[ed] upon whether [its] receiving and shipments and schedules [were] 5 well managed." The Los Angeles distribution center was already crowded, 6 and already suffered from systems and operational controls. These problems 7 were exacerbated when the Company expanded into Texas because Texas 8 stores were also being serviced by the Los Angeles distribution center, which 9 was already bursting at the seams but had to have more inventory in order to 10 stock the new Texas stores. The Los Angeles distribution center was so 11 overcrowded that employees could not effectively receive products into the 12 warehouse or ship them into stores. They could not even get over boxes to 13 count the physical inventory. And by the time products were received by its 14 stores, they were already rotten, spoiled or past their expiration dates. As a 15 result, the Company suffered massive inventory losses. Ultimately, the 16 Company was forced to take an $8.2 million shrinkage charge which, had it 17 been taken during the Class Period, would have reduced the Company's 18 earnings by over 16%. 19 7. During the Class Period, the Company's internal controls were 20 also grossly lacking. For example, defendants had no procedures for 21 recording inventory that was discarded in 99 Cents' retail stores. According 22 to numerous employees who worked at various stores during the Class 23 Period, food and other inventory were thrown out all the time, and there was 24 no procedure, either formally or informally, for tracking or reporting the 25 inventory that was discarded. Defendants also had no procedure for 26 identifying or tracking obsolete inventory. Instead, "dead" products were 27 routinely shipped to 99 Cents' stores even though they were not ordered by 28

DOCS\279669v1 4 1 the stores and the products could not be resold because they were spoiled, 2 were past the expiration date, or otherwise had no demand. Furthermore, 3 defendants did not properly track the inventory it had. Former employees 4 estimated that 40% to 50% of the time when a product was scanned at the 5 store, the item came up as "miscellaneous," which made it impossible to 6 track what items were sold. The Company's lack of internal controls 7 I resulted in an inability to account for inventory shrinkage. 8 8. Despite these serious problems, throughout the Class Period, 9 defendants created the appearance that other than some minor hiccups with 10 its expansion into Texas, all was well with the Company. In fact, however, 11 the defendants' failure to implement adequate internal controls and to 12 account for shrinkage resulted in the issuance of false and misleading 13 financial statements during the class period. 14 9. Nevertheless, David Gold and Company CFO Andrew Farina 15 certified in filings with the SEC, that "the Company's disclosure controls and 16 procedures are effective," and that the Company's financial statements 17 included in the filings with the SEC "fairly presents in all material respects 18 the financial condition,. results of operations and cash flows of the 19 [Company]." Farina and David Gold made these certifications even though 20 they were aware of or with conscious recklessness ignored the fact that the 21 Company ' s financial reports violated generally accepted accounting 22 principles ("GAAP") and that its reported net income and earnings per share 23 ("EPS") were overstated because each of the Individual Defendants named 24 herein were aware that the Company' s disclosure controls and procedures 25 were wholly ineffective. 26 10. The large amount of shrinkage was known by defendants 27 throughout the Class Period. In September 2003, when Howard Gold 281

DOCS\279669v1 5 1 spearheaded an inventory count in the Company's Los Angeles distribution 2 center which was conducted with assistance from other members of the Gold 3 family, defendants at that time confirmed what they already knew -- that the 4 Company's Los Angeles distribution center, its main and essentially the only 5 functioning distribution center, was suffering from large inventory shrinkage 6 losses as a result of overcrowding and grossly inadequate inventory 7 management and systems controls. In late March to early April 2004, the 8 Company also took an inventory count in its stores which confirmed to 9 defendants that massive shrinkage was occurring in its stores as well. In or 10 around the time of this inventory count, the Company replaced its auditor, 1 1 PriceWaterhouseCoopers, with Deloitte & Touche. On April 21, 2004, even 1 2 though defendants knew that the Company's financial results would be 1 3 negatively impacted by the large shrinkage charge that would be required to 1 4 be taken despite the change in auditors, defendants nevertheless made 15 forecasts for second quarter and fiscal 2004 which they were aware could not 16 be met because the forecasts did not take into account the large shrinkage 1 7 provision. 18 11. On June 11, 2004, the stock market closed in honor of the state 19 funeral of former president Ronald Reagan. That day, defendants suddenly 20 announced that 99 Cents' second quarter 2004 earnings guidance was being 21 lowered from $0.19 to $0.20 per share to $0.04 to $0.07 per share -- a steep 22 drop of approximately 60% to 80%. Defendants also announced that it 23 would only open 11 stores in second quarter 2004, instead of the 13 stores 24 previously forecasted, and that this would reduce its sales estimates for the 25 second quarter. In the press release, defendants disclosed that earnings per 26 share ("EPS") for second quarter 2004 was impacted by "$0.05 to $0.08 from 27 an additional shrink and markdown provision," which reduced the 28

DOCS\279669v1 6 1 Company's second quarter 2004 guidance by over 25%. Defendants 2 disclosed that its "Los Angeles distribution center [was] operating at over- 3 capacity which negatively impacted labor productivity, store deliveries, store 4 level in-stock positions and consequently, comp sales." Defendants also 5 disclosed that the Company was "evaluating inventory controls and 6 procedures both at the store level and the Company's various warehouse 7 locations." Defendants further disclosed that there were "operational issues" 8 and indicated that the Company lacked "proper management and systems 9 infrastructure." 10 12. Following the disclosure of this adverse news, on June 14, 11 2004, the next trading day, the Company's stock plummeted from $20.48 to 12 $14.10, a drop of over 30% on extremely high volume of over 13.7 million 13 shares - more than double the Company's average trading volume. 14 Thereafter, analysts quickly downgraded the stock, noting that defendants' 15 failure to disclose material facts during the Class Period "undermine[s] the 16 credibility of management." 17 13. Plaintiffs who purchased 99 Cents stock during the Class Period 18 did so at artificially inflated prices due to defendants' misrepresentations and 19 failure to disclose material facts concerning the true condition of the 20 Company. Specifically, defendants made misrepresentations and failed to 21 disclose material facts with respect to the Company's inventory losses, 22 ability to receive and ship inventory, internal controls, and their impact on 23 the Company's financial results. As a result of the undisclosed facts 24 concealed by defendants, 99 Cents' stock traded at artificially inflated prices 25 during the Class Period, reaching as high as $36.07. It dropped to $14.10 at 26 the end of the Class Period when it was disclosed that the Company would 27 be required to take a material inventory shrinkage provision, that its Los 28

DOCS\279669v1 7 1 Angeles distribution center was operating at over-capacity which negatively 2 impacted sales and increased shrinkage, that it did not have the proper 3 management and systems infrastructure in place, and that these problems had 4 an adverse impact on the Company's financial results. The defendants' false 5 I and misleading statements or omissions directly and proximately caused 6 plaintiffs' economic loss. Plaintiffs acquired their 99 Cents shares at prices 7 artificially inflated by defendants' false and misleading statements or 8 omissions, and were damaged when the artificial inflation was removed and 9 the value of 99 Cents stock plummeted as a result of disclosure of the truth 10 regarding the Company's inventory shrinkage, distribution, internal controls, 11 and their impact on the Company's financial results. 12 14. Although members of the Class who acquired 99 Cents 13 securities during the Class Period suffered damages, the CFO of the 14 Company, Andrew Farina, fared much better. He sold all of his shares of 99 15 Cents stock while the stock was trading near its high for proceeds in excess 16 of $2.6 million. 17 15. Subsequently, the full extent of the Company's problems was 18 revealed when defendants disclosed that the Company would have to take a 19 shrinkage provision of $8.2 million to account for inventory losses. This 20 provision should have been taken during the Class Period, and would have 21 ^ materially reduced the Company's net income and EPS by over 16% during 22 ^ the Class Period. Defendants also disclosed that it had problems handling 23 perishable goods and distributing inventory received from suppliers to its 24 stores from its Los Angeles distribution center. Defendants further disclosed 25 that the Company had problems with accounts payable, inventory cut-off and 26 the accumulation and tracking of construction in progress. Defendants also 27 admitted that the Company had weak internal controls. In fact, the 28

DOCS\279669v1 8 1 Company's accounting and inventory controls were so weak that it was 2 unable to timely file its Form 10-Q for third quarter 2003 "without 3 unreasonable effort or expense." The Company also delayed the filing of its 4 Form 10-K for fiscal 2004 because management did not complete the 5 necessary testing of its internal controls over financial reporting. Moreover, 6 the Company identified material weakness relating to (i) deficiencies in the 7 internal control environment, (ii) deficiencies in the design, documentation 8 and execution of significant control activities, and (iii) deficiencies in the 9 management information systems and information technology -- which will 10 require its independent accountant to express an adverse opinion on the 11 effectiveness of the Company's internal controls. 12 16. Further, since the disclosure of the truth, the Golds' fears were 13 realized as they started to lose control of the Company. The Company hired 14 outsiders to serve as the Executive Vice President of Supply Chain and 15 Merchandising and the Senior Vice President of Store Development. 16 Andrew Farina was replaced as CFO, although he remained with the 17 Company in a different capacity. Farina's replacement, James Ritter, served 18 as 99 Cents' CFO for less than three months before resigning himself, which 19 required the Company to hire an interim CFO and a consultant associated 20 with•the CFO at a rate of $50,000 per month. David Gold was removed as 21 CEO, although he continued as Chairman. Howard Gold was removed from 22 being in charge of distribution to a newly created position of Executive Vice 23 President of Special Projects. The Company also removed Ben Schwartz, a 24 long standing member from its Board after it was determined that he could 25 not be deemed independent under applicable NYSE rules due to payment by 26 the Company to a business owned by Mr. Schwartz's son; Howard Gold, a 271 281

DOCS\279669v1 9 1 non-independent director, also resigned from the Board in order to satisfy the 2 NYSE's requirement for a majority of independent directors. 3 17. On March 7, 2005, 99 Cents also announced a potential 4 restatement of previously issued financial statements because it improperly 5 accounted for leasehold improvements, rent holidays, and certain 6 depreciation. The restatement will impact the Company's financial results 7 for fiscal 2002, fiscal 2003 and the first three quarters of fiscal 2004. The 8 restatement further establishes that defendants had no financial controls 9 during the Class Period.

10 JURISDICTION AND VENUE 11

12 18. Jurisdiction is conferred by §27 of the 1934 Act. The claims 13 asserted herein arise under §§10(b) and 20(a) of the 1934 Act and Rule 14 I Ob-5. 15 19. Venue is proper in this District pursuant to §27 of the 1934 Act. 16 Many of the false and misleading statements were made in or issued from 17 this District. 18 20. The Company's principal executive offices are located in this 19 District in City of Commerce, California, where the day-to-day operations of 20 the Company are directed and managed.

21 THE PARTIES 22

23 21. Lead Plaintiffs Joseph Boodaie and Mojgan Boodaie purchased 24 99 Cents securities during the Class Period and were damaged thereby. 25 22. Lead Plaintiff Samuel A. Toovy purchased 99 Cents securities 26 during the Class Period and was damaged thereby. 27 28

DOCS\279669v1 10 23. Other plaintiffs and other members of the Class are willing and able to serve as a plaintiff or Class representative if necessary. 24. Defendant 99 Cents is a deep-discount retailer of primarily name brand and consumable general merchandise in the United States. The 5 Company's stores offer an assortment of regularly available consumer goods, 6 as well as a variety of close-out merchandise. 99 Cents supplements its 7 name brand merchandise with private-label items. As of March 12, 2004, the 8 Company operated 194 retail stores with 150 in California, 19 in Texas, 15 9 in Arizona and 10 in Nevada. 99 Cents also sells merchandise through its 10 Bargain Wholesale division at prices generally below normal wholesale 11 levels to retailers, distributors and exporters. 12 25. At all relevant times, defendant David Gold ("David Gold") was 13 the Chairman and CEO of 99 Cents. 14 26. At all relevant times, defendant Eric Schiffer ("Schiffer") was 15 the President of 99 Cents. Eric Schiffer is married to David Gold's daughter, 16 Karen, who works for the Company as a Senior Buyer. 17 27. At all relevant times, defendant Andrew A. Farina ("Farina") 18 was CFO of 99 Cents. During the Class Period, Farina sold all of his 99 19 Cents shares at prices near the Class Period high for proceeds of over $2.6 20 million. 21 28. At all relevant times, defendant Howard Gold ("Howard Gold"), 22 son of David Gold, was the Senior Vice President of Distribution and a 23 director of 99 Cents. 24 29. At all relevant times, defendant Jeff Gold ("Jeff Gold"), son of 25 David Gold, was the Senior Vice President of Real Estate and Information 26 Systems and a director of 99 Cents. 27 28

DOCS\279669v1 11 1 30. The individuals named as defendants in ¶¶ 25-29 are 2 collectively referred to herein as the "Individual Defendants." The 3 Individual Defendants, because of their positions with the Company, 4 possessed the power and authority to control the contents of 99 Cents' public 5 statements during the Class Period. Each defendant was provided with 6 copies of the Company's reports and press releases alleged herein to be 7 misleading prior to or shortly after their issuance and had the ability and 8 opportunity to prevent their issuance or cause them to be corrected. Because 9 of their positions and access to material, non-public information, each of 10 these defendants knew that the adverse facts specified herein had not been 11 disclosed to and were being concealed from the public and that the positive 12 representations that were being made were then materially false and 13 misleading. 14 31. The Individual Defendants were involved in the day-to-day 15 operations of the Company. Because of the Individual Defendants' positions 16 with the Company, they had access to the adverse undisclosed information 17 about its business, operations, products, operational trends, financial 18 statements, markets and present and future business prospects via access to 19 internal corporate documents and reports, conversations and correspondence 20 with other corporate officers, customers and employees, and attendance at 21 management and Board of Directors meetings. 22 32. It is appropriate to treat the Individual Defendants as a group for 23 pleading purposes and to presume that the false, misleading and incomplete 24 information conveyed in the Company's public filings, press releases and 25 other publications as alleged herein are the collective actions of the narrowly 26 defined group of defendants identified above. Each of the above officers of 27 99 Cents, by virtue of his high-level position with the Company, directly 28

DOCS\279669v1 12 1 participated in the management of the Company, was directly involved in the 2 day-to-day operations of the Company at the highest levels, and was privy to 3 confidential proprietary information concerning the Company and its 4 business, operations, products, growth, financial statements, and financial 5 condition, as alleged herein. Each Individual Defendant was involved in 6 drafting, producing, reviewing and/or disseminating the false and misleading 7 statements and information alleged herein, was aware, or deliberately 8 disregarded, that false and misleading statements were being issued 9 regarding the Company, and approved or ratified these statements, in 10 violation of the federal securities laws. 11 33. As officers and controlling persons of a publicly-held company 12 whose common stock was, and is, registered with the SEC pursuant to the 1 3 Exchange Act, traded on the New York Stock Exchange (the "NYSE"), and 14 governed by the provisions of the federal securities laws, the Individual 1 5 Defendants each had a duty to promptly disseminate accurate and truthful 16 information with respect to the Company's financial condition and 1 7 performance, growth, operations, financial statements, business, products, 1 8 markets, management, earnings and present and future business prospects, 19 and to correct any previously-issued statements that had become materially 20 misleading or untrue, so that the market price of the Company's publicly- 2 1 traded securities would be based upon truthful and accurate information. 22 The Individual Defendants ' misrepresentations and omissions during the 23 Class Period violated these specific requirements and obligations. 24 34. The Individual Defendants participated in the drafting, 25 preparation, and/or approval of the press releases, SEC filings and various 26 other communications complained of herein and were aware of, or 27 deliberately or recklessly disregarded, the misstatements contained therein 28

DOCS\279669v1 13 1 and the omissions required to be disclosed in order to make their statements 2 contained therein not false or misleading, and were aware of their materially 3 false and misleading nature. Each of the Individual Defendants had access to 4 the adverse undisclosed information about 99 Cents' business prospects and 5 financial condition and performance as particularized herein and knew, or 6 deliberately or recklessly disregarded, that these adverse facts rendered their 7 positive representations about 99 Cents materially false and misleading. 8 35. Each Individual Defendant was provided with copies of the 9 documents alleged herein to be misleading prior to or shortly after their 10 issuance and had the ability and opportunity to prevent their issuance or 11 cause them to be corrected. Accordingly, each of the Individual Defendants 12 is responsible for the accuracy of the public reports and releases detailed 13 herein and is therefore primarily liable for the representations contained 14 therein. 15 36. Each of the defendants is liable as a participant in a fraudulent 16 scheme and course of business that operated as a fraud or deceit upon 17 purchasers of 99 Cents common stock by disseminating materially false and 18 misleading statements and/or concealing material adverse facts. The scheme 19 deceived the investing public regarding 99 Cents' business, operations, 20 management and the intrinsic value of 99 Cents securities, artificially 21 inflated the price of 99 Cents securities during the Class Period, and caused 22 plaintiffs and other members of the Class who acquired 99 Cents securities 23 during the Class Period to suffer damages when the truth became known.

24 BACKGROUND 25

26 37. 99 Cents is a deep-discount retailer of general merchandise, 27 selling products in its stores for $0.99. After establishing itself in California, 28

DOCS\279669v1 14 1 defendants decided to expand the Company's stores into other regions in 2 order to continue the Company's growth. In January 2003, defendants 3 completed the purchase of a new distribution center in Texas, and embarked 4 on a rapid expansion of 99 Cents stores in Texas. 5 38. The success of the Company's entry into Texas was important 6 as an indicator of the Company's ability to expand nationwide. The 7 Company's first two Texas stores were opened in Houston on June 19, 2003. 8 By October 2003, the Company had 10 stores in Houston. However, the 9 Texas market was extremely competitive. Sales from the new Texas stores 10 ran behind the sales of the average new 99 Cents stores outside of Texas, and 11 the Company incurred costs associated with the start-up of its Texas 12 operations. Further, the expansion into Texas exacerbated the storage, 13 distribution, and internal control problems that defendants were already 14 having with the Company's core operations. 15 39. As a result of these problems, the Gold family became 16 increasingly concerned. Because investors had questioned the ability of the 17 Gold family to expand 99 Cents stores nationwide without having seasoned 18 outsiders at the executive levels, defendants worried that if the Company 19 appeared to falter, there would be a shareholder revolt to replace members of 20 the family with outside management and that they would lose control of the 21 Company they had built. 22 40. The Gold family also worried that their personal transactions 23 and dealings with the Company would come under scrutiny. For example, 24 99 Cents leases 12 of its stores and a parking lot associated with one of these 25 stores from certain members of the Gold family. The Gold family, in 26 connection with these leases, received annual rental payments of 27 28

DOCS\279669v1 15 I approximately $1.9 million, $2.2 million and $2.1 million in 2001, 2002 and 2 2003, respectively. 3 41. The Gold family was also concerned about outside inquiries into 4 the Company's sale of Universal International, Inc. and Odd's-N-End's Inc. 5 subsidiaries (collectively "Universal") to David Gold and his wife, Sherry. 6 On September 30, 2000, Universal was sold to Universal Deals, Inc. and 7 Universal Odd's-N-End's, Inc., both of which were owned 100% by David 8 and Sherry Gold. Universal was sold at a price equal to the Company's 9 carrying book value of the assets of Universal, or $33.9 million, instead of 10 fair market value. Additionally, although Universal had no revenues since 11 2001, Universal paid 99 Cents a management fee on a quarterly basis and 12 paid a lease for a warehouse owned by 99 Cents, totaling approximately 13 $12.5 million, from third quarter 2000 to fourth quarter 2003. 14 42. Although these related party transactions were disclosed, the 15 Golds were worried that scrutiny by shareholders and other outsiders could 16 cause these transactions to cease. Further, the legitimacy of these 17 transactions could be delved into and investigated by the Company's new 18 managers and entities such as the SEC and the Justice Department. In fact, 19 according to a former Universal employee in charge of its operations before 20 the class period, 99 Cents pushed "dead" (i.e., obsolete) inventory on 21 Universal that it could not sell through its retail stores or its wholesale 22 division, in effect attempting to "wash[] inventory through Universal." 23 43. In. an effort to prevent the Gold family's loss of control of the 24 Company and to avoid scrutiny of their personal dealings with the Company, 25 defendants embarked on a scheme to defraud by falsely inflating the 26 financial results of the Company and concealing serious problems that were 27 affecting the Company in an effort to create the illusion that the Company 28

DOCS\279669v1 16 I was continuing its success and growth. The Golds' grip over the Company 2 was so tight that they even had control over the Board of Directors. It was 3 later found that one of the Company's purportedly independent directors, 4 Ben Schwartz, was in fact not "independent," and that the Company was in 5 violation of NYSE rules during the Class Period. 6 was finally disclosed about 7 44. As set forth herein, when the truth the Company' s actual business and financial condition, the artificial inflation 8 in the stock price was removed, 99 Cents' stock dropped, and plaintiffs and 9 other members of the Class suffered damages as a result. 10 E AND G ST UED 1 1

12 45. Second Quarter 2003 Earnings Release. On July 22, 2003, 99 1 3 Cents issued a press release entitled "99 Cents Only Stores Reports Earnings 14 Per Share of $0.21 for the Second Quarter Ended June 30, 2003." The press 15 release stated in part: 16 99 Cents Only Stores reported net income of $14.8 1 7 million for the quarter ended June 30, 2003 compared to 1 8 $13.5 million in the second quarter of 2002. 19 Earnings per share was $0.21 in the second quarter of 20 2003, compared with earnings per share of $0.19 in the second 21 quarter of 2002, with an additional 1.1 million shares 22 outstanding. 23 Eric Schiffer, President of the Company, said, "We are 24 pleased to report year to date earnings per share of $0.41, in 25 line with the First Call consensus estimate from the outset of 26 the year, and announce continued strong retail sales and same- 27 store-sales in the second quarter of 2003. 28

11 DOCS\279669v1 17 1 "This is especially gratifying in light of our initial entry 2 in Texas, which was a significant milestone for the Company. 3 The new Houston, Texas stores have received strong initial 4 customer support. We are also pleased to announce our new 5 Texas distribution center is operational and servicing our 6 Texas stores effectively."

7 46. On August 13, 2003, defendant Farina sold 78,154 shares of his 8 stock at $33.40 per share for proceeds of $2,610,343. The sales of these 9 shares brought Farina's holdings of 99 Cents stock to zero. 10 47. Second Quarter 2003 Form 10-Q. On August 14, 2003, 99 11 Cents filed its Form 10-Q with the SEC for its second quarter 2003 ending 12 on June 30, 2003, which was signed by Farina. In the Form 10-Q, the 13 Company reported total net income of $14.8 million and diluted EPS of 14 $0.21 for second quarter 2003. The Form 10-Q also represented that "Mr. 15 [David] Gold and Mr. Farina concluded that the Company's disclosure 16 controls and procedures are effective." 17 48. In connection with the first quarter 2003 Form 10-Q filed on 18 August 14, 2003, David Gold and Andrew Farina also separately certified 19 that: 20 I I have reviewed this quarterly report on Form 10-Q of 99 21 Cents Only Stores; 22 2. Based on my knowledge, this quarterly report does not 23 contain any untrue statement of material fact or omit 24 to state a material fact necessary to make the statements 25 made, in light of the circumstances under which such 26 statements were made, not misleading with respect to the 27 period covered by this quarterly report; 28

DOCS\279669v1 18 1 3. Based on my knowledge, the financial statements, and 2 other financial information included in this quarterly 3 report, fairly present in all material respects the 4 financial condition, results of operations and cash 5 flows of the registrant as of, and for, the periods 6 presented in this quarterly report; 7 4. The registrant's other certifying officer and I are 8 responsible for establishing and maintaining disclosure 9 controls and procedures (as defined in Exchange Act 10 Rules 13a-15e and 15d-15e) for the registrant and we 11 have: 12 a) Designed such disclosure controls and 13 procedures or caused such disclosure controls 14 and procedures to be designed under our 15 supervision to ensure that material information 16 relating to the registrant, including its 17 consolidated subsidiaries, is made known to us 18 by others within those entities, particularly during 19 the period in which this quarterly report is being 20 prepared; 21 b) Evaluated the effectiveness of the registrant's 22 disclosure controls and procedures and presented 23 in this report our conclusions about the 24 effectiveness of the disclosure controls and 25 procedures, as of the end of the period covered by 26 this report based on such evaluation; and 27 28

DOCS\279669v1 19 1 c) Disclosed in this report any change in the 2 registrant's internal control over financial 3 reporting that occurred during the registrant's 41 most recent fiscal quarter that has materially 5 affected or is reasonably likely to materially affect, 6 the registrant's internal control over financial 7 reporting; 8 5. The registrant 's other certifying officers and I have 9 disclosed .... 10 a) All significant deficiencies in the design or 11 operation of internal controls which are 12 reasonably likely to adversely affect the 13 registrant's ability to record, process, summarize 14 and report financial information; and 15 b) Any fraud, whether or not material, that involves 16 management or other employees who have a 17 significant role in the registrant 's internal 18 controls. 19 49. Additionally, in the August 14, 2003 Form 10-Q, David Gold 20 and Farina individually certified, pursuant to Section 906 of the Sarbanes- 21 Oxley Act of 2002, that: 22 (i) the Report fully complies with the requirements of section 13(a) 23 or section 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 24 78m(a) or 78o(d)); and 25 (ii) the information contained in the Report fairly presents, in all 26 material respects, the financial condition and results of operations of 27 the Issuer. 28

DOCS\279669v1 20 1 50. In the August 14, 2003 Form 10-Q, the Company also stated 2 that: "Our success depends upon whether our receiving and shipment 3 schedules are organized and well managed. As we continue to grow, we 4 may face unexpected demand on our warehouse operations, as well as 5 unexpected demands on our transportation network, which could cause 6 delays in delivery of merchandise to or from our warehouses to our stores." 7 51. The foregoing statements concerning the Company's financial 8 results and business condition in second quarter 2003 were false and 9 misleading when made for, inter alia, the following reasons: 10 (a) The Company's reported net income and EPS were 11 overstated due to its failure to properly take a charge for shrinkage as 12 required under GAAP. Unbeknownst to investors, the Company suffered 13 extensive inventory losses resulting from theft and expired, spoiled or 14 obsolete goods; 15 (b) Contrary to David Gold and Farina's representations that the 16 Company's "financial statements ... fairly present in all material respects the 17 financial condition, results of operations and cash flows of the [Company]," 18 in fact, these financial statements were false and misleading when made and 19 violated GAAP; 20 (c) Contrary to David Gold and Farina' s representations that the 21 Company' s "disclosure controls are effective" and that they have "disclosed 22 ... all significant deficiencies in the design or operation of internal controls," 23 in fact, the Company did not have adequate internal controls . The Company 24 did not have the proper management and systems infrastructure in place, and 25 could not properly track the inventory in either its distribution centers or its 26 retail stores; 27 28

DOCS\279669v1 21 1 (d) Contrary to defendants' representation that the Company's 2 "new Texas distribution center is operational and servicing our Texas stores 3 effectively," the Texas distribution center did not become fully functional 4 until approximately August 2004. Consequently, the Company was stocking 5 its new retail stores in Texas from its Los Angeles distribution center rather 6 than from its Texas distribution center, placing strains on the Company's Los 7 Angeles distribution center, which was already suffering from inventory and 8 operational control problems because it was overcrowded; and 9 (e) Defendants' statements that there "may be" unexpected 10 demands on its warehouse operations was false and misleading when made 11 because, at the time of the statement, defendants were already aware, but 12 failed to disclose, that these demands already existed and that 99 Cents' Los 13 Angeles distribution center, which was basically servicing all of its retail 14 stores, was so overcrowded that receipt of shipments from vendors and 15 delivery of products to stores were significantly impeded, shrinkage greatly 16 increased, and these problems adversely impacted the Company's financial 17 results. Further, defendants failed to disclose that these problems were 18 I compounded by the fact that the Los Angeles distribution center lacked 19 management, systems and operational controls. 20 52. Third Quarter 2003 Earnings Release. On October 21, 2003, 21 99 Cents issued a press release announcing its financial results for third 22 quarter 2003. The press release stated in part: 23 99 Cents Only Stores® (NYSE:NDN) reported net 24 income of $12.1 million for the third quarter ended September 25 30, 2003, compared to $13.3 million in the third quarter of 26 2002. 27 28

DOCS\279669v1 22 1 Earnings per share were $0.17 in the third quarter of 2 2003, compared to earnings per share of $0.19 in the third 3 quarter of 2002.

4 53. Third Quarter 2003 Form 10-Q. On November 5, 2003, 5 defendants filed 99 Cents' Form 10-Q with the SEC for its third quarter 2003 6 ending September 30, 2003, signed by defendant Farina. The Form 10-Q 7 reported net income of $12.1 million and diluted EPS of $0.17 for the 8 Company's third quarter 2003. The Form 10-Q also represented that "Mr. 9 Gold and Mr. Farina concluded that the Company 's disclosure controls 10 and procedures are effective." Additionally, the Form 10-Q included 11 certifications by Gold and Farina similar to those reproduced above in ¶ 48_ 12 in the Company's previous Form 10-Q, attesting that the quarterly report did 13 not contain any untrue statements of material fact or omit to state a material 14 fact, that the financial results included in the Form 10-Q fairly presented the 15 financial condition of the Company, and that the Form 10-Q disclosed all 16 significant deficiencies in the design or operation of internal controls. The 17 Form 10-Q also stated that: "Our success depends on whether our receiving 18 I and shipment schedules are organized and well managed. As we continue 19 to grow, we may face unexpected demands on our warehouse operations, 20 as well as unexpected demands on our transportation network, which could 21 cause delays in delivery of merchandise to or from our warehouses to our 22 stores." 23 54. The foregoing statements concerning the Company's financial 24 results and business conditions in third quarter 2003 were false and 25 misleading when made for the same reasons set forth in ¶ 51, above. 26 27 28

11 DOCS\279669v1 23 1 55. Fourth Quarter 2003 Earnings Release. On March 11, 2004, 2 99 Cents issued a press release announcing the Company's financial results 3 for fourth quarter 2003. The press release stated in part: 4 99 Cents Only Stores® (NYSE:NDN) reported fourth 5 quarter net income per share of $0.21 on net income of $15.0 6 million compared to earnings per share in the fourth quarter of 7 2002 of $0.28 on net income of $19.7 million.

8 56. Fiscal Year 2003 Form 10-K. On March 15, 2004, 99 Cents 9 filed its Form 10-K with the SEC for fiscal year 2003 ending December 31, 10 2003, signed by defendants Schiffer, David Gold, Howard Gold, Jeff Gold, 11 and Farina, among others.' The Company reported net income of $56.5 12 million and diluted EPS of $0.78 for the 2003 fiscal year. In the Form 10- 13 K, defendants also represented that the Company's distribution centers were 14 capable of storing large quantities of products, stating that: "The size of the 15 Company's distribution centers and warehouses allows storage of bulk 16 one-time close-out purchases and seasonal or holiday items without 17 incurring additional costs." 18 57. The Fiscal Year 2003 Form 10-K reported that "Inventories are 19 priced at the lower of cost (first in, first out) or market." The 10-K further 20 stated that: 21 At December 31, 2002 and 2003, we recorded net inventory 22 value of $83.2 million and $105.6 million, respectively. We 23 periodically review the net realizable value of our inventory 24 and make adjustments to its carrying value when appropriate. 25 The current carrying value of our inventory reflects our belief 26

27 ' On April 5, 2004, the Company filed an amended Form 10-K, substantially identical to the one it filed on March 15, 2004, "solely to correct certain typographical errors." 28

DOCS\279669v1 24 1 that we will realize the net values recorded on our balance 2 sheet. 3 58. Like the Company's prior filings with the SEC, the Form 10-K 4 also represented that David Gold and Andrew Farina concluded that the 5 Company' s "Disclosure Controls and procedures are effective in timely 6 alerting them to material information required to be included in our 7 periodic SEC filings." Additionally, it included certifications by David 8 Gold and Farina substantially similar to those reproduced in ¶¶ 48, attesting 9 that the Form 10-K did not contain any untrue statements of a material fact 10 or omit to state a material fact, that the financial statements fairly presented 11 in material respects the financial condition of the Company, and that the 12 Form 10-K disclosed all significant deficiencies in the design or operation of 1 3 internal controls. 14 59. In the Form 10-K, the Company also stated: "Our success 15 depends upon whether our receiving and shipment schedules are organized 16 and well managed. As we continue to grow, we may face unexpected 17 demands on our warehouse operations, as well as unexpected demands on 1 8 our transportation network, which could cause delays in delivery of 19 merchandise to or from our warehouse to our stores." 20 60. The foregoing statements concerning the Company's financial 2 1 results and business condition in fourth quarter 2003 and for fiscal 2003 22 were false and misleading when made for the reasons set forth in ¶ 51. 23 61. First Quarter 2004 Earnings Release. On April 20, 2004, 99 24 Cents issued a press release announcing its financial results for first quarter 25 2004. The press release stated in part: 26 99 Cents Only Stores reported first quarter net income 27 per share of $0.13 on net income of $9.3 million compared to 28

DOCS\279669v1 25 1 earnings per share in the first quarter of 2003 of $0.20 on net 2 income of $14.6 million. 3

4 "During 2004, we plan to grow our square footage by 5 25% by opening 48 new 99 Cents Only Stores, with 6 approximately 12 in Houston and 13 in Dallas, 17 in California, 7 5 in Arizona and 1 in Nevada. The Company opened 10 stores 8 in the first quarter. One of these new stores, located in 9 Northern California, achieved record sales for its first week of 10 business. The Company plans to open 13 stores in the second 11 quarter, 15 in the third quarter and 10 in the fourth quarter." 12

13 ... EPS for the second quarter is projected in the range 14 of $0.19 to $0.20.

15 62. First Quarter 2004 Form 10-Q. On April 29, 2004, 16 defendants filed the Form 10-Q for 99 Cents for its first quarter 2004 ending 17 on March 31, 2004, which was signed by Farina. The Form 10-Q included 18 the Company's financial results, and reported net income of $9.3 million and 19 diluted EPS of $0.13 for first quarter 2004. The Form 10-Q represented that 20 "Mr. Gold and Mr. Farina concluded that the Company's disclosure 21 controls and procedures are effective." In addition, the Form 10-Q included 22 certifications by Gold and Farina, substantially similar to those reproduced 23 above in ¶ 48, wherein they attested that the quarterly report did not contain 24 any untrue statements of material fact or omit to state a material fact, that the 25 financial statements contained in the quarterly report fairly presented in all 26 material respects the financial condition of the Company, and that the 27 Company's disclosure controls and procedures were effective. The Form 10- 28

DOCS\279669v1 26 1 Q also stated that: "Our success depends upon whether our receiving and 2 shipment schedules are organized and well managed. As we continue to 3 grow, we may face unexpected demands on our warehouse operations, as 4 well as unexpected demands on our transportation network, which could 5 cause delays in delivery of merchandise to or from our warehouses to our 6 I stores." 7 63. The foregoing statements concerning the Company's financial 8 results and business condition in first quarter 2004 were false and misleading 9 when made for the reasons set forth in ¶ 51. In addition, the Company's 10 projections for the second quarter 2004 were made without reasonable basis. 11 Defendants had taken an inventory count in its stores and were aware that the 12 Company suffered from high inventory shrinkage and that a massive 13 shrinkage charge was required which would substantially reduce its publicly 14 forecasted financial results for second quarter 2004. Indeed on April 6, 15 2004, at or around the time of the inventory count, the Company's Audit 16 Committee replaced its outside auditors, PriceWaterhouseCoopers, with 17 Deloitte & Touche. Defendants were also aware that the Company's 18 forecasted store openings and sales would not be met because, by this time, 19 the Company was already behind on opening new stores and lacked the 20 manpower required to open the number of stores defendants publicly 21 projected. 22 64. On May 14, 2004, defendants issued a press release in which 23 they announced that the Company's board of directors had authorized the 24 repurchase of up to 3 million shares of the Company's common stock from 25 time to time in open market transactions or privately negotiated transactions 26 over a period ending on May 31, 2005. In issuing this announcement, 27 defendants hoped to project management's confidence in the Company and 28

DOCS\279669v1 27 11 to stave off a decline in the Company's share price they privately anticipated 2 would occur once they were forced to disclose the truth regarding the 3 Company's business condition and financial results. 4 65. Revelation of Previously Undisclosed Material Facts. On 5 June 11, 2004, the market was closed in honor of the state funeral of former 6 president Ronald Reagan . That day, defendants issued a Company press 7 release stating in part as follows: 8 99 Cents Only Stores reported today that it is lowering 9 second quarter 2004 earnings per share guidance to $0.04 to 10 $0.07 per share. The Company projects second quarter 11 comparable store sales to be -3% to -4%. The Company is 12 revising estimated second quarter new store openings to 11 13 and total sales to $235 million to $238 million. These 14 estimates are preliminary until the Company announces its 15 actual quarter results following the end of the second quarter. 16 President Eric Schiffer said, "EPS for the second quarter 17 of 2004 is projected to be impacted $0.03 by lower than 18 planned comp sales and gross margin impact from the growth 19 in grocery sales and escalating dairy product pricing, $0.05 to 20 $0.08 from an additional shrink and markdown provision, 21 $0.02 from higher litigation and workers comp expenses, $0.01 22 from increased fuel and transportation costs and a $0.01 23 valuation adjustment on marketable securities. 24 "The company is interviewing and plans to quickly 25 engage an outside consulting firm to assist in evaluating 26 inventory controls and procedures both at the store level and 27 the Company's various warehouse locations. 28

DOCS\279669v1 28 1 "Our Los Angeles distribution center is operating at 2 over-capacity which negatively impacted labor productivity, 3 store deliveries, store level in-stock positions and 4 consequently, comp sales. We expect to expand our 5 warehouse capacity by the fourth quarter. 6

7 -- Earnings per share are now estimated to be in 8 the range of $0.04 to $0.07per share. 9 -- Previous EPS guidance was $0.19 to $0.20 per 10 share. 11 The Company's full year 2004 guidance, provided in its 12 first quarter 2004 earnings release, will be impacted by some 13 or all of the conditions mentioned above. At this time, the 14 Company has decided it will not provide guidance for the 15 third andfourth quarters of2004. 16 President Eric Schiffer said, "We are focused on 17 satisfactorily addressing the operational issues discussed 18 above as well as implementing further steps to ensure that the 19 proper management and systems infrastructure is in place to 20 re-establish desirable earnings growth.

21 66. Investors reacted with shock to this news. Not only was 99 22 Cents' second quarter 2004 earnings guidance lowered from $0.19 to $0.20 23 per share to $0.04 to $0.07 per share, a steep drop of approximately 60% to 24 80%, but investors were also shocked by the disclosure that the Company 25 would not be able to open the number of stores and achieve the sales its 26 previously guided investors to expect, that the Company's "Los Angeles 27 distribution center [was] operating at over-capacity which negatively 28

DOCS\279669v1 29 1 impacted labor productivity, store deliveries, store level in-stock positions 2 and consequently, comp sales," that the Company was "evaluating inventory 3 controls and procedures both at the store level and the Company's various 4 warehouse locations," that there were "operational issues," and that the 5 Company lacked "proper management and systems infrastructure." 6 67. Following this adverse news, the price of the Company's shares 7 plunged from $20.48 per share to $14.10 per share, on extremely high 8 volume of almost 13.8 million shares. The sell-off wiped out more than 30 9 percent of the stock's value, as befuddled investors came to grips with the 10 truth about the Company. 11 68. Within days, numerous securities analysts downgraded the 12 Company's stock. For example, Merrill Lynch & Co. analyst Daniel Barry 13 downgraded the stock from "neutral" to "sell." Barry cut his earnings 14 estimates for the second quarter by 15 cents to 4 cents a share and cut his 15 2004 forecast by 37 cents to 46 cents. He also cut his 2005 earnings estimate 16 by 43 cents to 57 cents a share, cautioning that Merrill has "little confidence 17 that the new estimates are even in the ballpark." Likewise, Robert 18 Buchanan, an analyst with AG Edwards & Sons, rated 99 Cents stock a 19 "sell." "For some time now, 99 Cents Only Stores has been a concept whose 20 growth has outstripped its current management structure," wrote Buchanan. 21 "This situation now appears to be worse than we originally thought and the 22 stock will face significant pressure." Similarly, James Ragan, a senior equity 23 analyst with Crowell, Weedon & Co., wrote that "the capacity issues in LA 24 were a complete surprise, and undermine the credibility of management, 25 which, in our opinion, is unprepared to solve these problems without outside 26 help." POST CLASS PERIOD EVENTS 27 28

DOCS\279669vi 30 1 69. Since the disclosure of the Company's problems on June 11, 2 2004, additional facts have shed light on these problems. Defendants 3 disclosed that 99 Cents made an inventory shrinkage provision of over $8 4 million relating to perishable products and other losses, and disclosed 5 additional facts regarding the Company's deficient internal controls, 6 management and systems infrastructure and processes. 7 70. On July 20, 2004, 99 Cents issued a press release announcing its 8 financial results for the second quarter ended June 30, 2004, as follows: 9 99 Cents Only Stores® (NYSE:NDN) reports net income 10 of $2.6 million for the quarter ended June 30, 2004, compared 11 to $14.8 million for the second quarter of 2003. Earnings per 12 share were $0.04 for the second quarter of 2004, compared to 13 earnings per share of $0.21 for the second quarter of 2003. 14 1 15 Gross margin for the second quarter of 2004 was 36.2% 16 versus 40.0% for the second quarter of 2003. Retail gross 17 margin for the quarter was 36.9% versus 41.2% in 2003. The 18 Company made an additional inventory shrinkage provision 19 during the quarter, accounting for approximately 350 basis 20 points. The remaining gross margin reduction was primarily 21 from the overall growth of the grocery-related categories in the 22 sales mix. 23 24 [Eric Schiffer, President of the Company, said:] "We 25 have begun addressing the operational issues discussed above 26 as well as implementing further steps to help ensure that the 27 28

11 DOCS\279669v1 31 1 proper management and systems infrastructure are in place 2 to help re-establish desirable earnings growth. 3 "We have engaged a consulting firm to work with 4 management to review and document selected inventory 5 management processes and controls and identifypotential 6 weaknesses to assist with reduction of inventory shrinkage, 7 including those associated with perishable products. This 8 work is progressing through its initial stages and has been 9 underway since late June. 10 "We have recently leased and moved into approximately 11 200,000 square feet ofadditional warehouse space, which has 12 relieved the over-capacity of our main California distribution 13 center. We believe the additional warehouse space should help 14 to more effectively manage in-store and out-of-stocks by the 15 fourth quarter in our non-Texas stores. Also, we believe the 16 planned implementation in our California distribution center 17 of the High Jump warehouse management system, key 18 modules of which are scheduled for use by late 2004, should 19 help reduce store out-of-stocks and improve the timeliness of 20 store deliveries.

21 71. On July 20, 2004, defendants also conducted a conference call 22 with analysts. During the conference call, defendant Schiffer elaborated on 23 the factors that negatively impacted the Company. According to Schiffer, 24 "The Company made an additional inventory shrinkage provision during 25 the quarter accounting for approximately 350 basis points as a percent of 26 sales." Schiffer stated, We have begun addressing the operational issues 27 I ... as well as implementing further steps to help ensure that the proper 28

DOCS\279669v1 32 1 management and system infrastructure are in place to help re-establish 2 desirable earnings growth." With regards to shrinkage, Schiffer also stated: 3 "[Yjou have to be very smart in how you handle produce, fruits and 4 vegetables; otherwise you have spoilage and to some extent, we lost a lot of 5 produce there and could have done a better job in retrospect with the 6 training, allocation and handling of it. And would have been a reduction 7 in spoilage and some of the shrinkage we had had to do with spoilage on 8 produce." Schiffer further stated: "The stores got kind ofjammed up and 9 because they would not have the space here to take product and a lot of 10 stuff got sent out, so I talked about working on this shrinkage issue as 11 being one of the two top priorities. Other top priorities for our management 12 team here is working on our stores here. Working on that issue. So, we are 13 working on it hard, and some of the issues is improving the store order 14 systems so the stores can order; can make sure they have the items; 15 improving the way we allocate." 16 72. On August 9, 2004, defendants filed 99 Cents' Form 10-Q for 17 the second quarter 2004 ending on June 30, 2004. In the Form 10-Q, 18 defendants further disclosed: 19 As previously announced on June 11, 2004, during the 20 second quarter of fiscal 2004 and in connection with physical 21 counts of our retail store inventories performed by an outside 22 service and our inventory control department, as well as a 23 review of related inventory accounting processes, the 24 Company's management determined that it was necessary to 25 make an additional shrinkage provision of $8.2 million. We 26 believe this may indicate a deficiency in our internal controls 27 28

DOCS\279669v 1 33 1 and processes, relating to inventory management and 2 reporting. 3 We are currently focused on implementing changes to 4 our internal controls to address what we believe are the 5 weaknesses. In June 2004, we hired an outside consulting firm 6 to review and document selected inventory management 7 processes and controls and identify potential weaknesses to 8 assist with the reduction of inventory shrinkage, including 9 those associated with perishable products. In addition to 10 responding to the recommendations of our consultants, we plan 11 to adopt updated policies in the third and fourth quarter of 2004 12 to tighten procedures around the transfer and movement of 13 inventory received from suppliers at both the retail stores and 14 the Company's distribution centers, as well as inter and intra- 15 store and warehouse transfers ofinventory.

16 73. On October 20, 2004, 99 Cents issued a press release 17 announcing that David Gold would end his tenure as CEO on January 1, 18 2005, but would remain as Chairman. According to the press release, 19 Schiffer will become CEO, and Jeff Gold, the Senior Vice President of Real 20 Estate and Information Systems, will become the President and COO. In 21 another press release that day, the Company also announced that it hired an 22 executive to fill the newly created position of Executive Vice President of 23 Supply Chain and Merchandising. 24 74. On October 20, 2004, 99 Cents also announced the Company's 25 financial results for the third quarter of fiscal year 2004 in a press release. 26 The press release quoted Schiffer as saying that " We continue to address our 27 operational issues, mentioned in previous releases, surrounding inventory 28

DOCS\279669v1 34 1 shrinkage and distribution ." Schiffer was also quoted as saying that "The 2 consulting firm hired to work with management to review and document our 3 inventory management processes and controls has identified operational and 4 process issues in our distribution centers and we will soon start the process 5 of evaluating the inventory handling procedures at our retail stores." 6 75. On November 9, 2004, defendants filed a "Notification of Late 7 Filing" on Form 12b-25 with the SEC. It stated that 99 Cents' internal 8 controls were so poor that it could not timely file its Form 10-Q for third 9 quarter fiscal 2003 "within the prescribed time period without unreasonable 10 effort or expense." 11 76. On November 15, 2004, defendants filed the Form 10-Q for 99 12 Cents for its third quarter ending September 30, 2004. In the Form 10-Q, 13 defendants further disclosed that: 14 During the period covered by this quarterly report, as 15 part of the physical inventory reconciliation and monthly 16 closing processes, we identified and corrected significant 17 deficiencies in certain of our procedures surrounding 18 accounts payable and inventory cut-off and the accumulation 19 and tracking of construction in progress.

20 77. The Form 10-Q filed on November 15, 2004 also contained 21 language different than the language contained in the Company's previous 22 Form 10-Qs by disclosing that the Company had problems in its Los Angeles 23 distribution center. According to the Form 10-Q : 24 Our success depends upon whether our receiving and 25 shipment schedules are organized and well managed. As we 26 continue to grow, we may face unexpected demands on our 27 warehouse operations, as well as unexpected demands our 28

DOCS\279669v1 35 1 transportation network, which could cause delays in delivery of 2 merchandise to or from our warehouses and/or to our stores. 3 Such demands and delays have recently occurred at the 4 Company's distribution center in Los Angeles.

5 78. In the Form 10-Q filed on November 15, 2004, the Company 6 also stated it would end 2004 with store growth of only 16.4%, compared to 7 growth of 20% and 25 % annually in prior years, and that its new stores 8 would be in traditional markets (California and Arizona), in order to 9 concentrate on improving operations, management and systems 10 infrastructure. The Company thus implicitly admitted that the Company's 11 expansion into Texas during the Class Period greatly strained its 12 management and systems infrastructure. According to the Form 10-Q: 13 From 2000 to 2003 the Company grew the number of 14 stores between 20% and 25% annually. The Company has 15 reduced its previous planned store growth rate starting in the 16 fourth quarter of 2004 and continuing through 2005. The 17 Company plans to add a total of 3 stores in the fourth quarter of 18 2004, and expects to end 2004 with 220 stores for an 19 estimated annual store count growth rate of 16.4%. The 20 Company expects to open at least 25 new stores in 2005, 21 primarily in its traditional markets, focusing on California 22 and Arizona . The reduction in the previously planned number 23 of store openings during the fourth quarter of 2004 and fiscal 24 year 2005 should help allow the Company to concentrate on 25 improving results of operations and enhancing management 26 and systems infrastructure to support greater growth in future 27 years. 28

DOCS\279669v1 36 1 79. In the Form 10-Q filed on November 15, 2004, the Company 2 also disclosed that Howard Gold, who was in charge of distribution during 3 the Class Period, was being moved to another position within the Company. 4 According to the Form 10-Q: "Howard Gold, who for many years has been 5 in charge of the Company's distribution operations, is moving over to the 6 newly created position of Executive Vice President of Special Projects. 7 Distribution will now report to Mike Zilkind our recently hired Executive 8 Vice President of Supply Chain and Merchandising." 9 80. On December 17, the Company announced that Andrew Farina 10 would be replaced as CFO of the Company by James Ritter, an outsider. 11 81. On January 6, 2005, 99 Cents announced that Norm Plotkin, 12 another outsider, was hired as Senior Vice President of Store Development to 13 "oversee all of 99 Cents Only Stores' real estate and construction functions." 14 82. On January 6, 2005, the Company issued a press release 15 announcing its fourth quarter 2004 financial results. In discussing the 16 disappointing financial results, defendants Schiffer also stated that "` [w]e 17 have identified a number of executional issues in the stores and across the 18 supply chain ,"' and that the Company's problems were so extensive that "`it 19 could take most of 2005 to resolve the majority of these executional 20 issues."' 21 83. In 2005, the negative news about the extent of 99 Cents' 22 problems with systems, operations, and internal controls continued to trickle 23 out. On March 7, 2005, 99 Cents announced "a potential restatement of its 24 financial statements and a delay in its earnings release and filing ofForm 25 10-K." The Company also announced that it identified "material 26 weaknesses relate[d] to (i) deficiencies in the internal control environment; 27 (ii) deficiencies in the design, documentation and execution of significant 28

DOCS\279669v1 37 1 I control activities; and (iii) deficiencies in the management information 2 systems and information technology." Further, the Company disclosed that 3 its independent accountant will express an adverse opinion on the 4 effectiveness of the Company 's internal controls . According to the press 5 release: 6 Potential Restatement of Previously Issued Financial Statements

7 The Company is evaluating certain lease and 8 depreciation issues, which may result in restatement of 9 previously issued financial statements. ... [T]he Company is 10 analyzing its method of accounting for leasehold improvements 11 funded by either landlord incentives or allowances under 12 operating leases (tenant improvement allowances) and its 13 method of accounting for rent holidays. Additionally, the 14 Company is reviewing certain depreciation issues related to 15 prior periods to determine whether adjustments to previously 16 issued financial statements will be required. ... 17 Sarbanes Oxley Compliance Update 18 As an "accelerated filer," the Company is required to 19 comply with Section 404 of the Sarbanes Oxley Act of 2002 for 20 the year ended December 31, 2004. Management has 21 substantially completed its assessment of the internal controls 22 over financial reporting for the year ended December 31, 2004. 23 Based on the work performed to date on internal controls, 24 management did not complete the necessary testing of its 25 internal controls over financial reporting as of December 31, 26 2004. Therefore, the Company's independent accountants are 27 unable to complete their audit of management's assessment of 28.

DOCS\279669v1 38 1 the internal controls over financial reporting. Further, 2 management has identified material weaknesses as defined by 3 the Public Company Accounting Oversight Board. These 4 material weaknesses relate to (i) deficiencies in the internal 5 control environment; (ii) deficiencies in the design, 6 documentation and execution ofsignificant control activities; 7 and (iii) deficiencies in the management information systems 8 and information technology. The Company has been advised 9 by its independent accountant that they will disclaim an 10 opinion on management's assessment of internal controls 11 because of the scope limitation and express an adverse opinion 12 on the effectiveness of the internal controls as of December 13 31, 2004 because ofmaterial weaknesses. 14 Delay in Earnings Release and Filing Form 10-K 15 The Company announces that in consideration of the 16 various issues indicated in this release, there will be a delay in 17 the timing of the previously announced Earnings Release and 18 Earnings Call. The Company will be extending the time 19 required to file the Form 10K by filing Form 12b-25 with the 20 Securities and Exchange Commission and will announce the 21 timing of the Earnings Release and Earnings Call at a later 22 date. 23 84. On March 8, 2005, 99 Cents announced that its new CFO, Jim 24 Ritter "has resigned, effective immediately, to pursue other opportunities." 25 Ritter, who was hired as CFO in December 2004, was on the job for less than 26 three months. In the same press release, the Company also announced that 27 two members of the Company 's Board would resign because "Ben 28

DOCS\279669v1 39 1 Schwartz, a long standing board member, could not be deemed 2 independent under applicable NYSE rules due to payments by the 3 Company (as previously disclosed in the company's proxy statement) to a 4 business owned by Mr. Schwartz's son. In order to satisfy the NYSE 5 requirement for a majority of independent directors, Howard Gold ... who 6 was deemed a non-independent director, also resigned from the Board. "The 7 Board currently intends that Howard Gold will fill one of the vacancies on 8 the Board when the Board fills the other vacancy created by these 9 resignations with a director who satisfies the NYSE independence 10 requirements." 11 85. On March 14, 2005, 99 Cents announced that it appointed Jeff 12 Kniffin, a partner with Stanton Associates, as interim CFO. In a Form 8-K 13 filed on March 18, 2005, the Company further disclosed that it entered into 14 an agreement and would pay Jeff Kniffin, and another partner with Stanton 15 Associates, Lewis Stanton, who would provide consulting services to the 16 Company, fees in the amount of $50,000 per month. 17 86. On April 27, 2005, 99 Cents announced another delay in its 18 release for fourth quarter and year-end 2004 earnings, which were previously 19 expected on April 27, 2005. The Company announced that it is continuing to 20 discuss certain issues with its current and former external auditors. Further, 21 the Company announced that it expected its adjustment for operating lease 22 rent holidays will result in a reduction of net income, net of tax effects, of 23 $200,000 to $300,000 for fiscal 2002, $500,000 to $700,000 for fiscal 2003, 24 and approximately $50,000 to $100,000 per quarter for the first three 25 quarters of 2004. REASONS 26 27 28

DOCS\279669v1 40 1 87. Defendants' statements during the Class Period alleged above in 2 ¶¶_45, 47-50, 52, 53, 55-57 were false and misleading when made. 3 88. Although the defendants disclosed on June 11, 2004 that the 4 Company suffered from serious operational issues, these problems were 5 longstanding and plagued 99 Cents throughout the Class Period. 6 89. During the Class Period, 99 Cents was negatively impacted by 7 the over-capacity in its Los Angeles distribution center, was unable to handle 8 perishable goods and to account for inventory losses, had problems with 9 transfer of inventory received from suppliers and inter and intra-store and 10 warehouse transfers of inventory, and had problems with inventory cut-off 11 and the accumulation and tracking of construction in progress. As 12 defendants later admitted, the Company did not maintain adequate internal 13 financial and operational controls. The lack of internal controls rendered 99 14 Cents' financial results inaccurate and caused the Company to overstate its 15 financial results during the Class Period, which defendants were aware of or 16 consciously disregarded. Further, defendants knew the financial guidance 17 they provided for the second quarter 2004 was false and was without 18 reasonable basis because of the lack of internal control and their knowledge 19 that a large shrinkage provision had to be taken. 20 Misrepresentation and Omissions Concerning 99 Cents' 21 A. 22 Distribution Centers 23 1. Los Angeles Distribution Center 24 25 90. During the Class Period, defendants' statements regarding the 26 Company's distribution center and warehouse operations were false and 27 Imisleading because, defendants failed to disclose that 99 Cents' main 28

11 DOCS\279669v1 41 1 distribution center in Los Angeles was overcrowded, lacked operational, 2 information and systems control, could not adequately handle the Company's 3 inventory, and could not properly receive goods or make shipments to stores. 4 It was only at the end of the Class Period that defendants disclosed that there 5 were problems with the Company's distribution center. Such problems, 6 however, did not occur overnight but, rather, were occurring throughout the 7 Class Period. 8 91. The Company's Los Angeles distribution center was key to the 9 smooth functioning of the Company. The Company itself recognized that 10 "[o]ur success depends upon whether our receiving and shipment schedules 11 are well organized and well managed." The Los Angeles distribution center 12 consisted of an 880,000 square foot warehouse and distribution facility in the 13 City of Commerce as well as a 180,000 square foot warehouse storage space 14 located adjacent to this main distribution facility. The Company also leased 15 a 66,000 square foot deli and frozen distribution center in the City of 16 Commerce. The Company also had a 741,000 square foot distribution center 17 in Houston, which was the Texas distribution center. In light of the fact that, 18 during the Class Period, the Company's Texas distribution center was not 19 operational until almost the end of the Class Period, and that the Company's 20 deli and frozen distribution center was small and used to store only food 21 products requiring refrigeration, the Company's Los Angeles distribution 22 center served as the primary, if not the only, distribution center for all of 99 23 Cents' retail stores. 24 92. During the Class Period, the Company experienced serious 25 inventory problems as a result of insufficient capacity at its Los Angeles 26 distribution center. Because of the lack of space at its Los Angeles 27 distribution center, 99 Cents was unable to make deliveries or keep certain 28

DOCS\279669v1 42 1 items in stock, which negatively impacted its same-store sales, i.e., sales to 2 stores that had been open for more than a year. Further, problems at its 3 distribution center resulted in increased shrinkage, or inventory losses due to theft and spoiled, expired or obsolete goods. Because of the lack of capacity at the Los Angeles distribution center, 99 Cents will have to spend additional money expanding its warehouse capacity and implementing inventory controls. 8 93. According to a former 99 Cents employee who worked as a 9 foreman in the Los Angeles distribution center, the center was overcrowded 10 because the Company opened up new stores without expanding the capacity 11 of this main distribution center to keep pace with the demands for supplying 12 the new stores. According to this former employee, there was not enough 13 space for the storage of merchandise that was coming in on 80 to 100 large 14 truckloads or "trailers" per day. There were delays in trucks being loaded to 15 distribute the merchandise because the overcrowded conditions at the 16 distribution center hampered order pulling. Further, there were attempts by 17 the Company to cut the number of trucks going out from the distribution 18 center in order to cut costs, resulting in the stores not being adequately 19 supplied. Although a certain number of pallets of merchandise should have 20 been loaded on trucks for delivery pursuant to orders from the stores, due to 21 lack of trucks, some pallets were left behind to be shipped on another day. 22 This former employee also stated that frozen foods were sometimes in 23 storage for long periods of time, before being shipped to stores for sale just 24 one day before their expiration. By the time stores received and displayed 25 such merchandise, they had already expired and could not be sold. Some 26 food items were shipped to stores after expiration dates had passed, 27 28

DOCS\279669v1 43 1 including canned goods. Also, there were non-food products stored for 2 which demand had waned and for which there were no further orders. 3 94. According to another former 99 Cents employee who worked in 4 a supervisory capacity in the Company's Los Angeles distribution center 5 before and during the Class Period, the Company experienced overcrowding, 6 inventory control and distribution issues on an ongoing basis that continues 7 throughout the Class Period. 8 95. A former Company clerk who handled workmen's 9 compensation benefits from the Company's headquarters in the Los Angeles 10 distribution center during the Class Period, also observed that the Los 11 Angeles distribution center was overcrowded. According to this employee, 12 the warehouse did not have enough room to store the products that 99 Cents 13 was buying in bulk. "Half the time, they didn't even know where certain 14 things were because they were moving things around, they were trying to 15 make more space. The capacity was beyond." There were also delays in 16 unloading trucks of merchandise coming in to be stored, as well as in pulling 17 orders to be loaded onto the trucks for distribution, because they didn't know 18 where the items were placed in the warehouse. According to this employee, 19 "we were constantly receiving e-mails from Jeff Gold or other top executives 20 concerning the warehouse." This witness had received forwarded e-mails 21 from Jeff Gold relating to injuries that had occurred in the Los Angeles 22 distribution center as a result of the overcrowding. E-mails were also 23 circulated from distribution center supervisors who complained about poor 24 storage bin organization and their inability to find orders placed by stores. 25 96. This employee also stated that the problems in the Los Angeles 26 distribution center resulted in problems in 99 Cents' stores. "Some of the 27 times, the stores wouldn't even know if they received the exact [order] or if 28

DOCS\279669v1 44 I

1 they even had the item. They would receive these orders in a not organized 2 way. Half the time, these orders would be shipped and these managers 3 would not know where certain items were that they ordered, and then when 4 they'd look up, they'd find them weeks later." According to this former 5 employee, in order to correct errors made by the Los Angeles distribution 6 center, the Company's retail stores would have to "borrow" products from 7 each other because the shipments they received from the Los Angeles 8 distribution center were not what the stores had ordered. According to this 9 former employee, "most of the time, there [were] ... four or five different 10 stores [] within a twenty-mile radius of each other. And managers would 11 take over [the inventory shipping problems]. What they did was have a 12 `borrowed' list. So if somebody from another store ordered [] two or three 13 cases of items, but then they borrowed two cases from another store, they 14 would have to double their order and send back those cases." This witness 15 explained that orders placed with the distribution center became more 16 complex when stores would not only send in their usual order requests, but 17 added requests for their "borrowed list order." 18 97. Another former 99 Cents employee who worked as a cashier, 19 stocker and deli worker in one of the stores in California, said that deliveries 20 to her store from the distribution center would be late or missed, and that the 21 wrong merchandise would be delivered as there would be mix-ups with 22 deliveries to other stores. It was not unusual for different stores to actually 23 ship products between themselves to make up for the errors or deficiencies 24 stemming from the Los Angeles distribution center. 25 98. A former 99 Cents employee who worked at the Company's Los 26 Angeles distribution center during the Class Period also observed the 27 overcrowded conditions at the distribution center. This former employee 28

DOCS\279669v1 45 1 observed that pallets of merchandise would be stacked too high, above a line 2 that was drawn to limit the height of the stacks. Also, the overcrowded 3 conditions caused delays in pulling orders for the stores and getting trucks 4 loaded to deliver product to the stores. 5 99. Another former 99 Cents employee involved with the 6 Company's expansion into Texas, recalled that the Company had a 7 "nightmare" in November and December 2003 when goods were arriving in 8 the Los Angeles distribution center and there was nowhere to put them. The 9 Los Angeles distribution center was "full," but the shipping yards had 10 containers ready to deliver. He heard that the trucking companies just started 11 dumping trailers filled with inventory "anywhere they could find a space 12 within two or three miles" of the Los Angeles distribution center, and that 13 the Company lost millions of dollars in Christmas merchandise as a result of 14 the overloaded warehouse. A trailer full of Christmas merchandise that 99 15 Cents had purchased for Christmas 2003 was found in January or February 16 2004, when it was too late to ship and sell the merchandise in retail stores. 17 100. A network consultant who worked on a contractual basis with 18 99 Cents during the Class Period also stated that he visited the Company's 19 Los Angeles distribution center and observed that "it was a mess. It was just 20 stuff everywhere. And how they could track or account for anything would 21 be beyond me. ... Things weren't organized. Things weren't stacked in an 22 orderly fashion. Things were not labeled correctly or were unlabeled. 23 There's so much bulk that it's real easy for them to lose a lot of product and 24 not even know it's gone. Even if you ask somebody where something was, 25 they couldn't readily tell you where it was." This witness noted that there

26 I was little security and ample opportunity for theft, and there was lack of 27 I intake and outtake record keeping. 28

DOCS\279669v1 46 1 101. A vendor to 99 Cents during the Class Period also stated that the 2 Company's Los Angeles distribution center had so much merchandise inside 3 that it impeded the process by which containers in trucks were loaded and 4 unloaded. For example, 99 Cents purchased over 100 containers of products 5 from him in a one month period, but it took two months before the Company 6 picked them up. Further, after being picked up, twenty of these containers 7 I sat in the shipping yard because the Company did not have the space to 8 I empty them. 9 102. As a result of the severity of the problems affecting 99 Cents' 10 Los Angeles distribution center, 99 Cents was ultimately forced to hire an 11 outside consultant to handle the inventory issues, to lease 200,000 square 12 feet of additional warehouse space to alleviate the operating difficulties 13 caused by its overcrowded main distribution center, and to deploy new 14 software to manage the warehouse. The Company also acknowledged that it 15 was updating its policies in order to "tighten procedures around the transfer 16 and movement of inventory received from suppliers at both the retail stores 17 and the Company's distribution centers, as well as inter and intra-store and 18 warehouse transfer of inventory." 19 103. The problems affecting the Los Angeles distribution center 20 caused increased inventory shrinkage and, had the shrinkage been properly 21 accounted for, would have materially and negatively impacted the 22 Company's financial results during the Class Period. Theses problems also 23 impeded the Company's ability to receive products from vendors and to ship 24 them out to stores, which negatively impacted the Company's sales for 25 second quarter 2004.

26 2. Texas Distribution Center 27 28

DOCS\279669v1 47 1 104. Defendants' statements during the Class Period concerning the 2 Company's Texas distribution center were also false and misleading when 3 made. 4 105. Contrary to defendants' Class Period statement in July 2003 that 5 the Company's Texas distribution center was operational, in fact, the 6 distribution center was not operational until after the end of the Class Period. 7 Whether the Texas distribution center was operational is material because 8 the Company had purchased the Texas distribution center at a cost of $23 9 million, and in order to leverage this fixed cost and to operate the Texas 10 center at or above break-even levels, the Company had to rapidly open up 11 new stores in Texas. However, during the vast majority of the Class Period, 12 the Texas stores were not being served by the Texas distribution center but 13 rather, by the Los Angeles distribution center. Not only did this further 14 aggravate the already overcrowded condition in 99 Cents' Los Angeles 15 distribution center but it increased the Company's costs. 16 106. According to a former 99 Cents employee involved in 17 overseeing construction relating to the Company's expansion into Texas 18 during the Class Period, as of April 2004, the Texas distribution center was 19 "almost always empty." It was not until early-to-mid May 2004 (towards the 20 end of the Class Period) that the facility started to receive inventory. Rather 21 than stocking the stores opened in Texas by this point from the Texas 22 distribution center, 99 Cents stocked its Texas stores with inventory from its 23 Los Angeles distribution center. This former employee recalled that Senior 24 Vice President of Distribution and Logistics, Howard Gold, was responsible 25 for overseeing the merchandise shipments to Texas. Even after the Texas 26 facility became fully functional, which did not occur until approximately 27 August 2004, the Company did not utilize the refrigeration/freezer section of 28

DOCS\279669vl 48 I the facility because the Company did not want to pay the electricity bill. 2 Instead, the Company outsourced receiving and stocking functions to a 3 refrigeration company in Katy, Texas. 4 107. A former Real Estate Manager for the Company during the 5 Class Period also corroborated that the Texas distribution center did not start 6 begin to supply merchandise to Texas stores until shortly before July 2004. 7 8 B. Misrepresentations Concerning the Company's Financial 9 Results 10 1. Failure to Account for Extensive Inventory Shrinkage 11 1 2 108. The Company's financial statements during the Class Period 1 3 were false and misleading because defendants failed to account for the fact 14 that the Company suffered from large inventory losses attributable to 15 "shrinkage." Shrinkage is a term attributed to theft and spoiled, inedible, 16 expired and obsolete goods. The failure to properly account for these losses 17 resulted in overstatement of the Company's net income and earnings during 18 the Class Period. 19 109. According to the Company's Form 10-K filed on March 15, 20 2004, the Company's "Inventories are priced at the lower of cost (first in first 21 out ["FIFO"]) or market." In the Form 10-K, defendants stated that "[w]e 22 periodically review the net realizable value of our inventory and make 23 adjustments to its carrying value when appropriate." In the Form 10-K, 24 defendants also stated that "[i]f we sell large portions of our inventory at 25 amounts less than their carrying value or if we write down a significant 26 part of our inventory, our cost of sales, gross profit, operating income and 27 net income could suffer greatly during the period in which such event or 28

DOCS\279669v1 49 1 events occur." Accordingly, defendants knew that proper inventory controls 2 to account for shrinkage were absolutely essential to the accurate financial 3 reporting. 4 110. As acknowledged by defendants in the March 15, 2004 Form 5 10-K, misstatements of the inventory carrying value and significant 6 inventory write downs can severely impact the Company's cost of sales, 7 gross profit, operating income and net income. This is because of the 8 cascading negative impact that shrinkage has on the cost of sales, which then 9 negatively affects gross profit, operating income and net income. Before 10 making any adjustment for shrinkage, under the FIFO inventory method 11 employed by the Company during the Class Period, inventory items are first 12 recorded using the unit costs from the most recently purchased cost layers. 13 The cost of sales is determined by adding the beginning inventory (i.e., the 14 prior year ending inventory) with the current year purchases during the 15 period and subtracting the cost of the ending inventory. The cost assigned to 16 beginning inventory (i.e., prior year ending inventory) and ending inventory, 17 therefore, determines the current year cost of goods sold, as the current year 18 purchases are known with certainty. Accordingly, accurate beginning and 19 ending inventory valuation are essential to reporting accurate and reliable 20 financial statements. 21 111. A company, such as 99 Cents, that reports its inventory under 22 the lower of cost or market initially records its inventory at the purchase 23 price (i.e., costs). However, under GAAP, "a departure from the cost basis of 24 pricing the inventory is required when the utility of the goods is no longer as 25 great as its cost.... A loss of utility is to be reflected as a charge against 26 the revenues of the period in which it occurs." ARB No. 43 Chapter 4 27 Statement 5. Thus, periodically and especially at year end, if the market 28

DOCS\279669v1 50 1 price of the physical inventory is below the purchase price reported in the 2 financial statements, the inventory must be written down to the market price. 3 The reported cost of sales, gross profit, operating income, and net income are 4 reliable only if beginning and ending inventory amounts are accurate. 5 112. The Company's inventory during the Class Period was 6 overstated, and artificially inflated the Company's financial results. 7 Defendants were aware since at least the beginning of the Class Period that 8 the Company was suffering from large inventory losses due to theft and 9 expired, inedible, spoiled and obsolete perishable inventory items, in large 10 part due to the Company's handling of such products. As a result, 11 defendants knew that the Company should have taken a material shrinkage 12 provision during the Class Period. Yet, defendants decided not to take the 13 required charges during the Class Period in order to create the appearance 14 that the Company was still growing and succeeding. Ultimately, defendants 15 disclosed that the Company had a problem with shrinkage and announced 16 that it would have to take a sizable shrinkage adjustment of $8.2 million. 17 Had the Company properly taken the $8.2 million charge during the Class 18 Period, it would have materially reduced the Company's net income and 19 EPS. 20 113. The $8.2 million charge would have reduced the Company's 21 EPS by approximately $0.12 per share during the Class Period. This is also 22 material in light of the fact that the Company's reported EPS during the 23 Class Period was only $0.21 in second quarter 2003, $0.17 in third quarter 24 2003, $0.21 in fourth quarter 2003 and 0.13 in first quarter 2004. The charge 25 would have also reduced the Company's net income by $8.2 million within 26 the Class Period. This is material in light of the fact that the Company's 27 reported net income during the Class Period was only $14.8 million in 28

DOCS\279669v] 51 1 second quarter 2003, $12.1 million in third quarter 2003, $15 million in 2 fourth quarter 2003 and $9.3 million in first quarter 2004. The following is a 3 table summarizing the effect of the shrinkage adjustment:

4 Combined Combined Class Period Class Period 5 before Shrinkage after 2Q 2003 3Q 2003 4Q 2003 1 Q 2004 adjustment Adjustment adjustment 6 Net Earnings (millions ) $ 14.8 $ 22. 1 $ 15.0 $ 9.3 $ 51 .2 $ (8.20) $ 43.0 Earnings Per Share $ 0.21 $ 0.17 $ 0.21 $ 0.13 $ 0.72 $ (0.12) $ 0.60 7 Accordingly, because defendants failed to timely recognize the $8.2 8 million shrinkage adjustment during the Class Period, earnings per 9 share during the Class Period were materially overstated by at least 10 16%. 11 114. The severe problems with inventory shrinkage were pervasive 12 and well-known throughout the Class Period. Numerous former 99 Cents 13 employees have stated that the problems in the Company's Los Angeles 14 distribution center described above in, contributed to the inventory shrinkage 15 problem and described pervasive inventory shrinkage problems at 99 Cents' 16 stores. These former 99 Cents employees also reported that the inventory 17 controls that account for shrinkage, discussed in detail below were not 18 employed in either the Company's distribution center or its retail stores. 19 115. Before and during the Class Period, 99 Cents increased the 20 amount of perishable consumable items in an effort to increase the number of 21 store visits by its customers. In particular, having daily consumables like 22 milk, bread, eggs and cheese, as well as produce and products from the 23 frozen and deli categories, was important to the Company. Just before the 24 start of the Class Period, groceries constituted approximately 43% of the 25 I Company's merchandise. 26 27 28

I DOCS\279669v1 52 1 116. Former 99 Cents employees reported that the during the Class 2 Period spoiled, inedible and expired inventory items included: canned foods, 3 frozen foods, produce, eggs, dairy foods, deli meats, packaged foods, canned 4 soda, chips, dog food and even batteries. The former employees reported 5 that they routinely had large amounts of spoiled, inedible and expired 6 inventory items. According to former employees, these items often came 7 into the stores already rotten or expired or very close to the expiration dates. 8 The employees reported that they would sometimes throw-out the spoiled, 9 inedible and expired inventory items without ever putting the items on the 10 store shelves. More often, the employees reported that they would put these 11 spoiled, inedible and expired inventory items out for sale, but customers 12 refused to buy the items. The employees stated that they often received 13 customer complaints that the food items were spoiled, inedible and expired. 14 117. A former 99 Cents clerk whose duties included worker's 15 compensation and other loss claims and who reported to work each day at 99 16 Cents' corporate headquarters within the Los Angeles Distribution facility 17 during the Class Period, stated that the Company had lax security in the Los 18 Angeles distribution center and in its stores, which she claimed resulted in 19 frequent thefts of merchandise. According to this employee, "they 20 [management] did make it clear that they were losing a lot of money. They 21 did admit that they needed to boost up their security because a lot of stores 22 were losing money, a lot of stores. As far as people working at the stores, 23 people working at the warehouse, money was coming up missing, products 24 were coming up missing, inventory wasn't being counted right." This 25 witness indicated that the Company had inadequate mechanisms and 26 processes in place to account for theft-related losses. According to this 27 former employee, during the Class Period the Los Angeles distribution 28

DOCS\279669v1 53 I center inventory routinely included expired food products or products that 2 would soon reach their expiration dates which could not be sold by the time 3 the inventory was shipped to the stores. She said that "even the stores would 4 call us and they would say, `Hey, I got my shipment, but the thing is that the 5 stuff has expired. "' 6 118. Another former 99 Cents employee who worked as a cashier in 7 one of the Company's stores during the Class Period recalled that there were 8 expired food items sold at the store where she worked and that she witnessed 9 customers' repeated complaints that the stores were selling food past the 10 expiration date. She and other 99 Cents employees also reported that 11 shoplifting and employee theft was a common occurrence, including theft of 12 money from the cash registers. 13 119. Another former 99 Cents employee who worked as a stocker in 14 a Houston Texas store during the Class Period stated that spoiled perishable 15 food items were "thrown out all the time" and that when he threw the items 16 out there was no procedure in place to report the disposal of these items. 17 This same former 99 Cents employee also stated that food items were 18 frequently consumed by employees without payment during employee break

19 times. 20 120. According to a former assistant manager who worked at six or

21 I seven 99 Cents stores in California during his tenure which continued from 22 mid 1990s through the Class Period, there was no procedure for recording 23 items that had expired or otherwise could not be sold. According to this 24 I assistant manager, he threw out expired food items on numerous occasions. 25 If there were only a small amount, such as six or seven items, he would 26 typically throw the items away without tracking the information. Although 27 he would report the number of items he was throwing away if it involved 28

DOCS\279669v1 54 i larger number of items, this was not required. Rather, he simply felt more 2 comfortable informing the corporate office when there was an issue with a 3 item. This former employee spoke to various people at the corporate office 4 regarding expired or problematic inventory, but there was "no one in 5 charge" of these matters. 6 121. A former 99 Cents employee during the Class Period who 7 served as District Manager in charge of a group of stores for over a decade, 8 stated that "there was no effort to track perishables thrown out because it was 9 not supposed to happen, but it happened all the time." According to this 10 former employee, store managers found deli products in particular on a daily 11 basis that were in the coolers and freezers that were not rotated, or moved to 12 the deli counter, and thus had to be thrown out. Further, David Gold and 13 Eric Schiffer knew that inventory being thrown out "was common place and 14 happening daily." The witness recalled, for example, that he received 15 forwarded voice mails from David Gold referencing large volumes of 16 expired merchandise that had been thrown out at the stores and telling 17 mangers to make sure perishable inventory gets rotated onto the store floor. 1 8 122. One former store stocker stated that the store inventory 1 9 problems began at the distribution center because it was evident to him that 20 the distribution center was maintaining expired food products. As an 2 1 example, he stated that "when we got our shipments in [from the distribution 22 center], I remember one time I found a pallet full of dog food that had 23 maggots on it;" also, "there's a lot of things that are very old, especially the 24 stuff that they sell like in their deli, and stuff like that ... we'd open it up, 25 and it's basically rotten." This employee further reported that food items and 26 products would come from the distribution center in damaged and unsellable

27 I condition, citing dented cans that had mold on them and bananas and 28

DOCS\279669v1 55 1 watermelons infested with fruit flies and stated, "they'd stack stuff that 2 wasn't supposed to be stacked together, like manure would be stacked with 3 food or something like that." This same employee stated when a store 4 receives inventory that they do not want or need "they just ship the stuff out 5 that they are not going to use anymore and they give it all to [another store]. 6 That's what every store does. Basically, when they're done using it and they 7 have too much of it, they just send it to another store, even if it's expired or 8 not." He also reported that it was a common practice for the stores to 9 attempt to sell expired merchandise up to a week after the expiration date 10 and hope that the customers would not notice and complain about the dates 11 or how the products looked stating that he witnessed customers coming back 12 to the store to complain that they became ill after consuming food items they 13 had purchased there. He recalled observing and hearing about attempts to 14 remove expiration dates from products before shipping expired or unsellable 15 merchandise to other stores. This employee stated that he told friends and 16 relatives, "just don 't buy any food there because it's just not good, not good 17 for you at all," adding that the store very rarely rotated stock. In other 18 words, this former employee warned against buying "any food" from 99 19 Cents, which was approximately 43% of the stores inventory, because the 20 food being sold at 99 Cents could make a person sick if consumed. This 21 scenario was recounted by numerous former 99 Cents employees. 22 123. According to another former 99 Cents employee who worked as 23 a deli worker in a 99 Cents store in California during the Class Period, the 24 store would receive food items that had passed their expiration date or were 25 so close to it that the item would expire shortly after being displayed for sale. 26 "There would be a lot of stuff in the deli that that would happen to a lot, just 27 because that's the kind of stuff that they bought, that was close to the date. 28

DOCS\279669v1 56 II But sometimes it would be so close that we couldn't sell it [because 2 customers would not buy expired food]. Sometimes they'd [corporate 3 management would] send little papers saying to sell it for cheaper than 4 normal, and we would do that, but it still wouldn't sell because it would be S i expired the very next day or so. Sometimes we got stuff that was already 6 expired by the time it got there, or damaged." According to this employee, 7 99 Cents' store policy was to try to sell products to the public even after their 8 expiration dates to avoid taking a loss, and recalls an instance where a lot of 9 eggs started piling up because they were not selling since they were past the 10 expiration dates. She was directed to crack an egg open each day after the 1 1 expiration date until it was apparent that the eggs were clearly spoiled. Also, 12 according to this employee, aside from food products, there was merchandise 1 3 sitting on the store shelves that could not be sold because there was no 1 4 customer interest in the product. Nevertheless, the distribution center would 1 5 continue to send such items to the store. In fact, there were products on the 16 store shelves that dated from the 1980s and 1990s that customers would not 17 buy. Additionally, according to this employee, there were losses due to theft 1 8 and shoplifting, including employees eating food products being sold by the 19 company without paying for them, theft from cash registers, and shoplifting 20 by customers. 2 1 124. Another former 99 Cents employee who worked as a cashier and 22 stocker in a 99 Cents store also stated that the 99 Cents store where she 23 worked had food items that were outdated or nearing expiration. She also 24 stated that there were products left on the store shelves even when it was 25 evident that the customers had lost interest in purchasing such items. This 26 former employee also noted that employee theft and shoplifting by customers 27 2 8

DOCS\279669vl 57 ti

1 was a serious problem, stating, "[t]hey were losing a lot of money in stolen 2 stuff." 3 125. Similarly, another former 99 Cents employee who held the 4 positions of cashier, head cashier and warehouse clerk in a store in 5 California during the Class Period noted that the store would frequently sell 6 food items that had expired or gone beyond their "best if used before ..." 7 dates, and observed customers arguing with store managers about the sale of 8 such products. She further stated that shoplifting and employee theft were a 9 big problem in the store. 10 126. A former employee who worked as a stocker in a 99 Cents store 11 during the Class Period also noted that there were delivery problems and 12 delays in restocking store shelves. Also, according to this former employee, 13 there was merchandise put out for sale that was outdated and that customers 14 no longer wanted to buy, including expired disposable batteries. The store 15 would receive unwanted outdated and expired products from the distribution 16 center, and rather than put these products on the shelves, which were already 17 filled with these items, "we would just stack them up in the back." The 18 expired merchandise included perishable food items such as bread, tortillas 19 and fruit juices. Even expired canned foods, which have long shelf lives, 20 were stored beyond their expiration dates and then put out for sale. This 21 store stocker reported that there would be an effort to try to stock shelves and 22 sell items before the expiration, but the product would be left on the shelves 23 for sale even after the expiration dates. He also reported that employees 24 ^ would consume food items that were for sale without paying for those items. 25 127. Another former 99 Cents employee who worked as a cashier and 26 stocker in an Arizona 99 Cents store during the Class Period also stated that 271 perishable items would be kept on shelves or otherwise stored beyond 28

DOCS\279669v1 58 1 expiration dates and not timely removed. She stated that "I do know that 2 sometimes they would not get rid of something and keep it on the market; 3 you know what I mean, for a long amount of time. I do know they were 4 doing that for a while." She stated that the store would keep outdated 5 merchandise on shelves such as calendars, toys and books long after 6 consumer interest or need had passed. She stated, "They would just leave 7 them out and never take them out and put different things out, more 8 updated type of stuff." 9 128. Similarly, a former 99 Cents assistant store manager who 10 worked during the Class Period in a new 99 Cents store in Texas, which she 11 said was serviced by the Los Angeles distribution center, stated that her 12 store received a lot of perishable food items that were already expired or near 13 expiration, damaged, spoiled and in general not suitable for sale when 14 delivered, including cookies, yogurt, hot dogs and other deli meats. Sodas 15 and chips would be received in damaged condition, and even products in 16 cans or jars would arrive already expired, damaged or opened "all the time. 17 That was every truck." Her store also received merchandise for which there 18 was no market or consumer interest, and products that were not ordered. 19 Within the storage area of her store, "Our room would be so packed, we 20 didn't even know what we had in there." 21 129. Obsolete inventory was left to languish on store shelves when it 22 should have been written off. A former purchasing employee stated that 23 David Gold always encouraged the employees to get obsolete, or what 99 24 Cents called "dead" inventory out of the warehouse and into the stores in an 25 I effort to sell the merchandise through deep discounts. Former employees 26 the I repeatedly reported that "dead" inventory was difficult to sell, despite 27 deep discounts offered, because this was merchandise for which there was no 28

DOCS\279669v1 59 1 ^ demand to begin with. Sometimes "dead" or slow-moving inventory was 2 transferred to the Company's Wholesale Division as another means to get rid 3 of it. However, the former purchasing employee stated that the woman who 4 ran the Wholesale Division, Helen Pipkin, was "partial" to selling the 5 ^ existing wholesale merchandise, and so this method was not successful. 6 130. Obsolete inventory languished on the Company's balance sheet 7 as well. As a result of the pervasive shrinkage problems that existed at the 8 company before and during the Class Period, the financial statements during 9 the Class Period were materially misstated. The financial statements were 10 misstated because the company did not adequately quantify and adjust for the 11 inventory shrinkage. These pervasive shrinkage problems were not properly 12 accounted for in the books because the company lacked adequate internal 13 controls that were required so that shrinkage could be quantified. 14 131. The extent of inventory shrinkage, i.e., thefts and spoiled, 15 inedible, expired and obsolete inventory, can only be identified through 16 proper and adequate internal controls. Spoiled, inedible and expired 17 inventory items should be properly accounted for on a contemporaneous and 18 continuous basis and the disposal of these merchandise items should have 19 been recorded by keeping a log. Spoiled, inedible and expired inventory 20 items that are not properly tracked on a log should be accounted for by the 21 periodic physical inventory count. However, this internal control is adequate 22 only if the periodic physical inventory count is accurate. Obsolete inventory 23 write-offs, however, cannot be quantified from the physical inventory count 24 because obsolete inventory will appear in the physical count even though 25 such inventory is no longer saleable. Obsolete inventory must, therefore, be 26 accounted for through adequate inventory controls, such as an inventory 27 turn-over report by inventory item. Inventory thefts are accounted for by 28

DOCS\279669v1 60 1 writing down the inventory reported on the books to the physical inventory 2 count. However, this internal control is adequate only if the periodic 3 physical inventory count is accurate and reliable. 4 132. The $8.2 million identified by defendants of spoiled, inedible, 5 expired, obsolete and stolen inventory items written off by Company as 6 inventory shrinkage did not suddenly, all in one day, or one month either rot, 7 expire, become obsolete or turn up stolen. Extrapolating from the 8 Company's own financial information, the number of items written off 9 totaled at least 13.8 million items, based on the reported 40% profit margin. 10 It required at least several months for the number of inventory items affected 11 to amount to $8.2 million. Accordingly, the $8.2 million loss accrued over 12 the Class Period. 13 133. The Company and the Individual Defendants' fraudulent 14 accounting practices included overstating inventory by disregarding physical 15 inventory counts, failing to value inventory based on actual costs, and failing 16 to provide adequate inventory reserves and write-downs, which allowed for 17 the fraudulent deferral of current period cost of sales expenses. As a result 18 of the severe and pervasive inventory shrinkage understatement, the 19 Company ultimately took a charge of $8.2 million in a later period. As 20 required under GAAP, specifically ARB No. 43 Chapter 4 Statement 5, this 21 material charge should have been taken during the Class Period.

22 2 Internal Inventory Control Failures 23 134. At all relevant times during the Class Period, the Company's 24 internal controls were extremely weak and did not enable the Company to 25 accurately report its financial results. Nevertheless, defendants David Gold 26 I and Farina certified in the Company's SEC filings throughout the Class 27 28

DOCS\279669v1 61 1 Period that 99 Cents had effective internal controls. Among other things, 2 they falsely and recklessly certified that the financial results reported in the 3 Company's filings with the SEC "fairly presents, in all material respects, the 4 financial conditions and results of operations of the [Company]," that they 5 evaluated the effectiveness of the internal controls and concluded that these 6 "controls and procedures are effective," and that they disclosed all 7 significant deficiencies in internal controls or other factors that could 8 significantly affect internal controls. 9 135. A material weakness in the internal control structure is the worst 10 possible financial statement reportable condition. As defined by the 11 American Institute of Certified Public Accountants (AICPA), a material 12 weakness exists when internal controls are such that significant errors or 13 irregularities may occur and not be detected within a timely period by 14 employees in the normal course of performing their assigned functions. In 15 other words, a system that allows illegal acts such as thefts to could go 16 undetected suffers from a material internal control weakness. Failure of the 17 internal controls causes a lack of reliable financial information, which is 18 another material weakness as defined by the AICPA. Effective internal 19 inventory controls are critical at each step in the purchase to sale chain to 20 ensure accurate inventory and cost of sales data for financial statement 21 reporting. The Company failed to implement adequate internal controls 22 systems and procedures. 23 136. A large volume retailer, such as 99 Cents, is wholly dependent 24 on adequate internal inventory controls to guard against and account for theft 25 and other inventory shrinkages in order to assure that the financial 26 statements are fairly presented in compliance with GAAP. These internal 27 inventory controls should include: proper recording of inventory costs; 28

DOCS\279669v1 62 1 proper tracking of inventory sales; proper tracking of spoiled, inedible and 2 expired inventory disposal so that write-off adjustments are accurately 3 reflected in the books; adequate evaluation and write-off of obsolete 4 inventory; writedown adjustments based on accurate periodic physical 5 inventory count; and adequate evaluation of and adjustments for inventory 6 shrinkage not accounted for through other methods. Defendants' repeated 7 certifications misled investors into believing that such inventory controls 8 were in place at the Company. Unfortunately for investors, these internal 9 inventory controls were not properly implemented or maintained by 99 Cents 10 throughout the Class Period.

11 a. Defendants Failed to Properly Record Inventory 12 137. As reported by former 99 Cents employees, during the Class 13 Period the Company utilized a perpetual inventory software system called 14 Accuterm. The Accuterm system is designed to allow for inventory tracking 15 of retail purchases and sales to allow immediate real-time accounting of 16 inventory stocks. As reported by a former 99 Cents employee, the Company 17 maintained an inventory of over a thousand merchandise items. Each item 18 was supposed to have its own unique item number that would correspond to 19 a unique bar code. As each item was purchased or sold, the Accuterm 20 I system would allow for an increase or decrease in the inventory stock. The 21 Accuterm system was dependent on reliable information to be input at both 22 the inventory purchase and sales points. However, the Accuterm system 23 contained inaccurate information because of the unreliability of the 24 information put into it - in other words, garbage in results in garbage out. 25 138. Throughout the Class Period, the Accuterm system was 26 provided with inaccurate and unreliable information. As described in detail 27 28

DOCS\279669v1 63 I above, at all times during the Class Period the warehouse distribution centers 2 were overwhelmed by the shipments that came into the warehouse to the 3 point that shippers started dumping containers anywhere they could find 4 I space within two to three miles of the warehouse. Large quantities of 5 inventory were routinely lost within and around the Los Angeles distribution 6 warehouse facility. As a result, the inventory was not properly recorded into 7 the inventory system. As evidence of the lack of proper inventory input at 8 the warehouse, a former 99 Cents cashier reported that when a merchandise 9 item for sale to a customer was scanned into the Accuterm point of sale 10 system, the name of the item was supposed to appear on the register screen to 11 provide assurance that the items were correctly accounted for in the system. 12 Once the sale was final, the Accuterm system should then cause an automatic 13 charge to cost of sales and a reduction in the corresponding inventory item 14 that should have been recorded on the books at cost. However, this same 15 cashier stated that 40% to 50% of the time that she scanned non-produce 16 inventory items (i.e., other than fruits and vegetables), the item would come 17 up in the Accuterm system as a generic "miscellaneous." In other words, 18 40% to 50% of non-produce inventory items were not properly recorded into 19 the inventory system at the warehousing stage, which thereby prevented a 20 proper charge to the cost of sales and likewise failed to cause a reduction in 21 the inventory recorded on the books at the time of sale. This cashier also 22 stated that the Accuterm system was not programmed with an inventory 23 number or code to input for perishable produce items and so she would 24 simply override the system by simply inputting the price of the produce item. 25 As with the generic miscellaneous items mentioned above, when produce 26 was sold, the Accuterm system could not make a respective charge to the 27 cost of sales and corresponding reduction in the inventory recorded on the 28

DOCS\279669v1 64 1 books. Accordingly, the Accuterm perpetual inventory system employed by 2 99 Cents operated on a garbage in garbage out basis, making any report 3 generated from it wholly inaccurate and unreliable. 4 139. According to another former employee who worked at 99 Cents' 5 corporate offices, the Company did not start using a SKU system at all until 6 the early 2000s, and even then, a lot of merchandise at stores rang up as 7 "miscellaneous," which prevented tracking of what items were sold and 8 made calculation of gross margin by item impossible. Although this 9 employee ended his employment with the Company before the Class Period, 10 the information he provided is consistent with the information provided by 11 the cashier who was employed by the Company during the Class Period, 12 above. 13 140. Likewise, according to a former 99 Cents employee during the 14 Class Period who was a District Manager for over a decade, a lot 15 merchandise at the stores rang up on the cash register simply as 16 "miscellaneous ." As a result, there was no way of knowing what specific 17 item had been sold. Also, "there was no way of doing gross margin 18 accurately" because the point of sale system did not track all items by 19 specific item type. Additionally, according to this witness, certain inventory 20 was not accounted for in 99 Cents' inventory systems at all. Inventory that 21 was pushed out to stores per David Gold's direction, which were not 22 specifically ordered by the stores, was referred to as "divide out" or "plussed 23 out" merchandise. This merchandise was primarily small quantities of a 24 single item (typically 2,000 to 3,000 cases with each case holding between 25 12 and 24 individual units, and was un-orderable) which either the main

26 I warehouse found and did not know existed or the original order was small. 27 Because of the relatively small quantities, divide out inventory was not 28

DOCS\279669v1 65 1 entered into the Company's inventory system at all. When these items were 2 found, which was an almost daily occurrence, David Gold directed the 3 warehouse to "plus it out" to all or most of the retail stores in equal 4 proportions in order to get rid of it. Every single delivery to a store included 5 a "divide out sheet" prepared in the warehouse before delivery. The divide 6 out sheet reflected the item type and quantity (in number of cases) delivered, 7 and were typically one to our pages long, with 20 different item types 8 included per page. Although the individual divide out inventory items were 9 considered a small quantity, the cumulative quantity of all divide out 10 merchandise that was sent out to stores on every delivery (once every two 11 days) was "a lot of merchandise" that was not accounted for in NDN's 12 inventory system at all. 13 141. A Computer Technician who worked for 99 Cents from 1999 14 through mid 2004 also stated that the Company's point of sales system could 15 not track store inventory. According to this witness, it was not until 16 approximately April 2004, a month before his departure from the Company, 17 that a new system to track store inventory was installed. As set forth herein, 18 April 2004 was also around the time when defendants took an inventory 19 count at its retail stores. 20 142. A former IT employee who developed the Company's 21 warehouse and inventory programs and who worked for 99 Cents up until the 22 beginning of the Class period stated that the internal inventory controls did 23 not allow for accurate inventory tracking. He stated that the warehouse 24 inventory was supposed to be categorized and assigned "logical locations" 25 within the warehouse by aisle and bin number. He stated that inventory was 26 frequently lost and that Howard Gold instructed him to write computer 27 "inventory hunting" applications that created "virtual bins" to track the 28

DOCS\279669v1 66 1 amount of lost, missing, obsolete, spoiled and expired merchandise. Howard 2 Gold personally named the virtual bins "Unknown"; "Lostt" [double "t" 3 intentional]; "Losttt"[triple "t" intentional]; and "Killed." The "Unknown" 4 virtual bin held merchandise that had been received at the warehouse, but 5 didn't yet have a physical space assigned to it yet, either because there 6 wasn't room for it, because it hadn't yet been assigned a stock number, or 7 due to shrinkage. The former IT employee said Howard Gold assigned some 8 merchandise that was included in the Unknown virtual bin a "dummy stock 9 number" that did not correspond to an actual recognized stock number in the 10 system, until it could be determined where the inventory would be housed. 11 He stated that a case contained between twelve and twenty-four individual 12 items and that at any given time the "Unknown virtual bin" contained 13 approximately 50,000 cases of various merchandise at various costs. He 14 stated that the "Lostt" virtual bin included inventory that had a recognized 15 stock number and so Howard believed it was physically present in the 16 warehouse, but just could not be located in the warehouse. He stated that a 17 warehouse supervisor was assigned to go through the entire warehouse to 18 locate the inventory that matched the stock numbers of the inventory that 19 was included in the Lostt virtual bin. He also explained that while he 20 worked at the Company the "Lostt virtual bin" had up to 100,000 cases of 21 merchandise. The "Losttt" virtual bin held inventory that had been ordered 22 and recorded as delivered, but could not be found anywhere in the warehouse 23 even after a search was conducted. The former IT employee stated that while 24 he was employed at the Company, the Losttt virtual bin also had up to 25 100,000 cases of merchandise at any given time. The "Killed" virtual bin 26 ^ was where Howard Gold tracked inventory that could not be resold in stores 27 because it was known to be obsolete, spoiled and expired. The former IT 28

II DOCS\279669v1 67 1 employee reported that during his employment, the "Killed" virtual bin 2 contained the largest number of cases of merchandise -up to 100,000 cases. 3 He reported that the standing order from Howard Gold was to ship out 4 "Killed" merchandise to the retail stores in order to minimize financial 5 losses. According to this witness, the terms "virtual bin," "Lost double-t," 6 "Lost triple-t," and "Killed" were terms regularly used around the corporate 7 office in discussing inventory, and approximately 90% of the reports 8 pertaining to inventory that could be viewed online had reference to the 9 virtual bins. Thus, defendants were aware what the virtual bins were and 10 what they contained. 11 143. This same former employee reported that each store received a 12 truck full of merchandise every two days of approximately 105 cases of 13 merchandise and that 65%-70% of merchandise shipped was inventory that 14 the stores did not order. In other words, each store received approximately 15 12,422 cases (105 cases times 182 annual truck loads times 65%) of un- 16 ordered, slow moving merchandise that they were expected to sell to 17 customers. 18 144. Consistent with these statements, other former store -employees 19 who worked for the Company during the Class Period reported that the stores 20 would receive inventory that they did not order. One former store assistant 21 manager stated that the stores would receive "pallets of junk" that "none of 22 us ordered." "And we'd call and we'd ask them [the warehouse], `Hey, 23 what's going on?' And they would say something like they're cleaning the 24 warehouse and they found a bunch of loose stuff and so every store in the 25 area is getting at least a pallet of it to try and distribute it out evenly." He 26 reported that the stores could not "do anything with this stuff' because it was 27 28

DOCS\279669v1 68 1 expired food items, merchandise that the public was not interested in buying, 2 or damaged items that could not be sold. 3 145. According to a Network Consultant hired to help improve the 4 Company's network infrastructure during the Class Period, the Los Angeles 5 Distribution Center was disorganized, poorly managed and maintained poor 6 recordkeeping. He further reported that the inventory bar-coding system was 7 inefficient and that inventory theft from the Distribution center and the stores 8 was not adequately addressed by 99 Cents' management. He also stated that 9 inadequate telecommunications wiring and outdated hardware hampered the 10 flow of information within the company and between the company and 11 vendors. He reported an overall lack of internal controls at 99 Cents. 12 146. Based on his own observations, the Network Consultant bluntly 13 stated that the LA Distribution center, "was a mess. It was just stuff 14 everywhere. And how they could track or account for anything would be 15 beyond me. Even in the executives' offices there was just stuff everywhere." 16 He further commented with regard to the distribution center and inventory 17 control, "[t]hings weren't organized. Things weren't stacked in an orderly 18 fashion. Things were not labeled correctly or were unlabeled. -There's so 19 much bulk that it's real easy for them to lose a lot of product and not even 20 know it's gone. Even if you ask somebody where something was, they 21 couldn't readily tell you where it was." He also noted that the storage areas 22 of individual retail stores, essentially mini-warehouses, had the same 23 problems. Concerning theft, he stated that "[i]t's easy to take things from 24 those stores, and certainly from a distribution center, without them being 25 accounted for." He reported that 99 Cents lacked proper inventory intake 26 and outtake recordkeeping. He reported the 99 Cents' inventory system and 27 28

DOCS\279669v I 69 1 controls were below industry standards based on his observations of 2 computerized inventory systems at other companies. 3 147. The Network Consultant stated that 99 Cents' computer system 4 and platforms were obsolete and insufficient for the Company's needs. He 5 concluded "that was the major problem, the hardware infrastructure was so 6 obsolescent, inefficient, poorly managed, that it's impossible to believe that 7 the software applications themselves could have functioned well." Based on 8 his professional experience, he stated that "[y]ou cannot run a retail 9 distribution organization like [99 Cents] without an extremely efficient 10 network platform, computer systems, et cetera" and further stated that even 11 the more up-to-date software, such as Accuterm, which 99 Cents used for 12 inventory control, did not function properly with the older hardware 13 infrastructure. He stated that he informed 99 Cents' management of the 14 problems described herein and also informed them that the company's stated 15 growth projections were unrealistic in light of urgently needed improvements 16 and upgrades to the hardware, platforms and inventory system. He stated 17 that management ignored his advice that the hardware, platforms and 18 systems needed updating. 19 148. Witnesses also highlighted another major weakness in the 20 internal inventory controls - the fact that 99 Cents did not perform inventory 21 turnover analysis. Individual Defendants relied on the availability of 22 closeout merchandise as its purchasing philosophy rather than buying 23 inventory based on quarterly or annual demand. Former 99 Cents employees 24 stated that 99 Cents could have easily improved its financial performance by 25 simply performing an analysis of the inventory turnover to identify slow 26 moving merchandise. The failure of this internal control - the failure to 27 perform proper inventory turnover analysis -- during the Class Period caused 28

DOCS\279669v1 70 1 the Company to fail to timely record the shrinkage adjustment to account for 2 the high volumes of obsolete inventory that needed to be written off. 3 b. Defendants Failed to Properly Conduct 4 Physical Inventory Count 5

6 149. With all the failures in the Company's computerized perpetual 7 inventory system internal controls, it was even more important to conduct an 8 accurate annual physical inventory count. To the shareholders further 9 misfortune, the inventory count also suffered material internal control 10 failures. 11 150. The Company's inventory count was not properly conducted. 12 Numerous employees have stated that 99 Cents employees were required to 13 participate in the annual inventory count, which typically took place in 14 September over a three day period on a Friday, Saturday and Sunday. The 15 former employees stated that employees worked in teams of two or three and 16 that there were 30 or more teams. Each team was provided a pre-determined 17 inventory list that the team was responsible for verifying the accuracy. 18 These inventory lists were generated from the Company's computer 19 inventory system. Several employees stated that the lists included a 20 description of the items, the location in the warehouse where the inventory 21 item can be located and the item quantity that should be in that location. The 22 employees were directed to record the quantity of items found in that 23 location. The former employees also stated that the inventory count was 24 directly supervised by Howard Gold, with assistance from Jeff Gold, Eric 25 Schiffer and David Gold. All four defendants were present during the 26 physical inventory count. 27 28

DOCS\279669v1 71 1 151. The Company's former IT employee who developed the 2 Company's warehouse and inventory programs reported that after the 3 physical inventory count was completed, the information from the count 4 sheets were input into a spreadsheet that reported the discrepancies between 5 the inventory that was pre-determined on the count sheets and the amount 6 listed by the persons who performed the count. This 99 Cents manager 7 described the physical inventory count spreadsheets as follows: 1) the first 8 column identified the bin number designation from the warehouse system; 2) 9 the next column contained a total physical inventory count for all products in 10 that bin, and on an itemized basis within that bin; 3) the next column 11 contained a total physical inventory count for all products in that bin, and on 12 an itemized basis within that bin; 4) the next column reflected the total 13 system count for that bin and the itemized products within it; 5) the next 14 column reflected the "delta" or change between the physical and system 15 inventory counts; and 6) the last column reflected the total inventory cost at 16 retail and at wholesale. 17 152. The physical count process was completely devoid of controls 18 and training. A former 99 Cents employee who worked at the Company 19 from the mid-1990s through 2004 and who participated in the physical 20 inventory stated that employees did not receive any training and received 21 only verbal instructions on the day of the count, which varied from year to 22 year. According to this witness, most of the 99 Cents employees did not 23 want to work over the weekend to perform the count and did not appear to 24 make an effort to achieve an accurate count. He could recall only one 25 employee who appeared to make an effort to perform accurate counts. A 26 former IT employee during the Class Period who developed the Company's 27 warehouse and inventory programs also corroborated that employees did not 28

DOCS\279669v1 72 1 receive any training, and that the instructions on how and what to count were 2 provided by Howard Gold and they were not always the same. 3 153. A former 99 Cents District Manager who participated in the 4 inventory count also' described the inventory count as utilizing "dark ages" 5 methods of counting and a lot of "crawling over boxes" to get to the 6 inventory in the warehouse. He reported that quite often the inventory items 7 on the list could not be found, and that the inventory quantities actually 8 present were approximately 10% less than the amount of inventory on the 9 computer-generated list. A former warehouse employee stated that during 10 the inventory count, he found that approximately 25%-35% of the time the 11 inventory on-hand was lower than what the inventory sheet reflected or that 12 he could not locate the inventory listed on the inventory sheet at all. 13 According to this witness, during the physical inventory counts, a lot of 1 4 times he "couldn't find stuff." 1 5 154. According to another employee during the Class Period who 16 participated in the annual inventory count in September, he doubted the 17 accuracy of the physical warehouse inventory count, because the warehouse 1 8 was so crowded that it was sometimes difficult to "even go around the corner 19 to count." 20 155. Former employees stated that before the Excel spreadsheet 21 inventory adjustments from the physical count was provided to Accounting, 22 Howard Gold had to approve and authorize its release . Jeff Gold also 23 reviewed the Excel spreadsheet when it became available. Any inventory in 24 the "virtual bins" categorized as "Unknown," "Lostt," or "Losttt" that was 25 not located after a search of the warehouse and all "Killed" virtual bin 26 inventory plus the difference between the physical and system inventory 27 figures should have been written off. However, a former IT employee who 28

11 DOCS\279669v1 73 1 developed the Company's warehouse and inventory programs stated that 2 Howard Gold was disinclined writing-off merchandise as shrinkage and 3 sometimes would not approve the amounts on the Excel spreadsheet for 4 release to Accounting. The inventory shortages noted by the employees in 5 the inventory count were sometimes not accepted by Howard Gold. The 6 former employees reported that Howard Gold would instead require that the 7 inventory be recounted until he was personally comfortable with the 8 shrinkage adjustment. Certain employees stated that some employees 9 performing the count would simply note an amount that agreed with the 10 quantity reported on the per-determined count list. One witness stated that 11 the inventory count was unreliable because "a lot of employees didn't care" 12 and so they simply reported "guesstimates" rather than actually physically 13 counting the inventory. The employees reported that this recounting process 14 "dragged on" for weeks and even months following the initial physical 15 inventory count. However, during this period, the amount of inventory on 16 hand was changed by inventory received from vendors subsequent to the 17 initial count and by additional inventory shipments to the retail stores and, 18 from there, sales to customers. Thus, any recount would therefore not be 19 reliable. Furthermore, employees stated that the Golds refused to accept that 20 inventory was obsolete and non-sellable. One store manager stated that 21 "Howard [Gold] and Dave [Gold] were packrats," and stated that they kept 22 all kinds of outdated merchandise because they always felt that "someone 23 was going to want it," despite its age or obsolescence. The final inventory 24 figures would not be released for weeks or months until the employees 25 counting the inventory returned an inventory count that Howard Gold could 26 live with and would refuse to accept the obvious obsolescence of other 27 28

DOCS\279669vl 74 1 inventory, regardless of the accuracy of the original count or the obviousness 2 obsolescence of the items. 3 156. All of the weaknesses and failures in the internal inventory 4 controls identified above caused the ending inventory and cost of sales 5 reported on the Company's financial statements to be unreliable. 6 Consequently, the financial statements taken as a whole did not fairly report 7 the financial condition of the Company in accordance with GAAP standards 8 during the Class Period. 9 157. At the end of the Class Period, defendants shocked investors by 10 disclosing that the Company needed to "ensure that the proper management 11 and systems infrastructure [were] in place," and that it needed to 12 "implement[] changes to [its] internal controls to address identified 13 weaknesses." Defendants further disclosed that there were operational and 14 process issues in its distribution centers such that the Company was forced to 15 create a new position to oversee all aspects of purchasing, inventory control, 16 distribution and merchandising. 17 158. 99 Cents' internal controls were so poor that, after defendants 18 finally disclosed that the Company's operational and financial controls were 19 deficient, the Company was not able to file its third quarter 2004 form l OQ 20 "within the prescribed time period without unreasonable effort or expense." 21 The Company also was unable to file its Form 10-K for year ended 2004 on 22 time in part because the Company did not complete the necessary testing of 23 its internal controls over financial control by year end and it identified 24 material weaknesses relating to deficiencies in internal controls, in the 25 design documentation and execution of significant control activities, and in 26 the management information systems and information technology. As a 27 result, the Company has announced that its outside auditor will express an 28

DOCS\279669v1 75 1 adverse opinion on the effectiveness of the Company's internal controls 2 because of material weakness. 3 Statements Concerning the 4 C. False and Misleading 5 Company's Performance for Second Quarter 2004 6 159. During the Class Period, defendants issued specific financial 7 guidance to analysts and investors for second quarter 2004 that were false 8 and misleading when made. Defendants guided the market to believe that, 9 for second quarter 2004, the Company would achieve EPS of $0.19-$0.20. 10 However, at the time of issuing this guidance, defendants knew the guidance 11 was false and without a reasonable basis because they were aware that the 12 Company lacked internal controls and thus the ability to make forecasts, and 13 they knew that the Company was required to take a massive charge for 14 shrinkage of $8.2 million which would dramatically reduce the Company's 15 financial results. Defendants also guided the market to believe that the 16 Company would open 13 new stores in second quarter 2004. The opening of 17 new stores was important as new stores meant additional sales and revenue 18 to 99 Cents. However, at the time of issuing this guidance, defendants knew 19 the guidance was false and without a reasonable basis because the Company 20 I was already behind in store openings and did not have the manpower to open 21 113 new stores. 22 1. Financial Guidance for Second Quarter 2004 23 24 160. Defendants knew by April 20, 2004 that the Company would 25 not meet its financial guidance for second quarter 2004, as they were aware 26 that the Company lacked internal controls sufficient to allow accurate 27 forecasts and they knew that the Company would be required to take a 28

DOCS\279669v1 76 1 massive provision for shrinkage which would substantially reduce the 2 Company's financial performance in second quarter 2004. 3 161. As discussed above, at all relevant times, the Company lacked 4 internal controls such that accurate forecasts could be made. For example,

5 I according to a Network Consultant who worked on a contractual basis with 6 99 Cents during the Class Period, in connection with his review of the 7 Company's network infrastructure, he became aware of the Company's lack 8 of internal controls. According to the witness, the network infrastructure 9 was the lifeblood of the business, as it linked distribution, consumer markets, 10 retail stores and vendors. The Company had problems with their networks, 11 which often went down. "Being able to get timely information, to get orders 12 processed in a timely manner was almost impossible and there were 13 problems with it all the time." This witness also stated that the Company's 14 computer technology was antiquated and did not operate efficiently, 15 contributing to the Company's internal control problems. "You cannot run a 16 retail distribution organization like that without an extremely efficient 17 network platform, computer systems, etc." The more up-to-date software the 18 Company had, such as "Accuterm," which was used for inventory control, 19 did not function properly with the older hardware the Company had in place, 20 which was obsolete, inefficient and poorly maintained. As to use of the 21 Accuterm system, "Orders are not going to be placed on time, they are not 22 going to be delivered on time, they are not going to be distributed on time." 23 Additionally, "it was almost impossible for them to figure out what they 24 had." The Company "was not using a very efficient bar-coding system to 25 track the products, and how you manage an Accuterm system is with bar- 26 coding." According to this witness, the internal controls were "grossly 27 lacking." This witness stated that he pointed out problems that needed 28

DOCS\279669vl 77 1 correcting to 99 Cents' Director of Management Information Systems 2 ("M.I.S."), who reported directly to the Senior Vice President of Information 3 Systems, Jeff Gold. 4 162. Additionally, at all relevant times, defendants were aware that 5 large amounts of inventory in its Los Angeles distribution center were lost, 6 stolen or obsolete through the records maintained in "virtual bins," which 7 were created at the direction of Howard Gold. Through this data, defendants 8 knew that a massive shrinkage charge was required. 9 163. Furthermore, each of the Individual Defendants participated in 10 the Company's warehouse-wide inventory count taken in September 2003, 11 and Howard Gold reviewed and had final approval authority over the 12 inventory figures in an Excel spreadsheet before they were provided to 13 Accounting. When Howard Gold was not satisfied with the end numbers, 14 they were not released to Accounting. Thus, defendants had access to 15 information about the Company's inventory and knew, or were reckless in 16 not knowing, that a large shrinkage charge was required. 17 164. In addition to the inventory losses in the Los Angeles 18 distribution center, losses were also occurring at individual 99 Cents retail 19 stores. The Company had no system or policy to track those losses even 20 though numerous employees said that large amounts of inventory were 21 thrown out all the time. The defendants knew they should have, but they did 22 not, timely wrote off these losses under GAAP. In late March / early April 23 2004, when the Company took inventory counts at approximately 90% of its 24 stores, the inventory count confirmed what defendants already knew - that 25 the Company suffered large losses from shrinkage for which a charge would 26 be required. At or around the time of this inventory count, defendants 27 replaced its auditor, PriceWaterhouseCoopers, with Deloitte & Touche. 28

DOCS\279669v1 78 4. ^

1 With knowledge that the Company needed to take a large shrinkage 2 provision and that, even its new auditors would require the Company to take 3 the charge, defendants nevertheless made forecasts on April 21, 2004 for 4 second quarter and fiscal 2004 which they knew could not be met due to the 5 massive shrinkage provision that the Company would be required to take. 6 165. Thus, defendants were aware that their EPS guidance of $0.19 7 to $0.20 per share for second quarter 2004 was not accurate and would not 8 be met, and that their projection would be reduced by at least $0.05-$0.08 9 because the Company would be required to take an additional shrink and 10 markdown provision. In fact, the Company earned only $.04 in second 11 quarter 2004. 12 13 2. Guidance Regarding Store Openings 14 166. The opening of new stores was very important to the Company 15 because each new store meant increased revenues . As the Company stated in 16 its SEC filings, "[w]e depend on new store openings for future growth." 17 During the Class Period, defendants stated that the Company would open 13 18 stores in second quarter 2004. This statement, however, was false and 19 misleading because defendants were aware that the Company would not meet 20 this projection. 21 167. According to an employee in the Real Estate Department during 22 the Class Period, Jeff Gold, Howard Gold, Eric Schiff and David Gold 23 seemed to make up and publicly announced the number of stores that the 24 Company planned to open. The witness based this observation on the fact 25 that defendants would announce the number of stores it planned to open 26 without previously verifying the numbers with the Real Estate Managers. In 27 28

DOCS\279669vl 79 I fact, the Real Estate Managers learned of the new growth targets from 2 reading Company press releases. 3 168. According to this witness, although the Company typically 4 planned on 25% growth in the number of stores on a yearly basis, the 5 company was "always behind" this growth target because there was "not 6 enough manpower." The 25% growth rate became increasingly more 7 difficult to achieve as the number of stores increased, but the number of real 8 estate employees did not. The Real Estate Department consisted of four 9 Managers, two employees responsible for construction, and one attorney. 10 Further, all leases went to Jeff Gold for review and approval, who would 11 delay the signing leases and invoices for so long that contractors who were 12 not paid would walk off jobs. The leases also had to be approved through 13 outside counsel and the in-house attorney. The approval process delayed 14 75% of store openings by six to twelve months. In addition, following the 15 execution of the lease, a typical build out took three months. Delayed store 16 openings meant lost revenue, as 99 Cents' average revenue per store was 17 around $4.8 million per year. 18 169. According to this witness, 99 Cents' Board met on the second 19 Saturday of every month in the corporate office, and he frequently attended 20 the real estate discussions during these meetings. Prior to each Board 21 meeting, Jeff Gold required the Real Estate Managers to update an Excel 22 spreadsheet for presentation to the Board. The spreadsheet listed store 23 openings "in the pipeline," a target opening date for each store and any 24 additional information in the "comment" column (such as a status of 25 permits). Jeff Gold would review the spreadsheet prior to presentation to the 26 Board, and would frequently move up target store opening dates. For 27 example, Jeff Gold may have announced that the Company would open 10 28

DOCS\279669v1 80 1 new stores by a certain date, but only seven stores were targeted to open by 2 that date in the draft spreadsheet. Jeff Gold would then move up the target 3 dates of three stores, so that it would appear that the company could meet 4 its previously announced target. According to this witness, CFO Farina 5 expressed doubt to him over the target store opening dates identified by Jeff 6 Gold, and complained that he needed realistic store opening dates in order to 7 forecast sales . Thus, at least Jeff Gold and Farina knew the target dates for 8 store openings were false and unrealistic. 9 170. Defendants - also knew the Company could not meet its 10 projection for store openings in second quarter 2004 because it was already 11 behind in opening new stores. Another former employee in the Real Estate 12 Department during the Class Period stated that 99 Cents frequently had 13 "slippage." "Slippage" is the term used in the Real Estate Department for 14 stores that did not or would not open on time according to the schedule. 15 Although slippage is common in the real estate industry, 99 Cents' slippage 16 was very frequent . The slippage was "usually weeks, often months, and 17 sometimes they never opened ." Store openings were important because 18 everyday a new store does not open after the target date makes forecasted 19 sales and revenues evermore difficult to achieve. This witness also stated 20 that "when the numbers [of stores] were missed, they did a little shuffle." 21 This witness also attended "part one" of the Board meeting, in which new 22 store openings and progress on deals in the pipeline were presented by Jeff 23 Gold. According. to this witness, "we'd all leave the Board meeting 24 laughing" about how inaccurate the information provided was. For example, 25 Jeff Gold made statements in every meeting about progress made on a 26 specific new store and an estimated opening date for the store, which

27 I everyone from the Real Estate Department in attendance knew was nowhere 28

11 DOCS\279669v1 81 1 near opening due to permit or construction issues that most of the time were 2 caused by Jeff Gold's failure to approve of critical steps like hiring a 3 contractor, submitting a permit, paying a contractor for work already done, 4 or signing the lease. Additionally, Jeff Gold routinely cited specific deals as 5 "in the pipeline" when he and everyone in the Real Estate Department knew 6 that the particular deals "were dying." Furthermore, many stores in Texas in 7 particular were opened even though they were not ready because they were 8 not fully stocked with merchandise, as they were waiting for a truck from the 9 Los Angeles distribution center to drive to Texas and deliver inventory, 10 which was not done until an entire truckload of inventory could be 11 transported. 12 171. Additionally, according to a former Computer Technician for 99 13 Cents who was involved in installing equipment for new stores, some stores 14 were not ready to be opened because equipment had not yet been obtained 15 for the new stores, and he would have to borrow equipment from other 16 stores. There were also stores that were opened prior to being fully stocked. 17 He estimated that in December 2003, 15% of the stores were opened prior to 18 I being ready to open. 19 172. Accordingly, when defendants made their projection for store 20 openings in second quarter 2004, defendants were aware they were false and 21 could not be met because the projection was not based on the Real Estate 22 Department's assessment. Further, the Company was already behind in 23 opening stores due to lack of manpower and due to delays caused by Jeff 24 Gold. ADDITIONAL SCIENTER ALLEGATIONS 25 26 27 28

DOCS\279669v1 82 1 173. As alleged herein, each of the defendants made the alleged 2 statements with scienter because they knew, or consciously disregarded, that 3 the public statements were false and misleading when made. 4 174. During the Class Period, defendants were motivated to defraud 5 the investing public in order to keep 99 Cents under the control of the Gold 6 family and to prevent intrusion from outsiders. After the adverse facts about 7 the Company were disclosed, defendants were forced to include outsiders 8 into the Company. Since the disclosure, David Gold ended his tenure as 9 CEO, Farina was replaced as CFO, Howard Gold was removed from being in 10 charge of distribution, the Company hired outsiders as the Executive Vice 11 President of Supply Chain and Merchandising and the Senior Vice President 12 of Store Development, and the Company added two outside directors to its 13 Board. In addition, the Company removed Ben Schwartz, a long-standing 14 member of the Board, after it was determined that he was not "independent" 15 under applicable NYSE rules due to payment by the Company to a business 16 owned by Mr. Schwartz's son. In order to satisfy the NYSE's requirement 17 for a majority of independent directors, Howard Gold, a non-independent 18 director, also resigned from the Board. 19 175. At all relevant times during the Class Period, defendants were 20 fully aware of 99 Cents' business condition and the fact that the Company's 21 core operations were suffering. The Individual Defendants were senior 22 officers of the Company, and were privy to confidential information 23 concerning the Company's operations, finances, financial condition and 24 present and future business prospects. The Individual Defendants were 25 "hands-on" managers, and were involved in the day-to-day operations of the 26 Company. David Gold, for example, would actively participate in open- 27 house days for vendors who wanted to sell products to the Company, and 28

DOCS\279669v1 83 1 would even help stock 99 Cents' retail stores. According to one former 2 employee, David Gold's participation in the operations of the Company was 3 so extensive that "not one purchase order for a closeout went out without 4 Dave Gold knowing about it." According to another former employee, 5 David Gold was the "ultimate micromanager" who reviewed pending bills 6 for mistakes and would send out mass-distributed voice mails after reviewing 7 in detail the "Top 300 Report," which contained store sales information for 8 the prior five weeks, broken down into top sales by item, by store, by district, 9 and by region. Another employee said that David Gold told him that he 10 spent three hours every morning reviewing and replying to about 200-400 11 voice mail messages from Company employees. Each of the Individual 12 Defendants discussed the financial condition and operations of the Company 13 with its employees, customers, vendors and consultants, received reports, e- 14 mails and other correspondence about the Company, and attended meetings 15 where the business condition and operations of the Company were discussed. 16 They were well aware of the true business and financial condition of the 17 Company at all relevant times. Numerous former employees have stated that 18 the Gold family members were in essence "controlling micromanagers" who 19 had their hands in the details of every aspect of the business because they 20 trusted very few people outside of the family circle. The Company was run 21 "like a mom and pop shop," and the Golds disregarded the fact that there 22 were public shareholders to whom they were accountable. Information was 23 kept closely within the Gold family circle. 24 176. Each of the Individual Defendants was involved in the issuance 25 of public statements about the Company through press releases, conference 26 calls, shareholder communications, the news media and filings with the SEC. 27 Defendants reviewed these public statements prior to their issuance, and had 28

DOCS\279669v1 84 1 the ability to prevent their issuance or cause them to be corrected. Defendant 2 Schiffer, as President of 99 Cents, was quoted extensively in the Company's 3 press releases. Defendant Farina signed each of the Company's Form 10-Qs 4 during the Class Period. He, along with David Gold, certified, in each of the 5 Company's Form 10-Q and Form 10-K filings during the Class Period, that 6 the Company's internal controls were effective and that the financial results 7 contained in each of these filings fairly presented the Company's financial 8 condition. The Company's Form 10-K during the Class Period was signed 9 by each of the Individual Defendants. 10 177. Throughout the Class Period, defendants were fully aware of the 11 problems with the Los Angeles distribution center. As set forth above, the 12 Los Angeles distribution center consisted of a large warehouse physically 13 attached to the Company's corporate offices and a smaller adjacent storage 14 area. The offices of David Gold, Schiffer, Jeff Gold and Howard Gold were 15 only about 200-250 feet away from the corporate entrance that leads to the 16 warehouse. Farina's office was next to the Accounting Department and was 1 7 near the warehouse. The Individual Defendants' physical proximity allowed 18 ^ them to oversee the functions of the distribution center and to visually 19 observe the overcrowded condition and problems with the distribution

20 I center. According to a former employee, David Gold was in the warehouse 21 several times a week, and he was very aware of how much merchandise was 22 in the warehouse and outside of it due to space problems. 23 178. Defendant Howard Gold, as the Senior Vice President of 24 Distribution, was responsible for ensuring the smooth flow of the 25 distribution system and, at all relevant times, was aware that the 26 overcrowded condition of the Los Angeles distribution center was causing 27 28

I DOCS\279669v1 85 II ^

1 disruptions in this system, resulting in "out-of-stocks" for 99 Cents stores 2 and high shrinkage rates. 3 179. During the Class Period, Howard Gold was aware of the 4 Company's high shrinkage rate and lack of inventory controls. Howard Gold 5 had employees in IT write applications for "virtual bins" for inventory that 6 did not correlate with a physical location in the warehouse. These 7 applications were "inventory hunter programs," and among the categories of 8 virtual bins were "Unknown," "Lostt 1 I'Losttt 11 and "Killed 17 which Howard 9 Gold personally named and which held hundreds of thousands of cases of 10 merchandise (with each case containing between 12 and 24 items) that could 11 not be located in the warehouse. 12 180. Howard Gold and the other defendants also participated in the 13 Company's annual physical inventory count, and were aware of the 14 Company's high shrinkage. According to former employees, the annual 15 inventory count was supervised by Howard Gold. Jeff Gold, David Gold and 16 Eric Schiffer assisted Howard Gold and were physically present during the 17 count. Howard Gold had final approval authority over the inventory figures 18 before they were provided to Accounting, and sometimes would not approve 19 them for release if he was not satisfied with the end numbers. After the truth 20 was disclosed at the end of the Class Period, Howard Gold was removed 21 from being in charge of distribution. 22 181. The defendants, at all relevant times, also knew about the 23 Company's distribution center problems, which adversely impacted the 24 Company's shrinkage and its ability to manage inventory. According to an 25 employee who worked in the Company's headquarters responsible for 26 entering orders and scheduling deliveries to stores, the Accuterm system 27 enabled employees with access to the system to check the amount of 28

DOCS\279669v1 86 1, '1

1 inventory in the Los Angeles distribution center. The inventory control 2 program, to which she had access and with which she was familiar, identified 3 items by name, item number, amount received in previous shipment, quantity 4 of item, the date the Company expected to receive more of the item, and bin 5 number (which showed the item's location in the warehouse). Through 6 Accuterm, defendants were aware that the amount of inventory contained in 7 the Los Angeles distribution center was much more than the warehouse 8 could handle. 9 182. Further, according to a former employee who worked in 99 10 Cents' corporate office, defendant Jeff Gold frequently sent out e-mails 11 regarding problems with the distribution center. Another former employee 12 involved in scheduling delivery of products to stores stated that one of the 13 buyers who regularly attended meetings with David Gold and Howard Gold, 14 held each week at 9:00 a.m. on Thursdays in the Company's conference 15 room, often mentioned that the meetings involved discussions of problems in 16 the Company warehouse, including "how overbooked we are" and that there 17 were "problem items" in the warehouse. 18 183. Throughout the Class Period, defendants also knew that the 19 Company did not have adequate internal controls. Defendants were aware 20 that the Company's computer and networking systems were antiquated and 21 that timely or accurate information could not be provided. Defendants knew 22 that the Company's internal controls over finances and operations were so

23 I weak that the Company's financial results and projections were materially 24 Iinaccurate. 25 184. At all relevant times, defendant Jeff Gold, as the Senior Vice 26 President of Real Estate and Information Systems, had responsibility for the 27 Company's information systems. Jeff Gold was aware that the Company's 28

DOCS\279669v1 87 1, l

1 computer and networking systems were out-dated and that, due to problems 2 with these systems, the Company did not have adequate internal controls. A 3 former IT consultant said that he informed management of the inadequacies 4 of the system. 5 185. During the Class Period, defendants David Gold and Farina 6 certified in SEC filings that they had evaluated the effectiveness of 99 Cents' 7 disclosure controls and procedures. Thus, it was each of these defendants' 8 responsibility to ensure that the Company's internal controls necessary for 9 accurate reporting and projections were in place. Subsequently, the 10 Company surprised investors by disclosing that the required internal controls 11 were, in fact, not in place. 12 186. Additionally, defendants were aware that the Company's 13 financial results and projections throughout the Class Period were inaccurate 14 due in large part to the lack of internal controls, as the Company could not 15 properly account for significant inventory losses. Nevertheless, defendants 16 released financial results during the Class Period that they knew or recklessly 17 disregarded were false and misleading, and David Gold and Farina even 18 certified in the Company's public filings with the SEC-that the Company's 19 financial results were fairly presented. 20 187. Jeff Gold also made public projections about store openings 21 without previously verifying the numbers with Real Estate Managers. 22 Instead, according to Real Estate Managers, they learned about the forecasts 23 for store openings through the Company's press releases. 24 188. After the end of the Class Period, the Company announced that 25 Farina, the Company's CFO, would be replaced. Farina's replacement, 26 James Ritter, resigned from 99 Cents after less than three months on the job. 27 The Company later had to hire an interim CFO and someone associated with 28

DOCS\279669v1 88 1 the CFO as a consultant at the rate of $50,000 per month. This suggests that 2 the Company's financial controls and financial results suffered from large 3 and severe problems of which defendants could simply not have been 4 ignorant. 5 189. Scienter is further supported by the fact that, during the Class 6 Period, Farina sold 78,154 shares of 99 Cents common stock at $33.40 per 7 share, when the stock was trading near its Class Period high, for proceeds of 8 over $2.6 million. The timing and amount of the trade is unusual. 9 According to a Form 4 filed with the SEC dated August 15, 2003, Farina 1 0 acquired the 78,154 shares of common stock through exercise of options and, 11 following the sale of these shares on August 13, 2003, he beneficially owned 12 zero shares of 99 Cents common stock. Also, based on available public 13 records, it appears the only other time Farina sold stock during his tenure at 14 99 Cents, which began in 1996, was in November 2002, when he sold 29,300 15 shares for proceeds of $801,648. 16 190. On May 14, 2004, just three weeks ahead of defendants' 1 7 disclosure of the adverse facts alleged herein, 99 Cents announced a stock 1 8 repurchase program in which it would repurchase up to three million shares 19 of the Company's common stock from time to time over a one year period. 20 The release of this positive announcement just ahead of defendants' 21 disclosure of the adverse facts alleged herein, also supports scienter. This 22 was defendants' attempt to blunt the impact of the bad news defendants 23 knew was going to be released. FINANCIAL STATEMENTS WERE MATERIALLY 24 THE FALSE AND MISLEADING AND VIOLATED GAAP 25

26 191. At all relevant times during the Class Period, defendants

27 I represented that 99 Cents' financial statements, when issued, were prepared 281

DOCS\279669v1 89 4,

1 in conformity with GAAP, which are recognized by the accounting 2 profession and the SEC as the uniform rules, conventions and procedures 3 necessary to define accepted accounting practices at a particular time. 4 However, the Company used improper accounting practices in violation of 5 GAAP and SEC reporting requirements to falsely inflate 99 Cents' assets, 6 net income and earnings per share in the interim quarters and fiscal year 7 during the Class Period. 8 192. 99 Cents' materially false and misleading financial statements 9 resulted from a series of deliberate decisions by senior management designed 10 to conceal the truth regarding 99 Cents' operating results. Specifically, 11 defendants caused the Company to violate GAAP by, among other things, 12 failing to timely record a shrinkage provision in connection with its 13 inventory and failing to establish and maintain adequate internal accounting 14 controls. 15 193. As set forth in Financial Accounting Standards Board ("FASB") 16 Statement of Financial Accounting Concepts ("Concepts Statement") No. 1, 17 Objectives of Financial Reporting by Business Enterprises (November 18 1978), one of the fundamental objectives of financial reporting is that it 19 provide accurate and reliable information concerning an entity's financial 20 performance during the period being presented. Concepts Statement No. 1, 21 paragraph 42, states: 22 Financial reporting should provide information about an 23 enterprise's financial performance during a period. Investors 24 and creditors often use information about the past to help in 25 assessing the prospects of an enterprise. Thus, although 26 investment and credit decisions reflect investors' and creditors' 27 expectations about future enterprise performance, those 28

DOCS\279669v1 90 1 expectations are commonly based at least partly on evaluations 2 of past enterprise performance. 3 194. As set forth in SEC Rule 4-01(a) of SEC Regulation S-X, 4 "[f]inancial statements filed with the [SEC] which are not prepared in 5 accordance with [GAAP] will be presumed to be misleading or inaccurate." 6 17 C.F.R. §210.4-01(a)(1). Management is responsible for preparing 7 financial statements that conform with GAAP. As noted by the American 8 Institute of Certified Public Accountants ("AICPA") Codification of 9 Statements on Auditing Standards § 110.03: 10 The financial statements are management's 11 responsibility ... Management is responsible for adopting sound 12 accounting policies and for establishing and maintaining 13 internal control that will, among other things, initiate, record, 14 process, and report transactions (as well as events and 15 conditions) consistent with management's assertions embodied 16 in the financial statements. The entity's transactions and the 17 related assets, liabilities and equity are within the direct 18 knowledge and control of management ... . Thus, the fair 19 presentation of financial statements in conformity with 20 generally accepted accounting principles is an implicit and 21 integral part of management ' s responsibility.

22 A. Failure to Timely Record Shrinkage Provision 23 195. The defendants violated GAAP in accounting for the 24 Company's inventory by failing to take a charge against earnings to account 25 for its material inventory shrinkage. As discussed above, 99 Cents 26 experienced major problems with its inventory, including handling expiring 27 and perishable products and poor management of inventory stored at its 28

DOCS\279669v1 91 1 distribution center as well as at its individual stores. Accordingly, based on 2 the facts alleged above as well as evidence of management's knowledge of 3 the inventory issues, a provision for inventory shrinkage should have been 4 taken during the Class Period. 5 196. Indeed, the Company belatedly revealed in its Form 10-Q filed 6 with the SEC for the second quarter of 2004, period ended June 30, 2004, 7 that: 8 [D]uring the second quarter of fiscal 2004 and in connection 9 with physical counts of our retail store inventories performed 10 by an outside service and our inventory control department, as 11 well as a review of related inventory accounting processes, the 12 Company's management determined that it was necessary to 13 make an additional shrinkage provision of $8.2 million.

1 4 197. Generally, GAAP requires that inventory be stated at the lower 1 5 of cost or net realizable value. Chapter 4 of Accounting Research Bulletin 1 6 ("ARB") No. 43, provides: 17 A major objective of accounting for inventories is the proper 18 determination of income through the process of matching 19 appropriate costs against revenues ... 20 The primary basis for accounting for inventories is cost .... A 21 departure from the cost basis of pricing inventories is required 22 when the utility of goods is no longer as great as its cost. 23 Where there is evidence that the utility of goods, in the 24 ordinary course of business, will be less than cost, whether due 25 to physical deterioration, obsolescence, changes in price levels, 26 or other causes, the difference should be recognized as a loss in 27 28

DOCS\279669v1 92 1 the current period. This is generally accomplished by stating 2 such' goods at the lower level commonly designated as market. 3 198. Additionally, pursuant to GAAP, an estimated loss from a loss 4 contingency "shall be accrued by a charge to income" if: (i) information 5 available prior to issuance of the financial statements indicated that it is 6 probable that an asset had been impaired or a liability had been incurred at 7 the date of the financial statements; and (ii) the amount of the loss can be 8 reasonably estimated. Statement of Financial Accounting Standard 9 ("SFAS") No. 5, Accountingfor Contingencies ¶ 8 (March 1975). SFAS No. 10 5 also requires that financial statements disclose contingencies when it is at 11 least reasonably possible (e.g., a greater than slight chance) that a loss may 12 have been incurred.2 The disclosure shall indicate the nature of the 13 contingency and shall give an estimate of the possible loss, a range of loss, 14 or state that such an estimate cannot be made. The SEC considers the 15 disclosure of loss contingencies to be of significant importance. 16 Accordingly, Regulation S-X provides that disclosures in interim period 17 financial statements may be abbreviated and need not duplicate the 1 8 disclosure contained in the most recent audited financial statements, except 19 that, "where material contingencies exist, disclosure of such matters shall be 20 provided even though a significant change since year end may not have 2 1 occurred." 17 C.F.R. §210.10-01. 22 199. The Company violated GAAP by failing to take a timely charge 23 for shrinkage in its interim financial statements as required by Accounting 24 25

26 2 Moreover, FASB Concepts Statement No. 5 states, "[a]n expense or loss is 27 recognized if it becomes evident that previously recognized future economic benefits of an asset have been reduced or eliminated ...." 28

DOCS\279669v1 93 1 Principles Board Opinion No. 28, Interim Financial Reporting (May 1973), 2 ¶17: 3 The amounts of certain costs and expenses are frequently 4 subjected to year-end adjustments even though they can be 5 reasonably approximated at interim dates. To the extent 6 possible such adjustments should be estimated and the 7 estimated costs and expenses assigned to interim periods so 8 that the interim periods bear a reasonable portion of the 9 anticipated annual amount.

10 200. Indeed, defendants knew or recklessly disregarded that Class 11 Period financial statements were in violation of GAAP and materially false 12 and misleading because the Company failed to timely record a shrinkage 13 provision despite the fact that the Company was experiencing problems with 14 its inventory management. 15 B. Failure to Maintain an Adequate System of Internal 16 Controls 17 201. In addition to the foregoing improper accounting practices, the 18 Company also suffered from a chronic and systematic breakdown of its 19 internal accounting controls throughout the Class Period, which rendered 99 20 Cents' financial reporting inherently corrupt, subject to manipulation and 21 unreliable, resulting in materially false and misleading financial statements. 22 Contrary to GAAP and SEC requirements, the defendants either failed to 23 implement and maintain an adequate internal accounting control system, or 24 knowingly and/or recklessly tolerated the failure to use existing internal 25 accounting controls in a manner that would ensure compliance with GAAP. 26 202. In this regard, the defendants failed to design and implement an 27 internal control system, among other areas, over the Company's inventory 28

DOCS\279669v1 94 1 management process sufficient to monitor shrinkage, in order to timely 2 recognize a shrinkage provision in its financial statements. The fact that 99 3 Cents had to hire an outside consulting firm to "review and document 4 selected inventory processes and controls and identify potential weaknesses 5 to assist with the control of inventory shrinkage, including those associated 6 with perishable products" indicates the Company was aware of its inadequate 7 accounting and internal control system during the Class Period. 8 203. Section 13(b)(2) of the Exchange Act states, in pertinent part, 9 that every reporting company must: (A) make and keep books, records and 10 accounts which, in reasonable detail, accurately and fairly reflect the 11 transactions and disposition of the assets of the issuer; and (B) devise and 12 maintain a system of internal controls sufficient to provide reasonable 13 assurances that transactions are recorded as necessary to permit the 14 preparation of financial statements in conformity with GAAP. These 15 provisions require an issuer to employ and supervise reliable personnel, to 16 maintain reasonable assurances that transactions are executed as authorized, 17 to properly record transactions on an issuer's books and, at reasonable 18 intervals, to compare accounting records with physical assets. 19 204. 99 Cents violated Section 13(b)(2) of the Exchange Act by 20 failing to maintain adequate internal controls relating to inventory 21 management and reporting, among other areas. Indeed, 99 Cents revealed in 22 its Form 10-Q for the third quarter 2004, period ending September 30, 2004 23 that: 24 During the period covered by this quarterly report, as 25 part of the physical inventory reconciliation and monthly 26 closing processes, we identified and corrected significant 27 deficiencies in certain of our procedures surrounding 28

DOCS\279669v1 95 1 accounts payable and inventory cut-off and the accumulation 2 and tracking of construction in progress.

3 205. Furthermore, during the Class Period, 99 Cents violated Section 4 13(b)(2) of the Exchange Act by failing to employ reliable personnel and 5 failing to implement procedures reasonably designed to prevent accounting 6 irregularities. Due to the inherent weaknesses in its internal control system, 7 the Company was forced to create a new position and initiate the proper 8 procedures in an effort to improve its system. The Company admitted in its 9 third quarter 2004 Form 10-Q: 10 We have created and filled the position of Executive Vice 11 President of Supply Chain and Merchandising to oversee all 12 aspects of purchasing, inventory control, distribution and 13 merchandising. We have also initiated procedures to enforce 14 recording of inventory movements at our stores, including 15 damages, spoilage and inter-store transfers. 16 206. 99 Cents' lack of adequate internal controls rendered 99 Cents' 17 Class Period financial reporting inaccurate, unreliable and subject to 18 manipulation resulting in the issuance of materially false and misleading 19 financial statements. Nonetheless, throughout the Class Period, the 20 Company regularly issued quarterly and annual financial statements without 21 ever disclosing the existence of the significant and material deficiencies in 22 its internal accounting controls and falsely asserted that its financial 23 statements complied with GAAP. 24 C. Violations of SEC Regulations 25 207. Item 7 of Form 10-K and Item 2 of Form 10-Q, Management's 26 Discussion and Analysis of Financial Condition and Results of Operations 27 ("MD&A"), require the issuer to furnish information required by Item 303 of 28

DOCS\279669v1 96 1 Regulation S-K [17 C.F.R. 229.303]. In discussing results of operations, 2 Item 303 of Regulation S-K requires the registrant to: 3 Describe any known trends or uncertainties that have had 4 or that the registrant reasonably expects will have a material 5 favorable or unfavorable impact on net sales or revenues or 6 income from continuing operations.

7 208. The instructions to Paragraph 303(a) further state: 8 The discussion and analysis shall focus specifically on 9 material events and uncertainties known to management that 10 would cause reported financial information not to be 11 necessarily indicative of future operating results.

12 209. In addition, the SEC, in its May 18, 1989 Interpretive Release 13 No. 34-26831, has indicated that registrants should employ the following 14 two-step analysis in determining when a known trend or uncertainty is 15 required to be included in the MD&A disclosure pursuant to Item 303 of 16 Regulation S-K: 17 A disclosure duty exists where a trend, demand, commitment, 18 event or uncertainty is both presently known to management 19 and reasonably likely to have material effects on the 20 registrant's financial condition or results of operation.

21 210. Nonetheless, 99 Cents' Class Period Forms 10-K and 10-Q 22 failed to disclose the Company's improper accounting practices as noted 23 above as well as its internal control system deficiencies, all of which were 24 reasonably likely to have a material adverse effect on 99 Cents' operating 25 results, and the disclosure of such was necessary for a proper understanding 26 and evaluation of the Company's operating performance and an informed 27 investment decision. 28

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1 D. Additional GAAP Violations 2 211. As a result of the foregoing accounting improprieties, the 3 defendants caused 99 Cents' reported financial results to violate, among 4 other things, the following provisions of GAAP for which each defendant is 5 necessarily responsible: 6 a) The principle that financial reporting should 7 provide information that is useful to present and 8 potential investors and creditors and other users in 9 making rational investment, credit and similar 1 0 decisions was violated (FASB Concepts Statement 11 No. 1, ¶34); 12 b) The principle that financial reporting should 13 provide information about the economic resources 14 of an enterprise, the claims to those resources, and 15 effects of transactions, events and circumstances 16 that change resources and claims to those 17 resources was violated (FASB Concepts Statement 18 No. 1, ¶40); 19 c) The principle that financial reporting should 20 provide information about how management of an 21 enterprise has discharged its stewardship 22 responsibility to owners (stockholders) for the use 23 of enterprise resources entrusted to it was violated. 24 To the extent that management offers securities of 25 the enterprise to the public, it voluntarily accepts 26 wider responsibilities for accountability to 27 28

DOCS\279669v1 98 1 prospective investors and to the public in general 2 (FASB Concepts Statement No. 1, ¶50); 3 d) The principle that financial reporting should be 4 1 reliable in that it represents what it purports to 5 represent was violated. That information should 6 be reliable as well as relevant is a notion that is 7 central to accounting (FASB Concepts Statement 8 No. 2, Qualitative Characteristics of Accounting 9 Information ¶¶58-59 (May 1980)); 10 e) The principle of completeness, which means that 11 nothing is left out of the information that may be 12 necessary to insure that it validly represents 13 underlying events and conditions was violated 14 (FASB Concepts Statement No. 2, ¶79); and 15 f) The principle that conservatism be used as a 16 prudent reaction to uncertainty to try to ensure that 17 uncertainties and risks inherent in business 18 situations are adequately considered was violated. 19 The best way to avoid injury to investors is to try 20 to ensure that what is reported represents what it 21 purports to represent (FASB Concepts Statement 22 No. 2, ¶¶95, 97). 23 212. Further, the undisclosed adverse information concealed by the 24 defendants during the Class Period is the type of information which, because 25 of SEC regulations, regulations of the national stock exchanges and 26 customary business practice, is expected by investors and securities analysts 27 to be disclosed and is known by corporate officials and their legal and 28

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1 ^

1 financial advisors to be the type of information which is expected to be and 2 must be disclosed. NO SAFE HARBOR 3

4 213. The statutory safe harbor provided for forward-looking 5 statements under certain circumstances does not apply to any of the allegedly 6 false statements pleaded in this complaint as they were not forward-looking. 7 214. To the extent there are statements that could be construed as 8 forward-looking statements, they were not identified as "forward-looking 9 statements" when made, and there were no meaningful cautionary statements 10 identifying important factors that could cause actual results to differ 11 materially from those in the purportedly forward-looking statements. To the 12 extent that the statutory safe harbor does apply to any statements that could 13 be construed as forward-looking pleaded herein, defendants are liable for 14 those false forward-looking statements because at the time each of those 15 forward-looking statements were made, the particular speaker knew that the 16 particular statement was false or the statement was authorized or approved 17 by an executive of 99 Cents who knew that the statement was false when 18 made. 19 CLASS ACTION ALLEGATIONS

20 215. Plaintiffs bring this action as a class action pursuant to Rule 23 21 of the Federal Rules of Civil Procedure on behalf of all persons who 22 purchased or otherwise acquired 99 Cents securities (the "Class") during the 23 Class Period. Excluded from the Class are defendants, the officers and 24 directors of the Company at all relevant times, members of their immediate 25 families and their legal representatives, heirs, successors or assigns and any 26 entity in which defendants have or had a controlling interest. 27 28

DOCS\279669vl 100 1 216. The members of the Class are so numerous that joinder of all 2 members is impracticable. The resolution of their claims in a class action 3 will provide substantial benefits to the parties and the Court. 99 Cents had 4 more than 72 million shares of stock outstanding, owned by hundreds if not 5 thousands of persons. 6 217. There is a well-defined community of interest in the questions 7 of law and fact involved in this case. Questions of law and fact common to 8 the members of the Class which predominate over questions which may 9 affect individual Class members include: 10 a) Whether defendants violated the 1934 Act; 11 b) Whether defendants omitted and/or misrepresented 12 material facts; 13 c) Whether defendants' statements omitted material 14 facts necessary to make the statements made, in 15 light of the circumstances under which they were 16 made, not misleading; 17 d) Whether defendants knew or deliberately 18 disregarded that their statements were false and 19 misleading; 20 e) Whether the defendants' misrepresentations and/or 21 omissions caused artificial inflation in the price of 22 99 Cents securities; and 23 f) Whether the Class suffered damages, the extent of 24 damage sustained by Class members and the 25 appropriate measure of damages. 26 27 28

DOCS\279669v1 101 1 218. Plaintiffs' claims are typical of those of the Class because 2 plaintiffs and the Class sustained damages from defendants' wrongful 3 conduct. 4 219. Plaintiffs will adequately protect the interests of the Class and 51 have retained counsel who are experienced in class action securities 6 litigation. Plaintiffs have no interests which conflict with those of the Class. 7 220. A class action is superior to other available methods for the fair 8 and efficient adjudication of this controversy. FIRST CLAIM FOR RELIEF 9 For Violation of §10(b) of the 1934 Act And Rule 10 I Ob-5 Against All Defendants

11 221. Plaintiffs repeat and reallege ¶¶ 1-220, by reference, as if fully 12 set forth herein. 13 222. During the Class Period, defendants disseminated or approved 14 the false statements specified above, which they knew or deliberately 15 disregarded were misleading in that they contained misrepresentations and 16 failed to disclose material facts necessary in order to make the statements 17 made, in light of the circumstances under which they were made, not 18 misleading. 19 223. Defendants violated § 10(b) of the 1934 Act and Rule I Ob-5 in 20 that they: 21 a) Employed devices, schemes, and artifices to 22 defraud; 23 b) Made untrue statements of material facts or 24 omitted to state material facts necessary in order to 25 make the statements made, in light of the 26 circumstances under which they were made, not 27 misleading; or 28

DOCS\279669v1 102 1 c) Engaged in acts, practices, and a course of 2 business that operated as a fraud or deceit upon 3 plaintiffs and others similarly situated in 4 connection with their purchases of 99 Cents 5 securities during the Class Period. 6 224. Plaintiffs and the other members of the Class have suffered 7 damages in that, in reliance on the integrity of the market, they acquired 99 8 Cents securities at prices artificially inflated by defendants' 9 misrepresentations and omissions, and they suffered damages when the truth 10 was disclosed about the Company and the artificial inflation was removed 11 from 99 Cents' securities price. 12 225. As a direct and proximate result of these defendants' wrongful 13 conduct, plaintiffs and the other members of the Class suffered damages in 14 connection with their purchases of 99 Cents securities during the Class 15 Period. SECOND CLAIM FOR RELIEF 16 For Violation of §20(a) of the 1934 Act Against All Defendants 17

18 226. Plaintiffs repeat and reallege ¶¶ 1-225 by reference, as if fully 19 set forth herein. 20 227. The Individual Defendants acted as controlling persons of 99 21 Cents within the meaning of §20(a) of the 1934 Act. By reason of their 22 positions as officers and/or directors of 99 Cents, the Individual Defendants 23 had the power and authority to cause 99 Cents to engage in the wrongful 24 conduct complained of herein. 99 Cents controlled each of the Individual 25 Defendants and all of its employees. By reason of such conduct, the 26 Individual Defendants and 99 Cents are liable pursuant to §20(a) of the 1934 27 Act. 28

DOCS\279669v1 103 1 PRAYER FOR RELIEF 2 WHEREFORE, plaintiffs pray for judgment as follows: 3 a) Declaring this action to be a proper class action pursuant 4 to Fed.R.Civ.P. 23; 5 6 b) Awarding plaintiffs and the members of the Class 7 damages, interest and costs;

8 c) Awarding reasonable costs, including attorneys' fees; and

9 d) Awarding such other relief as the Court may deem just 10 and proper. 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28

DOCS\279669v1 104 1 JURY DEMAND 2 Plaintiffs demand a trial by jury. 3 Respectfully Submitted. 41 DATED: April 29, 2004 MILBERG WEISS BERSHAD 5 & SCHULMAN LLP Jeff S. Westerman 6 Elizabeth P. Lin 7 KRISTEN MCCULLOCH 8 9

10 355 S. Grand Ave., Suite 4170 Los Angeles, CA 90071-3172 11 Telephone: (213) 617-1200 12 (213) 617-1975 (fax)

13 MUCH SHELIST FREED DENENBERG AMENT & RUBENSTEIN, P.C. 14 Carol V. Gilden Joseph D. Ament 15 Conor R. Crowley 1800 16 191 North Wacker Drive, Suite Chicago, Illinois 60606 17 (312) 521 -2000 18 Co-Lead Counsel for the Class 19 20 21 22 23 24 25 26 27 28

11 DOCS\279669v1 105 F

1 DECLARATION OF SERVICE BY MAIL 2 I, the undersigned, declare: 3 1. That declarant is and was, at all times herein mentioned, a resident of 4 the County of Los Angeles, over the age of 18 years, and not a party to or interest 5 in the within action; that declarant's business address is 355 South Grand Avenue, 6 Suite 4170, Los Angeles, California 90071. 7 2. That on April 29, 2005, declarant served the SECOND AMENDED 8 CONSOLIDATED COMPLAINT FOR VIOLATIONS OF THE FEDERAL 9 SECURITIES LAWS by depositing a true copy thereof in a United States mailbox 10 at Los Angeles, California in a sealed envelope with postage thereon fully prepaid 11 and addressed to the parties listed on the attached Service List. 12 3. That there is a regular communication by mail between the place of 13 mailing and the places so addressed. 14 I declare under penalty of perjury that the foregoing is true and correct. 15 Executed this 29`'' day of April, 2005, at Los Angeles, California. 16 17 18 19 20 21 22 23 24 25 26 27 28

11 DOCS\279669v1 106 99 Cents Only Store Service List April 29, 2005

Counsel for Plaintiffs

Katharine Ryan Jeff S. Westerman Thomas Grammer Milberg Weiss Bershad Schiffrin & Barroway & Schulman LLP 3 Bala Plaza E, Suite 400 355 S. Grand Ave., Suite 4170 Bala Cynwyd, PA 19004 Los Angeles, CA 90071-3712 Tel: 610-667-7706 Tel.: (213) 617-1200 (610) 667-7706 (fax) (213) 617-1975 (fax)

Joshua M. Lifshitz Steven G. Schulman Bull And Lifshitz Peter E. Seidman 18 East 41st Street Sharon M. Lee New York, NY 10017 Milberg Weiss Bershad Tel.: (212) 216-6222 & Schulman LLP One Pennsylvania Plaza New York, NY 10119 Tel.: (212) 594-5300 (212) 868-1229 (fax)

Carol V. Gilden Joseph D. Ament Conor R. Crowley Much Shelist Freed Denenberg Ament & Rubenstein, P.C. 191 North Wacker Drive, Suite 1800 Chicago, IL 60606 Tel.: (312) 521-2000 (312) 521-2100 (fax)

Defendants

Robert Dell Angelo Munger Tolles & Olson LLP 355 South Grand Avenue, 35'x' Floor Los Angeles, CA 90071 Telephone: (213) 683-9540 (213) 683-4040 (fax)

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