On February 9, 2007, the Court entered the Order and Judgment signed by U.S. District Judge Percy Anderson approving the settlement and dismissing the action with prejudice. The Court grants Plaintiffs Counsels’ application for $1,075,000 in attorneys’ fees and $146,645.20 in costs. Further, the Court authorizes reimbursement of expenses of $2,000 for plaintiff class representatives: Joseph Boodaie and Samuel Toovey.
On September 20, 2006, a Stipulation of Settlement was filed.
As disclosed by the Company’s FORM 10-Q for the Quarterly Period Ended December 31, 2005, on June 15, 2004, three plaintiffs, Joseph Boodaie, Morgan Boodaie and Samuel Toovy, were designated “lead plaintiffs” pursuant to the Private Securities Class Action Reform Act (“PSLRA”), and filed a consolidated amended complaint that superseded the various complaints originally filed and contained an expanded class period. The defendants moved to dismiss the consolidated amended complaint for failure to state a claim upon which relief can be granted, in particular by failing to satisfy the pleading standards of PSLRA. By order dated March 30, 2005, the Court granted the defendants’ motion to dismiss, and granted the plaintiffs leave to amend the complaint. The plaintiffs filed a second amended complaint on April 29, 2005. The defendants moved to dismiss the second amended complaint as well. That motion is fully briefed. On June 16, 2004, another alleged shareholder, Paul Doherty, filed a shareholder derivative suit in Los Angeles County Superior Court, repeating the allegations of the Harkness complaint and demanding, purportedly on behalf of the Company, damages and other relief against certain of the Company's executive officers and directors for alleged breaches of fiduciary and other duties. This action was stayed pending resolution of the defendants’ motion to dismiss the complaint in the putative class action. On or about January 24, 2006, the Company, the Company’s insurer and plaintiffs’ counsel in both the federal securities class action and in the state derivative class action verbally agreed to settle these matters on the following key deal terms: The Company’s insurer would pay $2,062,500 in settlement of the putative class action, with the Company to pay an equal sum; the Company’s insurer would pay $87,500 in settlement of the state derivative class action, with the Company to pay an equal sum; and the class action period would be extended though and including September 21, 2005. The parties are presently working on documenting their agreement in a comprehensive written settlement agreement. To date, such an agreement has not been executed, nor have the parties obtained preliminary or final class approval from the Court. The Company established reserves for this matter at March 31, 2005 of $2.2 million.
According to the Notice of Voluntary Dismissal dated March 22, 2004, the Plaintiff in the first filed complaint voluntarily dismissed his action against 99 Cents Only Stores. An identical class action was filed on June 16, 2004, and a Corrected Consolidated First Amended Complaint was filed on December 29, 2004. On March 30, 2005, U.S. District Judge Percy Anderson granted the Defendants Motion to dismiss the Corrected Consolidated First Amended Complaint with leave to file an amended consolidated complaint within thirty days.
The complaint charges that the Company and certain of its officers and directors violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, and Rule 10b-5 promulgated thereunder, by issuing a series of material misrepresentations to the market about the Company's financial condition thereby artificially inflating the price of 99 Cents' shares. More specifically, the Complaint alleges that the Company failed to disclose and misrepresented the following material adverse facts which were known to defendants or recklessly disregarded by them: (1) that the Company underestimated competition when it opened stores in Texas; (2) that as a result of this, the Company failed to implement a more flexible pricing strategy in its Texas stores that would have achieved "growth" for the Company; (3) that its Los Angeles distribution center was operating at over capacity thereby negatively impacting labor productivity, store deliveries, store level in-stock positions, and consequently comparable sales; (4) that the Company's comparable sales were being negatively impacted by distribution challenges and aggressive post strike promotions from supermarkets especially in Southern California (most notably Kroger, Co., Albertson's, Inc., and Safeway, Inc.); (5) that the Company's gross margins increased due to unfavorable freight costs, increased prices on dairy products, and an unfavorable shrink variance; (6) that the Company lacked adequate internal controls; (7) that the Company's bottom line continued to be adversely affected by worker's compensation expenses; and (8) that as a result of the above, the defendants' positive statements about the Company were lacking in any reasonable basis when made.
The complaint further alleges that on or around June 11, 2004, 99 Cents reported that it was lowering second quarter 2004 earnings per share guidance to $0.04 to $0.07 per share. News of this shocked the market. Shares of 99 Cents fell $6.38 per share or 31.15 percent to close at $14.10.