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•

enter into, conduct or otherwise participate in discussions and negotiations (including solicitation of a revised Company Takeover Proposal) with such person regarding the Company Takeover Proposal.

        Neither our Board nor the special committee may (a) adversely change its recommendation that our shareholders approve the merger agreement in response to an intervening event or a Superior Company Proposal or (b) accept a Superior Company Proposal and terminate the merger agreement, in each case, unless our Board or our special committee has determined, acting reasonably in good faith, after giving due consideration to the written opinion of its outside legal counsel, and after consulting its independent financial advisor, that the failure to take such action would be inconsistent with its fiduciary duties.

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Conditions to the Completion of the Merger (page 102)113)

        The completion of the merger is subject to, among other things, the following conditions:

•

the approval of the merger agreement by the holders of our common stock pursuant to the Shareholder Approval, described above in this Summary Term Sheet;



•

the absence of any laws or governmental orders that prohibit the consummation of the merger;



•

all approvals from or registrations, declarations or filings with, or notices to, or permits from any governmental entity shall have been filed or obtained without imposition of material conditions, other than such approvals the failure of which to obtain has not had, and would not reasonably be expected to have, a Company Material Adverse Effect (as defined in "The Merger Agreement—Definition of Company Material Adverse Effect and Parent Material Adverse Effect");



•

each party's respective representations and warranties in the merger agreement being true and correct as of the date of the merger agreement and as of the closing date in the manner described in "The Merger Agreement—Conditions to the Completion of the Merger";



•

the absence of a Company Material Adverse Effect;



•

each party's performance in all material respects of its obligations required to be performed under the merger agreement prior to the closing date of the merger, and



•

the expiration or termination of the applicable waiting period under the HSR Act.

Termination of the Merger Agreement (page 104)115)

        The Company and Parent may agree in writing to terminate the merger agreement without completing the merger at any time, even after our shareholders have approved the merger agreement. The merger agreement may also be terminated upon written notice in certain other circumstances, including:

•

by either the Company or Parent:



•

if the merger is not completed on or before April 6, 2012 (the "Walk-Away Date"), except that the right to terminate will not be available to any party whose failure to comply with any of its obligations under the merger agreement results in the failure of the merger to be completed by the Walk-Away Date;



•

if a law or final and non-appealable governmental order prohibits the consummation of the merger, so long as the party seeking to terminate has used its reasonable best efforts to challenge the governmental order;



•

if the Shareholder Approval was not obtained at the special meeting or any adjournment or postponement of the special meeting, except this right to terminate will not be available to

the Company if the failure to obtain the Shareholder Approval was the result of the Company's failure to perform any of its obligations under the merger agreement; or



•

if the other party breaches or fails to perform any of its representations, warranties or covenants contained in the merger agreement such that certain closing conditions to the merger agreement would not be satisfied, and which breach cannot be cured by the Walk-Away Date or, if capable of being cured, has not been cured by the earlier of (a) twenty days after the delivery of written notice by the terminating party to the breaching party of such breach and (b) the Walk-Away Date, so long as the terminating party is not then in material breach of any representation or warranty in the merger agreement such as would give rise to the failure of the breaching party's closing condition with respect to the accuracy of the terminating party's representations and warranties in the merger agreement




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and the terminating party has not failed to perform in any material respect any covenant in the merger agreement;





•

by Parent:



•

prior to the Shareholder Approval, if (a) we, our Board or any committee thereof (i) withdraws, qualifies or modifies, or proposes publicly to withdraw, qualify or modify, in a manner adverse to Parent or Merger Sub, its recommendation that our shareholders approve the merger agreement or its approval of the merger agreement, or approves or recommends any Company Takeover Proposal, or (ii) delivers a notice to Parent informing Parent that we have received a Superior Company Proposal and that, in connection with such Superior Company Proposal, we are prepared to terminate the merger agreement, (b) a Company Takeover Proposal becomes publicly known and neither our special committee nor our Board has confirmed the recommendation of the Board within five business days of Parent's written request that it do so, or (c) we breached any of our obligations regarding Company Takeover Proposals or Superior Company Proposals in any material respect; and



•

by the Company:



•

prior to the Shareholder Approval, if, in order to accept a Superior Company Proposal, we comply with the notice and other requirements described in "The Merger Agreement—Termination in Connection with a Superior Proposal" and we pay Parent the termination fee described in "The Merger Agreement—Termination Fee"; or



•

if the Shareholder Approval has been obtained and all other conditions to the obligations of Parent and Merger Sub to effect the merger (other than as specified in the merger agreement) have been satisfied, we have notified Parent that all conditions to our obligations to effect the merger (other than as specified in the merger agreement) have been satisfied or will be waived, the marketing period (as defined in "The Merger Agreement—Financing") has ended, and Parent and Merger Sub have failed to consummate the merger prior to the Walk-Away Date (unless such failure was a result of our failure to perform our obligations under the merger agreement or to deliver any of the documents or information or cause to occur any other actions with respect to which we are required to use our reasonable best efforts to deliver or cause to be delivered or occur pursuant to our covenant to cooperate with Parent's financing efforts).


Termination Fees and Expense Reimbursement (page 105)116)


        We will be obligated to pay to Parent a termination fee of $47.25 million if:

•

the merger agreement is terminated by either the Company or Parent because the Shareholder Approval has not been obtained at the special meeting or any adjournment or postponement of the special meeting;




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•

we terminate the merger agreement prior to obtaining the Shareholder Approval in order to accept a Superior Company Proposal;



•

if Parent terminates the merger agreement for any of the following reasons:



•

the Company, our Board or our special committee (a) delivers a notice of a Superior Company Proposal and a statement that, in connection with such Superior Company Proposal, we are prepared to terminate the merger agreement, or (b) withdraws, qualifies or modifies, in a manner adverse to Parent, its recommendation that our shareholders approve the merger agreement;






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•

a Company Takeover Proposal becomes publicly known and neither our special committee nor our Board has confirmed the recommendation of the Board within five business days of Parent's written request that it do so;



•

we breached any of our obligations regarding a Company Takeover Proposal or a Superior Company Proposal in any material respect; or



•

we failed to perform any of our representations, warranties or covenants contained in the merger agreement such that certain of Parent's closing conditions to the merger agreement would not be satisfied, and which breach cannot be cured by the Walk-Away Date or, if capable of being cured, has not been cured by the earlier of (a) twenty days after the delivery of written notice by Parent to us of such breach and (b) the Walk-Away Date, so long as Parent and Merger Sub are not then in material breach of any representation or warranty in the merger agreement such as would give rise to the failure of our closing condition with respect to the accuracy of Parent and Merger Sub's representations and warranties in the merger agreement and Parent and Merger Sub have not failed to perform in any material respect any covenant in the merger agreement; or



•

the merger agreement is terminated because of the failure to consummate the merger on or before the Walk-Away Date and:



•

the Company's closing conditions have been satisfied (other than as specified in the merger agreement) and the marketing period has not ended as a result of the Company's failure to perform any of its obligations under the merger agreement; or



•

a Company Takeover Proposal has been announced after the date of the merger agreement and not withdrawn, the termination occurs before the special meeting, and within the 12 months following such termination the Company enters into a definitive agreement to consummate a Company Takeover Proposal or a Company Takeover Proposal is consummated (for purposes of this bullet, references to "20%" in the definition of Company Takeover Proposal will be deemed references to "50%").

        Parent will be obligated to pay us a termination fee of $94.5 million if the Shareholder Approval has been obtained and all other conditions to the obligations of Parent and Merger Sub to effect the merger (other than as specified in the merger agreement) have been satisfied and:

•

the marketing period has ended, we have notified Parent that all conditions to our obligations to effect the merger (other than as specified in the merger agreement) have been satisfied or will be waived and Parent and Merger Sub have failed to consummate the merger prior to the Walk-Away Date (unless such failure was a result of our failure to perform our obligations under the merger agreement or to deliver any of the documents or information or cause to occur any other actions with respect to which we are required to use our reasonable best efforts to deliver or cause to be delivered or occur pursuant to our covenant to cooperate with Parent's financing efforts); or




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•

the Walk-Away Date has occurred and the marketing period has not ended as a result of any reason other than our failure to perform any of our obligations under the merger agreement or to deliver any of the documents or information or cause to occur any other actions with respect to which we are required to use our reasonable best efforts to deliver or cause to be delivered or occur pursuant to our covenant to cooperate with Parent's financing efforts.

        Also, if either Parent or the Company successfully sues to enforce the payment of its respective termination fee, the non-prevailing party will pay the prevailing parties' out-of-pocket costs and expenses (including reasonable attorneys' fees), up to a maximum of $10 million.




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Remedies (page 64)75)


        In no event will we be entitled to monetary damages under the merger agreement other than the $94.5 million termination fee plus certain out-of-pocket costs and expenses. Subject to certain exceptions, we are entitled to seek specific performance in order to enforce Parent and Merger Sub's obligations under the Merger Agreement; however, we cannot seek specific performance to require Parent or Merger Sub to cause the equity financing to be funded or to consummate the merger.

        Concurrently with the execution of the merger agreement, each of ACOF III and CPPIB entered into a limited guarantee in our favor pursuant to which it irrevocably guaranteed its pro rata portion of Parent's obligations with respect to the termination fee described above and certain expenses payable by Parent to enforce the payment of the termination fee. These limited guarantees are our sole recourse against ACOF III, CPPIB and certain of their respective affiliates and representatives for any damages we may incur in connection with the merger agreement and the transactions contemplated by the merger agreement.


Dissenters' Rights (page 108)119)


        If you do not wish to accept the $22.00 per share merger consideration in the merger, you have the right under California law to have your shares appraised by a California court, provided that you comply with certain procedures. These dissenters' rights are subject to a number of restrictions and technical requirements. Generally, in order to exercise dissenters' rights, among other things, (a) you must not vote in favor of the approval of the merger agreement, (b) you must make a written demand for appraisal in compliance with California law within 30 days of notification that the merger agreement has been approved, (c) you must hold shares of our common stock on the record date and continuously hold such shares through the completion of the merger and (d) demands for payment must be filed with respect to at least five percent of the outstanding shares of our common stock. The fair value of your shares of our common stock as determined in accordance with California law may be more or less than, or the same as, the merger consideration to be paid to non-dissenting shareholders in the merger.Annex C to this proxy statement contains a copy of the California statute relating to shareholders' dissenters' rights. Failure to follow all of the steps required by this statute will result in the loss of your dissenters' rights.


Market Price of the Company's Common Stock (page 117)129)


        The Company's common stock is listed on the New York Stock Exchange under the symbol "NDN." The closing trading price of our common stock on October 10, 2011, the last trading day prior to our public announcement that we had entered into the merger agreement, was $20.49 per share. The closing trading price of our common stock on March 10, 2011, the day prior to public disclosure by the Company that we had received an acquisition proposal from certain of our affiliates and Leonard Green & Partners, L.P. ("LGP"), was $16.68 per share. The merger consideration represents a premium of approximately 32% to our closing share price on March 10, 2011. On [    •    ],December 9, 2011, which is the most recent practicable trading date prior to the date of this proxy statement, the closing trading price of our common stock was $[    •    ]$21.88 per share.




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QUESTIONS AND ANSWERS ABOUT THE MERGER AND THE SPECIAL MEETING


        The following questions and answers address briefly some questions you may have regarding the merger and the special meeting. These questions and answers may not address all questions that may be important to you as a shareholder of the Company. Please refer to the more detailed information contained elsewhere in this proxy statement, the annexes to this proxy statement and the documents referred to or incorporated by reference in this proxy statement.


The Merger and Related Transactions


Q:    What is the proposed transaction?

A:

The proposed transaction is the acquisition of the Company pursuant to the Agreement and Plan of Merger, dated as of October 11, 2011, as it may be amended from time to time, by and among the Company, Parent and Merger Sub. Parent and Merger Sub are controlled by ACOF III and CPPIB. Under the terms of the merger agreement, if the merger agreement is approved by the Company's shareholders and the other closing conditions under the merger agreement have been satisfied or waived (other than those which, by their nature, are satisfied upon the closing of the merger or are non-waivable), Merger Sub will be merged with and into the Company, with the Company continuing as the surviving corporation. Upon consummation of the merger, the Company will become a wholly owned subsidiary of Parent. After the merger, shares of the Company's common stock will not be publicly traded.

Q:    What will I receive for my shares of the Company's common stock in the merger?

A:

Upon completion of the merger, you will receive $22.00 per share in cash, without interest and less any applicable withholding taxes, for each share of our common stock that you own. This does not apply to (a) shares owned by any of our shareholders who are entitled to and who properly exercise dissenters' rights under California law, (b) shares owned by the Company, and (c) shares owned by Parent, Merger Sub or any other direct or indirect wholly owned subsidiary of Parent, including shares to be contributed to Parent immediately prior to the completion of the merger by the Rollover Investors. Upon consummation of the merger, you will not own shares in the Company or Parent. See "Special Factors—Material United States Federal Income Tax Consequences" beginning on page 6373 for a description of the U.S. tax consequences of the merger. You should consult your own tax advisor for a full understanding of how the merger will affect your federal, state, local and/or foreign taxes.

Q:    How will the Company's stock options be treated in the merger?

A:

Each outstanding stock option to purchase the Company's common stock granted under our equity incentive plans and outstanding as of immediately prior to the effective time of the merger will become fully vested and exercisable immediately prior to and contingent on the closing of the merger and will be cancelled as of the effective time of the merger. The holder of such stock option will be entitled to receive a cash payment for each share of our common stock subject to such stock option, equal to the excess, if any, of (a) the $22.00 per share merger consideration over (b) the option exercise price payable in respect of such share of our common stock issuable under such stock option, without interest and less any applicable withholding taxes.

Q:    How will the Company's restricted stock units and performance stock units be treated in the merger?

A:

Each outstanding restricted stock unit and performance stock unit granted under our equity incentive plans will be cancelled as of the effective time of the merger. The holder of such restricted stock unit or performance stock unit will be entitled to receive a cash payment equal to the product of (a) the number of unforfeited shares of our common stock subject to the restricted




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stock unit or performance stock unit, as applicable, multiplied by (b) the $22.00 per share merger consideration, without interest and less any applicable withholding taxes.

Q:    When do you expect the merger to be completed?

A:

We are working toward completing the merger as quickly as possible, and we anticipate that it will be completed in the first quarter of calendar year 2012. In order to complete the merger, we must obtain the Shareholder Approval and the other closing conditions under the merger agreement must be satisfied or waived (to the extent such conditions are waivable). Neither we nor Parent and Merger Sub are obligated to complete the merger unless and until the closing conditions in the merger agreement have been satisfied or waived (to the extent such conditions are waivable), which conditions are described in "The Merger Agreement—Conditions to the Completion of the Merger" beginning on page 102.113. The merger will be effective at the time the statutory merger agreement is filed with the Secretary of State of the State of California or such other time as may be provided in the statutory merger agreement as the effective time of the merger. A copy of the statutory merger agreement is attached asAnnex D to this proxy statement. Unless otherwise agreed by the parties to the merger agreement, the closing of the merger will occur on the later of (a) the third business day following the satisfaction or waiver of the conditions described in "The Merger Agreement—Conditions to the Completion of the Merger", and (b) the date that is the earlier of (i) any business day during the marketing period to be specified by Parent and (ii) the third business day after the final day of the marketing period. For purposes of the merger agreement, "marketing period" means a period of at least 15 consecutive business days following the Company and Parent's satisfaction of certain obligations with respect to Parent's financing of the merger as described in "The Merger Agreement—Financing of the Merger", excluding any day from November 21, 2011, to November 25, 2011. The marketing period either will be completed on or prior to December 19, 2011, or will commence on or after January 4, 2012.

Q:    What effects will the proposed merger have on the Company?

A:

Upon completion of the proposed merger, the Company will cease to be a publicly traded company and will be wholly owned by Parent. As a result, you will no longer have any interest in our future earnings or growth, if any. Following completion of the merger, the registration of our common stock and our reporting obligations with respect to our common stock under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), are expected to be terminated. In addition, upon completion of the merger, shares of our common stock will no longer be listed on the New York Stock Exchange (the "NYSE") or any other stock exchange or quotation system.

Q:    What happens if the merger is not completed?

A:

If the merger agreement is not approved by our shareholders, or if the merger is not completed for any other reason, our shareholders will not receive any payment for their shares pursuant to the merger agreement. Instead, the Company will remain as a public company and our common stock will continue to be registered under the Exchange Act and listed and traded on the NYSE. Under specified circumstances, the Company may be required to pay Parent a termination fee, or Parent may be required to pay the Company a termination fee, in each case, as described in "The Merger Agreement—Termination Fee" beginning on page 105.116.




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The Special Meeting


Q:    Where and when is the special meeting?

A:

The special meeting will be held at City of Commerce Community Center, Rosewood Park Meeting Room, 5600 Harbor Street, City of Commerce, California 90040, on [    •    ],Thursday, January 12, 2012, at [    •    ] a.m.1:00 p.m., local time.




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Q:    What matters will be voted on at the special meeting?

A:

You will be asked to consider and vote on the following proposals:



•

the approval of the merger agreement; and



•

the approval of a motion to adjourn or postpone the special meeting to another time and/or place for the purpose of soliciting additional proxies in favor of the proposal to approve the merger agreement, if necessary.

Q:    Does our Board recommend that our shareholders vote "FOR" the approval of the merger agreement?

A:

Yes. After careful consideration and upon the unanimous recommendation of our special committee, our Board, by the unanimous vote of our independent directors, recommends that you vote:



•

"FOR" the approval of the merger agreement.

You should read "Special Factors—Purpose and Reasons for the Merger; Recommendation of Our Special Committee and Board of Directors; Fairness of the Merger" beginning on page 3233 for a discussion of the factors that our special committee and Board considered in deciding to recommend the approval of the merger agreement. In addition, in considering the recommendation of our special committee and Board with respect to the merger agreement, you should be aware that some of the Company's directors and executive officers have interests in the merger that are different from, or in addition to, the interests of our shareholders generally. See "Special Factors—Interests of the Company's Directors and Executive Officers in the Merger" beginning on page 66.77.

Q:    How do the directors and executive officers of the Company and the Rollover Investors intend to vote?

A:

Our directors and executive officers have informed us that they intend to vote all of their shares of common stock "FOR" the approval of the merger agreement because they believe that the merger and the merger agreement are in the best interests of the Company and its shareholders. None of our executive officers and directors has made a recommendation with respect to the proposed transaction other than as set forth in this proxy statement. In the aggregate, they beneficially own approximately 33.5% of the total number of outstanding shares of the Company's common stock (which includes approximately 33% beneficially owned by the Rollover Investors and Au Zone Investments #2, L.P.). The Rollover Investors and Au Zone Investments #2, L.P. have entered into a voting agreement with Parent whereby they have agreed to vote all of their shares in favor of the merger.

Q:    Are all shareholders of the Company as of the record date entitled to vote at the special meeting?

A:

Yes. All shareholders who own our common stock at the close of business on [    •    ],December 2, 2011, which is the record date for the special meeting, will be entitled to vote (in person or by proxy) the shares of our common stock that they hold on that date at the special meeting, or any adjournments of the special meeting.




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Q:    What constitutes a quorum for the special meeting?

A:

The presence at the special meeting in person or by proxy of the holders of a majority of the shares of our common stock outstanding on the record date will constitute a quorum for purposes of the special meeting. Abstentions are counted for this purpose, but "broker non-votes" are not.




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Q:    What do I need to attend the special meeting?

A:

Only shareholders and their proxies may attend the special meeting. If you are a record shareholder who received a paper copy of this proxy statement, an admission ticket is included with the mailing and is attached to the proxy card. You will need to bring that admission ticket and your photo identification to the special meeting. If you hold your shares in "street name" through a broker, bank or other nominee or if you have received your proxy materials electronically, you may obtain an admission ticket in advance by sending a written request, along with proof of ownership, such as a bank or brokerage account statement, to us at Investor Relations at 99¢ Only Stores, 4000 Union Pacific Avenue, City of Commerce, California 90023. If you arrive at the special meeting without an admission ticket, we will admit you only if we are able to verify that you were an actual shareholder of the Company as of the record date for the special meeting.

Q:    What vote of the Company's shareholders is required to approve the merger agreement?

A:

The approval of the merger agreement requires the affirmative vote of the holders of a majority of the outstanding shares of the Company's common stock. A failure to vote your shares, abstention from the vote or a "broker non-vote" will have the same effect as voting "AGAINST" the approval of the merger agreement. A "broker non-vote" occurs when a broker does not have discretion to vote on approval of the merger agreement because the broker has not received instructions from the beneficial holder as to how such holder's shares are to be voted.

Q:    What vote of the Company's shareholders is required to adjourn the special meeting for the purpose of soliciting additional proxies to approve the merger agreement?

A:

Approval of the proposal to adjourn the special meeting, if necessary, for the purpose of soliciting additional proxies requires the affirmative vote of a majority of the holders of our common stock present in person or by proxy.proxy and voting on the proposal. A failure to vote your shares of common stock or a broker non-vote will have no effect on the outcome of the vote to approve the proposal to adjourn the special meeting. An abstention will have the same effect as voting "AGAINST" the proposal to adjourn the special meeting.

Q:    How do I vote my shares without attending the special meeting?

A:

If you hold shares in your name as a shareholder of record on the record date, then you received this proxy statement and a proxy card from us. You may submit a proxy for your shares by Internet, telephone or mail without attending the special meeting. To submit a proxy by Internet or telephone twenty-four hours a day, seven days a week, follow the instructions on the proxy card. To submit a proxy by mail, complete, sign and date the proxy card and return it in the postage-paid envelope provided. Internet and telephone proxy facilities for shareholders of record will close at [    •    ],11:59 p.m. Eastern Time on January 11, 2012, the day prior to the special meeting. If you hold shares in "street name" through a broker, bank or other nominee, then you received this proxy statement from the nominee, along with the nominee's voting instructions. You should instruct your broker, bank or other nominee on how to vote your shares of common stock using the voting instructions provided to you.




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Q:    How do I vote my shares in person at the special meeting?

A:

If you hold shares in your name as a shareholder of record on the record date, you may vote those shares in person at the special meeting by giving us a signed proxy card or ballot before voting is closed. If you would like to do that, please bring your admission ticket and your photo identification with you to the special meeting. Even if you plan to attend the special meeting, we strongly encourage you to submit a proxy for your shares in advance as described above, so your




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vote will be counted if you later decide not to attend. If you hold shares in "street name" through a broker, bank or other nominee, you may vote those shares in person at the meeting only if you obtain and bring with you a signed proxy from the necessary nominee giving you the right to vote the shares, an admission ticket and your photo identification. To obtain a signed proxy prior to the special meeting, you should contact your nominee.

Q:    If my shares are held in "street name" by my broker, bank or other nominee, will my nominee vote my shares for me?

A:

Your broker, bank or other nominee willnot vote your shares on your behalf unless you provide instructions to your broker, bank or other nominee on how to vote. You should follow the directions provided by your broker, bank or other nominee regarding how to instruct it to vote your shares. Without those instructions, your shares will not be voted, which will have the same effect as voting "AGAINST" the approval of the merger agreement, but will have no effect for purposes of the proposal to adjourn the special meeting, if necessary, to solicit additional proxies.

Q:    Can I revoke or change my vote after I submit my proxy?

A:

Yes. If you hold your shares through a broker, bank, or other nominee, you have the right to change or revoke your proxy at any time before the vote is taken at the special meeting by following the directions received from your broker, bank or other nominee to change those instructions. If you hold your shares in your name as a shareholder of record, you have the right to change or revoke your proxy at any time before the vote is taken at the special meeting by (a) delivering to our Corporate Secretary at 99¢ Only Stores, 4000 Union Pacific Avenue, City of Commerce, California 90023, a signed written notice of revocation, bearing a date later than the date of the proxy, stating that the proxy is revoked, (b) attending the special meeting and voting in person (your attendance at the meeting will not, by itself, change or revoke your proxy—you must vote in person at the meeting to change or revoke a prior proxy), (c) submitting a later-dated proxy card or (d) submitting a proxy again at a later time by telephone or Internet prior to the time at which the telephone and Internet proxy facilities close by following the procedures applicable to those methods of submitting a proxy.

Q:    What does it mean if I receive more than one proxy card or vote instruction form?

A:

If your shares are registered differently and are in more than one account, you may receive more than one proxy card or voting instruction form. Please complete, sign, date and return all of the proxy cards and voting instruction forms you receive regarding this special meeting (or submit your proxy for all shares by telephone or Internet) to ensure that all of your shares are voted.

Q:    Are dissenters' rights available?

A:

Yes. Under California law, you have the right to seek appraisal of the fair market value of your shares of our common stock as determined by a California court if the merger is completed, but only if (a) you do not vote in favor of approving the merger agreement, (b) you comply with the requirements of California law and (c) demands for payment are filed with respect to at least five




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percent of the outstanding shares of our common stock. See "Dissenters' Rights" beginning on page 108.119.

Q:    Will any proxy solicitors be used in connection with the special meeting?

A:

Yes. To assist in the solicitation of proxies, the Company has engaged Morrow & Co., LLC.




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Q:    Who will count the votes cast at the special meeting?

A:

A representative of our transfer agent, American Stock Transfer & Trust Company, LLC, will count the votes and act as an inspector of election.

Q:    Should I send in my stock certificates now?

A:

No. PLEASE DO NOT SEND IN YOUR STOCK CERTIFICATES WITH YOUR PROXY. If you hold your shares in your name as a shareholder of record, then shortly after the merger is completed you will receive a letter of transmittal with instructions informing you how to send in your stock certificates to the paying agent in order to receive the $22.00 per share merger consideration in respect of your shares of our common stock. You should use the letter of transmittal to exchange your stock certificates for the merger consideration which you are entitled to receive as a result of the merger. If you hold your shares in "street name" through a broker, bank or other nominee, then you will receive instructions from your broker, bank or other nominee as to how to effect the surrender of your "street name" shares in exchange for the merger consideration.

Q:    Who can help answer my other questions?

A:

If you have more questions about the merger, need assistance in submitting your proxy or voting your shares, or need additional copies of the proxy statement or the enclosed proxy card, you should contact the Company's proxy solicitor:

		470 West Avenue—3rd Floor Stamford, CT 06902 Banks and Brokerage Firms, please call (203) 658-9400 Shareholders, please call (800) 566-9061




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SPECIAL FACTORS


Background of the Merger


        In October 2010,recent years, David Gold, Chairman of our Board, together with members of his family (the "Gold/Schiffer Family"), have contemplated that the Company might be more suitable for ownership as a private company, considering, among other things, that as a privately-held company, the Company could focus on long-term growth initiatives without the stock market reaction to quarterly earnings or sales announcements and the negative impact on trading prices of potentially failing to meet analyst forecasts.

        In the fourth calendar quarter of 2010, in light of the historic low interest rates for acquisition financing at that time, the Gold/Schiffer Family began to consider the desirability and feasibility of a potential going private transaction of the Company. At or around that time, members of the Gold/Schiffer Family, including Eric Schiffer, the Company's Chief Executive Officer, and Jeff Gold, the Company's President and Chief Operating Officer, beganentered into discussions with representatives of Leonard Green & Partners, L.P. ("LGP"), an existing investor in the Company with the financial capability to execute a potential transaction and significant expertise in the retail industry. Among other matters, and based solely on publicly available information about the Company, members of the Gold/Schiffer Family and LGP discussed the Company and its competitive landscape, different balance sheet options and the general benefits of going private. These discussions were exploratory only and were initiated by the Gold/Schiffer family in their capacity as shareholders. In addition, at that time the Gold/Schiffer Family had not made a determination of whether it wanted to move forward with a transaction, and LGP had informed the Gold/Schiffer Family that it did not wish to proceed with any transaction without their involvement.

        During this exploratory phase and while these discussions were ongoing, the law firm of Skadden, Arps, Slate, Meagher & Flom LLP ("Skadden") advised the Gold/Schiffer Family. The Gold/Schiffer Family also consulted with Guggenheim Securities, LLC ("Guggenheim"), including with respect to the structural and financial aspects of such a transaction.

        On January 17, 2011, Mr. Schiffer contacted a representative of Munger, Tolles & Olson LLP ("Munger Tolles"), the Company's outside corporate counsel, to discuss the fact that the Gold/Schiffer Family was considering the possibility of making a proposal to the Company for a going private transaction and would be informing the Board of this development. He also told Munger Tolles that the Gold/Schiffer Family would be requesting the Board's approval to share confidential information of the Company with potential partners in such a transaction. At Mr. Schiffer's request, Munger Tolles then discussed these matters further with a representative of Skadden. On that same day, Mr. Schiffer also informed the independent members of the Board of this development and called a Board meeting for January 19, 2011.

        On January 19, 2011, the Board met telephonically. Representatives of Munger Tolles and Skadden were also present. Messrs. Schiffer, J. Gold and David Gold, the members of the Gold/Schiffer Family who serve on the Board (the "Interested Directors"), and other members of the Gold/Schiffer Family who also attended the meeting, informed the independent members of the Board of their potential interest in a going private transaction involving the Company, but that no decision to proceed with a proposal had been made. They also informed the independent members of the Board that preliminary discussions were proceeding with LGP regarding LGP's potential participation in such a transaction, and that the Gold/Schiffer Family had not agreed to be exclusive with LGP and would not enter into any exclusive arrangements with LGP without the approval of the independent members of the Board. Also at the meeting, the Interested Directors requested that the Board approve the sharing of confidential information of the Company with private equity firms and potential sources of financing in connection with this process. The Interested Directors then recused themselves and left the meeting, as did Skadden. The independent directors then discussed the information that had been shared with the




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Board by the Interested Directors, and asked questions of Munger Tolles as to potential next steps. Following this discussion, the independent directors authorized the Company to provide confidential information to potential investment partners and/or financing sources of the Gold/Schiffer Family pursuant to an appropriate confidentiality and standstill agreement.

        On January 20, 2011, Mr. Schiffer met with a senior executive of LGP to confirm LGP's potential interest in participating in a going private transaction involving the Company.

        On January 21, 2011, Munger Tolles delivered a proposed confidentiality and standstill agreement to LGP. On January 24, 2011, LGP delivered its comments to the proposed confidentiality and standstill agreement to Munger Tolles.




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        Over the next few days, Munger Tolles discussed LGP's comments and certain other changes to the agreement with Marvin Holen, an independent member of the Board, and Chairman of the Board's Corporate Governance Committee, Rob Kautz, the Company's Chief Financial Officer, and Russell Wolpert, the Company's Chief Legal Officer, as well as with LGP, and a confidentiality and standstill agreement was entered into between the Company and LGP on January 27, 2011.

        On or about February 1, 2011, the Company established a protocol to share a limited amount of confidential information with potential partners of the Gold/Schiffer Family. All decisions as to what confidential information would be shared were made by Mr. Holen, Mr. Kautz and Mr. Wolpert.

        During February 2011, after execution by LGP and the Company of the confidentiality and standstill agreement, the Company provided LGP a limited amount of confidential information, including income statement summaries detailing the Company's revenues and expenses for the 2008 to 2011 fiscal years, schedules comparing the Company's financial performance during the first three quarters of the 2011 fiscal year against the Company's projected results, various inventory, sales and store performance analytics prepared by the Company (with individual stores referred to only by a reference code to disguise their identity), information relating to Company capital expenditures and estimated depreciation costs and other financial information and data measuring the Company's recent financial performance. Following establishment of the special committee, all of the confidential information provided to LGP in February 2011 was furnished to Lazard and was posted in the data room for review by other prospective bidders.

Messrs. Schiffer, J. Gold and Kautz met with LGP on February 8, 2011, and February 15, 2011, and Mr. Kautz met with LGP on March 2, 2011, to discuss the Company's operations and financial information and other diligence matters.

        During the month of February and the first week of March, representatives of the Gold/Schiffer Family and representatives of LGP, together with their respective advisors, engaged in a series of discussions regarding the potential structure of a going private transaction, the possible price to be paid to the Company's shareholders in such transaction, the capital structure of the Company following such transaction, and certain arrangements that would govern the relationship of the parties after the closing of such transaction. During the course of these discussions, it was determined that the most likely structure to effect a going private transaction would be a merger of the Company with a new entity to be formed by LGP and the Gold/Schiffer Family, and that the price to be offered to the Company's shareholders in such transaction would likely be at or around $19.00 per share.

        From February 16 through February 18, 2011, Skadden and Munger Tolles had several discussions regarding process. Skadden informed Munger Tolles that, if the Gold/Schiffer Family's discussions with a private equity firm led to a going private proposal, the preference of the Gold/Schiffer Family was to enter into a definitive merger agreement that would provide the Company with a go-shop period in which to solicit alternative proposals to acquire the Company after the signing of the definitive agreement. Skadden also mentioned the alternative possibility of a limited solicitation process being run by the Board on a confidential basis, prior to execution of a definitive agreement. During this period,




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Munger Tolles discussed these ideas and various alternatives with the independent directors. The independent directors, who met telephonically with Munger Tolles on February 18, expressed the view that they would not approve the Company entering into a definitive agreement with the Gold/Schiffer Family and any other potential buyer or have any discussion regarding potential terms of such a transaction without public disclosure of any acquisition proposal and a full and open process to explore other alternatives conducted by a special committee of independent directors with independent advisors. On February 18, Munger Tolles informed Skadden of the independent directors' views.

        On February 22 and February 24, 2011, Skadden and Munger Tolles had several additional discussions, during which Skadden informed Munger Tolles that the Gold/Schiffer Family intended to retain Guggenheim as a financial advisor, and that the Gold/Schiffer Family planned to assess LGP's position as to a potential proposal to acquire the Company. During these discussions, Skadden confirmed to Munger Tolles that the Gold/Schiffer Family would not enter into any binding or exclusive relationship with LGP in connection with such a proposal, and that the Gold/Schiffer Family remained open to pursuing a transaction with another buyer if one emerged.

        On February 25, 2011, the independent directors had a telephone discussion with Munger Tolles to discuss Munger Tolles' recent discussions with Skadden as well as the Gold/Schiffer Family's retention of Guggenheim as its financial advisor.

        On March 8, 2011, representatives of LGP sent a written proposal to representatives of the Gold/Schiffer Family regarding the terms of a potential transaction in which LGP would participate with the Gold/Schiffer Family in a buyout of the Company. Between March 8, 2011, and March 10, 2011, representatives of the Gold/Schiffer Family and representatives of LGP, together with their respective advisors, discussed the potential terms of such a transaction.

        On March 10, 2011, Skadden informed Munger Tolles that the Gold/Schiffer Family and LGP planned to deliver a letter to the Board with a going private proposal later that day, and that the Gold/




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Schiffer Family and LGP understood that the proposal would be publicly disclosed. Skadden requested, on behalf of LGP, that the Board confirm that the delivery of a going private proposal by LGP would not violate LGP's confidentiality and standstill agreement. Munger Tolles informed the independent directors of these developments in a telephone call that same day. The independent directors determined that they would be willing to convene a Board meeting to consider LGP's request with respect to its confidentiality and standstill agreement, subject to confirmation from the Gold/Schiffer Family that any arrangement between the Gold/Schiffer Family and LGP would be non-binding and non-exclusive and that the Gold/Schiffer Family would remain free to enter into another transaction with a different bidder. Munger Tolles called Skadden to inform them of the position of the independent directors, and Skadden stated that the Gold/Schiffer Family would be in a position to confirm all of these matters to the Board. Skadden also confirmed that the Company could state in any press release about the going private proposal that the Gold/Schiffer Family had not made any commitment of exclusivity with LGP relating to a transaction. As part of the conversations that gave rise to their proposal, the Gold/Schiffer Family and LGP also had preliminary discussions regarding issues that would be addressed in a shareholders agreement should any definitive agreement with the Company regarding the proposed transaction be reached in the future.

        On the evening of March 10, the Board met, with representatives of Munger Tolles and Skadden present. The Interested Directors provided the other Board members with background on the potential proposal, noting that, as part of the proposal, the Gold/Schiffer Family was prepared to roll over a substantial portion of their existing equity investment in the Company. The Interested Directors also confirmed that they had not entered into any binding agreements or arrangements with LGP. The Interested Directors then recused themselves and left the meeting, as did Skadden. After further discussion, the independent directors determined that the delivery of a going private proposal by LGP and the Gold/Schiffer Family would not violate LGP's confidentiality and standstill agreement. Following the Board meeting, the Gold/Schiffer Family and LGP delivered a letter to the Board with




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the terms of a non-binding, conditional going private proposal to acquire the Company at $19.09 per share stating, among other things, that the Gold/Schiffer Family was prepared to roll over a substantial percentage of its equity ownership and expected to increase its pro forma percentage ownership in the Company. The proposal was conditioned on: (a) the completion of due diligence, including financial, legal, accounting and tax diligence, (b) the receipt of financing commitments with respect to the financing necessary to complete the proposed transaction, (c) the negotiation of a satisfactory acquisition agreement with customary terms and conditions, (d) reaching agreement among members of the Gold/Schiffer Family and LGP with respect to the terms of a shareholders' agreement and (e) reaching agreements with the management of the Company with respect to their ongoing roles as managers of the Company. The Board convened again on the evening of March 10, with Munger Tolles and Skadden present, and discussed the terms of the going private proposal. The Interested Directors then recused themselves and left the meeting, as did Skadden, and the independent directors approved the disclosure of the going private proposal before the opening of the NYSE the next morning.

        On March 11, 2011, prior to the opening of the NYSE, the Company issued a press release announcing the receipt of the going private proposal from the Gold/Schiffer Family and LGP. That afternoon, the Board and Munger Tolles convened by telephone to discuss the formation of a special committee of the Board. After discussion, and the recusal of the Interested Directors, the Board approved the formation of a special committee of independent directors, consisting of Lawrence Glascott, Marvin Holen and Peter Woo (the "special committee"), to consider the going private proposal and other proposals and strategic alternatives available to the Company, including the possibility of taking no action with respect to the going private proposal and remaining a public company. At the March 11, 2011 meeting, the members of the special committee unanimously agreed that Marvin Holen would serve as Chairman of the special committee.

        Following the March 11, 2011 Board meeting, the special committee met on several occasions with Munger Tolles to discuss appropriate next steps in light of its charter and its obligations to the




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Company's shareholders. The special committee then considered its choice of legal counsel at meetings held on March 17 and March 18, 2011. After considering the qualifications and experience of several law firms, on March 18, 2011, the special committee engaged Morrison & Foerster LLP ("Morrison & Foerster") as its independent legal counsel.

        At a meeting of the special committee held on March 23, 2011, Morrison & Foerster reviewed with the special committee its fiduciary duties to the Company and its shareholders. The special committee discussed and confirmed the independence of each member of the special committee. The special committee also reviewed with Morrison & Foerster the scope of the special committee's mandate and noted that the Board resolutions appointing the special committee provided the special committee with authority to, among other things, consider, and, if deemed appropriate, negotiate the proposal received from LGP and the Gold/Schiffer Family as well as any other proposals received by the Company and to consider other strategic alternatives, including remaining an independent public company. The special committee then discussed the process for selection of a financial adviser. During the meeting, a teleconference was held with Messrs. Kautz and Wolpert and a representative of Munger Tolles. The special committee instructed the Company representatives to furnish to the special committee copies of all information previously furnished by the Company to LGP. In addition, the special committee advised the Company representatives that the special committee would have sole responsibility for managing the process of furnishing any additional information to LGP or to any other potential counterparties.

        On March 24, 2011, a representative of Skadden contacted Morrison & Foerster and advised that he had been contacted by a private equity firm, which we refer to as Bidder C, regarding Bidder C's potential interest in a transaction with the Company. The representative of Skadden reported that he had advised Bidder C it should speak with Morrison & Foerster. In the same conversation with Morrison & Foerster, the representative of Skadden stated that the Gold/Schiffer Family was open to




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discussions with strategic bidders and other private equity firms and that the Gold/Schiffer Family would consider selling its entire equity interest to a strategic buyer in the retail space if an attractive offer was made. Later on March 24, Morrison & Foerster spoke with a representative of Bidder C who expressed his firm's interest in exploring a potential transaction with the Company. Morrison & Foerster advised Bidder C that the special committee would respond after it had selected its financial adviser.

        Between March 23 and March 30, 2011, the special committee reviewed materials received from 21 investment banks seeking to act as financial adviser to the special committee. The special committee met with five investment banks, asking them, among other things, about their experience with companies in the Company's industry, with special committees and with going private transactions, and about their relationships, if any, with LGP and members of the Gold/Schiffer Family and other potential acquirors of the Company. On March 30, after considering the qualifications, experience, and independence of the investment banks, the special committee resolved to engage Lazard Frères & Co. LLC ("Lazard") as its financial adviser, subject to negotiation of an acceptable engagement agreement. Following negotiation of such agreement, Lazard was engaged on April 8, 2011, to act as financial adviser to the special committee.

        On March 29, 2011, Latham & Watkins LLP ("Latham"), LGP's legal counsel, and Skadden contacted Morrison & Foerster. Latham suggested that the Company enter into a definitive merger agreement with LGP, based on the March 10, 2011 proposal from LGP and the Gold/Schiffer Family, that would include a go-shop provision allowing the special committee to solicit alternative transactions for some period of time after signing the definitive merger agreement. Later that day, Morrison & Foerster discussed the LGP proposal with the special committee and discussed the advantages and disadvantages of following such a process as compared to other potential processes, including in particular the solicitation of other potential bidders prior to signing a binding definitive acquisition agreement with any bidder. Following this discussion, the special committee concluded that it would be more beneficial to the Company's shareholders for the special committee to review the position and




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outlook of the Company and strategic alternatives that may be available to it and to conduct a market check prior to signing a merger agreement and directed Morrison & Foerster to so inform Latham. In April and May 2011, similar proposals were made by LGP and advisers to the Gold/Schiffer Family who suggested that such a process might allow the special committee to take advantage of the then favorable financing market conditions. In each case, the special committee considered the proposal, but concluded that it would be more beneficial to the Company's shareholders for the special committee to complete its review of the Company and conduct a market check prior to signing a merger agreement.

        On April 11, 2011, at the direction of the special committee, the Company issued a press release stating that the special committee had been formed to, among other things, consider the March 10, 2011 proposal from LGP and the Gold/Schiffer Family. The press release stated that the special committee was also authorized to consider other proposals and strategic alternatives which might be available to the Company and that the special committee had retained Lazard as its financial adviser and Morrison & Foerster as its legal counsel. The press release also stated that the Gold/Schiffer Family had assured the Company that it would support a full and open process and consider other bidders arising from such a process.

        Later on April 11, 2011, the special committee met with Lazard and Morrison & Foerster. Following a further discussion of the March 10 proposal from LGP and the Gold/Schiffer Family and discussion of various alternative courses of action, the special committee again concluded that a competitive bidding process would be most beneficial to the Company's unaffiliated shareholders and instructed Lazard to implement a process pursuant to which bids would be sought from both potential strategic buyers and private equity buyers. The special committee further instructed Lazard to consider alternatives to selling the Company. At this meeting, the special committee also discussed the status of the Company's four-year business plan, which was being prepared by Company management in the




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ordinary course of business and which had not yet been completed. The special committee noted, among other things, that the financial projections to be included in the plan, could be used to facilitate the special committee's review of the Company and strategic alternatives available to the Company and the solicitation of bids to acquire the Company.

        During the next several weeks, Lazard conducted a review of the Company and its business. Lazard was contacted during this time period by Bidder C and another private equity firm, both of which expressed an interest in a possible transaction with the Company. However, the other private equity firm never submitted a bid despite having signed a non-disclosure agreement. With Lazard's assistance, the Company began preparing a confidential information memorandum to be furnished to prospective bidders. In addition, with Lazard's assistance, the special committee worked with Mr. Kautz and other members of the Company's management team as they finalized the Company's four-year business plan projections for consideration and use by the special committee in its evaluation of the Company and strategic alternatives available to the Company, and for inclusion in the confidential information memorandum.

        On April 25, 2011, Lazard and Morrison & Foerster participated in a teleconference with Guggenheim and Skadden. During this discussion, Guggenheim and Skadden confirmed that there were no agreements between LGP and the Gold/Schiffer Family and that the Gold/Schiffer Family was open to strategic and private equity buyers. Guggenheim and Skadden explained that there had been discussions between the Gold/Schiffer Family and LGP regarding, among other things, debt leverage, corporate governance and exit strategies with respect to the post-merger company. During these discussions, Guggenheim and Skadden advised that the discussions with LGP contemplated that the Gold/Schiffer Family would own a majority interest in the post-acquisition company as a result of rolling over a substantial ownership interest in the Company. Guggenheim also discussed its views regarding the likelihood of certain parties bidding for the Company.

        On April 28, 2011, the special committee met with Lazard and Morrison & Foerster. The special committee again discussed alternative processes for seeking bids for the Company and reconfirmed its




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intention of seeking other bidders and considering other strategic alternatives before it made any recommendation to the Board. The special committee then reviewed with Lazard potential counterparties who might be contacted to ascertain their interest in acquiring the Company. Following the special committee's agreement on a list of potential counterparties, the special committee directed Lazard to commence contacting the potential counterparties as soon as practicable.

        During May 2011, at the direction of the special committee, Lazard commenced a marketing process, ultimately contacting 51 potential bidders, comprised of 33 potential strategic acquirers and 18 private equity firms. Lazard advised the potential bidders that the special committee would consider proposals to acquire all of the outstanding shares of the Company, including those held by the Gold/Schiffer Family, as well as proposals to acquire the Company together with the Gold/Schiffer Family. Lazard also reiterated to potential bidders that the Gold/Schiffer Family had not made any commitment of exclusivity with LGP. On or about May 6, 2011, a representative of Lazard called a representative of Ares Management LLC ("Ares Management") regarding the possibility of Ares Management submitting a proposal for an acquisition transaction with the Company. In that call and in subsequent contacts between Ares Management and Lazard, Lazard assured Ares Management that the special committee was fully committed to conducting a full and open competitive bidding process with respect to any acquisition transaction and that the Gold/Schiffer Family had not made any formal or informal exclusive arrangements with any buyer and would entertain transactions involving all potential buyers. Lazard further informed Ares Management that the Gold/Schiffer Family was not mandating any specific rollover investment amount by the Gold/Schiffer Family and in the interest of having an open process to help maximize value to existing shareholders would consider proposals with little to no rollover. Lazard further informed Ares Management, during the May 6^th call and in subsequent




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contacts, that Ares Management would be afforded the same opportunity to conduct diligence as were other potential buyers.

        Over the course of the second half of May and the first week of June, ACOF Operating Manager III, LLC, an affiliate of Ares Management (collectively, "Ares"), Bidder C, and four other private equity firms signed confidentiality agreements with the Company. The confidentiality agreements included a customary standstill provision prohibiting bidders from acquiring shares of Company common stock or making proposals to acquire the Company as well as a prohibition on discussions or negotiations with any party (including members of the Gold/Schiffer Family) regarding a potential acquisition of the Company unless the special committee had consented to such discussions. The firms that signed a confidentiality agreement received a confidential information memorandum about the Company and were provided with access to selected documents through a virtual data room. Three of the four other private equity firms that signed confidentiality agreements ultimately declined to proceed further. The fourth firm, which we refer to as Bidder D, continued with the process.

        On May 10, 2011, the special committee asked LGP to amend its existing confidentiality agreement to conform to the confidentiality agreement used by the special committee in its process. Following several discussions of the terms of an amendment, LGP signed an amended and restated confidentiality agreement on July 13, 2011.

        On May 13, 2011, Lazard and Morrison & Foerster met with Guggenheim and Skadden at their request. Guggenheim and Skadden reviewed their discussions with LGP regarding debt leverage, corporate governance and exit strategies for the post-merger entity and indicated that these would be important considerations in connection with any alternative transaction proposal that required a significant rollover by the Gold/Schiffer Family. Guggenheim and Skadden requested guidance from Lazard and Morrison & Foerster with respect to the marketing process envisioned by the special committee. In a follow up conversation on May 17, 2011, Lazard and Morrison & Foerster described generally the marketing process that the special committee had decided to implement.

        During the first half of June 2011, Ares, Bidder C and Bidder D attended management presentations and participated in initial meetings with the Gold/Schiffer Family. The meetings with the




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Gold/Schiffer Family were also attended by representatives of Lazard on behalf of the special committee and by representatives of Guggenheim.

        After the management presentation attended by Ares on June 9, Ares, Lazard, Guggenheim, Mr. Schiffer and Mr. J. Gold discussed LGP's publicly disclosed going private proposal and the Gold/Schiffer Family's relationship with LGP. In such discussions, Mr. Schiffer expressed the Gold/Schiffer Family's support for a full and open process and a willingness to give consideration to alternative proposals.

        On June 15, 2011, the special committee discussed whether or not to obtain appraisals of the real properties owned by the Company. The special committee conferred with Lazard regarding the potential uses of such appraisals and the potential costs and time required to obtain such appraisals. Based on their business experience and knowledge of the Company and its assets, the special committee concluded that it was highly likely that the value of the Company as a going concern exceeded the value obtainable through a liquidation of the real estate and other assets of the Company by a significant margin. The special committee also considered alternative methods of financing the Company's real estate, but noted that disposition of the real properties owned by the Company would result in the Company having to incur substantial expenses in order to lease back the same properties, as well as the disruption of the Company's operations if the Company were unable to lease back those properties and was required to move all of the stores and warehouse operations currently conducted in properties owned by the Company to separate locations. Based on the foregoing, the special committee decided not to obtain appraisals of the real properties owned by the Company.




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        On June 17, 2011, Lazard sent a process letter to each of Ares, Bidder C and Bidder D. The letter requested non-binding proposals by June 29, 2011, and required bidders to describe their proposed arrangements, if any, with the Gold/Schiffer Family. Subsequently, each of these parties was provided access to additional information in the virtual data room. In addition, each party met on one occasion in June with members of the Gold/Schiffer Family to discuss their potential interest in rolling over a portion of their equity interests in the Company. Lazard and Guggenheim attended all of these meetings between the prospective bidders and members of the Gold/Schiffer Family. Lazard periodically reportedfurnished oral reports to the special committee on such meetings and the other diligence efforts undertaken by Ares, Bidder C and Bidder D. In such oral reports, Lazard advised the special committee that the prospective bidders had discussed in general terms with members of the Gold/Schiffer Family the bidder's investment philosophy, the bidder's views on the discount retail sector and how each prospective bidder might support the Company's future operations.

        On June 29, 2011, Bidder C submitted a non-binding indication of interest proposing a potential acquisition of the Company for $20.09 per share in cash. Bidder C's proposal did not require members of the Gold/Schiffer Family to roll over any equity interests in the Company, although Bidder C separately expressed a preference for some level of on-going equity participation by the Gold/Schiffer Family in the transaction. Bidder C's proposal also contemplated combining the Company with another business owned by Bidder C. On June 30, Ares submitted a non-binding indication of interest proposing a potential acquisition of the Company for $21.50 per share in cash. The proposal from Ares was conditioned upon on-going participation and support from the Gold/Schiffer Family, although no specific amount or structure was proposed. Both Bidder C and Ares indicated that the indicative price set forth in their indication of interest was subject to further diligence. Bidder D chose not to submit a non-binding indication of interest. The special committee, together with its advisers, at meetings held on July 1 and July 5, 2011, reviewed the indications of interest received from Ares and Bidder C and discussed the potential for other bidders to enter the process. Without concluding whether the proposed purchase prices represented an attractive valuation for the Company, the special committee determined that the proposals were of sufficient interest to merit further consideration and directed Lazard to continue discussions with both parties while continuing to solicit other potential bids and considering other alternatives.

        On June 29, 2011, the special committee met with LGP at LGP's request. Lazard and Morrison & Foerster attended the meeting, as did Latham. LGP discussed their interest in the Company and acknowledged the special committee's desire to run, and the potential benefits of, a competitive bidding process. However, LGP also stated their concerns about restrictions the special committee had imposed on communications by bidders with the Gold/Schiffer Family, in particular the prohibition on bidders having communications with the Gold/Schiffer Family that were not chaperoned by Lazard. The meeting ended without any agreement on process. On July 6 and 7, Morrison & Foerster engaged in further discussions with Skadden regarding the restrictions on bidders' communications with the Gold/Schiffer Family. After further discussions with Lazard and Morrison & Foerster, and considering the potential benefits and appropriate safeguards, the special committee determined to allow bidders to have limited, un-chaperoned conversations with the Gold/Schiffer Family before any deadline established by the special committee for submitting final, definitive bids and potentially in other circumstances. The topics to be discussed at such un-chaperoned meetings would be limited to those approved by the special committee, which reserved the right to impose such other conditions on un-chaperoned meetings as it deemed appropriate. Un-chaperoned meetings would be permitted only if the potential bidders agreed not to enter into any agreements with the Gold/Schiffer Family, without the special committee's prior consent, regarding a potential rollover of the shares owned by the




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Gold/Schiffer Family and with respect to related matters. This position was conveyed to LGP, as well as to Ares and Bidder C. On July 13, LGP signed an amended and restated confidentiality agreement. LGP publicly disclosed the amended and restated confidentiality agreement in a Schedule 13D amendment filed on July 14, 2011. LGP was thereafter provided with a copy of the management




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presentation and the confidential information memorandum and access to the Company's virtual data room. LGP also attended a management presentation on July 15, 2011.

        On July 11, 2011, at the request of Lazard, Ares, Lazard, Guggenheim and members of the Gold/Schiffer Family, including Mr. Schiffer and Messrs. D. Gold, J. Gold and H. Gold, met to further discuss Ares' proposal. At such meeting, members of the Gold/Schiffer Family again expressed their support for a full and open process.

        LGP, Ares and Bidder C all continued their diligence efforts through July and August of 2011. Such diligence efforts included additional meetings with Company management and meetings with members of the Gold/Schiffer Family, all of which were attended by representatives of Lazard. At the meetings with the Gold/Schiffer Family, general discussions were held about the possibility of members of the Gold/Schiffer Family rolling over a portion of their equity interests in the Company and their expectations in the event they were to roll over a portion of their equity interests. In addition, Bidder C discussed with the Gold/Schiffer Family the possible combination of the Company with another business owned by Bidder C. During the course of these diligence efforts, on July 12, 2011, Bidder C orally advised Lazard that it would be prepared to raise its non-binding indication of interest to $20.49 per share in cash. Furthermore, on or about July 21, 2011, members of the Gold/Schiffer Family requested that Lazard coordinate a meeting with Ares so that they could better familiarize themselves with Ares as a potential buyer and further discuss Ares' proposed transaction structure.

        On July 15, 2011, a potential strategic acquirer, whom we refer to as Bidder E, signed a confidentiality agreement with the Company. On August 2, 2011, another potential strategic acquirer, whom we refer to as Bidder F, also signed a confidentiality agreement. Both Bidder E and Bidder F were provided with the confidential information memorandum, attended management presentations and had an opportunity to meet with members of the Gold/Schiffer Family in meetings attended by representatives of Lazard. Subsequently, Bidders E and F declined to proceed.

        On July 25, 2011, representatives of Ares met with members of the Gold/Schiffer Family in a meeting attended by representatives of Lazard and Guggenheim to discuss debt leverage in connection with a potential acquisition transaction and certain post-acquisition corporate governance matters.

        On July 26, 2011, the special committee met with Morrison & Foerster and Lazard. Lazard reviewed the process for soliciting bids and reported on the status of the discussions with the current bidders and several potential bidders. Lazard also reviewed the Company's recent operating performance and stock price performance, and the Company's projections. Lazard then presented to the special committee its preliminary valuation analyses, comprised of a preliminary public trading analysis, a preliminary selected precedent transactions analysis and a preliminary discounted cash flow analysis. Lazard also reviewed with the special committee, for its information, a preliminary leveraged recapitalization analysis, including the potential impact of a leveraged dividend, and discussed the potential structure of a stock repurchase program.

        In late July 2011, Bidder D advised Lazard that it was still interested in a transaction with the Company, notwithstanding its failure to submit a non-binding indication of interest. Bidder D met with members of the Gold/Schiffer Family on August 1, 2011, in a meeting attended by representatives of Lazard and Guggenheim to discuss the interest of members of the Gold/Schiffer Family in participating as minority investors in an acquisition by Bidder D.

        In meetings held on August 3 and August 4, 2011, the special committee discussed the possibility that the Gold/Schiffer Family might prefer to roll over a smaller portion of its equity investment than was contemplated in the March 10 proposal. The special committee discussed with Lazard and Morrison & Foerster the potential implications of the Gold/Schiffer Family rolling over a smaller




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percentage of its equity interests in the Company and authorized its members and advisers to seek clarification of the Gold/Schiffer Family's position in this regard. On August 17, 2011, Lazard reported




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to the special committee that Guggenheim had advised Lazard that the Gold/Schiffer Family was now contemplating rolling approximately 25% to 30% of its equity interests.

        On August 15, 2011, Bidder D advised Lazard that it had decided not to proceed with a potential transaction.

        On August 17, 2011, the special committee reviewed with Morrison & Foerster a form of merger agreement to be furnished to prospective bidders. The special committee decided, among other things, not to include a go-shop provision in the merger agreement in view of, among other things, the marketing process which had already been conducted and the length of time elapsed since it was publicly announced that an offer had been made to acquire the Company. The special committee decided to include in the merger agreement a requirement that the merger be approved by holders of a majority of the shares of Company common stock held by persons other than the Gold/Schiffer Family, any acquirer and their respective affiliates, as well as a provision allowing the special committee to consider potentially superior proposals received on an unsolicited basis after execution of the merger agreement. The special committee also discussed with Lazard and Morrison & Foerster alternatives to selling the Company.

        On August 23, 2011, process letters were sent to each of the remaining bidders requesting definitive bids by September 21, 2011. The prospective bidders were requested to submit the details of their proposed debt and equity financing sources as well as a mark-up of the form of merger agreement furnished with the process letter. In addition, the prospective bidders were requested to specify their requirements, if any, for the Gold/Schiffer Family to roll over a portion of its equity investment in the Company. On September 7, 2011, the deadline for bids was changed to September 27, 2011, to allow bidders to substantially complete their diligence.

        During late August of 2011, Ares informed the special committee that it proposed to submit a joint bid with the Canada Pension Plan Investment Board ("CPPIB"). The special committee had no objection to Ares submitting a joint bid with CPPIB. During late August and September of 2011, LGP, Ares, CPPIB and Bidder C all held further diligence meetings with the Company. On September 10, 2011, Lazard, on behalf of the special committee, furnished to each of the prospective bidders a set of rules governing un-chaperoned meetings with members of the Gold/Schiffer Family. The rules limited the topics that could be discussed at any un-chaperoned meetings. LGP subsequently held un-chaperoned meetings with members of the Gold/Schiffer Family and Guggenheim on September 12 and September 26 to discuss the following pre-approved topics: post-acquisition corporate and capital structure, post-acquisition corporate governance arrangements and LGP's track record as an investor in retail businesses. Bidder C held an un-chaperoned meeting with members of the Gold/Schiffer Family and Guggenheim on September 13 to discuss the following pre-approved topics: valuation of the business that Bidder C proposed to combine with the Company, post-acquisition corporate and capital structure, post-acquisition corporate governance arrangements and specific rollover amounts for individual members of the Gold/Schiffer Family. Ares held an un-chaperoned meeting with members of the Gold/Schiffer Family and Guggenheim on September 23 to discuss the following pre-approved topics: post-acquisition corporate and capital structure and post-acquisition corporate governance arrangements. In addition, prior to the September 27 deadline, members of the Gold/Schiffer Family and Guggenheim, on the one hand, and representatives of LGP, Ares and Bidder C, on the other hand, held additional, un-chaperoned conversations to further discuss the pre-approved topics.

        On September 27, LGP submitted a definitive bid to acquire the Company for $20.00 per share in cash. The LGP bid contemplated that the Gold/Schiffer Family would participate by rolling over $150 million of its equity investment in the Company. On that same day, ACOF III/CPPIB submitted a definitive bid to acquire the Company for $21.50 per share in cash. The bid was not dependent upon the Gold/Schiffer Family rolling over any of its equity, although ACOF III/ CPPIB indicated they would




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be prepared to accept a rollover of up to $100 million. Both the LGP bid and the ACOF III/CPPIB bid were accompanied by financing commitment letters and a mark up of the form of merger agreement furnished by the special committee. Both mark-ups included elimination of the requirement that the merger be approved by a majority of the shareholders who were not affiliated with the Gold/Schiffer Family or any other buyer. Bidder C declined to bid, citing difficulties in financing its proposed structure.




        The special committee met on September 28 with Lazard and Morrison & Foerster to review the bids and related documents. The special committee also discussed the possibility of maintaining the Company as an independent public company as well as a possible leveraged dividend. At this meeting, the special committee authorized its advisers to disclose the bids to Guggenheim and Skadden, provided that such advisers agreed that neither they nor any members of the Gold/Schiffer Family would contact either bidder and would permit the special committee to negotiate the transaction for the Company. Later that day, representatives of Lazard and Morrison & Foerster discussed the bids with Skadden and Guggenheim, who agreed that neither they nor any members of the Gold/Schiffer Family would contact either bidder until price negotiations had been completed.

        On September 29, Lazard contacted LGP and ACOF III/CPPIB, requesting each bidder to submit its best and final bid. On September 30, the special committee met again with Lazard and Morrison & Foerster to review the bids received on September 27 and related documents. At this meeting, the special committee also reviewed and discussed with Mr. Kautz the Company's recent operating results through August 2011 and month-to-date sales for the September period and the outlook for the balance of fiscal 2012 and the next several years. Mr. Kautz advised that August results had been strong, and that fiscal year 2012 results to date were better than as forecast under the Company's projections. Accordingly, management anticipated that the Company's results for the full fiscal year 2012 might be modestly better than was forecast in the Company's projections. However, Mr. Kautz stated that a revision of projected results for future years was not warranted, given the short duration of such improved results and the risks in the business in future periods. The special committee, after discussing, with the assistance of Lazard, the Company's recent results and outlook and management's views, and the risks and uncertainties faced by the Company, determined that the Company's projections should continue to be used. The special committee also considered the possibility of a leveraged recapitalization as an alternative transaction. Also during this period, at the request of LGP, Lazard, on behalf of the special committee, authorized LGP and Guggenheim to discuss alternative structures for the LGP proposal with a view to enhancing value to the Company's shareholders.

        Following further negotiations with Lazard, on October 1, ACOF III/CPPIB raised their bid to $22.00 per share and LGP raised its bid to $21.00 per share. ACOF III/CPPIB proposed to finance the increase in their bid through a larger equity contribution by ACOF III/CPPIB. LGP's increased bid included a proposal for the Gold/Schiffer Family to roll $50 million of its shares of Company common stock into a preferred class of stock of Parent, in addition to the contemplated rollover of $150 million of its shares of Company common stock into common stock of Parent. The special committee held a meeting on the evening of October 1 and discussed the bids presented by ACOF III/CPPIB and LGP. The special committee concluded that the price offered by ACOF III/CPPIB represented an attractive valuation for the Company. Accordingly, the special committee instructed Lazard and Morrison & Foerster to commence negotiations with ACOF III/CPPIB and their legal counsel, Proskauer Rose LLP ("Proskauer") on the merger agreement and related documents with a view towards reaching an agreement for a sale of the Company at $22.00 per share. Pending completion of such negotiations, the special committee directed its advisers to remain open to an improved bid from LGP. The special committee also directed Lazard to inform Guggenheim of the revised bids which had been received and authorized the Gold/Schiffer Family's legal and financial advisers to negotiate the terms of a proposed rollover agreement, voting agreement and other arrangements between ACOF III/CPPIB and members of the Gold/Schiffer Family.




        On the afternoon of October 3, 2011, a representative of Latham contacted Skadden and advised that LGP had flexibility with respect to its proposal. The representative of Latham requested an opportunity to discuss the details with Skadden as legal counsel to the Gold/Schiffer Family. Later in the afternoon on October 3, 2011, Skadden forwarded the request to Morrison & Foerster and sought permission from the special committee to engage in such discussions. Later that day, Morrison & Foerster informed Skadden that it would follow up with Latham on behalf of the special committee






and that, until otherwise notified by the special committee, the restrictions on communications with LGP and Latham about the LGP proposal should remain in place.

        On October 4, Morrison & Foerster contacted the representative of Latham, who stated that LGP wanted to have further discussions with members of the Gold/Schiffer Family to see if they could agree on changes to the structure of the Gold/Schiffer Family's participation in LGP's proposal that could potentially enable LGP to raise its bid price. The representative of Latham advised that he could not provide information about any potential structure or the amount by which LGP might raise its bid and suggested that LGP might be able to provide such information. Lazard then contacted LGP. In response to questions from Lazard, LGP did not provide any information as to how its bid might be restructured, but indicated that, depending on the outcome of discussions with the Gold/Schiffer Family, it might be in a position to raise its bid by $0.50 to $1.00 per share. Lazard told LGP that the special committee would consider its request.

        At a meeting later that day, Lazard and Morrison & Foerster described LGP's request to the special committee. The special committee discussed the request and the progress of the negotiations to date with each of LGP and ACOF III/CPPIB, and concluded that, while it remained open to improved bids, LGP's statements were too speculative to risk delaying or disrupting negotiations with ACOF III/CPPIB. In this regard, the special committee noted that LGP had not presented either an improved bid or a specific structure that would enable it to raise its bid and that the upper end of the range suggested by LGP was no better than the offer already made by ACOF III/CPPIB. The special committee also noted that ACOF III/CPPIB had made their $22.00 bid after receiving the same instruction as LGP did to present the best and final offer. The special committee believed that there was a risk that ACOF III/CPPIB would withdraw from the process or demand other concessions if the pending negotiations were disrupted or delayed, and that such risk was not warranted unless a more definitive alternative was presented. Taking into account these considerations, the special committee instructed Lazard to advise LGP that it should submit a more definitive proposal for improving its offer if it wanted the special committee to give it further consideration. Lazard delivered this message to LGP on the morning of October 5, 2011. LGP did not submit a more definitive proposal. On October 6, 2011, representatives of Lazard again called representatives of LGP and advised them that, if LGP was prepared to submit an improved bid, it should do so promptly. LGP did not submit an improved bid and did not respond further.

        From October 2 through October 11, 2011, Lazard and Morrison & Foerster engaged in negotiations with ACOF III/CPPIB and Proskauer with respect to the merger agreement and related documents. Among other things, Lazard and Morrison & Foerster engaged in extensive negotiations with ACOF III/CPPIB and Proskauer with respect to (a) the circumstances under which the merger agreement could be terminated and (b) the fees payable by the Company or ACOF III/CPPIB's acquisition vehicle in connection with the termination of the merger agreement in various circumstances. Negotiations also took place between Skadden and Guggenheim, on the one hand, and ACOF III/CPPIB and Proskauer, on the other hand, regarding the terms of a proposed rollover agreement, voting agreement and other arrangements, including the terms of employment arrangements with several members of the Gold/Schiffer Family and revised lease terms for Company stores occupying premises leased from the Gold/Schiffer Family and certain of their affiliates. Morrison & Foerster and Skadden periodically discussed the progress of their respective negotiations. Morrison & Foerster and Lazard briefed the special committee on the status of their negotiations with ACOF III/CPPIB and Proskauer during teleconference meetings held on October 4, 5 and 6 and also shared with the special committee during these meetings information obtained regarding the progress of the Gold/Schiffer Family's negotiations. Further updates on the progress of negotiations were provided by Morrison & Foerster to members of the special committee on October 7, 9 and 10.

        On the evening of October 10, 2011, a special meeting of the Company's Board of Directors was convened, attended by all of the members of the Board and representatives of Munger Tolles,






Morrison & Foerster and Lazard. The Interested Directors, together with a representative of Skadden in its role as counsel to the Gold/Schiffer Family, described the Gold/Schiffer Family's proposed






rollover agreement, voting agreement and other arrangements with ACOF III/CPPIB, including the terms under which new leases would be negotiated for stores occupying premises owned by the Gold/Schiffer Family and certain of their affiliates, proposed employment terms for Messrs. Schiffer, J. Gold and H. Gold, and proposed consulting agreement terms for Mr. D. Gold. They also stated that, together with their spouses and affiliated persons and entities, they intended to roll over shares of Company common stock held by them with an implied value of $100 million, based on the per share amount of the merger consideration. The Interested Directors confirmed that there were no other agreements between such directors or their families and ACOF III/CPPIB and that they had no other material interests in the proposed transaction. After answering questions posed by members of the Board, each of the Interested Directors recused themselves and left the meeting, as did Skadden.

        Munger Tolles then reviewed with the independent Board members their fiduciary duties to the Company and its shareholders. Morrison & Foerster then reviewed the terms of the proposed merger agreement and related documents, including the voting agreement and other agreements to be entered into by members of the Gold/Schiffer Family, and the process by which the agreements had been negotiated. Lazard then reviewed the process it, at the instruction of the special committee, had undertaken to solicit bidders to acquire the Company and to investigate possible alternatives and the results with various potential bidders. Mr. Kautz then joined the meeting via teleconference and reported on the Company's recent operating performance and anticipated performance for the balance of fiscal 2012. Mr. Kautz discussed the Company's prospects for the next several years, and Mr. Kautz and the special committee reviewed the Company's projections. Lazard then presented to the Board its valuation analyses (described in "—Opinion of Financial Advisor to our Special Committee and Board of Directors"). Lazard also reviewed with the Board, for its information, a leveraged recapitalization analysis, including the potential impact of a leveraged dividend.

        The Board meeting then recessed, and a meeting of the special committee was convened, attended by representatives of Morrison & Foerster and Lazard. The special committee discussed the information that had been presented during the Board meeting. Lazard then rendered to the special committee an oral opinion, which was confirmed by delivery of a written opinion dated October 11, 2011, to the effect that, as of that date and based upon and subject to the assumptions, procedures, factors, qualifications and other matters and limitations set forth in its opinion, the merger consideration to be paid to holders of the Company's common stock (other than the Rollover Investors, the Company, Parent, Merger Sub and holders who are entitled to and properly demand an appraisal of their shares) in the merger was fair, from a financial point of view, to such holders. The special committee discussed the process they had undertaken to solicit bids for the Company, the negotiations leading to the proposed merger agreement and the terms of the proposed merger, and reviewed the merits and risks of continuing the Company as a stand-alone business. After considering these alternatives, the proposed terms of the merger agreement and the other transaction documents and the presentations by Morrison & Foerster and Lazard, including Lazard's opinion, and after taking into account the other factors described below under the heading "—Purpose and Reasons for the Merger; Recommendation of Our Special Committee and Board of Directors; Fairness of the Merger," the special committee unanimously determined that the merger agreement, the merger and the other transactions contemplated by the merger agreement were advisable and fair to and in the best interests of the Company and its shareholders (other than the Rollover Investors and Parent and itsParent's affiliates to the extent any of them own any shares of Company common stock), and just and reasonable as to the Company, and recommended that the Board adopt a resolution approving and declaring the advisability of the merger agreement, the merger and the other transactions contemplated by the merger agreement and recommending that the shareholders of the Company approve and adopt the merger agreement.




        Following the special committee meeting, the meeting of the Board was reconvened. The Interested Directors were not present and did not participate in the re-convened meeting. The special






committee presented its recommendation to the Board and reviewed with the Board the factors that it had considered in making its recommendation. Lazard then rendered to the Board the same oral opinion described above. After considering the proposed terms of the merger agreement and the other transaction documents and the presentations by Munger Tolles, Morrison & Foerster and Lazard, including Lazard's opinion, and after taking into account the other factors described below under the heading "—Purpose and Reasons for the Merger; Recommendation of Our Special Committee and Board of Directors; Fairness of the Merger," the Board of Directors, with the Interested Directors not present and abstaining from the vote, by unanimous vote of the directors (other than the Interested Directors), approved and declared advisable the merger agreement and the transactions contemplated thereby, including the merger, and, subject to the conditions in the merger agreement, recommended that the shareholders of the Company approve and adopt the merger agreement, including the principal terms thereof, the statutory merger agreement and the merger.

        In the early hours of October 11, 2011, the merger agreement and related documents were finalized and executed by the Company and the affiliates of Ares and CPPIB established to implement the merger. Concurrently, the rollover agreement and voting agreement were executed by the Rollover Investors and the affiliates of Ares and CPPIB.

        On the morning of October 11, 2011, the Company, Ares and CPPIB issued a joint press release announcing the execution of such documents.


Purpose and Reasons for the Merger; Recommendation of Our Special Committee and Board of Directors; Fairness of the Merger


        The purpose of the merger is to enable the Company's shareholders to realize the value of their investment in the Company through their receipt of the $22.00 per share merger consideration in cash.


The Special Committee


        At a meeting on October 10, 2011, the special committee unanimously (a) determined that the merger agreement, the terms thereof, and the transactions contemplated thereby, including the merger, are advisable, fair to and in the best interests of the Company and its unaffiliated shareholders (other than the Rollover Investors and Parent and its affiliates to the extent that any of them own any shares of the Company's common stock) and just and reasonable as to the Company, and (b) recommended that the Board approve, adopt, and declare advisable the merger agreement and the transactions contemplated thereby, including the merger, and, subject to certain provisions in the merger agreement, recommend to the Company's shareholders that they approve and adopt the merger agreement, including the principal terms thereof, the statutory merger agreement and the merger. The special committee believes that the merger is fair, both substantively and procedurally, to our unaffiliated shareholders.

        In reaching its determination,determinations, the special committee consulted with and received the advice of its financial advisor and legal counsel, and discussed issues regarding the Company and its outlook with the Company's senior management team as well as the Company's outside corporate counsel. The special committee considered a number of factors that it believed supported its determination,determinations, including the following factors:

•

the fact that the $22.00 price per share of Company common stock represents a premium of approximately 32% over the closing price of the Company's common stock on March 10, 2011, the day before the Company announced that it had received a proposal from members of the Gold/Schiffer Family and LGP, and 33.6% and 33.2% premiums over the 1-week and 1-month average trading price prior to such announcement;




•

the current and historical market prices for the Company's common stock, including those set forth in "Important Information Regarding the Company—Company—Market Price of Common Stock and Dividend Information", which price has not closed over $22.00 since April 2004;2004 and which closing price ranged from a high of $18.88 to a low of $5.85 during the five year period ending on March 10, 2011, the day before the Company announced it had received a proposal from members of the Gold/Schiffer Family and LGP;



•

the merger allows the Company's shareholders to monetize their investment in the Company in the near future, providing shareholders with the value certainty and liquidity of cash, while avoiding risks and uncertainties, including those relating to the following:



•

competition from discount and deep-discount stores, dollar stores, single price point merchandisers, mass merchandisers, food markets, drug store chains, club stores and other retailers, who are currently operating in or may enter the Company's traditional markets, and who may possess substantially greater financial resources, buying power, name recognition and organization than the Company;



•

the significant logistical and business issues and related increase in risk associated with the Company's expansion outside of its core market in Southern California, and the fact that the Company has not thus far demonstrated a sustained ability to replicate the level of profitability and value creation achieved in Southern California in any other market;



•

the Company's need to expand its management resources and improve its information technology and logistics infrastructure in order to achieve its growth objectives;



•

uncertainty regarding the Company's ability to continue acquiring inventory at favorable prices and providing merchandise for profitable resale primarily at a price point of 99.99¢, $1.00 or less, which may be adversely affected by future inflation, merchandise price increases and other economic factors, as well as competition;



•

difficulties the Company may encounter pricing selected merchandise above a price point of 99.99¢ or $1.00 in order to increase gross margins, and the impact of any such practice on the Company's relationships with its customers, suppliers and vendors, and on the value of the Company's name and brand; and



•

the Company's ability to continue to lease or purchase retail real estate sites at favorable prices;



•

the special committee's belief that the merger was desirable at this time, as compared with other times in the Company's operating history, because, among other factors, the Company is substantially smaller than certain other dollar store chains, competition from national dollar store chains and other discount retailers is expected to increase in the Company's principal markets, the Company's ability to grow is subject to the risks and uncertainties described immediately above and the special committee's belief that addressing these challenges increases risk to the Company's ability to increase shareholder value in the long-term;



•

the special committee had engaged in a comprehensive auction process, including contacts by Lazard at the instruction of the special committee with 33 potential strategic buyers and 18 potential private equity acquirors, following public disclosures by the Company on March 11, 2011, that it had received the March 10, 2011 proposal from members of the Gold/Schiffer Family and LGP, and on April 11, 2011, that the Board had formed the special committee to, among other things, consider the proposal from members of the Gold/Schiffer Family and LGP and other proposals and strategic alternatives, and that the special committee had retained independent financial and legal advisors to assist in this process;





•

the $22.00 per share merger consideration is the result of multiple negotiated increases from the initial bids received by the special committee, including increases provided by each of LGP and ACOF III/CPPIB following price negotiations led by Lazard after they were requested to submit their best and final bids pursuant to the special committee's bidding instructions;



•

the financial analyses presented to the special committee by Lazard, and the opinion of Lazard to the effect that, as of October 11, 2011, and based upon and subject to the assumptions, procedures, factors, qualifications and other matters and limitations set forth in its opinion, the merger consideration to be paid to holders of the Company common stock (other than the Rollover Investors, the Company, Parent, Merger Sub and holders who are entitled to and properly demand an appraisal of their shares) in the merger was fair, from a financial point of view, to such holders, as more fully described below in "—Opinion of Financial Advisor to Our




Special Committee and Board of Directors" (the full text of the written opinion of Lazard is attached asAnnex B to this proxy statement), and such financial analyses and opinion of Lazard were adopted by the special committee as its own (The special committee noted that Lazard's opinion refers to holders of the Company's common stock other than the Rollover Investors, the Company, Parent and Merger Sub and thus includes all unaffiliated shareholders and certain affiliated shareholders, such as certain officers and directors of the Company and Au Zone Investments #2, L.P. The special committee interpreted Lazard's opinion as providing that the merger consideration is fair, from a financial point of view, to all unaffiliated shareholders because both the unaffiliated shareholders and the affiliated shareholders (other than the Rollover Investors, the Company, Parent and Merger Sub) are to be paid the same $22.00 per share merger consideration on the terms set forth in the merger agreement. Further, the special committee interpreted the Lazard opinion's exclusion of holders who are entitled to and properly demand an appraisal of their shares as acknowledging that such holders of the Company's common stock will not receive the merger consideration, and will instead receive an amount in an appraisal proceeding that may be more than, less than or the same as the merger consideration. Lazard did not offer an opinion as to the fairness of the hypothetical consideration such holders may receive by virtue of the merger. Accordingly, the exclusions from Lazard's opinion did not affect the view of the special committee as to the fairness of the merger consideration offered under the merger agreement to all unaffiliated shareholders);





•

that possible strategic alternatives to the proposed merger, including continuing as a standalone company, a sale to or merger with other parties, and returning capital to shareholders through a dividend or stock repurchase, were evaluated by the special committee with the assistance of Lazard and Morrison & Foerster, and the special committee determined such alternatives were less favorable to the Company's shareholders than the merger given the potential risks, rewards and uncertainties associated with those alternatives;



•

that members of the Gold/Schiffer Family have agreed to convert approximately 18,691,000 of their shares of the Company's common stock (representing approximately 80% of their aggregate holdings of the Company's common stock) in the merger for the cash merger consideration, while agreeing to roll over approximately 4,545,000 of their shares of the Company's common stock;



•

the likelihood that the merger would be completed, based on, among other things:



•

the absence of a financing condition in the merger agreement, the fact that Parent and Merger Sub had obtained committed debt and equity financing for the transaction, the number and nature of the conditions to the debt and equity financing, the reputation of the financing sources and the obligation of Parent to use its reasonable best efforts to obtain the debt financing;





•

the absence of significant required regulatory approvals, other than those relating to the HSR Act;



•

that the merger agreement provides that, in the event of a failure of the merger to be consummated under certain circumstances, Parent will pay the Company a $94.5 million termination fee, without the Company having to establish any damages; and



•

the reputation and financial capacity of ACOF III and CPPIB and their ability to complete large acquisition transactions;



•

the other terms of the merger agreement and related agreements, including:



•

the Company's ability to, under certain circumstances, provide information to, and participate in discussions and negotiations with, third parties regarding unsolicited acquisition proposals, if the special committee or the Board has determined in good faith following procedures specified in the merger agreement that the failure to take such action would be inconsistent with its fiduciary duties to the Company's shareholders;



•

the ability of the Board (acting upon the recommendation of the special committee) or the special committee to accept a Superior Company Proposal and terminate the merger agreement, subject to certain conditions (including the Company's obligation to negotiate with Parent regarding any revisions to the terms of the merger agreement proposed by Parent prior to such termination), if the Company pays a $47.25 million termination fee; and



•

the ability of the Board (acting upon the recommendation of the special committee) or the special committee, under certain circumstances, following procedures specified in the merger agreement, to withdraw, qualify or modify its recommendation that the Company's shareholders vote to approve and adopt the merger agreement; and



•

the availability of statutory dissenters' rights to the shareholders who are entitled to demand and have properly demanded such rights and have complied with all of the other required procedures under California law for exercising dissenters' rights, which require the Company to




purchase at their fair market value the shares of the Company's common stock owned by such holders of dissenting shares, as described in "Dissenters' Rights" (so long as dissenters' demands have been filed with respect to at least five percent of the outstanding shares of the Company's common stock).

        The special committee believed that sufficient procedural safeguards were and are present to provide assurance of the fairness of the proposed merger to the Company's unaffiliated shareholders and that the proposed merger is procedurally fair to the Company's unaffiliated shareholders. These procedural safeguards include:

•

that the special committee is composed of three independent directors who are not affiliated with the Rollover Investors, ACOF III or CPPIB or any entity affiliated with ACOF III or CPPIB, are not employees of the Company, and other than their receipt of Board and special committee fees (which are not contingent upon the consummation of the merger or the special committee's or Board's recommendation of the merger) and their interests described under "—Interests of the Company's Directors and Executive Officers in the Merger," have no interests in the merger different from, or in addition to, those of the Company's unaffiliated shareholders;



•

that while the special committee and the Company did not retain a representative to act solely on behalf of the unaffiliated shareholders, the special committee retained and was advised by Morrison & Foerster, as its independent legal counsel, and Lazard, as its independent financial advisor;






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•

that the special committee met more than 50 times between March 11, 2011, and October 10, 2011, actively set strategy for and oversaw the auction process and the negotiation of pricing and other terms with ACOF III/CPPIB and made all material decisions relating to the Company's strategic alternatives beginning on March 11, 2011;



•

the recognition by the special committee that it had the authority not to recommend the approval of the merger or any other transaction as well as the recognition that it had the authority to pursue other transactions and strategic alternatives;



•

that discussions had been held with, and feedback received from, multiple strategic and private equity companies as part of the process of exploring the possibility of a transaction;



•

the special committee's extensive arm's-length negotiations with ACOF III/CPPIB, which, among other things, resulted in better contractual terms than those initially proposed by ACOF III/CPPIB, including a larger termination fee payable by Parent under certain circumstances and the inclusion of "fiduciary out" provisions described in "Merger Agreement—Restrictions on Solicitation of Other Offers" and "Merger Agreement—Termination in Connection with a Superior Company Proposal"; and



•

while, pursuant to the voting agreement, the Rollover Investors and Au Zone Investments #2, L.P. (which is affiliated with the Rollover Investors) have committed to vote in favor of approving the merger agreement and the merger, such commitment terminates automatically upon termination of the merger agreement by the Company to accept a Superior Company Proposal and in other circumstances specified in the voting agreement, except that in such other circumstances they will continue to have an obligation to vote against certain third party takeover proposals until the earlier to occur of (a) the 12 month anniversary after termination of the voting agreement and (b) Parent's receipt of the $47.25 million termination fee from the Company, among other conditions.

        The Special Committeespecial committee noted that the merger does not require approval by holders of at least a majority of the shares of Company common stock held by the Company's unaffiliated shareholders. The special committee did not believe that such approval was required to protect the interests of the unaffiliated shareholders because the Rollover Investors, who are entitled to vote at the special meeting, are proposing to dispose of approximately 80% of the shares of Company common stock owned by the Rollover Investors and their affiliates in the merger for the same consideration as will be received by the unaffiliated shareholders in the merger. Accordingly, the special committee concluded that the interests of the Rollover Investors would be substantially aligned with the interests of the unaffiliated shareholders with respect to the merger vote. The special committee also noted that the approval of the merger agreement would still require the approval of approximately 25% of our unaffiliated shareholders.




        In the course of its deliberations, the special committee also considered a variety of risks and other countervailing factors related to entering into the merger agreement and the proposed merger, including:

•

that the shareholders of the Company (other than the Rollover Investors) will not participate in any future earnings or growth of the Company's business and will not benefit from any potential sale to a third party in the future, or from any appreciation in the Company's value, including any appreciation resulting from steps that may be taken to open new stores, increase same store sales, become a nationwide extreme value retailer, price selected merchandise above a price point of 99.99¢ or $1.00 per item, or otherwise, at a point when, given unstable economic conditions, the extreme value retail industry may be growing as a whole;




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•

the risk that the proposed merger might not be completed in a timely manner or at all, including the risk that the proposed merger will not occur if sufficient debt and equity financing is not obtained;



•

the Company's inability to seek specific performance to require Parent or Merger Sub to complete the merger and the fact that the Company's sole remedy in connection with Parent's failure to close the merger generally would be limited to a $94.5 million termination fee and up to $10 million for reimbursement of out-of-pocket costs and expenses, payable only in the circumstances specified in the merger agreement, which is guaranteed by ACOF III and CPPIB, severally and not jointly;



•

that Parent and Merger Sub are newly formed corporations with essentially no assets other than the equity commitments of ACOF III and CPPIB;



•

the restrictions on the conduct of the Company's business prior to the completion of the proposed merger, which may delay or prevent the Company from undertaking business opportunities that may arise and certain other actions it might otherwise take with respect to the operations of the Company pending completion of the proposed merger;



•

the potential negative effect that the pendency of the merger, or a failure to complete the merger, could have on the Company's business and relationships with its employees, vendors, landlords and customers;



•

the Company and its subsidiaries are restricted from soliciting, initiating, or encouraging the submission of alternative acquisition proposals from third parties or the making of any inquiry, proposal or offer that would reasonably be expected to lead to an alternative acquisition proposal;



•

the possibility that the amounts that may be payable by the Company upon the termination of the merger agreement, including a termination fee of $47.25 million and up to $10 million in out-of-pocket costs and expenses payable to the extent specified in the merger agreement in connection with Parent's enforcement of its rights to such termination fee, and the processes required to terminate the merger agreement, including the opportunity for Parent to make revisions to its merger proposal, could discourage other potential acquirors from making a competing bid to acquire the Company;



•

the fact that the $47.25 million termination fee is payable to Parent if the shareholders of the Company fail to approve the merger; and



•

the fact that an all cash transaction would be taxable to the Company's shareholders that are U.S. holders for U.S. federal income tax purposes.

        In addition, the special committee was aware of and considered that the Company's directors and executive officers have interests with respect to the merger that differ from, or are in addition to, their interests as shareholders of the Company, as described in "—Interests of the Company's Directors and Executive Officers in the Merger" and "—Golden Parachute Compensation." In this regard, the special committee noted that the merger was negotiated by the special committee and unanimously approved by the special committee, as well as by all of the independent members of the Board, that the only interest such persons have in the merger are based upon their ownership of stock or stock options and that the consideration to be received by such persons is the same as will be received by our unaffiliated shareholders and by unaffiliated persons holding comparably priced options. In addition, the special committee believed that such different or additional benefits as may be available to other directors and Company officers (in addition to the rollover of shares of Company common stock contemplated by the Interested Directors) are in significant part attributable to services provided or to be provided by such directors and executive officers, are customary and/or determined on an arm's-length basis, and were




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either not offered in contemplation of the merger or, if offered in contemplation of the merger, were negotiated after the merger consideration had been agreed by the special committee.

        The special committee did not consider the Company's net book value, which is an accounting concept, to be a factor in determining the fairness of the transaction because it believed that net book value is not a material indicator of the value of the Company's equity but rather an indicator of historical costs. The special committee did not consider the liquidation value of the Company's assets to be a factor in determining the fairness of the transaction because they believed that the Company was a viable, going concern where value is derived from cash flow generated from its continuing operations. Based upon their business judgment and their knowledge of the Company and its assets and business, the special committee believed that the value that might be realized in a liquidation value would be significantly lowerless than the Company'sits value as a going concern. In this regard, the special committee noted that the book value of the Company's assets as of April 2, 2011 was approximately $824 million, of which approximately $200 million was cash and a substantial portion of the balance consisted of inventory which would likely be disposed of at a loss in a liquidation. Accordingly, the special committee concluded that a formal liquidation analysis was not necessary in order to determine the fairness of the transaction. The special committee also did not consider the prices paid by the Company for past purchases of the Company's common stock because no such purchases have been made during the last two years other than in connection with the payment by holders of performance stock units of taxes associated with the vesting of the performance stock units. The special committee was not aware of any firm offers during the prior two years by any person for (a) the merger or consolidation of the Company with another company, (b) the sale or transfer of all or substantially all of the Company's assets or (c) a purchase of the Company's securities that would enable the holder to exercise control of the Company, except the offer by members of the Gold/Schiffer Family and LGP as described in "—Background of the Merger."

        The foregoing discussion of the information and factors considered by the special committee is not intended to be exhaustive, but includes material factors considered by the special committee. In view of the wide variety of factors considered by the special committee and the complexity of these matters, the special committee did not find it practicable, and did not attempt, to quantify, rank or otherwise assign relative weights to the foregoing factors in reaching its determination, and did not undertake to make any specific determination as to whether any particular factor, or any aspect of any particular factor, was favorable or unfavorable to the ultimate determination of the special committee. In addition, individual members of the special committee may have given different weights to different factors and may have viewed some factors more positively or negatively than others. The special committee's determinations and recommendations described above were based upon the totality of the information considered.


The Board of Directors


        The Board believes that the merger agreement, the terms thereof, and the transactions contemplated thereby, including the merger, are fair to and in the best interests of the Company and its shareholders (other than the Rollover Investors and Parent and its affiliates to the extent that any of them own shares of the Company's common stock).unaffiliated shareholders. The Board adopted the analyses and determinations of the special committee in its evaluation of the fairness of the merger agreement and the merger.merger as its own. In determining the reasonableness of the special committee's analysis and the fairness of the merger agreement and the merger, the Board considered and relied upon the following factors, among others:

•

the special committee's unanimous determination that the merger agreement, the terms thereof, and the transactions contemplated thereby, including the merger, are advisable, fair to and in the best interests of the Company and its unaffiliated shareholders (other than the Rollover Investors and Parent and its affiliates to extent that any of them own any shares of the Company's common stock) and its recommendation that the Board approve, adopt and declare advisable the merger agreement and the transactions contemplated thereby, including the merger;




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•

that no member of the special committee has an interest in the merger different from, or in addition to, that of the Company's unaffiliated shareholders, other than the receipt of Board and special committee fees (which are not contingent upon the consummation of the merger or the special committee's or Board's recommendation of the merger) and any interests described under "—Interests of the Company's Directors and Executive Officers in the Merger";






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•

the opinion of Lazard received by the special committee and the Board to the effect that, as of October 11, 2011, and based upon and subject to the assumptions, procedures, factors, qualifications and other matters and limitations set forth in its opinion, the merger consideration to be paid to holders of the Company common stock (other than the Rollover Investors, the Company, Parent, Merger Sub and holders who are entitled to and properly demand an appraisal of their shares) in the merger was fair, from a financial point of view, to such holders, as more fully described below in "—Opinion of Financial Advisor to Our Special Committee and Board of Directors" (the full text of the written opinion of Lazard is attached asAnnex B to this proxy statement);



•

the process undertaken by the special committee and its independent financial and legal advisors in connection with evaluating, negotiating and approving the proposed merger, as described in "—Background of the Merger"; and



•

the availability of statutory dissenters' rights to the shareholders who are entitled to demand and have properly demanded such rights and have complied with all of the other required procedures under California law for exercising dissenters' rights, which require the Company to purchase at their fair market value the shares of the Company's common stock owned by such holders of dissenting shares, as described in "Dissenters' Rights" (so long as dissenters' demands have been filed with respect to at least five percent of the outstanding shares of the Company's common stock).

        The Board also was aware of and considered that the Company's directors and executive officers have interests with respect to the merger that differ from, or are in addition to, their interests as shareholders of the Company, as described in "—Interests of the Company's Directors and Executive Officers in the Merger" and "—Golden Parachute Compensation." In this regard, the Board noted that the merger was negotiated by the special committee and unanimously approved by the special committee, as well as by all of the independent members of the Board, that the only interest such persons have in the merger are based upon their ownership of stock or stock options and that the consideration to be received by such persons is the same as will be received by our unaffiliated shareholders and by unaffiliated persons holding comparably priced options. In addition, the Board believed that such different or additional benefits as may be available to other directors and Company officers (in addition to the rollover of shares of Company common stock contemplated by the Interested Directors) are in significant part attributable to services provided or to be provided by such directors and executive officers, are customary and/or determined on an arm's-length basis, and were either not offered in contemplation of the merger or, if offered in contemplation of the merger, were negotiated after the merger consideration had been agreed by the special committee.

        The foregoing discussion of the information and factors considered by the Board is not intended to be exhaustive, but includes material factors considered by the Board, including the factors considered by the special committee discussed above. In view of the wide variety of factors considered by the Board and the complexity of these matters, the Board did not find it practicable, and did not attempt, to quantify, rank or otherwise assign relative weights to the foregoing factors in reaching its determination, and did not undertake to make any specific determination as to whether any particular factor, or any aspect of any particular factor, was favorable or unfavorable to the ultimate determination of the Board. In addition, individual members of the Board may have given different weights to different factors and may have viewed some factors more positively or negatively than




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others. The Board approves and declares advisable the merger agreement and the transactions contemplated thereby and, subject to certain provisions in the merger agreement, recommends that the Company's shareholders approve and adopt the merger agreement, including the principal terms thereof, the statutory merger agreement and the merger, based upon the totality of the information considered.

        Other than as described in this proxy statement, the Board is not aware of any firm offers by any other person during the past two years for a merger or consolidation of the Company with or into another company, the sale or other transfer of all or any substantial part of the Company's assets or a purchase of the Company's securities that would enable the holder to exercise control of the Company.

        Our Board recommends that you vote "FOR" the proposal to approve the merger agreement.


Opinion of Financial Advisor to Our Special Committee and Board of Directors


        The special committee retained Lazard to act as its financial advisor, including in connection with the merger. In connection with Lazard's engagement, the special committee requested that Lazard evaluate the fairness, from a financial point of view, of the merger consideration to be paid to holders




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of the Company's common stock (other than the Rollover Investors, the Company, Parent, Merger Sub and holders who are entitled to and properly demand an appraisal of their shares). On October 10, 2011, at a meeting of the special committee and the Board held to evaluate the merger, Lazard rendered to the special committee and the Board an oral opinion, which was confirmed by delivery of a written opinion dated October 11, 2011, to the effect that, as of that date and based upon and subject to the assumptions, procedures, factors, qualifications and other matters and limitations set forth in its opinion, the merger consideration to be paid to holders of the Company's common stock (other than the Rollover Investors, the Company, Parent, Merger Sub and holders who are entitled to and properly demand an appraisal of their shares) in the merger was fair, from a financial point of view, to such holders.

        The full text of Lazard's written opinion, dated October 11, 2011, to the special committee and the Board, which sets forth, among other things, the assumptions made, procedures followed, matters considered and limitations on the scope of the review undertaken by Lazard in connection with its opinion, is attached to this proxy statement asAnnex B and is incorporated into this proxy statement by reference. The description of Lazard's opinion set forth in this document is qualified in its entirety by reference to the full text of Lazard's opinion. Lazard's opinion was addressed to the special committee and the Board (each in its capacity as such) in connection with their evaluation of the merger. The opinion addresses only the fairness of the merger consideration from a financial point of view, does not address any other aspect of the merger and does not constitute a recommendation to any shareholder as to how such shareholder should vote or act with respect to the merger or any related matter. You are encouraged to read Lazard's opinion and this section carefully and in their entirety.

        In connection with its opinion, Lazard:

•

reviewed the financial terms and conditions of the merger agreement;



•

reviewed certain publicly available historical business and financial information relating to the Company;



•

reviewed various financial forecasts and other data provided to Lazard by the Company relating to the Company's business (which financial forecasts are included in "—Certain Projections");



•

held discussions with members of the Company's senior management with respect to its business and prospects;



•

reviewed public information with respect to certain companies in lines of business Lazard believed to be generally relevant in evaluating the Company's business;




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•

reviewed the financial terms of certain business combinations involving companies in lines of business Lazard believed to be generally relevant in evaluating the business of the Company;



•

reviewed historical stock prices and trading volumes of the Company's common stock; and



•

conducted other financial studies, analyses and investigations as Lazard deemed appropriate.

        Lazard assumed and relied on the accuracy and completeness of the foregoing information without independent verification of such information. Lazard did not conduct any independent valuation or appraisal of any assets or liabilities (contingent or otherwise) of the Company or concerning the solvency or fair value of the Company, and Lazard was not furnished with any such valuation or appraisal. With respect to the financial forecasts utilized in Lazard's analysis, Lazard assumed, with the special committee's consent, that they were reasonably prepared on bases reflecting the best currently available estimates and judgments as to the Company's future financial performance. Lazard assumed no responsibility for and expressed no view as to any forecasts or the assumptions on which they were based.

        Further, Lazard's opinion was necessarily based on economic, monetary, market and other conditions as in effect on, and the information made available to Lazard as of, the date of its opinion.




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Lazard assumed no responsibility for updating or revising its opinion based on circumstances or events occurring after the date of its opinion. Lazard did not express any opinion as to the prices at which shares of the Company's common stock might trade at any time subsequent to the announcement of the merger. Lazard's opinion did not address the relative merits of the merger as compared to any other transaction or business strategy in which the Company might engage or the merits of the underlying decision by the Company to engage in the merger.

        In rendering its opinion, Lazard assumed, with the special committee's consent, that the merger would be consummated on the terms described in the merger agreement, without any waiver or modification of any material terms or conditions. Lazard also assumed, with the special committee's consent, that obtaining the necessary governmental, regulatory or third party approvals and consents for the merger would not have an adverse effect on the Company or the merger. Lazard did not express any opinion as to any tax or other consequences that might result from the merger, nor did Lazard's opinion address any legal, tax, regulatory or accounting matters, as to which Lazard understood that the Company obtained such advice as it deemed necessary from qualified professionals. Lazard expressed no view or opinion as to any terms or other aspects of the merger (other than the merger consideration to the extent expressly specified in Lazard's opinion), including, without limitation, the form or structure of the merger, the rollover investment or the Rollover Letter, the financing letters, the voting agreement or any other agreements or arrangements entered into in connection with, or contemplated by, the merger. In addition, Lazard expressed no view or opinion as to the fairness of the amount or nature of, or any other aspects relating to, the compensation to any officers, directors or employees of any parties to the merger, or class of such persons, relative to the merger consideration or otherwise. The issuance of Lazard's opinion was approved by Lazard's opinion committee.

        In preparing its opinion to the special committee and the Board, Lazard performed a variety of financial and comparative analyses. The following is a brief summary of the material financial and comparative analyses that Lazard deemed to be appropriate for this type of transaction and that were reviewed with the special committee and the Board by Lazard in connection with rendering its opinion. The summary of Lazard's analyses described below is not a complete description of the analyses underlying Lazard's opinion. The preparation of a fairness opinion is a complex analytical process involving various determinations as to the most appropriate and relevant methods of financial analysis and the application of those methods to the particular circumstances and, therefore, is not readily susceptible to partial or summary description. In arriving at its opinion, Lazard considered the results of all of the analyses undertaken by it and assessed as a whole and did not draw, in isolation, conclusions from or with regard to any one factor or method of analysis considered by it. Rather, Lazard made its determination as to fairness on the basis of its experience and professional judgment




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after considering the results of all of the analyses. Accordingly, Lazard believes that its analyses must be considered as a whole and that selecting portions of its analyses and factors or focusing on information presented in tabular format, without considering all analyses and factors or the narrative description of the analyses, could create a misleading or incomplete view of the processes underlying its analyses and opinion.


Summary of Financial Analyses of Lazard


        In its analyses, Lazard considered industry performance, general business, economic, market and financial conditions and other matters, many of which are beyond the control of the Company. No company or business used in Lazard's analyses is identical to the Company, and an evaluation of the results of those analyses is not entirely mathematical. Rather, the analyses involve complex considerations and judgments concerning financial and operating characteristics and other factors that could affect the public trading or other values of the companies analyzed. The estimates contained in Lazard's analyses and the ranges of valuations resulting from any particular analysis are not necessarily indicative of actual values or predictive of future results or values, which may be significantly more or




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less favorable than those suggested by the analyses. In addition, analyses relating to the value of businesses or securities do not purport to be appraisals or to reflect the prices at which businesses or securities actually may be sold. Accordingly, the estimates used in, and the results derived from, Lazard's analyses are inherently subject to substantial uncertainty.

        The merger consideration was determined through negotiations between the special committee, ACOF III and CPPIB, and was approved by the special committee and the Board. Lazard was not requested to, and it did not, recommend the specific merger consideration payable in the proposed merger or that any given merger consideration constituted the only appropriate consideration for the merger. The decision to enter into the merger agreement was solely that of the special committee and the Board and the opinion of Lazard was only one of many factors taken into consideration by the special committee and the Board in their evaluation of the merger. Consequently, the analyses described below should not be viewed as determinative of the views of the special committee, the Board or management with respect to the merger or merger consideration.

        The financial analyses summarized below include information presented in tabular format. In order to fully understand Lazard's financial analyses, the tables must be read together with the text of each summary. The tables alone do not constitute a complete description of the financial analyses. Considering the data in the tables below without considering the full narrative description of the financial analyses, including the methodologies and assumptions underlying the analyses, could create a misleading or incomplete view of Lazard's financial analyses.

        The following is a summary of the material financial and comparative analyses that Lazard deemed to be appropriate in connection with rendering its opinion.


Public Trading Analysis


        Lazard performed the following selected public companies analyses. Financial data of both the selected companies and the Company were based on publicly available research analysts' estimates, public filings and other publicly available information.

        Lazard reviewed certain financial and stock market information of the Company and the following six selected publicly traded companies in the discount retail industry, which is the industry in which the Company operates:

•

Dollar General Corp.



•

Dollar Tree, Inc.




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•

Family Dollar Stores, Inc.



•

Dollarama Inc.



•

Big Lots, Inc.



•

Fred's, Inc.

        Although none of the selected companies is directly comparable to the Company, the companies included are publicly traded companies with operations and/or other criteria, such as lines of business, markets, business risks and size and scale of business, which Lazard considered similar to the Company for purposes of analysis.

        Lazard calculated and compared various financial multiples and ratios of the above referenced companies, including, among other things, (i) the enterprise value of each company as a multiple of its earnings before interest, taxes, depreciation and amortization ("EBITDA") for the last twelve months ("LTM") and its projected EBITDA for calendar years 2011 and 2012 and (ii) the ratio of each company's October 7, 2011, closing share price to its calendar year 2011 and 2012 estimated earnings




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per share ("EPS"). The calendar year 2011 and 2012 estimated EPS for each of the reference companies used by Lazard in its analysis were based on I/B/E/S, which represents publicly available consensus estimates. The following table summarizes the results of this review:

		Reference Companies Multiples Range
Enterprise Value to LTM EBITDA			4.9x - 11.9x
Enterprise Value to 2011E EBITDA			4.7x - 11.1x
Enterprise Value to 2012E EBITDA			4.2x - 9.9x
Share Price to 2011E EPS			11.7x - 19.8x
Share Price to 2012E EPS			10.1x - 17.0x

		Enterprise Value (in millions)			Enterprise Value to LTM EBITDA			Enterprise Value to 2011E EBITDA			Enterprise Value to 2012E EBITDA			Share Price to 2011E EPS			Share Price to 2012E EPS
Dollar General Corp.		$	15,886			9.7x			8.9x			8.1x			16.5x			14.4x
Dollar Tree, Inc.		$	9,370			10.7x			10.0x			9.0x			19.8x			17.0x
Family Dollar Stores, Inc.		$	6,629			8.1x			7.8x			7.1x			16.1x			13.9x
Dollarama Inc.		$	2,981			11.9x			11.1x			9.9x			17.9x			15.6x
Big Lots, Inc.		$	2,208			5.2x			5.2x			4.8x			11.7x			10.1x
Fred's, Inc.		$	388			4.9x			4.7x			4.2x			13.4x			11.4x
Mean		$	6,244			8.4x			8.0x			7.2x			15.9x			13.8x
Median		$	4,805			8.9x			8.4x			7.6x			16.3x			14.2x
Low		$	388			4.9x			4.7x			4.2x			11.7x			10.1x
High		$	15,886			11.9x			11.1x			9.9x			19.8x			17.0x

        Based on an analysis of the relevant metrics for eachmean, median and range of the reference companiesmultiples summarized above and Lazard's professional judgment, Lazard selected a reference range of:

•

7.0x to 8.5x for enterprise value to LTM EBITDA;



•

6.5x to 8.0x for enterprise value to 2011 estimated EBITDA;



•

6.0x to 7.5x for enterprise value to 2012 estimated EBITDA;



•

14.0x to 17.0x for share price to 2011 estimated EPS; and



•

12.0x to 15.0x for share price to 2012 estimated EPS.

        Lazard applied each such range of enterprise value to EBITDA multiples and share price to earnings per share multiples for the selected companies to the LTM EBITDA, estimated EBITDA and estimated EPS of the Company, as reflected in the financial forecasts for the Company prepared by the management of the Company and included in"—Certain Projections."




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        From this analysis, Lazard estimated an implied price per share range for shares of the Company's common stock as follows, as compared to the $22.00 merger consideration per share provided in the merger agreement:

Multiple		Implied Price Per Share Range
Enterprise Value to LTM EBITDA		$17.64 - $20.71
Enterprise Value to 2011E EBITDA		$16.83 - $19.95
Enterprise Value to 2012E EBITDA		$17.55 - $21.11
Share Price to 2011E EPS		$15.24 - $18.51
Share Price to 2012E EPS		$15.22 - $19.02


Selected Precedent Transactions Analysis


        Lazard reviewed and analyzed certain publicly available financial information of target companies in selected precedent merger and acquisition transactions since January 1, 2009 involving control acquisitions of U.S. based retail corporations it viewed as relevant. Other transactions were considered but were not deemed to be relevant based on a variety of factors, including, among other things, transaction size and transaction terms. In performing these analyses, Lazard analyzed certain financial information and transaction multiples relating to the target companies involved in the selected transactions and compared such information to the corresponding information for the Company.

        Although none of the selected precedent transactions or the target companies party to such transactions is directly comparable to the merger or to the Company, all of the transactions were chosen because they involve transactions that, for purposes of analysis, may be considered similar to the merger and/or involve targets that, for purposes of analysis, may be considered similar to the Company.




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        The transactions reviewed were:

Announcement Date		Acquiror		Target
February 2010		Walgreen Company		Duane Reade Holdings, Inc.
April 2010		Apollo Global Management, LLC		CKE Restaurants, Inc.
May 2010		Oak Hill Capital Partners, L.P.		Dave & Buster's Holdings, Inc.
August 2010		Kelso & Company, L.P.		LRI Holdings, Inc.
September 2010		3G Capital Management, LLC		Burger King Holdings, Inc.
October 2010		Bain Capital, LLC		The Gymboree Corporation
November 2010		TPG Capital/		J.Crew Group, Inc.
		Leonard Green & Partners, L.P.
December 2010		Leonard Green & Partners, L.P.		Jo-Ann Stores, Inc.
June 2011		Leonard Green & Partners, L.P./		BJ's Wholesale Club, Inc.
		CVC Capital Partners




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        For each of the transactions, Lazard calculated and compared the enterprise value as a multiple of EBITDA for the trailing twelve months prior to the date that the relevant transaction was announced. The results of the analysis were as follows:

Enterprise Value/ LTM EBITDA
Low			6.6x
Mean			8.6x
Median			7.7x
High			15.1x

Target		Enterprise Value			Enterprise Value/LTM EBITDA
		($ in millions)
Duane Reade Holdings, Inc.		$	1,075			15.1x
CKE Restaurants, Inc.		$	1,027			6.6x
Dave & Buster's Holdings, Inc.		$	570			7.6x
LRI Holdings, Inc.		$	577			8.5x
Burger King Holdings, Inc.		$	4,027			9.0x
The Gymboree Corporation		$	1,656			7.7x
J.Crew Group, Inc.		$	2,683			8.5x
Jo-Ann Stores, Inc.		$	1,577			7.5x
BJ's Wholesale Club, Inc.		$	2,700			7.0x
Low						6.6x
Mean						8.6x
Median						7.7x
High						15.1x

        Based on the foregoing analyses and Lazard's professional judgment and industry knowledge, Lazard applied multiples of 8.0x to 10.0x to the Company's EBITDA for the trailing twelve months ended July 2, 2011, to calculate an implied equity value per share range for the Company of $19.69 to $23.78, compared to the $22.00 merger consideration per share provided in the merger agreement. In addition to the transactions listed above, Lazard's presentation, which is an exhibit to the Schedule 13E-3 filed by the Company on October 27, 2011, also included three other transactions and one public offer involving U.S. based discount retailers. However, the data from those precedents were not included in Lazard's selected precedent transactions analysis because of the time frame in which those three transactions occurred (2004 and 2007), the significant change in the capital markets since the time frame in which such transactions occurred, and, in the case of the offer, the subsequent withdrawal of the offer.


Discounted Cash Flow Analysis


        Based on the projections provided by the Company's management,        Lazard performed a discounted cash flow analysis to calculate a range of implied equity values per share of the CompanyCompany's common stock based on discounting to calculate the estimated present value(a) estimates of the standaloneCompany's unlevered free cash flows that the Company could generate during the last nine months of thefiscal 2012 fiscal year through the end of fiscal 2015 derived from the Company's management projections and (b) terminal values based on the Company's estimated EBITDA for the last twelve months ended fiscal 2015 fiscal year.provided in the Company's management projections. Unlevered free cash flow was calculated based on EBITDA less book depreciation and amortization ("EBIT"), less assumed cash taxes paid on EBIT, plus book depreciation and amortization, less increases in working capital and other items including change in deposits and other long-term assets, and less capital expenditures. Cash taxes on EBIT were calculated using the tax rate of 37.5% provided by management and based on the assumption that the Company was taxed on a




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fully taxed basis. BasedUnlevered free cash flow for each of the periods was calculated as follows based on the projections provided by the Company's management, Lazard derived unlevered free cash flows of $15 million for the last nine months of the 2012 fiscal year, $8 million for the 2013 fiscal year, $30 million for the 2014 fiscal year and $28 million for the 2015 fiscal year.management:

		Last Nine Months of FY2012			FY2013P			FY2014P			FY2015P
		($ in millions)
EBITDA		$	116		$	178		$	205		$	239
Depreciation and amortization			(22	)		(30	)		(33	)		(38	)
EBIT		$	93		$	147		$	172		$	202
Taxes at 37.5%			(35	)		(55	)		(65	)		(76	)
Unlevered net income		$	58		$	92		$	108		$	126
Depreciation and amortization			22			30			33			38
Increase in working capital and other (including change in deposits and other long-term assets)			(12	)		(15	)		(20	)		(26	)
Capital expenditures			(53	)		(100	)		(90	)		(110	)
Unlevered free cash flow		$	15		$	8		$	30		$	28

        Lazard also calculated estimated terminal values for the Company by applying a range of terminal valueexit multiples of 7.0x to 8.5x to the Company's estimated EBITDA for the Company'slast twelve months ended fiscal year ending March 31, 2015 provided in the Company's management projections. The range of terminal valueexit multiples wasis the same as the range selected by Lazard in its professional judgment by reference tofor the Enterprise Valueenterprise value to LTM EBITDA trading multiples calculated forof the selected companies listeddescribed in the "—Opinion of Financial Advisor to Our Special Committee and the Board of Directors—Public Trading Analysis" section above, among other things.above. The standalone free cash flows and terminal values were discounted to present value using discount rates ranging from 8.0% to 10.0%, which were based on a weighted




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average cost of capital ("WACC") analysis of the selected companies listed in the "—Opinion of Financial Advisor to Our Special Committee and the Board of Directors—Public Trading Analysis" section above. The weighted average cost of capitalWACC is a measure of the average expected return on all of a given company's equity securities and debt based on their proportions in such company's capital structure. Lazard took into account certain financial metrics, including betas, for the selected companies in estimating the weighted average cost of capital.

        Lazard then added together the corresponding estimated present values of the standalone free cash flows and terminal values (referred to as the implied enterprise value) and the Company's $221.8 million net cash balance as of July 2, 2011 (together with the implied enterprise value, the equity value), then divided the sums by the fully diluted share count of the Company to arrive at the implied equity value per share range. The following tables illustrate the steps of the discounted cash flow analysis ($ in millions, except per share data):

		Present Value of Last Nine Months of FY2012-FY2015
					Present Value of Terminal Value Given LTM EBITDA Exit Multiple of									Total Implied Enterprise Value Given LTM EBITDA Exit Multiple of
		Unlevered Free Cash Flow
WACC					7.0x			7.75x			8.5x			7.0x			7.75x			8.5x
8.0%		$	68		$	1,254		$	1,389		$	1,523		$	1,322		$	1,456		$	1,591
9.0%			66			1,212			1,341			1,471			1,278			1,408			1,538
10.0%			65			1,171			1,296			1,422			1,236			1,361			1,487




		Equity Value Given LTM EBITDA Exit Multiple of									Implied Equity Value Per Share Given LTM EBITDA Exit Multiple of
WACC		7.0x			7.75x			8.5x			7.0x			7.75x			8.5x
8.0%		$	1,544		$	1,678		$	1,813		$	21.53		$	23.38		$	25.23
9.0%			1,500			1,630			1,759			20.93			22.71			24.50
10.0%			1,458			1,583			1,709			20.35			22.07			23.80




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        This discounted cash flow analysis resulted in an implied equity value per share range for the Company of $20.35 to $25.23, compared to the $22.00 merger consideration per share provided in the merger agreement.


Miscellaneous


        The special committee selected Lazard to act as its financial advisor, including in connection with the merger, based on Lazard's qualifications, experience, reputation and familiarity with the Company and its business. Lazard is an internationally recognized investment banking firm providing a broad range of financial advisory and securities services.

        The preliminary financial analyses provided by Lazard to the special committee on July 26, 2011 did not constitute an opinion of, or recommendation by, Lazard with respect to a possible transaction or otherwise. The financial analyses performed by Lazard in connection with its preliminary presentation on July 26, 2011 were substantially similar to the financial analyses summarized above. However, Lazard updated (a) the market data used in its public trading analysis, although that did not change the various trading multiple ranges Lazard deemed appropriate for that analysis, and (b) the fully diluted share count of the Company, which resulted in de minimis changes in the implied equity value per share ranges calculated in Lazard's financial analyses. In addition, Lazard refined its discounted cash flow analysis by using discount rates ranging from 8.0% to 10.0% instead of the 9.0% to 11.0% that was used in the preliminary analysis, and by not adding back stock based compensation to EBITDA (which lowered unlevered free cash flow by approximately $1 million for the last nine months of fiscal 2012, $2 million for fiscal 2013, $2 million for fiscal 2014 and $2 million for fiscal 2015). These refinements, along with the use of an updated fully diluted share count, resulted in an increase to the implied equity value per share range based on the discounted cash flow analysis from $19.89 to $24.59 to a range of $20.35 to $25.23 in the final presentation. Lazard's preliminary presentation was therefore superseded by its final presentation to the special committee on October 10, 2011.

In connection with Lazard's services as the financial advisor of the special committee, the Company has agreed to pay Lazard an aggregate fee based on the transaction value as of the closing date of the merger, which fee is currently estimated to beapproximately $9.65 million, of which $250,000 was payable upon Lazard's engagement, $1.25 million was payable upon the date Lazard rendered its opinion and an estimatedapproximately $8.15 million is contingent upon the closing of the merger. The fee payable to Lazard will depend on the number of fully diluted shares of the Company's common stock as of the closing date of the merger. The Company does not expect more than a de minimis fluctuation in this share amount between now and the closing of the merger. The Company also has agreed to reimburse Lazard for its reasonable expenses (including attorneys' fees) and to indemnify Lazard and related parties against certain liabilities and other items, including liabilities under U.S. federal securities laws, arising out of or related to its engagement.

        Lazard, as part of its investment banking business, is continually engaged in the valuation of businesses and their securities in connection with mergers and acquisitions, negotiated underwritings, secondary distributions of listed and unlisted securities, private placements, leveraged buyouts, and valuations for estate, corporate and other purposes. Lazard in the past has provided and in the future may provide certain investment banking services to certain affiliates of ACOF III and CPPIB and their portfolio companies, for which Lazard has received and may receive compensation, including, without limitation, during the past two years, having advised an affiliate of ACOF III in 2010.2010 for which it received a fee of $400,000. In addition, in the ordinary course of their respective businesses, Lazard, LFCM Holdings LLC (an entity indirectly owned in large part by managing directors of Lazard) and their respective affiliates may actively trade securities of the Company and certain of its affiliates and of certain affiliates of ACOF III and CPPIB and their portfolio companies for their own accounts and for the accounts of their customers and, accordingly, may at any time hold a long or short position in




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such securities and also may trade and hold securities on behalf of the Company and certain affiliates of ACOF III and CPPIB and their portfolio companies.


Presentations of Guggenheim Securities, LLC to the Gold/Schiffer Family


        In February 2011, the Gold/Schiffer Family retained Guggenheim to act as its financial advisor in connection with a possible going private transaction involving the Company. Guggenheim was retained to provide strategic advice and assistance relating to a review of potential transaction alternatives and negotiation of a transaction, but was not asked to produce and did not produce a report that was intended to arrive at a valuation of the Company. In connection with analyzing the initial September 27 bids and the revised October 1 "best and final" bids submitted to the special committee by LGP and ACOF III/CPPIB, and comparing those bids to various alternatives to a going private transaction, Guggenheim prepared written materials that were delivered by Guggenheim to the Gold/Schiffer Family on September 30, October 3 and October 5, 2011. Each is summarized below.




Table        Unless otherwise stated, all of Contentsthe financial analyses included in these written materials were based on management's four year projections (which are described in "—Certain Projections"), adjusted for changes that the Gold/Schiffer Family believed appropriate if the Company were to incur a significant amount of debt in connection with a going private transaction (the "Adjusted Management Projections"). The principal adjustments that were used to derive the Adjusted Management Projections include a decrease in capital expenditures related to investments in new and existing stores, distribution center investments and information technology investments, and a corresponding increase in lease and rent expense, which assumes that the aforementioned capital investments will be made through lease arrangements rather than purchases in order to preserve cash flow for debt repayment. The adjustments used to derive the Adjusted Management Projections were provided by the Gold/Schiffer Family to Guggenheim in connection with Guggenheim's analyses of the Gold/Schiffer Family's rollover equity and management equity incentives under the relevant proposals and other potential alternatives for the Company that included remaining public with an increase in financial leverage. The Adjusted Management Projections were not provided to ACOF III/CPPIB or any other bidder or to the special committee.

        September 30 Presentation.    On September 30, 2011, Guggenheim delivered written materials to the Gold/Schiffer Family analyzing the initial bids submitted to the special committee by LGP and ACOF III/CPPIB on September 27, , 2011 (the "Initial Bids"), which. This presentation included the following information and analyses:

•

A(1) a summary of the Initial Bids, including for each member of the Gold/Schiffer Family, the amount of equity to be rolled over (assuming total rollover of $125 million and $50 million for the LGP Initial Bid and the ACOF III/CPPIB Initial Bid, respectively, of which each family member participates proportionately based on its respective share ownership) and the cash proceeds to be received at closing;



•

Aclosing, (2) a summary of the terms of the debt commitments under each Initial Bid;



•

ABid, (3) a comparison under each of the Initial BidBids of (a)the sources and uses of funds (b) free cash flow available for debt pay-down and the summary credit statistics following completion of the merger through 2016 assuming the Adjusted Management Projections were fully achieved, (4) a summary of the structure of management equity incentives under each Initial Bid, and (c) upfront liquidity and future value of rollover equity assuming a 2016 exit at a 7.5x multiple and various scenarios regarding(5) the aggregate amount of equity to be rolled over by the Gold/Schiffer Family;following financial analyses:



•

An illustrativeTransaction Multiple and Internal Rate of Return Analysis:  Guggenheim provided an analysis of the transaction values implied by each of the Initial Bids as a multiple of 2011fiscal year 2012 projected EBITDA, contained in management's four year projections (which are described in "—Certain Projections"),the ratio of total pro forma debt as of the closing to EBITDA for the twelve months ended June 30, 2011 ("LTM EBITDA"), the Gold/Schiffer Family's pro forma ownership




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following completion of the merger, and the four year internal rate of return ("IRR") on the equity underto be invested in the transaction as summarized in the table below:

			Initial Bid
			ACOF III/ CPPIB			LGP
Price Per Share			$	21.50		$	20.00
Enterprise Value (in millions)			$	1,545		$	1,435
Implied EV/FY 2012E EBITDA				8.5x			7.8x
Total Pro Forma Debt (in millions)			$	775		$	670
Pro Forma Debt/LTM EBITDA				5.2x			4.5x
Gold/Schiffer Family Equity Rollover			$	50		$	125
Gold/Schiffer Family Pro Forma Ownership				8	%		21	%
IRR on Invested Equity:
Trailing Exit EV/LTM EBITDA
	6.5x			13	%		16	%
	7.0x			16	%		19	%
	7.5x			19	%		22	%
	8.0x			22	%		25	%
	8.5x			25	%		27	%

The four year IRR on invested equity in each Initial Bidcase was based on the respective capital structures proposed by each of the bidders and was calculated assuming athe Adjusted Management Projections were fully achieved and the Company was sold at the end of fiscal 2016 at an enterprise value/EBITDA multiple reference range of per share merger consideration between $20.00 and $22.50; and



•
An illustrative6.5x-8.5x, which range was determined by Guggenheim in its professional judgment to be appropriate based on an analysis of the structurecurrent and historical trading multiples of companies in the dollar store, club, mass and food retail sectors ("comparable companies"), and a review of the relative growth, risk and returns characteristics of these comparable companies.

•

Upfront Liquidity and Future Value Analysis:  Guggenheim summarized for the Gold/Schiffer Family, under each of the Initial Bids and assuming different amounts of total Gold/Schiffer Family equity rollover, the amount of upfront proceeds to be received by the Gold/Schiffer Family, the future value of the Gold/Schiffer Family's rollover equity in 2016 and the future value of management equity incentives under eachin 2016. These analyses are summarized in the table below:

			ACOF III/CPPIB Initial Bid Family Rollover Equity									LGP Initial Bid Family Rollover Equity
	($ in millions)		$0			$50			$100			$100			$125			$150
	Upfront Pre-Tax Proceeds to Gold/Schiffer Family		$	500		$	450		$	400		$	365		$	340		$	315
	Future Value of Rollover Equity in 2016			0			101			203			223			278			334
	Future Value of Management Equity Incentives in 2016 (all management)			52			52			52			60			60			60

The midpoint of the range of enterprise value/EBITDA multiples used in the analysis of IRR on invested equity (i.e., 7.5x) was used to estimate the future value of the Gold/Schiffer Family's




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rollover equity and management equity incentives in this analysis assuming the Adjusted Management Projections were fully achieved. The calculation of the future value of management equity incentives further assumed, consistent with the terms of the Initial Bids, (1) in the case of the LGP Initial Bid, assumingthat the recipients of management equity incentives would be entitled to 7.5% of the total increase in value of LGP's equity investment in the merger, and (2) in the case of the ACOF III/CPPIB Initial Bid, that the recipients of management equity incentives would be entitled to 5.0% of the total increase in value of ACOF III/CPPIB's equity investment in the merger and an additional 5.0% of the increase in value of such investment over a 2016 exit at a 7.5x multiple.

strike price equal to 150% of the amount of ACOF III/CPPIB's initial equity investment.

        October 3 Presentation.    On October 3, 2011, Guggenheim delivered written materials to the Gold/Schiffer Family analyzing the "best and final" bids submitted to the special committee by LGP and ACOF III/CPPIB on October 1, , 2011 (the "Best and Final Bids"), which included the following information and analyses:

•

A(1) a summary of the Best and Final Bids, including for each member of the Gold/Schiffer Family, the amount of equity to be rolled over (assuming total rollover of $200 million and $50 million for the LGP Initial Bid and the ACOF III/CPPIB Initial Bid, respectively, of which each family member participates proportionately based on its respective share ownership) and the cash proceeds to be received at closing;



•

For the ACOF III/CPPIB proposal at $22.00 per share, (2) a summary of (a) the sources and uses of funds, (b) free cash flow available for debt pay-down and various credit statistics during the four year projection period ending fiscal 2016, and (c) upfront liquidity and future value of rollover equity assuming a 2016 exit at a 7.5x multiple and $50 million of equity to be rolled over by the Gold/Schiffer Family in the aggregate;



•

An illustrative analysis of the transaction values as a multiple of 2011 projected EBITDA, pro forma ownership and the four year internal rate of return on equity under the ACOF III/CPPIB proposal assuming a range of per share merger consideration between $20.00 and $22.50;



•

An illustrative analysis of the value of the equity incentives under the ACOF III/CPPIB proposal and potential alternative equity incentive structures, in each case including a sensitivity analysis at various exit multiples and assuming 100% and 90% achievement of management's projections;



•

A summary of the terms of the debt commitments under the ACOF III/CPPIB proposal and recent and historical leveraged finance market benchmarks;



•

A (3) for the ACOF III/CPPIB Best and Final Bid only, a summary of the sources and uses of funds and the free cash flow available for debt pay-down and various credit statistics during the four year projection period ending fiscal 2016 assuming the Adjusted Management Projections were fully achieved; (4) a summary of the proposals made by the Gold/Schiffer Family to ACOF III/CPPIB, and the responses from ACOF III/CPPIB, in each case with respect to, among other matters, equity incentives, employment agreements for Messrs. Schiffer, J. Gold and H. Gold, the amount of rollover equity and the terms under which such equity would be repurchased by the Company under certain circumstances, and the terms upon which leases would be entered into by the Company at closing for stores owned by the Gold/Schiffer Family or its affiliates; and (5) the following financial analyses:

•

Transaction Multiple and Internal Rate of Return Analysis:  Guggenheim provided an analysis of the transaction value implied by the ACOF III/CPPIB Best and Final Bid as a multiple of calendar year 2011 projected EBITDA, the ratio of total pro forma debt as of the closing to LTM EBITDA, the Gold/Schiffer Family's pro forma ownership following completion of the




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merger, and the four year IRR on equity to be invested in the transaction as summarized in the table below:

			ACOF III/CPPIB Best and Final Bid
Price Per Share			$	22.00
Enterprise Value (in millions)			$	1,582
Implied EV/CY 2011E EBITDA				9.0x
Total Pro Forma Debt (in millions)			$	775
Pro Forma Debt/LTM EBITDA				5.2x
Gold/Schiffer Family Equity Rollover			$	50
Gold/Schiffer Family Pro Forma Ownership				8	%
IRR on Invested Equity:
Trailing Exit EV/LTM EBITDA
	6.5x			11	%
	7.0x			14	%
	7.5x			17	%
	8.0x			20	%
	8.5x			23	%

Consistent with Guggenheim's September 30^th presentation, the four year IRR on invested equity was based on the capital structure proposed by ACOF III/CPPIB and was calculated assuming the Adjusted Management Projections were fully achieved and the Company was sold at the end of fiscal 2016 at an enterprise value/EBITDA multiple reference range of 6.5x-8.5x.

•

AnUpfront Liquidity and Future Value Analysis:  Guggenheim summarized for the Gold/Schiffer Family under the ACOFIII/CPPIB Best and Final Bid the amount of upfront proceeds to be received by the Gold/Schiffer Family, the future value of the Gold/Schiffer Family's rollover equity in 2016 and the future value of management equity incentives in 2016. This analysis assumed that the Gold/Schiffer Family rolled $50 million of equity in the merger and is summarized in the table below:

($ in millions)		ACOF III/CPPIB Best and Final Bid
Upfront Pre-Tax Proceeds to Gold/Schiffer Family		$	461
Future Value of Rollover Equity in 2016			97
Future Value of Management Equity Incentives in 2016 (Gold/Schiffer Family management only)			32

Consistent with Guggenheim's September 30^th presentation, the midpoint of the range of enterprise value/EBITDA multiples used in the analysis of IRR on invested equity (i.e., 7.5x) was used to estimate the future value of the Gold/Schiffer Family's rollover equity and management equity incentives in this analysis, and the analysis assumed that the Adjusted Management Projections were fully achieved.

•

Analysis of the Future Value of Management Equity Incentives:  Guggenheim also provided an analysis of the proposed preferred security offeredfuture value of management equity incentives (referred to below as "management promote") under the ACOF III/CPPIB Initial Bid, the management equity incentive counterproposal made to ACOF III/CPPIB by LGP to the Gold/Schiffer Family, in exchange for $50 million of additional rollover equity.and a revised proposal




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from ACOF III/CPPIB following receipt of the Gold/Schiffer Family's counterproposal. The summary terms of those proposals and the estimated future value of the management promote assuming that the Company achieved 100% and 90% of the Adjusted Management Projections is set forth in the table below:

			Achievement of Adjusted Management Projections EBITDA
ACOF III Initial Bid			90%			100%
			($ in millions)
Promote Value to Management (All Management)
	5% at 1.0x Initial Equity Value Strike		$	18.8		$	31.6
	5% at 1.5x Initial Equity Value Strike			2.9			15.7
Total Management Promote			$	21.7		$	47.3




			Achievement of Adjusted Management Projections EBITDA
Gold/Schiffer Family Counterproposal			90%			100%
			($ in millions)
Promote Value to Family Management
	7% at 1.0x Initial Equity Value Strike		$	26.4		$	44.3
Promote Value to Non-Family Management
	4% at 1.0x Initial Equity Value Strike		$	15.1		$	25.3
Total Management Promote			$	41.4		$	69.6




			Achievement of Adjusted Management Projections EBITDA
ACOF III Proposal as of October 2, 2011			90%			100%
			($ in millions)
Promote Value to Family Management
	5% at 1.0x Initial Equity Value Strike		$	18.8		$	31.6
	Total Promote Value to Family Management		$	18.8		$	31.6
Promote Value to Non-Family Management
	3% at 1.0x Initial Equity Value Strike		$	11.3		$	19.0
	3% at 1.5x Initial Equity Value Strike			1.7			9.4
	Total Promote Value to Non-Family Management		$	13.0		$	28.4
Total Management Promote			$	31.9		$	60.0

        October 5 Presentation.    On October 5, 2011, Guggenheim delivered written materials to the Gold/Schiffer Family analyzing various transaction alternatives, including the ACOF III/CPPIB proposal at $22 per share, a dividend recapitalization that returnswould return $562 million in cash to shareholders through a one-time dividend, and a dividend recapitalization in combination with share repurchases that similarly returnswould return $562 million to shareholders, but only half of which would be returned through a one time dividend, with the other half being utilized to repurchase shares at an assumed average price of $17.$17.00. Both of the non-ACOF III/CPPIBrecapitalization alternatives contemplated the Company remaining public and paying an ongoing quarterly dividend of $.09 per share, increasing annually by $.01 per share per quarter.

        Each of these alternatives were analyzed using, at the direction of the Gold/Schiffer Family, the following three operating cases:

•

the Adjusted Management Projections;




Management's projections (which are described inTable of Contents"—Certain Projections");



•

An alternative upside case based on management's projections,the Adjusted Management Projections, except that (a) same-store sales growth for fiscal 2012 was increased to 6.5%, (b) core and Texas same-store sales growth was increased to 2.5% for fiscal 2013 and 2% thereafter, and (c) EBIT margins grew to 10.2% by fiscal 2015; and



•

A downside case based on management's projections,the Adjusted Management Projections, except that (a) core and Texas same-store sales had growth of 0% starting in fiscal 2013, (b) EBIT margin decreased a cumulative 1.50% from 8.7% in fiscal 2012 to 7.2% in fiscal 2015, (b) only 50% of projected new stores actually opened each year during the projection period, and (d) only 50% of projected sales for products above 99.99¢ was actually achieved.

        For each transaction alternative under each operating case described above, Guggenheim's analysis illustrated, among other matters, the upfront proceeds to be received by the Gold/Schiffer Family, the present value of the interim cash flows (including dividends and expected management compensation under each scenario) to the Gold/Schiffer Family during the projection horizon, the present value of the Gold/Schiffer Family's future equity value in 2016 and the total present value of consideration to be received by the Gold/Schiffer Family. The following table summarizes the present value of total cash flow to the Gold/Schiffer Family under each operating scenario and each transaction alternative:

		EV / FY2016 EBITDA Exit Multiple			Proposed Merger with ACOF III / CPPIB			Dividend Recapitalization			Dividend Recapitalization & Share Repurchase
					Total Present Value of Consideration / % Change vs. Merger
Alternative Case			5.5x		$	512		$	496 / (3	)%	$	525 / 2	%
			6.5x			543			554 / 2	%		600 / 11	%
			7.5x			573			612 / 7	%		676 / 18	%
			8.5x			604			670 / 11	%		752 / 24	%
Adjusted Management Projections			5.5x		$	496		$	465 / (6	)%	$	485 / (2	)%
			6.5x			524			518 / (1	)%		554 / 6	%
			7.5x			552			572 / 4	%		624 / 13	%
			8.5x			580			626 / 8	%		694 / 20	%
Downside Case			5.5x		$	441		$	349 / (21	)%	$	334 / (24	)%
			6.5x			456			383 / (16	)%		378 / (17	)%
			7.5x			471			417 / (11	)%		422 / (10	)%
			8.5x			487			451 / (7	)%		466 / (4	)%
Discount Rate / Cost of Equity
(Mid-point of estimated range)						14.80	%		11.89	%		11.89	%

        Guggenheim estimated a range of the Company's cost of equity under each of the alternative scenarios described above and used the midpoint of those ranges to calculate the present values reflected in the above tables. The estimated cost of equity was based on (i) Guggenheim's then-current estimate of the prospective U.S. equity risk premium range, (ii) a review of the Company's Bloomberg historical five-year average adjusted beta and its then-current Barra predicted beta, (iii) the prevailing yield on the 20-year U.S. Treasury bond as a proxy for the risk-free rate, (iv) the Company's target capital structure on a prospective basis under each of the transaction alternatives and (v) Guggenheim's investment banking and capital markets judgment and experience in valuing companies similar to the Company.

        In addition to the foregoing, one or more of the Guggenheim presentations described above included various summary information regarding relative stock price performance and volume information for the Company and its peers in the dollar store, club, mass and food retail sectors ("comparable companies"),companies, comparable company valuation multiple analysis, comparable company growth and margin analysis and an implied terminal multiple analysis based on comparable company market prices and their respective discounted cash flow values based on Wall Street equity research consensus estimates.




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        In performing its analyses, Guggenheim relied upon and assumed the accuracy and completeness of all financial, legal, regulatory, tax, accounting, and other information provided to or discussed with it by the Company or the Gold/Schiffer Family or obtained by Guggenheim from public sources, including, without limitation, management's projections and the alternative operating cases referred to above. Guggenheim did not assume any responsibility or liability for the independent verification of, and it did not independently verify, any such information, including, without limitation, the financial projections and the alternative operating cases. Guggenheim expressed no view or opinion regarding the reasonableness of such financial projections or the alternative operating cases or the assumptions upon which they were based.

        Guggenheim was not asked to render or deliver, nor has Guggenheim rendered or delivered, any opinion with respect to the fairness of the merger or the merger consideration. The materials and analyses that Guggenheim presented to the Gold/Schiffer Family were not analyses with respect to the fairness of the merger consideration, did not reflect any opinion of Guggenheim as to the fairness of




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the merger consideration and should not be viewed as determinative of the opinion of Guggenheim, , the Gold/Schiffer Family, the Company's Board, the special committee, or the Company's management with respect to the fairness of the merger consideration or whether the Company's Board or the special committee would have been willing to agree to a different merger consideration. The summaries do not constitute a recommendation to the Gold/Schiffer Family, the Company's Board, the special committee or the Company's shareholders with respect to the fairness of the merger or the transactions contemplated thereby. In addition, Guggenheim's materials and analyses do not constitute a recommendation to any shareholder of the Company on how to vote or act with respect to the merger and should not be relied upon by any person, other than the members of the Gold/Schiffer Family, for any purpose. It should be noted that Guggenheim acted on behalf of the members of the Gold/Schiffer Family, and did not act on behalf of ACOF III/CPPB,CPPIB, the Company, or the special committee or the Company's other shareholders.

        The foregoing discussion of the Guggenheim written materials is only a summary of their analyses. Shareholders are urged to read all of the Guggenheim written materials, copies of which have been filed as Exhibits (c)(4), (c)(5) and (c)(6) to the Schedule 13E-3 filed by the Company, the Rollover Investors, Parent, Merger Sub, the Ares Filing Persons and CPPIB with the SEC on October 27, 2011, for more details regarding the Guggenheim written materials and analyses.

        Guggenheim and its affiliates engage in a wide range of financial services activities for their own accounts and the accounts of their customers, including asset and investment management, investment banking, corporate finance, mergers and acquisitions, restructuring, merchant banking, fixed income and equity sales, trading and research, derivatives, foreign exchange and futures. The Gold/Schiffer Family selected Guggenheim on the basis of, among other things, Guggenheim's qualifications, experience, expertise and reputation in mergers and acquisitions as well its knowledge of and expertise in the retail sector.

        Pursuant to the engagement letter between Guggenheim and the Gold/Schiffer Family, the Gold/Schiffer Family has agreed to pay Guggenheim customary feesa fee for its financial advisory services in connection with the merger.merger consisting of a fixed fee of $2.5 million, which is not contingent on the closing of the transaction, and a discretionary fee that is currently anticipated to be $1.5 million. The Gold/Schiffer Family also agreed to reimburse Guggenheim for its reasonable out-of-pocket expenses, and to indemnify Guggenheim against particular liabilities, including liabilities under the federal securities laws. To the best of its knowledge after reasonable inquiry, Guggenheim and its affiliates have not earned any fees from the Gold/Schiffer Family, ACOF III, CPPIB, the Company or any of their respective affiliates in the last two years.




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Purpose and Reasons for the Merger for the Rollover Investors


        Under SEC rules governing "going-private" transactions, the Rollover Investors are required to express their reasons for the merger to the Company's unaffiliated shareholders, as defined in Rule 13e-3 of the Exchange Act. The Rollover Investors are making the statements included in this section solely for the purpose of complying with Rule 13e-3 and related rules and regulations under the Exchange Act. For the Rollover Investors, the purpose of the merger is to enable Parent to acquire all of the outstanding shares of the Company's common stock in a transaction in which the Company's unaffiliated shareholders will receive fair value for their shares, so Parent will bear the rewards and risks of the ownership of the Company. In addition, based upon, among other things, written materials provided by Guggenheim to the Gold/Schiffer Family, as described in "—Presentations of Guggenheim Securities, LLC to the Gold/Schiffer Family," the Rollover Investors determined that the $22.00 per share merger consideration was an attractive price for the shares of the Company's common stock that they are selling in the merger, which represents approximately 80% of the shares of the Company's common stock held by the Gold/Schiffer Family and its affiliates. Further, the merger will allow the Rollover Investors to maintain approximately 20% of their current investment in the Company through their respective commitments to make an equity investment in Parent as described in "—Financing of the Merger—Equity Financing—Rollover Investment," and at the same time enable Messrs. Schiffer, J. Gold and H. Gold to maintain leadership roles with the surviving corporation. For the reasons why the Rollover Investors are undertaking the merger at this time, see "—




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Purpose and Reasons for the Merger for Parent, Merger Sub, the Ares Filing Persons and CPPIB


        Under a possible interpretation of the SEC rules governing "going private" transactions, one or more of Parent, Merger Sub, the Ares Filing Persons (as defined below) and CPPIB may beare deemed to be affiliates of the Company and, therefore, may beare required to express their purpose and reasons for the merger to the Company's unaffiliated stockholders. Parent, Merger Sub, the Ares Filing Persons and CPPIB are deemed to be "affiliates" of the Company within the meaning of Rule 13e-3 of the Exchange Act solely based upon the transactions identified herein, and there is no other factual basis on which such persons would be deemed to be "affiliates" of the Company within the meaning of Rule 13e-3 of the Exchange Act. Parent, Merger Sub, ACOF III, ACOF Management III, L.P. ("ACOF Management III"), ACOF Operating Manager III, LLC ("ACOF Operating III"), Ares Management LLC ("Ares Management"), Ares Management Holdings LLC ("Ares Management Holding"), Ares Holdings LLC ("Ares Holdings"), Ares Partners Management Company LLC ("APMC") and CPPIB are making the statements included in this section solely for the purpose of complying with the requirements of Rule 13e-3 and related rules and regulations under the Exchange Act.

        ACOF Management III is the general partner of ACOF III, ACOF Operating III is the general partner of ACOF Management III, Ares Management ownscontrols ACOF Operating III, Ares Management Holdings controls Ares Management, Ares Holdings controls Ares Management Holdings and APMC indirectly controls Ares Management.Holdings. We refer to ACOF III, ACOF Management III, ACOF Operating III, Ares Management, Ares Management Holdings, Ares Holdings and APMC, collectively, as the "Ares Filing Persons."

        If the merger is completed, the Company will become a subsidiary of Parent. For Parent and Merger Sub, the purpose of the merger is to effectuate the transactions contemplated by the merger agreement. For the Ares Filing Persons and CPPIB, the purpose of the merger is to allow ACOF III and CPPIB, respectively, to indirectly own equity interests in the Company and to bear the rewards and risks of such ownership after shares of the Company's common stock cease to be publicly traded.

        The Ares Filing Persons and CPPIB believe that structuring the transaction as a merger transaction is preferable to other transaction structures because (a) it will enable Parent to acquire all of the outstanding shares of the Company's common stock at the same time, (b) it represents an




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opportunity for the Company's unaffiliated shareholders to receive fair value for their shares of common stock in the form of the merger consideration and (c) it allows the Rollover Investors to, among other things, maintain (indirectly through Parent) a portion of their investment in the Company. Parent, Merger Sub, the Ares Filing Persons and CPPIB are undertaking the transaction at this time based on the time frame laid out by the Company and its advisors as discussed in "—Background of the Merger."


Position of the Rollover Investors as to the Fairness of the Merger


        Under SEC rules governing "going-private" transactions, each of the Rollover Investors is required to express its beliefs as to the fairness of the merger to the Company's unaffiliated shareholders. The Rollover Investors are making the statements included in this section solely for purposes of complying with Rule 13e-3 and related rules and regulations under the Exchange Act. The Rollover Investors believe that the merger is fair to the Company's unaffiliated shareholders on the basis of the factors described in "—Purpose and Reasons for the Merger; Recommendation of Our Special Committee and Board of Directors; Fairness of the Merger" and the additional factors described below. However, the views of the Rollover Investors as to the fairness of the merger should not be construed as a recommendation to any Company shareholder to approve the merger agreement.

        None of the Rollover Investors or their advisors participated in the deliberations of the special committee or the Board regarding, or received advice from the Company's legal advisor or the special committee's legal or financial advisors as to, the fairness of the merger. None of the Rollover Investors has performed, or engaged a financial advisor to perform, any valuation or other analysis for the purposes of assessing the fairness of the merger to the Company's unaffiliated shareholders. As described in "—Background of the Merger," the Rollover Investors consulted with Guggenheim regarding certain structural and financial aspects of the proposed transaction from the point of view of the Rollover Investors. However, Guggenheim did not provide an opinion with respect to the fairness of the merger consideration.

        Based on, among other things, the factors considered by, and the analysis and resulting conclusions of, the Board and the special committee discussed in "—Purpose and Reasons for the Merger;




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Recommendation of Our Special Committee and Board of Directors; Fairness of the Merger" (which analysis and resulting conclusions the Rollover Investors adopt), the Rollover Investors believe that the merger is substantively fair to the Company's unaffiliated shareholders. In particular, the Rollover Investors considered the following:

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the fact that the $22.00 price per share of Company common stock represents a premium of approximately 32% over the closing price of the Company's common stock on March 10, 2011, the day before the Company announced that it had received a proposal from members of the Gold/Schiffer Family and LGP, and 33.6% and 33.2% premiums over the 1-week and 1-month average trading price prior to such announcement;



•

the fact that the special committee determined, by the unanimous vote of all members of the special committee, and the Board determined, by the unanimous vote of the independent directors, that the merger is fair (both substantively and procedurally) to, and in the best interests of, the Company and its unaffiliated shareholders;



•

the fact that the merger consideration is all cash, thus allowing shareholders to immediately realize a certain and fair value for their shares of the Company's common stock;



•

the fact that the merger will provide liquidity for the Company's unaffiliated shareholders without the delays that would otherwise be necessary in order to liquidate the positions of larger holders, and without incurring brokerage and other costs typically associated with market sales; and




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•

the fact that there are no unusual requirements or conditions to the merger and that the merger is not conditioned on any financing being obtained by Parent, increasing the likelihood that the merger will be consummated and that the consideration to be paid to the Company's unaffiliated shareholders in the merger will be received.

        The Rollover Investors further believe that the merger is procedurally fair to the Company's unaffiliated shareholders based upon the following factors:

•

the fact that the special committee, consisting solely of directors who are not officers or employees of the Company and who are not affiliated with any of the Rollover Investors, was given exclusive authority to, among other things, review, evaluate and negotiate the terms of the proposed merger, to decide not to recommend the merger, and to consider alternatives to the merger;



•

the fact that the special committee retained its own nationally recognized legal and financial advisors, which the special committee determined had no relationships that would compromise the independence of the special committee;



•

the fact that the special committee's independent financial advisor, Lazard, rendered an opinion to the special committee and to the Board that, as of October 11, 2011, and based upon and subject to the assumptions, procedures, factors, qualifications and other matters and limitations set forth in its opinion, the merger consideration to be paid to holders of the Company common stock (other than the Rollover Investors, the Company, Parent, Merger Sub and holders who are entitled to and properly demand an appraisal of their shares) in the merger was fair, from a financial point of view, to such holders, as more fully described below in "—Opinion of Financial Advisor to Our Special Committee and Board of Directors" (the full text of the written opinion of Lazard is attached asAnnex B to this proxy statement);



•

the fact that none of the Rollover Investors or any of their advisors participated in or had any influence over the deliberative process of, or the conclusions reached by, the special committee or the negotiating positions of the special committee;






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the fact that the special committee was deliberate in its process, taking more than six months to run a thorough, open and competitive process and to evaluate various alternatives;



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the fact that 51 potential bidders were contacted by Lazard to assess their interest in a transaction, of which (a) six signed confidentiality agreements with the Company, (b) three conducted extensive due diligence, including participating in management presentations, and (c) two delivered written proposals to the special committee to acquire the Company;



•

the fact that the $22.00 per share merger consideration (a) was the result of the special committee's extensive arm's-length negotiations with ACOF III/CPPIB, which, among other things, resulted in better contractual terms than those initially proposed by ACOF III/CPPIB, including a larger termination fee payable by Parent under certain circumstances and the inclusion of "fiduciary out" provisions described in "Merger Agreement—Restrictions on Solicitation of Other Offers" and "Merger Agreement—Termination in Connection with a Superior Company Proposal," (b) represented the highest price bid in the auction process, and (c) was significantly higher than the initial acquisition proposal of $19.09 per share received by the Company in March 2011;



•

the fact that the fee payable by the Company to Parent if the merger agreement is terminated under certain circumstances will not exceed $47.25 million, or approximately 3% of the Company's total equity value implied by the merger consideration, which the Rollover Investors believe would not present a material impediment to a competing bidder; and




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•

the availability of statutory dissenters' rights to the shareholders who are entitled to demand and have properly demanded such rights and have complied with all of the other required procedures under California law for exercising dissenters' rights, which require the Company to purchase at their fair market value the shares of the Company's common stock owned by such holders of dissenting shares, as described in "Dissenters' Rights" (so long as dissenters' demands have been filed with respect to at least five percent of the outstanding shares of the Company's common stock).

        The Rollover Investors note that the merger does not require approval by holders of at least a majority of the shares of Company common stock held by the Company's unaffiliated shareholders. The Rollover Investors do not believe that the absence of such approval should affect the fairness determination because, among other things, the Rollover Investors, who are entitled to vote at the special meeting, are proposing to dispose of approximately 80% of the shares of Company common stock owned by them and their affiliates in the merger for the same consideration as will be received by the unaffiliated shareholders in the merger. Accordingly, the Rollover Investors believe their interests should be substantially aligned with the interests of the unaffiliated shareholders with respect to the merger vote. The Rollover Investors also note that approval of the merger agreement will still require the approval of approximately 25% of the unaffiliated shareholders.

        The Rollover Investors also considered a variety of risks and other countervailing factors related to the substantive and procedural fairness of the proposed merger, including:

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that the shareholders of the Company (other than the Rollover Investors) will not participate in any future earnings or growth of the Company's business and will not benefit from any potential sale to a third party in the future, or from any appreciation in the Company's value, including any appreciation resulting from steps that may be taken to open new stores, increase same store sales, become a nationwide extreme value retailer, price selected merchandise above a price point of 99.99¢ or $1.00 per item, or otherwise, at a point when, given unstable economic conditions, the extreme value retail industry may be growing as a whole;



•

the risk that the proposed merger might not be completed in a timely manner or at all, including the risk that the proposed merger will not occur if sufficient debt and equity financing is not obtained;



•

the Company's inability to seek specific performance to require Parent or Merger Sub to complete the merger and the fact that the Company's sole remedy in connection with Parent's failure to close the merger generally would be limited to a $94.5 million termination fee and up to $10 million for reimbursement of out-of-pocket costs and expenses, payable only in the circumstances specified in the merger agreement, which is guaranteed by ACOF III and CPPIB, severally and not jointly;



•

that Parent and Merger Sub are newly formed corporations with essentially no assets other than the equity commitments of ACOF III and CPPIB;



•

the restrictions on the conduct of the Company's business prior to the completion of the proposed merger, which may delay or prevent the Company from undertaking business opportunities that may arise and certain other actions it might otherwise take with respect to the operations of the Company pending completion of the proposed merger;



•

the potential negative effect that the pendency of the merger, or a failure to complete the merger, could have on the Company's business and relationships with its employees, vendors, landlords and customers;



•

the Company and its subsidiaries are restricted from soliciting, initiating, or encouraging the submission of alternative acquisition proposals from third parties or the making of any inquiry,




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proposal or offer that would reasonably be expected to lead to an alternative acquisition proposal;

•

the possibility that the amounts that may be payable by the Company upon the termination of the merger agreement, including a termination fee of $47.25 million and up to $10 million in out-of-pocket costs and expenses payable to the extent specified in the merger agreement in connection with Parent's enforcement of its rights to such termination fee, and the processes required to terminate the merger agreement, including the opportunity for Parent to make revisions to its merger proposal, could discourage other potential acquirors from making a competing bid to acquire the Company;



•

the fact that the $47.25 million termination fee is payable to Parent if the shareholders of the Company fail to approve the merger; and



•

the fact that an all cash transaction would be taxable to the Company's shareholders that are U.S. holders for U.S. federal income tax purposes.

        The Rollover Investors did not consider net book value, which is an accounting concept, for purposes of determining the fairness of the per share merger consideration to the Company's unaffiliated shareholders because, in their view, net book value is not indicative of the Company's market value but rather an indicator of historical costs. In addition, the Rollover Investors did not consider liquidation value because of their belief that liquidation sales generally result in proceeds substantially less than sales of a going concern, because of the impracticability of determining a liquidation value given the significant execution risk involved in any breakup, because they considered the Company to be a viable going concern, and because the Company will continue to operate its business following the merger. Finally, the Rollover Investors did not consider a pre-merger going concern value of the Company's common stock as a public company for the purposes of determining the fairness of the per share merger consideration to the Company's unaffiliated shareholders because, following the merger, the Company will have a significantly different capital structure. However, to the extent the pre-merger going concern value was reflected in the public market trading price of the Company's common stock immediately prior to the announcement of the initial acquisition proposal on March 11, 2011 (i.e., unaffected by any speculation or expectation that a transaction would occur), the per share merger consideration of $22.00 represents a significant premium to the going concern value of the Company.

        The foregoing discussion of the information and factors considered and given weight by the Rollover Investors in connection with the fairness of the merger is not intended to be exhaustive but is believed to include all material factors considered by them. The Rollover Investors did not find it practicable to, and did not, quantify or otherwise attach relative weights to the foregoing factors in reaching their position as to the fairness of the merger. Rather, the Rollover Investors reached their




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position as to the fairness of the merger after considering all of the foregoing as a whole. The Rollover Investors believe these factors provide a reasonable basis upon which to form their position regarding the fairness of the merger to the Company's unaffiliated shareholders. This position should not, however, be construed as a recommendation to any Company shareholder to approve the merger agreement. None of the Rollover Investors makes any recommendation as to how shareholders of the Company should vote their shares of Company common stock relating to the merger.


Position of Parent, Merger Sub, the Ares Filing Persons and CPPIB as to the Fairness of the Merger


        Under a possible interpretation of the rules of the SEC governing "going private" transactions, one or more of Parent, Merger Sub, the Ares Filing Persons and CPPIB may be deemed to be affiliates of the Company and, therefore, may be required to express their position regarding the fairness of the merger to the Company's unaffiliated shareholders. Parent, Merger Sub, the Ares Filing Persons and CPPIB are making the statements included in this section with respect to the fairness of the merger solely for the purpose of complying with the requirements of Rule 13e-3 and related rules and regulations under the Exchange Act. The views of Parent, Merger Sub, the Ares Filing Persons and CPPIB should not be construed as a recommendation




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to any Company shareholder as to how that shareholder should vote on the proposal to approve the merger agreement.

        Parent and Merger Sub attempted to negotiate the terms of a transaction that would be most favorable to them, and not to the shareholders of the Company, and, accordingly, did not negotiate the merger agreement with a goal of obtaining terms that were fair to such shareholders. None of Parent, Merger Sub, the Ares Filing Persons or CPPIB believes that it has or had any fiduciary duty to the Company or its shareholders, including with respect to the merger and its terms. The unaffiliated shareholders of the Company were, as described elsewhere in this proxy statement, represented by the special committee of the Board that negotiated with Parent, Merger Sub, the Ares Filing Persons and CPPIB, with the assistance of the special committee's legal and financial advisors.

        None of Parent, Merger Sub, the Ares Filing Persons or CPPIB participated in the deliberation process of the special committee or the Board as to, or received advice from the special committee's or the Company's legal or financial advisors as to, the substantive or procedural fairness of the merger to the unaffiliated shareholders of the Company, nor did they undertake any independent evaluation or other analysis of the fairness of the merger or engage a financial advisor for such purpose. Nevertheless, they believe that the proposed merger is substantively fair to the unaffiliated shareholders based on the following factors:

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the fact that the $22.00 price per share of Company common stock represents a premium of approximately 32% over the closing price of the Company's common stock on March 10, 2011, the day before the Company announced that it had received a proposal from members of the Gold/Schiffer Family and LGP, and 33.6% and 33.2% premiums over the 1-week and 1-month average trading price prior to such announcement;



•

the current and historical market prices for the Company's common stock, including those set forth in the table as described in "Important Information Regarding the Company—Market Price of Common Stock and Dividend Information", which price has not closed over $22.00 since April 2004;



•

the fact that the merger consideration is all cash, which provides certainty of value and liquidity to unaffiliated shareholders and allows the unaffiliated shareholders not to be exposed to the risks and uncertainties relating to the prospects of the Company;



•

the fact that Parent and Merger Sub had obtained third party commitments for equity and debt financing for the transaction and, pursuant to the merger agreement, each of Parent and Merger Sub is obligated to use its reasonable best efforts to obtain the debt financing on the terms of such commitments as described in "—Debt Financing";






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•

the limited guarantees of ACOF III and CPPIB as described in "—Remedies; Limited Guarantees" in the Company's favor with respect to their pro rata portions of Parent's and Merger Sub's obligations under certain instances to pay a termination fee and certain expenses of the Company;



•

the fact that the special committee and the Board received an opinion from Lazard, dated October 11, 2011, to the effect that, as of that date and based upon and subject to the assumptions, procedures, factors, qualifications and other matters and limitations set forth in its opinion, the merger consideration to be paid to holders of the Company common stock (other than the Rollover Investors, the Company, Parent, Merger Sub and holders who are entitled to and properly demand an appraisal of their shares) in the merger was fair, from a financial point of view, to such holders, as more fully described below in "—Opinion of Financial Advisor to Our Special Committee and Board of Directors" (the full text of the written opinion of Lazard is attached asAnnex B to this proxy statement);






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the Company's ability to, under certain circumstances, (a) provide information to, and participate in discussions and negotiations with, third parties regarding unsolicited acquisition proposals and (b) terminate the merger agreement in order to enter into a definitive agreement related to a Superior Company Proposal, subject to paying a termination fee of $47.25 million (equal to approximately 3% of the equity value of the transaction);



•

the Company's ability to, under certain circumstances, receive a termination fee of $94.5 million (equal to approximately 6% of the equity value of the transaction);



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the fact that the special committee determined, by the unanimous vote of all members of the special committee, and the Board determined, by the unanimous vote of its independent directors, that the merger is fair (both substantively and procedurally) to, and in the best interests of, the Company and its shareholders (other than the Rollover Investors and Parent and its affiliates to the extent that any of them own shares of the Company's Common Stock);unaffiliated shareholders; and



•

the fact that the Company's shareholders (other than the Rollover Investors) will have the right to dissent from the merger and to demand judicial determination of the fair market value of their shares under California law (so long as dissenters' demands have been filed with respect to at least five percent of the outstanding shares of the Company's common stock).

        Parent, Merger Sub, the Ares Filing Persons and CPPIB believe that the proposed merger is procedurally fair to the unaffiliated shareholders based on the following factors:

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that the special committee is composed of three independent directors who are not affiliated with the Rollover Investors, ACOF III or CPPIB or any entity affiliated with ACOF III or CPPIB, are not employees of the Company, and other than their receipt of Board and special committee fees (which are not contingent upon the consummation of the merger or the special committee's or Board's recommendation of the merger) and their interests described under "—Interests of the Company's Directors and Executive Officers in the Merger," have no interests in the merger different from, or in addition to, those of the Company's unaffiliated shareholders;



•

that while the special committee and the Company did not retain any representative to act solely on behalf of the unaffiliated shareholders for purposes of negotiating a transaction or preparing a report, the special committee retained and was advised by independent legal counsel and an independent financial advisor;



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that the special committee met more than 50 times between March 11, 2011, and October 10, 2011, actively set strategy for and oversaw the auction process and the negotiation of pricing and




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other terms with ACOF III/CPPIB and made all material decisions relating to the Company's alternatives beginning on March 11, 2011;





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the fact that the special committee was given authority to, among other things, review, evaluate and negotiate the terms of the proposed merger and the recognition by the special committee that it had the authority to decide not to approve the merger or any other transaction;



•

the price of $22.00 per share cash consideration to be paid in respect of each share of the Company's common stock and the other terms and conditions of the merger agreement resulted from extensive arm's-length negotiations between Parent and its advisors, on the one hand, and the special committee and its advisors, on the other hand;



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the fact that the Board approved the merger agreement by a unanimous vote of its independent directors following the unanimous recommendation of the special committee;



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the special committee and the Board received an opinion from Lazard, as described above; and






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•

the availability of statutory dissenters' rights to the shareholders who are entitled to demand and have properly demanded such rights and have complied with all of the other required procedures under California law for exercising dissenters' rights, which require the Company to purchase at their fair market value the shares of the Company's common stock owned by such holders of dissenting shares, as described in "Dissenters' Rights" (so long as dissenters' demands have been filed with respect to at least five percent of the outstanding shares of the Company's common stock).

        Parent, Merger Sub, the Ares Filing Persons and CPPIB note that the merger does not require approval by holders of at least a majority of the shares of Company common stock held by the Company's unaffiliated shareholders. Parent, Merger Sub, the Ares Filing Persons and CPPIB do not believe that the absence of such approval should affect the fairness determination because, among other things:

•

the Rollover Investors, who are entitled to vote at the special meeting, are proposing to dispose of approximately 80% of the shares of Company common stock owned by the Rollover Investors and their affiliates in the merger for the same consideration as will be received by the unaffiliated shareholders in the merger. Accordingly, Parent, Merger Sub, the Ares Filing Persons and CPPIB believe that the interests of the Rollover Investors should be substantially aligned with the interests of the unaffiliated shareholders with respect to the merger vote; and



•

the approval of the merger agreement will still require the approval of approximately 25% of the unaffiliated shareholders.

        In the course of reaching their fairness determinations to the Company's unaffiliated shareholders, Parent, Merger Sub, the Ares Filing Persons and CPPIB also considered a variety of risks and other countervailing factors related to the merger agreement and the merger, including:

•

that the shareholders of the Company (other than the Rollover Investors) will not participate in any future earnings or growth of the Company's business and will not benefit from any potential sale to a third party in the future, or from any appreciation in the Company's value;



•

the risk that the proposed merger might not be completed in a timely manner or at all, including the risk that the proposed merger will not occur if sufficient debt and equity financing is not obtained;



•

the Company's inability to seek specific performance to require Parent or Merger Sub to complete the merger and the fact that the Company's sole remedy in connection with Parent's failure to close the merger generally would be limited to a $94.5 million termination fee and up to $10 million for reimbursement of out-of-pocket costs and expenses, payable only in the circumstances specified in the merger agreement, which is guaranteed by ACOF III and CPPIB, severally and not jointly;



•

that Parent and Merger Sub are newly formed corporations with essentially no assets other than the equity commitments of ACOF III and CPPIB;



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the potential negative effect that the pendency of the merger, or a failure to complete the merger, could have on the Company's business and relationships with its employees, vendors, landlords and customers;



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the Company and its subsidiaries are restricted from soliciting, initiating, or encouraging the submission of alternative acquisition proposals from third parties or the making of any inquiry, proposal or offer that would reasonably be expected to lead to an alternative acquisition proposal;




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•

the possibility that the amounts that may be payable by the Company upon the termination of the merger agreement, including a termination fee of $47.25 million and up to $10 million in out-of-pocket costs and expenses payable to the extent specified in the merger agreement in connection with Parent's enforcement of its rights to such termination fee, and the processes required to terminate the merger agreement, including the opportunity for Parent to make revisions to its merger proposal, could discourage other potential acquirors from making a competing bid to acquire the Company;



•

the fact that the $47.25 million termination fee is payable by the Company to Parent if the shareholders of the Company fail to approve the merger; and



•

the fact that an all cash transaction would be taxable to the Company's shareholders that are U.S. holders for U.S. federal income tax purposes.

        In the course of reaching their fairness determinations, Parent, Merger Sub, the Ares Filing Persons and CPPIB did not consider the Company's net book value, which is an accounting concept, to be a factor in determining the substantive fairness of the transaction to the unaffiliated shareholders because they believed that net book value is not a material indicator of the value of the Company's equity but rather an indicator of historical costs. Parent, Merger Sub, the Ares Filing Persons and CPPIB did not establish a pre-merger going concern value for the Company's equity as a public company for the purposes of determining the fairness of the transaction to the unaffiliated shareholders because, following the merger, the Company will have a significantly different capital structure, which will result in different opportunities and risks for the business as a more highly leveraged private company. However, to the extent the pre-merger going concern value was reflected in the pre-announcement per share price of the Company common stock, the per share merger consideration of $22.00 represented a premium to the going concern value of the Company. Parent, Merger Sub, the Ares Filing Persons and CPPIB did not consider the liquidation value of the Company's assets to be a factor in determining the fairness of the transaction to the unaffiliated shareholders because they considered the Company to be a viable ongoing business and they believed that the liquidation value of the Company would be significantly lower than the Company's value as an ongoing business and that, due to the fact that the Company is being sold as an ongoing business, the liquidation value is irrelevant to a determination as to whether the merger is fair to the unaffiliated shareholders. In addition, Parent, Merger Sub, the Ares Filing Persons and CPPIB did not consider the prices paid by the Company for past purchases of the Company's common stock because no such purchases have been made during the last two years other than in connection with the payment by holders of performance stock units of taxes associated with the vesting of the performance stock units. In making their determination as to the substantive fairness of the merger to the unaffiliated shareholders, Parent, Merger Sub, the Ares Filing Persons and CPPIB were not aware of any firm offers during the prior two years by any person for (a) the merger or consolidation of the Company with another company, (b) the sale or transfer of all or substantially all of the Company's assets or (c) a purchase of the Company's securities that would enable the holder to exercise control of the Company, except the offer by LGP and members of the Gold/Schiffer family described in "—Background of the Merger."




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        The foregoing discussion of the information and factors considered and given weight by Parent, Merger Sub, the Ares Filing Persons and CPPIB in connection with the fairness of the merger is not intended to be exhaustive but is believed to include all material factors considered by Parent, Merger Sub, the Ares Filing Persons and CPPIB. Parent, Merger Sub, the Ares Filing Persons and CPPIB did not find it practicable to assign, and did not, assign or otherwise attach, relative weights to the individual factors in reaching their position as to the fairness of the merger. Rather, their fairness determinations were made after consideration of all of the foregoing factors as a whole. Parent, Merger Sub, the Ares Filing Persons and CPPIB believe the foregoing factors provide a reasonable basis for their belief that the merger is substantively and procedurally fair to the unaffiliated shareholders of the Company. This belief should not, however, be construed as a recommendation to any shareholders of




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the Company to approve the merger agreement. Parent, Merger Sub, the Ares Filing Persons and CPPIB do not have any recommendation as to how the shareholders of the Company should vote their shares of the Company relating to the merger.


Plans for the Company After the Merger


        It is expected that, upon consummation of the merger, the operations of 99¢ Only Stores will be conducted substantially as they currently are being conducted, except that we will (a) cease to have publicly traded equity securities and instead be a wholly owned subsidiary of Parent and (b) have a significant amount of debt, whereas now we have none. Parent has advised us that it does not have any current plans or proposals and is not in negotiations to cause us to engage in any of the following:

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an extraordinary corporate transaction following consummation of the merger involving our corporate structure, business or management, such as a merger, reorganization or liquidation;



•

the sale or transfer of a material amount of assets; or



•

any other material changes in our business.

        We expect, however, that both before and following consummation of the merger, the management and/or board of directors of the surviving corporation will continue to assess our assets, corporate and capital structure, capitalization, operations, business and properties to determine what changes, if any, would be desirable following the merger to enhance the business and operations of the surviving corporation and may cause the surviving corporation to engage in the types of transactions set forth above if the management and/or board of directors of the surviving corporation decides that such transactions are in the best interest of the surviving corporation upon such review. The surviving corporation expressly reserves the right to make any changes it deems appropriate in light of such evaluation and review or in light of future developments.


Effects of the Merger


        If the merger agreement is approved by our shareholders and the other conditions to the closing of the merger are either satisfied or waived (to the extent such conditions are waivable), Merger Sub will be merged with and into 99¢ Only Stores with 99¢ Only Stores continuing as the surviving corporation.

        If the merger is completed, each share of our common stock will be converted into the right to receive $22.00 in cash, without interest and less any applicable withholding taxes, other than (a) shares owned by any of our shareholders who are entitled to and who properly exercise dissenters' rights under California law, (b) shares owned by the Company, and (c) shares owned by Parent, Merger Sub or any other direct or indirect wholly owned subsidiary of Parent, including shares to be contributed to Parent immediately prior to the completion of the merger by the Rollover Investors. Each outstanding stock option to purchase the Company's common stock granted under our equity incentive plans and outstanding as of immediately prior to the effective time of the merger will become fully vested and




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exercisable immediately prior to and contingent on the closing of the merger and will be cancelled as of the effective time of the merger. The holder of such stock option will be entitled to receive a cash payment for each share of our common stock subject to such stock option, equal to the excess, if any, of (a) the $22.00 per share merger consideration over (b) the option exercise price payable in respect of such share of our common stock issuable under such stock option, without interest and less any applicable withholding taxes. Each outstanding restricted stock unit granted under our equity incentive plans will be cancelled as of the effective time of the merger. The holder of such restricted stock unit will be entitled to receive a cash payment equal to the product of (a) the number of unforfeited shares of our common stock subject to the restricted stock unit, multiplied by (b) the $22.00 per share merger consideration, without interest and less any applicable withholding taxes. Each outstanding performance




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stock unit granted under our equity incentive plans will be cancelled as of the effective time of the merger. The holder of such performance stock unit will be entitled to receive a cash payment equal to the product of (a) the number of unforfeited shares of our common stock subject to the performance stock unit, multiplied by (b) the $22.00 per share merger consideration, without interest and less any applicable withholding taxes.

        Following the merger, all of the equity interests in 99¢ Only Stores will be owned indirectly through Parent by ACOF III, CPPIB and the Rollover Investors. If the merger is completed, ACOF III, CPPIB and the Rollover Investors will be the sole beneficiaries of our future earnings and growth, if any, and they will be the only ones entitled to vote on corporate matters affecting 99¢ Only Stores following the merger. Similarly, ACOF III, CPPIB and the Rollover Investors will also bear the risks of ongoing operations, including the risks of any decrease in the value of 99¢ Only Stores after the merger and other risks related to the incurrence by the surviving corporation of significant debt as described below under"—Financing of the Merger."

        If the merger is completed, none of our shareholders other than the Rollover Investors will have any interest in 99¢ Only Stores' net book value or net earnings. The table below sets forth the direct and indirect interests in 99¢ Only Stores' net book value and net earnings of the Rollover Investors (including indirectly through Au Zone Investments #2, L.P.), ACOF III and CPPIB prior to and immediately after the merger, based on the net book value and net earnings for the fiscal year ended April 2, 2011, and the quarterfirst half ended July 2,October 1, 2011.

		Ownership of the Company Prior to the Merger									Ownership of the Company After the Merger										Ownership of the Company Prior to the Merger									Ownership of the Company After the Merger
		% Ownership			Net earnings for the fiscal year ended April 2, 2011			Net book value as of April 2, 2011			% Ownership			Net earnings for the fiscal year ended April 2, 2011			Net book value as of April 2, 2011				% Ownership			Net earnings for the fiscal year ended April 2, 2011			Net book value as of April 2, 2011			% Ownership			Net earnings for the fiscal year ended April 2, 2011			Net book value as of April 2, 2011
ACOF III			0.0	%	$	0		$	0			52.8	%	$	39,235		$	359,858				0.0	%	$	—		$	—			52.8	%	$	39,235		$	359,858
CPPIB			0.0	%	$	0		$	0			31.5	%	$	23,407		$	214,688				0.0	%	$	—		$	—			31.5	%	$	23,407		$	214,688
Rollover Investors			33.0	%	$	24,522		$	224,911			15.7	%	$	11,666		$	107,003				33.0	%	$	24,522		$	224,911			15.7	%	$	11,666		$	107,003

 


		Ownership of the Company Prior to the Merger									Ownership of the Company After the Merger										Ownership of the Company Prior to the Merger									Ownership of the Company After the Merger
		% Ownership			Net earnings for the quarter ended July 2, 2011			Net book value as of July 2, 2011			% Ownership			Net earnings for the quarter ended July 2, 2011			Net book value as of July 2, 2011				% Ownership			Net earnings for the first half ended October 1, 2011			Net book value as of October 1, 2011			% Ownership			Net earnings for the first half ended October 1, 2011			Net book value as of October 1, 2011
ACOF III			0.0	%	$	0		$	0			52.8	%	$	9,337		$	370,590				0.0	%	$	—		$	—			52.8	%	$	17,317		$	379,001
CPPIB			0.0	%	$	0		$	0			31.5	%	$	5,570		$	221,091				0.0	%	$	—		$	—			31.5	%	$	10,331		$	226,108
Rollover Investors			33.0	%	$	5,835		$	231,619			15.7	%	$	2,776		$	110,195				33.0	%	$	10,823		$	236,875			15.7	%	$	5,149		$	112,695

        99¢ Only Stores' common stock is currently registered under the Exchange Act and is quoted on the NYSE under symbol "NDN." As a result of the merger, 99¢ Only Stores will be privately held corporation, and there will be no public market for its common stock. After the merger, our common




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stock will cease to be quoted on the NYSE and the registration of our common stock under the Exchange Act is expected to be terminated.

        At the effective time of the merger, the directors of Merger Sub will become the directors of the surviving corporation and the current officers of 99¢ Only Stores will become the officers of the surviving corporation. The articles of incorporation and bylaws of 99¢ Only Stores will be amended as a result of the merger to be the same as set forth in exhibits to the merger agreement and will be the articles of incorporation and bylaws of the surviving corporation.




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Effects on the Company if the Merger Is Not Completed


        If the merger agreement is not approved by our shareholders or if the merger is not completed for any other reason, our shareholders will not receive any payment for their shares of common stock pursuant to the merger agreement. Instead, we will remain a public company and our common stock will continue to be registered under the Exchange Act and listed on the NYSE. The market price of our common stock prior to the public disclosure by the Company that we had received an acquisition proposal was significantly lower than the price offered in the merger. In addition, if the merger is not completed, we expect that our management will operate our business in a manner similar to that in which it is being operated today and that our shareholders will continue to be subject to the same risks and opportunities to which they currently are subject, including, among other things, the conditions of the retail industry and general economic, regulatory and market conditions.

        If the merger is not consummated, there can be no assurance as to the effect of these risks and opportunities on the future value of your shares of our common stock. For example, on March 10, 2011, the day before we announced that we had received an acquisition proposal from LGP and members of the Gold/Schiffer family, our common stock had closed at $16.68 per share. In the event the merger is not completed, the Board will continue to evaluate and review our business operations, prospects and capitalization, and make such changes as are deemed appropriate. If the merger agreement is not approved by our shareholders, or if the merger is not consummated for any other reason, there can be no assurance that any other transaction acceptable to us will be offered in the future or that our business, prospects or results of operations will not be adversely impacted.

        If the merger agreement is terminated under certain circumstances, including termination by the Company to accept a Superior Company Proposal or termination by either Parent or the Company for failure to obtain the Shareholder Approval, we will be obligated to pay Parent a termination fee of $47.25 million. On the other hand, Parent will have to pay us a termination fee of $94.5 million if the merger agreement is terminated under certain other circumstances. For a description of the circumstances triggering payment of the termination fees, see "The Merger Agreement—Termination Fee."


Financing of the Merger


        The obligations of Parent and Merger Sub to consummate the merger are not conditioned upon the receipt of any financing. Parent estimates that the aggregate amount of consideration necessary to complete the merger and the payment of related fees and expenses in connection with the merger and the financing arrangements will be approximately $1.6 billion. This amount is expected to be funded by Parent and Merger Sub with a combination of the equity financing contemplated by the equity commitment letters and the Rollover Letter described below, the debt financing contemplated by the debt commitment letter described below, and cash of the Company. These equity and debt financings are subject to the satisfaction of the conditions set forth in the commitment letters pursuant to which the financings will be provided.




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Equity Financing


ACOF III Equity Commitment

        Parent has received an equity commitment letter, dated October 11, 2011, from ACOF III. Pursuant to this equity commitment letter, ACOF III has committed, subject to the terms and conditions set forth therein, to purchase, or cause to be purchased, an aggregate of $370.9 million of equity of Parent solely for the purpose of funding ACOF III's portion of the equity financing of the merger consideration and all other amounts required to be paid by Parent or Merger Sub pursuant to and in accordance with the merger agreement, together with related fees and expenses. This equity commitment may be reduced to the extent that Parent and/or Merger Sub do not require the full amount of the equity commitment to fund the aggregate merger consideration and any other amounts




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required to be paid by them pursuant to and in accordance with the merger agreement, including the merger consideration that is not required to be paid to the Rollover Investors due to their contribution of certain shares of the Company's common stock to Parent pursuant to the Rollover Letter, as described below. Additional amounts may be funded by ACOF III or its affiliates in connection with an election by ACOF III and CPPIB to acquire all of the commitments in respect of the Bridge Loans, as described in "—Debt Financing" below.

        The obligation of ACOF III to fund its equity commitment under its equity commitment letter is subject to the following conditions:

•

the satisfaction (or waiver by Parent) of each of the conditions precedent to Parent's and Merger Sub's obligations to consummate the transaction contemplated by the merger agreement;



•

the substantially concurrent funding of the financing transactions contemplated by the debt commitment letter (or any replacement debt commitment letter as contemplated by the merger agreement); and



•

the substantially concurrent occurrence of the closing of the merger.

CPPIB Equity Commitment

        Parent has received an equity commitment letter, dated October 11, 2011, from CPPIB. Pursuant to this equity commitment letter, CPPIB has committed, subject to the terms and conditions set forth therein, to purchase, or cause to be purchased, an aggregate of $265.0 million of equity of Parent solely for the purpose of funding CPPIB's portion of the equity financing of the merger consideration and all other amounts required to be paid by Parent or Merger Sub pursuant to and in accordance with the merger agreement, together with related fees and expenses. This equity commitment may be reduced to the extent that Parent and/or Merger Sub do not require the full amount of the equity commitment to fund the aggregate merger consideration and any other amounts required to be paid by them pursuant to and in accordance with the merger agreement, including the merger consideration that is not required to be paid to the Rollover Investors due to their contribution of certain shares of the Company's common stock to Parent pursuant to the Rollover Letter, as described below. Additional amounts may be funded by CPPIB or its affiliates in connection with an election by ACOF III and CPPIB to acquire all of the commitments in respect of the Bridge Loans, as described in "—Debt Financing" below.

        The obligation of CPPIB to fund its equity commitment under its equity commitment letter is subject to the following conditions:

•

the satisfaction (or waiver by Parent) of each of the conditions precedent to Parent's and Merger Sub's obligations to consummate the transaction contemplated by the merger agreement;






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•

the substantially concurrent funding of the financing transaction contemplated by the debt commitment letter (or any replacement debt commitment letter as contemplated by the merger agreement); and



•

the substantially concurrent occurrence of the closing of the merger.

Rollover Investment

        The Rollover Investors have committed, subject to the terms and conditions set forth in the Rollover Letter, dated October 11, 2011, to contribute an aggregate of 4,545,451 shares of the Company's common stock (with an aggregate value of approximately $100.0 million based on the merger consideration) to Parent immediately prior to the consummation of the merger in exchange for shares of common stock of Parent. The shares contributed will be cancelled in connection with the merger and will not be entitled to receive any merger consideration upon completion of the merger.

        The obligations of Parent to consummate the transactions contemplated by the Rollover Letter are subject to (a) the satisfaction or waiver by Parent of each of the conditions precedent to Parent's and




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Merger Sub's obligations to consummate the transaction contemplated by the merger agreement, (b) the execution and delivery by the Rollover Investors of a stockholders agreement having terms consistent with those set forth in an exhibit to the Rollover Letter, (c) with respect to each Rollover Investor that is identified as an employee or consultant on an exhibit to the Rollover Letter, such Rollover Investor having executed and delivered an employment agreement or a consulting agreement having terms consistent with those set forth in an exhibit to the Rollover Letter and (d) the substantially concurrent closing of the merger.

        The obligations of each Rollover Investor to transfer, contribute and deliver the shares of the Company's common stock to Parent pursuant to the Rollover Letter are subject to (a) the satisfaction or waiver by Parent of each of the conditions precedent to Parent's and Merger Sub's obligations to consummate the transaction contemplated by the merger agreement, (b) the execution and delivery by each other party thereto that is not a Rollover Investor of a stockholders agreement having terms consistent with those set forth in an exhibit to the Rollover Letter, (c) if such Rollover Investor is identified as an employee or consultant on an exhibit to the Rollover Letter, Parent having executed and delivered an employment agreement or a consulting agreement with respect to such Rollover Investor having terms consistent with those set forth in an exhibit to the Rollover Letter and (d) the substantially concurrent closing of the merger.

        The foregoing discussion of the equity commitment letters from ACOF III and CPPIB and the Rollover Letter is only a summary of their material terms and may not include all of the information that is important to a particular shareholder. Shareholders are urged to read the entirety of the equity commitment letters from ACOF III and CPPIB and the Rollover Letter, a copy of each of which has been filed as Exhibits (d)(4), (d)(5), and (d)(7), respectively, to the Schedule 13E-3 filed by the Company, the Rollover Investors, Parent, Merger Sub, the Ares Filing Persons and CPPIB with the SEC on October 27, 2011, for more details regarding the such equity commitment letters and the Rollover Letter.


Debt Financing


        In connection with the execution and delivery of the merger agreement, as of October 4, 2011, Parent entered into a debt commitment letter with Royal Bank of Canada and certain of its affiliates (collectively, "RBC") and Bank of Montreal and certain of its affiliates (collectively, "BMO"), pursuant to which and subject to the conditions set forth therein each of RBC and BMO (each, an "Initial Lender" and, collectively, the "Initial Lenders") committed severally to provide to Parent a portion (and together equaling 100%) of $675.0 million of senior secured credit facilities, consisting of (a) a $150.0 million senior secured asset-based first lien revolving credit facility (the "Revolving Facility")




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and (b) a senior secured first lien term loan facility (the "Term Facility" and, together with the Revolving Facility, the "Senior Facilities") in an aggregate principal amount equal to (i) $525.0 million minus (ii) the amount (not to exceed $50.0 million) of the Revolving Facility drawn on the closing date of the merger. Notwithstanding the foregoing, of the $675.0 million commitment, only $575.0 million will be available upon the closing of the merger for purposes of paying the merger consideration.

        In addition, to the extent the borrower under the Senior Facilities (the "Borrower") does not receive $250.0 million of gross cash proceeds from the issuance of senior unsecured notes ("Senior Notes") on the closing date of the merger, the Borrower may elect and the Initial Lenders have committed severally to provide to the Borrower a portion (and together equaling 100%) of $250.0 million (minus the amount of gross cash proceeds from any Senior Notes issuance on the closing date of the merger) in senior unsecured increasing rate bridge loans (the "Bridge Loans") under a new senior unsecured bridge credit facility (the "Bridge Facility" and, together with the Senior Facilities, the "Facilities").

        Within a specified time period after receiving notice from the Initial Lenders prior to the commencement of the marketing period with respect to the Senior Notes, ACOF III and CPPIB (the "Sponsors"), any funds advised by either Sponsor's affiliated management companies, affiliates of the




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Sponsors and/or the Rollover Investors will have the option to acquire all but not less than all of the commitments in respect of the Bridge Loans and to fund the Bridge Loans on the closing date of the merger. If this option is exercised, the person or persons exercising the option will pay an option availability fee to the Initial Lenders.

        The proceeds of the Term Facility and the Senior Notes and/or Bridge Facility will be applied to (a) finance the transactions contemplated by the merger agreement and certain fees and expenses related to the transactions contemplated by the merger agreement and (b) to refinance or repay existing indebtedness of the Company and its subsidiaries to be agreed upon between the Borrower and the Initial Lenders. The Term Facility will be available in a single drawing on the closing date of the merger.

        Loans under the Revolving Facility will be made available on the closing date of the merger in an aggregate principal amount of up to $50.0 million to finance the transactions contemplated by the merger agreement and certain fees and expenses related to the transactions contemplated by the merger agreement and, subject to certain exceptions, to refinance or repay all existing third party indebtedness for borrowed money of the Borrower, the Company, and their respective subsidiaries. Letters of credit may be issued on the closing date of the merger to backstop or replace letters of credit outstanding on the closing date (including by "grandfathering" those existing letters of credit in the Revolving Facility). The letters of credit and the proceeds of loans under the Revolving Facility (except as set forth above) will be available after the closing date of the merger to finance capital expenditures, to finance working capital, to finance permitted acquisitions and other investments, and for general corporate purposes.

        The debt commitment letter expires on the earliest of (a) the termination of the merger agreement in accordance with its terms, (b) the consummation of the merger with or without the funding of the Facilities and (c) 11:59 p.m., New York City time, on April 8, 2012 (or, if earlier, the Walk-Away Date).

        The Initial Lenders' commitments to provide the debt financing under the Facilities are subject to, among other things:

•

the execution and delivery of definitive documentation with respect to the applicable Facilities in accordance with the debt commitment letter (including the term sheets) and the applicable specified documentation principles;



•

the accuracy of (a) certain specified representations and warranties made by the Borrower and its restricted subsidiaries in the definitive documentation of the applicable Facilities and (b) those representations made by the Company or any other party in the merger agreement as




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are material to the interests of the lenders, but only to the extent that Parent has the right to terminate its obligations under the merger agreement as a result of a breach of those representations;





•

the consummation of the merger (without any changes, modifications or amendments to the merger agreement or any consents or waivers thereof that are materially adverse to the interests of the lenders without the prior consent of the Initial Lenders (such consent not to be unreasonably withheld, delayed or conditioned)) prior to or substantially simultaneously with the initial borrowings under the Facilities; provided, that any reduction in the purchase price for the merger of not greater than 15% will be deemed to be not materially adverse to the lenders so long as the reduction is applied (a) first, to reduce the amount of the equity contribution and (b) second, the balance (if any) to reduce, on a pro rata basis, the funded amount under the Senior Facilities on the closing date of the merger;



•

since October 11, 2011, there not having not been any Event (as defined in "The Merger Agreement—Definition of Company Material AdverseEffect and Parent Material Adverse Effect"), change or occurrence that, individually or together with any other Event, has had or would




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reasonably be expected to have a Company Material Adverse Effect (as defined in "The Merger Agreement—Definition of Company Material AdverseEffect and Parent Material Adverse Effect");



•

the consummation of the equity contribution prior to or substantially simultaneously with the initial borrowings under the Facilities, in an aggregate amount at least equal to, when combined with the fair market value of the equity of management and existing equity holders of the Company and its subsidiaries rolled over or invested in connection with the transactions contemplated by the merger agreement, 40% of the total consolidated pro forma debt and equity capitalization of Parent and its subsidiaries on the closing date of the merger after giving effect to the transactions contemplated by the merger agreement;



•

after giving effect to the transactions contemplated by the merger agreement, there being no third party indebtedness for borrowed money of the Borrower and its restricted subsidiaries outstanding (other than the Facilities, any Senior Notes or "demand securities" issued in lieu of the Senior Notes, indebtedness disclosed in or permitted to remain outstanding under the merger agreement and other indebtedness to be agreed upon between the Borrower and the Initial Lenders);



•

the delivery of certain unaudited and pro forma financial statements;



•

the delivery of customary closing documents, including, among other things, customary legal opinions, customary officer's closing certificates, organizational documents, customary evidence of authorization and good standing in jurisdictions of formation/organization, in each case of the Borrower and the Guarantors (to the extent applicable) and a customary solvency certificate as of the closing date of the merger and after giving effect to the transactions contemplated by the merger agreement with respect to the Borrower and its subsidiaries on a consolidated basis;



•

the delivery of documentation and other information about the Borrower and the Guarantors required by regulatory authorities under applicable "know your customer" and anti-money laundering rules and regulations (including the PATRIOT Act) that has been reasonably requested in writing by the administrative agents under the Senior Facilities and the Initial Lenders at least ten days prior to the closing date of the merger;



•

with respect to the Senior Facilities, execution and delivery of documents and instruments required to create and perfect the security interests in the Revolver Collateral (as defined below) and the Remaining Collateral (as defined below) and, if applicable, those documents and instruments being in the proper form for filing (it being understood that, to the extent any security interest in any Revolver Collateral or Remaining Collateral (subject to certain




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exceptions) is not or cannot be provided and/or perfected on the closing date of the merger after use of commercially reasonable efforts to do so or without undue burden or expense, then the provision and/or perfection of a security interest in that collateral will not constitute a condition precedent to the availability of the Facilities on the closing date, but instead will be required to be provided and/or perfected within 90 days after the closing date of the merger (subject to extensions in the reasonable discretion of the administrative agent under the applicable Facility));





•

minimum excess availability under the Revolving Facility and a borrowing base (together with unrestricted cash and cash equivalents of the Company and its subsidiaries) of at least $50 million at the closing of the merger, after giving effect to the initial borrowing under the Revolving Facility, and closing costs;



•

with respect to the Revolving Facility, the delivery of (a) a field examination and inventory appraisal and such other reports, audits or certifications as the administrative agent under the Revolving Facility and the Initial Lenders have reasonably requested at least ten days prior to the closing date of the merger and (b) a borrowing base certificate prepared as of the last day of the last month ended at least 15 days prior to the closing date of the merger;




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•

with respect to the Bridge Facility, (a) the appointment by Parent of one or more investment banks to sell or privately place the Senior Notes (which condition Parent has satisfied by appointing Royal Bank of Canada, BMO Capital Markets and Deutsche Bank Securities Inc. to sell or privately place the Senior Notes), (b) the provision by the Borrower to the investment banks of a customary preliminary offering memorandum suitable for use in a customary U.S. "high yield road show" relating to the Senior Notes and in customary form for preliminary offering memoranda used in private placements of non-convertible debt securities under Rule 144A of the Securities Act of 1933, as amended, including or incorporating all financial statements and other information that would customarily be included in offering memoranda for use in Rule 144A debt offerings (other than a "description of notes" and information customarily provided by the investment banks or their counsel), and (c) drafts of customary "comfort" letters with respect to the financial information in the offering memorandum by auditors of the Company which those auditors are prepared to issue upon completion of customary procedures;



•

the investment banks referred to in the immediately preceding condition having been afforded a period of at least 15 consecutive business days (ending not earlier than the third business day prior to the closing date of the merger) following the satisfaction of the immediately preceding condition to seek to offer and sell or privately place the Senior Notes with qualified purchasers thereof;provided, that the marketing period shall not include any day from November 21, 2011, through November 25, 2011, and shall either conclude on or before December 19, 2011, or commence on or after January 4, 2012; and



•

the payment of specified fees and expenses due to the Initial Lenders on the closing date of the merger, to the extent invoiced at least three business days prior to the closing date of the merger.

        The Initial Lenders' commitments to provide the debt financing under the Facilities are not conditioned upon a successful syndication of any of the Facilities with other financial institutions. The debt commitment letter and the commitments thereunder may not be assigned by any party thereto (other than by (a) an Initial Lender to any lender, subject to the limitations set forth therein or (b) Parent, to the Borrower, the Company or another entity that is the ultimate borrower, in each case, so long as such entity is, or will be, controlled by ACOF III, CPPIB and the Rollover Investors after giving effect to the transactions and shall own the Company or be the successor to the Company) without the prior written consent of each other party thereto.

        As of the date of this proxy statement, no alternative financing arrangements or alternative financing plans have been made in the event the debt financing described above is not available as anticipated. The documentation governing the Facilities has not been finalized and, accordingly, their




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actual terms may differ from those described in this proxy statement. Although there can be no assurance, Parent believes that cash flow from operations should be sufficient to service the repayment obligations under the Facilities for the foreseeable future. Except as described herein, there is no plan or arrangement regarding the refinancing or repayment of the Facilities.

        Interest under the Term Facility will be payable at either (a) a LIBOR-based rate (subject to a floor of 1.50%)plus 6.00% or (b) an alternate base rate (determined in the same manner as under the Revolving Facility)plus 5.00%, at the option of the Borrower.

        Interest under the Revolving Facility will be fixed for a period of six months at either (a) a LIBOR-based rateplus 2.00% or (b) an alternate base rate (based on the greatest of the prime rate as published in the Wall Street Journal, the federal funds effective rateplus 0.50%, and the LIBOR quoted rate plus 1.00%)plus 1.00%, at the option of the Borrower. Thereafter the Revolving Facility will have variable pricing, based either on a LIBOR-based rateplus an applicable margin of between 1.75% and 2.25% or an alternate base rate (determined as set forth in the preceding sentence)plus an applicable spread of between 0.75% and 1.25%, in each case based on a pricing grid depending on the Borrower's average daily excess availability.




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        Interest under the Bridge Loans will initially be payable at a LIBOR-based rate (subject to a floor of 1.50%) plus 9.50%, which shall increase, following the third month after the closing date of the merger, by 0.50% each fiscal quarter thereafter to a specified cap (based on certain ratings). Interest on Bridge Loans will be payable quarterly in arrears.

        The Senior Facilities will be guaranteed on a joint and several basis by Parent and by each existing and subsequently acquired or organized direct or indirect wholly owned domestic restricted subsidiary of Parent other than the Borrower and immaterial and certain other subsidiaries (the "Subsidiary Guarantors" and, together with Parent, the "Guarantors").

        The Bridge Loans will be guaranteed on a joint and several basis by each Guarantor on a senior unsecured basis.

        The Term Facility will be secured by (a) a first priority perfected security interest, subject to permitted liens and other agreed upon exceptions and limitations, in the Remaining Collateral and (b) a second priority security interest, subject to permitted liens and other agreed upon exceptions, in the Revolver Collateral.

        The Revolving Facility will be secured by (a) a first priority perfected security interest, subject to permitted liens and other agreed upon exceptions and limitations, in all cash, cash equivalents, accounts receivable, inventory and related intellectual property rights of the Borrower and the Guarantors (collectively, the "Revolver Collateral") and (b) a second priority security interest, subject to permitted liens and other agreed upon exceptions and limitations, in substantially all other tangible and intangible personal property of the Borrower and each Subsidiary Guarantor, including (i) all of the capital stock of the Borrower, each direct wholly owned restricted subsidiary of the Borrower, and each Subsidiary Guarantor, and (ii) 65% of the voting stock and 100% of the non-voting stock of each first tier foreign subsidiary and foreign subsidiary holding company (collectively, the "Remaining Collateral").

        The Term Facility will mature on the date that is seven years after the closing date of the merger and will amortize in equal quarterly installments in aggregate annual amounts equal to a percentage of the original principal amount of the Term Facility with the balance payable on the seventh anniversary of the closing date of the merger. The Revolving Facility will mature on the date that is five years after the closing date of the merger.

        Except in certain circumstances, any Bridge Loan not paid in full on or before the first anniversary of the closing date of the merger will be automatically converted into a senior unsecured term loan with a maturity of eight years after the closing date of the merger.




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        The foregoing discussion of the debt commitment letter and the terms of the Facilities is only a summary of their material terms and may not include all of the information that is important to a particular shareholder. Shareholders are urged to read the entire debt commitment letter, a copy of which has been filed as Exhibit (b) to the Schedule 13E-3 filed by the Company, the Rollover Investors, Parent, Merger Sub, the Ares Filing Persons and CPPIB with the SEC on October 27, 2011, for more details regarding the debt commitment letter.


Material United States Federal Income Tax Consequences


        The following is a summary of certain material U.S. federal income tax consequences of the merger that are relevant to U.S. holders (as defined below) of the Company's common stock whose shares will be converted to cash in the merger and who will not own (actually or constructively) any shares of the Company's common stock after the merger. The following discussion does not address the tax consequences to shareholders who are not U.S. holders, nor does it purport to consider all aspects of U.S. federal income taxation that might be relevant to beneficial holders of the Company's common stock. The discussion is based on current provisions of the Internal Revenue Code of 1986, as amended (the "Code"), existing, proposed, and temporary regulations promulgated under the Code, and rulings,




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administrative pronouncements, and judicial decisions as in effect on the date of this proxy statement, changes to which could materially affect the tax consequences described below and could be made on a retroactive basis. The discussion applies only to beneficial holders of the Company's common stock in whose hands the shares are capital assets within the meaning of Section 1221 of the Code and may not apply to beneficial holders who acquired their shares pursuant to the exercise of stock options or other compensation arrangements with the Company or who hold their shares as part of a hedge, straddle, conversion or other risk reduction transaction or who are subject to special tax treatment under the Code (such as foreign persons, dealers in securities or foreign currency, insurance companies, other financial institutions, regulated investment companies, tax-exempt entities, former citizens or long-term residents of the United States, S corporations, partnerships and investors in S corporations and partnerships, and taxpayers subject to the alternative minimum tax). In addition, this discussion does not consider the effect of any state, local, or foreign tax laws.

        If a partnership (or other entity taxed as a partnership for U.S. federal income tax purposes) holds shares of the Company's common stock, the tax treatment of a partner in such partnership generally will depend upon the status of the partner and the activities of the partnership. Accordingly, partnerships that hold shares of the Company's common stock and partners in such partnerships are urged to consult their tax advisors regarding the specific U.S. federal income tax consequences to them of the merger.

        For purposes of this discussion, the term "U.S. holder" means a beneficial owner of the Company's common stock that is, for U.S. federal income tax purposes, any of the following:

•

an individual who is a citizen or resident of the United States;



•

a corporation, or other entity treated as a corporation for U.S. federal income tax purposes, created in or under the laws of the United States or of any state (including the District of Columbia);



•

an estate, the income of which is subject to U.S. federal income taxation regardless of its source; or



•

a trust, if a court within the United States is able to exercise primary supervision over the administration of the trust and one or more U.S. persons have the authority to control all substantial decisions of the trust, or a trust that has a valid election in effect under applicable U.S. Treasury Regulations to be treated as a U.S. person for U.S. federal income tax purposes.




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Tax Consequences of the Merger for U.S. Holders


        The receipt of cash in exchange for the Company's common stock pursuant to the merger will be a taxable transaction for U.S. federal income tax purposes. In general, a U.S. holder who receives cash in exchange for shares pursuant to the merger will recognize gain or loss for U.S. federal income tax purposes equal to the difference, if any, between the amount of cash received (determined before the deduction of applicable withholding taxes) and the U.S. holder's adjusted tax basis in the shares surrendered for cash pursuant to the merger. Gain or loss will be determined separately for each block of shares (i.e., shares acquired at the same price per share in a single transaction) surrendered for cash pursuant to the merger. Such gain or loss will be capital gain or loss and will be long-term capital gain or loss if the U.S. holder's holding period for such shares is more than one year at the time of consummation of the merger. For non-corporate taxpayers, long-term capital gains are generally taxable at a reduced rate. Deduction of capital losses may be subject to certain limitations.


Information Reporting and Backup Withholding


        Cash payments made to U.S. holders pursuant to the merger will be reported to the recipients and the Internal Revenue Service to the extent required by the Code and applicable U.S. Treasury




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Regulations. In addition, certain non-corporate U.S. holders may be subject to backup withholding at a 28% rate on cash payments received in connection with the merger. Backup withholding will not apply, however, to a U.S. holder who (a) furnishes a correct taxpayer identification number and certifies that he, she or it is not subject to backup withholding on the Form W-9 or successor form, or (b) is otherwise exempt from backup withholding. Backup withholding is not an additional tax. Any amounts withheld under the backup withholding rules will be allowed as a refund or a credit against your U.S. federal income tax liability provided the required information is timely furnished to the Internal Revenue Service.

        The discussion set forth above is included for general information only. Each beneficial owner of shares of the Company's common stock should consult his, her or its own tax advisor with respect to the specific tax consequences of the merger to him, her or it, including the application and effect of state, local and foreign tax laws.


Remedies; Limited Guarantees


        In no event will we be entitled to monetary damages under the merger agreement other than the $94.5 million termination fee and certain out-of-pocket costs and expenses associated with judicial enforcement of Parent's obligation to pay us the termination fee for all losses and damages suffered as a result of the failure of the merger to be consummated or for any breach or failure to perform by Parent and Merger Sub under the merger agreement. Subject to certain exceptions, we are entitled to seek specific performance in order to enforce Parent and Merger Sub's obligations under the merger agreement; however, we cannot seek specific performance to require Parent or Merger Sub to cause the equity financing to be funded or to consummate the merger. Our exclusive remedy for the failure of Parent and Merger Sub to complete the merger is to receive a termination fee of $94.5 million and reimbursement of certain out-of-pocket costs and expenses, capped at $10 million, in the event that the Company successfully sues Parent to enforce the payment of the termination fee, in accordance with the terms and conditions of the merger agreement.

        Concurrently with the execution of the merger agreement, each of ACOF III and CPPIB (each, a "guarantor") entered into a limited guarantee in our favor pursuant to which it irrevocably guaranteed its pro rata portion of Parent's obligations with respect to the termination fee and expenses described above. The maximum amount payable by ACOF III in respect of its limited guarantee is $55,121,850, in the case of the termination fee payable by Parent and $5,833,000, in the case of the expenses payable by Parent to enforce the payment of the termination fee. The maximum amount payable by CPPIB in




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respect of its limited guarantee is $39,378,150, in the case of the termination fee payable by Parent and $4,167,000, in the case of the expenses payable by Parent to enforce the payment of the termination fee. These limited guarantees will terminate upon the earliest to occur of (a) the valid termination of the merger agreement under circumstances in which Parent would not be obligated to pay a termination fee, (b) the effective time of the merger, so long as ACOF III and CPPIB have satisfied their equity funding commitments, (c) the Company accepting payment of the termination fee by Parent and the payment by Parent of any expenses payable under the merger agreement, (d) the nine month anniversary of the date of a valid termination of the merger agreement, unless prior to such time the Company has notified a guarantor of a claim under a limited guarantee or Parent or Merger Sub of a claim under the merger agreement, in which case such limited guarantees will terminate in accordance with terms set forth in such limited guarantees, or (e) the Company or any of its controlled affiliates instituting any formal proceeding or bringing any other formal claim, in any litigation or other formal proceeding, against Parent, Merger Sub, ACOF III, CPPIB or certain of their respective affiliates or representatives in connection with the merger agreement or any of the transactions contemplated thereby (including under the equity commitment letters), other than any claims specifically permitted under the limited guarantees.




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        These limited guarantees are our sole recourse against ACOF III, CPPIB and certain of their respective affiliates for any damages we may incur in connection with the merger agreement and the transactions contemplated by the merger agreement.

        The foregoing discussion of the limited guarantees from ACOF III and CPPIB is only a summary of their material terms and may not include all of the information that is important to a particular shareholder. Shareholders are urged to read the entire ACOF III limited guarantee and the CPPIB limited guarantee, a copy of each of which has been filed as Exhibits (d)(2) and (d)(3), respectively, to the Schedule 13E-3 filed by the Company, the Rollover Investors, Parent, Merger Sub, the Ares Filing Persons and CPPIB with the SEC on October 27, 2011, for more details regarding such limited guarantees.


Voting Agreement


        Concurrently with the execution of the merger agreement, on October 11, 2011, Parent, the Rollover Investors and Au Zone Investments #2, L.P. (which is affiliated with the Rollover Investors) entered into the voting agreement. As of November 15, 2011, the Rollover Investors and Au Zone Investments #2, L.P. beneficially owned 23,236,812 shares of Company common stock, which represents approximately 33% of the total number of outstanding shares of the Company's common stock as of such date. Pursuant to the voting agreement, the Rollover Investors and Au Zone Investments #2, L.P. agreed, among other things, that they shall:

•

appear at the special meeting or otherwise cause all of their shares of the Company's common stock to be counted as present thereat for purposes of establishing a quorum, and respond to each request by the Company for written consent, if any;



•

vote, or cause to be voted, all of their shares of the Company's common stock in favor of the approval of the merger agreement and any related proposal necessary to consummate the merger; and



•

vote, or cause to be voted, all of their shares of the Company's common stock against any other takeover proposal, any proposal that would result in a change in the voting rights of any class of shares of the Company or the composition of the Board, and any other action that could reasonably be expected to (i) impede, interfere with, delay, discourage, adversely affect or inhibit the timely consummation of the merger or (ii) result in a breach of any representation, warranty, covenant or other obligation or agreement of the Company under the merger agreement or of the Rollover Investors or Au Zone Investments #2, L.P. under the voting agreement.

        The Rollover Investors and Au Zone Investments #2, L.P. also granted Parent an irrevocable proxy, and revoked any prior proxies relating to their shares of common stock, with respect to the




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voting of their shares in relation to the matters set forth above. The voting agreement provides that the Rollover Investors and Au Zone Investments #2, L.P. will not take certain actions that the Company is prohibited from taking under the merger agreement, including the taking of any actions with the purpose of facilitating an attempt by any person to make or propose any merger, sale of assets or other similar transaction involving the Company (other than the merger), in each case as described in "The Merger Agreement—Restrictions on Solicitations of Other Offers," except in certain circumstances following an adverse change in our Board's recommendation as to the merger where the Rollover Investors and Au Zone Investments #2, L.P. are permitted to engage in discussions in their capacity as shareholders of the Company as and to the same extent that the Company, our Board or our representatives are permitted to take such actions under the merger agreement. Further, the Rollover Investors and Au Zone Investments #2, L.P. agreed not to transfer or otherwise dispose of any of their shares, subject to certain exceptions for customary permitted transfers, or enter into any other voting agreement, whether by proxy, voting agreement or otherwise (other than the voting agreement) with respect to their shares.




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        The voting agreement will terminate on the earliest to occur of (a) the effective time of the merger, (b) the termination of the merger agreement in accordance with its terms, (c) the written agreement of Parent, the Rollover Investors and Au Zone Investments #2, L.P. or (d) the amendment, modification or waiver of any terms of the merger agreement without the prior consent of the Rollover Investors and Au Zone Investments #2, L.P. if such amendment, modification or waiver (i) changes the amount of the merger consideration or purchase price, or changes the form of such consideration, or (ii) could reasonably be expected to adversely affect any of the Rollover Investors or Au Zone Investments #2, L.P., in their capacity as a shareholder of the Company, in any material manner.

        Notwithstanding the termination of the voting agreement, the obligations of the Rollover Investors and Au Zone Investments #2, L.P. (a) to vote against any other takeover proposal, any proposal that would result in a change in the composition of the Board, and against certain other corporate actions, and (b) not to transfer or otherwise dispose of any of their shares, subject to certain exceptions for customary permitted transfers, or enter into any other voting agreements, shall survive until the earliest of (i) the twelve month anniversary of such termination, (ii) Parent's receipt of the termination fee from the Company, (iii) the Company's termination of the merger agreement as a result of a breach by Parent or Merger Sub, and (iv) the termination of the merger agreement by the mutual consent of the parties thereto. In addition, the obligations of the Rollover Investors and Au Zone Investments #2, L.P. set forth in clause (b) of the preceding sentence shall terminate if a takeover proposal receives the requisite shareholder approval and such persons have voted against such proposal.

        The foregoing discussion of the voting agreement is only a summary of its material terms and may not include all of the information that is important to a particular shareholder. Shareholders are urged to read the entire voting agreement, a copy of which has been filed as Exhibit (d)(6) to the Schedule 13E-3 filed by the Company, the Rollover Investors, Parent, Merger Sub, the Ares Filing Persons and CPPIB with the SEC on October 27, 2011, for more details regarding the voting agreement.


Interests of the Company's Directors and Executive Officers in the Merger


        In considering the recommendation of our Board with respect to the merger agreement, you should be aware that certain of the Company's directors and executive officers have interests in the merger that are different from, or in addition to, the interests of our shareholders generally, as more fully described below. Our Board was aware of these interests and considered them, among other matters, in reaching its decision to approve the merger agreement and recommend that the Company's shareholders vote in favor of approving the merger agreement. See "—Background of the Merger" and "—Purpose and Reasons for the Merger; Recommendation of Our Special Committee and Board of Directors; Fairness of the Merger" for a further discussion of these matters.




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Employment Arrangement with Mr. Schiffer


        As a condition to the obligations under the Rollover Letter, upon completion of the merger Parent and Mr. Schiffer have agreed to enter into an employment agreement having terms consistent with those included in a term sheet attached to the Rollover Letter. The employment agreement will contain a five-year term of employment. Mr. Schiffer will continue to serve as the Company's Chief Executive Officer. Mr. Schiffer will receive an annual base salary of $500,000, subject to annual review, but not decrease, by the board of directors, and he will be eligible to receive an annual target incentive bonus of 200% of his initial base salary, with a maximum annual bonus opportunity equal to 237.5% of his initial base salary. Mr. Schiffer will also be required to execute a non-competition, non-solicitation and confidentiality agreement.

        Further, in the event that Mr. Schiffer is terminated without "cause" (as defined in the term sheet) or he resigns for "good reason" (as defined in the term sheet), he will be entitled to receive the following benefits: (a) severance payments equal to (i) three times his base salary plus (ii) three times




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his target annual incentive bonus for the year of such termination, (b) full vesting of all outstanding and then-unvested stock options, (c) payment of any unpaid incentive bonus earned for a prior fiscal year, and (d) COBRA coverage for one year at the surviving corporation's sole expense or, if earlier, until Mr. Schiffer becomes eligible for comparable coverage under health plans of another employer. These payments and benefits will begin on the 60^th day following such termination, provided that Mr. Schiffer executes a general release, with 50% of the severance payments listed in (a) above to be paid in equal payments over the course of three years on the Company's regular payroll schedule and the other 50% to be paid in three annual lump-sum installments starting on the 60^th day following such termination. In the event that a "change in control" (as defined in the term sheet) occurs, 100% of Mr. Schiffer's options shall vest and become exercisable. The employment agreement term sheet also provides that the Company will be restricted from incurring a certain level of indebtedness in order to pay a dividend without the consent of Mr. Schiffer or Mr. J. Gold.


Consulting Arrangement with Mr. D. Gold


        As a condition to the obligations under the Rollover Letter, upon completion of the merger Parent and Mr. D. Gold have agreed to enter into a consulting agreement having terms consistent with those included in a term sheet attached to the Rollover Letter. The consulting agreement will contain a five-year term, and he will receive an annual consulting fee of $0.99. Such agreement may only be terminated in a limited set of circumstances, as described in the term sheet. Mr. D. Gold will also be required to execute a non-competition, non-solicitation and confidentiality agreement.


Employment Arrangement with Mr. J. Gold


        As a condition to the obligations under the Rollover Letter, upon completion of the merger Parent and Mr. J. Gold have agreed to enter into an employment agreement having terms consistent with those included in a term sheet attached to the Rollover Letter. The employment agreement will contain a five-year term of employment. Mr. J. Gold will continue to serve as the Company's President and Chief Operating Officer. Mr. J. Gold will receive an annual base salary of $400,000, subject to annual review, but not decrease, by the board of directors, and he will be eligible to receive an annual target incentive bonus of 200% of his initial base salary, with a maximum annual bonus opportunity equal to 237.5% of his initial base salary. Mr. J. Gold will also be required to execute a non-competition, non-solicitation and confidentiality agreement.

        Further, in the event that Mr. J. Gold is terminated without "cause" (as defined in the term sheet) or he resigns for "good reason" (as defined in the term sheet), he will be entitled to receive the following benefits: (a) severance payments equal to (i) three times his base salary plus (ii) three times his target annual incentive bonus for the year of such termination, (b) full vesting of all outstanding




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and then-unvested stock options, (c) payment of any unpaid incentive bonus earned for a prior fiscal year, and (d) COBRA coverage for one year at the surviving corporation's sole expense or, if earlier, until Mr. J. Gold becomes eligible for comparable coverage under health plans of another employer. In general, these payments and benefits will begin on the 60^th day following such termination, provided that Mr. J. Gold executes a general release, with 50% of the severance payments listed in (a) above to be paid in equal payments over the course of three years on the Company's regular payroll schedule and the other 50% to be paid in three annual lump-sum installments starting on the 60^th day following such termination. In the event that a "change in control" (as defined in the term sheet") occurs, 100% of Mr. J. Gold's options shall vest and become exercisable. The employment agreement term sheet also provides that the Company will be restricted from incurring a certain level of indebtedness in order to pay a dividend without the consent of Mr. J. Gold or Mr. Schiffer.




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Employment Arrangement with Mr. H. Gold


        As a condition to the obligations under the Rollover Letter, upon completion of the merger Parent and Mr. H. Gold have agreed to enter into an employment agreement having terms consistent with those included in a term sheet attached to the Rollover Letter. The employment agreement will contain a five-year term of employment. Mr. H. Gold will continue as Executive Vice President, Special Projects, of the Company. Mr. H. Gold will receive an annual base salary of $200,000, subject to annual review, but not decrease, by the board of directors, and he will be eligible to receive an annual target incentive bonus of 200% of his initial base salary, with a maximum annual bonus opportunity equal to 237.5% of his initial base salary. Mr. H. Gold will also be required to execute a non-competition, non-solicitation and confidentiality agreement.

        Further, in the event that Mr. H. Gold is terminated without "cause" (as defined in the term sheet) or he resigns for "good reason" (as defined in the term sheet), he will be entitled to receive the following benefits: (a) severance payments equal to (i) three times his base salary plus (ii) three times his target annual incentive bonus for the year of such termination, (b) full vesting of all outstanding and then-unvested stock options, (c) payment of any unpaid incentive bonus earned for a prior fiscal year and (d) COBRA coverage for one year at the surviving corporation's sole expense or, if earlier, until Mr. H. Gold becomes eligible for comparable coverage under health plans of another employer. In general, these payments and benefits will begin on the 60^th day following such termination, provided that Mr. H. Gold executes a general release, with 50% of the severance payments listed in (a) above to be paid in equal payments over the course of three years on the Company's regular payroll schedule and the other 50% to be paid in three annual lump-sum installments starting on the 60^th day following such termination. In the event that a "change in control" (as defined in the term sheet) occurs, 100% of Mr. H. Gold's options shall vest and become exercisable.


Shareholders Agreement with Messrs. Schiffer, D. Gold, J. Gold and H. Gold


        The Rollover Letter included a term sheet regarding a shareholders agreement that will be entered into concurrently with the completion of the merger.

Board Representation

        Pursuant to that term sheet, each of Messrs. Schiffer, J. Gold and H. Gold will serve on the board of directors of Parent so long as they remain employed as, respectively, the Company's Chief Executive Officer, President and Chief Operating Officer and Executive Vice President. In addition, the term sheet states that Mr. D. Gold will have the title of Chairman Emeritus (or a similar title) and board observer rights so long as he is a consultant of Parent.




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Equity Incentive Plan

        Parent will establish an equity incentive plan in connection with the closing of the merger. Under this plan, Parent will make available an aggregate of 10.5% of the fully diluted common equity of Parent immediately following the closing of the merger. Option awards with respect to 5% of the fully-diluted common equity of Parent promptly following the closing will be awarded in the aggregate to Messrs. Schiffer, J. Gold, H. Gold and Ms. Karen Schiffer, with the allocation among them to be determined prior to or promptly following the closing of the merger. The remaining 5.5% of the fully diluted common equity of Parent will be reserved for issuance to other senior management and key employees. Each option under the plan will vest in equal annual installments over five years, as described in the shareholder agreement term sheet, and have an exercise price equal to the fair market value at time of grant, including those options granted at closing, which will have an exercise price equal to the merger consideration of $22.00 per share.




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Put Option

        Under the shareholder agreement term sheet, in the event that any of Messrs. Schiffer, J. Gold or H. Gold are terminated without "cause" or resigns for "good reason" (as such terms are defined in their respective employment agreements), such terminated employee will have a put option to cause Parent to purchase certain of his shares (or shares such person holds through affiliates) of Parent's common stock at the greater of cost (less any distributions received thereon) and fair market value within twelve months following such termination, subject to extension under certain circumstances. This put option is subject to other limitations, as described in the shareholder agreement term sheet.


Agreements Regarding Lease Arrangements


        On October 11, 2011, Parent and Merger Sub entered into a letter agreement (the "Lease Letter Agreement") with members of the Gold/Schiffer Family and certain of their affiliates (collectively, the "Landlord Parties") with respect to the entry into new leases for thirteen stores and a store parking lot (the "Covered Properties"), all but one of which properties are currently leased by the Company on a month to month basis from the Landlord Parties and one of which is leased pursuant to a lease that expires on January 31, 2012.

        Pursuant to the Lease Letter Agreement, the Landlord Parties have agreed to enter into new leases with the Company having initial terms expiring on the fifth or tenth January 31^st occurring after the consummation of the merger. Parent, Merger Sub and the Landlord Parties have agreed to negotiate in good faith to reach an agreement on the fair market base rent for each such lease prior to the consummation of the merger. Subject to certain terms and conditions, if the parties are unable to reach agreement on the base rent for any lease, the parties shall select an arbitrator who shall select either Parent and Merger Sub's proposed fair market base rent or the applicable Landlord Party's proposed fair market base rent, which selection shall be final and conclusive; provided that, in no event shall the sum of the base rents for all of the Covered Properties exceed the base rents for such properties prior to the consummation of the merger by more than $1 million per year.

        Subject to certain terms and conditions, the Lease Letter Agreement provides the applicable Landlord Party with (a) the right to terminate the lease for the Company's store located at 6121 Wilshire Blvd, Los Angeles California, prior to the lease expiration date in connection with the re-development of the Landlord Party's property at such location, and (b) the right to develop the area surrounding the Company's store located at 8625 Woodman Avenue, Arleta, California, as such right is set forth in the Company's existing lease agreement with respect to such store.




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Special Committee Compensation


        In consideration of the expected time and effort that would be required of the members of our special committee in evaluating the merger, including negotiating the terms and conditions of the merger agreement, the Board determined that each member of the special committee will receive a monthly retainer of $3,000 during the duration of their service on the special committee and a meeting fee of $1,000 for each meeting of the special committee such member attends in person or by teleconference. Each member of the special committee will also be reimbursed for out-of-pocket expenses in connection with the performance of their duties. Such fees are payable whether or not the merger is completed.


Treatment of Stock Options


        As of October 1,November 15, 2011, there were approximately 470,678 shares of our common stock issuable pursuant to stock options granted under our equity incentive plans to our executive officers and directors. The merger agreement provides that each outstanding stock option granted under our equity incentive plans (including these stock options granted to our executive officers and directors and all other stock options granted under our equity incentive plans) whether or not then vested or exercisable, will as of




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immediately prior to the effective time of the merger become fully vested and exercisable contingent on the closing of the merger and cancelled as of the effective time of the merger. The holder of such stock option will be entitled to receive a cash payment for each share of our common stock subject to such stock option, equal to the excess, if any, of (a) the $22.00 per share merger consideration over (b) the option exercise price payable in respect of such share of our common stock issuable under such stock option, without interest and less any applicable withholding taxes.

        The following table sets forth, for each of our directors and executive officers holding stock options as of October 1,November 15, 2011, (a) the aggregate number of shares of our common stock subject to vested stock options, (b) the value of such vested stock options on a pre-tax basis, calculated by multiplying (i) the excess, if any, of the $22.00 per share merger consideration over the respective per share exercise prices of those stock options by (ii) the number of shares of the Company's common stock subject to those stock options, (c) the aggregate number of unvested stock options that will vest as of the effective time of the merger, assuming the director or executive officer remains employed by the Company at that date, (d) the value of those unvested stock options on a pre-tax basis, calculated by multiplying (i) the excess, if any, of the $22.00 per share merger consideration over the respective per share exercise prices of those stock options by (ii) the number of shares of the Company's common stock subject to those stock options, (e) the aggregate number of shares of the Company's common stock subject to vested stock options and unvested stock options for such individual as of the effective time of the merger, assuming the director or executive officer remains employed by the Company at




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that date, and (f) the aggregate amount of consideration that we expect to offer for all such stock options in connection with the merger.

		Vested Stock Options						Unvested Stock Options That Will Vest as a Result of the Merger						Aggregate Offer Consideration for All Stock Options
Name		Shares			Value			Shares			Value			Shares			Value
Executive Officers
Eric Schiffer			—			—			—			—			—			—
Jeff Gold			—			—			—			—			—			—
Howard Gold			—			—			—			—			—			—
Rob Kautz			260,678		$	3,575,655			—		$	—			260,678		$	3,575,655
Non-Employee Directors
Eric Flamholtz			36,000			351,000			18,000			78,780			54,000			429,780
Larry Glascott			36,000			339,300			18,000			78,780			54,000			418,080
Marv Holen			36,000			339,300			18,000			78,780			54,000			418,080
Peter Woo			30,000			295,710			18,000			78,780			48,000			374,490
Executive Officers and Directors Holding Stock Options as a Group			398,678		$	4,900,965			72,000		$	315,120			470,678		$	5,216,085


Treatment of Restricted Stock Units


        None of our executive officers or directors hold restricted stock units.




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Treatment of Performance Stock Units


        The following table identifies, for each of our executive officers holding performance stock units, the aggregate number of performance stock units as of October 1,November 15, 2011, and the pre-tax value of such performance stock units that will become fully vested in connection with the merger as calculated by multiplying the $22.00 per share merger consideration by the number of performance stock units.

		Aggregate Offer Consideration for All Performance Stock Units							Aggregate Offer Consideration for All Performance Stock Units
Name		Shares			Value				Shares			Value
Executive Officers
Eric Schiffer			—			—				—			—
Jeff Gold			—			—				—			—
Howard Gold			—			—				—			—
Rob Kautz			79,333		$	1,745,326				51,333		$	1,129,326
Executive Officers holding performance stock units as a group			79,333		$	1,745,326				51,333		$	1,129,326


Severance Arrangements


        Although there are no severance agreements between the Company and our executive officers, there are certain benefits that may be payable to our executive officers in connection with the terminations of their employment with the Company and/or a change in control of the Company.

        In January 2008, Mr. Kautz received an award of performance stock units. If a change of control (as defined in the award) occurs prior to the end of the performance period on March 31, 2012, the crediting and vesting of all of the unvested performance stock units will accelerate and the related




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shares will be paid out. The acceleration will not be tied to any performance levels for earnings before taxes because the Company achieved the last performance level for earnings before taxes set by the 2008 performance stock units plan at the end of fiscal year 2011. These performance stock units are reflected in the table above in "—Interests of the Company's Directors and Executive Officers in the Merger:—Treatment of Performance Stock Units."

        In addition, the Company has a deferred compensation plan to provide certain executive officers the ability to defer up to 80% of their base compensation and bonuses. (The plan is an unfunded nonqualified plan.) Upon a termination of employment, each of Messrs. Schiffer, J. Gold and H. Gold is entitled to a distribution of all deferred amounts and earnings thereon held on his behalf pursuant to the Company's deferred compensation plan.




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        The following table sets forth information on the potential payments to the Named Executive Officers upon termination, assuming a termination occurred on October 1,November 15, 2011, at which time the merger consideration was $22.00.

Name		Cash Payment ($)			Acceleration of Vesting of Options ($)			Acceleration of Crediting/Vesting of Performance Stock Units ($)
Eric Schiffer
•       Termination			925,9541,041,545	(a)
Robert Kautz
•       Termination Without Cause or With Good Reason						—			—
•       Change in Control						—			1,745,3261,129,326	(b)
•       Death						—			1,745,3261,129,326	(c)
•       Total and Permanent Disability						—			1,745,3261,129,326	(d)
Jeff Gold
•       Termination			922,7941,025,042	(a)
Howard Gold
•       Termination			927,4741,030,241	(a)

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(a)

Assumes a termination on October 1,November 15, 2011, and payments based on the aggregate balance in the deferred compensation plan as of such date. As discussed above, deferred compensation cash payments consist entirely of cash contributed by the Named Executive Officers.



(b)

Amount obtained by multiplying (i) 79,333,51,333, which is the number of performance stock units that would be converted into shares based on a change of control occurring on October 1,November 15, 2011, by (ii) the merger consideration of $22.00 per share.



(c)

Amount obtained by multiplying (i) 79,333,51,333, which is the balance of performance stock units that would be converted into shares at October 1,November 15, 2011, by (ii) the merger consideration of $22.00 per share.



(d)

As described above, the number of performance stock units that would convert into shares upon a termination of Mr. Kautz's employment due to disability is determined based on the service requirement only since all the performance levels had been achieved. Amount obtained by multiplying (i) 79,333,51,333, which is the number of performance stock units that would be converted into shares based on the expiration of all time based restrictions on the credited performance stock units as of October 1,November 15, 2011, by (ii) the merger consideration of $22.00 per share.


Bonuses in Connection with the Merger


        There will not be any bonuses paid to any of the Company's executive officers in connection with the completion of the merger.




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Employee Benefits


        For the one-year period following the effective time of the merger (or, with respect to specific benefit plans of the Company, if sooner, until the end of the applicable plan year for such plan ending immediately prior to the first anniversary of the effective time), Parent will provide, or will cause to be provided, to each employee of the Company and our subsidiaries that is employed after the effective time of the merger, base compensation, incentive compensation opportunities (excluding equity incentives) and employee benefits that, taken as a whole, are no less favorable in the aggregate than those provided to such employees immediately prior to the effective time of the merger under the Company's employee benefit plans. Parent will, or will cause the surviving corporation to, honor any




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employment, severance and termination agreement and deferred compensation plans, including with respect to any payments, benefits or rights arising as a result of the merger, in effect on the date of the merger agreement. In addition, Parent has agreed to recognize the service of employees with us prior to the merger as service with Parent and its subsidiaries in connection with any employee benefit plan, including any vacation, paid time off and severance plans, maintained by Parent or its subsidiaries which is made available following the merger by Parent or its subsidiaries for all purposes, including determining eligibility to participate, level of benefits, benefit accruals and vesting, except that an employee will not be entitled to a duplication of benefits with respect to the same period of time. See "The Merger Agreement—Employee Matters."


Directors' and Officers' Insurance


        The merger agreement provides that for a period of at least six years after the effective time of the merger, Parent and Merger Sub will maintain the Company's current directors' and officers' liability and indemnification insurance policies to cover acts or omissions occurring or allegedly occurring at or prior to the effective time of the merger for those individuals who are currently covered by the Company's current directors' and officers' liability insurance policy, so long as the annual premium for such policies does not exceed 300% of the last annual premium paid by the Company for such existing policies. If the annual premium exceeds 300% of the last annual premium paid, Parent shall maintain the most favorable policies of directors' and officers' liability insurance obtainable for an annual premium equal to 300% of the last annual premium paid. Parent may also elect to satisfy its obligations with respect to the directors' and officers' liability insurance policy by obtaining a prepaid directors' and officers' liability insurance policy at its expense, so long as the coverage and amount are no less favorable to such directors and officers than the insurance policies they currently have. See "The Merger Agreement—Indemnification and Insurance."


Golden Parachute Compensation


        The information set forth in the table below is intended to comply with Item 402(t) of Regulation S-K under the Exchange Act, which requires disclosure of information about compensation for each "Named Executive Officer" of the Company that is based on or otherwise relates to the proposed merger. The compensation described below is referred to as "golden parachute compensation." At the Company's annual meeting of shareholders in September 2011, the shareholders approved, on an advisory basis, the compensation payable to the Company's named executive officers, including the golden parachute compensation described in the table below. There have been no changes to the golden parachute compensation payable by the Company to the named executive officers since July 27, 2011, the date of the proxy statement for the 2011 annual meeting of shareholders of the Company, except that the value of Mr. Kautz's performance stock units has increased due to the increase in the Company's stock price, and certain deferred compensation




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payments to the Company's other named executive officers that were approved by shareholders at the annual meeting are not payable in connection with the proposed merger.

Name and Principal Position	Name and Principal Position		Cash ($)			Equity (S)			Pension/NQDC ($)			Prerequisites/ Benefits ($)			Tax Reimbursement ($)			Other ($)			Total ($)			Name and Principal Position		Cash ($)			Equity (S)			Pension/NQDC ($)			Prerequisites/ Benefits ($)			Tax Reimbursement ($)			Other ($)			Total ($)
Eric Schiffer	Eric Schiffer			—			—			—			—			—			—			—		Eric Schiffer			—			—			—			—			—			—			—
	Chief Executive Officer																							Chief Executive Officer
Robert Kautz	Robert Kautz			—			1,745,326	(a)		—			—			—			—			1,745,326		Robert Kautz			—			1,129,326	(a)		—			—			—			—			1,129,326
	Chief Financial Officer																							Chief Financial Officer
Jeff Gold	Jeff Gold			—			—			—			—			—			—			—		Jeff Gold			—			—			—			—			—			—			—
	President and Chief Operating Officer																							President and Chief Operating Officer
Howard Gold	Howard Gold			—			—			—			—			—			—			—		Howard Gold			—			—			—			—			—			—			—
	Executive Vice President of Special Projects																							Executive Vice President of Special Projects

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(a)

Amount obtained by multiplying (i) 79,33351,333 which is number of performance stock units that will become fully vested in connection with the merger, by (ii) the merger consideration on October 1,November 15, 2011, of $22.00 per share.


Other Relationships


        Eric Flamholtz, one of the independent members of the Company's Board of Directors, is providing management consulting services to Guggenheim Partners, LLC, an affiliate of Guggenheim, through Management Systems Consulting Corporation ("MSCC"), where Mr. Flamholtz is the president and a co-owner. Mr. Flamholtz disclosed this relationship to the other independent members of the Board upon becoming aware of Guggenheim's engagement by the Gold/Schiffer family in February 2011. MSCC's consulting services contracts with Guggenheim provide for aggregate fees of $175,000. In the past, MSCC also provided management consulting services to the Company. MSCC's consulting arrangement with the Company, which provided for fees of $9,999.99 per month, began in December 2008 and expired in November 2010.


Certain Projections


        99¢ Only Stores does not, as a matter of course, publicly disclose projections as to its future financial performance. In connection with their due diligence review of our Company, we provided Guggenheim, ACOF III, CPPIB and the financing sources of Parent with financial forecasts of 99¢ Only Stores' operating performance for fiscal years 2012 through 2015 prepared by our management (the "Projections"). The Projections were also provided to Lazard for use in connection with its financial analyses, as summarized in "—Opinion of Financial Advisor to Our Special Committee and Board of Directors." The Projections were prepared on a basis consistent with the accounting principles used in our historical financial statements. See "—Background of the Merger."

        The Projections were not prepared with a view to public disclosure and are included in this proxy statement only to give shareholders access to the information that was made available, in whole or in part, to ACOF III, CPPIB and the financing sources of Parent, in connection with their due diligence review of 99¢ Only Stores, and to Lazard for use in connection with its financial analyses summarized above, and are not included in this proxy statement in order to influence any shareholder to make any investment decision with respect to the merger or any other purposes, including whether or not to exercise dissenters' rights under California law. The Projections were not prepared with a view to




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compliance with published guidelines of the SEC regarding projections, the guidelines established by the American Institute of Certified Public Accountants for preparation and presentation of prospective financial information, or U.S. generally accepted accounting principles ("GAAP"). Furthermore, neither BDO USA, LLP, our independent auditor, nor any other independent accountants, has examined, reviewed, compiled or otherwise applied procedures to the Projections and, accordingly, assumes no responsibility for, and expresses no opinion on them. The Projections included in this proxy statement have been prepared by, and are the responsibility of, our management. The Projections were prepared in the ordinary course of the Company's business planning process solely for internal use of 99¢ Only Stores and are subjective in many respects.

        In compiling the Projections, 99¢ Only Stores' management took into account historical performance, combined with estimates regarding revenues, operating income, EBITDA and capital spending and these estimates were in turn developed taking into account trends in historical and expected operational performance on a variety of operational and financial metrics. Although the Projections are presented with numerical specificity, they reflect numerous assumptions and estimates as to future events made by our management that our management believed were reasonable at the time the Projections were prepared. However, this information is not fact and should not be relied upon as being necessarily indicative of actual future results. In addition, factors such as the conditions of the retail industry and general economic, regulatory and market conditions, all of which are difficult to predict and beyond the control of our management, may cause the Projections or the underlying assumptions not to be reflective of actual future results. In addition, the Projections do not take into account any circumstances or events occurring after they were finalized in May of 2011 and, accordingly, do not give effect to the merger or any changes to our operations or strategy that may be implemented after the completion of the merger. As a result, there can be no assurance that the Projections will be realized, and actual results may be materially better or worse than those contained in the Projections. The inclusion of this information should not be regarded as an indication that the Company, ACOF III, CPPIB, the Rollover Investors, the financing sources of Parent, Lazard, Guggenheim or any other recipient of this information considered, or now considers, the Projections to be material information or predictive of actual future results.

        Except to the extent required by applicable federal securities laws, we do not intend, and expressly disclaim any responsibility to, update or otherwise revise the Projections to reflect circumstances existing after the date when prepared or to reflect the occurrence of future events even in the event that any of the assumptions underlying the Projections are shown to be in error. The Projections constitute forward looking statements, see "Cautionary Statement Concerning Forward-Looking Information."

        Certain of the Projections set forth in the table below, including Adjusted EBITDA and EBITDA, may be considered non-GAAP financial measures. The Company provided this information to Lazard because the Company believed it could be useful to potential bidders in evaluating, on a prospective basis, the Company's operating performance and cash flow. Non-GAAP financial measures should not be considered in isolation from, or as a substitute for, financial information presented in compliance with GAAP, and non-GAAP financial measures as used in the Projections may not be comparable to similarly titled amounts used by other companies. A reconciliation of the differences between Adjusted




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EBITDA, EBITDA, and GAAP operating income is presented in the table below following the Projections.

			Fiscal Year Ended March Management Projections
(millions, except per share and store count)			2012P			2013P			2014P			2015P
OPERATING STATEMENT
Total sales			$	1,477.7		$	1,635.4		$	1,832.2		$	2,070.6
Total cost of sales				(877.1	)		(976.8	)		(1,097.3	)		(1,242.1	)
Gross profit			$	600.6		$	658.6		$	734.9		$	828.5
Operating expenses				(447.9	)		(480.7	)		(529.7	)		(589.4	)
Depreciation and amortization				(29.3	)		(30.5	)		(33.1	)		(37.6	)
Operating Income			$	123.5		$	147.4		$	172.0		$	201.5
Other income / (expense)				1.0			2.6			2.9			3.2
Income before taxes			$	124.5		$	149.9		$	174.9		$	204.8
Taxes				(46.7	)		(56.2	)		(65.6	)		(76.8	)
Net income			$	77.8		$	93.7		$	109.3		$	128.0
EPS			$	1.09		$	1.31		$	1.52		$	1.77
Diluted Shares				71.3			71.7			72.0			72.4
SELECTED ADDITIONAL INFORMATION
Store Count (year end)				302			337			380			429
Increase in working capital			$	(1.0	)	$	14.2		$	19.2		$	24.3
Capital Expenditures
	New Distribution and Transportation		$	2.7		$	22.0		$	3.9		$	28.4
	Stores (new leased and purchased, purchase of existing)			52.5			61.4			74.3			72.6
	Other (IT and operational)			12.4			16.5			12.3			8.5
	Total Capital Expenditures		$	67.6		$	100.0		$	90.5		$	109.5
ADJUSTED EBITDA AND RECONCILIATIONS
Adjusted EBITDA(1)			$	154.7		$	179.6		$	207.2		$	241.5
	Less: Stock Compensation Expense			1.9			1.8			2.1			2.4
	EBITDA		$	152.7		$	177.8		$	205.2		$	239.1
	Less: Depreciation and Amortization			29.3			30.5			33.1			37.6
	Operating Income		$	123.5		$	147.4		$	172.0		$	201.5
MANAGEMENT ANALYSIS(2)
	Sales Growth as a % of prior year			3.8	%		10.7	%		12.0	%		13.0	%
	Gross Margin % of Total Sales			40.6	%		40.3	%		40.1	%		40.0	%
	IBT margin % of Total Sales			8.4	%		9.2	%		9.5	%		9.9	%
	IBT growth as a % of prior year			5.3	%		20.4	%		16.7	%		17.1	%
	EPS growth as a % of prior year			4.3	%		19.9	%		16.1	%		16.5	%
	Adj EBITDA margin % of Total Sales			10.5	%		11.0	%		11.3	%		11.7	%
	Adj EBITDA growth as a % of prior year			4.5	%		16.1	%		15.4	%		16.6	%

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(1)

The EBITDA reported in management's internal reports is adjusted to exclude stock compensation expense, a non-cash item. This is presented above as Adjusted EBITDA which is the same as the Adjusted EBITDA presented in the Lazard reports utilized by the special committee in connection with the proposed merger and related process.



(2)

Note that fiscal 2011, which is not presented, was a 53 week retail calendar; therefore, fiscal 2012 growth percentages appear lower as a result of comparing 52 weeks of sales results to 53 weeks of sales results in the prior year.

Note: Numbers and percentages shown may not calculate due to rounding differences.




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Governmental and Regulatory Approvals


        Under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (the "HSR Act"), the merger may not be completed until the Company and Parent each file a notification and report form under the HSR Act with the Federal Trade Commission (the "FTC") and the Antitrust Division of the Department of Justice (the "DOJ") and the applicable waiting period has expired or been terminated. The Company and Parent are expected to filefiled the notification and report forms under the HSR Act with the FTC and the DOJ byon October 31, 2011, and the FTC and the DOJ granted early termination of the waiting period on November 1,8, 2011.

        At any time before or after consummation of the merger, notwithstanding any termination of the waiting period under the HSR Act, the Antitrust Division of the DOJ, the FTC or another antitrust and competition authority could take such action under applicable antitrust laws as it deems necessary or desirable in the public interest, including seeking to enjoin the consummation of the merger or seeking divestiture of substantial assets of 99¢ Only Stores or Parent's affiliates. Private parties may also seek to take legal action under the antitrust laws under certain circumstances.


Provisions for Unaffiliated Shareholders


        No provision has been made to grant the unaffiliated shareholders access to the files of the Company, Parent, Merger Sub, the Ares Filing Persons or CPPIB or to obtain counsel or appraisal services at the expense of any of the foregoing.


Litigation Related to the Merger


        Following the March 2011 announcement by the Company of the receipt of a going private proposal, seven complaints were filed related to the proposal, all in Los Angeles County Superior Court (the "Actions"). The Actions are captioned: Southeastern Pennsylvania Transportation Authority v. David Gold, et al. (filed March 14, 2011); John Chevedden v. 99¢ Only Stores, et al. (filed March 16, 2011); Rana Fong v. 99¢ Only Stores, et al. (filed March 17, 2011); Norfolk County Retirement Board v. Jeff Gold, et al. (filed March 22, 2011); Tammy Newman v. 99¢ Only Stores, et al. (filed March 25, 2011); Key West Police and Fire Pension Fund v. Eric G. Flamholtz, et al. (filed April 5, 2011); and Allen Mitchell v. 99¢ Only Stores, et al. (filed April 11, 2011). The plaintiffs in the Actions claim to be shareholders of the Company and propose to represent a class of all of the Company's public shareholders. Pursuant to stipulation, at the initial status conference on June 24, 2011, the court ordered the Actions consolidated, appointed lead plaintiffs' counsel, provided for consolidation with the Actions of any subsequently-filed actions arising out of the same facts, and stayed the Actions. On October 11, 2011, an eighth complaint was filed in an action captioned Harold Litwin v. 99¢ Only Stores, et al. (the "Litwin Action"); the allegations in the Litwin Action are similar to the seven earlier-filed Actions but include allegations concerning the Company's agreement, announced October 11, 2011, to go private. Plaintiffs' counsel in the consolidated Actions have filed a notice of related case in the Litwin Action, calling the court's attention to the June 24 order concerning consolidation and related matters. On October 21, 2011, plaintiffs' counsel in the consolidated Actions filed a First Amended Consolidated Complaint (the "Consolidated Complaint"). The Consolidated Complaint asserts claims for breach of fiduciary duty against members of the Gold/Schiffer Family and the Company's directors in connection with the merger. The Consolidated Complaint seeks to enjoin the merger and other remedies, including damages in an unspecified amount. WeOn November 23, 2011, a ninth complaint was filed in an action captioned Allen L. Mitchell v. David Gold, et al., in the United States District Court for the Central District of California, whose allegations resemble those of the Consolidated Complaint and the Litwin Action but purport to assert claims under both state and federal law. Also on November 23, 2011, counsel for the plaintiffs in the Consolidated Complaint signed a Memorandum of Understanding in which they agreed (subject to confirmatory discovery, class certification and court approval) to settle the litigation in consideration of the Company's agreement to




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make specified supplemental disclosures, which supplemental disclosures have been incorporated into this proxy statement. If completed and approved by the court, the settlement would have the effect of releasing the claims asserted in all of the litigation described in this paragraph. If the settlement is not approved, we cannot predict the outcome of these lawsuits or the amount of potential loss, if any, the Company could face as a result of such lawsuits.




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Estimated Fees and Expenses of the Merger


        We estimate that we will incur, and will be responsible for paying, transaction-related fees and expenses, consisting primarily of financial, legal, accounting and tax advisory fees, Securities and Exchange Commission filing fees and other related charges, totaling approximately $3,030,044.$12,680,044. This amount includes the following estimated fees and expenses:

Description		Amount to be Paid				Amount to be Paid
SEC filing fee		$	180,044			$	180,044
Printing, proxy solicitation and mailing expenses		$	250,000				250,000
Financial, legal, accounting and tax advisory fees		$	2,500,000				12,150,000
Miscellaneous expenses		$	100,000				100,000
Total		$	3,030,044			$	12,680,044




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CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING INFORMATION


        Statements that describe the objectives, expectations, plans or goals of the Company, Parent, Merger Sub or their affiliates are forward-looking statements, including, without limitation, statements relating to the completion of the merger. There are forward-looking statements throughout this proxy statement, including, without limitation, under the headings "Summary Term Sheet," "Questions and Answers about the Merger and the Special Meeting," "Special Factors," "Special Factors—Opinion of Financial Advisor to Our Special Committee and Board of Directors," "Special Factors—Plans for the Company After the Merger," "Special Factors—Effects of the Merger," "Special Factors—Certain Projections," "Special Factors—Governmental and Regulatory Approvals," and "Special Factors—Litigation Related to the Merger," and in statements containing words such as "believes," "plans," "estimates," "anticipates," "intends," "continues," "contemplates," "expects," "may," "will," "could," "should" or "would" or other similar words or phrases. There are a number of risks and uncertainties that could cause actual results or events to differ materially from these forward-looking statements, including the following:

•

the occurrence of any event, change or other circumstances that could give rise to the termination of the merger agreement;



•

the inability to complete the merger due to the failure to obtain shareholder approval or the failure to satisfy other conditions to consummation of the merger;



•

the failure to obtain the necessary debt financing arrangements set forth in the debt commitment letter received in connection with the merger agreement;



•

the failure to obtain equity financing as set forth in the equity commitment letters received in connection with the merger agreement;



•

the failure of the merger to close for any other reason;



•

risks that the proposed transaction disrupts current plans and operations and the potential challenges for employee retention as a result of the merger;



•

business uncertainty and contractual restrictions during the pendency of the merger;



•

the diversion of management's attention from ongoing business concerns;



•

the possible effect of the announcement of the merger on our customer and supplier relationships, operating results and business generally;



•

the amount of the costs, fees, expenses and charges related to the merger and the actual terms of certain financings that will be obtained for the merger;



•

the impact of the substantial indebtedness incurred to finance the consummation of the merger;

and other risks detailed in our current filings with the SEC, including our most recent filings on Forms 10-Q and 10-K. See "Where You Can Find More Information" beginning on page 131.140. We cannot guarantee any future results, levels of activity, performance or achievements. In light of the significant uncertainties inherent in the forward-looking statements, readers should not place undue reliance on forward-looking statements, which speak only as of the date on which the statements were made and it should not be assumed that the statements remain accurate as of any future date. Moreover, we assume no obligation to update forward-looking statements or update the reasons that actual results could differ materially from those anticipated in forward-looking statements, except as required by law.




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THE SPECIAL MEETING


Time, Place and Purpose of the Special Meeting


        This proxy statement is being furnished to our shareholders as part of the solicitation of proxies by our Board for use at the special meeting to be held at City of Commerce Community Center, Rosewood Park Meeting Room, 5600 Harbor Street, City of Commerce, California 90040, on [    •    ],Thursday, January 12, 2012, at [    •    ],1:00 p.m., local time, or at any postponement or adjournment of the meeting. The purpose of the special meeting is for our shareholders to consider and vote upon the following proposals:

•

approval of the merger agreement; and



•

approval of a motion to adjourn or postpone the special meeting to another time and/or place for the purpose of soliciting additional proxies in favor of the proposal to approve the merger agreement, if necessary.

        A copy of the merger agreement is attached asAnnex A to this proxy statement. This proxy statement and the enclosed form of proxy are first being mailed to our shareholders on or about [    •    ].December 12, 2011.


Board Recommendation


        After considering the unanimous recommendations of the special committee and the opinion of the special committee's financial advisor that as of October 11, 2011, and based upon and subject to the assumptions, procedures, factors, qualifications and other matters and limitations set forth therein, the merger consideration to be paid to holders of our common stock (other than the Rollover Investors, the Company, Parent, Merger Sub and holders who are entitled to and properly demand an appraisal of their shares) in the merger was fair, from a financial point of view, to such holders, the independent directors of our Board unanimously (a) approved and declared advisable the merger agreement and the transactions contemplated by the merger agreement, including the merger, (b) determined that (i) the terms of the merger agreement are just and reasonable as to the Company, (ii) the merger agreement, the terms of the merger agreement, and the transactions contemplated by the merger agreement, including the merger, are fair to and in the best interests of the Company and our unaffiliated shareholders, (other than the Rollover Investors and Parent and its affiliates to the extent that any of them own shares of the Company's common stock), (iii) the merger consideration is the highest price per share of the Company's common stock reasonably attainable, and (c) recommended that the shareholders of the Company approve and adopt the merger agreement, including the principal terms of the merger agreement, the statutory merger agreement, and the merger. For a discussion of the material factors considered by our special committee and the Board in reaching their conclusions, see "Special Factors—Reasons for the Merger; Recommendation of Our Special Committee and Board of Directors; Fairness of the Merger."

        Our Board recommends that you vote "FOR" the proposal to approve the merger agreement.


Record Date and Quorum


        The Board has fixed the close of business on [    •    ]December 2, 2011 as the record date for the special meeting, and only holders of record of our common stock on the record date are entitled to vote at the special meeting. On [    •    ],December 2, 2011, there were [    •    ]70,715,705 shares of our common stock entitled to be voted at the special meeting. Each share of common stock outstanding on the record date entitles its holder to one vote on all matters properly coming before the shareholders at the special meeting.

        The presence at the special meeting in person or by proxy of the holders of a majority of the shares of our common stock outstanding on the record date will constitute a quorum for the purpose of considering the proposals at the special meeting. Shares of common stock represented at the special




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meeting but not voted, including shares of common stock for which we have received proxies indicating




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that the submitting shareholders have abstained, will be treated as present at the special meeting for purposes of determining the presence of a quorum for the transaction of all business. In the event that a quorum is not present, or if there are insufficient votes to approve the merger agreement at the time of the special meeting, it is expected that the meeting will be adjourned or postponed to solicit additional proxies.


Vote Required for Approval


        The approval of the merger agreement requires the affirmative vote of the holders of a majority of the outstanding shares of our common stock.

        For the proposal to approve the merger agreement, you may vote FOR or AGAINST or ABSTAIN. Abstentions will not be counted as votes cast or shares voting on the proposal to approve the merger agreement, but will count for the purpose of determining whether a quorum is present.If you abstain, it will have the same effect as a vote "AGAINST" the approval of the merger agreement.

        If your shares of common stock are held in "street name," you will receive instructions from your broker, bank or other nominee that you must follow in order to have your shares voted. Under rules applicable to the NYSE, brokers who hold shares in "street name" for customers have the authority to vote on "routine" proposals when they have not received instructions from beneficial owners. However, brokers are precluded from exercising their voting discretion with respect to approving non-routine matters such as the approval of the merger agreement and, as a result, absent specific instructions from the beneficial owner of the shares, brokers are not empowered to vote those shares, referred to generally as "broker non-votes."These "broker non-votes" will not be counted for purposes of determining whether a quorum is present at the special meeting and will have the same effect as a vote "AGAINST" the approval of the merger agreement.

        Approval of the proposal to adjourn the special meeting, if necessary, for the purpose of soliciting additional proxies requires the affirmative vote of a majority of the holders of our common stock present in person or by proxy.proxy and voting on the proposal. A failure to vote your shares of common stock or a broker non-vote will have no effect on the outcome of any vote to adjourn the special meeting.An abstention will have the same effect as voting "AGAINST" any proposal to adjourn the special meeting.


Voting Agreement


        The Rollover Investors and Au Zone Investments #2, L.P. have executed a voting agreement with Parent, pursuant to which they have agreed to vote all shares of our common stock owned by them (constituting approximately 33% of the total number of shares of our common stock outstanding as of October 24,November 15, 2011) in favor of the approval of the merger agreement. As of October 11, 2011, the date of the merger agreement, our directors and executive officers beneficially owned approximately 33.5% of the outstanding shares of our common stock (which includes the approximately 33% beneficially owned by the Rollover Investors and Au Zone Investments #2, L.P.). All of our directors and executive officers have informed us that they intend to vote all of their shares of common stock "FOR" the approval of the merger agreement.


Proxies and Revocation


        If you submit a proxy by telephone or Internet or by returning a signed proxy card by mail, your shares will be voted at the special meeting as you indicate on your proxy card or by such other method. If you sign your proxy card without indicating your vote, your shares will be voted "FOR" the approval of the merger agreement, "FOR" the adjournment of the special meeting, if necessary, to solicit




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additional proxies, and in accordance with the recommendations of our Board on any other matters properly brought before the shareholders at the special meeting for a vote.




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        Proxies received at any time before the special meeting, and not changed or revoked before being voted, will be voted at the special meeting. You have the right to change or revoke your proxy at any time before the vote is taken at the special meeting if you hold your shares through a broker, bank or other nominee, by following the directions received from your broker, bank or other nominee to change or revoke those instructions.

        You have the right to change or revoke your proxy at any time before the vote is taken at the special meeting if you hold your shares in your name as a shareholder of record by:

•

delivering to our Corporate Secretary at 99¢ Only Stores, 4000 Union Pacific Avenue, City of Commerce, California 90023, a signed written notice of revocation, bearing a date later than the date of the proxy, stating that the proxy is revoked;



•

attending the special meeting and voting in person (your attendance at the meeting will not, by itself, change or revoke your proxy—you must vote in person at the meeting to change or revoke a prior proxy);



•

submitting a later-dated proxy card; or



•

submitting a proxy again at a later time by telephone or Internet prior to the time at which the telephone and Internet proxy facilities close by following the procedures applicable to those methods of submitting a proxy.

        PLEASE DO NOT SEND IN YOUR STOCK CERTIFICATES WITH YOUR PROXY CARD. IF THE MERGER IS COMPLETED, A SEPARATE LETTER OF TRANSMITTAL WILL BE MAILED TO YOU IF YOU ARE A SHAREHOLDER OF RECORD THAT WILL ENABLE YOU TO RECEIVE THE $22.00 PER SHARE MERGER CONSIDERATION IN EXCHANGE FOR YOUR 99¢ ONLY STORES STOCK CERTIFICATES.


Adjournments and Postponements


        Although it is not currently expected, the special meeting may be adjourned or postponed for the purpose of soliciting additional proxies or for other purposes specified in the merger agreement. Any adjournment may be made without notice, other than by an announcement made at the special meeting of the time, date and place of the adjourned meeting. Approval of the proposal to adjourn the special meeting, if necessary, for the purpose of soliciting additional proxies requires the affirmative vote of a majority of the holders of our common stock present in person or by proxy. Any signed proxies received by us in which no voting instructions are provided on this matter will be voted "FOR" an adjournment of the special meeting, if necessary, to solicit additional proxies. In addition, when any meeting is convened, the presiding officer, if directed by our Board, may adjourn the meeting if (a) no quorum is present for the transaction of business or (b) our Board determines that adjournment is necessary to enable the shareholders to consider fully information which our Board determines has not been made sufficiently or timely available to shareholders or otherwise to exercise effectively their voting rights. Any adjournment or postponement of the special meeting for the purpose of soliciting additional proxies will allow our shareholders who have already sent in their proxies to revoke them prior to their use at the special meeting as adjourned or postponed.


Rights of Shareholders Who Object to the Merger


        Shareholders may be entitled to seek dissenters' rights under California law in connection with the merger, provided that all requirements are met. This means that you may be entitled to have the fair market value of your shares determined by a California court and to receive payment based on that




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valuation. Under California law, the fair market value of your shares will be determined as of October 10, 2011, the last trading day prior to announcement of the proposed merger, excluding any appreciation or depreciation in consequence of the proposed merger. The ultimate amount you would




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receive as a dissenting shareholder in an appraisal proceeding may be more than, the same as, or less than, the amount you would have received under the terms of the merger agreement.

        In order to exercise dissenters' rights, (a) you must not vote in favor of the approval of the merger agreement, (b) you must make a written demand for appraisal in compliance with California law within 30 days of notification that the merger agreement has been approved, (c) you must hold shares of our common stock on the record date and continuously hold such shares through the completion of the merger and (d) demands for payment must be filed with respect to at least five percent of the outstanding shares of our common stock. Failure to follow all of the steps required by this statute will result in the loss of your dissenters' rights. See "Dissenters' Rights" andAnnex C to this proxy statement.


Solicitation of Proxies


        This proxy solicitation is being made by us on behalf of our Board and will be paid for by the Company. In addition, we have engaged Morrow & Co., LLC to assist in the solicitation of proxies for the special meeting and we estimate that we will pay Morrow & Co., LLC a fee of $6,500 plus certain costs associated with its services. We also have agreed to pay Morrow & Co., LLC for out-of-pocket expenses and to indemnify them against certain losses arising out of its proxy solicitation services. Our directors, officers and employees may also solicit proxies by personal interview, mail, e-mail, telephone, facsimile or other means of communication. These persons will not be paid additional compensation for their efforts. We will also request brokers, banks and other nominees to forward proxy solicitation material to the beneficial owners of our shares of common stock that the brokers, banks and nominees hold of record. Upon request, we will reimburse them for their reasonable out-of-pocket expenses related to forwarding the material.


Other Matters


        We do not know of any other business that will be presented at the special meeting. Should any business other than that set forth in the notice of special meeting of shareholders properly come before the special meeting, the enclosed proxy confers discretionary authority to vote with respect to only such matters that our Board does not know, a reasonable time before proxy solicitation, are to be presented at the special meeting. If any of these matters are presented at the special meeting, then the proxy holders named in the enclosed proxy card will vote in accordance with their judgment.


Questions and Additional Information


        If you have more questions about the merger, need assistance in submitting your proxy or voting your shares, or need additional copies of the proxy statement or the enclosed proxy card, you should contact the Company's proxy solicitor:



470 West Avenue—3rd Floor
Stamford, CT 06902
Banks and Brokerage Firms, please call (203) 658-9400
Shareholders, please call (800) 566-9061




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THE PARTIES TO THE MERGER


99¢ Only Stores
4000 Union Pacific Avenue
City of Commerce, California 90023
(323) 980-8145

        99¢ Only Stores, a California corporation, is an extreme value retailer of primarily consumable general merchandise with an emphasis on name-brand products. Our stores offer a wide assortment of regularly available consumer goods as well as a broad variety of first-quality closeout merchandise. We emphasize quality name-brand consumables, priced at an excellent value, in convenient, attractively merchandised stores. Over half of our sales come from food and beverages, including produce, dairy, deli and frozen foods, along with organic and gourmet foods. We opened our first 99¢ Only Stores location in 1982 and we believe that we operate the nation's oldest existing general merchandise chain where items are primarily priced at 99.99¢, $1.00 or less. As of October 13,November 15, 2011, we operated 289290 retail stores with 214 in California, 3536 in Texas, 27 in Arizona, and 13 in Nevada.

        For more information about us, please visit our website at www.99only.com. The information provided on our website is not part of this proxy statement, and therefore is not incorporated by reference. See also "Where You Can Find More Information." Our common stock is listed on the New York Stock Exchange under the symbol "NDN."


Parent and Merger Sub


Number Holdings, Inc.
Number Merger Sub, Inc.
2000 Avenue of the Stars, 12^th Floor
Los Angeles, California 90067
(310) 201-4100

        Number Holdings, Inc. ("Parent") is a Delaware corporation. Number Merger Sub, Inc. ("Merger Sub") is a California corporation and a wholly owned subsidiary of Parent. Both Parent and Merger Sub are controlled by ACOF III and CPPIB and were formed solely for the purpose of entering into the merger agreement and consummating the transactions contemplated by the merger agreement. Neither Parent nor Merger Sub has engaged in any business except for the activities incident to its formation and in connection with the transactions contemplated by the merger agreement. Upon consummation of the merger, Merger Sub will cease to exist and the Company will continue as the surviving corporation and a wholly owned subsidiary of Parent. Following the merger, all of the equity interests in the Company will be indirectly owned through Parent by ACOF III, CPPIB and the Rollover Investors.

Ares Corporate Opportunities Fund III, L.P.
2000 Avenue of the Stars, 12^th Floor
Los Angeles, California 90067
(310) 201-4100

        Ares Corporate Opportunities Fund III, L.P., a Delaware limited partnership, is a private equity fund indirectly controlled by Ares Management LLC, a Delaware limited liability company, which is a global alternative asset manager and SEC registered investment adviser with approximately $43 billion of committed capital under management and approximately 450 employees as of September 30, 2011. Ares Management is headquartered in Los Angeles with professionals also located across the United States, Europe and Asia and has the ability to invest in all levels of a company's capital structure—from senior debt to common equity. The firm's investment activities are managed by dedicated teams in its Private Equity, Private Debt and Capital Markets investment platforms.




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Canada Pension Plan Investment Board
One Queen Street East, Suite 2600
P.O. Box 101
Toronto, Ontario M5C 2W5

        Canada Pension Plan Investment Board is a professional investment management organization that invests the funds not needed by the Canada Pension Plan to pay current benefits on behalf of 17 million Canadian contributors and beneficiaries. In order to build a diversified portfolio of CPP assets, CPPIB invests in public equities, private equities, real estate, inflation-linked bonds, infrastructure and fixed income instruments. Headquartered in Toronto, with offices in London and Hong Kong, CPPIB is governed and managed independently of the Canada Pension Plan and at
arm's-length from governments. At June 30, 2011, the CPP Fund totaled C$153.2 billion.




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THE MERGER AGREEMENT


        The following discussion of the merger agreement is only a summary of its material terms and may not include all of the information that is important to a particular shareholder. Shareholders are urged to read the merger agreement, a copy of which has been included as Annex A to this proxy statement and is incorporated by reference herein. The rights and obligations of the parties are governed by the express terms and conditions of the merger agreement and not the summary set forth in this section or any other information contained in this proxy statement.

        The merger agreement has been included to provide you with information regarding its terms and provisions. The merger agreement contains, among other things, representations, warranties and covenants of the Company, Parent and Merger Sub. These representations, warranties and covenants may be subject to important limitations and qualifications agreed to by the contracting parties, such as qualifications with respect to materiality and knowledge. Furthermore, these representations and warranties in the merger agreement were used for the purpose of allocating risk between the parties to the merger agreement rather than establishing matters as facts and may be subject to a contractual standard of materiality or material adverse effect different from that generally applicable to public disclosures to shareholders. Factual disclosures about the Company, Parent, Merger Sub or their respective affiliates contained in this proxy statement or in the Company's public reports filed with the SEC, which are available without charge at www.sec.gov, may supplement, update or modify the factual disclosures about the Company, Parent, Merger Sub or their respective affiliates contained in the merger agreement.


The Merger


        The merger agreement provides for the merger of Merger Sub, a wholly owned subsidiary of Parent, with and into 99¢ Only Stores upon the terms and subject to the conditions set forth in the merger agreement. After the merger, 99¢ Only Stores will continue as the surviving corporation and as a wholly owned subsidiary of Parent.

        The surviving corporation will be a privately held corporation and our current shareholders, other than the Rollover Investors who will hold an ownership interest in the surviving corporation, will cease to have any ownership interest in the surviving corporation or rights as shareholders. Therefore, such current shareholders will not participate in any future earnings or growth of the surviving corporation and will not benefit from any appreciation in value of the surviving corporation.

        At the effective time of the merger, the directors of Merger Sub will become the directors of the surviving corporation and the current officers of 99¢ Only Stores will become the officers of the surviving corporation. The articles of incorporation and bylaws of 99¢ Only Stores will be amended as a result of the merger to be the same as set forth in exhibits to the merger agreement, subject to any revisions contemplated therein, and will be the articles of incorporation and bylaws of the surviving corporation. After the merger, our common stock will be delisted from the NYSE and deregistered under the Exchange Act.


Effective Time


        The merger will be effective at the time the statutory merger agreement is filed with the Secretary of State of the State of California or such other time as may be provided in the statutory merger agreement as the effective time of the merger. Unless otherwise agreed by the parties to the merger agreement, the closing of the merger will occur on the later of (a) the third business day following the satisfaction or waiver of the conditions described in "—Conditions to the Completion of the Merger" below, and (b) the date that is the earlier of (i) any business day during the marketing period to be specified by Parent and (ii) the third business day after the final day of the marketing period.




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        For purposes of the merger agreement, "marketing period" means a period of at least 15 consecutive business days following the Company and Parent's satisfaction of certain obligations with respect to Parent's financing of the merger as described in "—Financing of the Merger" below, excluding any day from November 21, 2011, to November 25, 2011. If the marketing period has not been completed on or prior to December 19, 2011, the marketing period will commence on or after January 4, 2012.


Merger Consideration


        Except as noted below, each issued and outstanding share of the Company's common stock will be converted into the right to receive $22.00 in cash, without interest and less any applicable withholding taxes. The following shares of common stock will not be converted into the right to receive the merger consideration in connection with the merger:

•

shares owned by the Company, which will be cancelled without payment;



•

shares owned by Parent, Merger Sub or any other direct or indirect wholly owned subsidiary of Parent, including shares to be contributed to Parent immediately prior to the completion of the merger by the Rollover Investors, which shares will be cancelled without conversion or consideration; and



•

so long as the requirements of California law are satisfied, including the requirement that demands are filed with respect to at least five percent of the outstanding shares of our common stock, shares held by shareholders who have properly demanded and perfected, and have not timely withdrawn, their dissenters' rights with respect to such shares in accordance with California law will be cancelled, and the holders of those shares will have only the rights granted by California law. See "Dissenters' Rights" andAnnex C.

        At the effective time of the merger, each holder of a certificate formerly representing any shares of common stock or of book-entry shares will no longer have any rights with respect to the shares, except for the right to receive the merger consideration upon surrender thereof.


Payment Procedures


        Parent will designate a paying agent reasonably acceptable to the Company to receive the aggregate merger consideration for the benefit of the holders of shares of our common stock. At or prior to the effective time of the merger, Parent will deposit, or will cause the surviving corporation to deposit, with the paying agent an amount in cash sufficient to pay the aggregate merger consideration.

        At the effective time of the merger, we will close our stock transfer books. After that time, there will be no further transfer of shares of our common stock that were outstanding immediately prior to the effective time of the merger.

        Promptly after the effective time of the merger, but in no event later five business days thereafter, the surviving corporation in the merger will cause the paying agent to mail to each holder of record of our shares a letter of transmittal and instructions advising you how to exchange your certificates or book-entry shares for the merger consideration. The paying agent will pay you your merger consideration after you have (a) surrendered your certificates or book-entry shares to the paying agent and (b) provided to the paying agent your completed and signed letter of transmittal and any other items reasonably required by the paying agent. Interest will not accrue or be paid in respect of the merger consideration. The paying agent will reduce the amount of any merger consideration paid to you by any applicable withholding taxes. YOU SHOULD NOT FORWARD YOUR STOCK CERTIFICATES TO THE PAYING AGENT WITHOUT A LETTER OF TRANSMITTAL, AND YOU SHOULD NOT RETURN YOUR STOCK CERTIFICATES WITH THE ENCLOSED PROXY.




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        If any cash deposited with the paying agent is not claimed within 12 months following the effective time of the merger, such cash will be returned to Parent upon demand. Subject to any applicable abandoned property, escheat or other similar property laws, after that point, holders of our common stock will be entitled to look only to Parent and the surviving corporation as general creditors with respect to any merger consideration that may be payable upon surrender of any certificates or book-entry shares.

        If the paying agent is to pay some or all of your merger consideration to a person other than you, as the registered owner of a stock certificate or book-entry shares, then (a) in the case of a stock certificate, you must have your certificate properly endorsed or otherwise in proper form for transfer, and (b) in the case of both a stock certificate and book-entry shares, the person requesting payment must have paid any transfer or other taxes payable by reason of the payment to a person other than the registered holder of such certificate or establish to Parent's satisfaction that the taxes have been paid or are not required to be paid.

        If you have lost your certificate, or if it has been stolen, defaced or destroyed, you will be required to provide an affidavit to that fact, and, if required by the paying agent or reasonably requested by the surviving corporation, post a bond as an indemnity against any claim that may be made against such certificate. The letter of transmittal instructions will tell you what to do in these circumstances.


Treatment of Stock Options, Restricted Stock Units and Performance Stock Units


Stock Options


        In accordance with the merger agreement, each outstanding stock option granted under our equity incentive plans that represents the right to acquire our common stock, whether or not then vested or exercisable, will as of immediately prior to the effective time of the merger become fully vested and exercisable immediately prior to and contingent on the closing of the merger and be cancelled as of the effective time of the merger. The holder of such stock option will be entitled to receive a cash payment for each share of our common stock subject to such stock option, equal to the excess, if any, of (a) the $22.00 per share merger consideration over (b) the option exercise price payable in respect of such share of our common stock issuable under such stock option, without interest and less any applicable withholding taxes.


Restricted Stock Units


        In accordance with the merger agreement, each restricted stock unit granted under our equity incentive plans that is outstanding as of immediately prior to the effective time of the merger will be cancelled as of the effective time of the merger. The holder of such restricted stock unit will be entitled to receive a cash payment equal to the product of (a) the number of unforfeited shares of our common stock subject to the restricted stock unit, multiplied by (b) the $22.00 per share merger consideration, without interest and less any applicable withholding taxes.


Performance Stock Units


        Under the merger agreement, each performance stock unit granted under our equity incentive plans that is outstanding as of immediately prior to the effective time of the merger will be cancelled as of the effective time of the merger. The holder of such performance stock unit will be entitled to receive a cash payment equal to the product of (a) the number of unforfeited shares of our common stock subject to the performance stock unit, multiplied by (b) the $22.00 per share merger consideration, without interest and less any applicable withholding taxes.




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Representations and Warranties


        The Company's representations and warranties relate to, among other things:

•

due organization, good standing and qualification;



•

our subsidiaries and the absence of Company equity interests in any other person;



•

our capitalization, the absence of voting agreements and certain related matters;



•

our corporate authority and authorization to enter into, and enforceability of, the merger agreement, determinations and recommendations of the special committee of our Board and by our Board, and the required shareholder vote to approve the principal terms of the merger agreement and the merger;



•

the absence of conflicts with, or defaults under, organizational documents, other contracts, and applicable judgments or laws; the required regulatory filings and consents and approvals of governmental authorities;



•

documents filed with or furnished to the SEC, the accuracy of the information in those documents, including our financial statements, and the furnishing by the Company to Parent of certain SEC comment letters;



•

the absence of certain undisclosed liabilities;



•

our internal controls over financial reporting, certain disclosures made to the Company's auditors and the audit committee of the Company's Board relating to our internal controls, and our disclosure controls and procedures;



•

the absence of investigations regarding the Company's accounting, auditing or internal control practices;



•

this proxy statement and any document incorporated by reference not being false or misleading and the compliance of such documents with the applicable requirements of the Exchange Act, though this representation does not apply to statements based on information supplied by or on behalf of Parent or Merger Sub;



•

absence of certain changes or events that could have a Company Material Adverse Effect (as defined in "—Definition of Company Material Adverse Effect and Parent Material Adverse Effect);



•

tax matters;



•

employee benefit and labor matters;



•

litigation, proceedings and government orders;



•

compliance with laws and compliance with, and adequacy of, governmental licenses and permits;



•

environmental matters;



•

personal and real property;



•

intellectual property;



•

material contracts (including the enforceability thereof and compliance therewith);



•

brokers' and finders' fees;



•

the opinion of the financial advisor to the special committee of the Board;



•

insurance matters;



•

transactions with affiliates;




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supplier relationships;



•

inventory;



•

the absence of violations of the Foreign Corrupt Practices Act of 1977 or similar laws; and



•

non-reliance on any representation or warranty, express or implied, made by Parent, Merger Sub or any their respective representatives, other than those set forth in the merger agreement.

        The merger agreement also contains various representations and warranties made jointly and severally by Parent and Merger Sub relating to, among other things:

•

their due organization, good standing and qualification;



•

operations of Merger Sub and Parent's ownership of the outstanding stock of Merger Sub;



•

their corporate authority and authorization to enter into, and enforceability of, the merger agreement;



•

the absence of conflicts with, or defaults under, organizational documents, other contracts and applicable judgments or laws; required regulatory filings and consents and approvals of governmental authorities;



•

information supplied by Parent or Merger Sub in relation to the Schedule 13E-3 or this proxy statement;



•

brokers' and finders' fees;



•

litigation, proceedings and government orders;



•

no ownership of shares of common stock of the Company;



•

delivery of copies of equity and debt commitment letters and the Rollover Letter and absences of changes therein;



•

the sufficiency of financing to pay the aggregate merger consideration and any other amounts required to be paid by Parent or Merger Sub in connection with the consummation of the transactions contemplated by the merger agreement;



•

absence of exclusivity arrangements with financial advisors or potential providers of debt financing;



•

absence of certain agreements;



•

the solvency of Parent and the surviving corporation in the merger;



•

non-reliance on Company estimates, projects, forecasts, forward-looking statements and business plans;



•

access to information;



•

non-reliance on any representation or warranty, express or implied, made by the Company or any of its representatives, other than those set forth in the merger agreement; and



•

enforceability and absence of default of the guarantors under the Guarantees.

        The representations and warranties of the parties will expire upon consummation of the merger.


Definition of Company Material Adverse Effect and Parent Material Adverse Effect


        Many of the representations and warranties in the merger agreement are qualified by Company Material Adverse Effect and Parent Material Adverse Effect standards.




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        For purposes of the merger agreement, "Company Material Adverse Effect" means any change, development, event, effect or occurrence (each, an "Event") that, individually or in the aggregate, (a) has or would reasonably be expected to have a material adverse effect on the business, assets, financial condition or results of operations of the Company and our subsidiaries, taken as a whole, or (b) prevents or materially delays the Company from performing our obligations under the merger agreement in any material respect or from consummating the merger;provided, that none of the following shall be deemed either alone or in combination to constitute, and none of the following shall be taken into account in determining whether there has been or would be, a Company Material Adverse Effect pursuant to clause (a) above:

•

any Event generally affecting:



•

the geographic regions or the industry in which the Company primarily operates to the extent that they do not disproportionately affect the Company and our subsidiaries, taken as a whole, in relation to other companies in the industry in which the Company primarily operates; or



•

the economy or financial, debt, credit, banking, foreign exchange, securities or capital markets, including any change in interest, currency or exchange rates, or in any commodity, security or market index, and including any disruption of any thereof, in the United States or elsewhere in the world to the extent that they do not disproportionately affect the Company and our subsidiaries, taken as a whole, in relation to other companies in the industry in which the Company primarily operates;



•

to the extent (but only to the extent) arising or resulting from any of the following:



•

changes in applicable law or applicable accounting regulations or principles or interpretations thereof to the extent that they do not disproportionately affect the Company and our subsidiaries, taken as a whole, in relation to other companies in the geographic area or industry in which the Company primarily operates;



•

the announcement or pendency of the merger agreement or any related agreement or the anticipated consummation of the merger (including the identity of Parent or any of its affiliates as the acquiror of the Company, or any action taken, delayed or omitted to be taken by the Company at the request or with the prior consent of Parent or Merger Sub), including the impact thereof on relationships, contractual or otherwise, with employees, customers, subcontractors or partners;



•

national or international political conditions, any outbreak or escalation of hostilities, insurrection or war, whether or not pursuant to declaration of a national emergency or war, acts of terrorism, sabotage, strikes, freight embargoes or other calamity or crisis to the extent that they do not disproportionately affect the Company and our subsidiaries, taken as a whole, in relation to other companies in the geographic area or industry in which the Company primarily operates; or



•

any decline in the market price, or change in trading volume, of the capital stock of the Company or any change in or failure to meet publicly announced revenue or earnings projections (whether such projections or predictions were made by the Company or independent third parties) or internal projections (it being understood that any Event giving rise to such failure (other than any Event described in the bullet points above) may be taken into account in determining whether there has been or will be a Company Material Adverse Effect);



•

any proceeding by any of the Company's shareholders (other than the Rollover Investors) arising out of, concerning or related to the merger agreement or the merger or any related proposals or




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processes that were announced or became known publicly (whether before or after the date of the merger agreement); or

•

fires, epidemics, quarantine restrictions, earthquakes, hurricanes, tornadoes or other natural disasters to the extent that they do not disproportionately affect the Company and our subsidiaries, taken as a whole, in relation to other companies in the geographic area or industry in which the Company primarily operates.

        For purposes of the merger agreement, "Parent Material Adverse Effect" means any change, event, circumstance, development or occurrence that, individually or in the aggregate, prevents or materially delays Parent or Merger Sub from performing its obligations under the merger agreement in any material respect or from consummating the merger or that is otherwise materially adverse with respect to the ability of Parent or Merger Sub to timely perform any of their obligations under the merger agreement in any material respect.


Conduct of Business Prior to Closing


        We have agreed in the merger agreement that, until the effective time of the merger, except as expressly required by the merger agreement, law or judgment, or as consented to by Parent, the Company will, and will cause our subsidiaries to:

•

conduct our and their respective businesses in all material respects in the ordinary course of business; and



•

use commercially reasonable efforts to preserve intact our and their current business organization and keep and preserve our and their present relationships with governmental entities, key employees, officers, customers, suppliers and others having business dealings material to the Company.

        We have also agreed in the merger agreement that, until the effective time, subject to certain exceptions in the Company's disclosure schedule, except as expressly required by the merger agreement, law or judgment or with Parent's prior written consent, the Company will not, and will not permit our subsidiaries to:

•

declare, set aside for payment or pay any dividends on, or make any other distribution in respect of, any shares of our or their capital stock or other Company securities, other than dividends and distributions made by one of our direct or indirect wholly owned subsidiaries to its parent;



•

adjust, split, combine or reclassify any of our or their stock or issue or authorize the issuance of any securities in lieu of shares of our or their capital stock;



•

purchase, redeem or otherwise acquire any Company securities or any other of our or their securities, or any rights, warrants or options to acquire any such securities except pursuant to the forfeiture of Company stock options or acquisitions in connection with the exercise of Company stock options or in connection with withholdings to satisfy tax obligations with respect to stock options and other Company securities, in each case in accordance with the terms of such securities in effect on the date of the merger agreement or the date of grant;



•

issue, deliver, sell, pledge or grant any shares of our or their capital stock or other Company securities, any voting securities, any securities convertible into or exchangeable for, or any options, warrants, calls or rights to acquire, any shares of our or their stock, voting securities or convertible or exchangeable securities, any phantom stock, phantom stock rights, stock appreciation rights or stock-based performance units (except for issuances required upon the exercise of stock options and the vesting of restricted stock units and performance stock units outstanding on the date of the merger agreement in accordance with their terms and issuances




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required under any Company benefit plan, Company benefit agreement or other written agreement, in each case as in effect as of the date of the merger agreement);

•

amend our or their articles of incorporation, bylaws or other organizational documents;



•

acquire or agree to acquire (by merger, consolidation, by purchasing all or a substantial equity or voting interest in or by purchasing all or a substantial portion of the assets of, or by any other manner) any business or any corporation, partnership or other business organization or division thereof in excess of $5 million for any individual acquisition;



•

except in the context of newly hired employees or promoted non-executive employees in the ordinary course of business consistent with past practice and except as required pursuant to the terms of any Company benefit plan, arrangement or other contract as in effect on the date of the merger agreement:



•

increase the compensation of (a) any of our executive officers or directors, by any amount or (b) any of our employees, other than increases in the ordinary course of business that are not material in the aggregate;



•

increase the severance or termination pay of or enter into any severance or termination agreement with any current or former executive officer or director of the Company or its subsidiaries;



•

establish, adopt, enter into or amend in any material respect any collective bargaining agreement, other labor contract, or Company benefit plan;



•

accelerate any rights or benefits, or make any material determinations, under any Company benefit plan except as required pursuant to the terms of any Company benefit plan, arrangement or other contract as in effect on the date of the merger agreement;



•

make any changes in accounting methods, principles or practices materially affecting the Company's reported consolidated assets, liabilities or results of operations, or write down any of our or their material assets (in each case, except as may be required by generally accepted accounting principles);



•

repurchase, prepay, incur or modify in any material respect or guarantee any indebtedness, except for advances of credit under the Company's existing credit facilities or short-term borrowings, each incurred in the ordinary course of business to finance working capital needs, and intercompany indebtedness;



•

issue or sell any debt securities or warrants or other rights to acquire any debt securities of the Company or our subsidiaries, guarantee any debt securities of another person, enter into any agreement to maintain any financial statement condition of another person, or enter into any arrangement having the economic effect of any of the foregoing;



•

make any loans, advances or capital contributions to or investments in any other person other than (a) to any wholly owned subsidiary of the Company, (b) advances to employees for travel and related ordinary expenses or other advances in the ordinary course of business in amounts not exceeding $5,000 to an individual and $100,000 in the aggregate, (c) advances to officers and directors as permitted by the Company's bylaws and indemnification agreements, or (d) cash management activities in the ordinary course of business;



•

make capital expenditures or incur any obligations or liabilities in connection with such expenditures that, in the aggregate, exceed the aggregate amount specified in the Company's disclosure schedule to the merger agreement;




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•

make or change any material tax election or any material accounting method or period in respect of taxes;



•

file any material amended tax return;



•

settle or compromise any material tax liability or refund;



•

with respect to any material contract or any contract or series of related contracts for the sale, lease or license of property or assets for consideration in excess of $5 million in any 12-month period or $10 million in the aggregate (other than purchase orders in the ordinary course with an aggregate total for all related purchase orders that do not exceed the aforementioned dollar limitations), enter into, amend, extend or terminate in a manner that is adverse to the Company or waive, release or assign any of the Company's material rights or claims under such contracts;



•

convene any special meeting (or adjournment of such meeting) of the Company shareholders, other than the special meeting to vote on the merger agreement and any meeting called in accordance with the Company bylaws;



•

sell, lease, license, sell and lease back, mortgage, or otherwise subject to any lien (other than permitted liens) or otherwise dispose of or abandon any of our or their properties or assets except in the ordinary course of business;



•

pay, discharge, settle or satisfy any action, litigation, claim or arbitration for an amount greater than $1 million, cancel any material indebtedness, affirmatively waive any claims or rights of material value or waive any material benefits of or agree to modify in any material manner any confidentiality, standstill or similar agreement;



•

adopt or implement a plan of complete or partial liquidation or dissolution, restructuring, recapitalization or other reorganization of the Company or our subsidiaries; or



•

authorize, commit or agree to take any of the foregoing actions.


Restrictions on Solicitations of Other Offers


        The Company and our subsidiaries are required to (and are required to direct our representatives to) cease and terminate any discussions or negotiations with respect to any proposal to acquire 20% or more of our outstanding shares of common stock or consolidated total assets or such assets to which 20% or more of our revenues or earnings are attributable, other than the merger (a "Company Takeover Proposal"), or any inquiry with respect to any such proposal. Subject to certain exceptions described below, the Company and our subsidiaries cannot:

•

solicit, initiate, or encourage or take any other action knowingly to facilitate or cause the submission of, or enter into any contract relating to, any Company Takeover Proposal, or the making of any inquiry, proposal or offer that would reasonably be expected to lead to a Company Takeover Proposal;



•

enter into, continue, conduct, maintain or otherwise participate in any discussions or negotiations regarding, furnish to any person any information with respect to, or otherwise cooperate in any way with any person with respect to, any Company Takeover Proposal or any inquiry with respect thereto; or



•

amend or grant any waiver or release under, or fail to use commercially reasonable efforts to enforce, any standstill or similar contract with respect to any capital stock of the Company or our subsidiaries.




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        If we receive a Company Takeover Proposal or a request for information or inquiry that contemplates, or that we believe could reasonably be expected to lead to, a Company Takeover Proposal, we must (a) promptly notify Parent (and in any event, within 24 hours of receipt of such Company Takeover Proposal or inquiry) and provide its material terms and (b) provide Parent with copies of all draft agreements provided to the Company or our representatives in connection with the Company Takeover Proposal. We must keep Parent reasonably informed of any material developments, discussions and negotiations related to such Company Takeover Proposal.

        If prior to the Shareholder Approval we or our representatives receive a written Company Takeover Proposal or a request for information or inquiry that contemplates or that we believe could reasonably be expected to lead to a Company Takeover Proposal, that was made after the date of the merger agreement and did not result from a breach of the applicable provisions of the merger agreement, and that our Board or our special committee determines in good faith, after consultation with its outside legal counsel and its independent financial advisor, constitutes or could reasonably be expected to lead to a "Superior Company Proposal" (as defined in "—Termination in Connection with a Superior Proposal"), and our Board or our special committee determines, acting reasonably and in good faith, after giving due consideration to the written opinion of its outside legal counsel, that the failure to take such action would be inconsistent with its fiduciary duties to the Company's shareholders, then we may, prior to receipt of the Shareholder Approval:

•

provide access to or furnish information with respect to the Company and our subsidiaries to the person making the Company Takeover Proposal, request or inquiry pursuant to a confidentiality agreement; and



•

enter into, conduct or otherwise participate in discussions and negotiations (including solicitation of a revised Company Takeover Proposal) with such person regarding the Company Takeover Proposal.

        Prior to obtaining the Shareholder Approval, our Board, acting upon the recommendation of the special committee, or the special committee may effect an Adverse Recommendation Change solely in response to an Intervening Event or a Superior Company Proposal if, in either case, our Board or the special committee has determined, acting reasonably and in good faith, after giving due consideration to the written opinion of its outside general counsel, and after consulting with its independent financial advisor, that the failure to take such action would be inconsistent with the fiduciary duties of our Board or the special committee to our stockholders under applicable law. In such event, we must provide Parent no less than four business days' prior written notice of our intent to effect an Adverse Recommendation Change. In connection with any litigation against the Company with respect to any dispute regarding the decision of our Board or the special committee to effect an Adverse Recommendation Change in this situation, Parent may request, and we will have to provide Parent, a copy of the opinion of our outside legal counsel, so long as Parent agrees that the delivery of such opinion does not constitute a waiver of our attorney-client privilege with respect to the subject matter of such opinion.

        An "Adverse Recommendation Change" is a withdrawal, qualification or modification in a manner adverse to Parent or Merger Sub by our Board (or any of committee thereof) of the recommendation of the merger agreement or the merger.

        An "Intervening Event" is any event occurring after the date of the merger agreement which affects us or our subsidiaries, taken as a whole (other than any event resulting from a breach of the merger agreement by us or our subsidiaries or any breach by any of the Rollover Investors of the Rollover Letter or the voting agreement), that was not reasonably foreseeable as of or prior to the date of the merger agreement; provided that none of the following shall be deemed (either alone or in




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combination) to constitute, or be taken into account in determining whether there has been or would be, an Intervening Event:

•

any development or change, positive or negative, in the economy or financial, debt, credit, banking, foreign exchange, securities or capital markets, including any change in interest, currency or exchange rates, or in any commodity, security or market index, and including any disruption of any thereof, in the United States or elsewhere in the world;



•

any changes, positive or negative, in applicable law or applicable accounting regulations or principles or interpretations thereof;



•

the announcement or pendency of the merger agreement or any related agreement or the anticipated consummation of the merger, including the impact thereof on relationships, contractual or otherwise, with employees, customers, subcontractors or partners;



•

national or international political conditions, any outbreak or cessation of, or escalation or decrease of, hostilities, insurrection or war, acts of terrorism, sabotage, strikes, freight embargoes or other calamity or crisis;



•

any changes in the market price, or changes in trading volume, of our capital stock;



•

our financial results, including any change in, or our exceeding (or failing to meet), revenue or earnings projections (whether such projections or predictions were made by us or independent third parties) or internal budgets, estimates or projections; or



•

any changes, positive or negative, with respect to any of our competitors or potential competitors, our competitive landscape or the industry in which we compete,

in each case above, no matter how material.


Termination in Connection with a Superior Company Proposal


        Though our Board has recommended that you approve the merger agreement, we may change this recommendation or terminate the merger agreement under certain circumstances in response to a Superior Company Proposal. A "Superior Company Proposal" is any bona fide written offer made by a third party after the date of the merger agreement that did not result from of a breach of our duty not to solicit other offers, as described in "—Restrictions on Solicitations of Other Offers" that (a) if consummated would result in the third party acquiring 50% or more of our outstanding shares or assets, (b) provides a higher per share value than the merger consideration, (c) does not contain a financing condition, and (d) our Board or the special committee determines in good faith, after consultation with counsel and independent financial advisor, is more favorable to our shareholders (other than the Rollover Investors and Parent and itsParent's affiliates to the extent that any of them own shares of our stock) than the merger and merger agreement and is reasonably likely to be completed in a timely fashion, taking into account all financial, regulatory, legal and other aspects of such proposal as the special committee or our Board determines to be relevant.

        Prior to obtaining the Shareholder Approval, our Board, acting upon the recommendation of the special committee, or the special committee may, in response to a Superior Company Proposal, resolve to accept such Superior Company Proposal and terminate the merger agreement. To exercise this termination right, the Board or the Special Committee must determine, acting reasonably and in good faith, after giving due consideration to the written opinion of its outside legal counsel, and after consulting with its independent financial advisor, that the failure to take such action would be inconsistent with its fiduciary duties to our shareholders. In connection with any litigation against the Company with respect to any dispute regarding the decision of our Board or the special committee to terminate the merger agreement in this situation, Parent may request, and we will be required to provide Parent, a copy of the opinion of our outside legal counsel, so long as Parent agrees that the




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delivery of such opinion does not constitute a waiver of our attorney-client privilege with respect to the subject matter of such opinion. In addition, we must take the following actions in order to terminate the merger agreement in connection with a Superior Company Proposal:

•

our Board or special committee must first provide Parent with written notice of our plan to terminate the merger agreement in connection with a Superior Company Proposal and such notice must include:



•

the identity of the person making such proposal, and



•

copies of all draft agreements and material written material relating to such takeover proposal provided to us or our representatives in connection with such proposal;



•

for the four business day period (the "negotiation period") following the delivery of the notice described above, if Parent so requests, the Company and our representatives must negotiate in good faith with Parent and its representatives regarding any revisions to the terms of the merger with Parent, which negotiations we must continue in good faith throughout the negotiation period so long as Parent and its representatives do the same; provided, however, that any changes to the financial terms or other material terms or conditions of the Superior Company Proposal that occur prior to the Company's termination of the merger agreement shall require the Company to provide a new notice to Parent and for a three-day negotiation period; and



•

we must pay Parent a termination fee of $47.25 million prior to or at the same time as the termination.


Agreement to Use Reasonable Best Efforts


        Subject to the terms and conditions set forth in the merger agreement, the Company, Parent and Merger Sub have agreed to use their reasonable best efforts to:

•

take, or cause to be taken, all actions, and do, or cause to be done, and to assist and cooperate with the other parties in doing, all things necessary to fulfill all closing conditions applicable to such party and to consummate and make effective, in the most expeditious manner practicable, the merger and other transactions contemplated by the merger agreement;



•

obtain all necessary actions or non-actions, waivers, consents, qualifications, approvals or exemptions from any governmental authority or non-governmental third party;



•

make all necessary registrations, filings and notifications and take all reasonable steps as may be necessary to obtain an approval, clearance, non-action letter, waiver or exemption from any governmental entity;



•

defend against any lawsuits or legal proceedings challenging, and respond to and seek to resolve any governmental entity objections to, the merger agreement or the consummation of the merger;



•

execute and deliver any additional documents or instruments necessary to consummate the merger;



•

cooperate with each other in connection with all such filings or submissions, including by furnishing to each other all information required for any filing made pursuant to law in connection with the merger; and



•

subject to applicable law and privileges, give the other parties prompt notice and keep them informed of the status of any request, inquiry, investigation, action or legal proceeding by or before any governmental entity with respect to the merger, promptly inform the other parties of any material communication regarding the merger received by such party from, or given by such




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party to, the FTC, the DOJ, or any other governmental entity, and consult and cooperate with one another and consider in good faith the views of one another and provide to such other parties in advance any presentations to be made or other information to be submitted by such party in connection with such proceedings.

        Each party also agreed to use their reasonable best efforts to take the following actions with respect to the HSR Act:

•

promptly make an appropriate filing of a notification and report form pursuant to the HSR Act;Act, which was filed with the FTC and the DOJ on October 31, 2011;



•

supply as promptly as practicable any additional information and documentation requested pursuant to the HSR Act; and



•

take all other actions to cause the expiration or termination of the applicable waiting periods under the HSR Act (including any extensions thereof) as soon as practicable.practicable (the FTC and the DOJ granted early termination of the waiting period on November 8, 2011).

        Parent will and will cause its subsidiaries or affiliates to take all such actions required by any governmental entity or arbitral body in order to obtain approval for the merger, including the acceptance by Parent of (a) any and all divestitures of Parent's or its subsidiaries' businesses or assets, (b) any agreement to hold any of Parent's, its subsidiaries' or the Company's assets separate, (c) any agreement to license any portion of Parent's or the Company's or their subsidiaries' business, and (d) any limitation or modification of any of Parent's or the Company's or their subsidiaries' businesses, services or operations.


Financing


        Parent and Merger Sub have each agreed to obtain the equity financing on the terms and conditions described in the equity commitment letters and to use its reasonable best efforts to obtain the debt financing on the terms conditions described in the debt commitment letter, including using its reasonable best efforts to:

•

maintain in effect the equity commitment letters and the debt commitment letter (the "financing letters");



•

negotiate and enter into definitive agreements with respect to the debt commitment letter on the terms and conditions contained in the debt commitment letter or on other terms that in either case would not reasonably be expected to (a) prevent or delay the closing of the merger or the date on which the debt financing could be obtained, or (b) make the funding of the financing less likely to occur, in each case, in any material respect;



•

comply on a timely basis with its covenants or other obligations set forth in, and satisfy on a timely basis all conditions applicable to it in, the financing letters and any definitive agreements relating thereto, and subject to the terms and conditions of the financing letters, consummate the equity and debt financings at or prior to the closing of the merger, and subject to the conditions of the financing letters, cause the prospective lenders and other persons committing to fund the financing to fund the financing at the closing, and enforce all of its material rights under the financing letters (but not, in each case, including through threatening, commencing or pursuing litigation, arbitration or other adversarial proceedings); and



•

comply with its obligations under the financing letters.

        Parent and Merger Sub are permitted to amend or modify, or waive any provision under, or supplement or replace, the financing letters or the Rollover Letter; provided, that Parent and Merger Sub may not effect any such amendment, modification, waiver, supplement or replacement without the




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Company's written consent if such amendment, modification, waiver, supplement or replacement (a) with respect to the financing letters, reduces the aggregate amount of the debt and equity financing,




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(b) with respect to the financing letters, has the effect of expanding, amending or modifying the marketing period in a manner that would reasonably be expected to delay or prevent the funding of the debt and equity financing, (c) with respect to the Rollover Letter, (i) increases the number of shares of the Company's common stock to be contributed thereby, (ii) provides for a consideration per share of the Company's common stock that exceeds the consideration per share in effect as of the signing date or (iii) is otherwise prohibited by the merger agreement, (d) imposes new or additional conditions or otherwise expands, amends or modifies any of the conditions to the financing, or otherwise expands, amends or modifies any other provision of the financing letters, in each case, in a manner that would reasonably be expected to delay or prevent or make materially less likely the funding of the financing on the closing date of the merger, or (e) otherwise adversely impacts the ability of Parent, Merger Sub or the Company, as applicable, to enforce its rights against other parties to the financing letters or any definitive agreements with respect thereto or otherwise to timely consummate the financing and the merger.

        Parent is required to keep the Company reasonably informed on the status of its efforts to arrange the debt financing, including providing prompt notice of certain breaches by parties to the financing letters and the receipt of certain other notices or communications, and the Rollover Investment, and provide to the Company copies of the material definitive agreements for the debt financing.

        If any portion of the debt financing becomes unavailable and such portion is reasonably required to fund the aggregate merger consideration, Parent and Merger Sub shall use their reasonable best efforts to arrange and obtain alternative financing from the same or alternative sources in an amount sufficient to consummate the merger with terms and conditions in the aggregate not materially less favorable to Parent and Merger Sub than the terms and conditions set forth in the debt commitment letter, as promptly as practicable following the occurrence of such event; provided that Parent and Merger Sub shall not be required to obtain such alternative financing if (a) any economic terms of such financing are less favorable to Parent and the surviving corporation in any respect and (b) any non-economic terms of such financing are less favorable, taken as a whole, to Parent and the surviving corporation.

        The Company has agreed to, and has agreed to cause its subsidiaries to (and to use its reasonable best efforts to cause its representatives to) provide such cooperation as is reasonably requested by Parent in connection with the arrangement, syndication and consummation of the debt financing, including, among other things, reasonable best efforts with respect to:

•

furnishing financial and business and other financial data and information of the Company and its subsidiaries as may be reasonably requested by Parent to consummate the debt financing as promptly as reasonably practicable following Parent's request;



•

participating upon reasonable notice in meetings, presentations, road shows, due diligence sessions, drafting sessions and sessions with rating agencies in connection with the financings and otherwise cooperating in syndication efforts;



•

assisting with the preparation of customary materials for rating agency presentations, marketing materials, bank information memoranda, offering documents, credit or other loan documents, security agreements or documents, perfection certificates or similar documents, and other documents necessary for or that are a condition of the financings;



•

obtaining accountant's comfort letters, legal opinions, "10b-5" representation letters, surveys, appraisals, title insurance and corporate and facility ratings, in each case, as reasonably requested by Parent;



•

cooperating reasonably with the debt financing sources' due diligence;




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•

taking all corporate actions reasonably requested by Parent to permit the consummation of the financings and to permit the proceeds thereof to be made available to the surviving corporation after the consummation of the merger;



•

cooperating with the financing sources in connection with the preparation by, or on behalf of the debt financing sources, a field examination and inventory appraisal and such other reports, audits or certifications in respect of the collateral securing the financings, as reasonably requested by Parent; and



•

executing and delivering customary financing agreements and documents, including customary closing certificates and documents, and authorization letters to the debt financing sources authorizing the distribution of information to prospective lenders, in each case, as may be reasonably requested by Parent.

        However, the Company and its subsidiaries are not obligated to pay any commitment or other fee or incur any other liability in connection with the financing prior to the effective time of the merger. In addition, neither the Company, its subsidiaries nor their respective representatives will be required to provide any legal opinion or other opinion of counsel prior to the effective time of the merger, and no director or officer of the Company or its subsidiaries will be required to execute any agreement, certificate, document or instrument with respect to the financing that would be effective prior to the effective time of the merger. Furthermore, nothing in the merger agreement will require such cooperation to the extent it would (a) cause any condition to the closing of the merger to fail to be satisfied or otherwise cause any breach of the merger agreement, (b) require the Company or any of its subsidiaries to take any action that will conflict with their respective organizational documents or result in the contravention, or would reasonably be expected to result in a material violation or material default under, any contract to which the Company or any of its subsidiaries are party, unless contingent on the closing of the merger, or (c) reasonably be expected to result in any officer or director of the Company or its subsidiaries incurring any personal liability that is not contingent on the closing of the merger.

        See "Special Factors—Financing of the Merger," for a discussion of the equity commitment letters and the debt commitment letter.


Employee Matters


        For the one-year period following the effective time of the merger (or, with respect to specific benefit plans of the Company, if sooner, until the end of the applicable plan year for such plan ending immediately prior to the first anniversary of the effective time), Parent will provide, or will cause to be provided, to each employee of the Company and our subsidiaries that is employed after the effective time of the merger, base compensation, incentive compensation opportunities (excluding equity incentives) and employee benefits that, taken as a whole, are no less favorable in the aggregate than those provided to such employees immediately prior to the effective time of the merger under the Company's employee benefit plans. Parent will, or will cause the surviving corporation to, honor any employment, severance and termination agreement and deferred compensation plans, including with respect to any payments, benefits or rights arising as a result of the merger, in effect on the date of the merger agreement.

        In general, Parent has agreed to recognize the service of employees with us prior to the merger as service with Parent and its subsidiaries in connection with any employee benefit plan, including any vacation, paid time off and severance plans, maintained by Parent or its subsidiaries which is made available following the merger by Parent or its subsidiaries for all purposes, including determining eligibility to participate, level of benefits, benefit accruals and vesting, except that an employee will not be entitled to a duplication of benefits with respect to the same period of time.




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        The merger agreement provides that, to the extent permitted under of any of Parent's employee welfare benefit plans that our employees are eligible to participate in after the effective time of the merger, Parent will cause all pre-existing condition limitations, exclusions, actively-at-work requirements and waiting periods that were inapplicable or waived under a comparable plan offered by the Company to be waived. In addition, such employees will receive credit under such new plan (for purposes of satisfying all deductible and co-payment requirements for the applicable plan year) for any eligible expenses incurred under the Company plans during the portion of the relevant plan year prior to such employee's participation in such new plans, unless such Parent plan may not legally be amended to so provide.

        Under the terms of the merger agreement, if Parent so requests, at least 15 days prior to the effective time, the Company shall terminate 401(k) plans before the closing. Nothing above confers any right to employment or continued employment for any person of any right or remedy under or by reason of the merger agreement.


Indemnification and Insurance


        Parent and Merger Sub have agreed that they will, and Parent will cause the surviving corporation to, honor all of our obligations to indemnify and exculpate current and former directors and officers of the Company and our subsidiaries for acts or omissions by such directors and officers occurring at or prior to the effective time of the merger, whether pursuant to our articles of incorporation, our bylaws, the comparable organizational documents of our subsidiaries, and any indemnification agreements or other agreements of the Company or our subsidiaries, and such obligations shall survive the merger and will continue in full force and effect in accordance with their terms until the expiration of the applicable statute of limitations with respect to any claims or potential claims against such directors or officers arising out of such acts or omissions or such later date as is provided pursuant to the terms thereof. Parent has agreed not to amend, repeal or otherwise modify our articles of incorporation, our bylaws or the respective comparable organizational documents of our subsidiaries in any manner that would adversely affect the rights of any director, officer or employee with respect to their acts or omissions occurring at or prior to the effective time of the merger.

        The merger agreement also provides that Parent will, and will cause the surviving corporation to, indemnify, defend and hold harmless and pay on behalf of or provide advancement of expenses (including reasonable legal fees and expenses) to, current and former directors and officers of the Company and our subsidiaries and any employee of the Company or any of our subsidiaries who acts as a fiduciary under any employee benefit plan in their capacities as such, against all losses, claims, damages, liabilities, fees and expenses (including attorneys' fees and disbursements), judgments, fines and amounts paid in settlement with respect to any claim, action, suit, proceeding or investigation, in respect of actions or omissions occurring at or prior to the effective time of the merger in connection with the duties of such director, officer or employee.

        Under the terms of the merger agreement, Parent and Merger Sub will also, for a period of at least six years after the effective time of the merger, maintain the Company's current directors' and officers' liability insurance and indemnification policies to cover acts or omissions occurring or allegedly occurring at or prior to the effective time of the merger for those individuals who are currently covered by the Company's current directors' and officers' liability insurance policy, so long as the annual premium for such policies does not exceed 300% of the last annual premium paid by the Company for such existing policies. If the annual premium exceeds 300% of the last annual premium paid, Parent shall maintain the most favorable policies of directors' and officers' liability insurance obtainable for an annual premium equal to 300% of the last annual premium paid. Parent may also elect to satisfy its obligations with respect to the directors' and officers' liability insurance policy by obtaining a prepaid directors' and officers' liability insurance policy at its expense, so long as the coverage and amount are




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no less favorable to such directors and officers than the insurance policies they currently have or by substituting the existing policies with policies from reputable and financially sound carriers.

        In addition, after consulting with Parent, the Company may elect, prior to the effective time of the merger, to purchase on an arm's-length basis a directors' and officers' liability insurance "tail" policy for a period of six years after the effective time of the merger with respect to acts or omissions committed or allegedly committed at or prior to the effective time of the merger, so long as the cost of such policy does not exceed 300% of the last annual premium paid by the Company for its existing policies.


Other Covenants


        The merger agreement contains additional agreements between the Company and Parent relating to, among other things:

•

the filing of this proxy statement and the Rule 13e-3 transaction statement on Schedule 13E-3 with the SEC (and cooperation in response to any comments from the SEC with respect to either statement);



•

the special meeting of our shareholders, and the recommendation of our Board;



•

Parent's access to our properties, offices, employees, books and records, and other information between the date of the merger agreement and the closing (subject to all applicable legal or contractual obligations and restrictions and confidentiality);



•

notification of certain matters;



•

coordination of press releases and other public announcements or filings relating to the merger;



•

payment of transfer taxes;



•

defense of shareholder litigation in connection with the merger;



•

the expenditure of funds by Parent and Merger Sub between the date of the merger agreement and the closing of the merger;



•

the payment of fees and expenses; and



•

actions to cause the disposition of our equity securities held by each individual who is a director or officer of the Company pursuant to the transactions contemplated by the merger agreement to be exempt under Rule 16b-3 promulgated under the Exchange Act.


Conditions to the Completion of the Merger


        The obligations of the Company, Parent and Merger Sub to consummate the merger are subject to the satisfaction or waiver of the following conditions on or prior to the closing date of the merger:

•

the affirmative vote to approve the merger agreement of the holders of a majority of the outstanding shares of our common stock;



•

the absence of any laws or governmental orders that prohibit the consummation of the merger;



•

the expiration or termination of the applicable waiting period under the HSR Act; and



•

all approvals from or registrations, declarations or filings with, or notices to, or permits from any governmental entity shall have been filed or obtained without imposition of material conditions, other than such approvals, registrations, declarations, filings, notices or permits the failure of which to obtain has not had, and would not reasonably be expected to have, a Company




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Material Adverse Effect (as defined in "—Definition of Company Material Adverse Effect and Parent Material Adverse Effect").

In addition to the conditions for all parties to the merger agreement, the obligations of Parent and Merger Sub to complete the merger are subject to the satisfaction at or prior to the effective time, of the following conditions:

•

the representations and warranties made by the Company regarding:



•

the absence of voting agreements must be true and correct in all material respects as of the date of the merger agreement and at the closing as though made on or as of the closing;



•

(a) our capitalization (subject to de minimis exceptions that do not increase the aggregate amount of the merger consideration by more than $750,000), (b) the absence of bonds, debentures, notes or other indebtedness of the Company with voting rights with respect to matters that our shareholders may vote on, (c) our corporate power and authority to execute and deliver the merger agreement, (d) our Board's and the special committee's determination and recommendation regarding the merger agreement, (e) the fact that the Shareholder Approval is the only approval required pursuant to California law, (f) the absence of certain changes or events that would reasonably be expected to have a Company Material Adverse Effect since April 2, 2011, and (g) the absence of brokers' and finders' fees except as disclosed (except for de minimis exceptions that do not result in any additional cost or liability of more than $50,000), shall be true and correct in all respects as of the date of the merger agreement and at the closing as though made on or as of the closing; and



•

all other matters shall be true and correct (disregarding all qualifications as to materiality or Company Material Adverse Effect) as of the date of the merger agreement and at the closing as though made on or as of the closing except, in each case:



•

representations and warranties that address matters only as of a particular date or period of time and only need to be true as of such date or period; or



•

where the failure of such representations to be true and correct would not have had or would not reasonably be expected to have, individually or in the aggregate, a Company Material Adverse Effect.



•

the Company's performance, in all material respects, of each of its obligations required to be performed by the Company in the merger agreement at or prior to the closing date;



•

the receipt by Parent of a certification signed by an executive officer of the Company that all of the conditions with respect to the representations and warranties and obligations of the Company under the merger agreement as described above have been satisfied;



•

the absence of any event, change or occurrence that, individually or in the aggregate, has had or would reasonably be expected to have a Company Material Adverse Effect since the date of the merger agreement; and



•

the receipt by Parent of a certification signed by an executive officer of the Company that an interest in the Company is not a U.S. real property interest.




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        In addition to the conditions for all parties to the merger agreement, the Company's obligation to complete the merger is subject to the satisfaction of the following conditions at or prior to the effective time:

•

the representations and warranties made by Parent and Merger Sub in the merger agreement, disregarding all qualifications and exceptions relating to materiality or Parent Material Adverse Effect), must be true and correct as of the date of the merger agreement and as of the closing date as though made on and as of the closing date, except:



•

those representations and warranties that address matters only as of a particular date or period of time and only need to be true as of such date or period; or



•

where the failure of such representations to be true and correct, individually or in the aggregate, would not prevent or materially delay the consummation of the merger or otherwise prevent Parent or Merger Sub from performing any of their material obligations under the merger agreement;



•

Parent's and Merger Sub's performance, in all material respects, of each of its obligations required to be performed by them in the merger agreement at or prior to the closing date of the merger; and



•

the receipt of a certificate signed by an executive officer of Parent certifying that all of the conditions with respect to the representations and warranties and obligations of Parent and Merger Sub under the merger agreement as described above have been satisfied.

        Notwithstanding the foregoing, none of the parties to the merger agreement may rely on the failure of any condition to be satisfied to excuse such party's obligation to effect the merger if such failure was caused by such party's failure to use the standard of efforts required from such party to consummate the merger and the other transactions contemplated by the merger agreement.


Termination of the Merger Agreement


        The merger agreement may be terminated at any time prior to the consummation of the merger, whether before or after the Shareholder Approval has been obtained:

•

by mutual written consent of Parent and the Company;



•

by either the Company or Parent:



•

if the merger is not completed on or before April 6, 2012 (the "Walk-Away Date"), except that this right to terminate will not be available to any party whose failure to comply with any of its obligations under the merger agreement results in the failure of the merger to be completed by the Walk-Away Date;



•

if a law or final and nonappealable governmental order enjoins, restrains or prohibits the consummation of the merger, so long as the party seeking to terminate has used its reasonable best efforts to contest, appeal, remove or render inapplicable the governmental order;



•

if the Shareholder Approval was not obtained at the special meeting or any adjournment or postponement of the special meeting, except this right to terminate will not be available to the Company if the failure to obtain the Shareholder Approval was the result of the Company's failure to perform any of its obligations under the merger agreement; or



•

if the other party breaches or fails to perform any of its representations, warranties or covenants contained in the merger agreement such that certain closing conditions to the merger agreement would not be satisfied, and which breach cannot be cured by the




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Walk-Away Date or, if capable of being cured, has not been cured by the earlier of (a) twenty days after the delivery of written notice by the terminating party to the breaching party of such breach and (b) the Walk-Away Date, so long as the terminating party is not then in material breach of any representation or warranty in the merger agreement such as would give rise to the failure of the breaching party's closing condition with respect to the accuracy of the terminating party's representations and warranties in the merger agreement and the terminating party has not failed to perform in any material respect any covenant in the merger agreement;

•

by Parent:



•

prior to the Shareholder Approval, if (a) we, our Board or any committee thereof (i) withdraws, qualifies or modifies, or proposes publicly to withdraw, qualify or modify, in a manner adverse to Parent or Merger Sub, its recommendation that our shareholders approve the merger agreement or its approval of the merger agreement, or approves or recommends any Company Takeover Proposal, or (ii) delivers a notice to Parent informing Parent that we have received a Superior Company Proposal and that, in connection with such Superior Company Proposal, we are prepared to terminate the merger agreement, (b) a Company Takeover Proposal becomes publicly known and neither our special committee nor our Board has confirmed the recommendation of the Board within five business days of Parent's written request that it do so, or (c) we breached any of our obligations regarding Company Takeover Proposals or Superior Company Proposals in any material respect; and



•

by the Company:



•

prior to the Shareholder Approval, if, in order to accept a Superior Company Proposal, we comply with the notice and other requirements described in "—Termination in Connection with a Superior Proposal" and we pay Parent the termination fee described in "—Termination Fee"; or



•

if the Shareholder Approval has been obtained and all other conditions to the obligations of Parent and Merger Sub to effect the merger (other than as specified in the merger agreement) have been satisfied, we have notified Parent that all such conditions to our obligations to effect the merger (other than as specified in the merger agreement) have been satisfied or will be waived, the marketing period has ended, and Parent and Merger Sub have failed to consummate the merger prior to the Walk-Away Date (unless such failure was a result of our failure to perform our obligations under the merger agreement or to deliver any of the documents or information or cause to occur any other actions with respect to which we are required to use our reasonable best efforts to deliver or cause to be delivered or occur pursuant to our covenant to cooperate with Parent's financing efforts).


Termination Fee


        We will be obligated to pay to Parent a termination fee of $47.25 million if:

•

the merger agreement is terminated by either the Company or Parent because the Shareholder Approval has not been obtained at the special meeting or any adjournment or postponement of the special meeting;



•

we terminate the merger agreement prior to obtaining the Shareholder Approval in order to accept a Superior Company Proposal;




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•

if Parent terminates the merger agreement for any of the following reasons:



•

the Company, our Board or our special committee delivers a notice of a Superior Company Proposal and a statement that we are in connection therewith prepared to terminate the merger agreement, or withdraws, qualifies or modifies in a manner adverse to Parent its recommendation that our shareholders approve the merger agreement;



•

a Company Takeover Proposal becomes publicly known and neither our special committee nor our Board has confirmed the recommendation of the Board within five business days of Parent's written request that it do so;



•

we breached any of our obligations regarding a Company Takeover Proposal or a Superior Company Proposal in any material respect; or



•

we failed to perform any of our representations, warranties or covenants contained in the merger agreement such that certain of Parent's closing conditions to the merger agreement would not be satisfied, and which breach cannot be cured by the Walk-Away Date or, if capable of being cured, has not been cured by the earlier of (a) twenty days after the delivery of written notice by Parent to us of such breach and (b) the Walk-Away Date, so long as Parent and Merger Sub are not then in material breach of any representation or warranty in the merger agreement such as would give rise to the failure of our closing condition with respect to the accuracy of Parent and Merger Sub's representations and warranties in the merger agreement and Parent and Merger Sub have not failed to perform in any material respect any covenant in the merger agreement; or



•

the merger agreement is terminated because of the failure to consummate the merger on or before the Walk-Away Date and:



•

the Company's closing conditions have been satisfied (other than as specified in the merger agreement) and the marketing period has not ended as a result of the Company's failure to perform any of its obligations under the merger agreement; or



•

a Company Takeover Proposal has been announced after the date of the merger agreement and not withdrawn, the termination occurs before the special meeting, and within the 12 months following such termination the Company enters into a definitive agreement to consummate a Company Takeover Proposal or a Company Takeover Proposal is consummated (for purposes of this bullet, references to "20%" in the definition of Company Takeover Proposal will be deemed references to "50%").

        Parent will be obligated to pay us a termination fee of $94.5 million if the Shareholder Approval has been obtained and all other conditions to the obligations of Parent and Merger Sub to effect the merger (other than as specified in the merger agreement) have been satisfied and:

•

the marketing period has ended, we have notified Parent that all conditions to our obligations to effect the merger (other than as specified in the merger agreement) have been satisfied or will be waived and Parent and Merger Sub have failed to consummate the merger prior to the Walk-Away Date (unless such failure was a result of our failure to perform our obligations under the merger agreement or to deliver any of the documents or information or cause to occur any other actions with respect to which we are required to use our reasonable best efforts to deliver or cause to be delivered or occur pursuant to our covenant to cooperate with Parent's financing efforts); or



•

the Walk-Away Date has occurred and the marketing period has not ended as a result of any reason other than our failure to perform any of our obligations under the merger agreement or to deliver any of the documents or information or cause to occur any other actions with respect




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to which we are required to use our reasonable best efforts to deliver or cause to be delivered or occur pursuant to our covenant to cooperate with Parent's financing efforts.

        Also, if either Parent or the Company successfully sues to enforce the payment of its respective termination fee, the non-prevailing party will pay the prevailing parties' out-of-pocket costs and expenses (including reasonable attorneys' fees), up to a maximum of $10 million.


Liability Cap and Limitation on Remedies


        Our right to receive payment of the termination fee from Parent and reimbursement for certain out-of-pocket costs and expenses, as described above in "—Termination Fee," is our sole and exclusive remedy against Parent, Merger Sub, ACOF III, CPPIB and certain of their respective affiliates and representatives for any loss suffered as a result of the failure of the merger to be consummated or for a breach or failure to perform under the merger agreement.

        Parent's right to receive payment of the termination fee from the Company and reimbursement for certain out-of-pocket costs and expenses, as described above in "—Termination Fee," are the sole and exclusive remedies of Parent and Merger Sub and their respective affiliates and representatives against the Company and its affiliates and representatives for any loss or damage suffered as a result of the failure of the merger to be consummated or for a breach or failure to perform under the merger agreement. Both we and Parent are entitled to seek specific performance to prevent breaches or threatened breaches of the merger agreement and to enforce the terms of the merger agreement without bond or other security. However, we cannot seek specific performance to require Parent or Merger Sub to cause the equity financing to be funded or to consummate the merger.


Amendment


        At any time prior to the consummation of the merger, the merger agreement may be amended by written agreement of Parent, Merger Sub and the Company, except that after receipt of the shareholder approval of the merger agreement, there will be no amendment that by law would require further approval by our shareholders without such approval having been obtained.


Extension of Time & Waiver


        At any time prior to the effective time of the merger, the parties may:

•

extend the time for the performance of any of the obligations or acts of the other parties to the merger agreement;



•

waive any inaccuracies in the representations and warranties in the merger agreement or any document delivered pursuant to the merger agreement; or



•

waive compliance by any of the other parties with any of the agreements or conditions contained in the merger agreement;

provided, however, that no failure or delay by the Company, Parent or Merger Sub in exercising any right under the merger agreement will operate as a waiver of that right, and no single or partial exercise of any right under the merger agreement will preclude any other or further exercise of such right or the exercise of any other right under the merger agreement. Any agreement on the part of a party to the merger agreement to any such extension or waiver will be valid only if in writing and signed on behalf of such party.




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DISSENTERS' RIGHTS


        If the merger is completed, you may be entitled to dissenters' rights under Chapter 13 of the California Corporations Code ("Chapter 13") as long as you comply with the conditions established by Chapter 13 and the other requirements of Chapter 13 are satisfied. Under California law, no dissenters' rights are available for shares listed on any national securities exchange, including the NYSE, such as our common stock, unless demands for payment are filed by at least five percent of the outstanding shares of our common stock.

        If you have a beneficial interest in shares of our common stock that are held of record in the name of another person, such as a broker, bank or other nominee, and you desire to perfect any dissenters' rights, you must act promptly to cause the holder of record timely and properly to follow the steps summarized below.Dissenters' rights cannot be validly exercised by persons other than shareholders of record regardless of the beneficial ownership of the shares.

        The discussion below is not a complete summary regarding your dissenters' rights under California law and is qualified in its entirety by reference to the text of the relevant provisions of California law, which are attached to this proxy statement asAnnex C. You should review this summary and Chapter 13 carefully if you wish to exercise dissenters' rights or if you want to preserve your right to do so in the future, because failure to comply with the required procedures within a certain time frame will result in the loss of your dissenters' rights.

        If the merger is completed, shareholders who do not vote in favor of the approval of the merger agreement may become entitled to be paid cash for the fair market value of their stock in lieu of the merger consideration set forth in the merger agreement.

        The merger agreement provides that shares of our common stock held by a holder who is entitled to demand and has properly demanded dissenters' rights in accordance with Chapter 13 shall not be converted into the right to receive the $22.00 per share merger consideration. At the effective time of the merger, such holders will cease to have any rights with respect to such dissenting shares, except the right to receive payment of the fair market value of such shares determined in accordance with Chapter 13.

        Section 1301(a) of the California Corporations Code requires the Company to give notice that the merger was approved to each of our shareholders who did not vote in favor of the approval of the merger agreement and requires us to provide a statement of the fair market value (excluding any appreciation or depreciation in consequence of the merger) of the shares on October 10, 2011, the day before the first announcement of the terms of the merger. If you do not wish to pursue your dissenters' rights, you will be entitled to receive the merger consideration set forth in the merger agreement in exchange for your shares of our common stock. All of our shareholders who desire to pursue their dissenters' rights must follow the procedures to perfect such rights as described below.

        Should you wish to become a dissenting shareholder:

1.

you must continuously hold your shares from the record date for shareholders entitled to consent to the merger;



2.

you must not vote any of the shares you wish to qualify as dissenting shares in favor of the approval of the merger agreement;



3.

you must make a written demand of the Company not later than 30 days after the date the Company provides you with notice that the merger was approved (the "Approval Notice").Please note that the 30-day time period begins on the date the Approval Notice was mailed, not on the date you receive it. In your written demand to the Company, include the number of shares you are qualifying as dissenting shares and state the amount you believe to be the fair market value of those shares as of the day before the announcement of the merger. This




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statement of the fair market value of your shares will constitute an offer to sell your dissenting shares to the Company at such price. You should send your written demand to Corporate Secretary at 99¢ Only Stores, 4000 Union Pacific Avenue, City of Commerce, California 90023. Even if you did not vote in favor of the approval of the merger agreement or if you gave a proxy to someone directing a vote against approval of the merger, you must still make the written demand to the Company as described above in order to qualify your shares as dissenting shares;

4.

you must submit the certificates representing your dissenting shares to Corporate Secretary at 99¢ Only Stores, 4000 Union Pacific Avenue, City of Commerce, California 90023. You must submit your certificates within the same 30-day time limit as for the written demand; and



5.

demands must be filed in accordance with the requirements of Chapter 13 with respect to at least five percent of the outstanding shares of the Company's common stock.

        If the Company agrees that your shares have been validly qualified as dissenting shares, and you and the Company agree upon the price of the shares, you will be entitled to the agreed upon price, plus any interest that may accrue at the legal rate on judgments from the date of such agreement.

        If the Company does not agree that your shares were validly qualified as dissenting shares, or if you and the Company fail to agree upon the fair market value of your shares, you may file a complaint with the California Superior Court within six months after the Approval Notice is mailed to you, requesting that the court determine the fair market value of the dissenting shares and/or whether your shares qualify as dissenting shares.

        If demands are received with respect to less than five percent of the outstanding shares of the Company's common stock, or if you fail to perfect your dissenters' rights or effectively waive, withdraw or lose such rights, or if a court of competent jurisdiction determines that you are not entitled to relief under Chapter 13, your shares of common stock will thereupon be deemed to have been canceled and converted into the right to receive the merger consideration.

        YOU SHOULD BE AWARE THAT IF YOU SEEK TO EXERCISE DISSENTERS' RIGHTS, THE FAIR MARKET VALUE OF YOUR SHARES, AS FINALLY DETERMINED UNDER CALIFORNIA LAW, COULD BE MORE THAN, THE SAME AS, OR LESS THAN THE AMOUNT OF THE MERGER CONSIDERATION THAT YOU WOULD RECEIVE PURSUANT TO THE MERGER AGREEMENT. IF THE FAIR MARKET VALUE AS FINALLY DETERMINED EXCEEDS THE MERGER CONSIDERATION THAT WAS OFFERED BY 99¢ ONLY STORES, THE COSTS AND EXPENSES OF THE APPRAISAL PROCEEDING WILL BE ASSESSED AGAINST 99¢ ONLY STORES. OTHERWISE, THE COSTS MAY BE APPORTIONED AT THE DISCRETION OF THE COURT.

        IN VIEW OF THE COMPLEXITY OF THE PROVISIONS OF CALIFORNIA LAW RELATING TO DISSENTERS' RIGHTS, ALL 99¢ ONLY STORES SHAREHOLDERS THAT WISH TO EXERCISE DISSENTERS' RIGHTS OR THAT WISH TO PRESERVE THEIR RIGHT TO DO SO SHOULD CAREFULLY REVIEW CHAPTER 13 OF THE CALIFORNIA CORPORATIONS CODE, BECAUSE FAILURE TO COMPLY WITH THE PROCEDURES SET FORTH THEREIN WILL RESULT IN THE LOSS OF SUCH RIGHTS. THOSE WISHING TO DISSENT SHOULD CONSULT WITH THEIR OWN LEGAL COUNSEL IN CONNECTION WITH COMPLIANCE UNDER CHAPTER 13.




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IMPORTANT INFORMATION REGARDING THE COMPANY


Directors and Executive Officers of the Company


        Set forth below for each of the directors and executive officers of the 99¢ Only Stores is his respective present principal occupation or employment, the name and principal business of the corporation or other organization in which such occupation or employment is conducted and his five-year employment history. Except as otherwise noted, each person identified below is a citizen of the United States of America and can be reached c/o 99¢ Only Stores, 4000 Union Pacific Avenue, City of Commerce, California 90023 or by telephone at (323) 980-8145.

        During the last five years, none of 99¢ Only Stores, our directors or our executive officers has been (a) convicted in a criminal proceeding (excluding traffic violations or similar misdemeanors) or (b) a party to any judicial or administrative proceeding (except for matters that were dismissed without sanction or settlement) that resulted in a judgment, decree or final order enjoining the person from future violations of, or prohibiting activities subject to, federal or state securities laws, or a finding of any violation of federal or state securities laws.

        99¢ Only Stores has a board of directors with seven members. The terms of the current directors will terminate on the date of the annual meeting of shareholders in 2012.


Directors:(1)


Name		Age			Year First Elected or Appointed Director			Principal Occupation		Age			Year First Elected or Appointed Director			Principal Occupation
David Gold			79			1965		David Gold has been Chairman of the Board since he co-founded 99¢ Only Stores in 1982 with his wife Sherry Gold. Mr. Gold has over 50 years of retail experience.			79			1965		David Gold has been Chairman of the Board since he co-founded 99¢ Only Stores in 1982 with his wife Sherry Gold. Mr. Gold has over 50 years of retail experience.
Jeff Gold			43			1991		Jeff Gold joined the Company in 1984 and has served in various managerial capacities. From 1991 to 2004 he served as Senior Vice President of Real Estate and Information Systems. In January 2005, he was promoted to President and Chief Operating Officer.			44			1991		Jeff Gold joined the Company in 1984 and has served in various managerial capacities. From 1991 to 2004 he served as Senior Vice President of Real Estate and Information Systems. In January 2005, he was promoted to President and Chief Operating Officer.
Eric Schiffer			50			1991		Eric Schiffer joined the Company in 1991 and has served in various managerial capacities. In March 2000, he was promoted to President and in January 2005 to Chief Executive Officer. From 1987 to 1991, he was a venture capitalist for Oxford Partners, a venture capital firm. Mr. Schiffer is a graduate of Harvard Business School.			50			1991		Eric Schiffer joined the Company in 1991 and has served in various managerial capacities. In March 2000, he was promoted to President and in January 2005 to Chief Executive Officer. From 1987 to 1991, he was a venture capitalist for Oxford Partners, a venture capital firm. Mr. Schiffer is a graduate of Harvard Business School.




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Name		Age			Year First Elected or Appointed Director			Principal Occupation
Lawrence Glascott			77			1996		Lawrence Glascott serves on the Company's Audit (Chairman), Compensation, Nominating and Corporate Governance and Strategic Planning Committees. Mr. Glascott has also served as Chairman of the board of directors of General Finance Corporation (Nasdaq: GFN) since November 2005, and is a member of that board's audit committee. Before Mr. Glascott retired in 1996, he had been Vice President—Finance of Waste Management International, an environmental services company, since 1991. Prior thereto, Mr. Glascott was a partner at Arthur Andersen LLP and was the Arthur Andersen LLP partner in charge of the 99¢ Only Stores account for six years. Additionally, Mr. Glascott was in charge of the Los Angeles based Arthur Andersen LLP Enterprise Group practice for over 15 years.
Marvin Holen			82			1991		Marvin Holen serves on the Company's Audit, Compensation, Nominating and Corporate Governance (Chairman) and Strategic Planning Committees. He is a practicing attorney and in 1960 founded the law firm of Van Petten & Holen, which specializes in corporate law. Mr. Holen previously served on the board of the Southern California Rapid Transit District (including as the Board's President), the board of California Blue Shield, the board of United California Savings Bank, and on numerous other corporate and philanthropic boards of directors.
Eric G. Flamholtz			68			2004		Eric G. Flamholtz, Ph.D., serves on the Company's Compensation and Strategic Planning Committees as Chairman and as a member of Nominating and Corporate Governance Committee. He has been a professor of management at the Anderson Graduate School of Management, University of California at Los Angeles since 1973 and in 2006 became Professor Emeritus. He is President of Management Systems Consulting Corporation, which he founded in 1978. He is the author of several books, includingGrowing Pains: Transitioning from an Entrepreneurship to a Professionally Managed Firm. As a consultant he has extensive experience with firms ranging from entrepreneurships to Fortune 500 companies, including Starbucks, Navistar, Inc., Baskin Robbins, Jamba Juice and Grocery Outlets, as well as several Chinese companies in various industries.




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Name		Age			Year First Elected or Appointed Director			Principal Occupation		Age			Year First Elected or Appointed Director			Principal Occupation
Peter Woo			62			2007		Peter Woo serves on the Company's Audit, Compensation, Nominating and Corporate Governance and Strategic Planning Committees. He is a founder and Chief Executive Officer of Megatoys, Inc., a Los Angeles-based holding company with subsidiaries and facilities in China and Hong Kong. Mr. Woo was instrumental in the redevelopment of the downtown Los Angeles area now known as the "toy district", and has served as an advisor on international trade to the City of Los Angeles.			62			2007		Peter Woo serves on the Company's Audit, Compensation, Nominating and Corporate Governance and Strategic Planning Committees. He is a founder and Chief Executive Officer of Megatoys, Inc., a Los Angeles-based holding company with subsidiaries and facilities in China and Hong Kong. Mr. Woo was instrumental in the redevelopment of the downtown Los Angeles area now known as the "toy district", and has served as an advisor on international trade to the City of Los Angeles.
Other Executive Officers:
Rob Kautz			53					Rob Kautz joined the Company in November 2005 as Executive Vice President and Chief Financial Officer. He is responsible for overseeing finance, accounting, strategic planning and information technology. He was the CEO/CFO of Taste Good LLC, a private start-up in food production and distribution, from September 2004 until he joined the Company. He was CFO and subsequently CEO for Wolfgang Puck Casual Dining and Wolfgang Puck Worldwide where he was employed from 1998 until July 2004. Mr. Kautz started his career with IBM and served in an officer capacity for a technology vendor and he is a graduate of Harvard Business School.			53					Rob Kautz joined the Company in November 2005 as Executive Vice President and Chief Financial Officer. He is responsible for overseeing finance, accounting, strategic planning and information technology. He was the CEO/CFO of Taste Good LLC, a private start-up in food production and distribution, from September 2004 until he joined the Company. He was CFO and subsequently CEO for Wolfgang Puck Casual Dining and Wolfgang Puck Worldwide where he was employed from 1998 until July 2004. Mr. Kautz started his career with IBM and served in an officer capacity for a technology vendor and he is a graduate of Harvard Business School.
Howard Gold			51					Howard Gold joined the Company in 1982 and has served in various managerial capacities. In 1991, Mr. Gold was named Senior Vice President of Distribution, and in January 2005 he was named Executive Vice President of Special Projects. Additionally, he has responsibility for the Company's allocation function and Bargain Wholesale division. He has been an executive with the Company for over 20 years, and previously served as a director of the Company.			52					Howard Gold joined the Company in 1982 and has served in various managerial capacities. In 1991, Mr. Gold was named Senior Vice President of Distribution, and in January 2005 he was named Executive Vice President of Special Projects. Additionally, he has responsibility for the Company's allocation function and Bargain Wholesale division. He has been an executive with the Company for over 20 years, and previously served as a director of the Company.

        Jeff Gold and Howard Gold are the sons of David Gold, and Eric Schiffer is the son-in-law of David Gold.


Selected Historical Financial Data


        The following table sets forth selected financial and operating data of the Company for the periods indicated. The data set forth below should be read in conjunction with our quarterly report on Form 10-Q for the period ended July 2,October 1, 2011, the consolidated financial statements for the fiscal years ended April 2, 2011, and March 27, 2010, and notes thereto. The three month periodfirst half ended on July 2,October 1, 2011, isand September 25, 2010, are comprised of 1326 weeks. The period ended on April 2, 2011, is comprised of 53 weeks while the period ended on March 27, 2010, is comprised of 52 weeks.




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(Amounts in thousands, except per share and operating data)	(Amounts in thousands, except per share and operating data)				Quarter Ended July 2, 2011			Year Ended April 2, 2011			Year Ended March 27, 2010			(Amounts in thousands, except per share and operating data)				Year Ended April 2, 2011			Year Ended March 27, 2010			First Half Ended October 1, 2011			First Half Ended September 25, 2010
Statements of Income Data:	Statements of Income Data:													Statements of Income Data:
Net Sales:	Net Sales:													Net Sales:
	99¢ Only Stores				$	357,544		$	1,380,357		$	1,314,214		99¢ Only Stores				$	1,380,357		$	1,314,214		$	709,764		$	659,802
	Bargain Wholesale					10,796			43,521			40,956		Bargain Wholesale					43,521			40,956			21,614			20,232
		Total sales				368,340			1,423,878			1,355,170			Total sales				1,423,878			1,355,170			731,378			680,034
Cost of sales (excluding depreciation and amortization expense as shown separately below)	Cost of sales (excluding depreciation and amortization expense as shown separately below)					219,520			842,756			797,748		Cost of sales (excluding depreciation and amortization expense as shown separately below)					842,756			797,748			436,784			403,701
	Gross profit					148,820			581,122			557,422		Gross profit					581,122			557,422			294,594			276,333
Selling, general and administrative expenses:	Selling, general and administrative expenses:													Selling, general and administrative expenses:
	Operating expenses					113,566			436,034			436,608		Operating expenses					436,034			436,608			227,933			215,304
	Depreciation and amortization					6,713			27,605			27,398		Depreciation and amortization					27,605			27,398			13,703			13,501
		Total operating expenses				120,279			463,639			464,006			Total operating expenses				463,639			464,006			241,636			228,805
	Operating income					28,541			117,483			93,416		Operating income					117,483			93,416			52,958			47,528
Other expense (income), net						116			(741	)		(135	)
Other (income) expense, net														Other (income) expense, net					(741	)		(135	)		102			(332	)
	Income before provision for income taxes					28,425			118,224			93,551		Income before provision for income taxes					118,224			93,551			52,856			47,860
Provision for income taxes	Provision for income taxes					10,742			43,916			33,104		Provision for income taxes					43,916			33,104			20,059			18,110
Net income	Net income				$	17,683		$	74,308		$	60,447		Net income				$	74,308		$	60,447		$	32,797		$	29,750
Earnings per common share attributable :	Earnings per common share attributable :													Earnings per common share attributable :
		Basic			$	0.25		$	1.06		$	0.88			Basic			$	1.06		$	0.88		$	0.46		$	0.43
		Diluted			$	0.25		$	1.05		$	0.87			Diluted			$	1.05		$	0.87		$	0.46		$	0.42
Weighted average number of common shares outstanding:	Weighted average number of common shares outstanding:													Weighted average number of common shares outstanding:
		Basic				70,465			69,963			68,641			Basic				69,963			68,641			70,517			69,768
		Diluted				71,332			70,995			69,309			Diluted				70,995			69,309			71,333			70,574
Company Operating Data:	Company Operating Data:													Company Operating Data:
Sales Growth:	Sales Growth:													Sales Growth:
		99¢ Only Stores				6.2	%		5.0	%		4.1	%		99¢ Only Stores				5.0	%		4.1	%		7.6	%		3.6	%
		Bargain Wholesale				8.8	%		6.3	%		0.3	%		Bargain Wholesale				6.3	%		0.3	%		6.8	%		0.5	%
			Total sales			6.3	%		5.1	%		4.0	%			Total sales			5.1	%		4.0	%		7.6	%		3.5	%
Gross margin	Gross margin					40.4	%		40.8	%		41.1	%	Gross margin					40.8	%		41.1	%		40.3	%		40.6	%
Operating margin	Operating margin					7.7	%		8.3	%		6.9	%	Operating margin					8.3	%		6.9	%		7.2	%		7.0	%
Net income	Net income					4.8	%		5.2	%		4.5	%	Net income					5.2	%		4.5	%		4.5	%		4.4	%
Retail Operating Data(a) :
Retail Operating Data(a) :														Retail Operating Data(a) :
99¢ Only Stores at end of period	99¢ Only Stores at end of period					285			285			275		99¢ Only Stores at end of period					285			275			288			279
Change in comparable stores net sales(b)	Change in comparable stores net sales(b)					5.9	%		0.7	%		3.9	%	Change in comparable stores net sales(b)					0.7	%		3.9	%		6.3	%		1.6	%
Average net sales per store open the full year	Average net sales per store open the full year				$	1,265	(g)	$	4,874		$	4,848		Average net sales per store open the full year				$	4,874		$	4,848		$	2,494	(g)	$	2,389	(i)
Average net sales per estimated saleable square foot(c)	Average net sales per estimated saleable square foot(c)				$	76	(d)(g)	$	291	(e)	$	289	(f)	Average net sales per estimated saleable square foot(c)				$	291	(e)	$	289	(f)	$	149	(d)(g)	$	142	(i)(j)
Estimated saleable square footage at period end	Estimated saleable square footage at period end					4,758,432	(h)		4,758,432			4,606,728		Estimated saleable square footage at period end					4,758,432			4,606,728			4,802,733	(h)		4,662,810	(k)
Balance Sheet Data:	Balance Sheet Data:													Balance Sheet Data:
Working capital	Working capital				$	341,057		$	323,314		$	263,905		Working capital				$	323,314		$	263,905		$	354,154		$	299,669
Total assets	Total assets				$	844,116		$	824,215		$	745,986		Total assets				$	824,215		$	745,986		$	872,492		$	781,688
Capital lease obligation, including current portion	Capital lease obligation, including current portion				$	484		$	448		$	519		Capital lease obligation, including current portion				$	448		$	519		$	467		$	485
Total shareholders' equity	Total shareholders' equity				$	701,876		$	681,549		$	600,422		Total shareholders' equity				$	681,549		$	600,422		$	717,804		$	634,183

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(a)

Includes retail operating data solely for the Company's 99¢ Only Stores. For comparability purposes, comparable stores net sales, average net sales per store and average net sales per estimated saleable square foot are based on comparable 52 weeks, for fiscal year periods presented and for the quarterfirst half ended on July 2,October 1, 2011, isand September 25, 2010, are based on a comparable 1326 weeks period.



(b)

Change in comparable stores net sales compares net sales for all stores open at least 15 months. The Company normally does not relocate stores or close them if renovations are taking place. In a rare situation where a store is relocated, or closed and later re-opened at the same location, the relocated or re-opened store is considered a new store for any




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comparable store sales analysis, and would only be included in the comparable store sales analysis once it has been open, or re-opened, for 15 months.




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