On March 20, 2000, District Court Judge Gary L. Taylor approved a $13.0 million settlement of the State Actions and Federal Action. There were no objections to the settlement. The settlement was funded by the Company's insurance coverage, a portion of which the Company obtained during the second quarter of 1999. On April 19, 2000, the settlement became final.

According to the firm's 10-Q filing dated 5/15/2000, on January 23, 1997, plaintiff Chaile Steinberg filed a purported class action suit against the Company and certain other defendants on behalf of individuals who purchased the Company's common stock in the initial public offering pursuant to the Registration Statement and Prospectus (Prospectus), dated February 22, 1996, and on the open market from February 22, 1996 through January 14, 1997 (the "Class Period"). On April 7, 1997, the plaintiffs Igor Glaudnikov, Cara Debra Marks and Lois Burke filed a second related action against the same defendants. The two cases were subsequently consolidated by court order, dated May 19, 1997. Both STEINBERG and GLAUDNIKOV (collectively, the "State Actions") contain identical factual allegations, and only differ in the number of shares purchased by plaintiffs and the California residence of two of the plaintiffs in the GLAUDNIKOV action.

The State Actions allege that defendants made false and misleading statements and intentionally concealed material negative information in the Prospectus and afterward during the Class Period, which artificially inflated prices for the Company's common stock. Plaintiffs contend that the class was damaged in an unspecified amount as a result of this artificial inflation of the Company's stock price.

On September 23, 1997, a federal class action complaint was filed on behalf of plaintiff James Frenkil by the same law firm that represents the plaintiffs in the State Actions (the "Federal Action"). One of the named plaintiffs in the Federal Action is a plaintiff in the State Actions. The class period and precipitating events are the same as in the State Actions, but the federal complaint purports to allege violations of certain federal securities laws. On October 17, 1997, the judge stayed the Federal Action pending resolution of the State Actions.

Defendants filed a general demurrer in the State Actions, challenging the legal sufficiency of the complaints. On June 26, 1997, the judge sustained the defendants' demurrer, finding that neither complaint pleaded facts sufficient to constitute causes of action against the defendants. The judge sustained the demurrer as to four of the causes of action with leave to amend, and as to the fifth cause of action for unlawful, unfair or fraudulent business practices and false or misleading advertising without leave to amend.

On July 9, 1998, plaintiffs filed their first amended consolidated complaint against the same defendants, alleging three causes of action. On September 22, 1998, defendants filed a general demurrer to the first amended consolidated complaint. On March 16, 1999, the judge sustained the demurrer as to the Company with respect to two of the three causes of action with leave to amend. As to the third cause of action, the judge sustained the demurrer as to the Company with respect to three of the five plaintiffs with leave to amend, and overruled the demurrer with respect to the other two plaintiffs. On April 14, 1999, plaintiffs filed their second amended consolidated complaint, alleging one cause of action. Thereafter, plaintiffs expressed a desire to file a third amended consolidated complaint. On June 24, 1999, the parties stipulated that plaintiffs must file a third amended consolidated complaint on or before July 30, 1999. Plaintiffs did not file a third amended consolidated complaint.

The original complaint alleges that Mossimo went public on February 22, 1996 through an $82.8 million public offering in which certain insiders sold shares. The complaint charges that the company made various positive statements about its future prospects and continued to report "explosive sales growth and strong margins." The complaint alleges that the company knew that its positive statements and its financial statements were false and misleading when reported because Mossimo had rapidly expanded and defendants had lost control of the company's operations and finances. The complaint alleges that in an attempt to conceal these facts defendants gradually revealed in a series of announcements that: (1) Mossimo's gross margins were being restrained by "unusually high production development costs" and "cost inefficiencies" from changing and adding sourcing agents and manufacturers; (2) the company had to sell large amounts of out-of-season merchandise at a substantial discount; (3) the company's marketing expenses would be significantly increased; and (4) earnings were being impacted by a physical inventory shortage.