FAO, Inc. Securities Litigation

The lawsuit claims that Defendants misled investors by misrepresenting FAO's financial condition. Specifically, the lawsuit claims that Defendants issued press releases and other statements that failed to disclose that the Company was experiencing a severe liquidity crunch and would not be able to continue to fund operations without an immediate infusion of cash. The lawsuit claims that as a result of these false and misleading statements, the value of FAO stock was inflated, and that investors who purchased FAO stock at these inflated prices were damaged. FAO filed for bankruptcy shortly after the end of the Class Period. Defendants deny they did anything wrong.

What is the Settlement Fund?

The proposed settlement calls for Defendants to create a settlement fund in the amount of $1.75 million in cash. This $1.75 million has been deposited into an interest bearing account, the "Gross Settlement Fund." It is estimated that approximately 2.26 million shares of FAO stock were damaged during the Class Period. Thus, Class Counsel estimate that the $1.75 million recovery represents an average recovery of 77.4¢ per share. This average recovery is only an estimate and can vary as explained below. Subject to the Court's approval, a portion of the Gross Settlement Fund also will be used to pay Plaintiffs' attorneys' fees and reasonable litigation expenses. See Question 16 for a more detailed explanation. A portion of the Gross Settlement Fund will also be used to pay taxes due on interest earned by the Gross Settlement Fund and any notice and claims administration expenses permitted by the Court or the Stipulation. After the foregoing deductions from the Gross Settlement Fund have been made, the amount remaining (the "Net Settlement Fund") will be distributed to Class Members who submit valid claims.

What can I expect to receive under the proposed Settlement?

Your share of the Net Settlement Fund will depend on: (1) the number of claims filed; (2) when during the Class Period you purchased your FAO stock; (3) whether you sold your FAO stock during the Class Period, or held your FAO stock past the end of the Class Period; (4) the amount of administrative costs, including the costs of notice; and (5) the amount awarded by the Court for attorneys' fees, costs and expenses. By following the Plan of Allocation at the end of this notice, you can calculate your "Recognized Loss." The Claims Administrator will distribute the Net Settlement Fund, according to the Plan of Allocation, after the deadline for submission of Proof of Claim and Release forms has passed and all claims have been processed. The percentage of the Recognized Loss that is distributed will be determined by dividing the total Recognized Losses of all Authorized Claimants by the Net Settlement Fund.

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