UNITED STATES DISTRICT COURT

DISTRICT OF MINNESOTA

In re PEMSTAR, INC . SECURITIESLITIGATION

Master File No. 02-1821 -DWF/SRN

CLASS ACTION

This Document Relates To :

ALL ACTIONS .

[CORRECTED] CONSOLIDATED COMPLAINT FORVIOLATION OF THE FEDERAL SECURITIES LAWS

TABLE OF CONTENTS

Page

I . SUMMARY OF THE ACTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I

II . JURISDICTION AND VENUE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

III. THE PARTIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

IV . FRAUDULENT SCHEME AND COURSE OF BUSINESS . . . . . . . . . . . . . . 9

V. MOTIVE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

A. The Secondary Offering . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10

B . Credit Facilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10

C . Acquisition Strategy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12

D. Convertible Debt Offering . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13

VI . GENERAL GAAP PRINCIPLES . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14

VII . FALSE AND MISLEADING STATEMENTS IN THE REGISTRATIONSTATEMENT AND DURING THE CLASS PERIOD . . . . . . . . . . . . . . . . . 15

A. Pemstar Misled the Market Regarding the Financial Condition ofthe San Jose and Taunton Facilities (Goodwill) . . . . . . . . . . . . . . . . . 15

1 . Legal Standard . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15

2. False and Misleading Statements Regarding Goodwill . . . . . . . . . 17

3 . Reasons Why Defendants Knew that Their GoodwillRepresentations Were False and Misleading with Regard to the Sa nJose Facility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 8

a. Forecast Showing Lack of Long-Term Profitability . . . . . . . 1 9

b. Change in Manner Plant Used . . . . . . . . . . . . . . . . . . 22

4. Reasons Why Defendants Knew that the Above Statements Wer eFalse and Misleading Regarding the Taunton Facility . . . . . . . . . . 23

B . Pemstar Misled the Market Regarding Its Inventories . . . . . . . . . . . . . . 28

1 . Legal Standard . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28

2 . False and Misleading Statements Regarding Inventories . . . . . . . . 29

3 . Evidence that These Statements Were False and Misleading Whe nMade . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 1

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Page

C. Pemstar Misled the Market Regarding the Accounts Receivables . . . . . . . . 39

1 . Legal Standard . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39

2 . False Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39

3 . Reasons Why These Statements About Accounts Receivable sWere False . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40

a. UltraCard Receivables . . . . . . . . . . . . . . . . . . . . . . 40

b. Sagarus Receivables . . . . . . . . . . . . . . . . . . . . . . . 4 1

c. EFI and Diva Receivables . . . . . . . . . . . . . . . . . . . . 4 1

D. Pemstar Misled the Market Regarding Revenue and Profits . . . . . . . . . . . 42

1 . False Representations . . . . . . . . . . . . . . . . . . . . . . . . . . . 42

2. Reasons Why These Statements Were False When Made . . . . . . . . 44

E. Pemstar Misled the Market Regarding the San Jose ProCenter . . . . . . . . . 45

1 . False Statement About ProCenter . . . . . . . . . . . . . . . . . . . . 45

2 . Reason Why the Above Statement Was False When Made . . . . . . . 45

F. Pemstar Misled the Market Regarding Its Restructuring and Layoffs . . . . . . 45

1 . False Statement About Restructuring and Layoffs . . . . . . . - . 45

2. Reason Why the Above Statement Was False When Made . . . . . . . 46

G. Pemstar Misled the Market Regarding Its Debt Level and Capacity . . . . . . . 46

1 . False Statement About Debt Level and Capacity . . . . . . . . . . . . . 46

2. Reason Why the Above Statement Was False When Made . . . . . . . 47

H. Pemstar Misled the Market Regarding Revenue Recognition in It sRegistration Statement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47

1 . False Statement Regarding Revenue Recognition in Pemstar's Jun e7, 2001 Registration Statement . . . . . . . . . . . . . . . . . . . . . . 47

2 . Reasons Why the Above Statement Was False When Made . . . . . . . 47

VIII. STOCK SALES BY DEFENDANTS . . . . . . . . . . . . . . . . . . . . . . . . . . 48

IX. POST CLASS PERIOD REVELATIONS . . . . . . . . . . . . . . . . . . . . . . . . . 49

X. CAUSES OF ACTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 1

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Page

XI. CLASS ACTION ALLEGATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . 54

XII . NO SAFE HARBOR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55

XIII . PRAYER FOR RELIEF . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55

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I. SUMMARY OF THE ACTION

1 . This is a securities class action on behalf of purchasers of Pemstar, Inc .'s ("Pemstar"

or the "Company") publicly traded securities from June 8, 2001 to May 3, 2002 (the "Class Period") .

This action is brought against Pemstar and its top officers : Allen J . Berning ("Berning"), William

B. Leary ("Leary"), William Kullback ("Kullback"), Robert R . Murphy ("Murphy"), Steve V .

Petracca ("Petracca"), Karl D . Shurson ("Shurson"), Robert D . Ahmann ("Ahmann"), Thomas A .

Burton ("Burton"), Hargopal Singh ("Singh"), Gregory S . Lea ("Lea") and Bruce M . Jaffe ("Jaffe")

(collectively, the "Individual Defendants"), for violations of the federal securities laws for making

false and misleading public statements concerning the Company's financial results and prospects

during the Class Period and in Pemstar's Secondary Offering Registration Statement and Prospectus

("Registration Statement"), filed on June 7, 2001 pursuant to Pemstar's Secondary Offering .

2. Counts One and Two allege claims against Pemstar and the Individual Defendant s

for violations of §§10(b) and 20(a) of the Securities Exchange Act of 1934 ("Exchange Act") .

Counts Three and Four allege claims against Pemstar and the Individual Defendants for violations

of § 11 of the Securities Act of 1933 ("Securities Act"), both individually (Count Three), and as

control persons under § 15 (Count Four) . Counts Three and Four arise under the Securities Act and

are predicated upon the Registration Statement containing untrue statements of material fact or the

omission of material facts required to be stated therein or necessary to make the statements therein

not misleading . They are not based upon any allegations of fraud detailed in Counts One and Two .

3 . The Class Period begins on June 8, 2001 with defendants' Secondary Public Offering

of 6 .9 million shares of Pemstar stock for proceeds of $79 .4 million to the Company and $7.1 million

to the Individual Defendants .

4. Pemstar is a seller of manufacturing and engineering services to high-tech industries .

Despite its relatively modest size, Pemstar's business strategy during the Class Period revolved

around an attempt to provide its services at locations around the globe . Pemstar attempted to obtain

this worldwide capability through a number of risky and expensive acquisitions of competing

engineering and manufacturing companies. As a result of these acquisitions, Pemstar reported

increasing levels of goodwill throughout the Class Period :

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3/31/01 6/31/01 9/31/01 12/31/01

Goodwill $31.6 $38.1 $55.3 $56.3(in millions )

5. From a stockholder's perspective, acquisitions raise the risk of a dilution o f

shareholder value and can lead to liquidity and credit problems if the acquisitions turn out to be poor

performers . Public investors in Pemstar understand this and rely upon Pemstar's financial

representations regarding these acquisitions in evaluating the health of Pemstar's finances and the

value of Pemstar securities .

6 . As defendants knew, two ofPemstar's key acquisitions, the Quadrus, Inc . ("Quadrus" )

acquisition in San Jose, California and the U .S. Assemblies New England, Inc . ("U.S. Assemblies" )

acquisition in Taunton, Massachusetts, were having serious financial difficulties requiring the write-

down of $22 million in goodwill . For example :

(a) Prior to the Class Period, the San Jose facility lost substantial customers an d

orders, leaving the facility with the prospect of a significant decline in revenue and with significant

unsellable inventory and uncollectible accounts receivables on its books; and

(b) Prior to the Class Period, Pemstar became aware that the Taunton facility was

unprofitable and that the facility was reliant upon sales from one customer, Telco Systems, Inc .

("Telco") to account for 98 .9% of its revenue and that Telco was reducing its orders .

7. Despite knowledge of these facilities' severe financial problems, Pemstar continued

to implicitly represent that the San Jose and Taunton facilities would be highly profitable by

maintaining more than $24 million in goodwill valuation for these facilities until the end of the Class

Period. At the end of the Class Period, Pemstar effectively admitted goodwill was materially

overstated during the Class Period when it wrote off approximately $22 million (90%) of goodwill

for these facilities, representing approximately one-quarter or 25% of Pemstar's total then-current

market capitalization .

8. In addition to the false financial statement, defendants made numerous additional

false statements, including statements about Pemstar's :

Inventory levels - despite knowledge that significant inventory needed to be writtenoff or reserved for.

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Accounts receivables - despite knowledge that significant accounts needed to bewritten off or reserved for.

Revenue and earnings projections - despite knowledge that these projections wereunrealistic given internal estimates and despite firm-wide layoffs .

9. The purpose of maintaining the above fictions was : (1) to mislead investors and

lenders so as to temporarily maintain an inflated stock price; (2) to maintain conformance with credi t

agreement covenants with IBM Credit and U.S . Bank; and (3) to continue acquiring additional

facilities using these credit facilities and inflated stock .

10. On May 3, 2002, the Company issued a press release entitled, "PEMSTAR Revises

Estimates for Fourth Fiscal Quarter 2002 Results and Announces Private Placement of Up to $5 0

Million ." The press release stated in part :

PEMSTAR, Inc., a leading provider of global engineering, manufacturing andfulfillment services to technology companies, today announced revised estimates forthe fourth quarter ended March 31, 2002 . Based on information currently available,the Company believes that fourth quarter revenue and earnings will come in belowits previous expectations. For the fourth fiscal quarter the Company expects toreport net sales of approximately $145 million and a GAAP basis net loss ofbetween $8 and $12 million , which on a per share basis equates to a loss range of$0.22 to $0.33 . On a cash basis, which excludes the impact of tax effectedamortization expense, a per share loss of between $0 .21 and $0 .32 is expected. Theestimated lossfor the quarter in cludes the impact ofcertain inventory write-downsand accounts receivable write-offs. The estimated loss excludes potentialadditional non-cash chargesfor write-offs ofgoodwill associated with acquisitionsas well as impairment of certain tax assets. As the Company has yet to complete_the audit process, it has not determined the amount, if any, of these additional non-cash charges .

PEMSTAR also announced today that it has entered into a definitiveagreement with two institutional investors for the private placement of up to $50million of the Company's 6 1/2% convertible notes with attached warrants topurchase common stock .

11 . On this news, the Company's share price plunged more than 60% to $2 .84 on May

6, 2002 on trading of more than 4 .5 million shares .

12 . The chart below shows Pemstar's stock price throughout the Class Period and its

decline with the revelation of the undisclosed financial information withheld throughout the Clas s

Period .

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Pemstar Inc . Indexed vs . NASDAQ Combined Composite IndexJune 1, 2001 to January 3, 200 3

200

150

0o_

o° 100N

O

CDO

5o

13 . On May 8, 2002, Business Wire ran an article entitled , "PEMSTAR Postpones_Its 4th

Quarter Earnings Conference Call." The article stated in part:

PEMSTAR, Inc., a leading provider of engineering, manufacturing,distribution and aftermarket services to technology companies, today announced thatit has postponed its 4th quarter earnings release and its investors conference call andWebcast for the Company's fourth quarter 2002 earnings, previously scheduled totake place on Wednesday, May 8, 2002 . The conference call and Webcast will berescheduled at a later date to be announced .

The Company is continuing to work to complete its determination and auditof reserves for accounts receivable and inventory, as well as potential charges forgoodwill impairment and valuation reserves for tax assets . The previouslyannounced guidance of GAAP basis net loss, which was provided net of tax benefit,may be adjusted as a result of any valuation reserves needed for tax assets and issubject to further adjustment in connection with the Company closing its books andcompletion of the audit .

14. Ultimately, the $50 million convertible note offering was terminated .

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06/01/2001 08/03/2001 10/11/2001 12/132001 02/19/2002 04/23/2002 06/25/2002 092712002 10/29/2002 01/02/2003

071032001 09/05/2001 11/122001 01/16/2002 03212002 05232002 07/26/2002 09/27/2002 11292002

H. JURISDICTION AND VENUE

15 . The claims asserted herein arise under §§10(b) and 20(a) of the Exchange Act and

under §§11 and 15 of the Securities Act . Jurisdiction is conferred by §27 of the Exchange Act .

Venue is proper pursuant to §27 of the Exchange Act as defendant Pemstar and/or the Individual

Defendants conduct business in, and much of the wrongful conduct took place in, this District .

III. THE PARTIES

16. Lead plaintiffs are Matt L. Brody, Keith Hewlett, Jr. and Keith Hewlett, Sr ., all of

whom purchased Pemstar publicly trades securities during the Class Period and were damaged

thereby .

17. Defendant Pemstar is a provider of electronics manufacturing services in th e

communications, computing, data storage, industrial and medical equipment markets . The Company

sells engineering, manufacturing and fulfillment services to its customers through 15 facilities

located in North America, Asia, Europe and South America, including facilities in San Jose,

California and Taunton, Massachusetts . Its headquarters is in Rochester, Minnesota .

18. Defendant Beming is, and at all times relevant to the allegations raised herein was ,

Pemstar's Chairman of the Board of Directors, Chief Executive Officer ("CEO") and President .

Defendant Berning sold 35,000 shares of Pemstar common stock in the Secondary Offering for

proceeds of $472,500. Berning signed all filings made with the Securities and Exchange

Commission ("SEC") and was present and/or directly made the statements to analysts .

19. Defendant Kullback is, and at all times relevant to the allegations raised herein was,

an Executive Vice President and Chief Financial Officer ("CFO") of Pemstar . Kullback signed all

filings made with the SEC and was present and/or directly made all oral statements to analysts .

20 . Defendant Leary was, during the Class Period, an Executive Vice President and

director of Pemstar. Defendant Leary signed the Registration Statement and/or amendments

pursuant to the Secondary Offering.

21 . Defendant Murphy is, and at all times relevant to the allegations raised herein was,

an Executive Vice President and director of Pemstar . Defendant Murphy sold 100,000 shares o f

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Pemstar common stock in the Secondary Offering for proceeds of $1 .35 million . Defendant Murphy

signed the Registration Statement and/or amendments pursuant to the Secondary Offering .

22. Defendant Petracca is, and at all times relevant to the allegations raised herein was ,

an Executive Vice President and director of Pemstar. Defendant Petracca sold 61,423 shares of

Pemstar common stock in the Secondary Offering for proceeds of $829,211 . In addition, defendant

Petracca sold 188,577 shares during the Class Period at prices between $12 .93 and $17 .82 per share,

receiving proceeds of more than $2 .9 million and dumping the vast majority of his equity interest

in Pemstar. Petracca was a member of the executive management team and group published all

documents filed with the SEC and issued to the public . In addition, Petracca signed the Registration

Statement as well as the S-3 shelf offering filed on December 17, 2001 . The S-3 offering

incorporated by reference Pemstar's 10-K filed on June 29, 2001 and 10-Q's filed on August 13, 2001

and November 9, 2001 .

23 . Defendant Shurson is, and at all times relevant to the allegations raised herein was ,

an Executive Vice President and director of Pemstar. Defendant Shurson sold 100,000 shares of

Pemstar common stock in the Secondary Offering for proceeds of $1 .35 million. Shurson was

member of the executive management team and group published all documents filed with the SEC

and, issued to the public . In addition, Shurson signed the Registration Statement as well as-the S-3

shelf offering filed on December 17, 2001 . The S-3 offering incorporated by reference Pemstar's 10-

K filed on June 29, 2001 and 10-Q's filed on August 13, 2001 and November 9, 2001 .

24. Defendant Ahmann is, and at all times relevant to the allegations raised herein was ,

an Executive Vice President and director of Pemstar. Defendant Ahmann sold 50,000 shares of

Pemstar common stock in the Secondary Offering for proceeds of $675,000 . Ahmann was member

of the executive management team and group published all documents filed with the SEC and issued

to the public . In addition, Ahmann signed the Registration Statement as well as the S-3 shelf

offering filed on December 17, 2001 . The S-3 offering incorporated by reference Pemstar's 10-K

filed on June 29, 2001 and 10-Q's filed on August 13, 2001 and November 9, 2001 .

25 . Defendant Singh was, at all times relevant to the allegations raised herein, a n

Executive Vice President and director of Pemstar . Defendant Singh signed the Registratio n

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Statement and/or amendments pursuant to the Secondary Offering . Defendant Singh sold 100,000

shares of Pemstar common stock in the Secondary Offering for proceeds of $1 .35 million .

26. Defendant Lea is, and at all times relevant to the allegations raised herein was, a

director of Pemstar . Defendant Lea was a member of Pemstar's Audit Committee which was given

the responsibility of reviewing the adequacy of Pemstar's system of internal accounting controls as

well as reviewing Pemstar's audits . Lea signed the Registration Statement as well as the S-3 shelf

offering filed on December 17, 2001 . The S-3 offering incorporated by reference Pemstar's 10-K

filed on June 29, 2001 and 10-Q's filed on August 13, 2001 and November 9, 2001 .

27. Defendant Burton is, and at all times relevant to the allegations raised herein was, a

director of Pemstar. Defendant Burton signed the Registration Statement and/or amendments

pursuant to the Secondary Offering . Burton was a member ofPemstar's Audit Committee which was

given the responsibility of reviewing the adequacy of Pemstar's system of internal accounting

controls as well as reviewing Pemstar's audits .

28. Defendant Jaffe is, and at all times relevant to the allegations raised herein was, a

director ofPemstar. Defendant Jaffe signed the Registration Statement and/or amendments pursuant

to the Secondary Offering . Jaffe was a member of Pemstar's Audit Committee which was given the

responsibility of reviewing the adequacy of Pemstar's system of internal accounting controls .. as. well

as reviewing Pemstar's audits .

29. Defendants Berning, Murphy, Petracca, Shurson, Ahmann and Singh are referred to

herein, collectively, as the "Selling Defendants . "

30 . During the Class Period, the Individual Defendants, as senior executive officer s

and/or directors of Pemstar, were privy to confidential and proprietary information concerning

Pemstar, its operations, finances, financial condition, and present and future business prospects . In

particular, Ahmann, Berning, Kullback and Petracca were intimately involved in the financial issues

relating to the San Jose facility.

31 . Because oftheir positions with Pemstar, the Individual Defendants had access to non-

public information about its business, finances, products, markets and present and future business

prospects via access to internal corporate documents, conversations and connections with othe r

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corporate officers and employees, attendance at management and board of directors meetings and

committees thereof and via reports and other information provided to them in connection therewith .

Because of their possession of such information, the Individual Defendants knew or consciously

disregarded the adverse facts specified herein that had not been disclosed to, and were being

concealed from, the investing public .

32. The Individual Defendants are liable as direct participants in, and co-conspirators wit h

respect to, the wrongs complained of herein . In addition, the Individual Defendants, by reason of

their status as senior executive officers and/or directors, were "controlling persons" within the

meaning of §20 of the Exchange Act and had the power and influence to cause the Company to

engage in the unlawful conduct complained of herein. Because of their positions with the Company,

the Individual Defendants were able to and did, directly or indirectly, control the conduct of

Pemstar's business .

33 . The Individual Defendants, because of their positions with the Company, controlle d

and/or possessed the authority to control the contents of its filings, reports, press releases and

presentations to securities analysts and through them, to the investing public . The Individual

Defendants were provided with copies of the Company's filings, reports and press releases alleged

herein to be misleading, prior to or shortly after their issuance, and had the ability and opportunity

to prevent their issuance or cause them to be corrected . Thus, the Individual Defendants had the

opportunity to commit the fraudulent acts alleged herein .

34. As senior executive officers and/or directors and as controlling persons of a publicly

traded company whose common stock was, and is, registered with the SEC pursuant to the Exchange

Act, and was traded on the Nasdaq National Market ("Nasdaq") and governed by the federal

securities laws, the Individual Defendants had a duty to promptly disseminate accurate and truthful

information with respect to Pemstar's financial condition and performance, growth, operations,

financial statements, business products, markets, management, earnings and present and future

business prospects, and to correct any previously issued statements that had become materially

misleading or untrue, so that the market price of Pemstar's publicly traded securities would be base d

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upon truthful and accurate information . The Individual Defendants' misrepresentations and

omissions during the Class Period violated these specific requirements and obligations .

IV. FRAUDULENT SCHEME AND COURSE OF BUSINES S

35 . Each defendant is liable for (a) making false statements, or (b) failing to disclos e

adverse facts known to him about Pemstar . Defendants' fraudulent scheme and course of business

that operated as a fraud or deceit on purchasers of Pemstar publicly traded securities was a success,

as it (a) deceived the investing public regarding Pemstar's prospects and business, (b) artificially

inflated the prices of Pemstar's publicly traded securities, (c) allowed certain of the defendants to sell

at least 678,577 shares of their Pemstar stock, recouping over $7 .7 million in illegal insider trading

proceeds, and (d) caused plaintiffs, and other members of the class to purchase Pemstar publicly

traded securities at inflated prices .

V. MOTIVE

36. Defendants were highly motivated to maintain an artificially inflated stock price and

give Pemstar the "appearance" of a thriving company to its investors and lenders so they could

continue to secure crucial financing . Financing was considered the lifeblood of the Company which

allowed them to pursue their growth through acquisitions strategy.

37 . Pemstar stated in its Registration Statement : "As part of our business strategy, we

expect to continue to grow by pursuing acquisitions of other companies, assets or product lines that

compliment or expand our existing business." Pemstar further elaborated that "[w]e expect to

continue to make substantial capital expenditures to expand our operations and remain competitive

in the rapidly changing electronics manufacturing services industry . Our future success depends

on our ability to obtain additional financing and capital to support our future growth, if any . "

38 . In order to keep the credit window open and to obtain additional financing and capital

to support its future growth, defendants engaged in a scheme and wrongful course of business that

revolved around manipulating the Company's goodwill, inventory, accounts receivables, revenues

and earnings through fraudulent accounting .

39. Defendants knowingly employed fraudulent accounting and reported inflated financial

results to : (a) keep the price ofPemstar's shares artificially inflated, (b) carry out a secondary offerin g

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of Pemstar securities at inflated prices, (c) comply with their two credit facilities loan agreements,

which contained covenants requiring them to maintain certain financial ratios, (d) continue acquiring

additional businesses using the banks' credit facilities and Pemstar's inflated stock, and (e) secure

badly needed financing in the Company's convertible debt offering.

40. Pemstar, always in need of capital, relied on this financing prior to, and throughout

the Class Period. Maintaining good relations with its creditors and the Company's ability to continue

to raise capital was directly tied to its ability to keep the Company's financial results and stock price

inflated .

A. The Secondary Offering

41 . Defendants were highly motivated to keep the price of Pemstar's shares artificially

inflated so they could carry out the Secondary Offering at inflated prices . By employing fraudulent

accounting and reporting inflated financial numbers, the Company and the Individual Defendants

were able to complete the offering on more favorable terms .

42. On June 8, 2001, the first day of the Class Period, Pemstar commenced the Secondary

Offering of 6 .9 million shares of common stock at the offering price of $13 .50 per share, pursuant

to an effective Registration Statement on Form S-1 and the Prospectus included therein . Pemstar

received proceeds of more than $6 .6 million in the Secondary Offering and executives Berning,

Petracca, Murphy, Singh and Shurson also pocketed more than $7 .1 million by selling stock in the

Secondary Offering at an inflated price .

43. Had Pemstar not engaged in fraudulent accounting byreporting false financial results,

the Company's shares would have traded far below the Secondary Offering price, yielding far less

in proceeds to the Company and to the defendants .

B. Credit Facilities

44. To support its future growth, Pemstar was highly motivated to comply with its two

credit facilities agreements and respective loan covenants requiring it to maintain financial ratios

relating to net profits after tax and fixed change coverage ratio .

45 . During the Class Period, it was clear that defendants could not maintain the financial

ratios required by the loan agreements . Nevertheless, defendants were determined to remain i n

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compliance (or close to compliance) with the loan covenants by reporting false financials and by

manipulating the Company's goodwill, inventory, accounts receivables, revenues and earnings .

Remaining in compliance with its loan covenants became vital, because a major breach might put

Pemstar in default . Indeed, prior to, and throughout the Class Period, Pemstar was obtaining waivers

from its lenders because it was concerned the loan covenant violations might put it into default .

46. For example, Pemstar stated this concern in its Registration Statement : "On March

31, 2001, we were not in compliance with our monthly leverage ratio covenant under our US Bank

credit facility, which if not cured or waived, could have resulted in an event of default ."

47. Defendants caused the Company to report inflated earnings and revenue to try to

remain in compliance with these loan covenants . Defendants reported artificially inflated quarterly

financial results by among other things, (a) failing to write down impairment of goodwill, (b) failing

to write down obsolete inventory, and (c) failing to write down uncollectible accounts receivables .

Had IBM Credit and US Bank known the full extent of Pemstar's difficulties, they may not have

granted the waivers . As such, by misstating revenues and earnings, Pemstar was able to obtain

waivers and was not deemed to be in default .

48. A write-down of goodwill would signal to investors and creditors that the value of

acquired assets, and the firm as a whole, had become "impaired ." Similarly, a write-down of

accounts receivables and inventory has the same effect .

49. In particular, Pemstar's loan covenant agreement with IBM Credit required it t o

maintain certain financial ratio . One covenant required that its "Net Profit after Tax to Revenue" be

"equal to or greater than . 75 percent quarterly and equal to or greater than 1.25% annually." By

falsifying its financial statements, Pemstar managed to comply with or marginally violate the

covenants. As demonstrated by the below chart, had the true figures been used for this calculation,

Pemstar would have dramatically violated each covenant .

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Net Profit after Tax to Revenue

Quarter ending Quarter ending Quarter ending6/30/2001 9/30/2001 12/31/200 1

As reported quarter 1 .50% 1 .71% -7 .30%ending

Actual (i .e., if all -21 .88% -20.84% -30 .16%impairment chargeswere taken thisquarter)

Another covenant that Pemstar was required to meet required its "Fixed Charge Coverage Ratio" t o

be "equal to or greater than 1 .30:1 .0 . "

Fixed Charge Coverage Ratio

Quarter ending Quarter ending Quarter ending6/30/2001 9/30/2001 12/31/200 1

As reported quarter 0.19% 0.49% -1 .23%ending

Actual (i.e ., if all -0.56 -1 .55% -5.06%impairment chargeswere taken thi squarter)

By falsifying its financials, Pemstar avoided default on its credit facilities .

C. Acquisition Strategy

50. Defendants were motivated to maintain their loan covenants, because their growth

by acquisitions strategy was dependent upon the Company's credit facilities to access capital and to

keep the value of their stock inflated . Pemstar's growth strategy depended directly upon its ability

to access credit and keep its lenders happy. Indeed, Pemstar was motivated to overstate inventories

and accounts receivables so it could maximize the amount of money it could borrow because its

borrowing base was dependent upon these financial figures . Pemstar's Registration Statement

explains the borrowing base :

Borrowings under our two U . S. credit facilities are limited to the lesser of thefacility amount or the available borrowing base calculated as a percentage ofaccounts receivable and inventory balances , which limits may restrict our ability toaccess the full amount of available borrowings .

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51 . Indeed, if Pemstar's creditors or investors had been aware of Pemstar's real financial

condition, any future acquisitions would have been halted due to the low offering value of the stock

or the creditors not permitting further borrowing .

52. Pemstar acquired two companies during the Class Period using existing credit

facilities and/or its inflated stock price . On September 24, 2001, Pemstar acquired Pacific

Consultants LLC ("Pacific Consultants") . On October 2, 2001, Pemstar acquired MTS Systems

Corporation's operations.

53 . Defendants' aggressive acquisition strategy was highly dependent upon their credi t

facilities that allowed them to take risks they may not have been able to take, but for the their

manipulation of revenues and earnings . For example, when defendants acquired Pacific Consultants

they merged Pacific Consultants into a wholly owned subsidiary of Pemstar . This tax-free

acquisitive transaction benefitted defendants because it requires no shareholder approval to merge

or acquire assets .

54. Had Pemstar not manipulated the numbers through fraudulent accounting, its lenders

may have balked or not approved the Pacific Consultants acquisition . Likewise, if Pemstar had put

the Pacific Consultants acquisition to a vote, it may not have gained shareholder approval .

D. Convertible Debt Offerin g

55 . Pemstar was motivated to continue reporting false financials and maintain its loan

covenants up to the time it could complete its convertible debt offering and receive new financing.

56 . In early 2002, Pemstar had been in violation of many of the banks' loan covenants an d

was desperately seeking capital it so badly needed . On May 3, 2002, Pemstar announced that it had

entered into a definitive agreement with two institutional investors for the private placement of up

to $50 million of the Company's 6 1/2% convertible notes with attached warrants to purchase

common stock .

57 . Pemstar announced on May 13, 2002 that the first installment of $5 million was

funded on May 10, 2002, and the Company's ability to receive additional installments was subjec t

to Pemstar's stock price returning to levels above minimum conversion prices .

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58. Pemstar eventually terminated the Agreement to Issue Additional Convertible Notes

after the accounting fraud had been revealed. But due to the accounting fraud, defend ants had

already received the first installment of $5 million that would have not been possible had the

Company reported its "true" fin ancial condition according to Generally Accepted Accounting

Principles ("GAAP") .

VI. GENERAL GAAP PRINCIPLES

59. GAAP are those principles recognized by the accounting profession as the

conventions, rules and procedures necessary to define accepted accounting practice at a particular

time . SEC Regulation S-X (17 C .F.R. §210.4-01(a)( 1)) states that financial statements filed with

the SEC which are not prepared in compliance with GAAP are presumed to be misleading and

inaccurate , despite footnote or other disclosure . Regulation S-X requires that interim financial

statements must also comply with GAAP , with the exception that interim financial statements need

not include disclosure which would be duplicative of disclosures accomp anying annual financial

statements . 17 C.F.R. §210 . 10-01(a) .

60. There are several general principles, which Pemstar violated, that must be followed

by companies in conducting their financial report ing to the public :

• The principle that interim financial reporting should be based upon the sameaccounting principles and practices used to prepare annual financial statements wasviolated (Financial Accounting Standards Board ("FASB") Accounting PrinciplesBoard Opinion No. 28, ¶10) ;

• The principle that "[financial reporting should provide information that is useful topresent and potential investors and creditors and other users in making rationalinvestment, credit, and similar decisions" was violated (FASB Statement ofFinancialAccounting Concepts ("FasCon") No. 1, ¶34) ;

• The principle that "[fjinancial reporting should provide information about theeconomic resources of an enterprise, the claims to those resources . . . and the effectsof transactions, events, and circumstances that change resources and to thoseresources" was violated (FasCon No . 1, ¶40) ;

• The principle that "[f]inancial reporting should provide information about howmanagement of an enterprise has discharged its stewardship responsibility to owners(stockholders) for the use of enterprise resources entrusted to it" was violated . "Tothe extent that management offers securities of the enterprise to the public, itvoluntarily accepts wider responsibilities for accountability to prospective investorsand to the public in general" (FasCon No . 1, ¶50) ;

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• The principle that "[f]inancial reporting should provide information about anenterprise's financial performance during a period" was violated . "Investors andcreditors often use information about the past to help in assessing the prospects of anenterprise. Thus, although investment and credit decisions reflect investors' andcreditors' expectations about future enterprise performance, those expectations arecommonly based at least partly on evaluations of past enterprise performance"(FasCon No . 1, ¶42) ;

• The principle that financial reporting should be reliable in that it represents what itpurports to represent was violated . "That information should be reliable as well asrelevant is a notion that is central to accounting" (FasCon No . 2, ¶¶58-59) ;

• The principle of completeness, which means that nothing is left out of theinformation that may be necessary to insure that it validly represents underlyingevents and conditions, was violated (FasCon No . 2, ¶79) ; and

• The principle that conservatism be used as a "prudent reaction to uncertainty to tryto ensure that uncertainties and risks inherent in business situations are adequatelyconsidered" was violated . "The best way to avoid injury to investors . . . is to try toensure that what is reported represents what it purports to represent" (FasCon No . 2,¶¶95, 97) .

VII. FALSE AND MISLEADING STATEMENTS IN THE REGISTRATIONSTATEMENT AND DURING THE CLASS PERIO D

A. Pemstar Misled the Market Regarding the Financial Conditionof the San Jose and Taunton Facilities (Goodwill)

1 . Legal Standard

61 . The Company's financial statements were materially false and misleading, and not

prepared in conformity with GAAP. Thus, Pemstar's financial statements did not fairly present the

Company's operations in violation of GAAP and SEC rules .

62 . There is also specific accounting guidance on the reporting of goodwill pursuant to

FASB Statement of Financial Accounting St andards ("SFAS") 121 . Goodwill represents the value

of the amount by which the purchase price exceeds the sum of net tangible assets and separately

identifiable int angible assets of an acquired facility. Companies may pay more than the value of

these net tangible assets because some intangible competitive advantage associated with the acquired

facility, such as strong brand reputation, provides a higher valuation th an the physical assets alone.

Pursuant to SFAS 121, companies were permitted to maintain this goodwill on their books as long

as the value of this goodwill was not impaired .

63 . Companies are obligated to evaluate their goodwill whenever "events or changes in

circumstances indicate that the carrying amount of an asset may not be recoverable ." SFAS 121 .

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SFAS 121 provides the following examples of events that would spur an obligation to evaluate

goodwill :

a. A significant decrease in the market value of an asset;

b. A significant change in the extent or manner in which an asset is usedor a significant physical change in an asset ;

A current period operating or cash flow loss combined with a history ofoperating or cash flow losses or a projection or forecast that demonstrates continuinglosses associated with an asset used for the purpose of producing revenue .

If [these or] other events or changes in circumstances indicate that thecarrying amount of an asset that an entity expects to hold and use may not berecoverable, the entity shall estimate the future cash flows expected to result fromthe use of the asset and its eventual disposition . Future cash flows are the future cashinflows expected to be generated by an asset less the future cash outflows expectedto be necessary to obtain those inflows . If the sum of the expected future cash flows. ., is less than the carrying amount of the asset, the entity shall recognize animpairment loss in accordance with this Statement .

64. In an arms length transaction, the price established for an acquisition is equal to th e

discounted present value of expected future cash flows for the underlying business acquired .

Goodwill captures the difference between the present value of the discounted future cash flows of

the acquired business and the fair market value of the net tangible assets and separately identifiable

intangible assets of the acquired entity. If the discounted present value of expected future cash flows

becomes impaired, then goodwill must be written down. In this regard, a goodwill write-down

provides a signal to investors and creditors that the value of acquired assets, and the firm as a whole,

has been impaired .

65. As a practical matter, many firms disclose their underlying difficulties first (causin g

the stock price to go down), and the goodwill write-down occurs subsequently. In these cases, the

write-down is anticipated in advance because the market already knows that the firm is experiencing

operational difficulties . However, in the case of Pemstar, management concealed the Company's

difficulties until the end of the Class Period . As a result, the write-down of goodwill was the first

indication given to investors that the value of Pemstar's recent acquisitions was impaired .

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66. As described below, Pemstar violated SFAS 121 by failing to properly review an d

recognize goodwill impairment for its San Jose and Taunton facilities despite knowledge of a

significant change in the extent or manner in which these assets were used, a significant physical

change in the assets, and current period losses and projections of losses at these facilities throughout

the Class Period .

2. False and Misleading Statements Regarding Goodwil l

67. During the Class Period, defendants made the following false and misleadin g

statements regarding goodwill :

68. The Registration Statement included the following representations regardin g

Pemstar's goodwill impairment policy:

Goodwill and other intangible assets - Goodwill represents the excess of thepurchase price over the fair value of the net assets acquired and is being amortizedon a straight-line basis over 20 years . Other intangible assets principally consist ofdebt financing costs that are being amortized over the terms of the applicableagreement .

Long-lived assets - The Company follows Statement of Financial AccountingStandards ("SFAS") No . 121, "Accounting for the Impairment of Long-Lived Assetsand for Long-Lived Assets to be Disposed Of. " SFAS No . 121 requires that long-lived assets, including goodwill, be reviewed for impairment whenever events orcircumstances indicate the carrying amount of an asset may not be recoverable . TheCompany evaluates potential impairment by comparing the carrying amount of theassets with the estimated undiscounted cash flows associated with them. If an .impairment exists, the Company measures the impairment utilizing discountedcash flows .

69 . The statement above was false because had defendants conducted a thorough an d

objective goodwill impairment evaluation in good faith and on a timely basis, defendants would hav e

concluded that the present value of future cash flows had declined significantly and the goodwill ha d

become impaired .

70. In this same filing, Pemstar represented in its consolidated balance sheets that it hel d

$29,164,000 in net goodwill assets .

71 . The above Registration Statement and/or amendments were signed by all defendants .

72. On July 25, 2001, Pemstar released its financial results for the first qua rter ended June

30, 2001 . The press release falsely represented that Pemstar had $38,056,000 in goodwill assets .

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On August 13, 2001, Pemstar filed its first quarter 10-Q with this same goodwill representation . The

document was group published by defendants and signed by defendants Berning and Kullback .

73 . On October 23, 2001, Pemstar released its financial results for the second quarter

ended September 30, 2001 . The press release falsely represented that Pemstar had $55,320,000 in

goodwill . On November 9, 2001, Pemstar filed its second quarter 10-Q with this same goodwill

representation. The document was group published by defendants and signed by defendants Berning

and Kullback .

74 . On January 29, 2002, Pemstar released its financial results for the third quarter ended

December 31, 2001 and falsely represented that it had $56,308,000 in net goodwill . On February 14,

2002, the Company filed its third quarter 10-Q with the SEC with this same goodwill representation .

The document was group published by defendants and signed by defendants Berning and Kullback .

At no time until the end of the Class Period did Pemstar undertake a goodwill impairment evaluation

or write down goodwill .

75. In Pemstar's Registration Statement filed with the SEC on June 7, 2001, and in

Pemstar's 2001 10-K filed with the SEC on June 29, 2001, Pemstar reported that it had recorded

$12.3 million in goodwill for its San Jose facility . At the end of the Class Period, in Pemstar's 2002

10-K, Pemstar wrote off $10,603,000, or approximately 90% of the remaining unamortized goodwill

on the San Jose facility.

76 . On May 7, 2001, Pemstar acquired U .S. Assemblies . This business was located in

Taunton, Massachusetts . The acquisition cost was $14 .5 million . Pemstar recorded $11,913,000

as goodwill . As announced on May 3, 2002 and in its 2002 10-K, Pemstar wrote off $11,367,000,

or approximately 95% of the remaining unamortized goodwill on the Taunton, Massachusetts

facility .

3. Reasons Why Defendants Knew that Their GoodwillRepresentations Were False and Misleading with Regard to theSan Jose Facility

77 . As noted above, according to SFAS 121, goodwill must be evaluated and w ri tten

down when internal forecasts suggest impairment in the profitability of the asset or if changes in th e

use or physical make up of the asset occurs . The following facts demonstrate that defendants knew

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that these conditions existed but did not do a proper goodwill analysis or impairment write-down

during the Class Period :

a. Forecast Showing Lack of Long-Term Profitability

78 . Early on, well before the beginning of the Class Period, Pemstar knew the San Jose

facility was in trouble . The San Jose facility was operating well below capacity by January 2001 .

The primary reason for this was a collapse in demand from communications customers .

Management in Minnesota would have known about this collapse in demand from their weekly

conference calls .

79. In April 2001, the situation had worsened . In particular, on April 13, 2001, at 7 :33

a.m., defendant Ahmann received an email from Jim Strong confirming Applied Materials, Inc .'s

("AMAT") "Project Shutdown ." Strong suggested that Pemstar needed to discuss the shutdown for

the OI Wall Panel and UCC projects .

80. On or about April 16, 2001, Pemstar held a meeting to discuss slowing spending in

the semi-conductor industry . Pemstar employees were informed at this meeting that one of the San

Jose facility's largest customers, AMAT, had canceled all of its existing backlog orders with

Peinstar . AMAT had retained Pemstar to build two products : (1) Operator Interface Wall Panels

costing $10,000-$15,000 per panel; and (2) Light Power Mechanisms costing about $-500 per

mechanism. Based on these figures, Pemstar generated roughly $1 .5 million in revenue per month

from AMAT at San Jose. The cancellation of backlog alone constituted a cancellation of

approximately $1 .5 million in orders. Internally, defendants Berning, Petracca and Ahmann referred

to this event as "AMAT backlog goes to zero ." In addition, this event put Pemstar in the position

of carrying $1 .5 million of inventory for AMAT, recovery of which was questionable .

81 . On or about April 20, 2001, another significant San Jose Pemstar customer, Astex ,

Inc . ("Astex"), cancelled all of its orders . As with AMAT, this development meant that Pemstar

would likely lose approximately $400,000 as a result of unsaleable and unbillable inventory. The

combination of AMAT and Astex's cancellations and the resulting increase in unsaleable inventory

significantly impacted the San Jose facility 's ability to operate at a profit . As a result, the process

and test equipment division at San Jose had reduced its number of employees from as many as 3 0

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to just four by June 1, 2001 . This reduction in employees was caused by Pemstar management's

evaluation of its lowered sales forecast. On June 1, 2001, Pemstar issued a salary freeze for the

month of June .

82. According to Pemstar San Jose's internal profit and loss statement, in April and May

2001, the San Jose facility lost money.

83 . On August 27, 2001, Gene Howard sent an email to several Pemstar executives ,

including defendant Ahmann and Dave Blegen, related to sales efforts at the San Jose facility. In

this email, Mr. Howard noted under the title "Collection from UltraCard" that "I do not see[] Pemstar

San Jose supporting additional design and development activities ." Indeed, not only did Pemstar not

get additional work from Astex, but they did not collect this money from Astex during the Class

Period .

84. In July, August and September, the San Jose facility again lost money.

85 . During the summer of 2001, Repeater Technologies, Inc . ("Repeater") began refusing

many of the "box build Systems" that Pemstar had built, and by September or October of 2001,

Repeater had stopped taking delivery altogether, leaving Pemstar with $400,000 in obsolete

inventory .

86. On October 5, 2001 at 6 :16 p.m., Jim Cogan sent an email concerning cost_cuttin g

measures at the San Jose facility. This email was entitled "Q3 Actions - Expense Reduction" and

was sent to defendants Petracca, Shurson, Berning and Singh. The email noted that "[t]o bring

everyone up to speed, the following plans are being made with regard to the days of shutdown and

expense reduction during Q3 ." The measures included :

(1) Closed during the week of Thanksgiving - 11-19 to 11-23 . This will beeither PTO or time off without pay

(2) Closed during the week of Christmas + December 31, 12-21 to 12-31 . Thiswill be either PTO or time off without pay. . . .

(3) All indirect personnel will be required to take one day every two weeks off . . . .(4) Senior Staff will have a 10% pay reduction for Q3 .(5) All non-required direct employees will be on an aggressive furlough program .(6) All temp positions will be evaluated against requirements .This program is intended to reduce expense by about $1 m in combination with thelast round of layoffs .

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87. On October 10, 2001, San Jose facility coordinator Mark Middleton sent a set o f

financial documents by email to defendants Kullback, Petracca, Ahmann and numerous other

Pemstar executives . Among the documents were charts entitled, "September FY 02 Actual Profit

and Loss Statement Consolidated," "September Actual Balance Sheet," and "September Cash Flow

Statement ." These documents demonstrated that Pemstar 's San Jose facility had lost $1,154,735

(after taxes) since April 1, 2001.

88 . On October 11, 2001, another set of documents was circulated to the same group o f

executives containing a September 30, 2001 San Jose facility's forecast for the remainder of 2001 .

This forecast again recounted the losses for July and August and projected continuing losses for

September, October, November and December. In total, the forecast estimated a total pretax loss

at the San Jose facility of $2.681 million for the second quarter of fiscal 2002 (ending September

31, 2002) and $2.518 million for the third quarter of fiscal 2002 (ending December 31, 2002) .

89. On October 30, 2001, defendant Ahmann wrote to defendant Berning regarding some

potential new business with LAM Research ("LAM") :

I come to find out Steve is planning to pull LAM into San Jose, in what I assumeis an effort to help save the site. . . . My position is the following. I believe we needto put LAM into the site where it is the most competitive and where we have themost technical support (probably Rochester or Chaska) . . . . If we try to force this intoSan Jose, we will likely lose the business .

90. The LAM project was never won by Pemstar.

91 . On January 3, 2002, Dave Blegen sent an email entitled "FY2003 Plan" to defendan t

Ahmann and numerous other Pemstar executives . This document contained financial information

both for the remainder of 2002 as well as financial projections for 2003 for the Process and Test

Equipment San Jose facility. The fiscal 2002 (ending March 31, 2002) "plan" goal for the San Jose

facility's Process and Test Equipment was $5,900,000 . However, the estimated actual revenue total

for San Jose was only $1,097,000, or less than 20% of plan . Looking forward, the "Projected

FY2002" revenues included only $80,000 in revenues for December 2001, January, February and

March of 2002; only $60,000 for March 2003, and only $40,000 in revenues for April 2002-February

2003 . The plan also noted that gross profit year to date for fiscal 2002 for the San Jose facility was

negative .

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92 . Similarly, on Tuesday, January 15, 2002, Jim Cogan (Vice President and General

Manager of the San Jose facility) sent an email entitled "Latest Forecast Update" to defendant

Petracca detailing San Jose manufacturing and ProCenter results for the year to date and expected

results through the end of the year (March 31, 2002) . The document contained defendant Petracca's

estimate for the San Jose facility of $197,365,000 in manufacturing revenue. This estimate was the

"plan" made prior to the fiscal year (before March 31, 2001) and was based upon defendant

Petracca's aspirations at that time. This plan was starkly contrasted by Jim Cogan's estimate of actual

results as detailed in this document . Jim Cogan's estimate was based upon actual results for the first

three quarters and an estimate for the final quarter which demonstrated that San Jose's manufacturing

revenue would produce only $90,486,000 in revenue, or 46% ofplan. The document further noted

that during the fourth quarter there were very few additional sales opportunities . Hence, this email

demonstrates that the most that the San Jose facility could expect to do was 46 .5% of plan even if

the facility captured all of its possible upside opportunities . Further, the report demonstrated that

San Jose's manufacturing was quickly declining from $33,368,000 in the first quarter 2002 (ending

June 30, 2001) to $22,914,000 in the second quarter (ending September 30, 2001) to $17,946,000

in the third quarter (ending December 31, 2001) to a projected $16,258,000 in the fourth quarter

(ending March 31, 2002) (less than half the revenue of the first quarter) .

93. On February 14, 2002, the Company filed its third quarter 10-Q with the SEC . This

10-Q confirmed that Pemstar had experienced decreases in gross profit due to :

industry wide reduction in demand that led to under-utilized facilities, write-downsof inventory, costs associated with shifting certain manufacturing programs fromhigher-cost to lower-cost facilities and severance costs resulting from reductions inworkforce .

As demonstrated above, one of the primary underutilized facilities was San Jose, however, no write-

downs of goodwill were taken until after the Class Period .

b. Change in Manner Plant Used

94. SFAS 121 also requires that goodwill be evaluated and written down when "[a ]

significant change in the extent or manner in which an asset is used or a significant physical chang e

in an asset" occurs . As demonstrated by the facts below, business was so poor at the San Jose

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facility that Pemstar began to dismantle pieces of the facility, thus obligating Pemstar to do a

goodwill impairment review .

95 . According to an email sent by Clyde Little to defendant Ahmann, in early January,

plans were approved for the transfer of OIWP, Light Tower and UCC production and materials from

the San Jose to the Austin, Texas facility . According to the email and attached plan, it was expected

that the materials would be transferred in early January and that Austin would be producing by

March 1, 2002. According to the plans, the equipment and finished goods moved from San Jose

occupied 4,045 square feet at the Austin facility. Defendant Ahmann confirmed in a January 11,

2002 email that "[a]s a result of this transfer, the Automation and Test group will be left with only

4 people in San Jose . "

96. On February 14, 2002, the Company filed its third quarter 10-Q with the SEC . This

10-Q noted that there were decreases in gross profit due to costs associated with shifting certain

manufacturing programs from higher-cost to lower-cost facilities. Despite this admission, the

Company failed to take a goodwill write-down for San Jose at this time and concealed from the

public that a write-down was necessary until the end of the Class Period.

4. Reasons Why Defendants Knew that the Above StatementsWere False and Misleading Regarding the Taunton Facilit y

97. According to SFAS 121 "[a]n entity shall review long-lived assets and certai n

identifiable intangibles to be held and used for impairment whenever events or changes in

circumstances indicate that the carrying amount of an asset may not be recoverable ." Pemstar would

be required to take a goodwill impairment charge if the Taunton facility's projected cash flow did

not cover the amount of goodwill carried by that facility. Pemstar's management knew prior to and

during the Class Period that the Taunton facility's business was failing dramatically so as to remove

any basis for maintaining $12 million in goodwill for that facility . The Taunton facility could not

be sufficiently profitable to cover the amount of goodwill .

98 . The Taunton facility had as its mission the production of circuit boards . Taunton's

manufacturing line of business accounted for the dominant share of the facility's total activity .

Although during the Class Period, Pemstar attempted to shift toward the "ProCenter" or prototyp e

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line of business, the ProCenter accounted for only a small portion of Taunton's business . The

Taunton facility had essentially one customer - Telco, which accounted for 98 .9% of its business .

Taunton General Manager Chris Lineberry ("Lineberry") instituted weekly forecast meetings, which

took place regularly every Monday or Tuesday. These meetings focused on Telco's demand for

Taunton's product . Lineberry, Materials Director Mark Zayak, operations Director Andy Bonaker

and occasionally an engineering person attended these meetings . General Manager Lineberry

received a weekly "Open Order Report" showing the monthly revenue generated by purchase orders

submitted by Telco (and other customers) . Even after Pemstar acquired the Taunton facility, the

facility "didn't have a steady flow of customers ." Instead, the facility basically had only one steady

customer-Telco. Otherwise, the Taunton facility had a couple of "flip-flop" customers that "came

and went, but the projects never got off the ground ." Pemstar understood this even before the

acquisition closed in May 2001 . In particular, several Pemstar executives, including defendants

Berning and Petracca personally visited the facility prior to the acquisition . On the day the

acquisition was announced, a "handful of people were called in " to personally speak with

defendant Petracca. At this meeting Petracca was told that the Taunton facility had only one

steady customer and the facility needed additional customers to survive .

99. In addition to the single customer problem, Pemstar executives, including defendant s

Berning and Petracca, knew the financial problems facing the Taunton facility even before Pemstar

completed the acquisition of the facility . The acquisition took place at a time when "it was do or die"

for the Taunton facility and for U.S. Assemblies (the Taunton corporate owner) . It was generally

known to all Taunton employees that business at the Taunton facility was very poor and its financial

condition was very precarious . The Taunton facility was clearly in dire financial straits certainly by

very early 2000, and this situation continued up to and beyond the acquisition date . Taunton was

hardly breaking even when Telco decided to withdraw business from Taunton because Telco wanted

a timely full service contract manufacturer ("CM") . Taunton was failing in its full service CM role .

If the acquisition had not gone through, the Taunton facility would have gone bankrupt . Indeed, in

January 2001, Telco, the facility's largest customer comprising 98 .9% of its business, informed U.S .

Assemblies/Matco executives that they had to either sell the Taunton facility or Telco was "pullin g

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out." Despite the poor condition of the Taunton business, Pemstar leased - not purchased - the

Taunton physical plant in the acquisition. In sum, Pemstar purchased the failing business and

nothing else .

100. Pemstar "had to know" that the Taunton facility was not profitable just by looking a t

the books . Several other strong indicators showed that the Taunton facility had serious problems

well before the acquisition, including the fact that by February 2000 there was "a ton" of excess parts

inventory and no product orders in which to use those raw materials . Because the Taunton facility's

outlook was bleak, three program managers left on the same day in February 2000 . "Everyone was

jumping ship," including (along with the program managers) planners, engineers, testers and

manufacturing staff. This was validated by the fact that generally speaking, 2000 was "not a bad

year" for electronic contract manufacturers . But the Taunton facility did not fare well . The Taunton

facility's business and financial condition was deteriorating during 2000 .

101 . The Taunton facility's poor performance continued in 2001 and business decline d

substantially prior to the acquisition. Telco's major customer, Verizon, began to cut back on its

orders to Telco . In addition, Telco began to shift its business away from Taunton and toward its

other two circuit board contract manufacturers . "Telco was pulling out because U . S . Assemblies was

broke." At the time just prior to the acquisition, Taunton "had no business at all ." Rather, Telco was

going to leave Taunton completely if the acquisition did not go through, and that would mean U .S .

Assemblies would go bankrupt, so it was "do or die ." All the creditors "were after" Taunton, causing

"complete chaos" as Taunton could not get materials from its suppliers and could not get things built .

The Taunton facility could not get materials from its suppliers . It was forced to buy parts inventory

from brokers, which meant paying higher prices . The alternative, which Taunton took, was for Telco

to buy the parts on its own account and supply them to the Taunton facility for use in the circuit

board manufacturing process . Telco did not favor this arrangement and shifted its business toward

other suppliers that could perform better as a complete contract manufacturer . Another customer,

SierraCom simply moved its business away from the Taunton facility altogether rather than purchase

the raw materials .

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102. Even after the acquisition, the Taunton facility's business did not improve, rathe r

business only got worse . During the latter half of 2001, the Taunton facility's dominant customer,

Telco, experienced a decline in its business and consequently pushed back its orders from Taunton .

Telco's major customer, Verizon, was cutting back its orders, and so Telco's orders slipped as a

result . Consequently, during the latter half of 2001, Taunton's sales and orders decreased steadily .

Indeed, by November 2001, although Telco accounted for about 98.9% of the Taunton facility's

business, Telco was continuing to send its new business to other suppliers such as Selectron . This

was due to Pemstar's "poor financial condition ." During the latter half of 2001, the Taunton facility

"was not breaking even." Corporate was paying the bills as "Taunton could not pay the bills ."

Indeed, suppliers put the Taunton facility on "credit-hold ." The source of the financial problem was

lack of sales .

103 . By January 2002, the Taunton facility's revenues had dropped to a level that

ranged between $100, 000-$300, 000 per month . This level was well below Taunton's break even

point of $3 to $4 million per quarter.

104. Mark Zayak and the program managers and buyer/planners on the manufacturing sid e

met with Telco "all of the time" and "sometimes daily" to adjust plans and forecasts . Telco - the

Taunton facility's dominant customer - had told Pemstar to shift the Telco account to .-another

Pemstar facility (these were located in California, Minnesota and overseas) or Telco would take its

business to another supplier. From November 2001 to May 2002, Telco pushed out and reduced its

orders and pushed out its payment dates to as much as 360 days . The Taunton facility manufactured

Telco's product based upon the forecast of Telco's demand . As parts inventory was purchased in

advance of final product production, Telco's "push-out" of its orders caused Taunton's parts

inventory to build up to a problem level.

105 . This massive hole caused by Telco's order slow down could not be made up by othe r

customers because "no one was buying." Indeed, the Taunton facility tried to attract Instron

Corporation ("Instron" ) as a customer, but Instron declined Pemstar 's overture . Similarly, Pemstar

"cou rted " a company named Welch Allyn, Inc . ("Welch Allyn") . The courting process included

having Welch Allyn employees come to the Taunton facility for presentations made by Taunton

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employees and "corporate folks ." Despite these efforts, Welch Allyn eventually chose to employ

Pemstar's Mexico facility rather than Taunton for its manufacturing needs .

106. As a result of the Taunton facility's reduced business activity, the employee count

dropped quickly. In early 2000, the Taunton facility employed about 200 people . This number

dropped substantially during 2000 . Former General Manager Tony DiSalvo was required to lay off

about 30 people in about August 2000, and he too was let go the next day.

107. The Taunton staff was reduced further in 2001 when large layoffs were made . The

staff numbered fewer than 120 at the time of the acquisition in May 2001 . The number of employees

was already down to about 100 in July 2001 . Between July 2001 and December 2001, there were

two additional sets of layoffs at the Taunton facility. The layoff in the July/August time frame was

accompanied by a reduced work week from 5 days to 4 days . In November 2001, a large layoff again

occurred. By November 2001, the Taunton staff was down to well below 100 employees . In late

2001, Pemstar asked all salaried employees at the Taunton facility to take a 10% pay decrease, which

lasted for two quarters .

108. In January 2002, the Taunton facility was in the process of reducing its staff. In May

2002, business had deteriorated to the point that Pemstar "let go" in excess of 40 employees of the

roughly 80 employees that had been employed at the facility . The staff reductions were made

because of the lack of business, and because customers were "pushing out" (i.e ., delaying or

postponing delivery of orders) . The number of employees has continued to decline steadily and the

total number of employees is approximately 20 to 25 at the present time .

109. In sum, the Taunton facility was a failing enterprise before, during and after Pemstar's

acquisition of Taunton, and during the Class Period as well . As such, Pemstar had no basis for

claiming goodwill as part of Taunton's asset base and should have noted this in its Registration

Statement as well as subsequent SEC filings .

110. In addition, Pemstar would be obligated to review its goodwill determination under

FAS 121 if the facility experienced a significant physical change or change in the use of the asset .

During the Class Period, the Taunton facility was attempting to shift away from its manufacturing

line of business, which was handled by the Taunton employees who were holdovers from U .S .

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Assemblies/Matco, the Company from which Pemstar acquired the Taunton facility in May 2001 .

Pemstar was attempting to shift the Taunton facility toward a prototype or "ProCenter" line of

business, thus making it into a "new product Facility" focusing on new product introduction ("NPI"

as this line of business is known) . This process required producing the customer's prototype circuit

boards until the customer ordered a large enough quantity to make large-scale production

economically feasible . As a result of Pemstar's attempt to alter the business focus of Taunton, the

Taunton facility began to hire different employees, purchase different machinery, and attempted to

court different customers . Hence, Pemstar experienced significant changes in the manner in which

the Taunton facility was used, requiring a reevaluation of goodwill .

111 . In addition, defendant Kullback was very aggressive about what got booked onto th e

balance sheet with regard to Taunton . In addition to the goodwill booked in connection with

Pemstar's acquisition of the Taunton facility , additional charges were made to goodwill which were

so aggressive that the corporate controller was ve ry reluctant and had to be "dragged kicking and

screaming to accept Kullback's decision on this matter ." In late 2001 , certain product lines were

running at a loss at the Taunton facility and these losses , amounting to approximately one half

million dollars were added to goodwill rather than shown as a loss, which would decrease operating

earnings . The controller ofthe Taunton facility finally left the Company on April 1, 2002 because

of disagreements with defendant Kullback over the financial statement . In sum, the Taunton

controller would not sign off on Taunton 's financial statements for the fiscal year ending March

31, 2002 because of what he believed to be improper "aggressive" accounting.

112. As a result of the above facts , had Pemstar conducted a thorough and objective

goodwill impairment evaluation on a timely basis , Pemstar would have concluded that the present

value of future cash flows had declined signific antly (i.e., the goodwill was impaired ) and written

the Taunton and San Jose facilities down long before the end of the Class Period .

B. Pemstar Misled the Market Regarding Its Inventories

1 . Legal Standard

113 . Pemstar violated Financial Accounting Standards by making false and misleading

statements to the public regarding Pemstar 's invento ry levels . GAAP, as set fo rth in Accounting

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Research Bulletin ("ARB") No . 43, Chapter 4, Inventory Pricing, requires that inventories b e

recorded at the lower of cost or market . ARB No . 43, Chapter 4, Statement 5, states :

A departure from the cost basis of pricing the inventory is required when the utilityof the goods is no longer as great as its cost . Where there is evidence that the utilityof goods, in their disposal in the ordinary course of business, will be less than cost,whether due to physical deterioration, obsolescence, changes in price levels, or othercauses, the difference should be recognized as a loss of the current period . This isgenerally accomplished by stating such goods at a lower level commonly designatedas market.

114. Pemstar overstated its inventory levels in its Registration Statement, in SEC filings ,

and in statements to the public because it failed to write off, or reserve for, inventory in which it ha d

little chance of recovering its investment .

2. False and Misleading Statements Regarding Inventorie s

115 . During the Class Period, Pemstar made the following false and misleading statement s

to the public regarding its inventory levels :

116 . On June 7, 2001, Pemstar filed its Registration Statement that included the followin g

representations regarding inventory policies :

We work to minimize the risk relative to our inventory by ordering materials andcomponents only to the extent necessary to satisfy existing customer orders. To theextent our orders of materials and components for specific jobs exceed our customers'orders, we may incur a charge for inventory obsolescence for a portion of theinventory cost, which in most cases, we negotiate with the customer to recover someor all of this inventory cost . . . . We believe we are largely protected from the risk ofinventory cost fluctuations because we generally pass these costs through to ourcustomers.

117. In the Registration Statement, Pemstar falsely claimed it had $113,421,000 i n

inventory .

118. On July 25, 2001, Pemstar issued a press release announcing its financial results fo r

the first quarter of fiscal 2002 and stating that inventory assets were valued at $128,6-15,000. On

August 13, 2001, Pemstar filed its 10-Q for its first quarter 2002 and reaffirmed and clarified these

results. The 10-Q stated the following false detailed description of its "inventory" assets for the first

quarter:

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June 31, 200 1

Raw materials $105,417,000Work in process $14,642,000Finished goods $10,037,000Less allowance for inventory obsolescence ($1,481,000)[Total] $128,615,000

119. The 10-Q was signed by defendants Berning and Kullback.

120. On October 23, 2001, Pemstar issued a press release announcing its financial results

for the second quarter of fiscal 2002 and stating that inventory assets were valued at $124, 968,000 .

On November 9, 2001, Pemstar filed its 10-Q for its second quarter 2002 and reaffirmed and

clarified these results . The 10-Q stated the following detailed description of its "inventory " assets

for the second quarter :

September 30, 200 1

Raw materials $105,502,000Work in process $13,143,000Finished goods $8,096,00 0Less allowance for inventory obsolescence ($1,772,000)[Total] $124,968,000

121 . On January 17, 2002, Pemstar issued a press release announcing its financial results

for the third quarter of fiscal 2002 and stating that inventory assets were valued at $101,277,000.

On February 14, 2002, Pemstar filed its 10-Q for its second quarter 2002 and reaffirmed and clarified

these results. The 10-Q stated the following detailed description of its "inventory" assets for the

second quarter :

December 31, 200 1

Raw materials $87,196,000Work in process $11,820,000Finished goods $5,629,00 0Less allowance for inventory obsolescence ($3,368,000)[Total] $101,277,000

122. In its second and third quarter 2002 10-Qs, Pemstar also represented the following :

The allowance for inventory obsolescence results from the decline in market valueof aged or technologically unusable materials, when identified, which remain onhand at balance sheet dates .

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123 . As described below, on a number of occasions defendants knew of significan t

obsolete inventory which they failed to write off, appropriately value or provide an inventor y

allowance for .

3. Evidence that These Statements Were False and MisleadingWhen Made

124. There is significant evidence that Pemstar knew about the impaired inventory, bu t

delayed writing off or reserving for inventory as follows :

125 . In or about May of 2001 , Pemstar m anagement composed a document entitled "P&T E

Revenue and Profit Actions ." This document listed 37 emergency actions designed to help salvag e

Pemstar's financial results . This document was updated as the status of these projects developed.

As of about June 12 or 13, 2001, the document contained the following items :

Clear Waferloader inventory [- Entrusted to] Strong - "Will sit on inventory toreduce loss . Still $900K in waferloader inventory. (Note: A lot of inventory onAMAT: $1 .2M CCC, $100K IO Box, est $500K on Jbox) .

126. The highlighted portion stating that Pemstar "sat" on the inventory "to reduce loss "

is direct evidence of an intent to manipulate Pemstar's accounting treatment of its inventory to avoid

writing it off as obsolete inventory prior to the Second Offering .

127. Pemstar would run into a myriad of inventory problems during the Class Period due

to the, Company's failure to have Master Agreements in place with its customers . For example,

Pemstar conducted a physical inventory of its San Jose facility in July 2001 and discovered that there

was $500,000 to $1 million missing . In addition, on June 26, 2001, defendant Ahmann wrote

defendant Berning, Jim Strong and Rick Ried the following email concerning the "San Jose AMAT

Inventory" :

Al ,

There is $530K of execss [sic] inventory for the Ultima Card Cage and $200K for theI/O Wall Panel. The Card Cage inventory was intended for Astex not AMAT . Weare a second tier supplier to Astex who is a supplier to AMAT . Astex has not deniedsome level of responsibility for this inventory since it was based off P/O's from them .We did not have an MSA in place yet . As a consequence, we have looked at theverbage on the P/O and believe they should be held liable . While they don't denyresponsibility, we have not been able to get an`agreement from them to date . Rickis going to try one more time today. If that fails, our plan is to invoice them for theinventory anyway . We are going through Mark Middleton to determine if w e

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physically need to ship it to claim the revenue or we can just convert it to consignedparts .

128 . Here the inventory in question should have been reserved for because there was n o

binding agreement in place requiring AMAT to purchase the product and the collectibility of thi s

inventory at this time was questionable .

129. Recognizing the lack of collectibility, Jim Strong composed a document entitle d

"Inventory Cost Discussions, Common Chamber Controller" on or about August 14, 2001 . The

purpose of this document was not to sell this inventory, but rather to persuade AMAT to pay a

carrying charge of 1% per month on the $1 .5 million of current inventory and $800,000 in expected

additional AMAT inventory Pemstar would be holding by the end of the year .

130. Prior to October 2001, Marvin Lang had mentioned to employees that the San Jos e

facility had between $750,000 and $1 million in excess inventory .

131 . Similarly, Pemstar never had a contractual agreement with Repeater, and Repeate r

had no liability for excess inventory. Although a draft 18-page Master Agreement was circulated,

Repeater did not sign this agreement but rather sent back red-lined counter-offer versions of the

draft. In the draft Master Agreement, Pemstar included a specific provision entitled "Holding

Inventory" which allowed Pemstar to bill Repeater for finished product even though Pemstar

subsequently placed the finished product in an on-site secured warehouse (rather than shipping the

product) . Because Pemstar and Repeater were operating without an executed contract, the two

companies operated largely under verbal agreements . Repeater began refusing many of the "Box

Build Systems" that Pemstar had built, and by September or October of 2001, Repeater had stopped

taking delivery altogether, leaving Pemstar with $400,000 in excess inventory.

132. Pemstar had similar problems with SANcastle Technologies, Inc . and ONI Systems

Corporation because Pemstar purchased parts to complete customers' orders before it had a fir m

contractual agreement with them. When these customers backed out or reduced their orders, Pemsta r

was stuck with excess inventory .

133 . This is discussed in an October 24, 2001 email Larry Degen sent defendants Kullbac k

and Berning which stated the following :

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In review this morning, with Al, Paul and Bill, of a rough version of the list of SJprofitability concerns, which has been under discussion, I ran into some reactions thatI need your help to address .

Pluris/Other potentially obsolete inventory - Reaction: Standard purchasingpractice has been that persons ordering beyond customer PO quantities are to befired . In conversation, I understand that past/present practice is markedly different .This point needs discussion and process change resolution . . . .

AMAT inventory with no contract cover . . . . Conversationally, I am given tounderstand that the agreement requires our maintaining available finished good [sic]state product without a commitment that the customer c an be held responsible forsuch goods .

Other matters appear better understood, though problematic .

134. In reaction to this email, defendant Berning forwarded the email on October 25, 200 1

to Ahmann, Pete Herman and Kullback with the following message :

Bob/PeteWe must make sure the AMAT/Pluris issues DO NOT turn into a future profit hit!Al

135 . On November 12, 2001, Kobi Goessel produced a report detailing the inventory fo r

AMAT . This repo rt concluded that Pemstar's San Jose facility was holding $942 ,344 in inventory

for AMAT.

136. On November 13, 2001, Kobi Goessel, Purchasing Manager of Pemstar ProCenter ,

produced a report on the "Material on order due by 12/31/01 by customer." This report demonstrated

that the San Jose Pro Center was expecting to receive $733,143 . 10 in additional inventory by the end

of the year. Ms. Goessel 's instruction to the recipients of this email was to "review and push out or

cancel as applicable . "

137 . On November 14, 2001, Al Tervalon wrote a report entitled "AMAT Inventory ." This

report stated :

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Project Amount Recommendation

OIWP - Current $356,740 .31 Hold material pending possible sale toAMAT

OIWP - Downrev $88,264 .45 Scrap or reallocate - no projectedfuture use

UltimaCardCage $464,336 .16 Bill Astex for carrying chargesLight Tower $33,003 .74 Scrap or reallocate - no projected

future useTotal Inventory $942,344.66

This list specifically does not include the disputed materials from Valley Services . . . .the Cancellation charges on this material are $18452 .00 . . . . The disputed Tycomaterials . . . are "on the problem shelf' and have also not been included . Myrna'sinvoices for these add up to $115,511 .85 but the Tyco guy says he thinks the total isaround $80,000 . Based on my recent conversation we may end up with some slightdiscount from that figure as well . These materials belong to the UltimaCardCageproject. As such, they belong to Astex and should be included in the carrying chargesinvoicing .

138. On December 5, 2001, the AMAT inventory problems had become so pronounce d

that Pemstar beg an returning AMAT inventory to Pemstar's suppliers Palex and Taymac without any

credits whatsoever for the inventory . Noting that this effectively amounted to a scrap of AMA T

inventory, Stephanie Homen wrote to Pemstar executives in an email on December 5, 2001 :

I have unfavorable charges in PPV associated with returns of Applied Materialsinventory for $0 which I am reclassing to your Intercompany account . The firstsection below are items vouched in October and the next section is still inUninvoiced Receipts as of November 30th. It appears to me that someone isreturning inventory for no credit. This is just like scrapping the inventory $ and .

. should be signed off by you at a minimum.

139. On December 5, 2001, Bill King emailed defendants Petracca and Kullback

discussing the "AMAT Inventory ." This email stated :

Steve asked me to send the detailed numbers for AMAT:

Here is a breakdown . . . . I am not seeing any sales activity in San Jose for thismate rial, and am working on determining if this invento ry is at risk . I do not knowof any agreement that is in place to allow us to retu rn this material to AMAT. Theage of this inventory is approaching the level at which it could be a problem for IBMCredit . The total is about 1 .1 million as shown in the Summary tab .

140. In response, defendant Kullback wrote back to Bill King and defendants Petracca an d

Berning on December 5, 2001 that :

It seems to me that this $1 .1 million is sitting in limbo . Please have the applicablefolks out there prepare a plan of resolution . . . ship back to customer, vendor otherparty, etc . We need a disposal plan. Sitting around and watching our investment i n

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this material deteriorate while we take no action is inappropriate in my opinion .Furthermore, in the absence of a plan we will have to reserve for this at audit time .

141 . In reaction, defendant Ahmann devised a plan to satisfy defendant Kullback . He

emailed a plan on December 6, 2001 to defendants Petracca, Kullback and Berning that stated :

Bill, we have a plan for this inventory as can be expected, it is not so simple . Bearin mind, we build three products in San Jose . They are the 0/I Wall Panel, theUltima Card Cage, and the Light Tower . The $1 .1M breaks down as such :

0/I Wall Panel in WIP 44K0/I Wall Panel Current Inventory 312K0/I Wall Panel DownRev Inventory 88KUltima Card Cage Inventory 464KLight Tower Inventory 33KDisputed Inventory 167K

The individual status and owner of each of these is the following:

• 0/I Wall Panel Current Inventory - Owners: Rick Ried, Jim Strong - We arecurrently building Wall Panels . Therefore Rick will assess what inventorylevel is required and then develop a history profile on the remaining inventoryto be presented to Greg Kerwick in AMAT's supplier management group . . . .There is no chance of AMAT taking inventory back .

• 0/I Wall Panel Downrev Inventory - Owners : Rick Ried, Jim Strong - Rickwill assess this inventory for obsolete parts . The remaining parts can likelystill be used .

• Ultima Card Cage Inventory - Owner: Rick Ried - This assembly does notship to AMAT. It ships to Astex . . . . Astex had agreed in the past to paycarrying charges . We have just come to find out they are reneging on thatagreement .

• Light Tower inventory - Owner : Rick Ried - . . . Rick will assess current orderoutlooks and either maintain the inventory or include it with the 0/I WallPanel .

• Disputed Inventory - Almost this entire amount is from Tyco . We cancelledorders to Tyco immediately following AMAT's cancellation to us. Tycononetheless shipped parts to us . . . . Tyco would not take them back and hasthreatened withholding other assemblies used elsewhere in the San Joseplant . . . .

142. In response to this email , on December 11, 2001, defendant CFO Kullback replied

by email to defendants Ahmann, Berning, and Petracca that :

Thank you Bob . The one critical missing piece of your analysis was estimatedcompletion/resolution dates . Please assign dates to all of the "to dos." If reasonable ,

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these dates will be used to help justify not booking any reserves on this probleminventory .

143 . Despite this inventory being "problem inventory," no write-downs or reserves were

ever taken until the end of the Class Period . Kullback was not truly interested in determining

whether they would actually collect these amounts, but rather only wanted a "cover" so that he could

avoid writing down this inventory.

144. In a last ditch effort to dump this inventory, San Jose attempted to dump the inventory

by shifting AMAT manufacturing and inventory to Austin. Indeed, on February 7, 2002, Bill King,

the San Jose Controller, emailed numerous Pemstar executives, including defendants Kullback,

Ahmann and Singh regarding the transfer of production from San Jose to Austin stating:

It was my understanding that Austin was to be a warehousing Facility and there wasnot going to be manufacturing there . Has there been a business change ?

While I appreciate that there may be customer driven reasons for moving productionto Austin, it seems that in our current environment adding personnel to support aprogram build in Austin while we are laying off staff in droves in San Jose may notbe in Pemstar's best interest .

While it is in San Jose's interest to get this inventory off of our books, it may not bein the interest of the organization .

145. In response, Clyde Little wrote back to defendants Kullback, Singh and Ahmann that :

This was authorized and communicated by Bob Ahmann in a note on 1/11/02 . . . . Thisplan has been review[ed] by many to include Al Berning as recently as yesterday .

146. Pemstar executives knew that the AMAT inventory should be written down or

reserved for . What transpired, was a fight between executives-to avoid getting stuck with this bad

inventory on their books. Specifically, because Austin was a satellite warehouse for the Rochester

office, a transition of this inventory from San Jose to Austin would mean Rochester would have to

show the AMAT inventory on its books . Realizing the questionable nature of the AMAT inventory,

executives in Rochester fought to avoid taking this on their books .

147. At a conference call held on May 14, 2002, defendants detailed the goodwill write-

downs taken in their 10-K :

[T]here are three acquisitions that are actually related to our Silicon Valleyacquisition, that Quadrus Manufacturing Company that we acquired in 1999 . Were

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obviously in Silicon Valley, with our emphasis in communications and high-tech,we've seen a fairly dramatic slowdown at that Facility . Our Taunton MassachusettsFacility, we wrote down the goodwill, related to that acquisition . And then a fairlysmall amount of goodwill, out of our acquired operation in Amelo, the Netherlands,that was an acquisition in 1999 . So they did goodwill write-downs for likes of thosethree facilities .

148. On or about July 1, 2002, Pemstar filed its 10-K for fiscal 2002 . In the 10-K, Pemstar

noted that it had written off $22 million (approximately 90%) of the goodwill associated with its Sa n

Jose and Taunton facilities :

In fiscal 2002, we recognized goodwill impairment charges of $24 .2 million relatedto our acquired facilities in Almelo, The Netherlands, San Jose, California andTaunton, Massachusetts . These charges are the conclusion from our analyses of theexpected future cash flows in response to the reduced sales volumes experienced infiscal 2002 in these locations .

149. Later in this same filing, the Company detailed this goodwill impairment :

In June 1999, the Company acquired Quadrus, Inc . a division of Bell Microproducts,Inc. Quadrus is a provider of electronic manufacturing services to original equipmentmanufacturers. The purchase price [was] $34,966,(000) . . . . The excess of thepurchase price over the estimated fair value of the net assets acquired of $12,346 hadbeen recorded as good will prior to the remaining unamortized balance fo $10,603being written off in March 2002 as a result of the Company's analysis of impairment .

In May 2001, the Company acquired certain assets and assumed certain liabilities ofU.S . Assemblies New England, Inc ., which operates through an 85,000 square footfacility in Taunton, Massachusetts . The purchase price [was] $14,522 . . . . The excessof the purchase price over the estimated fair value of the net assets acquired of$11,913 was recorded as goodwill prior to the remaining unamortized balance of$11,367 being written off in March 2002 as a result of the Company's analysis ofimpairment.

This write-off of $22 million comprised approximately one-half of Pemstar's market capitalizatio n

on this date .

150. Indeed, on January 25, 2002 at 12 :13 p.m., defendant Ahmann emailed Dan Keho e

at UltraCard, Inc. ("UltraCard") the following message :

We really need to get your payment plan and initiate payments . . . . I wanted to showsome level of tolerance and good faith with you. But by all standards, we have beenextremely lenient with a $400K balance one year in arrears . . . . If we don't get thisresolved shortly . . . [i]t will be turned over to our collector . . . who is extremely adeptat pursuing collections through lawsuits . . . .

Again, this receivable was not written down, collected or reserved for during the Class Period .

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151 . Similar issues regarding inventory were occurring at the Taunton facility .

Immediately prior to the Class Period and the time of Pemstar's acquisition of Taunton, the Taunton

facility had "a ton" of excess parts inventory and no product orders in which to use those raw

materials . Over-ordering was common at the time of the acquisition in May 2001 .

152 . The Taunton facility's inventory problem arose because it was a contract manufacture r

with a single dominant customer, Telco, which accounted for about 98 .9% of Taunton's revenue.

Telco, in turn, had one customer, Verizon . Taunton's inventory problems arose in particular when

Telco began to push out or delay its orders from Taunton . This situation worsened in the August-

September 2001 time frame with Verizon's business decline. In addition, the problem was

heightened by the fact that shortly before Pemstar acquired Taunton, Telco was purchased by an

Israeli company, which "squeezed" Taunton by canceling orders and "pushing- out" delivery dates .

As a result, Taunton was left holding finished goods inventory or raw material (parts) inventory

(when Telco pushed out the delivery dates after Taunton had purchased the raw materials but before

Taunton had begun production of the finished goods) . In both situations, Taunton bore inventory

carrying the cost . In addition, Taunton bore the costs of the declining value of the finished goods

and parts inventory, as these items aged and also as the markets for these items were softening. In

addition to canceling orders and pushing out delivery dates, Telco demanded the push--out of

payment dates, insisting on a 360-day payment date instead of the normal 45 days . The 360-day

payment terms called into question the legitimacy of recording the sale and booking the revenue, and

also impaired the quality of the accounts receivables .

153 . Taunton Materials Director Mark Zayak prepared a monthly Excess and Obsolet e

Inventory Report, which he submitted to Taunton General Manager Lineberry and Taunton's

Program Managers . By the fall of 2001, the report showed more than $1 million in excess and

obsolete inventory at the Taunton facility. Most of this resulted from Telco's delay/

postponement/cutback of orders .

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C. Pemstar Misled the Market Regarding the Accounts Receivable s

1. Legal Standard

154. During the Class Period, Pemstar failed to account for its accounts receivables in

accordance with Financial Accounting Standards . SFAS No . 5, Accountingfor Contingencies, states

that any loss to be expected from an uncollectible receivable should be accrued when it is probable

and when the amount of such loss can be reasonably estimated . See SFAS No. 5, ¶8 . According to

SFAS No. 5, ¶22 :

Losses from uncollectible receivables shall be accrued when both conditions inparagraph 8 are met [the loss is probable and the amount of loss can be reasonablyestimated] . Those conditions maybe considered in relation to individual receivablesor in relation to groups of similar types of receivables . If the conditions are met,accrual shall be made even though the particular receivables that are uncollectiblemay not be identifiable.

2. False Statements

155. On June 7, 2001, Pemstar filed its Registration Statement that falsely represented i t

had $106,510,000 in accounts receivables . On July 25, 2001, Pemstar released its financial results

for the first quarter ended June 30, 2001 . The press release represented that Pemstar had

$112,152,000 in accounts receivables . On August 13, 2001, Pemstar filed its first quarter 10-Q wit h

this same accounts receivables representation . The document was group published and signed b y

defendants Berning and Kullback .

156. On October 23, 2001, Pemstar released its financial results for the second quarte r

ended September 30, 2001 . The press release represented that Pemstar had $123,968,000 in

accounts receivables . On November 9, 2001, Pemstar filed its second quarter 10-Q with this same

accounts receivables representation . The document was group published and signed by defendants

Berning and Kullback.

157 . On January 29, 2002, Pemstar released its financial results for the third quarter ende d

December 31, 2001 and represented that it had $131,016,000 in accounts receivables . On February

14, 2002, the Company filed its third quarter 10-Q with the SEC with this same accounts receivable s

representation .

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158. On the same day, January 29, 2002, defendants Kullback and Berning held a

conference call to explain Pemstar's financial results . At that conference call, in response to a

question asked by Alex Planton of Engels and Snider regarding the nature of Pemstar's problem s

with accounts receivables, defendant Kullback and/or Berning stated :

We had one fairly significant bankruptcy within the company that we reserved for .A couple of companies are, I would say, small or non-strategic type of Silicon Valleycustomers, in a couple of cases where we still expect to get paid, but beingconservative, we voted it appropriate to post the reserves on some of the older - ourreceivables - and some of the older inventory, for example. Certainly none of ourblue-chip customers . And certainly, if you look at our top 20 customers, whichrepresented about 82 percent of our business, certainly nothing related to any of thosecustomers .

3 . Reasons Why These Statements About Accounts ReceivablesWere False

159 . The above representations were false and misleading because Pemstar failed to writ e

off or adequately reserve for several accounts receivables from major customers which Pemstar kne w

were unlikely to be paid. In particular :

a. UltraCard Receivable s

160. Pemstar had major problems with its accounts receivables with UltraCard becaus e

much of the balance of the account was many days past due. Indeed, for the UltraCard account,

Pemstar had about $500,000 in receivables . For example, on May 21, 2001, Pemstar composed an

Excel spreadsheet entitled "Ultracard financial SUMFinal" listing the accounts receivables from

UltraCard. This document was sent to defendant Ahmann . This document detailed 19 separate

invoices sent to UltraCard related to project "569" which had not been paid for a total of $402,875 .

As of May 21, 2001, all of the bills were more than 60 days old. More than 90% of this amount was

more than 90 days old. More than 85% was more than 110 days old and approximately 40% was

170 days or older (including two invoices that were 201 days old) . Indeed, by June 22, 2001, Jim

Starr sent an email to other Pemstar management at the San Jose facility noting that Pemstar would

not consider any projects from UltraCard until they had paid their bills .

161 . UltraCard did not pay this bill during the Class Period nor were these account s

receivables written off or reserved for. This is confirmed by a February 15, 2002 email sent b y

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defendant Ahmann to Gary Lingbeck regarding these exact same accounts receivables (now almost

all over a year old and some more than a year and a half past due) :

Gary,I have a request for you . Please review the attached note [stating that Ultracard hadmet with Pemstar to discuss Ultracard's need for an outsourcing partner] . It appearswe now have to get tough with Ultracard and attempt to exact payment . I know youhave a number of tricks up your sleeve on how to incent companies like this .

Despite this extreme collections problem, defendants did not collect, write down or reserve for this

account until the end of the Class Period .

b . Sagarus Receivables

162. Pemstar also had problems collecting on the Sagarus Robotics Corporation

("Sagarus") account, evidenced by a discussion to seek "collections" help in trying to get Sagarus to

pay.

163. On January 10, 2002, defendant Ahmann was informed that the Sagarus account was

a problem and that the San Jose facility had "tried and failed to get any response from Sagarus ." As

a result, defendant Ahmann suggested in an email to a Pemstar manager to get Gary Lingbeck

involved as noted that "When it comes to collections , he is the best in the business ." Despite the

classification of Sagarus as a collections account, the Sagarus accounts receivable was never

reserved for or written down and was not collected prior to the end of the Class Period.

c. EFI and Diva Receivable s

164. Electronics for Imaging, Inc. ("EFI") was also a troubling account to Pemstar . EFI

had accounts receivables of up to $100,000 that Pemstar retained on its books for over two years that

were past due . In particular, EFI owed Pemstar $67,000 for a single item for over two years and an

additional $1 million in receivables that were past due . Pemstar had an unusual agreement with Diva

Systems Corporation ("Diva"), a company that eventually declared bankruptcy . During 2001, Mark

Middleton, the controller for Pemstar's San Jose facility, told employees that they would see a

receivable of about $1 million from Diva, but not to worry about it . Middleton made it clear that this

$1 million came out of an unusual agreement between Diva and Pemstar. Under normal

circumstances, Pemstar would expect payment for a shipped product in 30 days . However, whe n

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Diva agreed to accept a shipment, it had 90 days . As such, this receivable should have been reserved

for.

D. Pemstar Misled the Market Regarding Revenue and Profits

1 . False Representations

165 . During the Class Period, Pemstar failed to account for its revenue recognition i n

accordance with Financial Accounting Standards . FasCon No. 5 states that revenues are not to be

recognized until earned . FasCon No. 5, ¶83(b). Revenues are earned when the entity has

substantially accomplished what it must do to be entitled to the benefits represented by the revenues .

Id . If collectibility is doubtful, revenues may only be recognized when cash is received . FasCon No .

5, ¶84(g) . As a result, Pemstar made the following false and misleading statements to the public :

166 . During the Class Period defendants made numerous false and misleading statement s

about revenue and earnings as follows :

167. On October 23, 2001, Pemstar released its financial results for the second quarte r

ended September 30, 2001 . The press release stated, in pertinent part, as follows :

"Once again, we delivered positive financial performance in what has been achallenging marketplace," said Allen Berning, PEMSTAR's chairman, president andCEO. "Our diverse customer base and engineering expertise are spread acrossseveral key markets and have enabled PEMSTAR to continue to grow. In addition,our focus on a horizontal business model has helped us to more quickly realign .capacity during the technology downturn . "

PEMSTAR currently expects to meet the analysts' consensus estimate for its third-fiscal quarter ending December 31, 2001 .

168 . On October 23, 2001, Pemstar also held a conference call to discuss its second quarter

results. At this conference call, defendants Kullback and Beming addressed questions from analysts .

Their statements were simultaneously broadcast to the public via CCBN webcast . At this conference

call, Kullback and/or Berning falsely stated in response to a question by Dave Miller with Kaufman

Bros . :

Q : Could you - you know - O&I had reset guidance and you guys sound prettypositive about IBM, Motorola and Seagate but of any of your other top customers,do you have any concerns that maybe forecast are a little - a little high? Could yougive any color on that?

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A: I think from a top customer perspective Dave, no, we don't have any - anyconcerns of any significance . We have seen the softening with O&I but lookingdown our top ten customer list for example you know - I see good stuff happeningthere in many cases .

169. On or about November 6, 2001, analysts and investment bankers had a meeting with

the Company's CFO (defendant Kullback) in the New York offices of Lehman Brothers . At the

meeting, defendant Kullback falsely assured analysts that the Company was on track to achieve

December 31, 2001 revenues of $180 million and earnings per share ("EPS") of $0 .11 for the

Company's third quarter :

Revenue for the third quarter is expected to be approximately $170 million, whichfalls within the range of analysts' estimates of $160 million to $183 million. On aGAAP basis, fiscal third quarter cash EPS is expected to be a loss of approximately$0.32 per share . Excluding the non-recurring charges, fiscal third quarter cash basisEPS is expected to meet the analysts' consensus estimates of $0 .10 per share.

170. Defendant Berning also noted that Pemstar's "prospects remain strong as we continue

to see an unsurpassed level of new business activity in both our engineering and manufacturing

groups," and that "[c]ombined with on-going cost-reduction efforts and a strong balance sheet, these

new business initiatives position the Company to effectively manage through the current recessionary

period and to capitalize on demand for our services as the economy recovers . "

171 . On January 29, 2002, the Company announced "Pemstar Reports Fiscal 200.2-Third-

Quarter Results," in a press release that falsely stated, in part :

Current economic uncertainties make it difficult to project results going forward .Based on what we know at this point, however, PEMSTAR currently expects to fallwithin the range of analysts' estimates for its fourth fiscal quarter ending March 31,2002 .

172. Later that same day (January 29, 2002), defendants Kullback and Berning held a

conference call to explain the financial results . At that conference call, analyst Alex Planton asked

the following question :

Q: On your guidance you said you're comfortable with the guidance, but what arethose estimates you're comfortable with ?

A: Revenue where it is right now is - and I'm sure this is going to be adjusted -is $155 million up to $189 million . And clearly $189 million is an obsolete number,and has been for some time . On the cash earnings per share, the range is $0 .07 to$0.11 . And again, $0 .11 on the high-end is a number that should have been adjusted

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previously. So $155 [million] is the low-end on revenues, and $0.07 on a cash basis,as of right now .

Q: You're comfortable you can make at least that? Is that what you're saying?Those are not your guidance numbers though?

A: Based on the current environment and our prospects and expectations for thequarter, we're comfortable that we can at least achieve those numbers .

2. Reasons Why These Statements Were False When Mad e

173. These revenue projections were recklessly made, because Pemstar knew that the Sa n

Jose and Taunton facilities' revenues and profits would be significantly below plan and that ther e

would be goodwill, inventory and accounts receivables write-offs which would make these earnings

projections impossible to meet .

174. In addition to the evidence discussed above, the following evidence demonstrates tha t

Pemstar understood that its revenue and earnings projections would be difficult to obtain on a

Company-wide basis :

(a) On August 2, 2001 at 10 :23 a.m., defendant Ahmann wrote a note to

numerous Pemstar executives stating the following :

Everyone,In my absence over the next two weeks, I want to ask all of you to focus on bringing in newwork. We know that our revenue numbers are down due to the slow down in the semiconindustry. However, it appears we may also be facing a gross margin challenge . This._s likelya statement of a couple of key issues . First, we still have some tapped out projectsconsuming labor . While these appear to finally be near the end, we need to ensure they are .Second, our backlog of work is dwindling which will likely start to show up in reducedutilization. Dave will cover this with you on Tuesday in Staff.

Even though it is not a panic situation, we just need to be prudent in our efforts to ensure itdoes not become one .

(b) On August 29 and 30, 2001, defendant Ahmann attended a marketin g

meeting where a marketing plan and marketing action were discussed . At this meeting, a powerpoint

slide was presented which contained the following statement :

Where are we today? . . . .

Current fiscal year shortage

,[Due in part to poor economic condition s

,/Due in part to lack of focus on our part

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As a result, defendants' assertions of comfort with their revenue projections were false and

misleading .

E. Pemstar Misled the Market Regarding the San Jose ProCente r

1 . False Statement About ProCenter

175 . On October 23, 2001, Pemstar also held a conference call to discuss its second qua rter

results. At this conference call, defendants Kullback and Berning gave false and misleading

statements to analysts that were simultaneously broadcast to the public via CCBN webcast . At this

conference, Lou Meshosho with Lehman Brothers asked the following question relating to Pemstar's

recent Pacific Consultants acquisition :

Q : Okay, great and how are you going to integrate, I guess with PacificConsultants . . . . I mean how are you gonna, I guess try to cross sale or justconsolidate them with your other 400 engineers ?

A: It actually consolidates very nicely. They are in Mountain, their primarylocation is in Mountain View, so they are right in the heart of Silicon Valley, so itcoordinates very nicely with our ProCenter in San Jose, in particular South SanJose, so we've got the valley covered from the heart to South . So we will see, lotsof good projects where they can use the services of a ProCenter in terms of, uh,product introduction part and we obviously are interested in the increasedcapabilities of product design .

2. Reason Why the Above Statement Was False When Made

176. This statement was knowingly false . Rather, Pemstar never expected. any

coordination between these two facilities and indeed, cannibalized the San Jose facility by takin g

engineers from the San Jose ProCenter to the new Pacific Consultants facility .

177. This is confirmed in an internal projection for Pemstar's S an Jose ProCenter showing

a projected $286,000 in losses for the third quarter ending December 31, 2001, and a January 15 ,

2002 forecast showing declining revenue for the fourth quarter of 2002 .

F. Pemstar Misled the Market Regarding Its Restructuring and Layoff s

1. False Statement About Restructuring and Layoffs

178. On October 23, 2001, Pemstar also held a conference call to discuss its second quarte r

results . At this conference call, defendants Kullback and Berning gave false and misleadin g

statements to analysts that were simultaneously broadcast to the public via CCBN webcast .

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Q: Okay and lastly you know we've been hearing on most of these calls youknow, cost cutting and restructuring . Are you doing any activities that you can pointto of significance in the cost-cutting area to supplement the softer economic scenariowe're all facing?

A: Yeah we have an ongoing program Keith where we are very aggressivelymanaging costs . We're not closing factories and we're -you know - not laying offhundreds ofpermanent employees but we are very aggressively on a weekly basismanaging our costs worldwide from air fare to - you know - other travel costs, tolooking at temporary employees et cetera so you know - no major- no majorrestructurings but certainly our team which includes and is led by the CEO, our CEOAl, meets on a weekly basis so looking at projections, forecasts and cost- cuttingmeasures throughout the company in these lean times .

2. Reason Why the Above Statement Was False When Made

179 . This statement is false because there were significant layoffs occurring at Pemstar a t

this time . In particular, at the San Jose facility alone, some 50 employees had been laid off by this

time and other facilities were laying off employees as well . At the Taunton facility dozens had been

laid off during the prior month. Indeed, Pemstar's 10-Ks demonstrate a decline of 441 employees

between March 31, 2001 and March 31, 2002 . Further, on January 17, 2002, the Company admitted

in a press release that Pemstar would take after-tax charges of approximately $16 million, or $0 .42

per share, in the fiscal third quarter that started on October 1, 2001 and ended December 31, 2001 .

Pemstar admitted that these charges reflected, among other things, "restructuring" charges .

G. Pemstar Misled the Market Regarding Its Debt Level and Capacit y

1 . False Statement About Debt Level and Capacit y

180. On October 23, 2001, Pemstar also held a conference call to discuss its second quarte r

results . In response to questions , defendants Kullback and Berning gave false and misleading

statements to analysts which were simultaneous broadcast to the public via CCBN webcast . At thi s

conference, defendants Berning or Kullback stated the following :

Our debt was up but as I mentioned in the script part of the call, ourdebt to total capital ratio is 26.4% which by many measures is verystrong . I have one universal average for the industry that I look atthat has debt to total cap but 34% with some very big players in the50-60% range so at26.4% our current view is that our balance sheetis very well poised. We do have borrowing capacity available to usto fund us to fund all of our near to mid-term needs on a goingforward basis certainly to the extent that cash flow from operationscontinues to improve as it has . We'll be generating cash internally sodebt coupled with our debt capacity coupled with cash generated fro m

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the business coupled - you know - always looking at the - at theequity and debt markets as potential opportunities .

2. Reason Why the Above Statement Was False When Mad e

181 . This statement is false because the level of capital was overstated because goodwill ,

accounts receivables and inventories, all components of Pemstar's capital, were overstated . Since

capital was overstated, the "debt to total cap," or "total capital ratio," was false and misleading .

Indeed, as described herein, Pemstar wrote off 25% of its market capitalization at the end of the

Class Period .

H. Pemstar Misled the Market Regarding Revenue Recognition in ItsRegistration Statement

1 . False Statement Regarding Revenue Recognition in Pemstar'sJune 7, 2001 Registration Statement

182 . In Pemstar's June 7, 2001 Registration Statement, Pemstar made the following fals e

statement regarding its revenue recognition with regard to its fiscal 2001 financial reports :

Revenue recognition - Revenue from the sale ofproducts is recognized whenthe product is shipped to the customer. In limited circumstances, although thephysical product remains on the Company's premises at the request of the customer,when title to and risks and rewards of ownership have contractually passed to thecustomer revenue is recognized in accordance with the guidance of Staff AccountingBulletin No. 101 . Revenue from design, development and engineering services isrecognized when the services are performed and collectibility is reasonably certain.

183. In the June 7, 2001 Registration Statement, Pemstar falsely stated it had net sales o f

$635,307,000 .

2. Reasons Why the Above Statement Was False When Mad e

184. Pemstar shipped boxes to Repeater for testing and concurrently issued a Retur n

Material Authorization ("RMA") number, which Pemstar provided to Repeater personnel so that

Repeater could return the box in the event the box did not pass the Repeater test . Although Pemstar

had issued the RMA allowing Repeater to return boxes to Pemstar, Pemstar still recognized revenue

from the actual shipment of the box to Repeater . Pemstar recognized roughly $150,000 in revenue

from Repeater per quarter, for boxes Pemstar knew would be returned . As a result of Pemstar's

violations of its revenue recognition policy, the statement about Pemstar's revenue recognition as

well as Pemstar's revenue figures cited to in its Registration Statement were false and misleading .

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185 . Further, prior to the Class Period, Pemstar booked revenue from sales to Diva an d

ONI despite the fact that products did not ship immediately, and Pemstar held on to the orders fo r

a period of time. In particular, Pemstar held product for Diva in its San Jose facility for at least fou r

months . Diva did not pay for that product despite the fact it was booked as revenue for well ove r

90 days, and Pemstar did not charge anything for storing the product . Pemstar also did the same

thing for ONI, booking product as revenue and then holding it at its San Jose facility.

VIII. STOCK SALES BY DEFENDANT S

PRE-CLASS PERIOD STOCK SALES

Date Name Shares Price Market Value

9/5/2000 Shurson, Karl 57,692 $11 .00 $634,61 2

9/5/2000 Murphy, Robert 57,692 $11 .00 $634,61 2

CLASS PERIOD STOCK SALES

Date Name Shares Price Market Value

6/13/2001 Shurson, Karl 100,000 $13 .50 $1,350,000

6/13/2001 Singh, Hargopal 100,000 $13 .50 $1,350,00 0

6/13/2001 Berning, Allen 35,000 $13 .50 $472,500

6/13/2001 Murphy, Robert 10,000 $13.50 $135,000 .

'6/13/2001 Petracca, Steve 16,423 $13.50 $221,71 1

6/13/2001 Petracca, Steve 45,000 $13.50 $607,500

6/13/2001 Ahmann, Robert 50,000 $13.50 $675,000

8/1/2001 Petracca, Steve 40,000 $17.82 $712,800

8/2/2001 Petracca, Steve 40,000 $17.64 $705,600

11/18/2001 Petracca, Steve 73,577 $12.93 $951,35 1

11/29/2001 Petracca, Steve 35,000 $15 .95 $558,250

186 . On June 13, 2001, defendant Ahmann sold 50,000 shares of stock at $13 .50 per share .

Defendant Berning sold 35,000 shares, defendant Singh sold 100,000 shares, defendant Shurson sol d

100,000 shares, defendant Murphy sold 10,000 shares and defendant Petracca sold 61,423 shares .

Defendants' sales in June 2001 occurred after the following events :

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(a) Defendant Ahmann had received an email concerning AMAT cancellation of the 01and UCC project . See ¶79 .

(b) The San Jose facility had losses in April and May . See ¶82 .

(c) Pemstar had issued a salary freeze on June 1, 2001 . See ¶81 .

(d) On Ap ri l 20 , 2001 Astex cancels all of its orders . See ¶81 .

187. Defendant Petracca also sold an additional 80,000 shares of stock on August 1 and

2, 2001 . These sales occurred after or contemporaneously with the following additional event :

defendant Ahmann's email of August 2, 2001, noting Pemstar knew that it was going to hav e

difficulty meeting its revenue and gross margin numbers . ¶174 .

188. Defendant Petracca also sold an additional 108,577 shares between November 18 an d

November 29, 2001 - cashing out all of his stock and vested options . These sales occurred after the

following additional event : defendant Petracca received financial statements described in ¶ 187 and

88 detailing that the San Jose facility had losses in five of the past six months and forecast upcoming

losses of more than $5 million for the San Jose facility .

IX. POST CLASS PERIOD REVELATION S

189. On May 6, 2002, Pemstar held a conference call to pre-announce shortfalls for it s

financial results for the fourth quarter of 2002, with defendants Kullback and Berning answering

questions from analysts in response to questions by analyst Michael Schneider . During this

conference call, defendant Kullback revealed for the first time that the shortfall occurred in som e

higher-cost regions :

That certainly gave rise to some of the adverse mix consequences and thecorresponding reduction in gross margins, even at the level of revenue we reported .At this point, we're still going through the numbers and still looking and analyzingperformance . . . but I think mix certainly had a big part of it ; in northern California,for example, the factory was more underutilized than we had expected .

190. On July 2, 2002, Pemstar announced yet more revisions to its p rior guidance for the

quarter ended June 30, 2002, and disclosed a $4 to $6 million restructuring charge over the first an d

second quarters of fiscal 2003 . The press release stated, in pertinent part, as follows :

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PEMSTAR now anticipates that the loss, including restructuring charges,will be in the range of $18 to $20 million .

Consistent with its May 14, 2002, news release, PEMSTAR is implementingits restructuring program . Once this program is fully implemented, the companyexpects to realize savings in excess of the range of $2 to $3 million per quarter itpreviously estimated . Restructuring charges for the June and September quarters areexpected to be consistent with prior guidance .

To date, Pemstar has taken the following steps as part of restructuring toreduce its costs :

- Taken steps to consolidate the engineering and manufacturing centersin San Jose, which is expected to result in lower engineering overhead and greatermanufacturing capacity utilization ;

- Consolidated the Boston manufacturing and engineering organizations . Additionalrestructuring actions are currently being assessed .

191 . Also on July 2, 2002, Pemstar disclosed "the resignation of William Kullback from

his position as Chief Financial Officer. . . . Kullback is leaving the Company to pursue other

opportunities." In the same press release, Pemstar disclosed the resignation of defendant Singh from

the Board of Directors in order to "accommodate the company's desire to increase the number of

outside directors on the Board . Michael Odrich, a managing director and head of Lehman Brothers'

Venture Capital Fund, who previously served as a PEMSTAR director from 1998 until 2001, was

appointed by the Board to fill the vacancy created by the planned retirement of Robert Murphy, one

of the founding directors of the Company . PEMSTAR expects to continue its efforts to add outside

directors to its Board as suitable candidates are identified and vacancies arise ."

192 . On August 14, 2002, Pemstar filed its first quarter 10-Q with the SEC . In this filing,

Pemstar stated :

Restructuring costs of $3 .0 million were recognized in the first quarter of fiscal 2003for the consolidation of certain facilities and worldwide workforce reductions . Theseactions were taken to rescale physical space and employee counts in affectedoperations to the current business levels . Further actions may be required asindicated by our continuing analysis .

In this filing, Pemstar again increased its allowance for inventory obsolescence from $6 .07 million

to $8.82 million.

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X. CAUSES OF ACTION

COUNT ONE

For Violation of §10(b) of the Exchange Actand Rule 10b-5 Against All Defendants

193. Plaintiffs incorporate ¶¶1-192 by reference .

194 . During the Class Period, defendants disseminated or approved the false statement s

specified above, which they knew, or recklessly disregarded, were materially false and misleading

in that they contained material misrepresentations and failed to disclose material facts necessary in

order to make the statements made, in light of the circumstances under which they were made, not

misleading .

195 . Defendants violated § 10(b) of the Exchange Act and Rule I Ob-5 in that they:

(a) Employed devices, schemes, and artifices to defraud ;

(b) Made untrue statements of material facts or omitted to state material fact s

necessary in order to make statements made, in light of the circumstances under which they wer e

made not misleading ; or

(c) Engaged in acts, practices, and a course of business that operated as a frau d

or deceit upon plaintiffs and others similarly situated in connection with their purchases of Pemstar

publicly traded securities during the Class Period .

196. Plaintiffs and the class have suffered damages in that, in reliance on the integrity of

the market, they paid artificially inflated prices for Pemstar publicly traded securities . Plaintiffs and

the class would not have purchased Pemstar publicly traded securities at the prices they paid, or at

all, if they had been aware that the market prices had been artificially and falsely inflated by

defendants' misleading statements .

197. As a direct and proximate result of these defendants' wrongful conduct, plaintiffs an d

the other members of the class suffered damages in connection with their purchases of Pemstar

publicly traded secu rities during the Class Period .

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COUNT TW O

For Violation of §20(a) of the Exchange ActAgainst All Defendants

198. Plaintiffs incorporate ¶11-197 by reference . The executive officers of Pemstar

prepared, or were responsible for preparing, the Company's press releases, SEC filings and

conference calls . The Individual Defendants controlled other employees of Pemstar . Pemstar

controlled the Individual Defendants and each of its officers, executives and all of its employees .

By reason of such conduct, defendants are liable pursuant to §20(a) of the Exchange Act .

COUNT THREE

For Violation of §11 of the Securities ActAgainst All Defendants

199 . This Count is brought pursuant to § 11 of the Securities Act on behalf of the class ,

against all defendants .

200. Plaintiff Matt Brody and members of the class purchased Pemstar common stock

issued pursuant to the Registration Statement filed by the Company with the SEC and declare d

effective by the SEC on June 8, 2001 .

201 . As alleged above, the Registration Statement was materially false and misleading ,

contained untrue statements of material fact, omitted to state material facts necessary to make th e

statements made in the Registration Statement, under the circumstances in which they were made ,

not misleading and failed to disclose material facts .

202. The false statements in the Registration Statement described at ¶¶68, 70 and 7 5

relating to goodwill were false and misleading because of the true facts stated in ¶178-82 .

203 . The false statement in the Registration Statement described at ¶155 relating t o

Pemstar's accounts receivables was false and misleading because of the true facts stated in ¶¶160-

161 and 164 .

204. The false statement in the Registration Statement described at ¶116 related to

protection from inventory cost fluctuations was false and misleading because of the true facts state d

in ¶¶78-82, 125 and 127-129 .

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205. The false statement in the Registration Statement described at ¶¶182-183 relating t o

Pemstar's revenue recognition was false and misleading because of the true facts stated in ¶1184-185 .

206. The Company is the registrant for the Secondary Offering and filed the Registration

Statement as the issuer of the stock, as defined in § 11(a)(5) of the Securities Act . The defendants

named herein were responsible for the contents of the Registration Statement and caused its filin g

with the SEC .

207. Pemstar is the issuer ofthe common stock sold via the Secondary Offering. As issuer,

Pemstar is liable to members of the class for misstatements in, and omissions from, the Registratio n

Statement.

208 . Defendants signed the Registration Statement and all defendants otherwise cause d

it to be prepared, filed with the SEC and circulated to the public, including plaintiffs and the othe r

members of the class .

209. None of the defendants named herein made a reasonable investigation or possessed

reasonable grounds for the belief that the statements described above, which were contained in the

Registration Statement, were accurate and complete in all material respects .

210. At the time plaintiffs purchased Pemstar common stock in the Secondary Offering ,

they did not know nor did any member of the class know, or by the reasonable exercise of care coul d

have known, of the facts concerning the inaccurate and misleading statements and omissions alleged

herein .

211 . Plaintiffs and members of the class purchased Pemstar common stock prior to the dat e

the Company made generally available to its securities holders an earnings statement covering a

period of at least 12 months beginning after the effective date of the Registration Statement.

212. In connection with the Secondary Offering and sale of the common stock, defendants ,

directly or indirectly, used the means and instrumentalities of interstate commerce and the United

States mail .

213. This action was brought within the one year after the discovery of the untru e

statements and omissions and within three years after the common stock was sold to the public i n

the Secondary Offering .

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214. By reason of the foregoing, defendants have violated §11 of the Securities Act and

are liable to plaintiffs and members of the class, each of whom has been damaged by reason of suc h

violations .

COUNT FOUR

Violation of §15 of the Securities Act(Against Pemstar and the Individual Defendants)

215 . Plaintiffs incorporate ¶1199-214 by reference .

216. This Count is asserted against Pemstar and the Individual Defendants and is based

upon principles of strict liability, negligence and lack of due diligence, but not fraud.

217. The defendants named in this Count acted as controlling persons of the Company

within the meaning of § 15 of the Securities Act . Pemstar controlled each of its officers named as

defendants. By reason of their senior management positions and/or directorships or ownership of

Pemstar's stock, the Individual Defendants named in this Count had the power to influence and

exercised the same to cause Pemstar to engage in the unlawful acts and conduct complained of

herein .

218. By reason of such wrongful conduct, Pemstar and the Individual Defendants are liabl e

pursuant to § 15 of the Securities Act. As a direct and proximate result of their wrongful conduct,

plaintiffs and other members of the class suffered damages in connection with their purchases o f

Pemstar's stock during the Class Period.

XI. CLASS ACTION ALLEGATIONS

219. Plaintiffs bring this action as a class action pursuant to Rule 23 of the Federal Rule s

of Civil Procedure on behalf of all persons who purchased Pemstar publicly traded securities (th e

"class") on the open market during the Class Period . Excluded from the class are defendants ,

directors and officers of Pemstar and their families and affiliates .

220. The members of the class are so numerous that joinder of all members i s

impracticable . The disposition of their claims in a class action will provide substantial benefits t o

the part ies and the Court . During the Class Pe riod, Pemstar had more than 36 million shares of stoc k

outstanding, owned by thousands of persons .

-54-

221 . There is a well-defined community of interest in the questions of law and fac t

involved in this case. Questions of law and fact common to the members of the class whic h

predominate over questions which may affect individual class members include :

(a) Whether the Securities Act was violated by defendants ;

(b) Whether the Exchange Act was violated by defendants ;

(c) Whether defendants omitted and/or misrepresented material facts ;

(d) Whether defendants' statements omitted material facts necessary to make th e

statements made, in light of the circumstances under which they were made, not misleading ; and

(e) Whether defendants knew or recklessly disregarded that their statements were

false and misleading for purposes of the Exchange Act claims .

XII. NO SAFE HARBO R

222. The statutory safe harbor provided for forward-looking statements under certai n

circumstances does not apply to any of the allegedly false statements in this complaint, because the

specific statements pleaded herein were neither identified as "forward-looking statements" when

made, nor accompanied by meaningful cautionary language identifying important factors that could

cause actual results to differ materially from those in the specific statements . To the extent that the

statutory safe harbor applies to any of the statements pleaded herein, defendants are liable for those

false forward-looking statements because at the time each of those forward-looking statements were

made, the speaker knew that the particular forward-looking statement was false, and/or the forward-

looking statement was made by or with the approval of an executive officer of Pemstar who knew

that the statement was false or misleading .

XIII. PRAYER FOR RELIEF

WHEREFORE, plaintiffs pray for judgment as follows :

A. Declaring this action to be a proper class action ;

B . Awarding damages, including interest ;

C. And such equitable/injunctive or other relief as the Court may deem proper .

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JURY DEMAND

Plaintiffs demand a trial by jury .

DATED: -----y 13j REINHARDT & ANDERSO NGARRETT D . BLANCHFIELD, JR. (#209855 )

i

G TT . ANCHFIELD, JR.

C :\WINDOWS\TEMPVGC80485 .w d

E-1000 First Nations Bank Building332 Minnesota StreetSt. Paul, MN 55101Telephone : 651/227-9990651/297-6543 (fax )

Liaison Counsel

MILBERG WEISS BERSHADHYNES & LERACH LLP

REED R . KATHREINSTANLEY S . MALLISON100 Pine Street, Suite 2600San Francisco , CA 94111Telephone : 415/288-4545415/288-4534 (fax)

MILBERG WEISS BERSHADHYNES & LERACH LLP

WILLIAM S . LERACHDARREN J. ROBBINS401 B Street, Suite 1700San Diego, CA 92101Telephone : 619/231-1058619/231-7423 (fax )

Lead Counsel for Plaintiffs

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