In Re: REMEC, Inc. Securities Litigation 04-CV-1948 …securities.stanford.edu/.../200654_r01c_04CV1948.pdfANTHONY EVANS Individually And On ) Behalf of All Other Similarly Situated,

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MILBERG WEISS BERSHAD& SCHULMAN LL P

JEFF S . WESTERMAN (SBN 94559)KAREN T. ROGERS (SBN 185465)RAMON M. GONZALEZ (SBN 220891)355 South Grand Avenue, Suite 417 0Los Angeles, CA 90071Telephone : (213) 617-1200Facsimile : (213) 617-197 5

Lead Counsel for Plaintiffs

`[Additional Counsel Appear on Signature Page]

FILE DMAY 0 4 200 6

CLERK, U.S . 01MICT COURTN 17 OF CALI FORNIA

!!y DEPUTY

UNITED STATES DISTRICT COURT

SOUTHERN DISTRICT OF CALIFORNI A

IN RE: REMEC INCORPORATED }SECURITIES LITIGATION )

This Document Relates to : )

ALL ACTIONS )}

ANTHONY EVANS Individually And On )Behalf of All Other Similarly Situated, )

Plaintiff, )

V5 .

REMEC INC., RONALD E . RAGLAND, and }WINSTON E. HICKMAN,

Defendants. )

CASE NO.04 CV 1948 JM (AJB )

CLASS ACTION BY FAXFOURTH AMENDED COMPLAINT FORVIOLATIONS OF THE FEDERALSECURITIES LAW S

DEMAND FOR JURY TRIA L

FOURTH AMENDED COMPLAINT FOR VIOLATIONS OF THE FEDERAL SECURITIES LAWSDOCS1354922v2

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Table of Content s2

Page3 SUMMARY OF THE ACTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

4 JURISDICTION AND VENUE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7

5 PARTIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

6 SUBSTANTIVE ALLEGATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

7 Class Period Events and Defendants ' False and Misleading Statements During th eClass Period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1 3

8Defendants Disclose the Major Goodwill Impairment and Internal Contro l

9 Deficiencies ; Remec 's-Auditors Resign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28

10 Defendants ' Class Period Statements Detailed Above Were Materially False an d

1 1Misleading When Made . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3 1

Remec ' s Annual Goodwill Impairment Test Performed On December 27, 2002 fo r12 the Fiscal Year Ended Janua ry 31 , 2003 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .34

13 Remec ' s Goodwill as of the Beginning of the Class Period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .37

14 Remec ' s Impairment Test Performed During The Class Period On December 26 ,2003 for the Fiscal Year Ended Janua ry 31, 2004 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38

15Remec ' s Goodwill Impairment Test Performed For The Quarter Ended July 30, 200 4

16 Based on Indicators of Impairment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .40. . . . .

17 Comparison of Actual Gross Profit Margins to Forecasts for Same Period . . . . . . . . . . . . . . . . . . . . . .43

18 Defendants ' Undisclosed Poor Gross Profit Margins on Products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50

19 Defendants ' Failure to Timely Recognize Goodwill Impairment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .63

20 Defendants Failed to Consider All Available Evidence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .74

21 ADC Mersum Oy ("Solitra ") Acquisition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .75

22 Spectrian Acquisition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .77

23 Himark Telecom Group Limited ("Himark") Acquisition . . . . . . . . . . . . . . 80

24 Paradigm Wireless Acquisition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .88

25 GAAP Violations for Failing to Timely Recognize Goodwill Impairment . . . . . . . . . . . . . . . . . . . . . . . 89

26 Defendants ' Knowingly False and Unreliable Forecasts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .94

27 Defendants ' Undisclosed Practice of "Pulling In Orders .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .99

28 Defendants ' Undisclosed Excess and Obsolete Invento ry Problems . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 1

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1 Excess and Obsolete Inventory Acquired from Spectrian . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .105

2 Defendants ' Undisclosed Chronic and Material Shortage of Component Parts . . . . . . . . . . . . . .125

3 Defendants Improperly Failed to Timely Write- Down Obsolete and/or Slow -MovingInventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .126

4Defendants' Undisclosed Inventory Reserve Deficiencies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .128

5Defendants' Improper Accounting of "Zero-Value Inventory ". . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

6Improper Shipping and Revenue Recognition on Non-Functional Products . . . . . . . . . . . . . . . . . . .137

7Defendants ' Failure to Adequately Monitor Accounts Receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .139

8Impact of Above Improper Practices on Goodwill Impairment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .142

9Defendants ' Failure to Maintain an Adequate System of Internal Controls . . . . . . . . . . . . . . . . . . . . 14 3

10ADDITIONAL SCIENTER ALLEGATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .149

11CAUSATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .153

12PLAINTIFFS' CLASS ACTION ALLEGATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .154

13APPLICABILITY OF PRESUMPTION OF RELIANCE : FRAUD-ON-THE-MARKET

14 DOCTRINE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .155

15 NO SAFE HARBOR IMMUNIZATION FOR ANY OF THE ALLEGED FALS ESTATEMENTS BY DEFENDANTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .156

16FIRST CLAIM Violation of §10(b) of The Exchange Act And Rule l0b-5 Promulgate d

17 Thereunder Against All Defendants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .156

18 SECOND CLAIM Violation of §20(a) of The Exchange Act Against the Individual Defendants] 5 S

19 PRAYER FOR RELIEF . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .160

20 JURY DEMAND . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .160

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Lead Plaintiff, the Cuvelier Group ("plaintiffs"), individually and on behalf of all other

persons similarly situated, alleges the following based upon personal knowledge as to itself and its

own acts, and information and belief as to all other matters, based upon, inter alia, the investigation

of its counsel, which included a review of the defendants' public documents, conference calls an d

announcements made by defendants, regulatory filings and reports, wire and press releases published

by and regarding Remec, Inc . ("Remec" or the "Company"), securities analysts' reports and

advisories about the Company, and other publicly available information .

SUMMARY OF THE ACTION

1 . Plaintiffs bring this class action on behalf of purchasers of Remec securities between

September 8, 2003 and September 8, 2004, inclusive (the "Class Period"), seeking remedies unde r

the Securities Exchange Act of 1934 (the "Exchange Act") .

2. Remec is a designer and manufacturer of high frequency subsystems used in the

transmission of voice, video and data traffic over wireless communications networks and in space

and defense electronics applications .

3 . The Complaint arises out of the defendants' false statements and material omissions

to the market in late 2003 and a large part of 2004 which enabled them to mislead the market as to

the strength of Remec's financial condition. In order to inflate the price of Remec securities ,

defendants caused the Company to overstate and falsely report its financial results, including sales,

revenue and goodwill, for the Class Period, and failed to disclose material facts necessary to mak e

the statements not misleading .

4 . At the heart of defendants' fraud, but accompanied by other misconduct, is

defendants' failure to timely write-down impaired goodwill which should have been taken at the

latest by August 2003, or a full year before it was taken . Defendants materially overstated goodwil l

which was accumulated primarily from three previous acquisitions, including the Class Period

acquisition of Paradigm and two pre-Class Period acquisitions . As explained below, defendants '

scheme concealed the need to write off 96% of the recorded goodwill, which was ultimately done at

the end of the Class Period by recognizing a $62 .4 million charge for goodwill impairment for

Remec's Commercial Wireless Division acquisitions . This impairment charge should have bee n

FOURTH AMENDED COMPLAINT FOR VIOLATIONS - 1 - CASE NO . 04 CV 1948 JM (AJB)OF THE FEDERAL SECURITIES LAWSDOCS\354922v2

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1 recognized during the Class Period . Indeed, the write-off would have wiped out 17% of Remec's

2 total assets and 25% of total shareholder's equity as of January 31, 2004, if taken during the Class

3 Period .

4 5. Defendants (falsely) assured the market in their SEC filings that "JtJhese estimates

5 fused in evaluating Remec's goodwill/ are consistent with the plans and estimates that we use to

6 manage the underlying businesses ." However, defendants' assumptions were knowingly

7 unrealistic and unattainable, as corroborated by information obtained from several confidential

8 witnesses and internal Company documents (detailed below) . According to these sources,

9 defendants used gross profit margin and sales growth percentage assumptions well above their own

10 internal forecasts, so even if their internal forecasts were accurate or in good faith (which plaintiffs

11 contest), they did not use those figures as the projected rates . While their own internal forecasts told

12 them they would never reach those numbers, they used knowingly baseless "assumptions" instead .

13 In this way, defendants were able to perpetuate their fraud : first, because the assumptions were not

14 promptly disclosed; and second, when they were disclosed, investors did not know defendants had

15 ignored their own forecasts and overinflated the margin and sales growth rates used in performing

16 the test . As a result, investors had no way to know the impairment tests were flawed and that

17 Remec's financials deliberately overstated Remec's goodwill during the Class Period . Contrary to

18 their public statements, defendants had not used estimates that were "consistent with the plans and

19 estimates used to manage the business . "

20 6. Specifically, the assumptions used in performing the required annual goodwill

21 impairment test in December 2002 and 2003, leading up to and into the Class Period, were

22 unrealistic and unsupported for at least the following reasons :

23 (a) the underlying forecasts were themselves unreliable and based on fraudulent

24 practices and inadequate internal controls confirmed in part by the issues raised in connection with

25 the resignation of Remec's outside accounting firm, Ernst & Young LLP ("E&Y"), two weeks after

26 the end of the Class Period ;

27 (b) the underlying internal forecasts demonstrated that the "assumptions" were

28 baseless and unattainable and not indicative of the estimates used in the underlying business ;

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I (c) the assumptions had no historical or ongoing basis in reality based on actual

2 performance, but were manipulated to support the desired goodwill ;

3 (d) historical gross profit margin percentages were far below the margin

4 assumptions used to test goodwill impairment (in fact, the percentage range used to justify the

5 goodwill value as of the beginning of the Class Period was 30-38%, when in fact the previous three

6 quarters' gross margin percentages were 15 .8%, 20 .2%, and 21 .9%, respectively, and the gross

7 profit margin range relied upon as of December 2003 was 24-29%, when in fact the actual gross

8 margins for the four quarters during the Class Period were 20 .2%, (-7%), 13 .4% and 4%) ; and

9 (e) the then-current quarter and the quarters immediately after the goodwill

10 impairment tests were performed demonstrated the gross over-inflation of defendants' assumptions,

11 yet defendants still failed to admit the impairment (which was known internally), or to promptly

12 disclose to the market the assumptions or details of the valuation model that were used to conduct

13 the test . Indeed, defendants waited approximately four months after each impairment test before

14 disclosing the assumptions utilized to determine whether the Company's goodwill was impaired .

15 7. Although the false statements and omissions relating to Remec's goodwill

16 impairment are sufficiently egregious by themselves, defendants engaged in other practices which

17 demonstrate the intentional nature of their misleading statements and omissions to the market

18 between September 2003 and September 2004 about Remec's financial condition .

19 8. During the Class Period, defendants announced improving financial results, including

20 increasing sales and revenues in the Company's Wireless Division, when, in fact, Remec's reported

21 results were dependent on shipping and recording revenue on non-functional product, "pulling-in"

22 orders from future quarters, over-valuing inventory that should have been written-down, selling

23 inventory that had already been written off, and manipulating inventory reserves to artificially

24 improve profits . In other words, Remec's revenue was inflated during the Class Period due to,

25 among other things, Remec's improper practices of selling and booking revenue for product known

26 to be non-functional, "pulling-in" orders from future quarters to meet current quotas, and overstating

27 the value of excess (and obsolete) inventory . These practices were not disclosed to the public, and

28 also contributed to the concealment of Remec's goodwill impairment .

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1 9. Remec's investors, and plaintiffs here, had a reason to expect that defendants utilized

2 reasonable and supportable goodwill testing assumptions (including sales growth rate and gross

3 profit margin percentages), based on legitimate projections and that they reevaluated those

4 assumptions when warranted, as required by Generally Accepted Accounting Principles ("GAAP"),'

5 and created more realistic assumptions, when needed, based on updated information . Defendants did

6 not disclose at any time during the Class Period that they did not follow this practice or did not

7 periodically reevaluate the basis for previously used goodwill impairment test assumptions, and in

8 fact, affirmatively asserted that the assumptions were based on reasonable estimates as used in the

9 underlying business .

10 10. As set forth below, however, despite the fact that Remec's gross profit margins

l 1 continued to not meet (or come close to) the assumptions used for several consecutive quarters

12 following defendants' periodic goodwill testing (and were even below internal forecasts), defendants

13 nevertheless continued to maintain the assumptions previously utilized (as demonstrated by their

14 failure to perform new tests and/or disclose new feasible assumptions); and thereby, misled the

15 market by failing to disclose that the previous assumptions and, hence, the goodwill impairment

16 analysis, were materially flawed . This gave the market the false impression that the assumptions

17 were still valid . Since accounting standards (i .e . GAAP) require the Company to reevaluate its

18 goodwill between annual tests under certain circumstances, by failing to do so, defendants

19 effectively continued to misrepresent to the market that the assumptions previously used were still

20 valid. However, they were not valid because of Remec's inability to achieve the margin percentages

21 assumed, in part because of the improper accounting practices, unreliable forecasts, shipping of non-

22 functional product, pulling-in orders from future quarters, inventory problems and deficient internal

23 controls .

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26 1 GAAP are those principles recognized by the accounting profession and the SEC as the unifor m27 rules, conventions and procedures necessary to define accepted accounting practices at a particular

time .

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11, Thus, Remec 's Class Period financial statements , which were filed with the Securities

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and Exchange Commission ("SEC") and provided to the market, were false and misleading because

the purported "increasing sales and revenues" defendants represented for the Company's Wireless

Division were dependent on :

(a) over-valuing inventory that should have been written down, or written off,

but instead remained on the books at full value ;

(b) selling inventory that had already been written off, or selling other "zero-

value" inventory (including "zero value" inventory obtained from pre-class period acquisitions) ;

(c) "pulling-in" orders from future quarters ; an d

(d) shipping and recording revenue on non-functional product (as explained

below, defendants recognized revenue on shipments of non-confirming products to customers to

give the false appearance of increased sales, strengthening demand and higher gross profi t

margins) .

12. Defendants led the market to believe there was a prospect of achieving the growt h

rates utilized in the goodwill impairment tests . Thus, when they disclosed at the end of the Class

Period 'that they would have to take a huge goodwill impairment charge, revealing that the

assumptions were baseless and not based on assumptions used to run the business, the stock dropped

immediately (by over 18%) . While the assumptions themselves may have been public prior to that

date, the deficiencies with those assumptions, were not disclosed . When they were, the market

reacted swiftly .

13 . During the Class Period and with the Company's stock trading at artificially inflated

prices, Remec completed the acquisition of Paradigm Wireless Systems Inc . ("Paradigm"), wherein

Paradigm shareholders received 1 .9 million shares of Remec common stock . According to the

Company, the deal was valued at $20 .957 million based on Remec's stock trading at $11 .03 per

share at the time of the signing of the letter of intent on October 31, 2003 . Remec portrayed this and

earlier acquisitions as contributing to its success in the wireless market, and a means by which it

insulated itself from negative pressures experienced by other wireless equipment providers .

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1 14. Defendants filed regular reports with the SEC . Defendants certified pursuant to the

2 Sarbanes-Oxley Act of 2002 that these financial reports were reviewed by them and did not contain

3 any material misrepresentations or omissions . These certifications that Remec's financial reporting

4 was accurate and that the Company's internal controls were adequate, were knowingly or recklessly

5 false when filed . Remec's financial statements were not accurate as discussed below, and the

6 Company was aware of significant internal control deficiencies during 2003 and 2004, which the

7 Company admitted in its Form 8-K filed with the SEC on September 30, 2004, only three weeks

8 after the end of the Class Period .

9 15. On September 8, 2004, after the market closed, defendants surprised the market by

10 announcing that Remec would have to take an enormous goodwill impairment charge of $62 .4

11 million for its commercial Wireless Division -the same division that defendants assured investors

12 was on a path to profitability . Even though the charge related to only one of Remec's business

13 segments, it represented a loss of approximately 18% of Remec's total assets, more than 25% of its

14 shareholders' equity, and more than 95% of its total goodwill from the previous quarterly reporting

15 period . In addition, the goodwill impairment charge increased the Company's accumulated deficit

16 by more than 40% from January 31, 2004 . Additionally, the assumptions that served as the basis for

17 carrying this goodwill were so seriously flawed that management knew, or was deliberately reckless

18 in not knowing, that the assumptions had no basis and that the goodwill during the Class Period was

19 a manipulation designed to falsely misrepresent Remec's financial condition and artificially maintain

20 the price of Remec's stock .

21 16. On September 8, 2004, the end of the Class Period, defendants disclosed that :

22 (a) goodwill values were overstated by $62 million ;

23 (b) the Company was unable to calculate the proper inventory reserves ; and

24 (c) Remec's internal controls were materially deficient .

25 17. The next day, on September 9, 2004, contrary to their repeated assurances during the

26 Class Period regarding the integrity of Remec's financial controls, defendants revealed that the

27 Company identified previously undisclosed "potential control deficiencies . "

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18. As a result of these announcements, Remec stock fell $ 1 .00 per share or 18 .87%, on

September 9, 2004, to close at $4 .30 per share, and lost more than 50% of its value from its Class

Period high of $12.86 per share . Notably, at $4 .30 per share, the Paradigm acquisition, which

required 1 .9 million shares at $11 .03 per share, would have required an additional 2,973,721 shares

of Remec stock, or 157% more shares, to be completed . The stock has never recovered its Clas s

Period value, and trades at just over $6 .00 today .

19 . As a result of defendants' positive (but false) statements about Remec, investors an d

plaintiffs here, purchased Remec stock at artificially inflated levels and were damaged when the

truth was revealed and the artificial inflation was removed from the stock price causing the stoc k

price to decline .

20. Defendants' consistent and blatant abdication of their duty to maintain effective an d

appropriate internal accounting controls and financial reporting systems ultimately led to Remec's

former auditors, E&Y's, withdrawal from providing auditing and accounting services to the

Company . On September 24, 2004, two weeks after the end of the Class Period, E&Y informed

Remec that it was resigning as the Company's independent registered public accounting firm

effective no later than the completion of its review of the Company's interim financial information

for the three and nine months ending October 29, 2004 . E&Y's resignation is telling .

JURISDICTION AND VENU E

21 . The claims asserted herein arise under and pursuant to Sections 10(b) and 20(a) of the

Exchange Act, (15 U .S .C . §§78j(b) and 78t(a), and Rule I Ob-5 promulgated thereunder (17 C .F .R .

§240 .1 Ob-5) .

22. This Court has jurisdiction over the subject matter of this action pursuant to §27 of

the Exchange Act (15 U.S.C . §78aa), and 28 U .S .C . § 1331 .

23 . Venue is proper in this Judicial District pursuant to §27 of the Exchange Act, 15

U.S.C. §78aa, and 28 U .S.C. §1391(b) . Many of the acts and transactions alleged, including the

preparation and dissemination of materially false and misleading information, occurred in substantia l

part in this Judicial District . Additionally, the Company maintains its principal executive office in

this Judicial District, located at 3790 Via de la Valle, Suite 311, Del Mar, California, 92014 .

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24. In connection with the acts, conduct and other wrongs alleged in this Complaint,

defendants, directly or indirectly, used the means and instrumentalities of interstate commerce,

including but not limited to, the United States mails, interstate telephone communications and the

facilities of the national securities exchange .

PARTIES

25 . Lead Plaintiff the Cuvelier Group purchased Remec securities at artificially inflate d

prices during the Class Period, as set forth in the list attached as Exhibit A and incorporated by

reference, and has suffered damages as a result of the wrongful acts of defendants as alleged .

26. Defendant Remec is a designer and manufacturer of high frequency subsystems used

in the transmission of voice, video and data traffic over wireless communications networks and i n

space and defense electronics applications .

27. Defendant Ronald E . Ragland served as the Company's Chief Executive Officer until

his retirement in February 2004 . After Robert W. Shaner's service as interim CEO, Ragland was

replaced as CEO by Thomas H . Waechter who was appointed on August 31, 2004 .

28. Defendant Winston E . Hickman served as the Company's Chief Financial Officer

from November 2003 until the end of the Class Period . Hickman succeeded David Morash as

Remec's CFO .

29. Defendants Ragland and Hickman are collectively referred to as the "Individua l

Defendants ."

SUBSTANTIVE ALLEGATION S

30. Plaintiffs' allegations are supported by, among other things, the information provided

by confidential witnesses . These witnesses include former Remec employees who provided facts

based on their personal experiences, which includes a variety of different vantage points, within

Remec :

(a) Witness I is a former Manager of Financial Application at Remec . Witness 1

worked for Remec prior to and during Class Period .

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1 (b) Witness 2 is a former Director of Accounting for Accounts Receivable,

2 Accounts Payable , and Fixed Assets at Remec . Witness 2 worked at Remec prior to and at the sta rt

3 of Class Period.

4 (c) Witness 3 is a former Vice President of IT at Remec . Witness 3 worked for

5 Remec prior to and during the Class Period .

6 (d) Witness 4 is a former Spectrian and Remec Sales Executive . Witness 4

7 worked at Remec after the Spectrian acquisition through and into the start of Class Period .

8 (e) Witness 5 is a former Spectrian and Remec Major Account Executive .

9 Witness 5 worked for Remec after the Spectrian acquisition and during Class Period .

10 (f) Witness 6 is a former Director of Cost Accounting and Director of Budgeting

i l and Forecasting at Remec . Witness 6 worked at Remec prior to and throughout Class Period .

12 (g) Witness 7 is a former Global Sourcing Manager at Remec . Witness 7 worked

13 for Remec prior to and throughout the Class Period .

14 (h) Witness 8 is a former Director of Global Logistics at Remec . Witness 8

15 worked at Remec prior to and throughout the Class Period .

16 (i) Witness 9 is a highly placed accounting executive at Remec who reported to

17 the Company ' s Audit Commi ttee and Chief Financial Officer throughout the Class Period . Witness

18 9 worked for Remec prior to and throughout the Class Period .

19 {j) Witness 10 is a former Spectrian and Remec Director of Supply Chain

20 Management . Witness 10 worked at Remec prior to the Class Period .

21 (k) Witness 11 is a former Spectrian employee and Remec Director of

22 Operations Engineering . Witness 11 worked for Remec prior to and throughout the Class Period .

23 (1) Witness 12 is a former Global Account Manager at Remec . Witness 12

24 worked for Remec prior to and throughout the Class Period .

25 (m) Witness 13 was a former Remec Corporate Controller prior to and

26 throughout most of the Class Period , until May 2004 . The witness was responsible for SEC

27 reporting and consolidation of Remec 's different business entities .

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1 (n) Witness 14 is a former Remec Staff Accountant . Witness 14 worked in the

2 corporate accounting office at Remec prior to and throughout the Class Period . The witness was

3 responsible for consolidating financial results from the BAAN system which were then entered into

4 a Hyperion system. This is how the Company's public financial statements were ultimately

5 derived. He/she reported to former Controller Patrick Gray and also indirectly to David Hinkle .

6 (o) Witness 15 is a former Remec Director of Base Station Operations . Witness

7 15 worked for Remec during the last quarter of the Class Period (2Q 04) . The witness was hired to

8 coordinate and manage the financial operations of Remec's various operations in Finland, Northern

9 California, the Philippines, Cost Rica, and China .

10 (p) Witness 16 is a former Remec Director of Supply Chain Management in

11 Poway, California . Witness 16 worked at Remec prior to and throughout the Class Period . His/her

12 responsibilities included negotiating supply contracts, "supply security," and cost reduction .

13 (q) Witness 17 is a former Remec Senior Buyer Planner and Commodity

14 Specialist in Poway, California . The witness worked for Remec prior to and throughout the Class

15 Period. He/she was responsible for managing material shortages for Remec's offshore

16 manufacturing facilities in Costa Rica and the Philippines .

17 (r) Witness 18 is a former Senior Director of Business Development and

18 Program Manager with Benchmark Electronics, Inc . The witness performed contract

19 manufacturing services on behalf of Spectrian and also for Remec following Remec's acquisition

20 of Spectrian in December 2002 . He/she was responsible for managing the "cash flow" of the

21 manufacturing process, as well as trying to "collect money" from customers like Remec . He/she

22 remained employed with Benchmark at least until Remec moved the manufacturing of amplifiers

23 from Benchmark's facilities in Thailand to Remec's own manufacturing facility in the Philippines,

24 which was completed in early 2004 .

25 (s) Witness 19 is a former Remec Customer Service Representative in Milpitas,

26 California . The witness was employed with Remec from October 2004 until around the time

27 Powerwave acquired Remec in September 2005 . His/her responsibilities included order entry,

28 tracking shipments, and dealing with overseas Remec manufacturers .

FOURTH AMENDED COMPLAINT FOR VIOLATIONS - 10- CASE NO . 04 CV 1948 JM (AJB)OF THE FEDERAL SECURITIES LAWSDOCS1354922v2

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1 (t) Witness 20 is a former Remec Commodity Manager in Poway, California .

2 The witness was employed with Remec from 2002 just before the end of the Class Period . His/her

3 responsibilities included buying manufacturing components, negotiating and establishing global

4 supply chain contracts, and "mentoring" the Costa Rica and Philippines manufacturing personnel .

5 (u) Witness 21 is a former Remec Accounts Receivable Administrator/Collector .

6 The witness worked at Remec prior to and throughout the Class Period . He/she handled collections

7 on accounts, including Cingufar, Lucent, Sprint, and Himark .

8 (v) Witness 22 is a former Inventory Analyst at Remec prior to and throughout

9 the Class Period . The witness' responsibilities included inventory accuracy, management of excess

10 and obsolete inventory, and inventory reporting . The witness reported to an Inventory and

11 Planning Manager, who reported to the Vice President of Global Supply Chain .

12 (w) Witness 23 is a former Senior Buyer/Planner with Remec and Spectrian in

13 Milpitas, California during the Class Period .

14 (x) Witness 24 is a former Remec Product Transfer Manager prior to and

15 throughout the Class Period . The witness was mainly responsible for transferring newly developed

16 products from the Poway facility to Remec's manufacturing facilities in Costa Rica and China .

17 (y) Witness 25 is a former Accounts Receivable Analyst with Remec . He/she

18 was employed with Remec prior to and throughout the Class Period . Among other duties, Witness

19 25 was responsible for authorizing write-offs .

20 (z) Witness 26 is a former Accounts Receivable Manager with Remec. He/she

21 was employed with the Company prior to and throughout the Class Period. Witness 26 was

22 responsible for Accounts Receivable activities including billing, invoicing, and collections on

23 Remec's U.S . accounts .

24 (aa) Witness 27 is a former Business Development Manager with Remec's

25 Wireless Communications division . The witness was employed with the Company prior to and

26 throughout the Class Period . He/she also worked for Paradigm prior to Remec's acquisition of

27 Paradigm. He/she translated and communicated the concerns of Chinese customers regarding

28 Remec's amplifiers to Remec personnel (including engineers) in the United States .

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(bb) Witness 28 was a former Remec Finance Consultant in the Accounting

department and later a Sales Analyst under EVP of Global Sales and Marketing Bit I Sweeney . The

witness worked at Remec from early 2004 throughout the end of the Class Period . As a Finance

Consultant, Witness 28 worked on different projects related to budgeting . His/her projects included

running different reports from the BAAN system for Controller David Hinkle, among others .

He/she also assisted Hinkle with running reports for preparation of the Company's 2005 Form 10-

K .

(cc) Witness 29 was a former Spectrian/Remec sales representative prior to and

throughout the Class Period . His/her duties included selling 100-watt and 120-watt amplifiers to

customers that included Sprint, Verizon, Cingular, T-Mobile, and AT&T . The witness reported to

a Sales Manager who, in turn, reported to EVP of Worldwide Sales Bill Sweeney .

(dd) Witness 30 was a former Spectrian VP of Operations from mid-2001 until

Remec's acquisition of Spectrian in December 2002 . His/her responsibilities included oversight of

manufacturing, manufacturing engineering, quality, purchasing materials, and field engineering .

The witness reported to Tom Waechter, who was the CEO of Spectrian at that time .

(ee) Witness 31 was a former Controller and VP of Finance at Remec's Shanghai

facility from September2002 until January 2005 . The witness' responsibilities included oversight

of Remec's manufacturing facility in Beijing (Himark) .

(ff) Witness 32 was a former Controller with Remec in Costa Rica from 1999

until September 2004. The witness' responsibilities included oversight of Remec's operations in

Costa Rica .

(gg) Witness 33 was a former Commodity Manager with Remec from April 2003

until September 2005 . The witness ' responsibilities included transfer of Remec ' s manufacturing

facility in Finland (Solitra ) to Shanghai .

(hh) Witness 34 was a former Controller with Remec's Wireless Division fro m

2001 throughout the Class Period . The witness' responsibilities included supporting the month-end

close process .

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1 (ii) Witness 35 was a former Demand Planner with Remec prior to and

2 throughout the Class Period . The witness' responsibilities included interacting with customers to

3 obtain order forecasts that Remec used to determine manufacturing schedules .

4 (jj) Witness 36 was a former VP of Global Supply Chain who worked at Remec

5 during most of the Class Period . The witness' responsibilities included reducing manufacturing

6 costs .

7 Class Period Events and Defendants' False andMisleading Statements During the Class Period

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9 31. Press Release (20 04) . The Class Period begins on September 8, 2003 . On that

10 date, the Company issued a press release announcing second quarter 2004 (2Q 04) results, including

11 improved sales, demand and profitability . The press release stated ?

12 Net sales for the three and six months ended August 1, 2003 were a record$86.2 million and $167.5 million, respectively, compared to $53 .5 million and

13 $112.6 million for the comparable prior year periods . . . .

14 Discussion of results :

15 Second quarter sales increased 61% over the comparable prior year quarter .

16 • Comprised of an 89% increase in Commercial sales and a 13% Defense increase .

17 • This represented our fourth consecutive quarterly sales increase overall .

18 • The increase in sales was 6% on a sequential basis .

19 Ongoing strengthening of demand for our commercial products should lead toincreases in net sales during the remainder of fiscal 2004 .

20• Despite price erosion in certain commercial markets, consolidated

Firs-cal profit as a

21 percentage of net sales increased to 24 .3% for the second quarter of iscal2004 from7.5% reported in the comparable prior year period .

22• Second quarter gross profit increased 421%to $20 .9 million in comparison to $4 .0

23 million for the same period last year.

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26 2 Bold and italics are used throughout for emphasis . Underlining , except for headings and titles ,27 denotes false and misleading statements, whether by affirmative misrepresentation or by omission of

material information .

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FOURTH AMENDED COMPLAINT FOR VIOLATIONS _ 13 - CASE NO . 04 CV 1948 JM (AJB)OF THE FEDERAL SECURITIES LAWSDOCS1354922v2

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I • The improvement in gross profit as a percentage of net sales represented the fourthconsecutive quarterly increase primarily as a result of increased sales volume,

2 productivity improvements and reduced supply chain costs .

3 Commenting on the 2Q 04 results, defendant Ragland stated :

4 Continued improvement in sales and gross margins, as well as reduction in operatingexpenses and critical competitive wins, supports our confidence in REMEC's game

5 plan to exit FY'04 with sustainable growth and profitability . In addition to continue dstrong market share gains, we believe that the OEM and service provider customers

6 are again spending on wireless infrastructure. Our Defense and Space Groupcontinues to perform atrecord levels, while we continue to improve the performance

7 of our Commercial Group .

8 32. Plaintiffs allege that the underlined portions of the above paragraph setting forth

9 defendants' statements on September 8, 2003 were false and misleading when made because :

10 (a) Defendants overstated the financial conditions of Remec by failing to

11 disclose and recognize the goodwill impairment ;

12 (b) Defendants overstated Remec's sales and revenues ;

13 (c) Gross profit margins were not improving ;

14 (d) Remec's goodwill and inventory values were overstated which permitted

15 defendants to portray Remec's financial condition as stronger than it actually was ;

16 (e) Remec was not enjoying "continued improvement" in sales and gross

7 margins ; and

18 (f) Defendants omitted material information about Remec's true financial

19 condition.

20 33. Defendants knew these statements were false when made for at least the following

21 reasons:

22 (a) Defendants knew demand was not "strengthening," but created the

23 appearance of stronger demand by shipping non-functional product and pulling-in orders from

24 future quarters ;

25 (b) Remec's "gross profit margins" assumptions were artificially inflated in the

26 goodwill impairment testing ;

27 (c) Because the purported "increased sales" and "higher gross profit margins"

28 were part of the assumptions used to test goodwill impairment, the test was distorted ;

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(d) Defendants were not improving the actual performance of the Commercia l

segment ; and

(e) Remec was manipulating its results to give the appearance of growth .

34 . Publication About Remec . On September 8, 2003, Bloomberg issued an article

following an interview of Remec's CFO, David Morash , entitled "REMEC Expects Return to

Profitability ; Shares Rise ." The article stated in part:

Remec Inc., a wireless-equipment maker that has lost money for 10 straightquarters, said it will return to profit in the period ending in January as sales rise . Thecompany's shares gained as much as 19 percent .

The company may break even in the third quarter ending in October, DavidMorash, chief financial officer of the Del Mar, California-based company, said in atelephone interview .

Remec, which makes equipment used to transmit voice, video and datatraffic, expects sales to increase for the rest of the year on stronger demand fromwireless service providers and manufacturers . The company has lost $133 .7 millionin the past two fiscal years .

The net loss for the second quarter ended Aug . 1 narrowed to $3 .56 million,or 6 cents a share, from $10.9 million, or 24 cents, a year earlier, as revenue climbed61 percent . That was the fourth straight quarterly sales gain, Remec said .

"The major improvement relates to the fact that we have had substantialgrowth in our business compared to our competitors ," Morash said .

35 . Plaintiffs allege that the underlined portions of the above paragraph setting forth

defendants' statements published on September 8, 2003 were false and misleading when mad e

(because :

(a) Remec 's "growth" was artificially achieved by accounting manipulations and

improper revenue recognition ; and

(b) Defendants knew demand was not "strengthening," but created the

appearance of stronger demand by shipping non-functional product and pulling-in orders from

future quarters .

36 . 10-0 Filed (20 04). On September 15, 2003, defendants filed a quarterly report on

Form I 0-Q for the second qua rter ended August 1, 2003, signed by defendant Raglandand former

CFO David Morash . The 10-Q included a certification from CEO Ragland pursuant to §302 of

the Sarbanes-Oxley Act of 2002 which stated :

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1, Ronald E . Ragland, certify that :

I have reviewed this qua rterly report on Form I O-Q of REMEC, Inc . ;

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2 . Based on my knowledge, this report does not contain any untrue statement ofa material fact or omit to state a material fact necessary to make the statements made,in light of the circumstances under which such statements were made, not misleadingwith respect to the period covered by this report ;

3 . Based on my knowledge, the financial statements, and other financialinformation included in this report, fairly present in all material respects the financialcondition, results of operations and cash flows of the registrant as of, and for, theperiods presented in this report ;

4. The registrant's other certifying officer( s) and I are responsible forestablishing and maintaining disclosure controls and procedures (as defined inExchange Act Rules 13a-15(e) and I5d-15(e)) for the registrant and have :

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(a) Designed such disclosure controls and procedures, or caused suchdisclosure controls and procedures to be designed under our supervision, to ensurethat material information relating to the registrant, including its consolidatedsubsidiaries, is made known to us by others within those entities, particularly duringthe period in which this report is being prepared ;

(b) Evaluated the effectiveness of the registrant's disclosure controls andprocedures and presented in this report our conclusions about the effectiveness of thedisclosure controls and procedures, as of the end of the period covered by this reportbased on such evaluation ; and

(c) Disclosed in this report any change in the registrant's internal controlover financial reporting that occurred during the registrant's most recent fiscalquarter (the registrant's fourth fiscal quarter in the case of an annual report) that hasmaterially affected, or is reasonably likely to materially affect, the registrant'sinternal control over financial reporting ; and

5 . The registrant's other certifying officer(s) and I have disclosed, based on ourmost recent evaluation of internal control over financial reporting, to the registrant'sauditors and the audit committee of the registrant's board of directors (or personsperforming the equivalent functions) :

(a) All significant deficiencies and material weaknesses in the design oroperation of internal control over financial reporting which are reasonably likely toadversely affect the registrant's ability to record, process, summarize and reportfinancial information ; an d

(b) Any fraud, whether or not material, that involves management orother employees who have a significant role in the registrant's internal control overfinancial reporting ,

37. The 2Q 04 I 0-Q also included a certification from Ragland pursuant to §906 of th e

Sarbanes-Oxley Act which stated :

FOURTH AMENDED COMPLAINT FOR VIOLATIONS - 16 - CASE NO . 04 CV 1948 JM (AJB)OF THE FEDERAL SECURITIES LAW SDOCS1354922v2

I Each of the undersigned, in his capacity as an officer of REMEC, Inc, (the"Registrant"), hereby certifies, pursuant to 18 U .S.C. Section 1350, as adopted

2 pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that :

3 1. The quarterly report of the Registrant on Form 10-Q for the period endedAugust 1, 2003 as filed with the Securities and Exchange Commission on the date

4 hereof (the "Report"), fully complies with the requirements of Section 13(a) or 15(d)of the Securities Exchange Act of 1934 .

52 . The information contained in the Report fairly presents, in all material

6 respects, the financial condition and results of operations of the Registrant .

7 38. Plaintiffs allege that the financial results reported in defendants' 2Q 04 10-Q issued

8 on September 15, 2003, were false and misleading and that defendants' certification of the 10-Q

9 pursuant to the Sarbanes-Oxley Act, were deliberately false and misleading . Further, defendants

10 omitted material information . Remec's financial condition, including that defendants' sales, margins

1 I and reported goodwill were all artificially inflated, as detailed below .

12 39. Press Release (CFO Resignation). On September 22, 2003, the Company

13 announced the resignation of its senior financial officer in a press release entitled "REMEC

14 Announces Resignation of CFO," which stated in part :

15 REMEC Inc . today announced that its chief financial officer, David L . Morash, hasresigned citing personal reasons .

1640. On October 31, 2003, while Remec stock was trading at artificially inflated prices,

17defendants announced a stock-based acquisition of Paradigm .

1841 . Press Release (Paradigm Acquisition) . The acquisition's closing was announced in

19a November 10, 2003 press release which stated :

20REMEC Completes Acquisition of Paradigm

21REMEC Inc . today announced that it has completed the acquisition of Paradigm

22 Wireless Systems Inc., currently the largest private domestic merchant supplier ofRF power amplifiers to the telecommunications infrastructure industry, in a stock-

23 for-stock merger . Paradigm shareholders will receive 1 .9 million shares of REMECcommon stock . The board of directors of both companies unanimously approved the

24 acquisition, which was valued at $20 .957 million based on REMEC's stock tradingat $11.03 per share at the time of the signing of the letter of intent on October 31,

25 2003 .

26 This acquisition will further strengthen REMEC's position as a globalsupplier of commercial wireless subsystem products . REMEC expects that this

27 transaction will be profitable from the onset, based on gaining substantial operationa lsynergies and reducing additional overhead costs . Paradigm currently has annualized

28 revenues of $24 million .

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1 "Paradigm is a synergistic value acquisition that increases our marke tpenetration and broadens our existing mid-to-high end product line with a strong low

2 cost product offering," said Ron Ragland, REMEC's chairman and CEO ."Paradigm's capabilities feature fast design cycle time and low cost design skill s

3 while REMEC's strength in manufacturing operations will accelerate Paradigm'sopportunities with their existing customers . The combination strengthens our

4 business in Korea and opens the China market with several important PA programs . "

5 42. Press Release (New CFO Named) . On November 14, 2003, the Company issued a

6 press release entitled "REMEC Names New CFO." The press release stated in part :

7 REMEC, Inc. today announced the appointment of Winston E . Hickman to theposition of Executive Vice President and Chief Financial Officer, effective

8 immediately. . . .

9 "Mr. Hickman's experience as a senior financial executive with publiccompanies, from the large to the entrepreneurial, will serve the company well as we

10 move forward in the growth and success of our global enterprise," said Ron Ragland,REMEC's Chairman and CEO .

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12 43. Press Release 13_O 04) . On December 8, 2003, Remec issued a press release

13 announcing third quarter 2004 results which were purportedly nearly double what they were for the

14 comparable prior year periods . The press release stated :

15 Net sales for the three and nine months ended Oct . 31, 2003 were a record$104.1 million and $271 .6 million, respectively, compared to $59 .4 million and

16 $172 .0 million for the comparable prior year periods . . . .

17 Discussion of third quarter results :

18 • Third quarter sales increased 75% over the comparable prior year quarter and 21%above the second quarter which results in five consecutive quarters of sales growth .

19• Commercial and Defense sales were up 105% and 14%, respectively, from the prior

20 year third quarter .

21 Continued strengthening of demand in core commercial markets and the acquisitionof Paradigm are expected to result in sales growth in the fourth quarter .

22• The gross profit margin for the quarter was 22%, reflecting continued industry

23 pricing pressures.

24 • The gross profit margin increased from 11 .5% reported in the comparable prior yearperiod as a result of increased sales volume, productivity improvements and reduced

25 supply chain costs .

26 • Third quarter results benefited from the sale of $1 .8 million of low cost inventoryobtained in the acquisition of Spectrian and the sale of $1 .8 million of inventory from

27 a discontinued product line.

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• Operating expenses of $25 .1 million were up $5 .1 million , or 25%, from the sameperiod of fi scal 2003 . This increase was primarily the result of the Spectrianacquisition in December 2003 and, to a lesser extent, the acquisition of HimarkCorporation in June 2004 .

Commenting on the results, Ron Ragland, chairman and chief executiveofficer of REMEC, said, "We are pleased with our progress during the third quarter .Our customers continue to endorse the REMEC strategy, our product and ourpartnerships . Key financial performance measures are up and we continue to seestrong indicators of business growth as reflected by our 21 % sales increase over thesecond quarter . I am particularly satisfied with the reductions we have made in ouroperating loss . Much of this improvement is coming from our supply chain focus onmaterial cost reductions and the contribution of our offshore factories . Productionlevels are uD at all locations and our China ramp is Droceedin2 on Dlan . Despite

44. Plaintiffs allege that the underlined portions of the above paragraph setting forth

defendants' statements on December 8, 2003 were false and misleading when made because :

(a) Defendants overstated the financial conditions of Remec by failing t o

disclose and recognize the goodwill impairment ;

(b) Defendants overstated Remec's sales and revenues ;

(c) Gross profit margins were not improving ;

(d) Remec's goodwill and inventory values were overstated which permitted

defendants to portray Remec' s financial condition as stronger than it actually was ;

(e) Remec was not "on track to achieve profitability in the near term ;"

(f) (Material cost reductions were not improving Remec's financial condition ;

and

(g) Remec's offshore factories in the Philippines were not successfully

manufacturing products, and its facility in Beijing (Himark) was unprofitable .

45 . Defendants knew these statements were false when made for at least the followin g

i reasons :

(a) Because the purported "increased sales" and "higher gross profit margins"

were part of the assumptions used to test goodwill impairment, the test was disto rted ;

FOURTH AMENDED COMPLAINT FOR VIOLATIONS - 19- CASE NO . 04 CV 1948 ,1M (AJB)OF THE FEDERAL SECURITIES LAWSDOCS1354922v2

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appearance of stronger demand by shipping non-functional product and pulling-in orders from

future quarters .

(c) Remec's "gross profit margins" were artificially inflated in the goodwill

impairment testing ;

(d) Remec was manipulating its results to give the appearance of growth ;

(e) Defendants received oral and written reports that their strategy of reducin g

material costs to improve profitability was unsuccessful ; and

(f) Defendants received oral and written reports that the Philippines and Beijin g

facilities were unproductive and unprofitable .

46. Following the December 8, 2003 announcement, on December 9, 2003, Remec stock

dropped 21 .79% to $8 .65 per share, in reaction to the news of a 7 cents per share loss, as compared

to a First Call projected loss of I cent per share .

47 . 10-0 Filing (30 04) . On December 15, 2003, Remec filed its quarterly report with

the SEC on Form I0-Q for the third quarter ended October 31, 2003 (3Q 04) . Plaintiffs allege that

the financial results reported in defendants' 3Q 04 were false and misleading and that defendants

omitted material information about Remec's financial condition, including that defendants' sales,

margins and reported goodwill were all artificially inflated, as detailed below .

48 . Press Release (CEO "Retirement " and 40 04 Expected Loss ) . On February 10,

2004, defendants issued a press release announcing Ragland' s retirement and announcing a fourth

quarter 2004 anticipated loss . The press release stated :

REMEC Announces Preliminary 4th Quarter Results Below Expectations ;REMEC Announces Retirement of CEO

REMEC, Inc . today con firmed that its financial results for the fourth quarter endedJanuary 31, 2004 will be lower than its break-even net income goal and advised thatoperating results will be under pressure through at least the first quarter of theCompany's new fiscal year. This is due in large part to three factors, two of whichwere disclosed in early January . As stated at the Needham Conference, the Companywill be taking a charge, for restructuring and other expense which includes chargesrelated to reducing its worldwide staff by approximately 15% andselling/restructuring selected businesses . This charge is expected to be in the rangeof $10 to $12 million . . . .

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The Company also disclosed at the Needham Conference that it isexperiencing higher than expected transition costs related to the transfer of itsmanufacturing from high cost locations, primarily Finland, to the Company's lowcost manufacturing sites in China, Costa Rica and the Philippines . In addition, butnot previously disclosed, the Company is experiencing higher than expected startupcosts on selected new products . . . . The Company expects to take a fourth quarterinventory write-down on the existing inventory attributable to these new productsincluding open purchase commitments and firm customer orders . . . .

All the above charges excluding the potential inventory reserve not yet quantifiedare expected to negatively impact profits approximately $20 to $23 million .

49. On February 11, 2004, based on the news release the previous day, Remec's stoc k

dropped 24.86% to $7 .80 per share .

50 . Press Release (40 04). On March 24, 2004 , Remec issued a press release

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I announcing fourth quarter (4Q 04) and year end 2004 (FY 04) results . The press release stated i n

part :

REMEC Inc . today announced financial results for its fourth quarter and fiscal yearended Janua ry 31, 2004 . Net sales for the quarter and full year were $113 million and$385 million, respectively , as compared to $75 million and $247 million,respectively , for the prior year . The company's sales from the fourth quarter andyear ended January 31, 2004 increased 51 % and 56% respectively, from the priomar . . .

Restructuring/impairment of long-lived assets and related charges, plusmanufacturing transition costs to lower cost labor markets and new product start-upcosts, totalled $20 .9 million . This is on the lower end of the $20 to $23 million rangeannounced in the company's February 10 Press Release . In this release Inventorywrite-downs and reserve adjustments were identified as a risk, but not quantified .Inventory adjustments plus receivable reserves negatively impacted earnings by $9 .5million . Of this total, $8 .4 million was related to inventory and $1 .1 million toreceivables . The $8 .3 million operating loss was approximately $4 .0 million greaterthan expected due in large part to continuing margin pressures in the commercialbusinesses .

Commenting on the quarter, Bob Shaner, the company's interim CEO, stated,"Our top line performance has been excellent but our top priority is to return thecompany to profitability while driving shareholder value . We are clearly operating ina challenging marketplace . Our markets are growing but margin pressures continue .The difficult actions we have taken at year-end will give us a significant boosttoward our goal of achieving solid profitability but there is a great deal more to do inorder to achieve this goal . We must improve our gross margins and bring ouroperating expenses in line . We will do this by focusing on our core businesses anddriving performance improvements through product innovation and a relentless driveto excellence throughout the company . "

The company's operations and restructuring activities resulted in a net loss of$(34.7) million for the fourth quarter of fiscal 2004, or $(0 .56) per diluted share ascompared to $(35 .8) million, or $(0 .70) per diluted share in the comparable prior yearperiod. For the fiscal year ending January 31, 2004, the company's net loss wa s

FOURTH AMENDED COMPLAINT FOR VIOLATIONS -21 - CASE NO . 04 CV 1948 JM (AJB)OF THE FEDERAL SECURITIES LAWSDOCS\354922v2

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$(49 .4) million, or $(0 .84) per diluted share as compared to $(63 .8) million, or$(1 .36) per diluted share in the year earlier period . Results for the fourth quarter andfull year of fiscal 2004 included a $4 .5 million gain on the sale of certain securities .

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Gross profit for the qua rter ending January 2004 declined $13 .6 million, to$0.6 million from $14 .3 million in the fourth quarter of the previous year . Excluding$20.0 million in charges related to inventories and other restructuring charges, fiscal2004 fourth qua rter gross profit was $20.6 million or 18% of sales . For the twelvemonths ended January 31, 2004, gross profit increased $26 .8 million, from $35 .1million in fiscal 2003 to $61 .9 million in fiscal 2004, an increase of 77%. Grossprofit margin increased from 14% in fiscal 2003 to 16% in fiscal 2004. Excludingfourth qua rter restructuring charges, the company 's gross profit increased $46 .8million to $89.1 million, Fiscal 2004 Gross profi t margin excluding restructuringcharges in the fourth quarter was 21 .3% as compared to 14 .2% in the prior year.

51 . 10-K Filing (FY 04) . On April 15, 2004, defendants filed Remec's Annual Repor t

10on Form IO-K for the year ended January 31, 2004 (2004 10-K) . The l0-K included a certificatio n

signed by defendant Hickman pursuant to §302 of th e Sarbanes-Oxley Act which stated :

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1, Winston E . Hickman, certify that :

1 have reviewed this annual report on Form 10-K of REMEC, Inc . ;

2 . Based on my knowledge, this annual report does not contain any untruestatement of a material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements weremade, not misleading with respect to the period covered by this annual report ;

3 . Based on my knowledge, the financial statements , and other financialinformation included in this annual report, fair] resent in all material respects thefinancial condition, results of operations and cash flows of the registrant as of, andfor, the periods presented in this annual report ;

4 . The registrant's other certifying officer and I are responsible for establishingand maintaining disclosure controls and procedures (as defined in Exchange ActRules 13a-15(c) and 15d- 15(e)) for the registrant and we have :

(a) designed such disclosure controls and procedures, or caused suchdisclosure controls and procedures to be designed under our supervision, to ensurethat material information relating to the registrant, including its consolidatedsubsidiaries, is made known to us by others within those entities, particularly duringthe period in which this annual report is being prepared ;

(b) evaluated the effectiveness of the registrant's disclosure controls andprocedures and presented in this report our conclusions about the effectiveness of thedisclosure controls and procedures, as of the end of the period covered by this reportbased on such evaluation ; and

(c) disclosed in this report any change in the registrant's internal controlover financial reporting that occurred during the registrant's most recent fiscalquarter (the registrant's fourth fiscal quarter in the case of an annual report) that hasmaterially affected, or is reasonably likely to materially affect, the registrant'sinternal control over financial reporting ; and

FOURTH AMENDED COMPLAINT FOR VIOLATIONS -22- CASE NO . 04 CV 1948 JM (AJB)OF THE FEDERAL SECURITIES LAWSDOCSU54922v2

5 . The registrant's other certifying officer and I have disclosed , based on ourmost recent evaluation, to the registrant's auditors and the audit committee ofregistrant's board of directors (or persons performing the equivalent functions) :

(a) all significant deficiencies and material weaknesses in the design oroperation of internal control over financial reporting which are reasonably likely toadversely affect the registrant's ability to record, process, summarize and reportfinancial data ; and

(b) any fraud, whether or not material, that involves management o r

financial reporting .

52. With respect to the Company's impairment analysis relating to goodwill, the 2004 10-

K stated :

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Valuation of Goodwill, Intangible and Other Long -Lived Assets. We arerequired to assess goodwill impairment in fiscal 2004 using the methodologyprescribed by Statement of Financial Accounting Standards (SFAS) No . 142"Goodwill and Other Intangible Assets ." SFAS No. 142 requires that goodwill betested for impairment at the reporting unit level (operating segment or one levelbelow an operating segment ) on an annual basis and between annual tests incertain circumstances . Application of the goodwill impairment test requiresjudgment , including the identification of repo rt ing units, assigning assets andliabilities to repo rt ing units, assigning goodwill to repo rt ing units and determiningthe fair value of each reporting unit . Significant judgments required to estimate thefair value of reporting units include estimating future cash flows, determiningappropriate discount rates and other assumptions . Changes in these estimates andassumptions could materially affect the determination of fair value and/or goodwillimpairment for each reporting unit .

The majority of our acquisitions that resulted in goodwill being recorded fallwithin our Commercial segment . The majority of goodwill and other long-livedassets within the Commercial segment are attributable to the ADC Mersum OY[Solitra], Himark and Paradigm acquisitions. . . . Management determined inaccordance with SFAS No . 142 that our segments meet the criteria for aggregationand therefore performed its analysis at the reporting segment level . The requiredannual goodwill impairment test was performed as of December 26, 2003 . Ourimpairment review process is based on a discounted future cash flow approach tha t

sa l

FOURTH AMENDED COMPLAINT FOR VIOLATIONS -23 - CASE NO, 04 CV 1948 JM (AJB)OF THE FEDERAL SECURITIES LAWSDOCS%354922v2

from the current trends . We may incur charges for impairment of goodwill in thefuture i the telecommunications sector does not recover as we expect, if we fail todeliver new products for these groups, if the products fail to gain expected marketacceptance or if we fail to achieve our assumed revenue growth rates or assumedgross margins. In performing the fiscal 2004 annual test for the Commercial

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A variance in the discount rate or gross margin assumptions could have asignificant impact on the amount of ident(fiedgoodwill impairment. For example,a 1% -2% change in either of these factors in our Commercial segment analysiswould have resulted in an indication of possible impairment that would have led usto further quantify the impairment and potentially record a charge to write-downthese assets .

53 . Plaintiffs allege that the financial results reported in defendants' 2004 10-K issued o n

April 15, 2004 , were false and misleading and that defendants ' cert ification of the 10-K pursuant to

the Sarbanes-Oxley Act, pa rticularly those po rtions underlined above , were deliberately false and

misleading . In addition , contrary to defendants ' representation , the estimates used in the goodwill

impairment as test as "assumptions ," were not "consistent with the plans and estimates [used] to

manage the underlying businesses ." Further , defendants omitted material information about

Remec's financial condition , including that defendants ' sales , margins and reported goodwill were

all artificially inflated , as detailed below .

54 . Press Release (Restructuring . On May 10, 2004, defendants announced a

restructuring of the Company . Defendants' press release issued that day stated :

REMEC Inc. today announced a reorganization of the Company that flattens andsimplifies the operational structure to ensure direct line-of-sight and accountabilityfrom product development through customer deliverables . The new organization iscomprised of two entities, both wholly-owned subsidiaries of REMEC Inc : REMECWireless Systems inc . and REMEC Defense & Space Inc .

Commenting on the restructuring , Bob Shaner , Remec's interim CEO stated :

"The engine of REMEC Wireless Systems is powered by the creation,engineering, manufacturing, distribution and delivery of our products and services toour customers . . . . This reorganization will bring a stronger emphasis with moreaccountability and authority to each of our product lines and product line leaders .Each product line leader will have `cradle to grave' responsibility for his product lineand the full support of our entire organization to meet the needs of our customers,employees and owners . Our products have never been in more demand and we mustmaintain the highest level of auality in the industry while doing so in a more

This was the same quarter (2Q 05) in which defendants reported a negative (-6.8%) sales growth .

Remec 2Q 05 Form 10-Q .

55. Press Release 1 05) . On June 8, 2004, defendants issued their first quarter 200 5

earnings release announcing improved profitability, including strong revenues in the Wireles s

segment . The press release stated :

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REMEC, Inc . today announced financial results for its first qua rter of fiscal year2005 , which ended April 30 . Net sales for the three months ended April 30, 2004increased 42.9%, to $116 .2 million as compared to $81 .3 million in the year earlierquarter . . . .

unit sales of Wireless Systems' products plus revenues from calendar year 2003acquisitions in the Wireless Systems segment . . . . The increased sales were the driverin gross profit increasing by 12 .0%, to $19 .5 million in the first quarter of fiscal 2005as compared to $17 .4 million in the prior year period . Gross margin howeverdecreased to 16 .8% during the first quarter of fiscal 2005 as compared to 21 .4%during the year earlier quarter. The decline in margin was attributable to acontinuation of industry-wide pricing pressures in the Wireless Systems segment andtransitional costs related to the Company's relocation of its manufacturing operationsprimarily from Finland to China . . . .

Commenting on the quarter, Bob Shaner, the Company's interim CEO, stated,"We are encouraged with our ton line Derformance which has been strengthened b y

Defense and Space businesses continue to be strong . In addition, we are realizing thebenefit from the restructuring and cost reduction actions that we have implemented .The pricing pressures we continue to experience in the wireless marketplace temperthese positive developments . As previously stated, our focus is to move the businessto solid profitability, and we believe the actions we are taking are moving us alongthat path . "

56 . Publication About Remec . Also on June 8, 2004, AFX News Limited reported,

"Wall Street after hours - DHB soars ; chip stocks remain busy after hours . "

Separately, Remec shares rose almost 6 percent in late trade after the wirelesssystems maker beat Wall Street's first-quarter estimates by 5 cents a share . The

57. Plaintiffs allege that the underlined portions of the above paragraphs setting forth

defendants' statements on June 8, 2004 were false and misleading when made because :

(a) Defendants overstated the financial conditions of Remec by failing t o

disclose and recognize the goodwill impairment;

(b) Defendants overstated Remec's sales and revenues ;

(c) Gross profit margins were not improving ;

(d) Remec's goodwill and inventory values were overstated which permitted

defendants to portray Remec's financial condition as stronger than it actually was; an d

(e) Remec was not moving toward "solid profitability . "

FOURTH AMENDED COMPLAINT FOR VIOLATIONS -25- CASE NO . 04 CV 1948 3M (Am)OF THE FEDERAL SECURITIES LAW SDOCS054922v2

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2 reasons :

3 (a) Because the purported "increased sales" and "higher gross profit margins"


5 (b) Defendants knew demand was not "strengthening," but created the


7 future quarters ;

8 (c) Remec's "gross profit margins" were artificially inflated in the goodwill

9 impairment testing; and

10 (d) Remec was manipulating its results to give the appearance of growth .

11 59. 10-0 Filing (1005). On June 9, 2004, Remec filed its quarterly report with the SEC

12 on Form 10-Q for the first quarter ended April 30, 2004 (IQ 05) . The report again included a

13 certification from defendant Hickman assuring investors of the integrity of the Company's financial

14 reporting and internal controls . With respect to goodwill, the I0-Q stated :

15 The majority of our acquisitions that resulted in goodwill being recorded fallwithin our Wireless Systems segment . The majority of goodwill and other long-lived

16 assets within the Wireless Systems segment are attributable to the ADC Mersum O Y[Solitra], Himark and Paradigm acquisitions . . . . Management determined in

17 accordance with SFAS No . 142 that our segments meet the criteria for aggregationand therefore performed its analysis at the reporting segment level . Our impairmen t

18 review process is based on a discounted future cash flow a roach that uses ourestimates of revenue for the reporting units, driven by assumed market growth rates

19 and assumed market segment share, and estimated costs as well as appropriat ediscount rates . These estimates are consistent with the plans and estimates that we

20 use to manage the underlying businesses . The estimates we used assume that wewill gain market segment share in the future and that the Wireless Systems segment

21 will experience continued recovery and a return to growth and profitability from thecurrent trends . We may incur charges for impairment of goodwill in the future if the

22 telecommunications sector does not recover as we expect, if we fail to deliver ne wproducts for these groups, if the products fail to gain expected market acceptance or

23 if we fail to achieve our assumed revenue growth rates or assumed gross margins .

24 60. The Company's IQ 05 Form l0-Q was signed by defendant Hickman and reaffirmed

25 the previously announced financial results . With respect to its financial results, the Company stated :

26 In the opinion of management, the condensed consolidated financial statement sincluded herein reflect all adjustments, consisting only of norma l recurring

27 adjustments, necessary to present fairly the consolidated financial position ofREMEC as of April 30, 2004, and the results of its operations for the three month

28 periods ended April 30, 2004 and May 2, 2003.

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61, With respect to the valuation of goodwi II, the Company stated in its IQ 05 Form 10-

2 Q:

3 We are required to assess goodwill impairment in fiscal 2005 using the methodologyprescribed by Statement of Financial Accounting Standards (SFAS) No . 142

4 "Goodwill and Other Intangible Assets ." SFAS No. 142 requires that goodwill betested for impairment at the reporting unit level (operating segment or one level

5 below an operating segment) on an annual basis and between annual tests incertain circumstances . Application of the goodwill impairment test require s

6 judgment, including the identification of repo rt ing units, assigning assets andliabilities to reporting units, assigning goodwill to reporting units and determining

7 the fair value of each reporting unit . Significant judgments required to estimate th efair value of reporting units include estimating future cash flows, determinin

8 appropriate discount rates and other assumptions_ Changes in these estimates andassumptions could materially affect the determination of fair value and/or goodwill

9 impairment for each reporting unit .

10 62. Plaintiffs allege that the financial results reported in defendants' l Q 05 10-Q issued

11 on June 9, 2004, were false and misleading, and that defendants omitted material information about

12 Remec's financial condition, including that defendants' sales, margins and reported goodwill were

13 all artificially inflated, as detailed below .

14 63. Plaintiffs allege that the underlined portions of the above paragraphs setting forth

15 defendants' statements on June 9, 2004 were false and misleading when made because :

16 (a) Defendants overstated the financial conditions of Remec by failing to

17 disclose and recognize the goodwill impairment ;

18 (b) Defendants overstated Remec's sales and revenues ;

19 (c) Gross profit margins were not improving ;

20 (d) Remec's goodwill and inventory values were overstated which permitted

21 defendants to portray Remec's financial condition as stronger than it actually was ;

22 (e) Remec's financial position was not "presented fairly ;" and

23 (f) The estimates used in the goodwill impairment as test as "assumptions,"

24 were not "consistent with the plans and estimates [used] to manage the underlying businesses ."


26 reasons :

27 (a) Because the purported "increased sales" and "higher gross profit margins"


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I (b) Defendants knew demand was not "strengthening," but created the


3 future quarters ;

4 (c) Remec's "gross profit margins" were artificially inflated in the goodwill

5 impairment testing; and

6 (d) Remec was manipulating its results to give the appearance of growth .

7 Defendants Disclose the Ma ior Goodwill Impairment and Internal Control Deficiencies-,Remec ' s Auditors Resig n

865 . Press Release (2Q 05) . On September 8, 2004, after the market closed, defendants

9issued a press release announcing enormous write-offs which blindsided investors . The press release

10stated in part :

I1REMEC, Inc . today announced financial results for its second quarter of fiscal year

12 2005, which ended July 30, 2004 . Net sales from continuing operations for the threemonths ended July 30, 2004 increased 35 .6% to $108 .8 million as compared to $80 .2

13 million for the quarter ended August 1, 2003 .

14 For the quarter ended July 30, 2004 the Company reported a net loss of$76.5 million or $1 .23 per share which included a goodwill impairment charge of

15 $62.4 million. This loss compares to a loss of $3 .6 million in the prior year secondquarter . "While the business environment in the wireless industry remains

16 challenging, we believe that we are making good progress in realigning ourbusinesses to achieve profitability," stated Tom Waechter, REMEC's new Presiden t

17 and CEO. He continued, "We conducted an impairment analysis of the goodwillassociated with our commercial wireless business and determined that it should be

18 written off in its entirety. This $62 .4 million non-cash charge reflects the significan tdownward profit challenges in the wireless marketplace resulting from industry

19 overcapacity and our continuing losses . Additionally, approximately $5 million ofour second quarter loss is attributable to actions directly related to our drive to

20 profitability . We believe that a significant portion of these expenses will notrecur ." . . .

21Commercial Wireless Systems' net sales were $84.5 million for the three

22 months ended July 30, 2004, up 40 .3% from the comparable year earlier quarter .

23 66. Thus, defendants revealed a net loss of $14 .5 million for their second quarter 2005

24 (2Q 05), even without the goodwill impairment charge (that is, $76 .5-62 .4 million), as compared to a

25 $3.6 million loss in the prior year second quarter .

26 67 . Press Release (Internal Control Deficiencies) . The next day, on September 9,

27 2004, investors were surprised again when Remec was forced to disclose significant deficiencies in

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its internal controls - controls it had repeatedly certified during the Class Period were adequat e

under Sarbanes -Oxley . A press release issued that day stated :

REMEC Files Form 10- Q

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REMEC, Inc . filed a Form I0-Q today with Securities and Exchange Commission forthe Company's second quarter of fiscal year 2005, which ended July 30, 2004 . Thefiling occurred a few hours after yesterday's filing deadline . The reason for the delaywas to allow management additional time to finalize the required accountingdisclosures associated with the goodwill impairment charge . Timely notification ofthe delayed filing was made to the SEC .

In response to inquiries related to its Form 10-Q filing , REMEC is issuing thefollowing clari fications :

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Sarbanes -Oxley Compliance. In the section of the Form I 0-Q identified as"Sarbanes -Oxley 404 Compliance" the Company stated that it had begun a detailedassessment of its internal controls as required by the Sarbanes-Oxley Act of 2002 . Itwas also stated that the Company had identified "potential control deficiencies."The identification of deficiencies and the remediation of those deficiencies is part ofthe required internal control process dictated by Section 404 of the Sarbanes-OxleyAct . REMEC has hired a Big Four accounting firm to assist in the documentation andassessment of its internal controls .

68. The 2Q 05 Form 10-Q stated, with respect to the goodwill impairment :

During the three months ended July 30, 2004, the Company determinedthere were indicators of impairment for the Wireless Systems reporting segment asa result of changes in management's assumptions with respect to revenue growthand gross margins . The Company tested the goodwill of the reporting segment forimpairment in accordance with SFAS No . 142, Goodwill and Other IntangibleAssets . The performance of the test required a two-step process . The first step of thetest involved comparing the fair value of the affected reporting unit with thereporting segment's aggregate carrying value, including goodwill . The Companyestimated the fair value of the Wireless Systems reporting segment as of July 2004using the income approach methodology of valuation . The assumptions used in thisimpairment test included sales growth rates ranging from 4%-8%, gross profitmargins ranging from 14%-24%, and a discount rate of 18 .6% . The estimates usedreflect the Company's inability to gain market segment share or attain the level ofpro fi tability previously anticipated . As a result of this comparison, the Companydetermined that the carrying value of the Wireless Systems business unit exceededits implied fair value as of July 2004 . The Company will have to issue financialstatements before completing the second step of the impairment test that allowsmanagement to measure the actual amount of the impairment loss . Using theguidance included in SFAS No . 5, Accounting for Contingencies the Company hasdetermined that an impairment loss is probable and that this impairment loss can bereasonably estimated . The Company's management has made its best estimate ofthe goodwill impairment loss for the Wireless Systems reporting segment to be$62.4 million. In accordance with SFAS No. 142, the Company has recorded anestimated charge to write down the value of its goodwill in the three months endedJuly 30, 2004 . Any adjustment to this estimated charge will be adjusted based on thecompletion of the second step of the impairment test which is expected to becompleted during the Company's third quarter of fiscal 2005 .

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The primary factors that contributed to the impairment assessment of theWireless Systems reporting segment in the three months ended July 30, 2004 werecontinued projected losses resulting from industry overcapaci ty resulting in lowerprofit margins, and manufacturing cost reductions lagging market price decreases.

The changes in the carrying amount of goodwill for the six months endedJuly 30, 2004 are as follows :

(In thousands )Balance as of January 31, 2004 $ 65,275Goodwill increase related to Paradigm acquisition (Note 8) 143Impairment losses 6( 400)Balance as of July 30, 2003 $ 3,01 8

69. With respect to the Company' s internal controls, the 2Q 05 Form 10-Q added :

Sarbanes-Oxley 404 Compliance . We have begun a detailed assessment ofour internal controls as .called for by the Sarbanes-Oxley Act of 2002 . We are still inthe evaluation of design phase where we have identified what may be controldeficiencies in our system of internal controls . As we move to the testing phase ofour project, we expect to validate these potential control deficiencies and to assesswhether or not they rise to the level of significant deficiencies or materialweaknesses . In the meantime, we have established a series of remediation teams toinvestigate these potential control deficiencies, and, where appropriate, to remediatethem, To ensure that we address these issues thoroughly, effectively, and timely, wehave supplemented our internal project team with the services of several outsidespecialists . Although we have made this project a top priority for the Company, therecan be no assurances that all control deficiencies identified and validated will beremediated before the end of the Company's fiscal year or that the remainingunresolved control deficiencies will not rise to the level of significant deficiencies ormaterial weaknesses .

70. As a result of defendants' announcements , investors were damaged when the trus t

was revealed and the artificial inflation was removed causing Remec's stock price to fall $1 .00 per

share or 18 .87%, on September 9, 2004, to close at $4 .30 per share, and lost more than 50% of its

value from its Class Period high of $12 .86 per share . Currently, at the time of the filing of this

Complaint, it is trading at around $6 .00 .

71 . Publication About Remec . Also on September 9, 2004, Bloomberg published a n

article further describing Remec's write-off and regulatory troubles . The article stated :

Shares of Remec Inc ., whose communications devices are used in mobilephones and missiles, fell as much as 28 percent after the company identified potential"deficiencies" in its system of internal controls .

Remec fell $1 .09, or 21 percent, to $4 .21 as of 2 :38 p .m. New York time inNASDAQ Stock Market composite trading. Earlier, the shares fell to as low as$3.82 .

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1 Remec said it is conducting a "detailed assessment" of internal controls calle dfor under the 2002 Sarbanes-Oxley Act, which set reporting standards for public

2 companies. The Del Mar, California-based company identified potential"deficiencies" during its assessment, according to a regulatory filing with the U .S .

3 Securities and Exchange Commission .

4 "We are going through our processes to make sure they meet the Sarbanes-Oxley requirements, and we found potential issues as a result," said Winston

5 Hickman, Remec's chief financial officer, in a telephone interview .

6 "Standards under the Sarbanes-Oxley laws are more restrictive than under theprevious guidelines," he said . "It raises the full disclosure rules to another level ."

7Remec is investigating whether the potential "deficiencies" pose "material

8 weaknesses" to the company .

9 72. On September 24, 2004, two weeks after the end of the Class Period, E&Y informed

10 Remec that it was resigning as the Company's independent auditor, effective no later than the

1 I completion of its review of the Company's interim financial information for the three and nine

12 months ending October 29, 2004 .

13 Defendants' Class Period Statements Detailed Above Were Materially False andMisleading When Mad e

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15 73. The statements detailed and underlined above were materially false and misleading

16 when made or omitted to disclose material information because :

17 (a) the Company failed to timely write-down impaired goodwill in its Wireless

18 segment, resulting in materially inflated financial statements during the Class Period ;

19 (b) The underlying assumptions used by defendants, including expected sales

20 and gross profit margins, were over-inflated and had no reasonable basis ;

21 (c) The estimates used in the goodwill impairment as test as "assumptions,"

22 were not "consistent with the plans and estimates [used] to manage the underlying businesses ;"

23 (d) defendants' statements concerning revenue growth and earnings were further

24 materially false because defendants failed to disclose improper practices which inflated these

25 figures;

26 (e) due to material internal problems with excess inventory, some of which were

27 the result of acquiring companies and/or product and technology which did not work or for which

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FOURTH AMENDED COMPLAINT FOR VIOLATIONS -31 - CASE NO . 04 CV 1948 JM (AJB)OF THE FEDERAL SECURITIES LAWSDOC51354922v2

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1 Remec had no ready market, defendants misrepresented the Company's reported financial and

2 accounting results during the Class Period ; an d

3 (f) defendants falsely certified that Remec had adequate internal controls .

4 74. Each of the positive statements alleged above about Remec's business made during

5 the Class Period was materially false and misleading when made and failed to disclose, inter alga,

6 the following adverse information which was then known only to defendants due to their access to

7 internal operational and financial data and disclosure of which was required to be made so as to

8 make the statements not misleading :

9 (a) That the Company's goodwill related to certain acquisitions was overstated

10 by approximately $62 million from the beginning of the Class Period ;

[ 1 (b) That the forecasts created and utilized by Remec's management were

12 unreliable and known to be unreliable ;

13 (c) That in performing the required annual goodwill impairment test in

14 December 2002, defendants had no reasonable basis to use gross profit margin assumptions of 30%

15 - 38% for the Commercial segment, which were not disclosed until more than four months later on

16 April 30, 2003 in Remec's 2003 Form 10-K ;

17 (d) That in performing the required annual goodwill impairment test in

18 December 2003, defendants had no reasonable basis to use gross profit margin assumptions of

19 24%-29% for the Commercial segment, which were not disclosed until approximately four months

20 later on April 15, 2004 in Remec's 2004 Form 10-K ;

21 (e) That the underlying assumptions about sales and gross profit margins had no

22 reasonable basis in fact and, therefore, caused the annual goodwill impairment test to be materially

23 distorted ;

24 (1) That customers were pulling business back from Remec due to poor

25 performance and quality ;

26 (g) That demand for Remec's products was weakening due to the fact that

27 several major Remec customers were having serious problems with their businesses, and thus were

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rescheduling, stretching out, or delaying the release date of and canceling existing orders wit h

Remec ;

(h) That because of its excess inventory and delivered, non-functioning

products, the Company's assets were grossly overstated, especially its receivables and inventory ;

(i) That the Company was dependent upon the sale of previously written off

inventory with a zero-cost basis to stave off the appearance of poor performance ;

(j) That defendants were manipulating the success of Remec's business model

by selling "written down" inventory which inflated the Company's gross margins ;

(k) That the Company's gross margins were decaying at a rate exceeding 13 0

basis points per month ;

(1) That the Company was experiencing materially higher expenses as a result of

defendants' attempts to transition business from Finland to China, compounded by high costs

related to establishing support for its original equipment manufacturer ("OEM") customers i n

China; and

(m) That the Company had material internal control deficiencies .

75 . Thus, Remec's revenue was inflated during the Class Period due to, among other

things, Remec's improper practices of selling and booking revenue for product known to be non-

functional, "pulling-in" orders from future quarters to meet current quotas, and overstating the value

of excess (and obsolete) inventory. These practices were not disclosed to the public .

76. To investors, defendants made it appear Remec's strategy was a success . Remec was

engaging in one acquisition after another, showing growth, and a seemingly competitive advantage

in the wireless market . What the investors did not know was the high volume of unsold inventory

which was eroding Remec's profitability, and that Remec's purported "sales" and growth in sales

(and revenue), were not based on "strengthening" demand or orders, but were supported by orders

expected in future quarters, and shipments of non-functioning product . Thus, the growth was

illusory and financial results artificially inflated .

I FOURTH AMENDED COMPLAINT FOR VIOLATIONS - 33 - CASE NO . 04 CV 1948 TM (AIB)OF THE FEDERAL SECURITIES LAWS

DOCS1354922v2

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Remec's Annual Goodwill Impairment Test PerformedOn December 27, 2002 for the Fiscal Year Ended January 31, 2003

2

3 77. Pursuant to SFAS No. 142, "Goodwill and Other Intangible Assets", Remec was

4 required to review its goodwill carrying value for impairment annually or more frequently if

5 impairment indicators arose . The Company adopted SFAS No. 142 on February 1, 2002 and

6 reported that it performed its impairment test annually thereafter during the fourth quarter . "In

7 accordance with SFAS No . 142, REMEC performed its transitional goodwill impairment test as of

8 February 1, 2002. REMEC did not recognize any goodwill impairment as a result of performing this

9 transitional test ." (2Q 04 Form 10-Q) .

to 78. The Company performed its first annual goodwill impairment test required by SFAS

I I No. 142 on December 27, 2002 for Fiscal 2003, the year ended January 31, 2003 (FY 03), and

12 "determined that no impairment existed at that date ." (Remec 2003 Form 10-K) .

13 79. As of January 31, 2003 goodwill in the Commercial segment was $33 .4 million of

14 Remec's total goodwill of $36 .7 million. In its Fiscal 2003 Form 10-K filing (filed on April 30,

15 2003, more than four months after the test was performed), Remec projected sales growth rates

16 ranging from 5% - 15% and gross profit margins ranging from 30% - 38% for its Wireless

17 Commercial segment .

18 80. Prior to its adoption of SFAS No . 142 on February I, 2002, Remec's goodwill

19 impairment review and testing was governed by SFAS No . 121, "Accounting for the Impairment of

20 Long-Lived Assets and for Long-Lived Assets ." In its Form 10-K filing for the year ended

21 January 31, 2002 (FY 02), the Company stated the following :

22 Valuation of Goodwill, Intangible and Other Long-Lived Assets . Inaccordance with Statement of Financial Accounting Standards (SFAS) No . 121,

23 Accounting for Impairment of Long-Lived Assets, we periodically assess th eimpairment of goodwill, intangible and other long-lived assets which require us to

24 make assumptions and judgments regarding the carrying value of these assets . Theassets are considered to be impaired if we determine that the carrying value may no t

25 be recoverable based upon our assessment of the following events or changes incircumstances : the asset's ability to continue to generate income from operations

26 and positive cashflow in future periods ; any volatility or significant decline in ou rstock price and market capitalization compared to our net book value ; loss of legal

27 ownership or title to the asset; significant changes in our strategic business objectivesand utilization of the asset(s) ; and the impact of significant negative industry or

28 economic trends .

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If assets are considered to be impaired, the impairment we recognize is theamount by which the carrying value of the assets exceeds the fair value of the assets .In addition, we base the useful lives and related amortization or depreciation expenseon our estimate of the period that the assets will generate revenues or otherwise beused by us . If a change were to occur in any of the above-mentioned factors orestimates, the likelihood of a material change in our reported results would increase .

In 2002, SFAS No. 142 "Goodwill and Other Intangible Assets" becameeffective and as a result, we will cease to amortize goodwill assets . We expect thatthe elimination of goodwill amortization will not have a significant impact on pretaxincome in 2002 . In lieu of amortization, we are required to perform an initialimpairment review of our goodwill in 2002 and an annual impairment reviewthereafter . We expect to complete our initial review during the first quarter of2002; however, we do not anticipate recording a material impairment charge inconnection with this process .

Remec 2002 Form 10-K .

81 . During the year ended January 31, 2002, Remec's Fiscal 2002, Remec reported gross

profit margins well below the 30% . 38% range that the Company later disclosed in its Fiscal 2003

Form 10-K filing - the first time investors were afforded a limited view of the components of th e

Company' s goodwill impairment valuation models .

82. Based on actual gross profit margins in the seven fiscal quarters before the first

goodwill impairment test (i .e.,'December 27, 2002), there was no historical or current basis for the

assumed range . For the quarter ended April 27, 2001, the first quarter of Fiscal 2002 (IQ 02),

Remec generated a financially draining gross profit margin of negative (-2 .4%) . The subsequent

three quarters reported yielded gross profit percentages of only 6 .6% for the quarter ended July 27,

2001 (2Q 02), only 12 .0% for the quarter ended October 26, 2001 (3Q 02), negative (-0 .6%) for the

quarter ended January 31, 2002 (4Q 02) ; 12 .1 % for the quarter ended May 3, 2002 (1 Q 03) ; negative

(-4 .6%) for the quarter ended August 2, 2002 (2Q 03) ; and 7 .9% for the quarter ended November 2,

2002 (3Q 03) . Thus, there was no historical or current basis for using a 30% - 38% gross profit

margin percentage range in Remec's subsequent Commercial segment goodwill impairment which

was performed on December 27, 2002 for the year ended January 31, 2003 . In addition, the 15 .8%

gross profit margin reported for the quarter then ended January 31, 2003 (4Q 03) and 20 .2% gross

profit margin reported for the following quarter ended May 2, 2003 (IQ 04) in which th e

assumptions were finally disclosed, confirm that the assumptions had no basis in reality . Using the

FOURTH AMENDED COMPLAINT FOR VIOLATIONS - 35 - CASE NO . 04 CV 1948 JM (AJB)OF THE FEDERAL SECURITIES LAW SDOCSU54922v2

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1 30% - 38% gross profit margin percentage range as an assumption in the goodwill impairment test

2 had the effect of hiding from investors that the actual goodwill was in fact materially impaired

3 almost a year prior to the commencement of the Class Period, at least as of December 27, 2002,

4 when the false gross profit margin percentage ranges were first utilized .

5 83. As with the falsely inflated gross profit margin component, the sales growth rate

6 component of the goodwill impairment testing also had no historical or current basis, given Remec's

7 actual contemporaneous (lack of) sales growth . In contrast, the sales growth rates ranging up to 42%

8 that Remec used in connection with its goodwill impairment valuations during the Class Period,

9 compared to immediately preceding quarters, the Company reported sales reductions with the

10 exception of IQ 02, the quarter ended April 27, 2001, for which it reported a sales growth rate of

I 1 only 11 .0%. From that point, Fiscal 2002 sales growth was dismal . The Company reported sales

12 decline rates of negative (-9 .0%) for quarter 2Q 02, negative (-16.8%) for 3Q 02, and negative (-

13 20.8%) for 4Q 02 .

14 84. Remec's goodwill impairment valuation model was fraught with errors,

15 inconsistencies and assertions lacking a basis in reality . Defendants omitted to disclose the

16 following material information which rendered their statements about Remec's goodwill impairment

17 review process, goodwill representations and Remec's financial statements, materially false and

18 misleading during the Class Period :

19 As far back the quarter ended April 27, 2001, Remec was generating gross profitmargins in its Wireless/Commercial segment which were well below the estimated

20 gross profit margin ranges that it used in connection with its goodwill impairmen tvaluation tests during the class period . Outrageously, at no time from the quarter

21 ended April 27, 2001 to the end of the class period (quarter ended July 30, 2004) didthe Company's quarterly gross profit margins in its Wireless/Commercial segmen t

22 meet or exceed the gross profit margins that it used in goodwill impairment valuationmodels .

23• The Company's forecasting system and methodology were so unpredictable that the

24 forecasts literally changed on a daily basis .

25 • Sales entered into the sales forecasting system were not based on bona fide salesorders from customers, but often represented bogus "potential" sales orders which

26 were entered by sales personnel .

27 The Company's Thailand contract manufacturer would manufacture products tofulfill the bogus potential orders and the Company would be stuck with unsaleable

28 inventory.

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• The Company' s financial systems were unable to prepare a mechanized calculationof inventory reserves .

• There was a lack of review and technical accounting oversight of certain accountingtransactions and activities within the financial statement close process .

• The Company did not consistently follow its policy and procedures for review,approval and documentation in the area of revenue recognition .

• The majority of product lines in the Commercial Division were unprofitable(discussed below) .

• Defendants manipulated inventory reserves in order to artificially inflate gross profitmargins ( discussed below) .

• Defendants' inability to collect on millions of dollars in Accounts Receivableundermined their gross profit margins (discussed below) .

Each of the above items affected sales and/or cost of sales which in turn affected the Company' s

gross profit margin percentage assumptions which rendered the gross profit margin percentages

which the Company used for its goodwill impairment test to be entirely unreliable . These

assumptions were not disclosed until September 8, 2004, and even after they were "disclosed," th e

market did not know, as defendants did, that the Company's internal projections and forecasts did

not support the assumption used, and they in fact had no reasonable basis to use the assumptions

they did .

Remec 's Goodwill as of the Beginning of the Class Perio d

85. As of the beginning of the Class Period, September, 8, 2003, Remec carrie d

approximately $44 .1 million of goodwill attributed to the Commercial segment in its financial

statements, representing approximately 13% of total assets and 17% of shareholders' equity .

However, as of the beginning of the Class Period, the goodwill carrying value was not supportable

by the information available to defendants . As required under GAAP, the reported goodwill valu e

must be assessed for impairment at least on an annual basis and whenever certain events occur, suc h

as a change in the assumptions that went into calculating the discounted future cash flows . At the

time of the prior goodwill impairment test performed on December 27, 2002, the gross profit margi n

percent used to assess goodwill impairment was a range of 30% - 38%. However, the actual gross

profit margin percentages subsequent to the December 27, 2002 goodwill impairment test were

12.1% for the quarter ended May 3, 2002 (1 Q 03) ; negative (-4.6) % for the quarter ended August 2 ,

FOURTH AMENDED COMPLAINT FOR VIOLATIONS -37- CASE NO . 04 CV 1948 JM (AJB)OF THE FEDERAL SECURITIES LAW S

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2002 (2Q 03) ; 7.9% for the quarter ended November 1, 2002 (3Q 03) ; 15.8% for the quarter ended

January 31, 2003 (4Q 03), 20.2% for the quarter ended May 2, 2003 (IQ 04) and 21.9% for the

quarter ended August 1, 2003 (2Q 04) . In addition, gross profit margins for the fiscal years 2002 and

2003 were only 3.8% and 10.2%, respectively . Remec's Form I 0-Q's for I Q 03 through 3Q 03 ;

I Remec's 2002 and 2003 Form 10-K's .

86. Since the annual goodwill impairment test is based on discounted future cash flows,

future sales, and future gross margins, defendants knew as early as the filing of the Company's

2003 Form 10-K filed on April 30, 2003, that the assumed gross profit margin percentage range of

30%- 38%that the Company used in connection with its annual goodwill impairment test was false

and misleading . As of April 30, 2003, the majority of the sales for the quarter ended May 2, 2003

(QI 05) would have been completed . The actual gross profit margin percent for the quarter ended

May 2, 2003 was 20 .2%, significantly below the 30% - 38% gross profit margin percent that was

disclosed to the public just two days earlier on April 30, 2003 in the Company's fiscal 2003 Form

10-K filing filed with the SEC . Additionally, defendants were aware that the actual gross profit

margin percentages for the year ended January 31, 2004 were materially lower than the 30% - 38%

that they disclosed to the public in the Company's annual goodwill impairment test for the year

ended January 31, 2003. Defendants therefore, knew that the underlying assumption whic h

defendants were relying upon at September 8, 2003, to support the current goodwill carrying value

were not reasonable or supportable . Accordingly, defendants should have caused Remec to

recognize a goodwill impairment charge of $44 million in its financial statements no later than fo r

the quarter ended August 1 , 2003 for which inaccurate and misleading results were reported on

September 8, 2003, the start of the Class Period .

Remec 's Impairment Test Performed During The Class PeriodOn December 26, 2003 for the Fiscal Year Ended J anuary 31, 2004

87. During Fiscal 2004, Remec acquired another company and as a result significantl y

increased its goodwill asset balance in its financial statements since the majority of acquisition

purchase prices were attributed to goodwill . In November 2003, Remec acquired Paradigm Wireless

Systems for $22 .1 million of which $17.3 million was attributed to goodwill .

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88 . As of January 31, 2004, goodwill in the Commercial segment was $62 .4 million of

I Remec's total goodwill of $65.5 million. The Company performed its second annual goodwil l

impairment test required by SFAS No . 142 on December 26, 2003 for Fiscal 2004, the year ended

January 31, 2004 .

89 . "In the Critical Accounting Policies and Estimates section of Remec's 2004 Form 10-

I K filed on April 15, 2004, approximately four months a fter its annual goodwill impairment test o n

I December 26, 2003, the Company stated the following concerning the test :

In performing the fiscal 2004 annual test for the Commercial segment, we assumedsales growth rates ranging from 5%-42% ; gross profit margins ranging from 24%-29% (excluding depreciation) ; an income tax rate ranging from 0%-23% and adiscount rate of 20%. For the Defense & Space segment analysis, our assumptionswere sales growth rates ranging from 10%-15%; gross profit margins ranging from26%-28% (excluding depreciation) ; an income tax rate of 35% and a discount rate of20%. We did not recognize any goodwill impairment as a result of performing thisannual test .

90 . In contrast to the gross profit margin percentages used for its goodwill impairmen t

test, Remec reported gross profit margin percentages of only 20 .2% for (I Q 04), 21 .9% for (2Q 04),

and 20 .2% for (3Q 04) in its Commercial segment . In the final quarter ended January 31, 2004,

Remec reported a financially draining negative (-7 .0%). These results further confirmed that there

was no historical or current basis for using a 24% - 29% gross profit margin percentage range for its

Commercial segment goodwill impairment test which was performed on December 26, 2003 for the

year ended January 31, 2004 . The range itself, however, was not disclosed until April 15, 2004 in

Remec's 2004 10-K .

91 . In fact, the actual gross profit margin percentages for the eleven consecutive fiscal

quarters and two fiscal years preceding the December 26, 2003 goodwill impairment test were never

even remotely close to the over-inflated assumptions used by Remec . See Ex. B attached . The

reported figures show that between the quarter ended April 27, 2001 (1 Q 02) and the quarter ended

October 31, 2003 (3Q 04), the actual gross profit margins ranged from a low ofnegative (-4.6%) (in

2Q 03) to a high of 21.9% (in 2Q 04), See Ex. B attached . In other words, the highest margin

attained never even met the bottom of the assumption range .

FOURTII AMENDED COMPLAINT FOR VIOLATIONS -39- CASE NO . 04 CV 1948 JM (AJB)OF THE FEDERAL SECURITIES LAWSDOCS\354922v2

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1 92. Remec's average and annual gross profit percentages confirm the lack of historical

2 basis for its assumptions . The average reported gross profit during these eleven quarters was 9 .9% .

3 For fiscal year 2002 (FY 02), gross profit was only 3 .8% .3 See Remec's 2002 Form 10-K . Again,

4 this is well below the 24% bottom of the assumption range . For fiscal year 2003 (FY 03), gross

5 profit improved only slightly to 10.2% . FY 03 Form 10-K . During this period (i.e., the ten quarters

6 preceding, and the first quarter of the Class Period), not once did Remec reach its gross profit

7 margin projections .

8 93. Defendants intentionally or recklessly ignored these historical results when using the

9 24% - 29% gross profit margin assumption in its December 26, 2003 goodwill impairment test .

10 They also ignored the contemporaneous results for the quarter then ended January 31, 2004 (4Q 04) :

11 an all-time low of negative (-7.0%) . Remec had received two months' worth of results (two-thirds

12 of the current quarter) for this quarter at the time of its December 26, 2003 test .

13 Remec 's Goodwill Impairment Test Performed For TheOuarter Ended July 30 2004 Based on Indicators of Impairment

1 4

15 94. The reported gross profit margins for the fiscal year 2004 (12.3%) and two

16 subsequent quarters (13.4% and 4.0%), confirm that there was no reasonable basis for Remec's

17 24% - 29% assumptions calculated at the time of the December 2003 goodwill impairment test .

18 95. During the first two quarters of Fiscal 2005, both Remec's gross profit margin

19 percentages and sales growth rates continued to worsen . The gross profit margin percent earned by

20 Remec in the Commercial segment topped out in 2Q 04 (quarter ended August 1, 2003) at

21 approximately 21 .9%. Subsequently, the Commercial segment gross profit margin percent steadily

22 declined through the end of the class period . By year end January 31, 2004, the 4Q 04 gross profit

23 margin percent dropped to 12 .3% for the fiscal year and a devastating negative (-7 .0%) for the

24 quarter then ended, significantly below, and providing no basis for the projected 24% - 29% gross

25 profit margin range utilized by defendants in the Fiscal 2004 Form 10-K filing in connection with

26

27 3 Remec's fiscal year ends January 31 .

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the goodwill impairment valuation of Remec's Wireless Commercial segment . Note that in the

Company's 2004 Form 10-K filing, filed almost four months after the December 2003 test, Remec

stated that "[i]n performing the fiscal 2004 annual test for the Commercial segment, we assumed

sales growth rates ranging from 5% - 42%; gross profit margins ranging from 24% - 29%

(excluding depreciation) ; an income tax rate ranging from 0%-23% and a discount rate of 20% ."

Remec 2004 Form 10-K .

96. Remec ' s Commercial segment reported a gross profit margin of 13 .4% in IQ 05

(quarter ended 4/30/2004) . At this point, defendants were again clearly aware that the significant

data (sales growth rates and gross profit percentage ranges) that it used in its goodwill impairment

calculation models performed on December 26, 2003 for the Fiscal 2004 Annual Test, December 27,

2002 for the Fiscal 2003 Annual Test, and February 1, 2002 for the FAS 142 Transition Test, wer e

not in line with the results that Remec was contemporaneously reporting . Ignoring this lack of any

correlation between the actual result and the assumptions used, the Company improperly waited

more than eight months until the quarter ended October 29, 2004 (3Q 05) to acknowledge that a

goodwill impairment charge in the Commercial segment was necessary . By this time, the gros s

profit margin percentage in the Commercial segment dropped further to 4 .0%.

97. These results show that during the Class Period, beginning with 3Q 04 and closing

with 2Q 05, reported gross profits ranged from a low ofnegative (-7.0%) (4Q 04) to a high of 20.2%

(3Q 04) . See Ex . B attached . Gross profits during the Class Period averaged only 7.7% . Not once

during the Class Period did Remec reach or even approach its gross profit assumptions .

98. Remec's reckless disregard for the gross profit margin data that it used for its

goodwill impairment valuation testing throughout the Class Period, was material and blatant as the

following charts plainly present :

FOURTH AMENDED COMPLAINT FOR VIOLATIONS - 41 - CASE NO . 04 CV 1948 JM (AJB)OF THE FEDERAL SECURITIES LAW SDOCS\354922v2

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Remec's Gross Profit % Factors used In Its Goodwill Impairment Test s

P•AbrmrdforFiscal 2004 an

12!2e103.

e 2

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and for2003

an Clue Parted.

-1

015194

1/3112003 5!22003 8/112003 10f31/2003 1131!2004 4130/2004 7130!2004 1012912004

04 2003 C1 2004 02 2004 Dam 04 2004 01 2005 02 2005 03 2005

Reporting Periods e& Gross Proat %

■ Assutned GrossProfit %- Low

DAssumed Gros eProfit %S. H

4i30lMS: t13103 10-K: Mt dtidpsed r11IJ01 : 113101 MOM : Remec

12127M11: Imp~^aM Testa 12i 07: 10-K . pe rformed peAamsd

tmpehmsM I pedarmed f2/l0 tmP~aM Impairment Test (ytdraton)Beginning of Test for EnGaf

Test for and 12!271021: no f 1212&93} ; no Impe&mewClass Period . Fiscal 2004 . charges CINe

FI>Kal2002 . r'° recognized . 916101 VTear, 582 .1 M Period

'mo 'd. 9li10{ charge

Reporting Periods

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Remec's Gross Profit % Factors used in its Goodwill Impairment Tests45.0%

40 .0%

35 .0%

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projected HipR Annual Tes tPedormed Mr

3LG% 48 - 3&s% Fiscal 2994 an tediratom Test12129103. p&o,me d

during o/E/30/04.

'"s 4

13 .4% 14 %

•.

Arkmial Teat End of ClassPufonned for 6 9 °i Period 9791W

Fiscal 2003 on CIns Poeriod ,

1=7192 -7.OX

1/31/2003 5812003 81112003 1013112003 1/31/2004 413012004 773012004 10!29!2004

Q4 2003 012004 02 2004 032004 Q4 2004 Q1 2005 02 2005 032005

Reporting Periods --*-Actual Gros Profit Margin %Assumed Gross Proltt Margin % LoAssumed Gross Pra T Margin X - H' jh

4135103 : 1)31)33 tO-x; Nat d)scfosed I I 411'5104 : 1131!04 7119194 : Remec

12)29193: 1OK. performed12MM2 : Impairment Testa Pe perlamedImpairment Peril a0 (211102 Impairment Impairmem Test Ind' taa

~~n9of Test for oTest for and i2127102~; no (12l2t303); no Imps rmem

Fismt 2003 . charges recopnked .Cluj Period, [Fiscal 2004 . thet os Test: $82.4 M Cas s

Reporting Periods

Comparison of Actual Gross Profit Mareins to Forecasts for Same Perio d

99. An accurate analysis of defendants' gross profit margin shortfalls requires that the

assumed gross profit margin percentages, as calculated at the time of the goodwi ll impairment tests,

be compared with actual gross profit margins in subsequent reporting periods . The assumed gross

profit margins used for goodwill impairment tests are projected numbers which by definition pertain

tofuture reporting periods . Specifically, actual gross profit margins of 20 .2%, 21.9%, and 20.2%

for the quarters ended May 2, 2003 (IQ 04 ), August 1, 2003 (2Q 04), and October 31, 2003 (3Q

04), respectively, must be compared to the gross profit margin assumed (30% - 38%) at the time o f

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the 4Q 03 goodwill impairment test was performed on December 27, 2002 . This comparison reveals

that the actual shortfall for 1Q - 3Q 04 was 8.1% -17.8% as illustrated in the following chart :

Q12004 Q2 2004 Q3 200 4

High Low High Low High Lo w

Assumed Gross Profi tMargin per 12/27/2002 38% 30% 38% 30% 38% 30%Goodwill ImpairmentAnalysis

Actual Gross Profit 20 .2% 20.2% 21 .9% 21 .9% 20.2% 20.2%Margi n

Shortfall 17 .8% 9 . 8% 16 .1% 8.1% 17 .8% 9 .8 %

100. These gross profit margin shortfalls of 8.1% - 17.8% in the first two quarter s

preceding the Class Period and the first quarter of the Class Period greatly exceed the 1% - 2%

change defendants admit would have required a potential write-down . 2004 Form 10-K (filed on

April 15, 2004) . At the very least, these shortfalls were sufficiently material to require Remec to

perform an interim goodwill impairment test pursuant to SFAS No . 142. By not taking the interim

tests, defendants knew they would be able to avoid taking a charge against goodwill and thereby

continue to inflate Remec's stock price and overall financial condition . Instead, defendants waited

until December 26, 2003, after eleven consecutive quarters and two fiscal years of gross profit

margin shortfalls to take the required annual goodwill impairment test . See Ex. B attached. The

gross profit margin shortfalls for these three quarters establish that the 30% - 38% assumptions

calculated at the time of the first annual goodwill impairment test on December 27, 2002 were

lacking any reliable or legitimate basis . In fact, the assumptions were so far off base from the

ongoing actual percentages that they could not be accounted for as merely poor business judgment .

101 . The gross profit margin assumptions of 14% - 24% utilized for the July 2004 (2Q 05)

goodwill impairment test (but not publicly disclosed until September 8, 2004) show that even these

lowered assumptions were knowingly unrealistic and unattainable . An internal spreadsheet dated

FOURTH AMENDED COMPLAINT FOR VIOLA'nONS -44- CASE NO . 04 CV 1948 JM (AJB)OF THE FEDERAL SECURITIES LAWSDOCS\354922v2

• .

1 July 13, 2004 reveals that defendants internally forecasted a gross profit margin of 9.7% for the

2 current quarter (2Q 05) based on financial reports they were contemporaneously receiving .

3 However, for the same quarter, defendants ultimately disclosed gross pro fi t margin assumptions of

4 14% - 24% to the public. Indeed, the same document shows that defendants' "budget" or target

5 gross profit margin was 23.3% for the same quarter. Thus, defendants knew they realistically

6 expected to fall short of their 14% - 24% assumptions . In fact, the actual gross profit margin of

7 4.0% was even far lower than their internal forecast of 9 .7%.

8 Gross Profit Q2 2005 Source

9 Budget 23.3% 7/13/04 Internal CompanySpreadsheet

10Forecast 9.7% 7/13104 Internal Company

11 Spreadsheet

12 Actual 4% 7/30/2004 Form 10-Q at 1 8

13 Gross profit as a percentage of net sales decreased from 21 .8% for the three months ended August 1 , 2003 to4.0% for the three months ended July 30, 2004. The decline was the result of price reductions on certain products,

14 higher reserves, and start up costs required to begin production on new amplifier and filter products and relocate ou rmanufacturing operations from Finland to China and Costa Rica as discussed earlier . Results for the second quarter

15 of fiscal 2004 included a favorable impact totaling $2 .8 million of low cost basis inventory obtained in ouracquisition of Spectrian . These sales declined to $0 .6 million in the second quarter of fiscal 2005 .

16 (REMEC 7/30/2004 Form 10-Q at 18)

17 102. In addition, an e-mail dated that same day (July 13, 2004) from Witness 15 to a Base

18 Station Systems VP entitled "Base Stations Systems Forecast to Budget" reveals that Hickman

19 personally adjusted thisforecast. Additional internal e-mails and spreadsheets show that a second

20 forecast was completed several weeks later . This updated forecast, which was discussed at a

21 meeting directed by Hickman on July 21, 2004, reveals that Remec lowered its internal gross profit

22 margin forecast for its Wireless division to 8.7% for the same quarter (2Q 05) . Nevertheless,

23 defendants waited until September 9, 2004 - nearly two months - to reveal that they were lowering

24 their original gross profit margin assumptions of 24% - 29% to 14% - 24% . Regardless, based on

25 dozens of internal documents, including spreadsheets entitled "Remec Wireless Group Financial

26 Summary July Forecast For FY2005" and "Remec Wireless Systems Segment Historical P&L :

27 FY'01-FY'05 BOD Plan," dated August 10, 2004, defendants knew that even these lowered

28 assumptions had no realistic basis .

FOURTH AMENDED COMPLAINT FOR VIOLATIONS - 45 - CASE NO . 04 CV 1948 JM (AIB)OF THE FEDERAL SECURITIES LAW S

DOCSt54922v2

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103 . Based on their own internal, "good faith" forecast, defendants' "budget" number and

gross profit margin assumptions were outrageously and unrealistically high . Witnesses corroborate

that these "pie in the sky" figures were knowingly unattainable . At the very least, defendants should

have disclosed the same 9 .7% gross profit margin that they relied upon internally . Instead,

defendants chose to ignore their own forecasts and used these knowingly baseless "assumptions . "

104 . Regarding revenue growth rates, Commercial segment net sales topped out in 4Q 04

(quarter ended January 31, 2004) at approximately $89 .8 million . The $89 .8 million net sales figure

was derived by subtracting Commercial segment net sales for the first three quarters of Fiscal 2004,

$205 .8 million, from the total Commercial segment net sales for Fiscal 2004, $295 .6 million,

according to Remec's 2004 Form 10-K filing for the year ended January 31, 2004 . Net sales were

$59.8million, $64.1 million, and $81 .8 million for 1 Q 04,2Q 04, and 3Q 04, respectively according

to the corresponding Form 10-Q filings .

105 . Commercial net sales steadily declined from approximately $89 .8 million for 4Q 04

to $84 .5 million in quarter 2Q 05 . Therefore, the Company should have used a flat to decreasing

sales trend regarding its goodwill impairment valuations rather than using sales growth rates between

5% and 42% until 2Q 05 .

106. As the following table clearly illustrates, Remec was aware of and chose to

intentionally disregard its decreasing sales growth trend at least as early as December 26, 2003, the

time at which the Company performed its annual FAS 142 goodwill impairment test :

[intentionally blank ]

I FOURTH AMENDED COMPLAINT FOR VIOLATIONS -46- CASE NO. 04 CV 1948 JM (A]B)OF THE FEDERAL SECURITIES LAWSDOCS13$4922v2

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Remec's Class Period Sales Growth % Factorsused In Its Goodwill Impairment Tests

■AdUW Sales Gr l %

■Asaumed Sales Growth % - Low

oAssumed Use Growth % - HI&

r

CJ

fA

nual Tediormsd forca! 2M417126109.

CUE

Period

'0'~ 1 0'~ ate`` E022006 03 2M5

Reporting Period s

1/31104 10-K,perfomredImpsirmenl 7130104: Remec

12/20!105: Test pertom► od End sminfingHGt,s fmpaiment 1 {122fl93): no (1ndlcstor$) Clegg

Period Tom forCharges Impairment PMio

e16Na Fib! 2004 . lam. Test; 582.4 M WW04Chang.

1 013 1120 03 1131/2004 4/300M MOM 04 1089/2004

032004 04 2004 01 2005 02 2005 03200S

Repwtkng Petlode

FOURTI3 AMENDED COMPLAINT FOR VIOLATIONS -47-OF THE FEDERAL SECURITIES LAWSDOCS1354912v2

CASE NO . 04 CV 1948 JM (AJB)

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Reme'c Sales Growth % Factorsused in Goodwill Impairment Test s

50.0%

40.0%

30.0%

20.0%

10.0 %

0.0 %

-10.0%

42%

Indiralor• TWpsAam»a during ( 11:MUM

wo~ea a

4%Annual Test end ofParfornod for •9 Class

8plnnkq of Coss Flsul MW on Ptflodirrfod, Wa10] 12126101. 9 11104

~'y -G .856 Adw i

10131/2003 1)3112004 4r3Q2004 7!3012004 10129!04

032004 04 2004 01M Q2 2005 03 2005

Reporting Periada

ginning of Class 1212!,03: 411w04: 1131104 10 7r70N4 : Remec End d Class PerwAl 2) A3 Impatrment nest K. per Drmed performed 916104

ra FiscW 2004 . pnpainnenl Test (tracaE n )(122503) no hnpalnnent Testrherpes $62.4 M charge.recognized.

10/31/2003 113112004 413012004 713012004 1012912004

032004 I 042004 I Q1 2005 I 022005 I 032006

Reporting Periods

- Actual Sales Growth

--Assumed Sales Growth - Lo w

Assumed Sales Growth - High

107. Remec utilized assumed sales growth rates of 5% - 42% in valuing its goodwill for

the December 26, 2003 test (which were not disclosed to the public until April 15, 2004) . Once

again, Remec never had any historical basis for using these assumptions . Prior to this, Remec's

repo rted sales growth rates between 1Q 02 and 4Q 02 ranged from a high of only 11.0% (IQ 02)

(nowhere near the 42% high end of the assumption ) to a staggering low ofnegative (-20.8%) (4Q

02) . Subsequent to the December 2003 test and during the Class Period, sales growth rates were

only 9.8% for the quarter ended January 31, 2004 (4Q 04), then plummeted to 0.9% for IQ 05, and

FOURTH AMENDED COMPLAINT FOR VIOLATIONS -48- CASE NO .04 CV 1948 JM (AJB)OF THE FEDERAL SECURITIES LAWSUOCSU54922v2

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I negative (-6.8%) for 2Q 05 . Sales growth rates for 1 Q 04, 2Q 04, and 3Q 04 were 8 .2%, 7 .3%, and

2 27 .4%, respectively .

3 108. The reported gross profit margin percentages fall significantly below - and provide no

4 legitimate basis for- the projected ranges of 24% - 29% utilized by defendants in 2004 . Remec 2004

5 Form 10-K. These percentages also show that in the fourteen fiscal quarters preceding the

6 September 8, 2004 disclosure, not once did Remec's reported gross profit margins meet the

7 projected percentages . These reported figures range from a low of negative (-7.0%) in 4Q 04 to a

8 high of 21.9% in 2Q 04 . See Ex. B attached .

9 109. The huge discrepancy between the actual and assumed gross profit margin and sales

10 growth rate percentages demonstrate the gross inaccuracy of Remec's assumptions and materially

I I distorted goodwill impairment valuations, which defendants used throughout the Class Period . This

12 discrepancy and inaccuracy were the result . of deliberate manipulation rather than poor business

13 judgment .

14 110 . Defendants received historical and contemporaneous information that actual gross

15 profits fell far below the assumed percentages for eleven straight quarters preceding the December

16 2003 test. Yet at no time did they alter their assumptions, or perform the interim impairment test

17 required by SFAS No . 142. SFAS No . 142 required Remec to review its goodwill carrying value for

18 impairment annually or more frequently if impairment indicators arose . (See further discussion

19 below). The Company's actual gross profit margin shortfalls between its December 2002 and

20 December 2003 tests provided-such indicators . As a result, Remec should have performed interim

21 goodwill impairments tests between December 2002 and December 2003 . Had defendants done so,

22 utilizing reasonable assumption rates, the goodwill impairment charge would have been required

23 much earlier. Instead, defendants ignored the contemporaneous results showing these shortfalls,

24 continued to grossly overstate Remec's financial condition, and failed to disclose Remec's materially

25 flawed goodwill valuations during the Class Period .

26 111 . Remec did not disclose the details of its goodwill impairment valuation to investors

27 or in its SEC filings, but only disclosed certain assumptions regarding the percentage ranges of

28 several financial components which were used in the model . As a result, defendants omitted t o

FOURTH AMENDED COMPLAINT FOR VIOLATIONS -49- CASE NO . 04 CV 1948 JM (AJB)OF THE FEDERAL SECURITIES LAW S

DOCSU54922v2

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disclose the material information that would have exposed the complete lack of veracity and

2 accuracy of the model, which defendants used to falsely and misleadingly represent Remec's

3 goodwill impairment valuation test and reported financial results . If Remec had used proper

4 assumptions and component data in connection with its Class Period goodwill impairment

5 valuations, the respective results would have essentially required Remec's entire $62 .4 million of

6 goodwill in the Wireless/Commercial segment to be written off at least as early as the quarter ended

7 April 30, 2004 . In addition, since actual gross profit margin percentages were significantly lower

8 then the gross profit margin percentage ranges used by Remec to calculate goodwill impairment

9 during the Class Period, Remec would have been required to write off up to $44 million of

10 Commercial segment goodwill at least as early as the start of the Class Period .

I I Defendants' Undisclosed Poor Gross Profit Margins on Products

12 112 . The gross profit margin and sales growth rate assumptions that defendants disclosed

13 to the public were knowingly unrealistic and false because they were based on forecasted sales and

14 profits for Commercial Division products, the majority of which defendants knew had no hope of

15 achieving profitability during the Class Period . To make matters worse, defendants purposefully

16 eroded profit margins by slashing prices in order "to get business now and get profit later" to

17 increase Remec's sales . Defendants knew this disastrous sales strategy reduced their gross profit

18 margins to such a degree that profitability on approximately 70% of their products was "hopeless ."

19 This was true for every quarter during the Class Period . Confidential witnesses confirmed that

20 defendants were aware of this doomed strategy (as discussed below) because : (a) Ragland

21 promulgated this "get business at all costs" strategy at meetings attended by Remec employees,

22 including Witness 14 ; (b) defendants attended regular meetings during which the abysmal gross

23 profit margins were openly discussed (Witness 14 and Witness 16) ; (c) defendants received internal

24 reports detailing this lack of profitability (Witness 16) ; and (d) Hickman personally attended

25 meetings regarding gross profit margin and sales forecasts for each Wireless product line, as

26 confirmed by internal documents, including a July 27, 2004 e-mail from a Base Station Systems VP

27 to Witness 15 ("My notes from Winston's meeting") .

28

FOURTH AMENDED COMPLAINT FOR VIOLATIONS -50- CASE NO . 04 CV 1948 3M (MB)OF THE FEDERAL SECURITIES LAWSDOCS1354922v2

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1 113. At the same time that defendants were: (a) disclosing assumed gross profit margin

2 percentages of 30% - 38% for 3Q 04 and 24% - 29% for 4Q 04 & IQ 05 (approximately four months

3 after each test was conducted), and 14% - 24% for 3Q 05, (b) announcing "We did not recognize any

4 goodwill impairment as a result of performing th[e] annual test" on December 26, 2003 (2004 Form

5 10-K), and (c) stating, "We may incur charges for impairment of goodwill in the future if . . . the

6 products fail to . . . achieve . . . assumed gross margins" (Id.), defendants were receiving

7 contemporaneous information that it was highly improbable that their products would even remotely

8 approach their assumed percentages . In fact, as of the date of the December 2003 goodwill

9 impairment test, defendants were aware that the majority of their products would produce little, if

10 any, actual profit during the Class Period . Defendants were aware of this because (as discussed

11 below): (a) they attended regular meetings during which the abysmal gross profit margins were

12 openly discussed ; and (b) they received internal reports detailing this lack of profitability . In fact,

13 defendant Ragland set the sales policy of slashing profit martins in order to increase sales in the hope

14 of eventually increasing profitability. Witnesses 16 and 14 stated that both Ragland and Hickman

15 regularly reviewed documents regarding Remec's profit margin on these and other products as

16 discussed below. Despite receiving this contemporaneous information that their products were not

17 profitable, defendants persisted in using their artificially inflated goodwill impairment assumptions .

18 As a result, defendants knew or were reckless in not knowing that these assumptions, calculated at

19 the time of the December 2002 and 2003 goodwill impairment tests (respectively), were baseless .

20 Therefore, pursuant to SFAS No . 142, defendants should have taken interim goodwill impairment

21 tests in each of three Class Period quarters preceding Q2 05, when they were finally forced to

22 recognize the impairment .

23 114. These allegations are corroborated by former Remec employees . Witness 16, a

24 former Director of Supply Chain management throughout the Class Period, explained that during

25 2004, which included the second through fourth quarters of the Class Period (4Q 04 through 2Q 05),

26 Remec needed to achieve a gross profit margin of 28% to 32% on its four Wireless Division product

27 lines (amplifiers, filters, power tops, and radio products) just to break even . This break-even

28 percentage varied depending on the type of product being sold . According to Remec's SEC filings ,

FOURTH AMENDED COMPLAINT FOR VIOLATIONS -51 - CASE NO. 04 CV 1948 JM (AIB)OF THE FEDERAL SECURITIES LAW SDOCS1354922v2

I

I the actual gross profit margins during 2004 were negative (-7 .0)% (4Q 04), 13 .4% (IQ 05),4 and

2 4 .0% (2Q 05) . Chart at ¶98 . Witness 16 estimated that in 2004, only approximately 30% of

3 Remec's business units were profitable, but the remaining 70% of product lines were not .

4 115. There are literally hundreds of internal documents confirming that defendants knew

5 Remec had no realistic hope of achieving any profitability on most of its products at the same time

6 they disclosed gross profit margin assumptions of 24% - 29% . In other words, by the time

7 defendants announced these assumptions in Remecs FY 04 10-K Filing on April 15, 2003 (1Q 05,

8 the third quarter of the Class Period), they had already received - and were contemporaneously

9 receiving-documents that revealed these assumptions to be egregiously overinflated and false . In

10 fact, as discussed below, Hickman and Ragland were provided this information on at least a weekly

11 and monthly basis, respectively, through the end of the Class Period . For example, a 148-page

12 internal report, "Wireless Systems Group Financial Reporting 30-day Follow-Up," dated June 22,

13 2004 (2Q 05), shows that defendants at the very least were updated by March 18, 2004 (the third

14 quarter of the Class Period, 1 Q 05) - approximately one month before they disclosed the

15 assumptions - that most of Remec's products had extremely poor or even negative gross profit

16 margins - and would continue to have such dismal gross profit margins for the following quarter

17 (2Q 05) : "Net Ups . . . revenue of $14 m[illion] or less with $7 .5 m[illion] loss ;" "Margin Problem -

18 PKLAM :" negative (-15)% in Q 1 05 and forecasted negative (-14)% in 2Q 05 (sales of $45,000 and

19 $3 .4 million) ; "Margin Problem - QBS :" negative (-6 .0)% both in actual gross profit margin for l Q

20 05 and forecasted for 2Q 05 ($2 .15 million and $2.78 million ; "Margin Problem - . . .ZTE:" negative

21 (-8)% in IQ 05 and forecasted negative (-1 .0)% in 2Q 05 ($747,000 and $1 .167 million) ; and an all-

22 time "Low GM - FDUAMCO :" negative (-100.0) % in IQ 05 and forecasted negative (-74 .4)% in 2Q

23 05 ($1 .7 million and $7.34 million) ("design challenges . . . poor GM . . . continues to be significant

24 risk . . . accelerate approval testing with Siemens . . . 12% ASP [Average Selling Price] reduction .") .

25 Indeed, based on the information provided by Witnesses 14 and 16 (i .e ., that Ragland and Hickman

26

27 4 Defendants falsely announced the actual gross profit margin for 1 Q 05 as 16.8% in a press releaseon June 8, 2004, more than five weeks after the quarter ended on April 30, 2004 .

28

FOURTH AMENDED COMPLAINT FOR VIOLATIONS - 52 - CASE NO . 04 CV 1948 JM (AJB)OF TIIE FEDERAL SECURITIES LAW SDOCS1354922v2

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s flregularly reviewed documents regarding profit margins on Remec's products), and the title of this

sample report, defendants undoubtedly received similar monthly reports throughout the first two

quarters of the Class Period (3Q 04 and 4Q 04) . Thus, they would have known at the time they

utilized the gross profit margin assumptions (for the December 2003 goodwill impairment test in

14Q 04), that the assumptions were false and unrealistic . Nevertheless, defendants did not disclose

that there were "indicators of impairment" until approximately ten weeks after the date of this

document .

116 . Hundreds of other internal Company documents describe in detail the abysmal gross

profit margins Remec experienced on most of its product lines throughout the Class Period . For

I example, an internal Wireless Systems financial statement ("Wireless Systems Overlays") show s

gross profit margins for : (a) filters at negative (-12 .2)% and negative (-6 .3)% ($2 .6 million and $1 .3

million), in I Q 05 and 2Q 05, respectively . An internal spreadsheet entitled "Q2 05 Amps Review

08-13-04" reveals that sales of QBS-476 amplifiers to Nortel resulted in a gross profit margin of

negative (-21 .9%) for both 1Q 05 and 2Q 05 ($2 .3 million and $2 .625 million ; cost of sales were

$2.8 million and $3 .2 million) . Similarly, a spreadsheet forecasting gross profit margins on ODU

filters for 1Q 05 and 2Q 05 reveals that Remec expected gross profit margins of negative (-20.0)%

and negative (-13 .01)%, respectively ($3 .036 million and $3.601 million) . The same documen t

I shows a forecasted gross profit margin on Components in IQ 05 of negative (-4 .68)% on $2 .91 8

million in sales .

117. Many other Company documents reveal that defendants' public statements regarding

Remec's financial condition and profit forecasts were known internally to be false at the time they

issued the statements . These documents include a July 27, 2004 e-mail from Witness 15 to a Bas e

Station Systems VP entitled "FY 05 Q2 Full-Year [Forecast]" which reveals that Hickman directed

at least one major meeting on July 21, 2004 regarding the forecasted gross profit margins for each of

the Wireless product lines . This e-mail confirms that Hickman knew Remec had little chance of

making a profit on most of its product lines all the way through the end of the Class Period (e .g.,

"Net Optimization -slim to no chance of making profit . . . . Components . . . overall volume and

(grass profit] margins are unrealistic") . The same spreadsheet shows that Hickman was receivin g

FOURTH AMENDED COMPLAINT FOR VIOLATIONS - 53 - CASE NO . 04 CV 1948 JM (A3$)OF THE FEDERAL SECURITIES LAWSDOCS1354922v2

I monthly information regarding the actual gross profit margins for each of its product lines through

2 the last two quarters of the Class Period . Other internal documents reveal that employees like a Base

3 Station Systems VP prepared extensive forecasts on each product line which they continuously

4 updated for Hickman . For example, in an August 4, 2004 e-mail to Remec employee to a Base

5 Stations Systems VP, Yasbek states in regards to a recent update, "Here is the latest . . . GPM

6 analysis for Winston . . . ." Indeed, numerous internal documents reveal that Hickman was updated

7 on a weekly basis, including a July 9, 2004 e-mail from a Business Planning VP copied to Hickman

8 entitled "Finance Weekly Updates - Week Ending July 9 ." Similarly, the "Weekly Changes to Q2

9 Revenue Forecast" (updated as of July 5, 2004) reported unfavorable revenue and profit changes on

10 a consistent weekly basis from May 10, 2004 to July 5, 2004 .

11 118 . Witness 16 explained that Remec was only able to achieve gross profit margins in

12 excess of the break-even point on the towertop products, which were essentially amplifiers that went

13 on top of signal towers, including TMAs, or tower masthead amplifiers . (These were different from

14 Remec's power amplifiers, which were attached to the base stations .) One of Remec's best

15 customers for these towertops was Motorola .

16 119. Witness 16 further explained that in 2003, senior management believed that Remec

17 had a "business model" that would allow the Company to become profitable . He/she said that this

18 model assumed, "as a general rule of thumb," that costs of 55 percent of revenue or below would

19 allow Remec to achieve profitable "net" margins. In other words, Remec had to realize a gross

20 profit margin of at least 35% in order for its products to actually be profitable . Another former

21 employee, Witness 13, confirmed that this figure of 55 percent was roughly accurate (i .e ., a good

22 approximation) . Witness 16 said that Remec senior management "knew what revenues would likely

23 be" and the goal was to challenge the cost assumptions .

24 120. Witness 16 further explained that many of the Remec senior managers were looking

25 at direct materials in 2003 and 2004 as a way to cut costs and thereby increase profit margins .

26 He/she estimated that the savings plan needed to be somewhere in the neighborhood of at least

27 $3,500,000 per quarter, or $15,000,000 or more on an annual basis . Witnesses 16, 33 , and 36 stated

28 that the savings plan included moving labor to places like the Philippines and China where the cost s

FOURTH AMENDED COMPLAINT FOR VIOLATIONS-54- CASE NO . 04 CV 1948 JM (AJB)

OF THE FEDERAL SECURITIES LAW SDOCS1354922v2

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1 of labor were much cheaper and Remec could pursue initiatives to reduce the costs of direct

2 materials . At least two witnesses, including Witness 36, a former VP of Global Supply Chain, stated

3 that Remec hoped to reduce direct material costs by 40 to 50 percent by relocating the supply base

4 from Europe to China .

5 121 . Witness 16 said that by the end of 2003 (the first quarter of the Class Period),

6 Remec's ability to drive down costs below the 55 percent of revenue requirement was "wishful

7 thinking ." He/she said that it was very apparent to everyone at the Company that Remec was

8 nowhere near achieving costs of less than 55% of revenues when the consolidation of the different

9 divisions (i.e ., CNS Hybrid, Magnum, Qbit, and Nanowave) occurred in early 2004. To make

10 matters even worse, consolidation was occurring at the original equipment manufacturer ("OEM")

1 I levels . In turn, the consolidation of OEMs created a situation in which the OEMs were not taking

12 and/or accepting orders and Remec could not continue to drive costs downward as previously hoped .

13 Even more significantly, competition in the industry created a situation in which Average Selling

14 Prices ("ASPs") were falling. (Witnesses 34 and 36 both confirmed that Remec's ASPs were

15 eroding during the Class Period, which, according to Witness 34, caused "a lot of top line pressure"

16 for Remec .) As a result, for every $1 that ASPs were reduced, Remec needed to decrease costs by

17 $1 .25, and Remec had to achieve these reductions on costs that could hardly be lowered any further

18 than they had already been reduced .

19 122 . Several internal documents confirm the fact that defendants' cost-savings and price-

20 reducing strategy was widely known to be reckless and unrealistic at Remec . For example, in an

21 August 3, 2004 e-mail regarding products manufactured in Costa Rica, a Manager states, "We are

22 predicting lower revenue in our FCAST than you have in your sheets . That is why everyone is

23 confused about how you can save more than we plan to sell ." Among the reasons Witness 13 left

24 Remec in mid-2004 was because he/she was not optimistic about Remec's ability to be successful

25 with Tom Waechter's cost reduction strategy .

26 123. An e-mail directed to a VP of Global Supply regarding "Incremental Savings," dated

27 August 9, 2004, provides another example of Remec's unrealistic and reckless "business model ."

28 Witness 15, a former Director of Operations during the end of the Class Period, said that th e


•

1 extremely "aggressive" $3 .5 million in projected cost savings referred to in the e-mail was just a

2 portion of a larger cost-savings initiative being undertaken by the Company . The $3 .5 million was

3 related to pressuring Remec's suppliers to provide "price breaks ." Witness 15 noted that there had

4 been "a big push" initiated from Waechter to derive this $3 .5 million in cost savings, which she

5 described as a "ridiculous" (i.e., unrealistic) amount . Witness 15 said it was critical for Remec to

6 attain these savings in order for Remec to become "cash-flow positive" by 3Q 04 and 4Q 04, the first

7 two quarters of the Class Period .

8 124. As for the 70 percent of products that failed to achieve profitable gross margins,

9 Witness 16 explained that approximately 20 percent consisted of "FDUAMCO" filters that were

10 made specifically for Siemens . This product group achieved only a 10% to 15% gross profit margin

11 in 2004 and 2005 . This was far short of the 28% to 32% gross profit margin that the witness alleged

12 was required for Remec to achieve profitability on these products . The witness said that these were

13 filter products that represented the "the largest opportunity" for Remec "to gain market share and

14 revenue," but Remec was unable to get the profit margins on this product above the requisite break-

15 even point at any time in 2004 and 2005 . According to an August 1 1, 2004 spreadsheet, Remec

16 recognized almost $25 million in sales of FDUAMCO products during the last quarter of the Class

17 Period alone .

18 125 . According to Witness 16, a former Director of Supply Chain Management, Remec

19 experienced difficulty in achieving profitable gross margins on the FDUAMCO because they were

20 "next-generation filter combination receivers ." This product was designed by Remec's Finnish

21. group, which had a reputation for "design over-kill" and tended to "design products that were not

22 producible ." As Witness 16 explained, the Finnish group had the "best engineering on products,"

23 but production of their products was typically not cost-effective at large scale production levels . In

24 addition, as discussed in a document entitled "Siemens FDUAMCO Program Review April 20,

25 2004," these filters suffered from "[k]nown technical qualification challenges" and gross profit

26 margin "challenges ."

27 126. Witness 16 said that it was apparent in early and mid-2004 (during the Class Period)

28 that Remec needed to drive down the costs on the FDUAMCO in order to be profitable, but Remec

FOURTH AMENDED COMPLAINT FOR VIOLATIONS - 56 - CASE NO . 04 CV 1948 IM (AJB)OF THE FEDERAL SECURITIES LAW SDOCS1354922v2

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1 was unable to do this in 2004 . As the witness put it, "Siemens wanted production pricing from unit

2 one, not on unit 500 ." He/she- explained that this meant that while Remec might have eventually

3 profited on the FDUAMCO once Remec gained experience and therefore improved manufacturing

4 efficiencies, Remec was not going to be profitable at the beginning of production on this line in early

5 2004. Nonetheless, Siemens demanded pricing that assumed Remec had already obtained the benefit

6 of these manufacturing efficiencies . In order to win the business, Remec had to accept this lower

7 pricing but the result was that Remec could not profitably manufacture and sell the FDUAMCO to

8 Siemens . Witness 16 said that therefore the Cost-Of-Goods-Sold ("COGS") on the FDUAMCO was

9 "close" to the sale price . Indeed, a July 2004 financial report created by Corporate Controller Steve

10 "Ziggy" Yasbek shows FDUAMCO filters as having virtually no ( .1%) gross profit margin .

11 127. Witness 16 noted that Remec was also losing money on the "P2PAM" amplifier that

12 Remec was selling during the Class Period . According to the witness, the losses on both the P2PAM

13 amplifier and the FDUAMCO filters were apparent from 2001 until a full year after the Class Period .

14 Witness 15 confirmed that P2PAM had "never worked," and therefore sales of the product were

15 "never going to happen" even though they had been forecasted during the Class Period . An internal

16 e-mail dated July 16, 2004 refers to an increase of $350,000 in forecasted sales of P2PAM for the

17 following week which never materialized . Hickman was one of the recipients of this e-mail.

18 According to an internal August 11, 2004 spreadsheet, Remec recognized revenue on sales of

19 P2PAM of more than $7 million for the last quarter of the Class Period alone . To place this into

20 context, this amounts to approximately 8% of the revenue recognized in the last quarter of the Class

21 Period (2Q 05) . The same document refers to Remec's shipment of 180 PKLAM units in that week

22 which were going to be returned because of a "quality issue ." According to the August 11, 2004

23 spreadsheet, which shows the sale price per unit to be $1,060, this amounted to a loss of almost

24 $200,000 for that week alone . Over the course of the entire quarter, these losses would have

25 amounted to almost $2 .3 million . This amounts to 3% of the revenue recognized in 3Q 04 . In

26 addition, the spreadsheet shows an $84,000 shipment of products to customer "ZTE" made on June

27 29, 2004, which had been recognized as revenue, and was ultimately reversed because the customer

28 had refused the delivery which was "not authorized . "

FOURTH AMENDED COMPLAINT FOR VIOLATIONS -57- CASE NO . 04 CV 1948 JM (AJB)OF THE FEDERAL SECURITIES LAWSDOGS 354922v2

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128 . Information provided by at least one confidential witness (Witness 16) and severa l

internal documents reveal that defendants knew that the FDUAMCO product line -- which accounted

for tens of millions of dollars in sales during each quarter of the Class Period - was a complete

failure . Nevertheless, defendants did not conduct any goodwill impairment tests until July 2004, o r

even disclose that there were "indicators of impairment" until approximately two months later on

September 9 . Witness 16 said that there were Program Reviews "every once in a while" on differen t

product lines , including the FDUAMCO line . There were approximately three to four Program

Review meetings on the FDUAMCO filter program during the Class Period . These were attended

by defendants Ragland and Hickman , the FDUAMCO filter Program Manager Jeff Alvord, an d

Witness 16 . Following Ragland's departure from the Company in early 2004, Tom Waechter

attended the Program Review meetings . These individuals met at the Del Mar facility in a

conference room with a full videoconference set-up . Personnel from the facilities in Finland and

Costa Rica were "linked in" via conference call . At these meetings, the discussion topics included

the status of the program (i.e ., FDUAMCO filter production) and gross profit margins on the

product. In addition, Witness 16 said that Hickman, Ragland, and later Waechter (in place of

Ragland) attended quarterly Operations Review meetings at the Del Mar facility, during whic h

operation and performance issues were presented and discussed, including gross profit margins and

margin shortfalls . Witness 16, who personally attended the "Ops meetings," said that other attendees

included VP of Global Supply Chain George Neale and his replacement Jerry Joyce, and Director of

Operations Clark Hickock, among others . At these meetings, the attendees generally discussed

products, capitalization, and materials . Witness 16 said that these Ops meetings were "full-blow n

reviews of operations ." The attendees prepared reports on their "piece of the operations ." Ragland,

and later Waechter, made suggestions on how to improve operations and performance . Hickman

asked questions about the FDUAMCO and other product lines, and discussed the profit margins on

the products. Witness 16 also said that Hickman reviewed documents that demonstrated th e

unprofitability of the FDUAMCO products . There are numerous examples of these documents,

such as a July 2004 "Sales and Standard Gross Profit Margin Analysis" showing a gross profi t

margin of one - tenth (1)% for FDUAMCO .


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129. Witness 34, a former Controller who reported to Hickman, confirmed that bot h

2 Hickman and CEO Tom Waechter participated in monthly reviews, in which he/she participated as

3 well . The monthly reviews were essentially a "financial review process" to review results of

4 operations . The witness said that most of the time the attendees were connected via conference cal l

5 from their own offices . During these meetings, the attendees discussed gross profit margins,

6 reserves, top line results, and budget trends . Helshe said the goal of the meetings was to "understand

7 changes" and results of analyses . Typically, "action items" were developed during the meetings and,

8 depending on the area of finance or operations relevant to the action items, individuals were assigned

9 to follow-through on the action items .

10 130. Witness 16 also stated that Remec's product portfolio and gross profit margins were

11 somewhat like a stock portfolio, in that some stocks performed well, while others did not . The

12 investor hopes that the performing stocks will perform well enough to compensate for the

13 underperforming stocks. However, according to the witness, Remec was "losing money from day

14 one" on the FDUAMCO filter line. Although Remec eventually hoped to become profitable on the

15 FDUAMCO and "make up the difference" for the periods when Remec was unprofitable on the

16 filters, profitability was not achieved in 2004 or 2005 .

17 131 . According to Witness 16, the losses on the FDUAMCO products were causing

18 Remec to lose money overall . For example, Witness 16 explained, using numbers estimated, that if

19 Remec had been making a 10 percent profit on the $35,000,000 worth of business it had in

20 towertops, Remec was making a profit of $3,500,000 . However, Remec was also losing 10 percent

21 or more on the $120,000,000' power amplifier business, which amounted to a loss of at least

22 $12,000,000, which could not be overcome by the small profits that Remec was making on other

23 business lines (such as the towertops) .

24 132. On June 8, 2004 (2Q 05), defendants issued a misleading press release announcing

25 lQ 05 earnings : "The increase in the Company's sales [as compared to IQ 04] was primarily

26 attributable to increased unit sales of Wireless Systems' products." However, defendants failed to

27 explain that this increase in sales was largely due to their doomed price-reduction strategy which

28 further eroded the abysmal profit margins on most of Remec's Wireless Division products . At least

FOURTH AMENDED COMPLAINT FOR VIOLATIONS 59 CASE NO . 04 CV 1948 .1M (AJB)OF THE FEDERAL SECURITIES LAW SDOCS054922v2

1 one witness (Witness 14) and dozens of internal documents (discussed below) confirm that

2 defendants were aware that their sales strategy was a disaster . Nevertheless, defendants

3 contemporaneously issued false or misleading public statements about Remec's financial condition,

4 including the June 8, 2004 press release .

5 133. Witness 14, a former corporate Staff Accountant for Remec throughout the Class

6 Period, corroborated Witness 16's account of Remec's reckless policy of minimizing its profit

7 margins on products to attract and keep customers . Witness 14 said that Ragland's attitude toward

8 sales had been "get the business now and get the profit later," meaning that Ragland saw a benefit in

9 developing inroads with customers even if that meant accepting minimal margins in order to

10 hopefully realize profitable sales some time in the future . Witness 14 said he/she based this assertion

I I on comments Ragland made during analyst/earnings conference calls and in meetings in which

12 Witness 14 was present . The witness explained that there were typically monthly meetings with the

13 CFO. Witness 14 was responsible for preparing materials, such as spreadsheets containing financial

14 data regarding various matters, for use in the meetings . As such, Witness 14 would sometimes be

15 summoned to join the meetings and asked questions about some of the contents of those reports in

16 Ragland's presence . This happened on at least ten occasions . Ragland made statements at these

17 meetings to the effect that Remec should get business with customers, regardless of the pricing,

18 with a goal of deriving profitable sales at some point in the future . The witness' account of

19 Ragland's reckless sales philosophy is corroborated by several internal documents . For example, an

20 internal Wireless Systems financial statement, dated August 2, 2004, ("Wireless Systems Overlays")

21 refers to "Loss leaders programs . . . PKLAM, ZTE, Siemens [QBS amplifiers] . "

22 134. Witness 14 stated that as a result of these poor gross profit margins, the goodwill

23 impairment was debated intensely during 4Q 03 at the beginning of the Class Period (when Remec's

24 actual 15 .8% profit margin fell woefully short of its 30% - 38% assumption), but the argument

25 prevailed that Remec "might" be profitable in 2004 . According to the witness, at the time

26 defendants conducted Remec's December 26, 2003 goodwill impairment test and forecasted its 30%

27 - 38% gross profit margins for 2004, the anticipation was that Remec would be unprofitable in l Q

28 05 and 2Q 05, would break even in 3Q 05, and would finally be profitable in 4Q 05 by lowering it s


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1 costs. However, Witness 14 said even the forecast of profitability was "a joke" because the margins

2 "were so horrible ." Numerous internal documents obtained by plaintiffs' counsel confirm that

3 defendants' hopes for profitability during the Class Period were unrealistic and knowingly false . For

4 example, a document entitled "Net Ops Business Review 7/25/05" shows that all the way through

5 the Class Period and beyond, one of Remec's biggest selling products continued to lose money :

6 "Good As It Gets - Nearly Break Even in 4 [Quarters] [beginning in 3Q 05] . . . high risk on revenue

7 . . . top line disaster. " Similarly, in a July 12, 2004 e-mail, a Wireless Planning VP confirms that the

8 best Remec could hope for its Wireless Division would be to "break-even" in 3Q 05 . Referring to an

9 attached forecast spreadsheet that was prepared for the June 2004 Board of Directors meeting, the

10 VP nevertheless acknowledges that the Wireless Division was expected to lose $3.2 million in that

11 same quarter . According to Witness 14, in IQ 05, E&Y advised the Company that if Remec

12 couldn't deliver a good first qua rter, the write-off would have to he made in the following quarter,

13 which is exactly what happened . Nevertheless, defendants concealed material information from, and

14 misled, the market as to the true financial condition of the Company .

15 135 . Witness 14 said that Hickman and an E&Y Audit Partner were definitely involved in

16 these debates. He/she recalled that the issue was being debated around the same time when David

17 Morash left Remec and Hickman joined the Company and continued to be debated following

18 Hickman's assumption of the CFO position . Witness 14 knew that the matter was being debated

19 during this timeframe because he/she was responsible for making certain entries into Remec's books

20 at the end of the reporting periods . As such, during the end of fiscal year 2004 timeframe, Witness

21 14 recalled that the goodwill valuation was one of the final figures for which he/she was waiting to

22 receive before it could be entered into the books . The witness was told at that time by his/her

23 supervisor, Controller Patrick Gray, that the goodwill valuation was being evaluated and that the

24 valuation was being debated .

25 136. Information provided to plaintiffs' counsel by Witness 32, a former Controller with

26 Remec in Costa Rica, and many internal documents confirm Remec's reckless cost-reduction

27 program during the Class Period, which was implemented in a futile attempt to improve gross profit

28 margins . The witness, a former Controller with Remec who reported to Pat Gray and later Steve

FOURTH AMENDED COMPLAINT FOR VIOLATIONS -61 - CASE NO . 04 CV 1948 ]M (AJB)OF THE FEDERAL SECURITIES LAWSDOCS%354922v2

l Yasbek, explained that during his/her tenure, which included the Class Period, there was a "constant

2 push" from Remec executives, including Ragland, regarding the need to reduce manufacturing costs .

3 (The witness said that Ragland issued his directives in occasional weekly conference calls in which

4 the witness participated .) However, the witness said that this effort had not succeeded as of the time

5 he/she left the Company in September 2004 . Internal documents confirm this "constant push" to

6 reduce costs . For example, a July 14, 2004 PowerPoint presentation states "[b]uilding [m]arket

7 [s]hare with Motorola . . . [c]ontinue with cost reduction and GM improvement ;" "Nokia . . . [m]ajor

8 [p]roduct lines [have] GM . . . of 7[%]-15% in 3Q [04] . . . . Next price reduction expected in January

9 2004. . . . Continue with aggressive cost reduction ;" "Siemens . . . [c]ontinue aggressive cost

10 reduction programs ."

11 137 . The Himark acquisition is a perfect example of Ragland's doomed sales philosophy .

12 Witness 15 noted that while Himark was able to sell Remec's products in China during the Class

13 Period, the margins of those sales were "unbelievably poor ." For example, on August 2, 2004,

14 Himark financial statement shows a gross profit margin averaging approximately 7% for Optimizers

15 in 1 Q 05 and 2Q 05 (the last two quarters of the Class Period) . This is far less than the 28% - 32%

16 gross profit margin that Witness 16 said was necessary for Remec to achieve profitability on its

17 products . According to Witness 15, Himark was "selling parts for a penny margin" and that the

18 margins at which Himark sold products were "worthless ."

19 138. On May 10, 2004 (2Q 05), defendants issued a misleading press release proclaiming

20 that Remec "maintain[ed] the highest level of quality in the industry . . . . " Yet less than six weeks

21 later, the internal Remec report, "Wireless Financial Reporting 30-day Follow-Up," dated June 22,

22 2004, reveals that Remec's customers were so displeased with the quality of the products that they

23 forced Remec to conduct periodic testing to prove that the products even worked : "PKLAM . . .

24 design error. . . recommend increasing [LCM Reserve] to $1 .065m;" "QBS . . . increased test validation

25 requirements [from] Siemens . . . design & quality problems . . . components added to correct . . . false

26 alarms . . . Norte] will require ASP reduction to compensate ;" "ZTE . . . impaired CREE device ;" and

27 "FDUAMCO . . . design challenges . . . poor GM . . . continues to be significant risk . . . accelerate

28 approval testing with Siemens . . . 12% ASP reduction ." Indeed, this internal document reveals that


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these quality problems were so pervasive and significant that executives acknowledged that

"business as usual is no longer acceptable ." Witnesses 14 and 16 stated that both Ragland and

Hickman regularly reviewed documents regarding profit margins on Remec 's products - a report as

critical as the "Wireless Financial Reporting 30-day Follow-Up" almost certainly would have been

one of them . More importantly, defendants probably received similar monthly reports throughout

the Class Period , and would have known long before the May 10, 2004 press release that many of

Remec ' s products were nowhere near "the highest level of quality in the industry ." Indeed, as

discussed below , Hickman received such reports on a weekly basis . Nevertheless , defendants

continued to mislead the public by failing to (a) correct this statement ; (b) correct their April 15,

2004 statement (FY 04 10 -K) that "We did not recognize any goodwill impairment as a result of

performing this annual test [on December 26, 2003] ;" and (c) reveal that there were "indicators of

impairment " until more than ten weeks after the date of this document .

Defendants ' Failure to Timely Recognize Goodwill Impairment

139 . Remec's Class Period reported financial results were materially overstated becaus e

defendants failed to cause Remec to recognize tens of millions of dollars in impairment losses

related to goodwill that were recorded in conjunction with the Company's acquisitions before the

Class Period and one acquisition during the Class Period . The overwhelming majority of assets

acquired through these acquisitions were predominantly identified as "goodwill . "

140 . Remec was required to recognize a charge for goodwill impairment well before it did .

At least by the beginning of the Class Period, defendants knew or recklessly disregarded that events

occurred that called for the write-down of millions of dollars in goodwill, including, among other

things : (1) significant negative market changes in the wireless telecommunications sectors, which

had a materially negative impact on the demand for the technology and products acquired through

Remec's acquisitions ; (2) problems with the development of the acquired technology materially

impaired Remec's acquisitions ability to contribute to the Company's consolidated revenues ; and (3)

the underlying assumptions used to test goodwill were not based on reasonable and supportable

information .

I FOURTH AMENDED COMPLAINT FOR VIOLATIONS - 63 - CASE NO. 04 CV 1948 JM (AJB)OF THE FEDERAL SECURITIES LAWSDOCS\354922v2

l 141, GAAP requires that the reported value of goodwill be assessed for impairment on an

2 annual basis, and, whenever certain triggering events occur, including : (I) a significant decrease in

3 the market value of the asset ; (2) a significant adverse change in legal factors or in the business

4 climate that could affect the value of an asset or an adverse action or assessment by a regulator ;

5 and/or (3) a current period operating or cash flow loss combined with a history of operating or cash

6 flow losses or a projection or forecast that demonstrates continuing losses associated with an asset

7 used for the purpose of producing revenue . FASB Statement of Financial Accounting Standards

8 ("SFAS") No . 142, Goodwill and Other Intangible Assets, ¶¶26, 28 (June 2001) .

9 142. GAAP also provides that financial statements recognize and report a charge to

10 income when : (1) information existing at the date of the financial statements indicates that it is

11 probable (e .g., that there is a likely chance) that an asset had been impaired ; and (2) the amount of

12 the impairment can be reasonably estimated . SFAS No . 5, Accounting for Contingencies (March

13 1975) .

14 143, In addition, SFAS No . 142 provides that where an event or changes in circumstances

15 indicate that the carrying value of the asset may not be recoverable, then : (1) the company must

16 compare the fair value of a reporting unit with its carrying amount, including goodwill . When the

17 carrying amount of a reporting unit exceeds its fair value, the second step of the goodwill

18 impairment test shall be performed to measure the amount of impairment loss ; and (2) compare the

19 implied fair value of reporting unit goodwill with the carrying amount of that goodwill . If the

20 carrying amount of reporting unit goodwill exceeds the implied fair value of that goodwill, an

21 impairment loss must be recognized in an amount equal to that excess through a charge against

22 earnings. The carrying amount is not recoverable if it exceeds its fair value . Per SFAS 142 "[t]he

23 fair value of an asset is the amount at which that asset could be bought or sold in a current

24 transaction between two willing parties, that is, other than in a forced liquidation sale . "

25 144. Defendants stated they tested the goodwill fair value using the "Income Approach ."

26 According to Todd E . Hardiman, Associate Chief Accountant, Division of Corporation Finance of

27 the U.S . Securities and Exchange Commission, the "Income Approach" is "based on expectations of

28 future income and cash flows - the discounted cash flow method is the most common example, "

FOURTH AMENDED COMPLAINT FOR VIOLATIONS -64- CASE NO . 04 CV 1948 JM (AJB)OF THE FEDERAL SECURITIES LAWSDOCS'354922v2

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1 which requires the use of assumptions . In other words, the income approach is based on discounting

2 expected future cash flows, which requires an estimate of future cash flows and an analysis of risk of

3 achieving those goals . SFAS 142 requires that a company using the Income Approach base any

4 assumptions used to calculate the goodwill fair value on reasonable and supportable information.

5 SFAS 142 further requires that all available evidence be considered . Given the long history of

6 missed gross profit margin and sales growth rate projections, and unsupportable current projections,

7 defendants never had any supportable information on which to base their assumptions . The fact that

8 they continued with their fraudulent assumptions in the face of such contemporaneous information

9 supports the fraudulent "nature of their statements with respect to goodwill impairment . In addition,

10 the assumptions used in 2002 were not disclosed until 2003 - after the 2003 test was already

I I performed . At the time the 2003 test was performed, although the assumptions were disclosed, the

12 market did not know, as defendants did that the assumptions were baseless and designed to yield a

13 find of"no impairment" in contravention information contemporaneously held by defendants which

14 indicated that those gross profit margins and sales growth assumptions could not be attained . Had

15 reasonably assumptions been used, the test would have indicated a material write down.

16 145. Two of the most significant components in a discounted cash flow model are : (1) the

17 projected future cash flows and (2) the discount rate . The projected cash flows are derived from

18 several factors including sales growth rates, gross profit margin percents, and estimated future costs .

19 The reasonableness and objectivity of the projections is critical to a proper analysis . Remec did not

20 publicly disclose these assumptions until well into the Class Period, and never disclosed all of the

21 details regarding the valuation model including future costs, cash flows, and number periods (years) .

22 146. Though defendants failed to publicly disclose all of the underlying factors used to test

23 Remec's goodwill carrying value, they eventually disclosed the sales growth and gross profit margin

24 factors . Of these two factors, the gross profit margin is more critical because the gross profit margin

25 determines whether the company can actually achieve profitability . Gross profit margin is the

26 amount earned before selling and administrative costs are factored in . Gross profit margin is derived

27 by dividing the gross profit (total sales less cost of goods sold) by the total sales . Gross profit

28 margin is important to review month-to-month trends to see whether business is improving o r

FOURTH AMENDED COMPLAINT FOR VIOLATIONS -65- CASE NO . 04 CV 1948 JM (AJB)OF THE FEDERAL SECURITIES LAW SDOCS1354922v2

I weakening and to monitor whether gross profits can cover the operating costs . If the gross profit

2 margin is zero, then increased sales growth rate would not generate income to cover the operating

3 costs . And if the gross profit margin is negative, then increased sales growth rate would in fact

4 create greater losses .

5 147. The goodwill impairment tests performed by defendants were flawed because there

6 was no basis for the key assumptions they used in connection with the goodwill impairment tests

7 performed for Remec both prior to and during the Class Period . As a result, there was no reasonable

8 basis for maintaining the goodwill book value as of the beginning of the Class Period or throughout

9 the Class Period . Accordingly, Remec and the Individual Defendants failed to timely recognize a

10 goodwill impairment charge in Remec's Wireless/Commercial segment .

11 148 . At the outset of the Class Period, a goodwill impairment charge of $44 million should

12 have been recognized at least as early as the quarter ended August 1, 2003 for which inaccurate

13 and misleading results were reported on September 8, 2003, the start of the Class Period . A $44

14 million goodwill impairment charge should have been recognized at this time because, inter alia,

15 the underlying assumptions used to support the goodwill carrying value were not based on

16 reasonable and supportable information . And when the Commercial segment goodwill value was

17 increased to $62.4 million after the November 2003 acquisition of Paradigm, the additional goodwill

18 from that transaction raised Remec's consolidated goodwill to a total of $65 .5 million . Defendants

19 should have further caused Remec to recognize an additional $18 .4 million ($62 .4 million less $44

20 million) goodwill impairment charge at least as early as the quarter ended April 30, 2004 as Remec's

21 actual sales growth rate of 0 .9% and gross profit margin percent of 13 .4% during that quarter were

22 materially lower than the assumed estimates used by defendants to support Remec's goodwill

23 carrying value .

24 149. Furthermore, Remec reported a gross profit margin of only 21.9% its in Form l0-Q

25 for the quarter ending August 1, 2003 (2Q 04), approximately one month before the start of the C lass

26 Period. See Ex. B attached; chart at ¶98 . This represented a shortfall of 8.1% - 16.1 % from the

27 30%-38% gross profit margin assumptions forecasted at the time of the December 2002 goodwill

28 impairment test, and disclosed on April 30, 2003 (FY 03 Form 10-K) . Chart at ¶99 . Remec filed its

FOURTH AMENDED COMPLAINT FOR VIOLATIONS -66- CASE NO . 04 CV 1948 JM (A .1B)OF THE FEDERAL SECURITIES LAWSDOCS1354922v2

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1 10-Q for 2Q 04 on September 15, 2003, one full week after the start of the Class Period . Therefore,

2 at the start of the Class Period, defendants knew or recklessly disregarded that Remec's actual gross

3 profit margins fell woefully short of the gross profit margin assumptions used in its Fiscal 2003

4 goodwill impairment test . Nevertheless, defendants failed to take a required interim test .

5 150. Going back even earlier, on June 16, 2003, almost three months before the start of

6 the Class Period, the Company reported in its Form I0-Q for 1 Q 04 a gross profit margin of20 .2%-

7 a9.8%- 17.8% shortfall . Chart at j99 . Therefore, defendants knew at the start of the Class Period

8 that their 30% - 38% gross profit margin assumptions were far off the mark, and that an interim

9 goodwill impairment test was required .

10 151 . The Company's 2003 Form 10-K asserted that "[t]hese estimates are consistent with

I I the plans and estimates that we use to manage the underlying businesses ." Defendants then

12 admitted that "[w]e may incur charges for impairment of goodwill in the future if the

13 telecommunications sector does not recover as we expect, if we fail to deliver new products for these

14 groups, if the products fai I to gain expected market acceptance or if we fail to achieve our assumed

15 revenue growth rates or assumed gross margins. In performing the fiscal 2003 annual test for the

16 Commercial segment, we assumed sales growth rates ranging from 5%-I 5% ; gross profit margins

17 ranging from 30%-38% (excluding depreciation) . (Remec 1/31/2003 Form 10-K at 27) .

18 152. Thus, by the start of the Class Period, defendants recklessly disregarded the fact that

19 the Company failed to achieve its assumed gross margins . This material shortfall represented "a

20 significant adverse change in legal factors or in the business climate that could affect the value of an

21 asset" . SFAS No. 142. As a result, Remec should have conducted another goodwill impairment test

22 with updated assumptions at least as early as the start of the Class Period .

23 153. Similarly, on April 15, 2004, more than seven months after the start of the Class

24 Period, Remec reported in its FY 04 10-K a devastating gross profit margin loss for 4Q 04 of

25 negative (-7.0%) See Ex. B; Remec 2004 10-K . This amounts to a staggering shortfall of31 .0% -

26 36.0% from the lowered 24% - 29% gross profit assumptions used in the Company's Fiscal 2004

27 Annual Goodwill impairment test performed on December 26, 2003, and disclosed to the public on

28 April 15, 2004 . Still Remec failed to perform an interim test .

FOURTH AMENDED COMPLAINT FOR VIOLATIONS -67- CASE NO . 04 CV 1948 JIM (AJB)OF THE FEDERAL SECURITIES LAW SDOCS1354922v2

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154 . Finally, the actual gross profit margin shortfalls for 4Q 04, IQ 05, and 2Q 05

compared to the assumptions used in the Company's December 2003 goodwill impairment test wa s

110.6% - 36.0% as illustrated in the following chart :

4Q 2004 1Q 2005 2Q 2005

High Low High Low High Low

Assumed Gross Profit Margin per1 212 612 0 0 3 Goodwill Impairment Analysis 29% 24% 29% 24% 29% 24 %

Actual Gross Profit Margin -7 .0% -7 .0% 13 .4% 13 .4% 4 .0% 4.0%

Shortfall 36 .0% 31 .0% 15 .6% 10.6% 25.0% 20 .0 %

155 . Indeed, it is undisputed that defendants had access to numerous sales and gross profi t

margin reports in the four quarters preceding the December 26, 2003 goodwill impairment test,

including the first quarter of the Class Period . Backlog Reports and monthly or weekly gross profit

margin reports would have clearly provided evidence that contemporaneous gross profit margins di d

not support assumptions used in immediately prior to both the December 2002 and 2003 goodwill

impairment tests . By ignoring the gross profit margin and sales growth rate shortfalls, defendants

were deliberately reckless in using those results in calculating its assumptions for the Decembe r

2003 test during the Class Period . As a result, defendants were required under GAAP to perform

another goodwill impairment test with assumptions based on the economic reality of the Company .

156 . Defendants knew that their chosen assumptions in the underlying factors used to tes t

the goodwill carrying value would result in Remec not reporting a charge for goodwill impairment .

As stated in Remec's 2004 Form 10-K filed on April 15, 2004 : "A variance in the discount rate o r

gross margin assumptions could have a significant impact on the amount of identified goodwil l

impairment . For example, a 1% - 2% change in either of these factors in our Commercial segment

analysis would have resulted in an indication of possible impairment that would have led us to

further quantify the impairment and potentially record a charge to write-down these assets . "

157 . When Remec finally did recognize the goodwill impairment, it provided an

explanation in the Company's 2Q 05 Form 10-Q filed on September 9, 2004 :

[T]he Company determined there were indicators of impairment for the WirelessSystems reporting segment as a result of changes in management's assumptions withrespect to revenue growth and gross margins . The Company tested the goodwill of

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1 the reporting segment for impairment in accordance with SFAS No . 142, Goodwilland Other Intangible Assets . . . The assumptions used in this impairment test included

2 sales growth rates ranging from 4%-8%, gross profit margins ranging from 14%-24%, and ad iscount rate of 18 .6%. . . . The Company's management has made its bes t

3 estimate of the goodwill impairment loss for the Wireless Systems reporting segmentto be $62 .4 million .

4In other words, defendants adjusted the sales growth rate factor range downward 1% - 34% (i.e ., 5%

5- 42% adjusted down to 4% - 8%) and adjusted the gross profit margin factor range downward 5% -

610% (i.e . 24% - 29% adjusted down to 14% - 24%). This is substantially more than the 1% - 2%

7change that defendants admit is material and "would have resulted in an indication of possible

8impairment that would have led us to further quantify the impairment and potentially record a charge

9to write-down these assets ."

10158 . For three fiscal years defendants received contemporaneous results showing

11"indicators of impairment." They knew all along the goodwill valuation metrics were off far more

12than 1%-2% throughout the Class Period . These indicators did notjust arise at the end of the Class

13Period .

14159 . Remec and the Individual Defendants stated that they periodically performed the

15goodwill "analyses" that they used to publicly "justify" Remec's goodwill carrying value throughout

16the Class Period . In its 2Q 05 Form 10-Q, filed on September 9, 2004 at the end of the Class Period,

17Remec admitted that it "determined there were indicators of impairment for the Wireless Systems

18reporting segment as a result of changes in management's assumptions with respect to revenue

19growth and gross margins" and "[tjhe Company's management has made its best estimate of the

20goodwill impairment loss for the Wireless Systems reporting segment to be $62 .4 million ."

21160. The total $62 .4 million in goodwill impairment charges is exclusively related to

22Remec's Wireless Commercial segment, which is a highly material amount . Even though it related

23to only one of Remec's business segments, it represented a loss of approximately 18% of Remec's

24total assets, more than 25% of its shareholders' equity, and more than 95% of its total goodwill value

25from the previous quarterly reporting period . In addition, the goodwill impairment charge increased

26the Company's accumulated deficit by more than 40% from January 31, 2004 .

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161 . The underlying assumptions that served as the basis to test the goodwill carrying

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value were so seriously flawed that defendants either knew, or were deliberately reckless in not

knowing, that these assumptions had no reasonable basis and that the reported goodwill value during

the Class Period was a manipulation designed to falsely misrepresent Remec's financial condition

and artificially maintain the price of Remec's stock . If the Sarbanes-Oxley certifications were true-

they knew .

162 . In fact, when Remec announced the goodwill write-down on September 9, 2004, th e

stock dropped $1 .00 or 18 .87%. In addition, even when Remec wrote down the goodwill in its

Wireless Commercial segment by $62 .4 million during the quarter ended July 30, 2004 (2Q 05), the

data ranges that it used were still falsely overstated . At the time, the projected sales growth rates and

gross profit margin ranges that Remec should have used for its goodwill impairment test were even

less favorable (lower) than the amounts ultimately disclosed by Remec in its 2Q 05 Form 10-Q on

September 9, 2004 . Therefore, although Remec wrote off the entire goodwill balance in its

Commercial segment, had the proper data components been used to calculate its goodwill

impairment, the results would have been even worse . This demonstrates that the assumptions used

by defendants were result oriented . In other words, the assumptions were picked to reach the

conclusion to improperly maintain the entire goodwill and not recognize any impairment . At the end

of the Class Period, the assumptions were reverse engineered to bring the goodwill to almost zero,

but in reality, the assumptions were still incorrect and overstated .

163 . At the end of the Class Period, in the September 9 disclosure, the defendant s

I represented that during the Class Period :

The Company estimated the fair value of the Wireless Systems reporting segment asof July 2004 using the income approach methodology of valuation . The assumptionsused in this impairment test included sales growth rates ranging from 4%-8%, grossprofit margins ranging from 14%-24%, and a discount rate of 18 .6%. The estimatesused reflect the Company's inability to gain market segment share or attain the levelof profitability previously anticipated . . . . The primary factors that contributed to theimpairment assessment of the Wireless Systems reporting segment in the threemonths ended July 30, 2004 were continued projected losses resulting from industryovercapacity resulting in lower profit margins, and manufacturing cost reductionslagging market price decreases . (2Q 05 Form I O-Q . )


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1 164, Stated differently, Remec was losing money and the gross profit margins and sales

2 growth rates used to justify the goodwill were wrong .

3 165. As evidenced by actual gross margins reported before and during the Class Period,

4 and sales growth rates reported during the Class Period, Remec consistently used unrealistic data

5 ranges for certain components of its goodwill impairment valuation testing models . In addition, the

6 allegation that the defendants intentionally manipulated the primary components of Remec's

7 goodwill impairment valuation tests and knew they were not able to generate reliable sales and gross

8 profit margin data accurate or timely enough to perform a valid goodwill impairment valuation

9 during the Class Period is corroborated by :

10 (a) internal reports from Fiscal 2003 ;

11 (b) public statements reported in Remec's September 24, 2004 Form 8-K filing

12 which were made by the Company's own auditors, E&Y, in connection with their withdrawal ; and

13 (c) information from confidential witnesses .

14 166. Remec's internal financial recordkeeping and controls were problematic even before

15 the Class Period . According to an internal Company memo by Jon Opalski (VP of the Wireless

16 Group) entitled "July 2002 Significant Events Report - Mobile Wireless Group," the Company

17 "continue[d] to have issues in getting accurate cost data and the costs allocated to our

18 regional/business unit structure appropriately. Profitability still not determined on new forecast .

19 Have not been able to get budget vs. actual last three months for mfg costs and concerned this may

20 be delayed another quarter based on recent financial status review with the finance team . . . ."

21 Without accurate and timely forecast data for sale and cost of sales, Remec could not have reliably

22 calculated, or monitored, its goodwill impairment valuations .

23 167. The consistent and blatant failure to maintain or provide effective and appropriate

24 internal accounting controls and financial reporting systems continued throughout the Class Period .

25 Ultimately, Remec's former auditors, E&Y resigned upon reporting accounting control deficiencies

26 to the Company . Two weeks after the end of the Class Period, "[o]n September 24, 2004, Ernst &

27 Young LLP ("E&Y") informed REMEC, Inc. (the "Company") that it was resigning as the

28 Company's independent registered public accounting firm effective no later than the completion of

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1 its review of the Company's interim financial information for the three and nine months ending

2 October 29, 2004 - shortly after the end of the class period . "

3 168. Evidence that Remec's internal control deficiencies and inability to generate timely

4 and accurate reports continued from the July 2002 Significant Events Report all the way through the

5 end-of the Class Period was confirmed by E&Y. In its Form 8-K filing dated September 24, 2004,

6 the Company disclosed that in resigning, E&Y advised its Audit Committee of significant

7 unresolved issues during the Fiscal 2003 and 2004 as follows :

8 E&Y advised the Audit Committee that in connection with the audit of theCompany's consolidated financial statements for the year ended January 31, 2003, it

9 was observed that there was a lack of review and technical accounting oversight o fcertain accounting transactions and activities within the financial statement close

10 process; lack of timely reconciliation of bank statements and the lack of preparation,review and documentation of reconciliations for certain other accounts . There was

11 noted an inability to prepare a mechanized calculation of inventory reserves by theCompany's financial information systems ; and it was recommended that certain

12 improvements be made to program and access controls for the Company' sinformation technology processes that support the internal control environment .

13E&Y advised the Audit Committee that in connection with the audit of the

14 Company's consolidated financial statements for the year ended January 31, 2004, itwas observed that the Company did not consistently follow its policy and procedure s

15 for review, approval and documentation in the areas of revenue recognition andpayroll and needed to enhance controls to identify duplicate payments . It was

16 recommended that the Company strengthen its documentation and analysi scapabilities for its foreign currency translation and exchange activities ; that

17 segregation of duties and controls be improved at a foreign subsidiary relating tocash, and timely accrual of liabilities . Further improvements were also recommende d

18 in program and access controls for information technology processes that support theinternal control environment .

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20 169. The control deficiencies identified by E&Y are directly related to "goodwill

21 impairment analysis" for the following reasons: (1) if Remec's monthly, quarterly and annual close

22 process was not reviewed for completeness and technical accounting accuracy, or was reviewed and

23 had material weaknesses (as prompted E&Y's resignation), the resulting reports generated from the

24 corresponding closings may have been unreliable ; (2) potentially unreconciled accounts included in

25 the Net Sales, Cost of Sales, or Inventories financial statement line items would likely impact the

26 results of the goodwill impairment tests ; (3) an inaccurate inventory reserves calculation would

27 result in inaccurate balances for Inventories and Cost of Sales . As Cost of Sales directly affects the

28 gross profit margin calculation, an inaccurate gross profit margin impacts the results of the goodwil l


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1 impairment tests ; (4) if Remec inconsistently applied its revenue recognition policy and procedures,

2 the Net Sales account was likely misstated. As Net Sales directly affects Net Sales growth and gross

3 profit margin calculations, corresponding goodwill impairment tests using those metrics were

4 probably inaccurate ; and (5) if liabilities were not timely accrued, Inventories and Cost of Sales

5 balances for respective reporting periods were likely inaccurate . As a result, corresponding gross

6 profit margin balances used in contemporaneous goodwill impairment calculations would have been

7 incorrect .

8 170. As a result of the issues listed above, the financial data and reports that Remec used to

9 test for goodwill impairment precluded an accurate assessment of goodwill . In addition, since E&Y

10 reported these issues to Remec and in light of the Sarbanes-Oxley certifications, former CFO David

1 l Morash and CEO Ragland must have been aware of the inherent problems with the Company's

12 accounting system and the effect of these problems on financial data and reports used in connection

13 with the Company's goodwill *impairment valuation testing .

14 171 . Remec's financial reporting and internal accounting controls were administrated by

15 the defendants and other senior management in a manner that they had to know manipulated

16 financial results for the purpose of hiding unfavorable information, particularly with respect to the

17 materially significant goodwill impairment in the Company's Wireless Commercial segment which

18 was evident to defendants at the beginning of, and throughout the Class Period .

19 172. Remec's sales and gross profit margin reporting problems were further compounded

20 by the fact that, according to Witness 10, a former Remec Director of Supply Chain Management,

21 Spectrian sales personnel would routinely enter bogus potential orders into the company's

22 forecasting system. On the basis of these potential orders, the company's Thailand contract

23 manufacturer would begin to manufacture products to fulfill the orders . However, at the very end of

24 the quarter, the sales personnel would "pull the order out of the forecast" meaning that the order

25 simply disappeared . This meant that Spectrian would then be stuck with the cost of finished goods

26 that had been made in anticipation of the order, but that had no identified customer to actually pay

27 for the products . The former Remec Director of Supply Chain Management said that the company's

28 forecasting system and methodology were so unpredictable that the forecast literally changed on a

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daily basis . Witness 10 added that just because sales were included in the forecast by no mean s

I meant they would result in actual closed deals .

173 . The sales forecasting deficiencies had a significant negative impact on Remec's

goodwill impairment valuation tests performed on December 27, 2002 and December 26, 2003 .

According to Witness 6, the sales order and forecasting issues were prevalent throughout the

Wireless/Commercial segment, as detailed above . Manufacturing unsaleable products negatively

affected both projected sales and projected cost of sales, the two components of management's fals e

gross margin assumptions . For example, if the Company doesn 't sell certain of its manufacture d

products, sales will obviously be down, but the Company would also be required to write-down th e

inventory of the nonsaleable manufactured products and suffer the manufacturing cost with no

offsetting revenue . The inventory write-down in turn increases cost of sales which has a negativ e

impact on gross profit margin . As a result, if the correct lower gross profit margins and sales growth

components were used in the goodwill impairment calculations, as reflected by actual results, rather

than defendants' baseless, inflated assumptions, the goodwill value would have been significantl y

lower .

174. In its SEC filings during the Class Period, the Company consistently misrepresented

the following by omitting to disclose key material facts :

Our impairment review process is based on a discounted future cash flowapproach that uses our estimates of revenue for the reporting units, driven byassumed market growth rates and assumed market segment share , and estimatedcosts as well as appropriate discount rates. These estimates are consistent with theplans and estimates that we use to manage the underlying businesses . Theestimates we used assume that we will gain market segment share in the future andthat the Commercial segment will experience recovery and a return to growth andprofitability from the current trends .

2003 Form 10-K . See also Remec's 2004 Form l0-K .

Defendants Failed to Consider All Available Evidence

175 . In addition to not using reasonable and supportable gross profit margin percent an d

sales growth rates in performing Remec's goodwill impairment test, defendants failed to consider al l

the available evidence that the Commercial segment goodwill carrying value was impaired . The

goodwill impairment test required by GAAP under SFAS 142 must be based on reasonable an d

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supportable information and must consider all available evidence . However, defendants failed to

consider the totality of the specific evidence available concerning the acquisitions for which

goodwill was recorded that when combined with the actual gross profit margins and sales growth

rates could not support the goodwill carrying value for these acquisitions .

ADC Mersum Oy ("Solitra") Acquisitio n

176. On October 31, 2001, Remec announced through PR Newswire that it acquired Solitra

in Oulu, Finland from ADC Telecommunications, Inc . The Company acquired the assets and

assumed all of the obligations of Sol itra's RF division and 100% of the shares of Solitra in exchang e

for cash consideration of $51 .6 million . In Remec 's 2003 Form 10-K filed on April 30, 2003 ,

defendants disclosed :

Solitra specializes in supplying RF equipment to OEMs in the mobile wirelessinfrastructure industry . Management believes that the addition of Solitra expandedthe Company's product portfolio and global footprint, and furthered its engineeringexpertise within products currently developed and already supplied for 2 .5G and 3Gcellular systems . Solitra further expanded the Company's presence in Europe andstrengthened its relationship with strategic customers, especially those located inScandinavia .

177. However, during late 2002 defendants knew or recklessly ignored that the Solitr a

acquisition had backfired, because, among other things, (1) Solitra's Scandinavian customers like

Ericsson and Nokia were struggling to generate orders and sales ; (2) the 3G technology was at a

standstill ; and (3) Finland's high cost of manufacturing necessitated the transfer of manufacturing t o

I other facilities in China, Costa Rica, and the Philippines .

178 . In February 2003, Ericsson, a key customer for Solitra, announced disappointin g

results for 2002 - a 36 percent decrease in net orders and a 37 percent decrease in sales over the

prior year . In addition, Ericsson disclosed that "In line with the industry consensus and ou r

previous estimate, we believe that the mobile systems market declined about 20% to an estimated

USD 42 b . during 2002 . For 2003, we believe that the mobile systems market may decline by as

much as 10%." Ericsson SEC Form 6-K at 2 (February 7, 2003) (emphasis added) .

179. Echoing the problems at Ericsson, the February 18, 2003 program The Money Gang

commented :

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Ericsson is not alone in that it's a company that's really been hurt by theovercapacity in wireless telecom, particularly ones who were just huge players in theinfrastructure and the handset area . 3G technology is somewhat interesting . It's notthe blockbuster that we thought it was when we were in the middle of believing thatit was a straight-line growth for wireless technology . The major players are realizingthey've made huge investments. They're still not getting the cash flow back to beable to deliver the profitable business trends that investors want and I think that 3Gwill become real but I think companies are very reluctant to make the infrastructureinvestment to move forward . I think similarly they're seeing that cell phone usersaren't exactly excited about flipping to their fifth or sixth handset for the nexttechnology, not yet convinced what they're getting for it to be worth it .

180 . Similarly, Nokia, another key Solitra customer, expected dismal results for 2002 . In

this regard, Nokia stated in its Form 6 - K filed on February 7,2003 : "As we entered 2002, we faced a

world of uncertainty - uncertainty in the economy, in international events and in our own market ,

with a lot of ambiguity surrounding consumer and operator behavior."

181 . Indeed, the problems of overcapacity and decreasing sales were apparent to th e

Remec defendants much earlier than September 2004 . However, defendants portrayed themselves as

successfully overcoming the challenges faced by others in the industry . Reassuring investors, they

attempted to distinguish themselves from the limitations on other wireless manufacturers by

presenting Remec as a vertically-integrated, diversified company, with strengthening demand and

sales .

182 . In addition, defendants improperly failed to assess impairment of Solitra's goodwil l

after its decision to transition manufacturing operations out of Finland . SFAS No. 121 states that the

recoverability of the carrying amount of an asset should be assessed when "A significant change in

the extent or manner in which an asset is used . . . ." In this regard, during Fiscal 2004, Remec had

begun a process of transitioning manufacturing operations away from Finland to other lower-cost

manufacturing facilities, such as, China, Costa Rica, and the Philippines . (According to a July 14,

2004 e-mail from Witness 15 to Filter Program Manager Jeff Alvord, the severance payments related

to this transition alone cost Remec $1 .5 million .) To be sure, by June 8, 2004, most manufacturing

activities in Finland had closed . Accordingly, defendants knew or recklessly disregarded that during

Fiscal 2004, Solitra's goodwill and other assets should have been assessed for impairment based on

their decision to move manufacturing operations out of Finland .

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183 . Witness 33, a former Remec Commodity Manager, explained that one of the

difficulties Remec faced in realizing the reduced costs they hoped to derive from the transfer o f

manufacturing from Finland to China was the delay between establishing a relationship with a ne w

supplier and when Remec was actually able to use those components to produce products . For

example, on just a simple "screwable" component, there was a two to three month gap between the

decision to go with a particular supplier for the component and actually incorporating the component

into the manufacture of finished goods that would result in actual savings in the manufacture o f

those finished goods . With more complex components, such as a circuit board, there was a six

month or longer gap between choosing the supplier and implementing the board into production-

level manufacturing . In addition, the witness said that there were quality problems related to the

components Remec procured from Chinese vendors, which resulted in problems with products sold

to Motorola, Siemens, and Nokia . In particular, in the late 2003 to early 2004 timeframe, there wa s

an issue with certain filter products sold to Motorola which Motorola returned because of concerns

over quality . Remec had to evaluate the problem to determine if the problem pertained to

manufacturing issues or whether the problem resulted from the components the supplier provided .

Snectrian Acquisitio n

184. Remec's acquisition of Spectrian on December 20, 2002 was, by all accounts, a

financially reckless decision by CFO Morash and CEO Ragland which substantially contributed to

Remec's $62 .4 million goodwill write-off at the end of the Class Period . More importantly,

Ragland, who was directly involved in the due diligence on Spectrian, knew the acquisition had little

if any chance of generating profits during the Class Period due to Spectrian's vast quantities of

excess and obsolete inventory and inability to realize cost-saving synergies (discussed below) .

Nevertheless, defendants failed to take any goodwill impairment tests or admit to "indicators of

impairment" until the final quarter of the Class Period . Witness 30, former Spectrian VP of

Operations up until the acquisition, said that Remec's merger with Spectrian was the most "bizarr e

merger and/or acquisition" he/she had ever witnessed . The witness explained that the synergies

between Remec and Spectrian were "just not there ." As he/she put it, in the year leading up to the

acquisition, both companies were "flailing" and that the story that Ragland, Waechter (then CEO o f

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Spectrian), and others were telling to The Street about a "tremendous benefit" that would com e

2 about from the acquisition was "just not true ." (The witness explained that once the acquisition was

3 completed, Waechter received a "sweet deal" from Remec, which included Remec buying Waechter

4 a house, paying for a new country club membership, and giving him a $1,000,000 bonus . )

5 185. Witness 30 said that Waechter had been with Spectrian for approximately one full

6 year prior to the witness joining Spectrian, but Waechter had been unsuccessful in bringing Spectrian

7 to profitability . As part of an effort to achieve a profitable level of operations for Spectrian, the

8 witness explained that Spectrian and Remec initiated an ill-fated "synergy savings" package in July

9 or August 2002, which was continued by Waechter after he joined Remec . Witness 30 ultimately

10 chose not to continue his/her employment with Remec once Remec acquired Spectrian because

11 he/she and many other Spectrian senior executives knew prior to the acquisition that the "cost

12 synergies" planned for the unified company were simply "not going to happen," and that, therefore,

13 the merger would ultimately prove unsuccessful .

14 186. Witness 30 said that Spectrian's poor financial condition was well known to the

15 Remec personnel, including Ragland, who conducted the due diligence pursuant to the acquisition .

16 Accordingly, the witness said that plans were undertaken, in coordination between Remec and

17 Spectrian personnel, to create a plan that would detail various "cost synergies" that Remec could

18 supposedly derive from the acquisition . The "cost synergies" plan involved the creation of so-called

19 "Tiger Teams" that were tasked with identifying cost reductions in every "functional area of

20 Spectrian's operations ." This is confirmed by dozens of internal Spectrian documents, including two

21 spreadsheets entitled "Tiger Team Summary," and "P0R Synergy Summary," both dated July 8,

22 2002. In a Business Communications Transaction Communication conference call on May 21, 2002,

23 Ragland made several references to the "cost synergies" anticipated for the merger between

24 Spectrian and Remec . Ragland said that he was "confident that within the first year of our

25 [Spectrian-Remec] combination, we'll [Remec] deliver a minimum of $20 million of synergies to

26 the bottom line, and in excess of $30 million annually thereafter." However, according to an

27 internal Spectrian report attached to a June 18, 2002 e-mail from a Remec VP of Manufacturing to

28 Witness 30, Remec/Spectrian only anticipated saving approximately $6.1 million in the first year .

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Even this reduced forecasted synergy savings amount is questioned by the VP in the e-mail, which

he characterizes as "very aggressive" (i,e., unrealistic) . In fact, according to another Spectrian

document, the very next day the VP submitted a revised savings schedule reducing that amount to

approximately $4.0 million . However, Witness 30 explained that even this reduced $4 .0 million in

synergies could not be attained for several reasons, including the fact that the forecasted sales for

which the savings were to be realized never occurred . Moreover, Witness 30 said that the tens of

millions which Ragland reported to the public would be saved as a result of the merger were

completely unrealistic and unattainable .

187 . More importantly, Witness 30 said that senior Remec executives, including Ragland ,

were aware of these unrealistic savings goals . The witness said that in the months preceding the

acquisition, beginning in October 2002, he/she prepared detailed reports regarding the unrealistic

savings prospects anticipated for the merger, which the witness provided to Waechter, and which

were forwarded to Ragland . He/she said Waechter and Spectrian CFO Michael Angel informed

him/her that they participated in virtually daily conference calls with Ragland and Morash .

According to the witness, Ragland seemed unwilling to admit that the "cost synergies" would fail .

188. Witness 30 explained that a major element of the "cost synergies " plan was th e

transfer of Spectrian's contract manufacturing operations over to Remec's manufacturing facilities in

the Philippines . Witness 30 said that the 10% - 12% forecasted manufacturing savings that were

supposedly going to be derived by transferring operations to the Philippines were unrealistic because

Remec was "woefully incapable" of taking on this manufacturing . He/she said, "We felt we couldn't

do it [i.e., realize the savings], but we put it in the spreadsheet" as part of the forecasted savings

anyway . Morash and the former VP of Remec Wireless Communications explained to the witness

that Ragland had made the decision to purchase Remec's Philippines facility . Morash and Remec

VP Opalski told Witness 30 that they had warned Ragland about the potential risks of this purchase,

but that "Ron [Ragland] didn't care." The witness said that Opalski and Morash both indicated that

having this discussion with Ragland had not been "pleasant ." In addition, Ragland told the witness,

"this [the terms of the deal] is the way it is going to be, end of conversation ." According to the

witness, Remec's decision to assume manufacturing of the amplifiers in-house set the stage for

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I Remec's excess and obsolete . inventory crisis . Remec's disastrous move of its manufacturing

2 facilities to the Philippines is discussed in detail below .

3 Himark Telecom Group Limited ("Himark") Ac uisition

4 189. Defendants were aware shortly after their purchase of Himark in May 2003 (1 Q 04)

5 that the acquisition was at great risk because : (a) Himark's products sold for little, if any, profit ; (b)

6 Himark had serious difficulties collecting millions of dollars from customers with whom it did not

7 even have contracts, (these aging accounts receivable ultimately had to be entirely written-off) ; (c)

8 Himark's Internet-related business at the time of the purchase was entirely unrelated to Remec's

9 Wireless communications business ; and (d) Himark's principal, Shu Yi Lin, with whom Ragland

10 was reportedly having an affair, was siphoning off millions of dollars due Remec from Himark's

I I customers that did actually pay . Nevertheless, defendants mislead public investors by failing to

12 admit that the goodwill Remec attributed to the acquisition was not impaired until the end of the

13 Class Period. Confidential witnesses confirmed that defendants were aware of these problems

14 because : (a) Ragland participated in conference calls prior to the acquisition of Himark in which he

15 was informed that the company had virtually no value (Witness 31) . (Ragland personally never

16 performed any due diligence on Himark, something Ragland had never before failed to do in

17 connection with an acquisition (Witness 14) .) ; (b) defendants attended regular meetings during

18 which the abysmal gross profit margins of Himark's products were openly discussed (Witness 14

19 and Witness 16) ; (c) defendants received internal reports detailing this lack of profitability (Witness

20 16); (d) Hickman personally sent a Director of Operations to China in the final quarter of the Class

21 Period to investigate Himark's significant financial and accounting problems (Witness 15) ; and (e)

22 defendant Hickman (and likely Ragland) received an August 2004 report based on this investigation

23 detailing Shu Yi Lin's depositing of huge sums of money due Remec in the bank account of a side

24 company owned by Lin (Witness 15) . The Operations Director recommended a formal audit of

25 Himark in this August 2004 report .

26 190. As part of defendants' strategy of portraying a growing, successful, and competitive

27 company to the market, defendants represented that they would create a vertically integrated

28 company, and cut costs by moving productions to lower-cost locations . To that end, they announce d

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plans to shut down their European facilities (primarily Netherlands and Finland) in favor of lower-

I locations like China . They ostensibly sought to acquire a company in Beijing in order to hel p

them sell into China (specifically, into Shanghai) .

191 . In May 2003, Remec acquired certain assets and assumed certain obligations o f

Himark, a private sales distribution and value-added telecommunications sector company

headquartered in Beijing, People's Republic of China, for a purchase price of approximately $11 . 8

million, including approximately 1 .4 million shares of Remec common stock with a value of $7 .0

million (based upon the closing price on the date the terms of the purchase agreement were agreed

to, or $5 .03 per share) as well as cash, a note payable and other consideration . According to an

internal report dated June 21, 2004 ("Worldwide Controllers' Conference"), Himark represented 4%

of Remec's total assets as of April 30, 2004, the end of the second quarter of the Class Period .

192. Witness 31, a former Controller and VP of Finance at Remec's Shanghai facility

whose responsibilities included oversight of Himark, said that he/she was involved in the du e

diligence Remec senior managers conducted on Himark. As a result, the witness'said that he/sh e

was aware that Himark had "no value" and there was no potential "value-add" in terms of Remec

acquiring Himark . The witness said that the only reason Remec acquired Himark was because of

Ragland's personal relationship with Himark principal Shu Yi Lin . The witness said that CFO Dave

Morash, VP Controller Pat Gray, and EVP of Global Operations Clark Hickock were also involved

in the due diligence on Himark . Witness 31 said that he/she and other members of the due diligence

team reviewed Himark's customer purchase contracts/sales contracts, evaluated Himark's track

record in terms of sales and potential liabilities, as well as what sort of opportunities, if any, Himar k

offered to Remec in the Chinese market . Based on this analysis, the witness asserted that Himark

"didn't have much value at all ." Prior to the close of the Himark acquisition in May 2003, the

witness participated in conference calls with Ragland regarding the due diligence on Himark . The

witness said that Ragland did not ask any questions regarding Himark during these conference calls

when the results of the due diligence were discussed .

193. On June 9, 2003, only one month after the due diligence on Himark was completed,

Waechter, commented on the Himark acquisition : "I'm really excited about the leadership that th e

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1 management team at Himark will bring into our China and expanded Asia operation, but I think

2 specifically, on the solution opiimization model that they've developed, they have the capabilities to

3 do an in-depth analysis of the network performance for the network operators throughout China ."

4 I Q 03 Remec Earnings Conference Call .

5 194. On September 8, 2003, in connection with Remec's announcement of its 2Q 04 and

6 FY 04 results, Ragland commented that "The acquisition of Himark expands our ability to serve the

7 China marketplace and provides important momentum and competitive advantage in achieving our

8 goal of a near term return to profitability and a strong second half performance . "

9 195. However, Remec failed to disclose material facts related to the acquisition . The

10 Company faced numerous challenges to making the transition and entering the China market, and

l 1 Himark made no contribution to sales in China by Remec . In addition, as discussed in more detail

12 below, the Himark acquisition was doomed from the start because : (a) its profit margins on its

13 products were virtually nonexistent ; (b) it had millions of dollars in Accounts Receivable with

14 customers with whom it had no contract ; and (c) its principal, Ms . Shu Yu Lin was allegedly

15 siphoning off huge sums of money owed Remec, while at the same time requesting additional money

16 from Remec to meet Himark's expenses . This last allegation is corroborated by internal documents .

17 According to at least one witness, serious concerns were raised to defendant Hickman in an August

18 2004 report based on a review of Himark operations, that "payments are not passed to Remec," and

19 that a "formal audit" of Himark be conducted . In addition, a July 21, 2004 e-mail from a Controller

20 at Remec to Himark Site Controller Yequing Zhou ("Importance : High") in which the Controller

21 questions a $400,000 increase in Himark's forecasted expenses for the 2Q 05, the last quarter of the

22 Class Period .

23 196. Witness 12, a former Remec Global Account Manager throughout the Class Period,

24 was familiar with the events surrounding the Himark acquisition . Witness 12 said that Ragland gave

25 Shu Yi Lin "a sweetheart deal" when Remec acquired Himark, but Witness 12 characterized

26 Remec's acquisition as "arguably the worst decision in Remec's history" and undoubtedly a major

27 contributing factor to the company's eventual need to write-off $60-plus million of impaired

28 goodwill related to the Wireless division . The witness asserted that Remec paid far too much fo r

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I Himark and this resulted in a large amount of goodwill being recorded as part of the acquisition .

2 However, Witness 12 observed that anyone with any awareness or knowledge of Himark knew even

3 before the acquisition that Himark was not able to bring meaningful value to Remec, so the goodwill

4 associated with Himark was overstated as soon as Himark was acquired and remained overstated

5 thereafter. According to Witness 12, the reality was that Himark had "incompetent people" and

6 Himark seemed incapable of making any meaningful headway in selling Remec products in China .

7 Himark had "no tangible assets, no intellectual property," according to the witness . In addition,

8 internal documents reveal that Himark embarked on a number of disastrous projects . For example,

9 an attachment to an August 13, 2004 e-mail from Witness 15 to Yasbek reveals that Himark's "DICS

10 Project" would have a "net cash flow loss of $1 .9 million," on approximately $10 million in sales

I I during FY 05 through FY 07 : "The project never turns a positive cash flow . . . . The payment history

12 of the Chinese telecomm customers is poor . The payment terms are very poor . . . . Revenue

13 recognition issue . . . . "

14 197. In fact, Himark brought none of the benefits defendants represented investors could

15 expect ; Remec could not shut down the Netherlands and Finland operations soon enough to realize

16 the claimed benefit, and Remec purportedly sold Himark back to Lin for "pennies on the dollar"

17 according to several former employees, including Witness 14 and Witness 31 . According to Witness

18 31, Hickman was directly involved in this decision . Witnesses 1, 2, 3, 14, 15, 16, 24, and 31

19 confirmed there were rumors at the Company during their employment (and the Class Period) that

20 defendant/CEO Ragland had a personal relationship with Lin, and that this influenced the decision to

21 acquire the company (and, subsequently, to sell it back to her so cheaply) . Ragland's affair with Lin,

22 according to the witnesses, was "common knowledge" at the Company, and understood to be the

23 reason why Remec bought Himark at such a high price . (As Witness 14 put it, Himark was a

24 "strange" purchase for Remec because Himark's Internet-related business was not related to the kind

25 of wireless gear that Remec sold .) Defendants never disclosed this personal relationship . Such a

26 relationship is material in that it raises questions as to whether the negotiations for the purchase and

27 sale of Himark were done at "arms-length" and absent any self-dealing .

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198. According to Witness 14, Ragland failed to perform due diligence related to the

2 Himark acquisition, and even used the SARS epidemic as a pretense for not doing so . According to

3 Witness 14, Himark was the first company Remec had ever purchased without conducting due

4 diligence . He/she said that after the acquisition, former Controller Patrick Gray went to China and

5 determined that "the accounting [at Himark] was wrong ." Witness 14 stated that as a result, Remec

6 had to infuse Himark with cash since Himark was not generating any of its own cash . As such, there

7 were inter-company transfers of cash to Himark in order to meet the Himark payroll and other costs .

8 Witness 15 confirmed that Himark required cash from Remec in order to fund Himark's operations .

9 He/she cited one example in August 2004 near the end of the Class Period when Shu Yi Lin

10 requested $400,000 from Remec for this purpose . An undated internal document reveals that Lin's

11 personal expenses averaged approximately $60,000 per month during 1 Q 05 and 2Q 05 .

12 199. Not long after Witness 15 joined Remec in the summer of 2004 (near the end of the

13 Class Period), Witness 15 was sent to China to perform "a site review" of the Company's facilities in

14 Beijing and Shanghai . The assignment came directly from Tom Waechter and Hickman, who

15 suspected there were problems related to Remec's China operations . This is corroborated by an

16 August 19, 2004 e-mail from Witness 15 to Yasbek in which the witness writes, "1 still do not have a

17 Remec laptop with me to travel to China to do all the documentation that Winston is expecting ."

18 Witness 15 described both Waechter and Hickman as "very involved and hands-on executives ."

19 Witness 34, who reported to Hickman, also described him as a "very hands-on" CFO . In addition,

20 an August 20, 2004 checklist from a Business Planning VP to Witness 15, entitled "Top Due

21 Diligence Items for China Trip" describes precisely what problems Witness 15 was to investigate at

22 Himark: "Review banking records . . . determine unapplied cash balances . . . [a]bsence of

23 "Sweetheart" deals . . . Unusual transactions (e .g., high level of cash activity) . . . Validation of

24 payment for good received . . . Absence of "Padding" of vendor payments for purposes of providing

25 kickbacks to employees," and dozens of other items . Clearly, Remec executives (including Hickman

26 who sent Witness 15 to Beijing) had serious suspicions that Shu Yi Lin was involved in numerous

27 financial improprieties at Himark .

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200. During this trip to China in August 2004, Witness 15 discovered that the Himar k

entity was receiving customer payments but was depositing them in a side company called "Himark

Beijing," which was wholly owned by Himark principal Shu Yi Lin . According to a report the

witness drafted entitled "China - Beijing Accounting Review (August 2004)" based on the August

2004 inspections, Witness 15 stated that Lin ostensibly set up the side company to process payments

from Himark/Remec's customers in China who purchased Remec products known as "optimizers,"

which prevent "dead zones" within multi-story buildings . However, Lin's side company was not

actually transferring the cash to Remec, which Lin was apparently keeping for herself . An internal

report sent in an August 3, 2004 e-mail marked "Urgent" from Remec employee Jeff Alvord to

Witness 15 and other employees shows that Himark recognized $1.9 million in revenue during the

third quarter of the Class Period (1 Q 05) alone . Despite the fact that Shu Yi Lin was allegedly

depositing these funds owed Remec in a bank account held by her side company, Remec continued

counting the Himark receivables on Remec's books . This is particularly disturbing in light of the

fact that Remec was not receiving funds owed by Himark's two biggest customers, Hui Bei Mobile

and Nin Xia (the so-called "Big 2"), which apparently Shu Yi Lin kept for herself . According to a

Jul), 2004 e-mail from an Accounting Manager, and copied to Hickman, E&Y only audited Remec's

Shanghai facility in China and never audited Himark during its 2Q 05 quarterly reviews (the last

quarter of the Class Period) . Witness 31 confirmed that Lin failed to route monies received from

customers to Remec's corporate office, and so the Accounts Receivable appeared as uncollectible on

Remec's books .

201 . In the report, which Witness 15 provided to Hickman, among others, he/she

recommended that a formal audit of Remec Beijing be conducted . However, Witness 15 stated that

he/she was pressured to "soften" the results of his/her findings, which were considered "too harsh"

by Hickman and Remec's lawyers . Witness 15 left Remec shortly thereafter, in part because of this

pressure . Although Witness 15 did not know if Remec ever received the cash it was owed by

Himark, Witness 21, a former- Remec Accounts Receivable Administrator/Collector prior to and

throughout the Class Period, said that he/she was still trying to collect on Himark receivables as o f

mid-2005, after the end of the Class Period . According to a July 9, 2004 spreadsheet (" Beijing

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1 Accounts Receivable"), as of May 31, 2003 (2Q 04), Himark's accounts receivable totaled $5 .7

2 million . These increased to $7.5 million as of July 30, 2003 (2Q 04) . By July 9, 2004 (2Q 05, the

3 last quarter of the Class Period), Himark's accounts receivable had ballooned to approximately $11 .3

4 million. As Witness 21 explained, these receivables had been on Remec's books "for years,"

5 including throughout the entire Class Period . As far as Witness 21 knew, "no one had ever been

6 assigned to collect on this account . "

7 202. On June 9, 2004, defendants filed Remec's quarterly report with the SEC on Form

8 10-Q for the first quarter ended April 30, 2004 (1Q 05) . The report, which included a certification

9 from defendant Hickman, misleadingly stated, "The majority of goodwill . . . within the Wireless

10 Systems segment are attributable to the [Solitra], Himark and Paradigm acquisitions." Defendants,

11 however, failed to mention that Himark contributed little if any actual value to Remec . Indeed, only

12 two days before defendants filed the Form 10-Q, July 7, 2004, Steve "Ziggy" Yasbek circulated a

13 report entitled "Beijing-[Himark] Network Optimization" which reveals that Remec was still trying

14 "to determine if the business is real (do we get paid[?]) . . . . Revenue recognition issue . . . . No track

15 record of getting paid . . . . High exposure to Bad Debt write[-]offs . . . . Hui Bei Mobile . . . [$1 .07

16 million] of AR's . . . . [Shu Yu] Lin needs to determine . . . a firm payment schedule . . . . Nin Xia . . .

17 [s]ame story as Hui [B]ei Mobile ;" Another internal Wireless Systems financial statement

18 ("Wireless Systems Overlays") characterizes "Beijing [Himark]/Op[timizers]" as a "revenue risk ."

19 More specifically, the July 7, 2004 report identifies dozens of Himark customers (Shi Hejiaxun, Rui

20 [H]ai BJ, Li Kang Pu, etc .) owing more than $4.85 million to Remec . According to a report dated

21 July 21, 2004, this was more than ten times the amount of Himark's actual and forecasted sales for

22 the month of July 2004 ($444,880). Hickman almost certainly reviewed the July 7 report- indeed,

23 the report was probably one of the reasons he sent someone to Himark shortly thereafter to

24 investigate suspected problems . He also probably reviewed a July 9, 2004 Remec spreadsheet

25 wherein Yasbek recommended that approximately $1 .5 million in Himark's accounts receivable that

26 were more than 120 days past due be reserved as Bad Debt . This amounted to more than 35% of

27 Himark's total accounts receivable ($4,278,773) at that time, according to the spreadsheet .

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203 . An August 3, 2004 report by Yasbek also establishes that defendants' own revenue

recognition policy explicitly violated GAAP. The report cites to SEC Staff Accounting Bulletin No .

101 ("Revenue Recognition in Financial Statements"), which states, the staff believes "that revenue

generally is realized or realizable and earned when ALL of the following criteria are met :

(p]ersuasive evidence of an arrangement exists ; [d]elivery has occurred or services have been

rendered ; [t]he seller's price to the buyer is fixed or determinable ; [and] Jc]ollectibility is reasonably

assured." Remec Policy No. 7-0020, Revenue Recognition, which was approved and signed on

December 8, 2003, stated that the Company recognizes revenue pursuant to SAB 101 . However, a t

least two of these criteria were not met as evidenced by Yasbek's July 7, 2004 report, which state s

that "[W]e generally do the work first and then we sign a contract after-the fact, which trigger s

payment. In essence, we're doing the work with no contract. Revenue recognition issue . . . . Report

higher revenue ." Defendants clearly violated GAAP by recognizing revenue when there was n o

contract in place . The July 7, 2004 report further states, "No track record of getting paid . High (and

aged) A/R balances . High exposure to bad debt write[-]offs ." Collectibility for Himark's

Optimizers was therefore far from certain, and, thus, defendants violated SEC Staff Accountin g

Bulletin No. 101 by recognizing revenue for these products . In addition, a far more egregious

revenue recognition problem is described in a series of June 30, 2004 e-mails between Yasbek ,

Witness 15, and Witness 31 . The e-mails refer to revenue recorded in BAAN from the purported

sale of an unidentified product to Nokia which was never actually shipped. As stated in the e-mail,

this was done in direct violation of Remec's revenue recognition policy (i.e ., "we can't recognize the

sales until we physically ship/delive[r] the goods") . More importantly, however, Maijala voices her

suspicion that " the reason behind all these shipments was pressure to get intercompany sales up or

inventory balances down or who knows but it's hard to believe these were done by acciden t

because there was even 3 different phantom shipments in the system . . . . Overall this all cause[s]

problems for us as auditing perspective {sic] . . . . Now our Customer Services need [sic] [to]

manually correct everything . . : and it's a hugejob to do ." In response , Yasbek acknowledges that

Himark is "transacting shipments but the good [s] physically [are not being] shipped . "


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204. Witness 31 confirmed that there were substantial problems related to revenu e

recognition and collection of Accounts Receivables from Himark's activities in China . He/she said

that Remec had recognized revenue based on distributions Himark made to various customers i n

China, but there were apparently discrepancies between the revenue recognized and the Accounts

Receivable booked by Himark .

205 . Finally, internal documents reveal that the gross profit margins on Himark's products

were so low that any hope for achieving profitability during the Class Period was unrealistic . For

example, a July 20, 2004 forecast spreadsheet shows that Himark achieved a low gross profit margin

of 13 .3% for its Optimization product on sales of $1 .933 million in 1 Q 05 . In addition, an August

10, 2004 spreadsheet (sent to Hickman in an August 12, 2004 e-mail from a Business Planning VP)

shows that Himark's "Enhancement" product achieved a dismal 5 .3% gross profit margin on sales of

$1 .933 million in 1Q 05 alone . These profit margins are significantly lower than the 28% to 32%

gross profit margin that Witness 16 stated was necessary in order for Remec to achieve profitability

on its Wireless Division product lines .

206. During the Class Period, defendants knew or recklessly ignored that the Himark

acquisition had backfired, because, among other things, (1) Himark did not enable Remec to easily

enter the China market ; (2) the Himark acquisition failed to give Remec the expected sales volume;

and (3 ) Himark was never effectively integrated into Remec . The entire Himark acquisitio n

therefore should have been written off at the latest by early July 2004 ; instead, defendants waited

two full months before announcing they had found "indicators of impairment" which required

writing off $62 .4 million in goodwill, which included the entire Himark acquisition .

Paradigm Wireless Acquisitio n

207. On October 31, 2003, Remec signed a letter of intent to acquire Paradigm Wireless in

a stock for stock merger. The transaction was valued at approximately $22 .1 million . In a Business

Wire press release of the same date, Remec disclosed :

Ron Ragland, chairman and chief executive officer of REMEC said, "Wehave known and admired Ki Nam as an industry innovator and leader for ten years,as he contributed to the success of the power amplifier industry . Paradigm is a veryconstructive fit with REMEC, strengthening our product line and providing cycl e


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time and low cost design skills . Ki will manage Business Development for ourCommercial operations with a specific emphasis on Korea and Asia . "

208 . However, during the Class Period defendants knew or recklessly ignored that the

Paradigm acquisition had backfired, because, among other things, (1) its technology was not

particularly compelling ; (2) the Paradigm acquisition failed to give Remec the expected boost in

revenue; and (3) Paradigm was never effectively integrated into Remec .

209. Witness 5, a former major account executive with Remec, asserted that the Paradigm

acquisition was ill advised and typical of Remec's poor acquisition choices, pointing out that its

technology, and purported reason for Remec's acquisition of it, had not sold well at Paradigm .

Witness 5 considered Remec's overall acquisition strategy a farce because much of the technology

Remec acquired from other companies "never worked . "

210. Another former employee, a former sales executive during the Class Period and the

time of the acquisition of Paradigm (Witness 4), agreed that Remec's acquisition of Paradigm made

little sense to him because Paradigm's products were not particularly compelling .

GAAP Violations for Failing to Timely Recognize Goodwill Impairmen t

211 . The existing overcapacity in the wireless telecommunications market coupled wit h

numerous problems Remec encountered in connection with its multiple acquisitions created a

situation whereby Remec faced rising inventory levels, and negative prospects for its acquired

technology, and the actual gross profit margin percentage and sales growth rates collectivel y

required a material write - downs of the inventory and goodwill carrying values . Remec ' s failure to

properly account for these undisclosed charges violated GAAP and materially inflated th e

Company's assets, shareholder's equity, net income and earnings per share as reported in statements

defendants made to investors throughout the Class Period .

212. As set forth in Financial Accounting Standards Board (FASB) Statement of Concepts

(Concepts Statement) No. 1, one of the fundamental objectives of financial reporting is that i t

provide accurate and reliable information concerning an entity's financial performance during the

period being presented . Concepts Statement No . 1, ¶42, states :

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Financial reporting should provide information about an enterprise's financialperformance during a period . Investors and creditors often use information about thepast to help in assessing the prospects of an enterprise . Thus, although investmentand credit decisions reflect investors' and creditors' expectations about futureenterprise performance, those expectations are commonly based at least partly onevaluations of past enterprise performance .

213. Furthermore, SEC Rule 4-01(a) of SEC Regulation S-X states that financial

statements filed with the SEC which are not prepared in accordance with GAAP will be presumed to

be misleading or inaccurate . [17 C .F .R . §210.4-01(a)(1)] . Management is responsible for preparing

financial statements that conform to GAAP . As noted by the AICPA professional standards :

[F]inancial statements are management's responsibility . . . . [M]anagement isresponsible for adopting sound accounting policies and for establishing andmaintaining internal control that will, among other things, record, process,summarize, and report transactions (as well as events and conditions) consistent withmanagement's assertions embodied in the financial statements . The entity'stransactions and the related assets, liabilities and equity are within the directknowledge and control of management . . . . Thus, the fair presentation of financialstatements in conformity with Generally Accepted Accounting Principles is animplicit and integral part of management's responsibility .

214. As discussed below, defendants caused the Company to violate GAAP in severa l

I ways by :

(a) improperly failing to timely recognize required write-downs of

approximately $62 million for impairment in the value of the goodwill carrying value ; and

(b) improperly failing to timely write-down obsolete and/or slow movin g

inventory.

215 . Remec's failure to timely write-down the goodwill carrying value is a violation o f

GAAP which requires the repo rted carrying value of long-term assets to be assessed wheneve r

certain triggering events occur, including :

(a) a significant decrease in the market value of the asset ;

(b) a significant change in the extent or manner in which an asset is used or a

significant physical change in an asset ;

(c) unanticipated competition ;

(d) a significant adverse change in legal factors or in the business climate that

could affect the value of an asset or an adverse action or assessment by a regulator ; and/o r

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I (e) a current period operating or cash flow loss combined with a history of

2 operating or cash flow losses or a projection or forecast that demonstrates continuing losses

3 associated with an asset used for the purpose of producing revenue . SFAS No . 121 Accounting for

4 the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of ¶5 (March

5 1995); SFAS No. 142 ¶28 .

6 216. Pursuant to SFAS No . 142, Remec was required to recognize an impairment loss by

7 reducing the goodwill carrying value by recognizing a charge against earnings because the fair value

8 of the goodwill was less than the carrying value .

9 217. Moreover, GAAP provides that an estimated loss from a loss contingency "shall be

10 accrued by a charge to income" if. (1) information available prior to issuance of the financial

1 I statements indicated that it is probable that an asset had been impaired or a liability had been

12 incurred at the date of the financial statements ; and (2) the amount of the loss can be reasonably

13 estimated . SFAS No. 5 ¶8 .

14 218. Moreover, GAAP provides that an estimated loss from a loss contingency "shall be

15 accrued by a charge to income" if, (1) information available prior to issuance of the financial

16 statements indicated that it is probable that an asset had been impaired or a liability had been

17 incurred at the date of the financial statements ; and (2) the amount of the loss can be reasonably

18 estimated . SFAS No. 5 ¶8 .

19 219. As a result of the accounting improprieties detailed above, defendants caused

20 Remec's reported financial results to violate, among other things, the following provisions of GAAP

21 for which each defendant is necessarily responsible :

22 (a) The principle that financial reporting should provide information that is

23 useful to present and potential investors in making rational investment decisions and that

24 information should be comprehensible to those who have a reasonable understanding of business

25 and economic activities (FASB Statement of Concepts No. 1, ¶34) ;

26 (b) The principle of materiality, which provides that the omission or

27 misstatement of an item in a financial report is material if, in light of the surrounding

28 circumstances, the magnitude of the item is such that it is probable that the judgment of a

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1 reasonable person relying upon the report would have been changed or influenced by the inclusion

2 or correction of the item (FASB Statement of Concepts No . 2, ¶132) ;

3 (c) The principle that financial reporting should provide information about how

4 management of an enterprise has discharged its stewardship responsibility to owners (stockholders)

5 for the use of enterprise resources entrusted to it. To the extent that management offers securities

6 of the enterprise to the public, it voluntarily accepts wider responsibilities for accountability to

7 prospective investors and to the public in general . (FASB Statement of Concepts No . 1, ¶50) ;

8 (d) The principle that financial reporting should provide information about an

9 enterprise's financial performance during a period . Investors and creditors often use information

10 about the past to help in assessing the prospects of an enterprise . Thus, although investment and

11 credit decisions reflect investors' expectations about future enterprise performance, those

12 expectations are commonly based at least partly on evaluations of past enterprise performance .

13 (FASB Statement of Concepts No . 1, ¶42) ;

14 (e) The principle that financial reporting should be reliable in that it represents

15 what it purports to represent . The notion that information should be reliable as well as relevant is

16 central to accounting . (FASB Statement of Concepts No . 2, ¶¶58-59) ;

17 (f) The principle of completeness, which means that nothing is left out of the

18 information that may be necessary to ensure that it validly represents underlying events and

19 conditions . (FASB Statement of Concepts No. 2, ¶80) ;

20 (g) The principle that conservatism be used as a prudent reaction to uncertainty

21 to try to ensure that uncertainties and risks inherent in business situations are adequately

22 considered . The best way to avoid injury to investors is to try to ensure that what is reported

23 represents what it purports to represent . (FASB Statement of Concepts No . 2, ¶¶95, 97) ; and

24 (h) The principle that contingencies that might result in gains are not reflected in

25 accounts since to do so might be to recognize revenue prior to its realization and that care should be

26 used to avoid misleading investors regarding the likelihood of realization of gain contingencies .

27 (SFAS No. 5, Accounting for Contingencies) .

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FOURTH AMENDED COMPLAINT FOR VIOLATIONS -92- CASE NO . 04 CV 1948 JM (AJB)OF THE FEDERAL SECURITIES LAWSDOCSus4922v2

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l 220. Due to the non -disclosures and non-GAAP- compliant accounting , the documents

2 which defendants caused the Company to disseminate to the investing public during the Class Period

3 were materially (as described in SEC Staff Accounting Bulletin No . 99) false and misleading .

4 221 . Defendants knew and ignored , or were reckless in not knowing , the facts which

5 indicated that the press releases , public statements , and fi lings with the SEC which were

6 disseminated to the investing public during the Class Period , were materially false and misleading

7 for the reasons set fo rth above .

8 222 . SEC Regulation S-X requires that financial statements filed with the SEC conform to

9 GAAP . Financial statements filed with the SEC which are not prepared in conformity with GAAP

10 are presumed to be misleading or inaccurate . [ 17 C .F .R. §210.401 (a)(1)] . The Company' s financia l

statements which were disseminated to the investing public during the Class Period, which

12 represented that the Company ' s financial position and results of operations were in conformity with

13 GAAP, were false and misleading for the reasons alleged herein and because they constituted an

14 extreme departure from GAAP . Said financial statements violated the following GAAP concepts

15 among others noted above :

16 • The concept that financial repo rt ing should provide information that is useful topresent and potential investors and creditors and other users in making rational

17 investment, credit and similar decisions (FASB Statement of Financial AccountingConcepts No . 1) .

18• The concept that financial reporting should provide information about an enterprise's

19 financial performance during a period (FAS13 Statement of Financial AccountingConcepts No . 1) .

20• The concept that financial reporting should be reliable in that it represents what it

21 purpo rts to represent (FASB Statement of Financial Accounting Concepts No . 2) .

22 • The concept of completeness , which means that nothin g material is left out of theinformation that may be necessa ry to ensure that it validly represents underlying

23 events and conditions (FASB Statement of Financial Accounting Concepts No . 2) .

24 The concept that conservatism be used as a prudent reaction to unce rtainty to t ry toensure that uncertainties and risks inherent in business situations are adequately

25 considered (FASB Statement of Financial Accounting Concepts No . 2) .

26 • The concept that the quality of reliability and, in particular , of representationalfaithfulness leaves no room for accounting representations that subordinate substance

27 to form (FASB Statement Of Financial Accounting Concepts No . 2) .

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FOURTH AMENDED COMPLAINT FOR VIOLATIONS - 93 - CASE NO. 04 CV 1948 JM (AJB)OF THE FEDERAL SECURITIES LAW SDOCS .354922v2

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1 223. Each and every Form I0-Q which defendants caused to be filed with the SEC during

2 the Class Period contained a substantially identical representation which stated : "The accompanying

3 unaudited Condensed Consolidated Financial Statements have been prepared in accordance with

4 generally accepted-accounting principles for interim financial information and with the instructions

5 to Form 10 Q and Article 10 of Regulation S-X . . . . In the opinion of management, all adjustments

6 (consisting of normal recurring accruals) considered necessary for a fair presentation have been

7 included."

8 224. For the reasons set forth above, the financial statements which were contained within

9 each and every Form 10-Q which defendants caused to be filed with the SEC during the Class Period

10 did not fairly present (AICPA Professional Standards Volume I, U .S. Auditing Standards, Section

11 411) the Company's results of operations and financial position in conformity with generally

12 accepted accounting principles because :

13 (a) The accounting principles selected and applied did not have general

14 acceptance .

15 (b) The accounting principles were not appropriate in the circumstances .

16 (c) The financial statements, including the related notes, were not informative of

17 matters that affected their use, understanding, and interpretation .

18 (d) The financial statements did not reflect the underlying events and

19 transactions in a manner that presented the financial position and the result of operations within a

20 range of acceptable limits that were reasonable and practicable to attain in financial statements .

21 225. Defendants were required to cause the Company to disclose, in its periodic filings

22 with the SEC, financial statements, and news releases the existence of the material facts described

23 herein and to appropriately recognize and report income in conformity with GAAP . Defendants

24 failed to cause the Company to make such disclosures and to account for and to report income in

25 conformity with GAAP .

26 Defendants' Knowingly False and Unreliable Forecast s

27 226. Defendants' sales growth rate and gross profit margin assumptions were largely based

28 on sales forecasts that were not merely unrealistic but were knowingly false. Several witnesses

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explained that Sales Representatives were typically required by senior management to forecast sales

equal to two-to-three times their historical sales amount (Witness 28 and Witness 29) . In fact, it was

commonly understood among the Sales Representatives that there was almost no hope of achieving

these ridiculously high sales forecasts, which, according to one witness (Witness 6), Ragland

imposed on the various heads of Remec's business units in a number of meetings throughout the

Class Period . Defendants used these unrealistic sales forecasts in order to maintain the artificiall y

inflated sales growth rate and gross profit margin assumptions used in the goodwill impairment tests .

227 . Witness 5, a former major account executive during the Class Period, explained ho w

William Sweeney, Remec's Global Executive Vice President of Sales and Marketing, bullied sales

people into providing forecasts of sales that he could "give to the street" (i .e. forecasts showing

growth) although they knew those forecasts could not be met . Then, when they did not meet thos e

numbers, which was inevitable, he would require them to pull in orders from future quarters to make

up the shortfall . In other words, the growth that Remec and the Individual Defendants reported to

the "street," and to shareholders and potential investors, was artificially inflated and only met by

pulling-in orders and revenue from future quarters . "Meeting" their numbers in this way, meant that

1 they were not experiencing true growth, or current growth, as their press releases and publi c

statements represented . The reason Remec's sales representatives were not able to meet the quota

given to the Street, was because the product was not functional, or was obsolete (as set forth above) ;

facts that were not disclosed to the public .

228 . Witness 5, former Spectrian and Remec employee, who was a Major Account

Executive at Remec during the Class Period, asserted that Sweeney dictated what the forecasts

needed to be and exerted inordinate pressure on sales personnel like to submit falsified sale s

forecasts . As a result, the forecasts that were ultimately submitted by sales personnel were

unreliable and contained fictitious orders or unrealistic expectations for when a deal would actuall y

close . Also, Sweeney's business ethics were extremely objectionable to Witness 5 , who state d

Sweeney "manipulated everything ." Remec sales personnel were required to enter their prospective

deals into Remec's "forecasting tool" (which may have been part of Remec's BAAN ERP

("Enterprise Resource Planning" software system) every month by a certain date . The informatio n


I input by the sales personnel included the prospective customer's name, the products to be sold, as

2 well as an assessment by the salesperson of how likely or viable they believed the deal to be . Then,

3 Remec sales managers, including Sweeney, evaluated what the sales personnel had entered and

4 provided feedback as to what the sales managers believed to be "the real likelihood" of the deals

5 closing . It was in this process that Sweeney would "browbeat you" to come back with a higher

6 percentage likelihood of a deal closing . So, for instance, if the salesperson had assessed that a deal

7 had a 25% likelihood of closing by a certain date, under Sweeney's pressure, the salesperson would

8 reassess and give the deal a higher percentage likelihood of closing, even though there was no basis

9 for increasing the percentage. According to Witness 5, the sales management would express disgust

10 and use intimidation if the sales personnel did not submit the numbers that were wanted .

1 229. By way of example, Witness 5 said that in January 2004, prospective business with

12 AT&T was overstated. Witness 5 said that Remec had been in a "bloodbath" with PowerWave to

13 get business with AT&T. While Remec made "phenomenal projections" on the AT&T business for

14 AT&T, this witness asserted that the AT&T deal was represented by Remec "to be better than it

15 was" and that projections regarding the AT&T deal were "embellished ." He/she knows that these

16 AT&T projections were overstated because another sales executive Witness 5 knew well, Witness 4,

17 who was personally involved in the AT&T deal originally, told Witness 5 what the actual potential

18 of the deal was . However, according to Witness 5 (and Witness 4), Witness 4 refused to "play their

19 games" and artificially inflate projections based on the AT&T deal, and was terminated shortly

20 thereafter.

21 230. Witness 6, former Director of Budgeting and Forecasting, who worked at Remec

22 throughout the Class Period, confirmed that defendant Ragland definitely imposed the Company's

23 sales objectives for the coming year on the various business units and it was incumbent on the

24 different business units - primarily members of the sales staff- to provide a forecast of anticipated

25 sales opportunities that matched Ragland's number . Consequently, Witness 6 explained that

26 Ragland was not basing the Company's forecast for 2004 on what the Company's various business

27 units believed existed in terms of identified sales opportunities ; rather, the sales staff was having to

28 put forth an amount of potential sales opportunities that did not actually exist . In other words ,

FOURTH AMENDED COMPLAINT FOR VIOLA11ONS -96- CASE NO . 04 CV 1948 JM (ASB)OF THE FEDERAL SECURITIES LAW SDOCS1354922v2

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1 according to Witness 6, the individual business unit managers were "required to come up with

2 numbers that were equal" to Ragland's number (say, for example, $500 million in sales) . These

3 sales forecasts provided the figures that Ragland used in making projections to The Street .

4 231 . According to Witness 6, Ragland imposed the sales objectives for the coming year on

5 the various heads of Remec's business units in a number of meetings that the witness personally

6 attended . Ragland would say to the employees, "Here are your numbers . . . find a way to get there ."

7 However, the goals set by Ragland were completely unrealistic and unattainable, according to

8 Witness 6. The witness elaborated that Ragland set the sales objectives and that EVP of Sales, Bill

9 Sweeney, exerted pressure on the sales staff to come back with sales forecasts that matched

10 Ragland's objectives . Thus, Sweeney himself was under considerable pressure and was carrying out

11 orders and directions received directly from Ragland . The witness asserted that the forecasts

12 submitted by the Company's various business units ultimately matched Ragland's figure for

13 expected sales, but did not always have identified sales opportunities from the business units to

14 support the forecasts . According to Witness 6, when the sales personnel were unable to identify

15 enough specific opportunities to meet their respective sales goals, they would enter deals for

16 potential sales of various product types at various dollar amounts that would be designated as "To Be

17 Determined" in the forecast . These "To Be Determined" opportunities supposedly meant that the

18 sales staff expected to find customers for these deals at a certain point within the coming year, but,

19 as Witness 6 pointed out, at the time they were included in the 2004 forecast at the end of 2003,

20 there was little or no basis to believe that these To Be Determined deals would ever actually be

21 realized . Further, even though these To Be Determined deals did not identify an actual customer,

22 they nonetheless included an anticipated profit margin that was going to be made on the deals .

23 Given that the Company's sales outlook for 2004 was unrealistic, Witness 6 agreed that any reliance

24 on the forecasts in determining or testing the Company's goodwill was misplaced .

25 232. Witness 8, former Director of Global Logistics for Remec's Wireless division

26 throughout the Class Period, confirmed that one of the reasons the Company's sales growth

27 expectations were not realized was that the sales forecasts were overly "optimistic" (i.e., inflated)

28 and did not result in actual sales . The witness confirmed that the forecasts were set by Ragland who

FOURTH AMENDED COMPLAINT FOR VIOLATIONS -97- CASE NO . 04 CV 1948 JM (A!B)OF THE FEDERAL SECURITIES LAW SDOCS\354922v2

s •I imposed them downward onto the sales organization which, while committed to the overall revenue

2 goals, did not have sufficient prospective deals to actually support the revenue targets .

3 233. Witness 9, was a highly placed accounting executive who reported to the Board's

4 Audit Committee and CFO throughout the Class Period, acknowledged that Remec's projections

5 were overstated or inflated due to sales personnel projecting that they foresaw opportunities that did

6 not actually exist, but which they made because of pressure from the Company's senior executives,

7 including Ragland .

8 234, Witness 28, a former Remec Finance Consultant and Sales Analyst during the Class

9 Period, explained that the sales forecasts were entered into BAAN at the beginning of each year, and

10 confirmed that these forecasts included "opportunities" that had yet to be determined . He/she said

11 that the Sales Representatives were required to enter a percentage of likelihood of the opportunities

12 being converted into orders into the BAAN system . Witness 28 clarified that this meant that if a

13 Sales Representative entered an opportunity into BAAN, the Sales Representative was supposed to

14 say that he/she thought it might have a 50 percent chance of being converted (or whatever

15 percentage the Representative felt was applicable to the given opportunity) . The Sales

16 Representatives were supposed to update the likelihood of the opportunities materializing into true

17 sales on a monthly basis . (Witness 35, a former Design Planner during the Class Period, confirmed

18 that the Sales Representatives entered their sales forecasts into BAAN and recorded "percentages" of

19 the likelihood that the forecasts would materialize .) However, several of the Sales Representatives

20 failed to update their prospects and re-evaluate the opportunities that they had entered at the

21 beginning of the year. As such, Witness 28 said that the Monthly Sales Reports that he/she ran from

22 BAAN and distributed to Sweeney contained the actual sales that had materialized, but many of the

23 opportunities were carried over from period to period without adjustments to the likelihood of the

24 opportunities materializing. Witness 28 estimated that Sales Representatives were off by as much as

25 30 percent. Thus, the witness-agreed with comments made to him/her by Business Unit Manager

26 Dave Piazza that the sales forecasts were inaccurate . The witness explained that there was a

27 "disconnect" between Sales and the Business Units, to the extent that the Business Unit Managers

28 did not rely on the forecasts produced by Sales . The forecasts generated from BAAN based on th e

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opportunities that the Sales Representatives entered into the system were given to Sweeney, but

Witness 28 did not think that they were reliable or that many other individuals in the Company relie d

on these forecasts . Witness 28 stated that as a result, the Business Unit Managers had apparently

been producing their own forecasts that were distinct from the forecasts produced by sales .

235 . Witness 28 further stated that the Sales Representatives were typically required t o

have two-and-one-half times their historical sales in opportunities . This ratio was confirmed by

Witness 29, a former Remec Sales Representative during the Class Period . Witness 29 also

explained that his/her direct supervising Sales Manager (who reported to Bill Sweeney) required the

sales personnel to actually identify potential sales opportunities two or three times above whateve r

the actual sales goal happened to be for the sales personnel . For example, Witness 29's goal of

$6,000,000 in calendar 2004 was set by Sweeney, but Witness 29's Sales Manager required him/her

to forecast approximately $15,000,000 for that same time period . According to the witness, th e

reason for the sales personnel having to forecast potential sales opportunities two to three times

above their actual sales goals was that it was presumed that in reality many of those goals would not

materialize . (The witness actually sold approximately $4,000,000 in calendar 2004 .) The witnes s

characterized this forecasting BAAN system as "weird" and the goals as very "subjective" and "up

in the air ." The logical explanation is that defendants used these unrealistic sales forecasts in orde r

to support the over inflated sales growth rate and gross profit margin assumptions used in the

goodwill impairment tests .

Defendants' Undisclosed Practice of "Pulling In Orders"

236. Witness 16 confirmed that Remec "pulled in orders" at quarter-end in order to meet

revenue projections during the Class Period . Witness 16 explained that with customers such as

Siemens, Motorola, and Lucent, Remec received "blanket purchase orders" for three and four-mont h

periods . These customers occasionally cancelled orders, and, therefore, according to Witness 16,

Remec faced the possibility of not meeting projected revenues based on initial sales forecasts . In

such situations, Remec nevertheless shipped the product to the customers based on forecasts . For

example, Witness 16 explained, if Remec realized that Lucent had cancelled, for example,

$1,000,000 worth of its orders in a particular quarter, Remec had to find that $1,000,000 somewher e

FOURTH AMENDED COMPLAINT FOR VIOLATIONS _99- CASE NO. 04 CV 1948 JM (AJB)OF THE FEDERAL SECURITIES LAW SDOCS\354922v2

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1 else . Witness 16 said that "quite often" at the end of each quarter during the Class Period, Remec

2 would ship orders to customers such as Siemens and Motorola from future periods "to help Remec

3 meet its numbers ." According to internal documents, these shipments would have included products

4 such as FDUAMCO's, QBS amplifiers, and MCPA's ("Multi-Carrier Power Amplifiers") for

5 Siemens, and Piller for Motorola . Witness 17, a former Remec Senior Buyer Planner and

6 Commodity Specialist throughout the Class Period, confirmed that Remec often shipped product to

7 customers in excess of what had been ordered for a particular period by "pulling in" orders from

8 future periods. Witness 17 said that pulling in these orders from future periods was necessary to

9 meet or to "exceed" numbers, by which he/she meant projections that Remec had forecasted to its

10 shareholders as sales . The witness recalled that there were "dramatic pull-ins" at the end of each

I 1 quarter during the Class Period that allowed Remec to exceed its numbers .

12 237. As an example of this practice, Witness 16 described Remec's "consignment

13 contract" with Siemens . He/she noted that Remec built and shipped finished goods to a hub that was

14 managed by a third party . Remec maintained ownership of the products until Siemens eventually

15 "pulled" the products for its own use in a future quarter . According to Remec's revenue recognition

16 policy, it is only when the consignment customer pulls the order from the hub that Remec can record

17 the revenue . This revenue recognition policy, as well as consignment customers Siemens and Nokia,

18 are discussed in a string of e-mails dated July 1 - 13, 2004 between Yasbek, and other Remec

19 employees . The same e-mail series also refers to the fact that in direct conflict with this policy,

20 Remec's China facilities (i.e ., Beijing/Himark and Shanghai) were recognizing revenue as soon as it

21 shipped an order to the hub .

22 238. Although Remec's shipment of goods to these hubs created a very "elongated"

23 process for Remec to actually get paid, it enabled Remec to ship products to Siemens and book

24 revenue in the current quarter when Remec was otherwise unable to meet its current quarterly

25 revenue projections . Witness 16 said that the elongated process for payment was typically a

26 timeframe of six months from the date Remec shipped product to Siemens to the time that Remec

27 received payment for that shipment .

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FOURTH AMENDED COMPLAINT FOR VIOLATIONS - 100 - CASE NO . 04 CV 1948 3M (AIB)OF THE FEDERAL SECURITIES LAWSDOCS%354922v2

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1 239, Witness 20, a former Remec Commodity Manager from well before the Class Period

2 until August 2004, also confirmed that Remec was "pushing orders out the door," meaning Remec

3 was pulling in orders from future periods . Witness 34 also confirmed that Remec pulled in orders

4 from future periods .

5 Defendants' Undisclosed Excess and Obsolete Inventory Problem s

6 240. According to information provided by new witnesses as well as hundreds of internal

7 documents, defendants Ragland and Hickman were aware that Remec was carrying a significant

8 amount of excess and obsolete inventory during the Class Period that, at the very least, required an

9 interim goodwill impairment test prior to 2Q 05 .

10 241 . Based on information provided by several former employees, including a former

Director of Accounting during the Class Period (Witness 2), defendants hoped to become something

12 of a one-stop-shop solution for wireless network needs . According to Witness 5, Remec was trying

13 to emulate the "vertical integration" strategy of its biggest competitor, PowerWave, which through

14 an "acquisition binge," transformed itself from being a "third-rate amplifier business" to a major

15 player in the wireless network equipment industry . To this end, defendants employed a growth-by-

16 acquisition strategy, which was ramped up after defendant Ragland took the helm . A former high-

17 level employee who worked at Remec during the Class Period (Witness 3), said management was

18 absolutely intent on becoming a $1 billion company as quickly as possible and adopted the strategy

19 of acquiring companies in order to achieve this goal . Witness 3 said that Remec's strategy in this

20 regard was "to buy sales" irrespective of the costs associated with attaining these revenues .

21 242. However, according to numerous former employees, the execution of this strategy by

22 defendants sacrificed due diligence in favor of closing deals that could be held out to the investing

23 public ostensibly as evidence of Remec's success . For example, Witness I a former Manager of

24 Financial Applications who worked at Remec during most of the Class Period, observed that

25 Remec's senior executives often acquired a company and its technology with the hope of later

26 finding a market for whatever technology or product had been acquired, rather than identifying a

27 need in the market and then creating a product (or acquiring a company with the product/technology)

28 to fill that need . In fact, in connection with several acquisitions, including Spectrian in 2002 an d


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Paradigm in 2003 during the Class Period, former employees (including Witness I and Witness 5),

pointed out there was no logic behind acquiring these companies that had substantial internal

problems of their own that would impact profitability, including inventory problems like those

already plaguing Remec . Witness l stated that Remec had "chronic inventory problems" that

resulted in Remec being unable "to tie up" (i.e . match up) reported and actual inventory levels . For

instance, Witness I personally observed the inventory problem related to Remec's acquisition of

Paradigm during the Class Period (in November 2003) . The former Manager explained how Remec

"bought Paradigm, kept the management, and then laid off everybody (i.e. Paradigm personnel) ." It

appeared the senior executives believed that Paradigm's technology and existing inventory assets

were very valuable. But Witness I observed that in the process of laying off so many personnel, a

great deal of the Paradigm assets "disappeared" and could not subsequently be found . The proble m

with the missing Paradigm inventory was that there was literally no one from Paradigm to ask about

where the inventory had "gone," or what inventory should or should not remain on the books .

243 . These problems went beyond fundamental mismanagement by Remec's top officers .

They resulted in tangible, material problems which should have been, but were not, disclosed t o

investors , including the impairment to goodwill . Defendants could not sell the products they (or

their acquired companies ) were manufacturing . Typically, the products could not be sold because no

meaningful marketing analysis had been performed prior to development in order to determine

whether a viable market even existed for these products . When the product became obsolete o r

otherwise could not be sold, it should have been written off . Instead, it was allocated to so-calle d

"Quarantine accounts ." Witness 1, a former Manager of Financial Applications, confirmed that

rather than writing off the obsolete inventory, as defendants should have, they assigned it to

"Quarantine accounts" in order to internally track it as unsellable inventory, but it was still reporte d

at its full value and more than it was worth . The witness knew about the practice because Witness I

was responsible for sett ing up the quarantine accounts in Remec 's BAAN ERP software system and

helping warehouse personnel to assign the physical inventory to the quarantine accounts in the

system. Thus, this unsellable invento ry was repo rted in Remec's public financial statements at these

full values which greatly overstated the value of Remec's inventory . According to this witness, the

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I cumulative amount of the overstated inventory assets during the Class Period was "millions o f

dollars . . . easily over $ ] 0 million ." Witness I noted that because the inventory was dispersed across

the entire company, it was difficult to get a precise figure . Overstated inventory of $10 million was

material to Remec because this would have caused the inventory reported on the January 31, 200 4

balance sheet to be overstated by $10 million, or approximately 14%, and the net loss reported on the

January 31, 2004 income statement to be understated by an additional $10 million loss, or

approximately 20% .

244. As part of Witness 8's efforts to consolidate and improve Remec's existing logistics

operations, he/she spent "a lot of time trying to get basic controls in place ." For example, one

facility the witness worked at lacked adequate controls to ensure that incoming inventory items were

received properly and that outgoing shipments were also accurately tracked and monitored .

According to the witness, the personnel at the site were "fairly undisciplined" and "lacked the skill

set" necessary to maintain accurate inventory control . As a result of this insufficient level of skill

and discipline, Witness 8 said that Remec simply lacked the ability to properly account for its

inventory . He/she said that the lack of controls meant that the inventory numbers being reported

simply lacked a reliable basis to support them .

245 . In addition to lacking a reliable basis for the inventory that was reported, Witness 8,

who was responsible for consolidating the Company's global logistics operations and determinin g

exactly how much inventory was on hand at the Company and then determining the proper value to

assign to the inventory, stated Remec had a significant amount of offsite inventory that was excess

and obsolete that was being reported by the Company in its public financial statements at its full

value. The witness confirmed that a significant amount of the offsite inventory was designated

within Remec's BAAN ERP system as part of "Quarantine accounts ." He/she explained that the

Quarantine accounts were ostensibly inventory accounts in which inventory intended for specific

customers had been allocated so that presumably it would not be utilized for purposes other than

those customers . However, Witness 8 said that the market for those customers disappeared and,

therefore, there was no real application or use for the inventory that had been allocated to the

Quarantine accounts, but was still being counted at full value even when it should have been writte n

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I off as excess and obsolete . According to Witness 8, the types of inventory that should have been

2 written off as excess and obsolete included all types of parts that could potentially go into Remec

3 products .

4 246. According to Witness 8, a great deal of the inventory needed to be considered as

5 excess and obsolete and, therefore, written off because no discernable use for the inventory could be

6 determined . The witness came to his initial conclusions regarding the total quantities and valuations

7 of inventory by around October 2003, and reported his findings in an Excel spreadsheet that

8 provided a detailed breakdown of the Company's inventory . Witness 8 submitted this spreadsheet in

9 an email that was accompanied by a summary of the findings, which he/she sent to Patrick Gray

10 (former Controller), George Neal (former VP of Supply Chain), David Morash (former CFO), and

11 Clark Hickock (former EVP of Global Operations), and possibly other individuals . The witness

12 submitted a second report to the same individuals in January 2004 which included an Excel

13 spreadsheet and contained detailed analysis regarding why the various inventory needed to be

14 considered excess and obsolete . Witness 8 explained the amounts of inventory being held at full

15 value that should have been written off were "well over $1 million" and estimated that 5-10% of

16 Remec's worldwide inventory reported in the Company's public financial statements consisted of

17 this offsite (excess and obsolete) inventory . This amount is material to Remec as it meant that the

18 balance sheet was materially overstated by between approximately $4 .15 million to $8 .3 million, i.e .,

19 5-10% of the inventory value as of October 2003, and because the income statement was likewise

20 overstated by these same amounts . The witness never received approval to actually take the write-

21 off that should have been taken based on the findings, and confirmed that it was still held in the

22 BAAN system at full value when he/she left the Company after the Class Period in 2005 .

23 247. Remec's vast quantities of excess and obsolete inventory held throughout the Class

24 Period is described in detail in numerous internal documents . For example, a document entitled

25 "Reserve Q2 FY'05 Filters Global" identifies the exact dollar amount for each type of filter carried

26 during 2Q 05 which Remec considered to be "E&O ." According to the "BAAN E&O Report,"

27 Remec carried $1,484,565 of the "Cowboy" filter manufactured in Finland . An updated version of

28 the same report shows that the excess and obsolete inventory carried through 2Q 05 in Remec' s

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Finland facility alone totaled $6 .864 million . (Indeed , according to an August 4, 2004 e-mail, Jeff

I Alvord referred to the filter reserve amounts as "hoked up," i.e ., false . )

248 . These figures pale in comparison to the staggering amount of total excess and

obsolete inventory of$29. 95 million that Remec carried into the last quarter of the Class Period (2Q

05), according to a 333- page document entitled "E&O [D]etail by BU 07-08-04,"which identifies the

specific excess and obsolete product, number of units, and price per unit for the entire Wireles s

Division . This figure represents almost 50% of the $62 .4 million in goodwill which defendants

1wrote off at the end of the Class Period . According to hundreds of internal documents obtained b y

plaintiffs' counsel covering the period early June to late August 2004 , including spreadsheets

entitled "Reserves Q2 FY' 05 Global Filters " (August 16 , 2004) and "Remec Amps-Global Reserves

Q2 FY' 05" . Remec carried this mountain of excess and obsolete inventory throughout the entire

Class Period ( i .e ., from at least the start of Class Period ), yet defendants waited until approximately

July 30 , 2004 before conducting an interim goodwill impairment test, and until September 9, 2004 t o

announce the results of that test .

Excess and Obsolete Inventory Acquired from Spectria n

249 . Witness 5, a former Major Account Executive at Remec during the Class Period,

confirmed that Spectrian, acquired by Remec in 2002, had accumulated large quantities of excess

and obsolete inventory. Witness 5 said this excess and obsolete inventory was attributable to a

number of reasons . For instance, Spectrian had a potential customer, MetroComm, which had bee n

developing a product called "Ricochet ." Even though the Spectrian salesperson on the MetroCom m

account warned Spectrian management not to purchase the components necessary to produce

products for the deal , because he/she was not confident the deal would actually materialize,

Spectrian nonetheless bought $3 million wo rth of components and the deal failed to materialize .

These components contributed to Spectrian 's excess and obsolete inventory, which Remec inherited

in the acquisition . The total amount of invento ry recorded by Remec from the Spectrian acquisition

was approximately $ 10.5 million . These obsolete components comprised approximately 100% of

Spectrian 's inventory acquired by Remec in December 2002. To place this into context, this

amounts to overstating 12.6% of Remec ' s invento ry value as of October 2001 3Q 04 Form 10-Q .

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1 In addition, the $3 million worth of obsolete Ricochet components was also material, amounting to

2 overstating 3.6% of Remec's inventory value as of October 2003 . According to Witness 16, all of

3 the Spectrian inventory, which would have included the Ricochet components, were carried

4 throughout the Class Period .

5 250. Witness 11, is a former Remec Director of Operations Engineering throughout the

6 Class Period, who was responsible for, among other things, getting products from contract

7 manufacturers "up and running" as new products were introduced, and transitioning operations from

8 certain Spectrian operations to certain Remec factories, had information relating to Remec's problem

9 with excess and obsolete inventory inherited from Spectrian . The witness did not view the Spectrian

10 acquisition favorably and observed that at the time Remec acquired Spectrian, Spectrian had "a lot of

11 garbage" in terms of inventory and explained how this inventory had accumulated . Spectrian built a

12 lot of a two multi-channel amplifier product line known as "Zeus," which was "very unreliable" and

13 was not selling well . A weekly Accounts Receivable report, dated July 9, 2004 . and addressed to

14 Hickman, shows that Zeus was selling during as late as the last quarter of the Class Period . The

15 Zeus product worked for a short time, but the quality of performance rapidly degraded and Spectrian

16 could not get the systems to remain at customer locations for very long . As a result, Spectrian ended

17 up getting stuck with a lot of inventory related to the failed Zeus product line .

18 251 . Both Witness 13 and Witness 16 confirmed that a substantial amount of Spectrian's

19 excess and obsolete inventory came from Cree Devices, which was a component supplier for the

20 Zeus product . Witness 11 further commented that a good amount of the Cree components had been

21 of extremely poor quality and contributed significantly to the problems Spectrian had getting the

22 Zeus products to work . As a result, the witness characterized Spectrian as "dead in the water" at the

23 time Remec acquired Spectrian .

24 252. Internal Spectrian documents confirm the fact that the Zeus product line was virtually

25 worthless because of its defects . For example, October 3, 2002 e-mails to/from Spectrian CFO

26 Michael Angel,. copied to Waechter, among others, in referring to "the condition of the Zeus

27 devices" which are "currently being reworked" at Cree, state, "the vast majority [of the Zeus

28 products sold to ACT] has been returned by ACT ." According to an October 8, 2002 report entitled ,

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1 "URF Risk Mitigation," "Zeus uses all URF devices ." The report states that these devices have a

2 "[h]igh risk with vendor[s]" as a result of a "device quality problem," and that Spectrian personnel

3 were expressing "skepticism that URF can meet performance targets," which the personnel blamed

4 in part on "late technology ." ltxdeed, an internal report entitled "Zeus LDMOS Transistor Problem

5 Chronology, 9/01 - 3/02" documents the history of Zeus' "internal defects" since Spectrian first

6 purchased it from Cree . An October 19, 2001 letter from a Supplier Quality Spectrian employee to

7 the UltraRF manufacturer's Quality Manager stating that "UltraRF LDMOS . . . did not comply with

8 purchase order requirements . . . . [Y]ou will identify the cause(s) of the defect(s) and implement

9 appropriate corrective action," confirms that the Zeus products were defective from the outset . In

10 fact, according to internal Spectrian documents, the Zeus product was such a total failure that Cree

l 1 had to reach a settlement agreement with Spectrian over Zeus' "failure mechanism" on November 7,

12 2002, less than two months before Remec acquired Spectrian . These documents reveal that

13 Spectrian ultimately reached a new purchase agreement with Cree on November 15, 2002 regarding

14 the defective Zeus and "Pegasus" components wherein Cree agreed to fix all the defects . Finally,

15 internal Spectrian spreadsheets show that as of October 28, 2002, Spectrian carried approximately

16 $10.3 million in Zeus inventory (but only reserved approximately $3 .5 million) . Thus, based on

17 even minimal due diligence of Spectrian, Ragland was or would have been aware that Remec was

18 acquiring millions of dollars' worth of useless, defective Zeus products alone .

19 253 . Witness I I estimated the amount of excess and obsolete inventory that Spectrian

20 brought to Remec when Remec acquired Spectrian was at least $10 million and consisted of both

21 finished, but problematic Zeus systems, as well as components from Cree . An internal Spectrian

22 document presented by the Board of Directors to Waechter, dated October 17, 2002, shows that

23 approximately two months before Remec acquired it, Spectrian carried $14 .3 million in Cree

24 inventory (necessarily including Zeus components) with approximately 77% of that amount ($14 .9

25 million) in reserves . Thus, even the Spectrian personnel acknowledged that the majority of its Cree

26 inventory would eventually have to be written off as excess and obsolete .

27 254 . Witness 30 estimated that Remec acquired $5 million to $10 million in raw materials

28 from Spectrian, as well as at least $5 million in finished goods . In addition, the specific Zeus and

FOURTH AMENDED COMPLAINT FOR VIOLATIONS - 107- CASE NO . 04 CV 194$ JM (AMB)OF THE FEDERAL SECURITIES LAWSDOCS\354922v2

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I Ricochet allegations of 12% and 3% corroborated by Witnesses 5 and I I, are in line with the overall

2 5% - 10% assessment of Witness 8 . Finally, internal documents confirm that Remec carried Cree

3 components through the end of the Class Period . For example, an internal Remec report, "Wireless

4 Systems Group Financial Reporting 30-day follow-up," dated June 22, 2004, refers to "impaired

5 Cree devices" carried during 2Q 05 .

6 255. The witnesses further corroborate plaintiffs' allegations that much of Remec's excess

7 and obsolete inventory was due to its purchase of Spectrian in December 2002, which Witness 16

8 described as Remec's "most costly" acquisition . Witness 16 said as a result of the telecom crash in

9 2000, Spectrian "got stuck" with an abundance of excess inventory that had been previously

10 purchased to meet customers' needs . Witness 16 said that this inventory, which he/she estimated at

I 1 being valued at around $5,500,000 to $6,000,000 was inventory that Remec was unable to sell,

12 primarily because technology "had changed ." This amounted to almost 10% of the $62 .4 million

13 goodwill impairment charge taken at the end of the Class Period . Witness 16 said that Remec was

14 required to keep the inventory on hand because of the warranty agreements that Spectrian had made

15 with Nortel that Remec had to honor. This inventory was carried on Remec's books during the

16 Class Period .

17 256. Witnesses 16, 18, 20, and 30 confirmed that Ragland, former EVP of Global

18 Operations Clark Hickock, and . Witness 16 were directly involved in the due diligence on Spectrian .

19 As a result, Ragland was aware of the vast quantities of excess and obsolete inventory Spectrian

20 carried at the time of the acquisition in December 2002 based on conversations with Spectrian

21 personnel and documents provided by Spectrian to Ragland . For example, an internal Spectrian

22 spreadsheet provided to plaintiffs' counsel ("Spectrian - Inventories by Program for the last two

23 quarters") shows that as of June 30, 2002, Spectrian carried approximately $44 million worth of

24 inventory, of which approximately $17.5 million was reserved. Thus, Spectrian was aware that

25 approximately 40% of its inventory would likely have to be written off. (An August 15, 2002 e-mail

26 shows that this spreadsheet was provided to Morash and Hinkle .) An updated spreadsheet, dated

27 August 13, 2002, shows that Spectrian actually carried $43.2 million in inventory with an "E&O

28 Reserve" of $19.5 million (or approximately 45%) of total inventory . Spectrian's excess and


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I obsolete inventory - as well as its reserves - continued to grow in the months preceding th e

company's purchase by Remec . Specifically, an internal report ("Impact of Upside on E&0")

presented by Spectrian's Board of Directors to Waechter on October 17, 2002 shows that

approximately two months before the acquisition, Spectrian carried a staggering $69.4 million in

inventory, of which 60.1% was reserved ($41.7 million) . The excess and obsolete raw material s

I alone totaled $30 .6 million, according to the report . Thus, Spectrian personnel knew that most of it s

inventory would ultimately have to be written off as excess and obsolete . More importantly,

Ragland would have reviewed all of these reports as part of his due diligence, and Waechter (a s

former Spectrian CEO) also held this information throughout his tenure at Remec .

257. Spectrian's excess and obsolete inventory became so problematic that the company

instituted (apparently unsuccessful) programs to rid itself of the unwanted products and raw

materials . A September 25, 2002 report outlines a number of "Actions to Reduce Inventory,"

including "plac[ing] [Benchmark and Motorola] on hold for all material buys ." Similarly, an

November 15, 2002 Remec report entitled "Raw Material Inventory Reduction Plan," presented by

the Board of Directors to Waechter, refers to "dispos[ing] of the excess material that has salvag e

value ."

258 . Witness 30 explained that Spectrian's voluminous excess and obsolete inventory ha d

accumulated for several reasons, including as a result of a deal between Spectrian and Cree . As part

of the agreement, Spectrian was required to buy certain devices from Cree for a number of years ,

even though Spectrian did not have an actual need for these devices . In fact, a September 4, 2002

letter from Spectrian CFO Angel to the SEC responding in part to the SEC's "continu[ing] . . .

concern[s] as to the adequacy of [Spectrian's] reserve for excess inventory and adverse purchase

commitments," reveals that Spectrian made a huge "$58 million purchase commitment [to Creel

solely because of the [$70 million] sale of [Spectrian's] UltraRF [manufacturing facility] to Cree" in

December 2000 . Angel admits that Spectrian did so "primarily because Cree was not willing and

interested in buying UltraRF without such a commitment ." Witness 30 estimated that Spectrian wa s

buying at least $1 million per quarter of inventory from Cree that Spectrian did not need . Internal

Spectrian documents confirm that these "UltraRF" (radio frequency) devices were costing Spectria n

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millions of dollars . For example , in an April 7, 2002 e-mail, Angel refers to a $1 .7 million per

month commitment with Cree . Later, in an August 15, 2002 e-mail, Angel states, "[W]e are

forecasting to buy about $2M from Cree in Q2 (which includes some current product that we

[actually] needed) ." In an October 17, 2002 conference call (approximately two months prior to

Remec's purchase of Spectrian), Cree CEO Charles Swoboda (who replaced Waechter) refers to a

current purchase commitment with Cree worth $5 million per quarter . However, according to

internal Spectrian documents, this contract with Cree was so burdensome that Spectrian was forced

to renegotiate the amounts owed to Cree pursuant to the contract in order to make the merger with

Remec possible . According to Witness 30, when Remec began negotiations with Spectrian in the

second half of fiscal year 2002, Spectrian was still obligated to buy $18 million worth of inventory

from Cree . According to the witness, Angel negotiated a $10 million to $1 I million buy-out on the

contract, whereby Spectrian substantially reduced the amount paid to Cree, but still assumed a large

quantity of unneeded materials . An internal Spectrian document confirms that Spectrian's remaining

commitment to Cree after renegotiating the purchase agreement amounted to $11 .2 million as of

September 30, 2002, with a savings of $9 million from the original contract . The witness explaine d

that Spectrian was obligated to buy many more devices than Spectrian ever needed from Cree. This

is corroborated by numerous internal Spectrian documents , including the April 7 , 2002 e -mail from

Angel , and more impo rtantly , from an executed copy of the amendment to Spectrian's purchase

contract with Cree, dated March 31, 2002 . In fact , in a June 28 , 2002 e -mail, Morash gives his

approval for Spectrian to "purchase $5 million [in Creel devices in Q2 (July 1, 2002 throug h

September 30, 2002 ) in order to satisfy [in part] the amended terms of the UltraRF contract ."

259. Not only did Remec inherit Spectrian's excess and obsolete invento ry from Cree, bu t

Witness 30 explained that Remec was obligated to purchase materials from Motorola "to keep that

ISpectrian/Remec ] deal with Motorola viable ." In the April 7 , 2002 e-mail (addressed to a Business

Unit Manager and other Remec employees , and copied to Waechter ), Angel refers to

Remec/Spectrian ' s "[m]inimum commitment for CY ' 02 reduced from $28M to $18 . 4M . . . just

when we need it most ( less about $3M to $4M that we may need to buy from [Motorola]") . An

internal Spectrian document dated October 17, 2002 shows that approximately two months befor e


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I Remec acquired it, Spectrian carried $1 .7 million in Motorola inventory . In addition,

2 Spectrian/Remec had contract commitments with ACT which totaled more than $15 million,

3 according to internal Spectrian documents, including an August 16, 2002 e-mail from Angel to

4 Morash and Hinkle . Another internal Spectrian document, dated June 30, 2002, shows that

5 Spectrian had a total of $15 .7 million in ACT inventory on hand and on order.

6 260. Finally, according to Witness 30, Spectrian also accumulated excess and obsolete

7 inventory as a result of the failure of Nortel to "live up to its contract" with Spectrian to purchase a

8 large amount of finished goods that Spectrian had built for Nortel, and Spectrian having to "buy back

9 Benchmark inventory" when Spectrian/Remec decided to "trash that relationship ." A November 6,

10 2002 e-mail from Witness 30 to Waechter confirms that Spectrian purchased at least $1 million in

l 1 Spectrian inventory for that quarter alone . More importantly, an internal report ("Impact of Upside

12 on E&O") presented by Spectrian's Board of Directors to Waechter on October 17, 2002 shows that

13 approximately two months before the acquisition, Spectrian carried $12.7 million in Benchmark

14 inventory, with approximately 42% reserved as excess and obsolete ($5 .3 million) . The witness

15 added that goods Spectrian had built for Nortel had little residual market value because the products

16 were custom built for Nortel .

17 261 . Although Remec ultimately only recorded approximately $10 .5 million in Spectrian

18 inventory at the time of the purchase, internal Spectrian documents confirm that the percentage of

19 inventory which Spectrian had reserved because of devaluation only increased since August 13,

20 2002 (when Spectrian's "E&O Reserve" was $19.5 million or approximately 45% of total inventory)

21 to October 17, 2002 (when reserves were $41.7million or approximately 60.1% of total inventory) .

22 The $41 .7 million in reserves would therefore only have increased to December 20, 2002, the date

23 of the acquisition . In other words, whatever inventory Spectrian was unable to sell by the end of

24 December 2002, i .e., at bare minimum the entire $10 .5 million in inventory that Remec actually

25 recorded, would almost certainly have been excess and obsolete . Thus, Ragland already knew that

26 he would likely not be able to sell any of this inventory . Indeed, according to numerous witnesses

27 and information contained in dozens of internal Remec and Spectrian documents, Remec never had

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FOURTH AMENDED COMPLAINT FOR VIOLATIONS _ 1 1 I _ CASE NO .04 CV 1948 JM (AJB)OF THE FEDERAL SECURITIES LAWSDOCS1354922v2

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I any realistic hope of selling off this inventory, much less profiting from it . Indeed, the entire

2 acquisition ultimately had to be written off at the end of the Class Period .

3 262. Based on the witnesses' accounts and information in both Remec and Spectrian

4 documents, Remec clearly acquired far more than the $10 .5 million in (excess and obsolete)

5 inventory it recorded . This discrepancy was explained by Witness 30, who recalled that one of the

6 last things that Angel and Morash did before the deal between Remec and Spectrian closed was to

7 "throw everything that they could write-off into goodwill ." The witness said that if Angel and

8 Morash saw that the inventory did not "have value" or even that it had little value, they "took the

9 opportunity to write it off because of the risk ." Witness 30 said he/she knew about this from

10 conversations with both Morash and Angel in which they indicated their intention of "dropping

I I everything they could [i.e ., written-off inventory] into goodwill ." The logic of doing so was that if

12 and when that written-off inventory could be sold, it would result in "pure margin ." This strategy of

13 writing off inventory and assigning the values to goodwill was expressly discussed during

14 conference calls with Hickman, the witness, Angel, Morash, and Clark Hickock . Based on the

15 witness' participation in these calls, "they [the participants] knew what they wanted to do with the

16 goodwill ." As the witness noted, Remec senior management's plan was to "fire sale all of this

17 inventory later on ." He/she said that this strategy of writing off inventory and assigning the value to

18 goodwill was "a great business strategy" "if you push the morality aside ." He/she also said that by

19 having inventory that had no value because that value had been allocated to goodwill, Remec would

20 be able to enjoy sales with next to no cost . Thus, Ragland would have recorded tens of millions of

21 dollars in worthless inventory which he simply recorded at zero value in order to keep it off Remec's

22 "books" and thereby sell it at pure margin .

23 263. Witness 30 explained that Spectrian wanted to write-off inventory, but did not want

24 "the numbers to look bad" in case Remec decided to back out of the deal . However, as events

25 developed, it turned out that "Remec didn't care," and even collaborated with Spectrian in this

26 process. In terms of why Spectrian had begun taking the write-offs, he/she explained that Spectrian

27 had become the subject of an SEC investigation . As a result, Angel had become very "sensitive" to

28 how long Spectrian could report inventory at its full value before having to write-it off . As such ,

FOURTH AMENDED COMPLAINT FOR VIOLATIONS - 112- CASE NO. 04 CV 1948 JM (AMB)OF THE FEDERAL SECURITIES LAW SDOCS1354922v2

1 Angel began writing off a great deal of inventory. In fact, anytime a sales forecast did not

2 materialize, Angel began writing off the inventory associated with the sales that had not

3 materialized. As Remec became aware of Spectrian's write-offs, the Remec personnel became

4 distressed because the write-offs were lowering the value of Spectrian's assets in comparison to how

5 Remec originally valued those assets .

6 264. Witness 20 knew Ragland had been directly involved because after performing the

7 due diligence on Spectrian, Ragland, Clark Hickock, and Witness 16 learned that Spectrian was

8 getting better pricing from Motorola-Freescale than Remec . The issue was discussed in meetings in

9 2004, held at the Del Mar facility and attended by Witness 16, Neale, Witness 20, Ragland, and

10 Motorola representatives . During these meetings, Witness 16, Neale, and Ragland noted to the

11 Motorola representatives and to the witness that they knew first-hand from a review of Spectrian's

12 books that Spectrian was receiving more favorable pricing from Motorola . Witness 20 was asked to

13 negotiate better pricing with Motorola-Freescale .

14 265. Witness 30 knew that Ragland was intimately involved in Remec's due diligence in

15 acquiring Spectrian. Specifically, according to the witness, Ragland met with Waechter and

16 Spectrian CFO Mike Angel at least five different times at the Spectrian facility in Sunnyvale,

17 California prior to the December 2002 close of Remec's acquisition of Spectrian . The witness

18 participated in some of the meetings which Ragland attended in July and August 2002 at the

19 Sunnyvale facility . At these meetings, Ragland, Witness 30, Angel, Waechter, and Remec's Head of

20 Manufacturing, discussed the "cost savings plan" described above through which Remec expected to

21 gain "cost synergies" in the acquisition of Spectrian .

22 266. Witness 18, a former Senior Director of Business Development and Program

23 Manager with Benchmark Electronics, knew about Ragland's direct involvement because he had

24 worked closely with Ragland, Waechter, and Morash prior to Remec's moving the amplifier

25 manufacturing facilities to the Philippines in early 2004 . (According to internal Spectrian

26 documents, including a report entitled "Production Transfers To The Philippines," dated July 22,

27 2002, the excess and obsolete Zeus amplifier product line was moved to the Philippines as part of

28 this transfer of facilities .) Witness 16 explained that Remec "came to a deal" with Spectrian to pa y


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only approximately 60 percent of Spectrian's market value at the time of the acquisition as a result o f

the excess and obsolete inventory issue . Witness 16 estimated that Spectrian had at least a `few

million dollars" worth of excess and obsolete inventory . To place this into context, even $2 million

in excess and obsolete inventory amounts to overstating 2.4% of Remec's inventory value as of

October 2003 . Form 10-Q for 3Q 04 . Witness 16 stated that Remec had to keep some of th e

I inventory to be used for warranty purposes throughout the Class Period . The witness noted that

Spectrian had provided 10-year warranties on products it sold to Nortel . In order to honor those

warranties after Remec acquired Spectrian, Remec was forced to "hang on" to the obsolet e

Inventory .

267. Witness 22, a former Inventory Analyst at Remec prior to and throughout the Clas s

Period, confirmed Remec had accumulated excess and obsolete inventory through the acquisition o f

Spectrian . According to the witness, this inventory was "impaired" because Spectrian had alread y

held on to it for some time prior to Remec acquiring the inventory . In other words, the value of the

inventory had already depreciated prior to Remec acquiring the inventory and would have continue d

depreciating (to the extent there was any remaining value to the inventory) following the acquisition .

Witness 22 further elaborated by noting that if Spectrian acquired the inventory at $100, for

example, by the time that Remec acquired it, the inventory was only worth $75 . Witness 22 added

that Remec took this inventory on the "unlikely" hope that some of it "could be sold" or utilized in

various manufacturing processes The various Business Unit managers were enlisted to assist in

these efforts, but the witness explained that Remec was unsuccessful in attempts to use or sell thi s

excess and obsolete impaired inventory . (The witness stated that this excess and obsolete inventory

was held mainly at facilities in Milpitas, California and at Benchmark's Thailand facility . )

268. Witness 29 corroborated Witness 22's allegation that the Spectrian inventory acquire d

by Remec was obsolete . Witness 29 explained that some of the legacy Spectrian products he/she

was attempting to sell were as much as six years old . According to the witness, in calendar 2003 and

2004, Remec was rapidly losing market share to competitors such as Powerwave because o f

Remec's outdated products . Witness 29 said that Remec definitely needed to "come out with new

amplifiers ," but the Company was unable to do so during his/her employment .

FOURTH AMENDED COMPLAINT FOR VIOLATIONS _ 1 14 _ CASE NO . 04 CV 1948 JM (AJB)OF THE FEDERAL SECURITIES LAW SDOCS1354922v2

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269. Witnesses 16, 18, and 20 explained that Spectrian had contracted with

ACT/Benchmark Electronics, Inc . ("Benchmark") to manufacture Spectrian's high power line

radio frequency ("RF") amplifiers for mobile phones intended for use in the Chinese, Korean, an d

Japanese markets . After Remec acquired Spectrian in December 2002, Remec decided to move the

manufacturing of the power amplifiers to Remec's facility in the Philippines (and did so in the

second half of 2003 and early 2004) and to assume the manufacturing of the amplifiers, which

Spectrian/Remec had previously been selling to Norteland Huawei in China . Witness 18 explained

that Remec decided to move the manufacturing of the high power line amplifiers to the Philippines

in order to reap the benefits of "amortiz[ing] the overhead costs" associated with manufacturing .

Witness 18 stated that one of the main reasons for Remec's $62 .4 million goodwill write-off i n

September 2004 was because of Remec's decision to move the manufacturing of the amplifier lin e

from Benchmark 's Thailand facility to Remec ' s manufacturing facility in the Philippines .

270. As part of its acquisition of Spectrian , Remec had ownership of all of the equipment

that was being used at Benchmark to manufacture the ampli fiers. Remec had unused manufacturing

space at its facility in the Philippines and was paying Benchmark money to store materials and

equipment . Witnesses 22 , 16, and 18 all stated that the value of the inventory held at Benchmark's

facility was approximately $6,500,000 . Witness 16 was personally involved in negotiating the

payment on this invento ry down to $3,000,000. Even this discounted inventory amounted t o

approximately 35.17% of all the Spectrian inventory carried throughout the first quarter of the Class

Period . Form I 0-Q for 4Q 04 . (As previously stated , the witness confirmed that Spectrian 's excess

and obsolete inventory was ca rr ied throughout the Class Period . More importantly , an internal "U .S .

Commercial Weekly Sales (June 26, 2004 through July 30, 2004)" report confirms that the

Benchmark invento ry was ca rried throughout the Class Period .) Witness 18 believed that in addition

to the inventory that was moved to the Philippines , Remec also moved at least $6,000,000 in

automated test equipment. According to Witness 18, Remec attempted to sell this test equipment

back to Benchmark at one time, but Benchmark declined . This $6,000,000 in test equipment woul d

have represented more than 10 % of the $62.4 million in goodwill that Remec ultimately wrote off at

the end of the Class Period . Witness 18 confirmed that Remec's disastrous move of the Benchmark

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OF THE FEDERAL SECURITIES LAWSDOCS\354922v2

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I manufacturing facilities and Remec's assumption of the amplifier manufacturing substantiall y

contributed to the $62 . 4 million write-off.

271 . On December 8, 2003 (4Q 04), defendants issued a misleading press release

announcing 3Q 04 results .5 Ragland commented on the results , stating, "[I]mprovement [from 3Q

03] is coming from . . . the contribution of our offshore factories . Production levels are up at all

locations . . . ." Defendants, however, knew at the time that Remec 's manufacturing facilities in th e

Philippines were a complete disaster . In fact, as discussed below, Ragland was provided with

reports detailing the facilities' gross manufacturing deficiencies more than a year prior to th e

acquisition .

272 . Witness 16 and Witness 18 both stated that Remec faced serious problems i n

assuming the manufacturing of the amplifiers in the Philippines, primarily because Remec did no t

have the specialized RF manufacturing knowledge to competently assume the high power line

amplifier manufacturing process, which Benchmark did not share with Remec . Remec simply "did

not know how to build the amplifiers right" Spectrian internal documents confirm that Remec ha d

the "[l]east experience with specific manufacturing methodologies used" by Spectrian/Benchmark,

as well as the "[l]east developed manufacturing test methods used ." Witness 16 specified tha t

Benchmark used a "feed forward" engineering method to manufacture the power amplifiers . Thi s

was a unique technology used by Benchmark which was ve ry different from Remec 's engineering

methods . Witness 30 agreed that the transfer of the manufacturing facilities to the Philippines was

destined for failure because Remec lacked the expe rt ise to handle such complex manufacturing .

According to the witness , Benchmark and formerly ACT Manufacturing ("ACT") had spent man y

years trying to efficiently build amplifiers for Spectrian . Even with all this experience,

Benchmark/ACT still had "lots of [manufacturing] issues ." In addition, Remec stood to experience

additional difficulties by transferring manufacturing to a facility that had no experience at all in

manufacturing the amplifiers . The witness explained that Remec had "no capability to build th e

5 Defendants falsely reported in the press release that gross profit for the quarter was 22%, when, infact, it was actually only 20.2%.

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boards" that were contained within the Spectrian amplifiers . Based on his/her evaluation of the

facilities in the Philippines, the Remec Engineers and Technical staff at the Philippines facility did

not have the knowledge or experience to manufacture the amplifiers, and Remec did not have the

business or logistical systems to handle the manufacturing process .

273 . Witness 30 emphasized that the Spectrian amplifiers had a difficult "design t o

manufacture" process . Even with the "best builders," the design was "tough to manufacture ."

Therefore, instead of decreasing costs associated with manufacturing the Spectrian amplifiers -

which was a key goal of the "cost synergies" that Remec sought to achieve following the acquisition

- it was clear to the witness that the already barely profitable, if not unprofitable, manufacturing of

the Spectrian amplifiers would only become less profitable . The witness stated that Remec had to

hire new engineers and build new supplier relationships, all of which added to the already high costs

and only further negatively impacted gross profit margins .

274. Witness 30 based these assertions on a visit he/she paid to Remec's manufacturin g

facility in the Philippines in approximately October 2002 . The witness said that he/she prepared

detailed "trip reports" based on his/her findings regarding the deficiencies at the Philippines facility

to handle the manufacturing of Spectrian's amplifiers . The witness gave these reports to Waechter,

which Waechter then provided to Ragland . (Waechter's comments to the witness on this issue were

something to the effect of, "don't worry about it, let's complete the merger and clean up the mess

later") . The witness stated in the reports that Remec was "woefully ill equipped" to assume

manufacturing at the Philippines facility, and that it made "zero sense" for Remec to do so .

Furthermore, the witness said that the Remec senior executives were duly cautioned at varying times

that the Remec manufacturing plant in the Philippines would not be able to handle the manufacturing

of the Spectrian amplifiers . The witness personally expressed these warnings to Morash and

Remec's VP of Manufacturing "over and over again ." Furthermore, the Spectrian Director of

Manufacturing Engineering and the Spectrian Director of Test Engineering also expressed similar

warnings to the Remec senior executives . As the witness explained, there were "heated debates all

the way to the top on both sides" about the risks of moving Spectrian's amplifier manufacturin g

facility to Remec ' s facility in the Philippines . The witness said that he/she was aware of warnings

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made to Ragland and other Remec senior executives about the potential for failure if manufacturing

were transferred to the Philippines, but these warnings fell on "deaf ears . "

275 . Witness 30 commented that Remec personnel had been shocked at how much bette r

the ACT/Benchmark facilities in Thailand had been compared to Remec 's facility in the Philippines.

For instance , the control processes Spectrian had in place in Thailand were "so much better" than

what Remec had in the Philippines . Furthermore , the witness said that Remec 's personnel in the

Philippines were shocked at the complexity of the Spectrian products and admitted they had never

manufactured anything so sophisticated .

276. Witness 16, a former Remec Director of Supply Chain Management, observed that

RF nodes were a difficult signal to work with and the Remec manufacturers in the Philippines had to

be taught the new engineering practices, as well as gain an understanding of the RF signal . Spectrian

internal documents reveal that the "[e]ase of integrating Matrix [Spectrian's internal software

system] to BAAN [was a] significant concern ." Witness 30 added that Remec did not intend to dea l

with Spectrian's former supply base, which only further decreased the likelihood that Remec could

successfully assume manufacturing of the legacy Spectrian amplifiers because relationships wit h

vendors and ordering plans would have to begin anew.

277. In an attempt to resolve these manufacturing problems, Witness 18 said that there

were a lot of Remec "senior technical people," including Director-level Remec employees Jerry

Kinder and a Director of Operations in the Engineering Department, who were both spending

significant time at the Philippines facility during the first or second quarters of the Class Period .

278. Witness 20 explained that not all of Benchmark's inventory had been moved t o

Remec's manufacturing facility in the Philippines, and that a "boatload" of inventory remained in

Benchmark's warehouse in Thailand from 2002 up until the time that Witness 20 left Remec in

August 2004, near the end of the Class Period . According to a document entitled "Net Ops Business

Review 7/25/05," this included finished goods known as 850 MHZ MCPA's, which are "primarily

Zeus bricks ." Witness 18 explained that this inventory consisted of both raw materials as well as

finished goods, which Witness 20 confirmed was mainly amplifier components worth at least "si x

figures ." Witness 20 said that the invento ry had to be carried on Remec's books during the Class


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1 Period in some capacity at least up until August 2004 . An internal financial statement entitled

2 "Wireless Systems Overlays," drafted after the end of the Class Period, confirms that almost $1

3 million in excess and obsolete components were carried throughout the Class Period . To place this

4 in context, this amounts to almost 10% of the inventory carried during the first quarter of the Class

5 Period (3Q 04) . The document shows that these components were written off well after the Class

6 Period ended, in 3Q 05 and 4Q 05 .

7 279. Witness 20 said that the inventory stored in Thailand was obsolete because it

8 represented component parts for products that Remec did not build any longer, such as amplifiers

9 that Spectrian had built, but for which no commercial application could be found . According to

10 Witness 20, this material had accumulated because Spectrian had forecasted "huge sales" on certain

I I amplifier product lines, but these forecasts did not materialize . Spectrian was stuck with the

12 component inventory that had been purchased in anticipation of manufacturing these amplifiers, as

13 well as finished amplifiers that ultimately could not be sold . Remec, then, acquired this excess and

14 obsolete inventory when Remec acquired Spectrian . Witness 20 blamed this excess and obsolete

15 inventory on a lack of due diligence on the part of Ragland and other members of senior

16 management . In fact, the witness explained that it was only after the acquisition that Remec

17 personnel performed due diligence on the inventory . Even then, however, it was done solely to

18 determine if the inventory could be used internally as components for other products or in Remec's

19 manufacturing process . The result of the due diligence was that there was no internal demand for the

20 excess inventory .

21 280. Hickman was clearly aware of the Benchmark inventory problem . As one former

22 employee Witness 23 explained, he/she was personally involved in gathering the information

23 regarding this inventory which was incorporated into reports that were submitted to Hickman for

24 approval . In addition, according to Witness 18, Ragland traveled "a number of times" to

25 Benchmark's facility in Thailand, including during the early months of the Class Period . Both

26 Witness 20 and Witness 18, who worked closely with Ragland, Tom Waechter, and Morash prior to

27 Remec's moving the amplifier manufacturing facilities to the Philippines, confirmed that Ragland

28 was directly involved in the due diligence related to the purchase of Spectrian . Witness 18 sai d

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that in one particular meeting Ragland told him/her not to worry about Remec "pulling out" the

manufacturing in Thailand to relocate it to a Remec facility, although that is precisely what

happened. Accordingly, Ragland must have been aware of the excess and obsolete inventory

problem in Thailand. Witness 18 further stated that he/she could "not imagine how Ragland would

not have been aware of the risks" involved with moving the manufacturing of the high powe r

I ampli fiers out of the Benchmark facility .

281 . Witness 20 also said that there was a lot of excess and obsolete inventory from th e

Spectrian acquisition at the Remec warehouse in Milpitas, California . The witness knew about this

excess and obsolete inventory because Operations personnel, including Master Scheduler Steve

Sabin, had performed due diligence on this inventory after Spectrian was acquired to determine if th e

inventory could be used internally by Remec to overcome some of the shortage issues the Company

was experiencing, or if the inventory could be used at all in Remec's manufacturing process . The

result of the due diligence was that there was no internal demand for the excess inventory in

Thailand and Milpitas . The only application that this inventory had outside the Company, as far as

the witness knew, was for servicing older products . Witness 22 confirmed that there was at least

several million dollars of inventory at the Milpitas facility . This amounts to almost 20% of th e

Spectrian invento ry carried by Remec during the first quarter of the Class Period (3Q 04) . Some of

this invento ry was "raw materials" that was basically wo rthless and having " no resale value"

because it had been recycled or was "proprieta ry ." Witness 22 explained that some of the wo rthles s

inventory represented raw materials that Spectrian had bought to build products that were never

built .

282. Witness 22 corroborated the fact that Remec had a significant excess and obsolet e

inventory problem as of early 2003, and that the problem persisted and worsened throughout th e

Class Period. He/she explained that large quantities of physical inventory should have been recorded

as excess and obsolete . Furthermore, he/she said that some of this inventory represented "zero-

value" inventory . The witness said that the accumulations of excess and'obsolete inventory were

due largely to forecasted sales failing to materialize, in addition to essentially worthless inventory

that was acquired following the purchase of Spectrian (which was on the books at the start of th e

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Class Period .) The witness also said that Hickman attended approximately twenty weekly inventory

meetings, including some during the Class Period, and that Waechter regularly attended those

meetings. Witness 22 also recalled that when Waechter became CEO, Waechter made comments

that the witness heard to the effect of, "[We can't have all our] cash tied up in inventory" and that the

inventory needed to be "liquidated ." As a result, Witness 22 got involved in selling this inventory to

brokers, including EE All Parts (in San Diego, California), New Advantage, Technolog y

Consignment Group, and IMS .

283 . Witness 10 is a former Spectrian employee and a former Remec Director of Suppl y

Chain Management until early 2003 . The witness said that Spectrian sales personnel would

routinely enter potential orders into the company's forecasting system . On the basis of thes e

potential orders, the company's Thailand contract manufacturer would begin to manufacture

products to fulfill the orders . However, at the very end of the quarter, the sales personnel would

"pull the order out of the forecast" meaning that the order simply disappeared . This meant that

Spectrian would then be stuck with finished goods that had been made in anticipation of the order ,

but which now had no identified customer . Witness 10 said that the company's forecasting syste m

and methodology were so unpredictable that the forecast literally changed on a daily basis . She

added that just because sales opportunities were in the forecast by no means meant they would result

in actual closed deals .

284. Witness 10 participated in meetings from August 2002 onward along with Remec

personnel, including Tom Phelps, Clark Hickock, Jon Opalski, and George Neal, in which the

Spectrian personnel told the Remec personnel how poor the company's sales forecasting was as well

as detailing the extent of the company's inventory problems . The witness observed that the Remec

personnel (i.e ., Hickock, Phelps, Opalski, and Neal) were "amazed" at how poor Spectrian's sales

forecasting was and at the proportions of Spectrian's excess and obsolete inventory . On the basis of

Witness 10's participation in these meetings, he/she said there was no way the Remec personnel

would not have known that Spectrian's forecasting system was extremely poor and unreliable . They

would also have known that Spectrian's actual sales were very poor and that the company's outlook

for future sales, irrespective of the unreliable forecasting system, were also very poor . In addition ,

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I they would have also known that Spectrian had huge quantities of excess and obsolete inventory .

2 After leaving Remec, the witness remained in regular contact with a colleague who was an Inventory

3 Analyst at Remec throughout and following the Class Period . According to what Witness 10 learned

4 from his/her colleague, Remec continued to carry a large amount of the legacy Spectrian inventory at

5 full value as recently as June/July 2005 . Witness 10 also socialized regularly with another former

6 colleague and former Spectrian/Remec Materials Manager following his/her departure from Remec,

7 and they discussed the large amount of Spectrian inventory that Remec continued to carry .

8 285. Witness 17 criticized Remec for carrying "too much inventory" at its Poway,

9 California, facility during the Class Period, particularly excess and obsolete electronic components

10 and custom sheet metal for products such as amplifiers andfilters . He/she valued this inventory,

11 which Remec had "ordered on its own," as amounting to well over $1,000,000. To place this into

12 context, this amounts to almost 10% of the Spectrian inventory carried on Remec's books during the

13 first quarter of the Class Period (3Q 04) . An employee who was based at Remec's Poway facility

14 had set-up various inventory consignment arrangements with companies that ensured Remec was

15 supplied with inventory . However, Remec apparently received more inventory from these

16 companies than it actually needed and this contributed further to the accumulations of excess and

17 obsolete inventory during the Class Period . As a result, Remec hired Witness 22 at some point

18 before the September 2004 announcement, in part to sell off the excess and obsolete inventory to

19 brokers . In addition, an internal document entitled "Remec Inventory" confirms that inventory

20 reviews were conducted weekly with conference calls every Monday during the Class Period.

21 286. Witness 27, a former Business Development Manager with Remec's Wireless

22 Communications division prior to and throughout the Class Period, explained that Remec/Paradigm

23 built customized high-power amplifiers ("Net Ops," according to internal Company documents) for

24 three or four customers in China. (According to a July 14, 2004 report entitled "Beijing-[Himark]

25 Network Optimization" drafted by Yasbek, a VP Corporate Controller, the two largest customers

26 were Hui Bei Mobile and Nin Xia .) According to an internal document, the grand total for excess

27 and obsolete Net Ops was valued at approximately $5.5 million in July/August 2004. In 3Q 04 and

28 4Q 04 (during the Class Period), two of these customers (most likely Hui Bei Mobile and Nin Xi a


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1 based on the July 14, 2004 report) stopped accepting product from Remec because of the poor

2 quality of the amplifiers, which stemmed from problems in the "manufacturing control process ."

3 According to the witness, at least one of the quality issues related to an "alarm" on the amplifiers .

4 (Each amplifier formed a single "module" that customers placed into a larger system .) The alarm

5 was supposed to alert the system of any problems so that the system could automatically shut down

6 to avoid the risk of larger, more severe problems . The failure of the alarm to transmit this signal

7 therefore could cause severe damage to the entire system . Witness 27 confirmed that this defect in

8 the amplifiers persisted throughout the Class Period . (The manufacturing of these amplifiers was

9 moved to Remec's facility in the Philippines after Remec acquired Paradigm .) (Siemens, one of

10 Remec's biggest customers, was also affected by alarm problems in its amplifiers . An internal

1I Remec report, "Wireless Systems Group Financial Reporting 30-day follow-up," dated June 22,

12 2004, refers to "[i]ncreased [t]est [v]alidation requirements [from] Siemens . . . [d]esign & [q]uality

13 problems . . . [cJomponents added to correct EMI and /f/alse fa/larms ." )

14 287. Remec never publicly reported the cancellation of their contracts with "The Big 2" (as

15 Hui Bei Mobile and Nin Xia -were known), despite the fact that Remec's own internal policies

16 required them to report the "loss of a significant contract," according to an internal Company

17 document entitled "Company Private Data," dated May 7, 2003 . A different section of the same

18 document entitled "Internal Audit Function" states that questions regarding Remec's audit and

19 financial reporting functions "should be directed to the Corporate CFO ." Thus, Hickman, who was

20 CFO during the Class Period, would have been aware that "The Big 2" cancelled their contracts .

21 288. Witness 7, former Global Sourcing Manager at Remec, responsible for

22 sourcing/procurement of product/inventory throughout the Class Period, confirmed that Remec

23 accumulated a great deal of inventory that either had to be sold back to the original vendors and/or

24 ultimately written-off as excess and obsolete because Remec was to a great extent driven by the

25 Company's engineers, who purchased myriad items to develop products that ultimately could not be

26 commercially sold. The witness further stated that the Company would return products to its

27 vendors under the condition that Remec would repurchase the same merchandise at a later date . This

28 would have the effect of removing an asset (i.e ., inventory) and a liability (i .e., accounts payable) off


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1 the balance sheet . However,'it also distorted the testing for excess and obsolete inventory by

2 positively affecting the inventory turnover ratio test . Witness 7 confirmed that Remec's various

3 acquisitions also contributed to the accumulations of excess and obsolete inventory and continued

4 contributing to the problem following their respective acquisitions . For instance, Paradigm, and

5 especially Spectrian, brought a lot of excess and obsolete inventory with them to Remec .

6 289. Witness 22 confirmed that Hickman was aware of all the problems associated with

7 the excess and obsolete inventory acquired from Spectrian . Witness 22 explained that he/she

8 (Witness 22) was responsible for running weekly inventory reports on the amount of inventory that

9 Remec held worldwide . Witness 22 said that these reports were based on the information in BAAN

10 and presented in the form of an Excel spreadsheet . Witness 22 typically sent a "soft copy" of these

11 reports to Hickman . Hard copies of the reports were distributed at the weekly inventory meetings .

12 Personnel from the Poway, California facility, including Witness 22, Business Unit representatives,

13 and personnel from the Milpitas, California, Costa Rica, and the Philippines facilities met via

14 conference call once a week to discuss inventory issues and the reports that Witness 22 had

15 generated based on the information in BAAN . According to the witness, Hickman also attended the

16 weekly inventory meetings . Witness 22 estimated that Hickman attended approximately 20 weekly

17 inventory meetings between November 2003 (the first quarter of the Class Period) and September

18 2004, at the end of the Class Period . In addition, Hickmanfrequently participated in the meetings

19 via conference call. Thus, defendants knew about the obsolete inventory but failed to disclose its

20 impact on goodwill .

21 290. Witness 22 added that there were significant financial consequences as a result of the

22 excess and obsolete inventory Remec carried on its books at least up until the time that he/she left

23 the Company in late 2004 . In this regard, the witness said that Remec was having cash problems and

24 these problems were exacerbated by the large sums of money tied up in inventory . Witness 22

25 pointed to Remec's financing initiatives through Silicon Valley Bank to illustrate his/her assertion

26 that Remec was experiencing cash shortage problems during his/her tenure . A July 20, 2004 press

27 release from Remec announced the two-year, $25 million revolving line of credit with Silicon Valley

28 Bank "secured by substantially all of the Company's assets ." According to the witness, Reme c

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1 would not have needed the credit facility the Company sought and received from Silicon Bank if it

2 did not have such cash-shortage problems .

3 291. Witness 14 stated that Remec "lost control" of its inventory as a result of a failed

4 reorganization attempt by the Company in 2003 and that the inability to control "inventory levels"

5 was fatal to Remec's financial condition . (The purpose of this reorganization, according to Witness

6 14, was to consolidate all of Remec's previously dispersed manufacturing operations and have them

7 report directly to former EVP Clark Hickock. The idea was that this would result in Remec saving

8 money on inventory purchases . But the hoped-for benefits failed to materialize and the

9 reorganization was actually very unsuccessful so far as Remec realizing any benefits .) Witness 16

10 specifically blamed the $62 .4 million goodwill write-off entirely on Remec's disastrous acquisition

11 of companies like Spectrian, Himark, and Paradigm, which necessarily included those companies'

12 excess and obsolete inventory . Witness 14 said it was possible that the amount of excess and

13 obsolete inventory Remec carried throughout the Class Period may have substantially contributed to

14 the $62 .4 million goodwill write-off in September 2004 .

15 Defendants' Undisclosed Chronic and Material Shortage of Component Part s

16 292 . Remec experienced constant shortages of materials necessary to bui Id products for its

17 customers during the Class Period which inhibited its sales and cut into its dwindling gross profit

18 margins . Witness 17 explained that Remec often did not have the requisite lead-time to procure

19 component parts for customers and this created a situation in which Remec's Cost-of-Goods-Sold

20 ("COGS") skyrocketed. He/she said that COGS dramatically increased when Remec Supply Chain

21 personnel had to procure component inventory that had not been included in the demand forecasts

22 because Remec typically ended up paying large amounts of money in order to get the component

23 inventory in the short amount of time needed to build and ship the product based on the less-than-

24 required lead times . This exacerbated a problem that Remec already had with high direct material

25 costs, and further reduced Remec's profit margins . Hundreds of internal documents reveal the

26 exorbitantly high costs paid by Remec or direct materials for its products . For example, a

27 spreadsheet dated July 20, 2004 shows direct material costs for filters to be as much as 79 .2% of

28 approximately $43 million in total recognized revenue during the last two quarters of the Class


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1 Period. Witness 19, a former Remec Customer Service Representative with Remec from October

2 2004 until after the end of the Class Period, confirmed that these "part shortages" frequently resulted

3 in delayed shipments . Witness 19 noted that shipments (and issues concerning delayed shipments)

4 were discussed during weekly meetings that the witness, a Global Customer Service Manager and

5 others attended, and personnel from the manufacturing facilities in Costa Rica and the Philippines

6 participated via teleconference .

7 293. Finally, Witness 33 stated that Remec faced the following problems in moving

8 production facilities from Finland to China : (1) material shortages resulting from delays in

9 establishing relationships with Chinese suppliers ; (2) delayed shipments of the components to

10 Remec once relationships were established ; (3) poor quality of components, resulting in further

1 l delays in production ; and (4) the fact that "forecasts [of sales] went up and down" affected how

12 many components were required . (Witness 32 confirmed that the amount of materials ordered by the

13 Costa Rica facility for use in its manufacturing products was typically based on forecasted client

14 demand.) Therefore, it was not always easy to order components within the requisite lead-times .

15 294 . Witness 29 confirmed that Remec's sales suffered because of supply shortages . The

16 witness attributed a $2,000,000 shortfall in his/her $6,000,000 sales goal for calendar 2004 to the

17 fact that Remec did not have the equipment to fulfill his/her orders . Remec was unable to deliver on

18 products that were listed as being available for sale because the Company did not have the

19 "materials" to build the products . The witness explained that he/she had a list of products that were

20 supposedly available to sell to customers he/she called on during her tenure but these products could

21 not always be delivered . The witness explained that this "parts shortage" was a chronic problem

22 throughout the Class Period .

23 Defendants Improperly Failed to Timely Write-DownObsolete and/or Slow-Moving Inventor y

24295 . Remec also violated GAAP in accounting for inventories by failing to take a timely

25charge against earnings to account for the fact that the market value of inventory had deteriorated

26substantially below cost because, among other things, projected demand requirements decreased, due

27to market conditions, and product life cycle changes . Defendants knew or recklessly disregarded

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1 (1) that customers were pulling business back from Remec due to poor performance, quality and

2 concerns about the stability of the Company ; and (2) that demand for Remec's products was

3 weakening due to the fact that several major Remec customers were having serious problems with

4 their businesses, and thus were rescheduling, stretching out, or delaying the release date of and

5 canceling existing orders with Remec . In this regard, Accounting Research Bulletins ("ARB")

6 No. 43 provides, in pertinent part :

7 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 utility

8 of 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 other

9 causes, the difference should be recognized as a loss of the current period . This isgenerally accomplished by stating such goods at a lower level commonly designated

10 as market. ARB 43, Chapter 4, State . 5 .

11 296. GAAP provides that an estimated loss from a loss contingency "shall be accrued by a

12 charge to income" if . (1) information available prior to issuance of the financial statements indicated

13 that it is probable that an asset had been impaired or a liability had been incurred at the date of the

14 financial statements ; and (2) the amount of the loss can be reasonably estimated . SFAS No . 5 ¶8 .

15 SFAS No. 5 also requires that financial statements disclose contingencies when it is at least

16 reasonably possible (e .g., a greater than slight chance) that a loss may have been incurred . The

17 disclosure shall indicate the nature of the contingency and shall give an estimate of the possible loss,

18 a range of loss or state that such an estimate cannot be made .

19 297 . The SEC considers the disclosure of loss contingencies to be so important to an

20 informed investment decision that it promulgated Regulation S-X, which provides that disclosures in

21 interim period financial statements may be abbreviated and need not duplicate the disclosure

22 contained in the most recent audited financial statements, except that, "where material contingencies

23 exist, disclosure of such matters shall be provided even though a significant change since year end

24 may not have occurred." 17 C .F .R. §210.10-01 .

25 298. The Company -violated the GAAP requirement by failing to take a provision for

26 inventory losses in its interim financial statements, as indicated by APB Opinion No . 28, 117,

27 Interim Financial Reporting :

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The amounts of certain costs and expenses are frequently subjected to year-endadjustments even though they can be reasonably approximated at interim dates . To

2 the extent possible such adjustments should be estimated and the estimated costs andexpenses assigned to interim periods so that the interim periods bear a reasonable

3 portion of the anticipated annual amount .

4 299. In addition, FASB Statement of Concepts No . 5 ("CONS") states, "[a]n expense or

5 loss is recognized if it becomes evident that previously recognized future economic benefits of an

6 asset have been reduced or eliminated ."

7 300. Defendants violated GAAP by failing to take a charge to income for its inventory

8 despite the fact that defendants knew or recklessly disregarded that much of the inventory was

9 excess (slow moving parts) and/or obsolete .

10 Defendants' Undisclosed Inventory Reserve Deficiencie s

11 301 . Confidential witnesses, internal documents, and Remec's quarterly SEC filings reveal

12 that defendants significantly under reported the Company's inventory reserves throughout the Class

13 Period in order to understate net losses and thereby increase earnings per share ("EPS") . Indeed, as

14 discussed below, by understating inventory reserves, defendants were able to understate Remec's

15 quarterly Net Losses by as much as 83% during the Class Period. More importantly, by understating

16 inventory reserves, defendants were able to overinflate gross profit margins by as much as 19%

17 during the Class Period . This explains why defendants were able to report relatively high gross

18 profit margins during the Class Period despite the fact that the majority of their products were

19 unprofitable . Hickman, according to witnesses and internal documents, was personally involved in

20 setting the inventory reserves and, therefore, was directly responsible for this manipulation .

21 302. Adjusting inventory reserves directly affects a company's gross profit margins, net

22 losses, and EPS . Gross profit margin is calculated by subtracting Cost of Sales from Net Sales . Cost

23 of Sales is calculated by adding Beginning Inventory plus the Cost of Goods purchased during a

24 reporting period minus the Ending Inventory . A decrease in inventory reserves will result in an

25 increase in Ending Inventory since Ending Inventory is presented as a net of inventory reserves .

26 Furthermore, an increase in Ending Inventory will result in a decrease to Cost of Sales which, in

27 turn, will increase gross profit margins and EPS .

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303 . Under GAAP, management is required to establish reasonable estimates for the value

of slow moving , excess and obsolete inventory, and to mark ending invento ry down to the lower of

cost or market value in the period in which a decline occurs . Accounting Research Bulletin No . 43,

Chapter 4 Statement 5 ; Accounting Principles Bulletin Opinion No . 28 1 14c . In addition , pursuant

to SFAS No . 5, which describes the accounting for contingencies , a loss for inventory reserves

should be recognized when it is probable and can be reasonably estimated . SFASNo . 5, paragraph 8

states In part :

An estimated loss from a contingency shall be accrued by a charge to income if bothof the following conditions are met :

a . Information available prior to issuance of the financial statements indicates that itis probable that an asset had been impaired or liability had been incurred at the dateof the financial statements . It is implicit in this condition that it must be probable thatone or more future events will occur confirming the fact of the loss .

b . The amount of loss can be reasonably estimated .

304 . Prior to the start of the Class Period, Remec historically maintained and reported

average Inventory Reserves and Contract Loss Reserves (for custom-manufactured inventory

rendered potentially excess and obsolete due to loss of manufacturing contracts) of approximately

33.4% of its Gross Inventory as the following chart illustrates :

1/31/2002 5/3/2002 8/2/2002 11/112002 1/31/2003 5/2/2003 HistoricalInventory 4Q 02 IQ 03 2Q 03 3Q 03 4Q 03 1Q 04 Average

Inventory, gross 70,406 70,604 68,866 65,002 75,216 79,13 3

Inventory Reserve 23,221 23,000 22,700 20,000 19,058 18,400Contract Los s

Reserv es 1 2,900 2,300 2,100 3,041 3

Total Inventory and 26,092 25,900 25,000 22,100 22,099 21,400Contract Loss Reserve s

Reserve as a % of 37 .1% 36.7% 36.3% 34.0% 29.4% 27.0% 33.4%Inventory, gross

305 . Immediately prior to the start of the Class Period, the quarter ended August 1, 2003

(2Q 04), defendants slashed Remec's Inventory and Contract Loss Reserves in order to artificially

inflate its earnings by reducing the extent of its losses . Indeed, they reduced the Company's

Inventory and Contract Loss Reserves from 36 .3% from the same reporting period one year before

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1 (2Q 03) to 21 .1%, which resulted in the Company's gross profit margin being overstated by

2 approximately $10.5 million or 12 .2%, and its Net Loss being understated by approximately $10 .5

3 million or 75%.

4 306. Accordingly, based on Remec's historical inventory reserves data, defendants knew at

5 least as early as 2Q 04 that the inventory reserve was understated by approximately $10 .5 million .

6 Yet, they continued to ignore their obligation under GAAP to recognize and record proper reserves

7 for its slow moving, excess, and obsolete inventory .

8 307. The largest reduction of the Company's inventory reserve was recorded during the

9 first quarter of the Class Period (3Q 04), when defendants cut Remec's historical inventory reserve

10 percentage by almost two-thirds, from 33 .4% to 12.6% . Indeed, defendants reduced the already

l 1 significantly lowered Inventory and Contract Loss Reserves of 21 .1% for 2Q 04 by almost half.

12 This drastic reduction resulted in the Company's Gross Profit Margin being overstated by

13 approximately $20 million or 19.0% and its Net Loss being understated by approximately $20

14 million or 83% .

15 308. Defendants were unable to maintain such artificially low reserves for the following

16 quarter (4Q 04) as Remec's reported Net Loss soared to $34 .655 million . In other words, the losses

17 were so great that defendants were forced to increase Inventory and Contract Loss Reserves to

18 $29.434 million, or approximately 27% of Net Inventories. Nevertheless, even this increased

19 amount fell significantly short of Remec's historical average of 33 .4%. (Indeed, as discussed below,

20 defendants maintained similarly artificially low percentages throughout the last two quarters of the

21 Class Period - 26 .4% for 1 Q 05 and 27 .5% for 2Q 05.) In the Company's January 31, 2004 Form

22 10-K filing, defendants disclosed the following :

23 Fiscal 2004 results include charges of approximately "$12.1 million ($11 .0 million ofwhich were recorded in the fourth quarter) to establish additional reserves for excess

24 inventory and $4.2 million to establish reserves for losses on two commercialprograms entered into in the latter half of fiscal 2004 .

25309. Remec's inventory reserve deficiency for the second quarter of the Class Period (4Q

2604) resulted in the Company's Gross Profit Margin being overstated by approximately $7 million or

276.2% and its Net Loss being understated by approximately $7 million or 16 .7% .

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310. For the third quarter of the Class Period (IQ 05), defendants decreased Remec's

inventory reserve percentage to 26 .4% which resulted in a deficiency of $7 .1 million, a Gross Profit

Margin overstatement of $7 .1 million (or 6 .1 %) and the Company's Net Loss being understated b y

I approximately $7 million or 50% .

311 . The final Class Period qua rter ' s reserves are pa rt icularly egregious in light of the fact

that an internal report ("E&O Detail by BU 07-08-04") reveals that Remec carried $29 .95 million in

excess and obsolete inventory for 2Q 05, which amounts to approximately 33 .6% of Gross

Inventory, almost equal with Remec's historical average of 33 .4%. Nevertheless, defendants

reported reserves of only $24 .5 million, or approximately 27 .5% of Gross Inventory . This resulted

in an inventory reserve deficiency of $5 .2 million, a Gross Profit Margin overstatement of 4 .8%, and

the Company's net loss being understated by approximately $5 .2 million or 6 .5%.

312 . As a result of defendants' significant inventory reserve understatements during th e

Class Period, Remec's quarterly Net Losses were understated by an average of approximately 28%,

and as high as nearly 83% (in 3Q 04) .

313 . Furthermore, the fact that Remec's $30 million in excess and obsolete inventory wa s

ultimately written off shows that reserves should have been increasing and not decreasing during the

last three quarters of the Class Period ($29 .434 million, $26 .9 million, and $24 .5 millio n

respectively . )

314. Witness 15 understood the Company's inventory reserve was problematic because

Remec did not use the same "calculation" to derive the inventory reserve from period to period .

Witness 34, a Controller at Remec prior to and throughout the Class Period who reported to

Hickman, confirmed that Hickman changed the inventory reserve process from the way this process

had been handled in the years prior to Hickman's arrival at Remec . According to the witness,

Hickman wanted to "make sure that nobody [else] touched reserves ." The witness knew this

because he/she attended monthly reviews with both Hickman and CEO Tom Waecther during which

reserves were discussed . In any event, Remec never disclosed in its SEC filings that the Compan y

changed the methodology by which the inventory reserve was derived .

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315 . Witness 22 con fi rmed that Hickman personally "became involved" with inventory

reserves when he (Hickman) joined the Company in late 2003 . Numerous internal documents

confirm that Hickman was not only apprised of eve rything that went on with the Company's

inventory reserves , but that he personally directed the setting and adjustments of these reserves . For

example , in a July 8 , 2004 e-mail from a former Controller to various employees , she refers to the

attached spreadsheet entitled "Q2 FY' 05 Reserves Review" and states , "There should be no changes

to reserve GL balances by site unless approved by Winston Hickman ." A July 15, 2004 spreadsheet

entitled "Q2 FY '05 Audit-Reporting Schedule" states , "Review & Approve (Quarterly] Reserve

Adjustments (Hickman , [et al .]) ." Another e-mail, dated July 19, 2004 , from a former Controller to

Witness 15 entitled "Q2 Reserves Review" states , "We have a hard deadline of next Friday -

reviewing with Winston [ Hickman] and Tom [Waechter] ." In an August 3, 2004 e-mail from

Witness 15 to four Wireless Division employees , the witness expresses his/her concern for the

decrease in invento ry reserves , and states , " I hesitate to present to Winston . . . such a low number

for Q2 ."

316. During the Company's Q3 2004 Earnings Call on December 8, 2003, Raglan d

provided earnings guidance for Q4 2004 and Fiscal 2005 which materially misrepresented Remec' s

true financial position :

Continuing, I wanted to give you a view of our fourth quarter, following this21% growth quarter-over-quarter. We are quite convinced that we are still steadily inthe growth mode and we are addressing and developing significant newopportunities . At this point in time, I would guide 5% to 10% higher on the top-line .Our goal is breakeven for the quarter .

In f iscal year 'G5, we are early in the budget process . . . And I believe at thispoint in the budget process, we would want to forecast $500 million a year, with eachquarter profitable, and for the full year a mid single digit net income are reasonableexpectations . (Emphasis added) .

At the time Ragland made these public statements, he knew they were false and misleading given th e

fact that Remec, based on its historical standards, understated its inventory reserves b y

approximately $ 18 million or 83% for the quarter ended October 31, 2003 (Q3 2004) . In addition,


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the Company should have reported a loss of at least $14 million for Q3 2004 rather than the $3 .5

I million loss reported in its respective Form 10-Q filing .

317 . Dozens of internal documents reveal the magnitude of Remec's Inventory Reserv e

deficiencies . For example, a document entitled "Excess and Obsolete Summary Report May 1,

2004," states that for Paradigm alone there was excess and obsolete inventory of approximately $2 .7

I million for raw materials and approximately $3 .8 million for finished goods, for a total o f

approximately $6 .5 million in essentially wo rthless invento ry . However , Remec only increased its

Inventory Reserves for this inventory by approximately $2 .5 million . Another Remec internal

document shows that as of March 5, 2004, the grand total of excess and obsolete inventory for

certain amplifiers (Net Ops, OEM ops , and "Ops Common ") was approximately $5 million. Remec,

however, only reserved $ 1 .2 million , or 24% of this amount . Similarly, a document entitled

"Reserves Q2 FY' 05 Global Filters " shows that Remec carried $ 1 .48 million wo rth of excess an d

obsolete invento ry for the "Cowboy" filter (manufactured in Finland ), but only reserved $438,778

(approximately 29 .6%) . An updated version of the same report shows that the excess and obsolete

invento ry carried through 2Q 05 in Remec ' s Finland facility totaled $6 . 86 million but only $3 .78

million was reserved . Remec's gross under-repo rt ing of its excess and obsolete invento ry and failure

to adequately reserve for this inventory substantially contributed to the $62 .4 million goodwill write-

down at the end of the Class Period .

318 . Witness 15 confirmed that Hickman personally calculated the reserve amount on a t

least one occasion . Witness 15 was tasked with calculating an Inventory Reserve for Remec for 3 Q

04 during the Class Period, and used a methodology that was previously used by Remec Controllers

for 2Q 04 and prior periods. However, according to the witness, Hickman rejected the figure

Witness 15 derived for the inventory reserve for 3Q 04 because it was "too high" and insisted that

the Company "needed more revenue" which the Company apparently did not have in order for

Witness 15's number to be acceptable . Hickman personally told Witness 15 that "1 don't like the

[inventory reserve] number" and that "it sounds horrible ." The witness' account of Hickman's

involvement is confirmed by a July 29, 2004 e-mail entitled "Declined : Reserve Preparation" from a

Remec Controller to a Base Station Systems VP . The document, copied to Witness 15, confirms

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Hickman's involvement and refers to the witness "meet[ing] separately with Winston [Hickman] ."

A July 25, 2004 e-mail from Ian Bourke (Remec UK) to a Remec Controller confirms that "only

Winston could approve the release of [inventory] reserves . . . . "

319. As a result, according to Witness 15, Hickman indicated he was going to calculate

the Inventory Reserve himself. Witness 15 learned from a Business Unit Controller after he/she left

Remec in September 2004 at the end of the Class Period that Remec ultimately reported a lower

number than what Witness 15 had calculated . Witness 15 explained that the inventory reserve figure

at issue represented a "global" figure that was based on information submitted by a wide variety of

individuals at the Company and input into Remec's BAAN system .

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320 . In addition, the following chart represents the Spectrian inventory carried into the first

two quarters of the Class Period (3Q 04 and 4Q 04) as a percentage of total Remec inventory .

Invento ry Reserve Analysis

113112003 5/2/2003 8/1 !2003 10/31/2003 1 /31 /200 44Q 42003 1Q 2004 2Q 2004 3Q 2004 4Q 2004

Spectrian Inventories , 53,117 57,733 67,088 83,056 79,496net per financial statement

Spectrian Invento ry 10,553 10,553 10,553 10,55 3(acquired 12/20/2002 )

Spectrian % of Total Inventory 19 .9% 18 .3% 15 .7% 12 .7%

Gross Inventory 75,216 79,133 84, 988 95 ,056 108,930

Inventory Reserve 22,099 21,400 17,900 12,000 29,434

Inventories, net pe rfinancial statement 53,117 57,733 67,088 83,056 79,4 96

321 . This chart shows that although Remec's inventory was increasing from 4Q 03 (the

quarter ending January 31, 2003) through the beginning of the Class Period (3Q 04, the quarter

ending October 31, 2003), its Inventory Reserve actually decreased. Remec was not only being less

conservative by decreasing its inventory reserves, but the inventory contemporaneously included a

significant amount of obsolete product, as corroborated by the witnesses above. Therefore, Remec

overstated its inventory, gross profit margin, net income and EPS because the Company should have

increased its inventory reserves by nearly $11 million at the start of the Class Period for

obsolete/nonsaleable products .

322. In addition to establishing inventory reserves for the anticipated devaluation of

Remec's excess and obsolete inventory, the Company also set an "LCM Reserve," (LCM or Lower

of Cost or Market is an inventory valuation method whereby inventory values are reduced when

market prices fall lower than cost, i.e., inventory is valued at the lower of cost or market) which,

according to a July 22, 2004 e-mail from an employee at Remec's "Folsom" facility to a Business

Unit Manager, "is for cases where we know we are going to ship product at a loss ," i.e., where the

COGS exceeds the sales price . According to an internal document entitled "Filter LCM Reserves

[07-26-04] [Q2 Q3 Q4]," LCM reserves were calculated by multiplying the number of backlogge d

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1 units by the loss price of the unit . The LCM reserves amounted to millions of dollars during the

2 Class Period . For example, according to the same document, the LCM reserves for FDUAMCO

3 filters in 2Q 05 alone totaled approximately $1 .96 million . A similar spreadsheet for the same

4 quarter shows LCM reserves for all of Remec's filters at $2 .34 million . Both Witness 34, a former

5 Controller who reported to Hickman, and Witness 35, a former Design Planner, confirmed that

6 FDUAMCO was one of the product lines designated as an LCM program during the Class Period

7 because it was being sold for less than what it cost to manufacture . Witness 35 stated that some of

8 the products were designated as LCM because of quality problems, whereby Remec had to "retrofit"

9 or "replace everything" on the products that had been returned to customers .

10 323. Finally, Remec established Warranty Reserves for some its excess and obsolete

I I inventory presumably to be used to replace defective parts for some of its products pursuant to long-

12 term warranty plans which ran as long as ten years . The amounts set aside in Warranty Reserves

13 were significant . For example, according to an internal document entitled "Reserves -Q2 FY'05,"

14 Remec's Warranty Reserves for its amplifier product lines totaled approximately $6 .37 million in 2Q

15 05. Nevertheless, the amounts in Warranty Reserves totaled only a fraction of the approximately

16 $30 million in excess and obsolete inventory which Remec carried through the end of the Class

17 Period .

18 Defendants ' Improper Accounting of "Zero-Value Inventory"

19 324. Witness 6, a former senior level accounting executive at Remec during much of the

20 Class Period, explained that when Remec acquired Paradigm, Remec improperly brought in

21 Paradigm's inventory assets at no value, but instead, assigned that value to the goodwill associated

22 with the acquisition. As a result, when Remec did sell the legacy Paradigm inventory, they were

23 able to do so at no cost, resulting in sales of 100% margin . Thus, in order to improve quarterly

24 numbers when the sales forecasts were not met, one method was to sell the zero-cost Paradigm

25 inventory at the end of the quarters. Witness 6 stated the sale of this "zero-value" inventory was the

26 "saving grace at the end of the quarter." Witness 6 was responsible for explaining the financial

27 results for "why we [Remec] didn't meet the goals" and variance . Witness 6 explained these

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`variances in meetings attended by David Hinkle (Controller) who would respond to concerns that

Remec was not meeting its goals by stating, "we can sell these products at zero margin . "

325. Witness 3, a former senior member of Remec's IT department during the Clas s

Period, confirmed that Remec sold inventory which it had already written off . The witness recalled

hearing Company executives discuss the "zero-value inventory" they had sold during the quarter .

326. Witness 8, former Director of Global Logistics for Remec's Wireless divisio n

throughout the Class Period, had discussions with another Remec employee who told him this was a

repeated practice at Remec .

327. According to Witness 5 , it was because so many Remec deals were money- losing

propositions for Remec that sales personnel like Witness 5 were encouraged to sell so-called "zero

value" inventory that had been written-off . As the witness explained, this zero-value inventory

allowed Remec to make "pure margin" on the sales. Witness 5 explained that Remec had large

quantities of inventory that had been written off because in the past Remec had overbuilt based on

fabricated forecasts . Although written-off inventory is typically "sold for scrap," according to

Witness 5, Remec would often sell this inventory at full "retail pricing ." For instance, the Remec

sales personnel were told by Sweeney to sell the zero-value inventory at whatever price they could

get, but as Witness 5 explained, they always went for the highest price this witness could get .

He/she recalled closing such a sale of zero-value multi-channel amplifiers with Sprint for around $2

million at the end of 2003, but this witness closed deals of such size virtually every quarter he/she

was with Remec . Even if the witness had only closed such deals during three of the four quarter s

during the Class Period, the approximately $ 6 million in pure margin represented approximately 2%

of Remec's reported revenue for that fiscal year . 2004 Form 10-K . This amount would have had a

I material effect on such earnings if properly written off .

Improper Shipping and Revenue Recognition on Non-Functional Products

328. According to a former Director of Accounting, Witness 2, Remec's revenue

recognition criteria was "decided by senior management," who would decide whether it was

appropriate to invoice a customer on a particular order . If a customer was invoiced, then revenue -

and a corresponding receivable - would be realized . The former accounting director said there wer e

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times when Remec had difficulty collecting certain receivables because Remec shipped product that

did not function to the customer's satisfaction and, therefore, the customer was unwilling to pa y

before the product worked satisfactorily . Witness 2 explained that Remec continued shipping th e

non-functioning products as part of "monthly shipping agreements ." According to the former

employee, Remec's senior management and sales staff directed that shipments of products continu e

even when those products had yet to perform to customer satisfaction . Specifically, the witness

stated the decisions were made by Ragland, Tom Waechter (CEO after Ragland), John Opalski (VP

of the Wireless Group), and David Hinkle (Controller) . Witness 2 said that the amounts involved in

these shipments of non-functioning products cumulatively amounted to the "high hundreds of

thousands of dollars" per customer and that there were at least two or three of these customers . The

witness further explained that these practices took place throughout the witness' tenure at th e

Company and that from all accounts, based on contacts with former colleagues in Accounts

Receivable, these receivables are still unpaid because the products still do not work .

329 . Another former employee, Witness 5, a former major account executive during th e

Class Period , corroborated that Remec booked revenue on equipment that did not work . They

shipped it to the customers and indicated "installed at site and functioning " on the invoice because

they needed to book the revenue . However , it was typically seven to eight months before the

product actually worked .

330. Witness 5 described a transaction with a customer, Alamosa Holdings, Inc ., which i s

a Sprint PCS affiliate, in 4Q 03 in which Sweeney instructed him to falsify certain documents that

would indicate that Remec equipment that had been shipped to the customer was installed and

functioning . However, in reality, he/she said the equipment was not installed and functioning and

would not be for yet another six or seven months . The witness explained that they shipped the

equipment to the location, but did not install it . Witness 5 said this deal represented close to $1

million of improperly booked revenue, which the witness recalled was booked in 4Q 03 . This

amount represented a material, approximately 1 .3%, of Remec 's reported revenue for that quarter.

4Q 03 Form 10-Q. He/she explained that the customer had been willing to sign documents

indicating acceptance of the systems because the Alamosa department responsible for the purchase

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would have lost its budget allocation in Alamosa ' s next fiscal year if they did not indicate that they

had made the purchase in 2003 .

Defendants' Failure to Adequately Monitor Accounts Receivable s

331 . Defendants were aware that they would be unable to collect on millions of dollars in

accounts receivable during the Class Period, which they knew undermined their gross profit margin

and sales growth rate assumptions . In fact, E&Y's 2005 First Quarter Review Results reveal tha t

collections of accounts receivable drastically slowed in I Q 05 . This report reveals that the Days

Sales Outstanding (DSO) for the U .S . Wireless Segment jumped almost 500% from 12 .91 days for

the quarter ended January 30, 2004 to 59 .19 days in the quarter ended April 30, 2004 (1 Q 05) . E& Y

reported that "[o]verall accounts receivable have increased in the first quarter due to higher sales an d

slower collections ." This serious collectibility problem included many, if not most, of Himark's

accounts . Numerous internal documents as well as allegations from confidential witnesses revea l

'that Hickman : (a) received regular reports documenting the accounts receivable problem throughout

the Class Period (Witness 26) ; and (b) participated in weekly conference calls in which the

magnitude of the problem was openly discussed (Witness 15) .

332. Witness 21, a former Remec Accounts Receivable Administrator/Collector prior to

and throughout the Class Period, collected on major accounts for Remec during the Class Period,

including Lucent . When Witness 21 took over collections on the Lucent account at the end of th e

Class Period, there were significant problems relating to outstanding, unpaid invoices, many o f

which were at least 60 days or more past due . As far as the witness knew, the problem stemmed

mainly from incorrect applications of payments made by Lucent . According to Witness 21, the

receivable records for Lucent were "just a mess," particularly because the monies received had bee n

inappropriately applied to the wrong invoices .

333 . Witness 21 identified another major weakness in Remec's accounts receivables

system : Remec did not assess penalties for late payments , so customers had more leeway and often

sent payments in later than they might normally have done if they faced late fees . Witness 2 1

prepared Excel spreadsheet reports on a weekly basis and submitted them to an Accounts

Receivable Manager . Witness 21 added that these reports typically contained information such as

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how much money had been collected during the week on specific accounts and how much the

witness thought could be collected in the following week . In turn, Witness 26 prepared Account s

Receivable repo rts that were submi tted to someone at the Del Mar facility .

334. Witness 21 recalled that there was increased pressure at the end of each quarte r

during his/her tenure (including during the Class Period) to collect outstanding balances. In

particular, during the last two quarters of the Class Period, his/her supervisor, Gilmore, face d

immense pressure "to get money in . "

335 . Witness 25, a former Remec Accounts Receivable Analyst throughout the Clas s

Period, confirmed the fact that Remec's Accounts Receivable department had serious problems . The

witness explained that when the "Poway Wireless" facility was first established in 2002, Remec had

individuals in the Accounting Department who were not "posting payments correctly ." As a result,

when Witness 25 was transferred to the Accounts Receivable Analyst position in 2003, he/she had to

restructure approximately one year's worth of accounts receivable on the Motorola account . Witness

25 had to work very closely with Motorola Accounts Payable personnel to resolve the issue . There

I were similar problems on the Lucent account .

336. Witness 25 noted that in the acquisition of Spectrian, Remec acquired receivables that

Remec was unable to collect . Witness 25 said that some of these accounts were at least six month s

or older at the time that Remec acquired Spectrian . Some receivables on Remec's books were over a

year old . Following the acquisition of Spectrian , the witness explained that Remec had a hard time

"getting the documentation" necessary to prove the validity of the outstanding balances . A "Weekly

AR Report 7-9-04," addressed to Hickman , identifies numerous Spectrian accounts receivabl e

including Verizon Wireless, Samsung Electronics, and Korea Network Corp .

337. Dozens of internal documents establish the magnitude of problems with Remec's

accounts receivables . For example, a document entitled "Accounts Receivable Aging as of July 16,

2004 for Remec Wireless" shows a total of approximately $5 .4 million of receivables over 90 days .

However, the same document shows that there are Accounts Receivable Reserves of only

approximately $3 .6 million . This amounts to almost 6% of the $62 .4 million goodwill impairment

charge taken at the end of the Class Period . The significance of this is obvious : Remec' s


I uncollectible receivables were materially under-reserved . Similarly, another spreadsheet dated July

2 18, 2004 shows that Himark Receivables over 90-days past-due ("Beyond Terms") were at $2 .5

3 million, but Reserves were only $877,000. An internal spreadsheet ("Q2 FY'05 Reserves Analysis -

4 AR") with accounts receivable information current as of August 3, 2004 shows just how little Remec

5 actually reserved . The spreadsheet shows the percentage of amounts owed to Remec which were

6 proposed for Accounts Receivable Reserves . Of the 21 accounts receivable identified, 14 had less

7 than 10% of the amounts owed to Remec proposed for reserve, and 17 had less than 16% reserved .

8 338. Witness 25 personally "processed the write-offs" on these overdue accounts . He/she

9 explained that write-offs were typically taken if it was determined that there was no way to collect

10 on the account or if a customer went out of business . Copies of the aging report were used to

11 determine accounts subject to write-offs and the Accounts Receivable Manager (or his/her superior)

12 was responsible for authorizing write-offs . Once approval was received, Witness 25 went into the

13 BAAN system and removed the account from the Accounts Receivable account and "put it against

14 bad debt ." The witness ran aging reports from BAAN. These reports were typically used for

15 Accounts Receivable reconciliation at the end of the month . He/she kept a copy of the aging reports

16 for his/her own use and sent another copy to an Accounting Manager .

17 339. Witness 26, a former Accounts Receivable Manager throughout the Class Period,

18 confirmed that Hickman was aware of the issues regarding Remec's accounts receivable . Witness

19 26 prepared reports from BAAN that reflected the status of accounts on which his/her team was

20 trying to collect . These reports contained information such as which customer accounts the

21 collectors were calling, which customers had sent in money, and the balance of receivables that was

22 expected to be collected . These reports were e-mailed to Hickman and Morash. Additional

23 documents confirmed that Hickman was aware of all the problems plaguing Remec's Accounts

24 Receivable. Several Aging Accounts Receivable reports and other documents drafted by or to

25 Hickman addressed these problems, including a July 2,-2004 e-mail from Hickman to a Business

26 Unit Manager and other employees ("Subject : Re: Proposed AR Write-off list for Amps BU"), in

27 which Hickman complains about the lack of "a formal policy" for writing off accounts receivable .

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1 Another e-mail addressed to Hickman from Witness 15, dated July 1, 2004, refers to the collection of

2 "Bad Debt in South America . "

3 340. According to Witness 15, Hickman was an active participant in weekly conference

4 calls in which accounts receivable issues were discussed. Witness 15 said that Hickman asked

5 many questions during these weekly calls . (Other participants included two former Controllers and

6 Steve "Ziggy" Yasbek .) During these conference calls, Hickman would go through all of the Aging

7 Accounts Reports' "reminder" columns for customer accounts that have payment issues, and asked

8 questions of the other participants such as "Did you do this?" or "When did you do that?" He also

9 asked about commitments made by subordinate personnel to resolve issues . A July 1, 2004 e-mail to

10 Yasbek ("Subject : Are you on these AR calls today?") also refers these calls and Hickman' s

attendance, and a July 6, 2004 e-mail addressed to Hickman refers to scheduling "Filters AIR

12 Review - Follow-Up Meetings." Finally, a June 29, 2004 e-mail from Witness 15 to a Remec

13 Controller entitled "Past Due Accounts Receivable Follow-Up Meetings" states, "Winston has asked

14 that I assist with organizing . . . meetings this week . . . . Winston Hickman, [et al.] are required

15 participants for the entire morning session of reviews . "

16 341 . Remec's inability to collect on its accounts receivables substantially contributed to

17 the $62.4 million goodwill impairment charge it took at the end of the Class Period . For example, as

18 described above, Witness 2 said that he/she was still trying to collect on Himark receivables as of

19 mid-2005, after the end of the Class Period . According to a July 9, 2004 spreadsheet ("Beijing

20 Accounts Receivable"), as of May 31, 2003 (2Q 04), Himark's accounts receivable totaled $5 .7

21 million . These increased to $7.5 million as of July 30, 2003 (2Q 04) . By July 9, 2004 (2Q 05, the

22 last quarter of the Class Period), Himark's accounts receivable had ballooned to approximately $11.3

23 million . Similarly, an internal report dated July 16, 2004 reveals that Nokia owed Remec

24 approximately $8.14 million on debts that were more than 60 days old (for filters purchased from

25 Remec Finland) .

26 Impact of Above Improper Practices on Goodwill Impairment

27 342. The foregoing improper practices resulted in the material overstatement of sales and

28 the material understatement of the inventory values included in the cost of sales, which, therefore ,

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I meant that there was no basis for the sales growth and margin assumptions used by Remec in its

2 annual goodwill tests .

3 343. Even taking the reported sales and cost of sales amounts as true, the Company should

4 have recognized a charge for goodwill impairment at least by the beginning of the Class Period . The

5 assumptions used by defendants to test the goodwill impairment immediately before and during the

6 Class Period were not based on reasonable and supportable information and did not consider all

7 available information as required by GAAP .

8 Defendants ' Failure to Maintain an Adequate System of Internal Control s

9 344. In addition to the foregoing improper accounting practices, the Company also

10 sufl'crcd from a chronic and systematic breakdown of its internal accounting controls throughout the

II Class Period, which rendered Remec's financial reporting inherently corrupt, subject to

12 manipulation, and unreliable, resulting in materially false and misleading financial statements .

13 Internal documents (discussed below) reveal that Hickman was aware of these material internal

14 control deficiencies resulting from BAAN . Nevertheless, defendants failed to disclose these internal

15 control problems until the end of the Class Period .

16 345 . Witness 6, former Director of Cost Accounting, who worked at Remec throughout the

17 Class Period, confirmed that Remec had numerous problems and internal control deficiencies that

18 made it very difficult for the Company to report reliable and accurate financial results . For example,

19 the witness stated that implementation and subsequent utilization of the BAAN System was so

20 flawed that the accuracy of information in the system was very unreliable . As a result, according to

21 Witness 6, Gray and Hinkle (both former Controllers) would simply make journal entries based on

22 what they thought the entries needed to be . In one instance recalled by the Witness, Gray and Hinkle

23 told Witness 6 that they would simply "make the numbers look right" to correct for issues that

24 emerged in Finland relating to the BAAN system. However, Witness 6 seriously doubted whether

25 Gray or Hinkle had any legitimate basis for arriving at the results and journal entries they ultimately

26 reported. Witness 14 also believed Gray had far too much power and control over Remec's finance

27 and accounting, and that Gray's access to the BAAN system was probably problematic for the

28 Company .

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346 . Witness 16 stated that a recurring problem that surfaced during the weekly "Ops

meetings" in 2003 and 2004 (during the Class Period) was the fact that the financial information i n

the BAAN system did not match operations records which were generated by Remec's Business

Unit Managers, even though some of the operations data was also derived from BAAN . Witness 16

said that it was difficult to get "true and correct" information from the BAAN system . He/she

explained that Remec had been a "standards-based" Company, as opposed to an "actuals-based"

Company, meaning that if actual operations varied from the standards that had been loaded into

BAAN changed - say for the price of manufacturing materials - then someone needed to go into

BAAN and change the standards to reflect the actuals . However, this did not always occur. This

problem is reflected in dozens of internal Company reports . For example, there is an exchange in an

August 11, 2004 e-mail between Remec employees Dave Crandell and Ian Burke relating to the

variance in these costs, which . . . "don[']t look to[o] bad except for the [T]riplexer ." Despite the

employees' half-hearted acceptance of the variances, the spreadsheet attached to this email shows as

much as hundreds of thousands.of dollars in variances between standard costs of materials and actua l

purchase price .

347 . The inherent unreliability of the BAAN system during the Class Period is already

corroborated (even pre-discovery) by literally dozens of e-mails between Remec employees

regarding material mistakes stemming from the system's numerous deficiencies : a $4 million and $6

million manufacturing overhead mistake in I Q 05 and 2Q 05 (from a Global Supply Chain VP, dated

July 23, 2004) ; a $2 .4 million credit balance error (c-mails dated July 8 through 14, 2004) ; "problem

areas for the June Close were . . . because of their BAAN implementation issues" for the Wireles s

Division (from Yasbek to Hickman , July 30, 2004) ; manufacturing and overhead costs overstated by

10% because of a BAAN/Hyperion mistake (July 14, 2004) ; $1 million BAAN mistake in General

Ledger accounts (from an Accounting Manager to Yasbek, July 23, 2004) ; "Paradigm . . .,

Spectrian . . ., [and] Beijing (China) Himark are not connected to the BAAN system" (inte rnal report ,

"Financial Statement Close ," July/August 2004); "Sarbanes -Oxley Internal Controls

Documentation ," dated July 13, 2004 : "There is no finance overview of [s]ales order input to ensure

that shipping terms conform to the contractual terms of the supply agreement or [purchase order] . . . .


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2 "SOX Process 404 Issues Log," dated July 7, 2004 : "BAAN job roles do not segregate functions by

3 location . For example, buyers in Poway can . . .ship to Milpitas without Milpitas' knowledge . . . .

4 Inventory balances do not match to BAAN . . . . Actual cost per unit is not stored in BAAN . . . . Too

5 many have access to BAAN . Changes are not traceable to users ;" July 20, 2004: e-mail copied to

6 Hickman regarding "SOX Process 404 Issues Log ." "We're now up to 70 [control] gaps and are

7 continuing to add to the list . . . . ;" "I lost my [BRAN] decoder ring . . . . $1 .8 [million] [manufacturing

8 cost] is not accurate" (July 23, 2004) ; "For July [2004] alone there is a difference [i.e., BAAN

9 discrepancy] of $723,214 .74" for the accounts receivable balance sheet ("Balance sheet Analysis &

10 Adjustments," August 18, 2004) ; in regards to "Sales and cost issues in BAAN," "[t]his is getting

11 very frustrating now, I have had to put up with this for 5 months . . . I keep hearing the words

12 'accountability', . . . [BAAN is] still . . . way off the $2 mill[ion] shown in the accounts" (June 24-July

13 7, 2004 e-mails) ; "Why can't the UK tie BAAN to Hyperion?" (July 22, 2004 e-mail) ; regarding

14 $1 .2 million discrepancy and other major BAAN closing problems : "1 am now concerned as we have

15 now gone into period 5 when period 4 is still up in the air" (June 24 - 30, 2004 e-mails copied to

16 Hickman) ; and "We are having real difficulties reconciling [BAAN] with Costa Rica, we are out by

17 over $2 million" (July 1, 2004 e-mail) . This is a small representative sample of the voluminous

18 internal documents obtained by plaintiffs' counsel which convey the frustration of Remec's own

19 employees in their failed attempts to properly implement the hopelessly deficient BAAN system.

20 348. As one of Remec's U.S . Customer Service Representatives, Witness 19 was

21 responsible for entering customer orders into the Company's BAAN system, including orders from

22 Cingular, AT&T, and Lucent . Witness 19 characterized BAAN as being useless because Remec had

23 been unwilling to spend sufficient money to acquire all of the capabilities and functionality that the

24 BAAN system could have actually provided . For example, Witness 19 said that the version of

25 BAAN that Remec was using during his/her tenure (from Fall 2004 until Fall 2005) lacked the

26 capability for users to enter and track serial numbers of products . According to Witness 19, Remec's

27 manufacturing personnel in the Philippines or Costa Rica had serial number information for parts

28 and products, but these numbers had to be manually obtained from the personnel at the oversea s

FOURTH AMENDED COMPLAINT FOR VIOLATIONS -141- CASE NO . 04 CV 1948 JM'ASB)

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1 manufacturing facilities and manually entered into BAAN by Witness 19 or one of his/her

2 colleagues because Remec lacked automated processes and procedures . Witness 14 also

3 corroborated that BAAN's IT system was very problematic and had significant deficiencies,

4 especially as it pertained to inventory accounting, and that it was therefore possible that Remec's

5 publicly reported figures may have lacked a reliable basis .

6 349. After the orders had been shipped to customers, Witness 19 received an e-mail from

7 personnel at the manufacturing facilities indicating that the products had been shipped . These e-mail

8 notifications contained a description of what had been shipped, the name of the customer, and the

9 shipping number . The witness said that this was another weakness of Remec's BAAN system, in

10 that there was an inability to transfer information from one business unit to another, for example,

I 1 from the Philippines business unit to the U .S . business unit . (Witness 20 confirmed that the

12 individual business units were not "tied together" in BAAN, meaning that while one unit did "have

13 visibility" into another, i.e., could view information, they could not transfer or share information

14 between them . Therefore, Witness 19 had to manually enter the date of the shipment into the U .S .

15 business unit in BAAN . Because the information was entered in the "notes section" of the system,

16 there was no way to automatically run shipment reports or track shipments . This deficiency is

17 discussed in a December 11, 2003 e-mail between Remec employees Jennifer Jeng and Jessica

18 Bishop, which confirms that " . . . we cannot distinguish between sites . . ." Witness 28 corroborated

19 this account, stating that running the Aging Accounts [Receivable] Report from BAAN was time

20 consuming because each country in which Remec operated was designated as a distinct company in

21 BAAN. (Witness 32 stated that the Costa Rica facility was designated as an independent business

22 unit in BAAN .) Therefore, Witness 28 had to run the Aging Reports for each of these entities .

23 According to the witness, the way that the information was put into the Aging brackets was

24 "incorrect," so he/she had to fix the Aging Report to accurately reflect the status of the accounts .

25 350. Witness 19 estimated that it took approximately six weeks from the time an order was

26 entered into BAAN to the time that he/she received notification from personnel at the manufacturing

27 facilities that the order had been shipped to the customer . The witness added that there were "a few"

28 instances during his/her one-year tenure in which the orders did not go out for long periods of tim e


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after she entered the order into BAAN . Witness 19 said that it was at least two months after thes e

orders were entered in BAAN that the orders were actually shipped to customers .

351 . Witness 14 confirmed that the BAAN system had significant deficiencies, especially

as it pertained to inventory accounting, and that it was quite possible Remec's publicly reported

financial results lacked a reliable basis . Witness 14 explained that the problems with accounting for

inventory resulted from the Company's failure to fully implement BAAN, which was "never on e

hundred percent ." More importantly, Witness 14 stated that top-level corporate accounting

personnel such as Hinkle, Gray and Morash made adjustments to financial results reported through

the BAAN system that were ultimately reported in Remec's public financial statements . However,

the reasons for these adjustments "were footnoted," but that such footnotes did not appear in the SEC

filings, but instead were submitted to the Company's auditors . Witness 14 said BAAN simply could

not supply accurate or meaningful data regarding inventory, making accurate sales forecasting very

difficult -- to the point where forecasting was "not even useful ." According to the witness,

forecasting stopped being useful following the reorganization that took place in 2003 . As Witness

14 explained it, because of the deficiencies with the BAAN system, they did not know "what [they ]

had and what [they] needed to buy." The limitations with BAAN led to Remec frequently buying

inventory it already had . By way of analogy, the witness offered, "Imagine you're selling apples and

you need to sell 100 apples a month, but you don't know how many apples you have . Maybe you

already have 80 apples, but you end up buying 100 because you didn't know you already had 80

apples ."

352. As noted above , defendants were ultimately forced to disclose the existence o f

"potential control deficiencies" on September 9, 2004 in connection with the Company's Form 10-Q

filing .

353. After the Class Period, on September 30, 2004, Remec filed a Form 8-K whic h

disclosed that its auditor, Ernst &Young, had advised the audit committee of certain internal contro l

deficiencies for the year ended January 31, 2003, including :

(a) lack of review and technical accounting oversight of certain accounting

transactions and activities within the financial statement close process ;

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1 (b) lack of timely reconciliation of bank statements and the lack of preparation,

2 review and documentation of reconciliations for certain other accounts ;

3 (c) inability to prepare a mechanized calculation of inventory reserves by the

4 Company's financial information systems ; an d

5 (d) inadequate program and access controls for the Company's information

6 technology processes that support the internal control environment .

7 354. The September 30, 2004 8-K also disclosed E&Y had advised the audit committee of

8 certain other internal control deficiencies for the year ended January 31, 2004, including :

9 (a) failure to consistently follow its policy and procedures for review, approval

10 and documentation in the areas of revenue recognition and payroll and needed to enhance controls

i 1 to identify duplicate payments ;

12 (b) lack of adequate documentation and analysis capabilities for its foreign

13 currency translation and exchange activities ; and

14 (c) lack of adequate segregation of duties and controls at a foreign subsidiary

15 relating to cash, and timely accrual of liabilities .

16 355 . Section 13(b)(2) of the Exchange Act states, in pertinent part, that every reporting

17 company must: (A) make and keep books, records and accounts which, in reasonable detail,

18 accurately and fairly reflect the transactions and disposition of the assets of the issuer ; and (B) devise

19 and maintain a system of internal controls sufficient to provide reasonable assurances that

20 transactions are recorded as necessary to permit the preparation of financial statements in conformity

21 with GAAP. These provisions require an issuer to employ and supervise reliable personnel, to

22 maintain reasonable assurances that transactions are executed as authorized, to properly record

23 transactions on an issuer's books and, at reasonable intervals, to compare accounting records with

24 physical assets . 15 U.S .C . §78m(b)(2) .

25 356. Remec violated Section 13(b)(2)(A) of the Exchange Act by failing to maintain

26 accurate records concerning its cash accounts, inventory reserves, and foreign currency translation

27 and exchange activities . Remec's inaccurate and false records were not isolated or unique instances

28 because they were improperly maintained for multiple reporting periods, from at least January 31 ,

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12003 . Accordingly, Remec violated Section 13(b)(2)(A) of the Exchange Act. 15 U .S.C .

§78m(b)(2)(A) .

357. In addition, Remec violated Section 13(b)(2)(B) of the Exchange Act by failing to

implement procedures reasonably designed to prevent accounting irregularities . Remec failed to pu t

into place proper reviews and checks to ensure that its management did not engage in accounting

improprieties . It failed to ensure that transactions were reported in accordance with its own policies

and with GAAP . Accordingly , Remec violated Section 13(b)(2)(B ) of the Exchange Act. 15 U.S .C .

§78m(b)(2)(B) .

358 . Remec's lack of adequate internal controls rendered Remec's Class Period financia l

repo rt ing inherently unreliable . and precluded the Company from preparing financial statements that

complied with GAAP . Nonetheless, throughout the Class Period , the Company regularly issued

quarterly and annual financial statements without ever disclosing the existence of the signi ficant and

material deficiencies in its inte rnal accounting controls and falsely asserted that its financia l

j statements complied with GAAP .

ADDITIONAL SCIENTER ALLEGATION S

359. As plaintiffs allege, defendants acted with scienter in that defendants knew that th e

I public documents and statements issued or disseminated in the name of the Company were

materially false and misleading ; knew that such statements or documents would be issued or

disseminated to the investing public ; and knowingly and substantially participated or acquiesced in

the issuance or dissemination of such statements or documents as primary violations of the federal

securities laws . As set forth elsewhere in this Complaint in detail, defendants, by virtue of their

receipt of information reflecting the true facts regarding Remec, their control over, and/or receip t

and/or modification of Remec allegedly materially misleading misstatements and/or their

associations with the Company which made them privy to confidential proprietary information

concerning Remec, participated in the fraudulent scheme alleged herein .

360. Defendants knew and/or recklessly disregarded the falsity and misleading nature o f

the information which they caused to be disseminated to the investing public . The ongoing

fraudulent scheme described in this Complaint could not have been perpetrated over a substantia l

FOURTH AMENDED COMPLAINT FOR VIOLATIONS -149- CASE NO . 04 CV 1948 JM (AiR)OF THE FEDERAL SECURITIES LAW SDOCS1354922v2

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1 period of time, as has occurred, without the knowledge and complicity of the personnel at the highest

2 level of the Company, including the Individual Defendants .

3 361 . A senior member of Remec's IT department, Witness 3, confirmed that, through the

4 BAAN ERP system, the Company's senior managers and executives had access to all the

5 information they needed to monitor the Company's operations and financial figures, particularly that

6 which pertained to any accounting and finance-related matters .

7 362. For example, defendants knew, or recklessly disregarded, that Remec had significant

8 inventory problems, that obsolete inventory was being "moved" to special accounts where it was

9 kept on the Company's books at higher-than-warranted values after it should have been written off,

10 that current "sales" were being reported based on "pulled-in" future orders, and that inventory was

I 1 being shipped to customers and recorded as "installed and functional," in order to book the revenue,

12 when it was not in working order . In fact, former IT employee, Witness 3, explained that Remec had

13 comprehensive systems in place to give the executives access to all they needed to monitor the

14 business, including, among other things, sales, revenue, inventory, and receivables . Another former

15 employee, Witness 1, who worked on the Baan ERP system and other applications at the Company

16 during the Class Period, confirmed that defendants Ragland and Hickman, specifically, both knew

17 about the use of quarantine accounts and the amount of inventory allocated to them because (a) they

18 each had direct access to the ERP system which clearly showed the amounts in the Quarantine

19 accounts, and (b) they were regularly briefed and provided this information by subordinate

20 managers . Indeed, defendants were able to run a query using the term "quarantine" which would

21 return a report of the various individual quarantine inventory accounts (as many as 50 of them,

22 which are numerically coded) .

23 363. During the Class Period, each of the Individual Defendants, as senior executive

24 officers and/or directors of Remec were privy to non-public information concerning its business,

25 finances, products, markets and present and future business prospects via access to internal corporate

26 documents, conversations and connections with other corporate officers and employees, attendance

27 at management and Board of Directors meetings and committees thereof and via reports and other

28 information provided to them in connection therewith . Because of their possession of suc h

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1 information, the Individual Defendants knew or recklessly disregarded the fact that adverse facts had

2 not been disclosed to, and were being concealed from, the investing public.

3 364. Because of the Individual Defendants' positions with the Company, they had access

4 to the adverse undisclosed information about the Company's business, operations, operational

5 trends, financial statements, markets and present and future business prospects and access to internal

6 corporate documents (including the Company's operating plans, budgets and forecasts and reports of

7 actual operations), conversations and connections with other corporate officers and employees,

8 attendance at management and Board of Directors meetings and committees, and via reports and

9 other information provided to them .

10 365 . It is appropriate to treat the Individual Defendants as a group for pleading purposes

l I and to presume that the false, misleading and incomplete information conveyed in the Company's

12 public filings, press releases and other publications alleged are the collective actions of the

13 defendants identified above . Each of the above officers of Remec, by virtue of their high-level

14 positions with the Company (namely, CEO and CFO), directly participated in the management of the

15 Company, was directly involved in the day-to-day operations of the Company at the highest levels

16 and was privy to confidential proprietary information concerning the Company and its business,

17 operations, growth, financial statements, and financial condition . These defendants were involved in

18 drafting, producing, reviewing and/or disseminating the false and misleading statements and

19 information alleged, were aware, or recklessly disregarded, that the false and misleading statements

20 were being issued regarding the Company, and approved or ratified these statements, in violation of

21 the federal securities laws .

22 366. As officers and controlling persons of a publicly-held company whose securities

23 were, and are, registered with the SEC pursuant to the Exchange Act, and was traded on the

24 NASDAQ and governed by the provisions of the federal securities laws, the Individual Defendants

25 each had a duty to disseminate promptly, accurate and truthful information with respect to the

26 Company's financial condition and performance, growth, operations, financial statements, business,

27 markets, management, earnings and present and future business prospects, and to correct any

28 previously-issued statements that had become materially misleading or untrue, so that the marke t


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price of the Company's publicly-traded securities would be based upon truthful and accurate

information . The Individual Defendants' misrepresentations and omissions during the Class Perio d

violated these specific requirements and obligations .

367 . The Individual Defendants participated in the drafting, preparation, and/or approval

of the various public and shareholder and investor reports and other communications complained o f

and were aware of, or recklessly disregarded, the misstatements contained therein and omissions

there from, and were aware of their materially false and misleading nature . Because of their Board

membership and/or executive and managerial positions with Remec, each of the Individual

Defendants had access to the adverse undisclosed information about Remec's financial condition and

performance and knew, or recklessly disregarded, that these adverse facts rendered the positive

representations made by or about Remec and its business issued by the Company materially fals e

and misleading .

368. - The Individual Defendants, because of their positions of control and authority as

officers and/or directors of the Company, were able to and did control the content of the various SEC

filings, press releases and other public statements pertaining to the Company during the Class

Period. Each Individual Defendant was provided with copies of the documents alleged herein to b e

misleading prior to or shortly after their issuance and/or had the ability and/or opportunity to prevent

their issuance or cause them to be corrected . Accordingly, each of the Individual Defendants i s

responsible for the accuracy of the public reports and releases issued and is, therefore, primarily

liable for the representations contained therein .

369 . Each of the defendants is liable as a participant in a fraudulent scheme and course o f

business that operated as a fraud or deceit on purchasers of Remec securities by disseminatin g

materially false and misleading statements and/or concealing material adverse facts . The scheme:

(a) deceived the investing public regarding Remec's business, operations, management and the

intrinsic value of Remec securities ; and (b) caused plaintiffs and other members of the Class t o

purchase Remec securities at artificially inflated prices .

FOURTH AMENDED COMPLAINT FOR VIOLATIONS - 152 - CASE NO . 04 CV 1948 JM (AJB)OF THE FEDERAL SECURITIES LAWSDOCS%354922v2

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l CAUSATION

2 370. During the Class Period, defendants materially misled the investing public, thereby

3 inflating the price of Remec, securities, by publicly issuing false and misleading statements and

4 omitting to disclose material facts necessary to make defendants' statements, as set forth herein, not

5 false and misleading . Said statements and omissions were materially false and misleading in that

6 they failed to disclose material adverse information and misrepresented the truth about the Company,

7 its business and operations, as alleged herein .

8 371 . At all relevant times, the material misrepresentations and omissions particularized in

9 this Complaint directly or proximately caused or were a substantial contributing cause of the

10 damages sustained by plaintiffs and other members of the Class . As described herein, during the

1 I Class Period, defendants made or caused to be made a series of materially false or misleading

12 statements about Remec's business, revenues, earnings, goodwill value, and success of various

13 acquisitions . These material misstatements and omissions had the cause and effect of creating in the

14 market an unrealistically positive assessment of Remec and its business, and financial statements,

15 thus causing the Company's securities to be overvalued and artificially inflated at all relevant times .

16 Among other things, defendants led the market to believe there was a prospect of achieving the

17 growth rates utilized in the goodwill impairment tests . When defendants disclosed at the end of the

18 Class Period that they would have to take a huge goodwill impairment charge, revealing that the

19 assumptions used in the goodwill impairment tests were baseless and not based on assumptions used

20 to run the business (as publicly represented), the stock dropped immediately (by over 18%) . While

21 the assumptions themselves may have been public prior to that date, the deficiencies with those

22 assumptions, were not disclosed until then. When they were, the market reacted quickly and the

23 stock dropped as a result . In other words, when the truth about defendants' wrongful acts, including

24 their delayed announcement of a material goodwill impairment charge, were revealed, the artificial

25 inflation of the stock price which defendants caused during the Class Period, was removed . Thus,

26 defendants' materially false and misleading statements during the Class Period resulted in plaintiffs

27 and other members of the Class purchasing the Company's securities at artificially inflated prices,

28 thereby causing the damages complained of herein .

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PLAINTIFFS' CLASS ACTION ALLEGATION S

372 . Plaintiffs bring this action as a class action pursuant to Federal Rule of Civil

Procedure 23(a) and (b)(3) on behalf of a Class, consisting of all those who purchased or otherwise

acquired the securities of Remec between September 8, 2003 and September 8, 2004, inclusive, and

who were damaged thereby . Excluded from the Class are defendants , the officers and directors of th e

Company, at all relevant times, members of their immediate families and their legal representatives,

heirs, successors or assigns and any entity in which defendants have or had a controlling interest .

373 . The market for Remec's securities was open, well-developed and efficient at all

relevant times . As a result of these materially false and misleading statements and failures to

disclose, Remec's securities traded at artificially inflated prices during the Class Period . Plaintiffs

and other members of the Class purchased or otherwise acquired Remec securities relying upon the

integrity of the market price of Remec securities, and market information relating to Remec, an d

have been damaged thereby .

374 . The members of the Class are so numerous that joinder of all members i s

impracticable . Throughout the Class Period, Remec's securities were actively traded on the

NASDAQ. While the exact number of Class members is unknown to plaintiffs at this time and can

only be ascertained through appropriate discovery, plaintiffs believe that there are hundreds or

thousands of members in the proposed Class . Record owners and other members of the Class may

be identified from records maintained by Remec or its transfer agent and may be notified of the

pendency of this action by mail, using the form of notice similar to that customarily used in

securities class actions .

375 . Plaintiffs' claims are typical of the claims of the members of the Class as all members

of the Class are similarly affected by defendants' wrongful conduct in violation of federal law that is

complained of herein .

376. Plaintiffs will fairly and adequately protect the interests of the members of the Clas s

I and has retained counsel competent and experienced in class and securities litigation .

FOURTH AMENDED COMPLAINT FOR VIOLATIONS - 154 _ CASE NO. 04 CV 1948 3M (AJB)OF THE FEDERAL SECURITIES LAW SDOCS\354922v2

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1 377. Common questions of law and fact exist as to all members of the Class and

2 predominate over any questions solely affecting individual members of the Class . Among the

3 questions of law and fact common to the Class are :

4 (a) whether the federal securities laws were violated by defendants ' acts as

5 alleged herein ;

6 (b) whether statements made by defendants to the investing public during the

7 Class Period misrepresented material facts about the business, operations and management of

8 Remec; an d

9 (c) to what extent the members of the Class have sustained damages and the

10 proper measure of damages .

11 378. A class action is superior to all other available methods for the fair and ef ficient

12 adjudication of this controversy since joinder of all members is impracticable . Furthermore, as the

13 damages suffered by individual Class members may be relatively small, the expense and burden of

14 individual litigation make it impossible for members of the Class to individually redress the wrongs

15 done to them . There will be no difficulty in the management of this action as a class action .

16 APPL ICABILITY OF PRESUMPTION OF RELIANCE :FRAUD - ON-THE -MARKET DOCTRIN E

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18 379 . At all relevant times, the market for Remec securities was an efficient market for the

19 following reasons , among others :

20 (a) Remec stock met the requirements for listing, and was listed and actively

21 traded on the NASDAQ, a highly efficient and automated market ;

22 (b) As a regulated issuer, Remec filed periodic public reports with the SEC and

23 the NASDAQ ;

24 (c) Remec regularly communicated with public investors via established market

25 communication mechanisms, including through regular disseminations of press releases on the

26 disclosures , such as communications with the financial press and other similar reporting services ;

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(d) Remec was followed by several securities analysts employed by majo r

brokerage firms who wrote reports which were distributed to the sales force and certain customers

of their respective brokerage firms . Each of these reports was publicly available and entered the

public marketplace .

380 . As a result of the foregoing, the market for Remec securities promptly digested

current information regarding Remec from all publicly-available sources and reflected suc h

information in Remec 's stock price . Under these circumstances , all purchasers of Remec securities

during the Class Period suffered similar injury through their purchase of Remec securities at

artificially inflated prices and a presumption of reliance applies .

NO SAFE HARBOR IMMUNIZATION FOR ANY OF THE ALLEGED FALSESTATEMENTS BY DEFENDANTS

381 . The statutory safe harbor provided for forward-looking statements under certain

circumstances does not apply to any of the alleged false statements pleaded in this Complaint . Many

of the specific statements pleaded herein were not identified as "forward-looking statements" when

made . To the extent there were any forward-looking statements, there were no meaningful warnings

in the purportedly forward-looking statements . Alternatively, to the extent that the statutory safe

harbor does apply to any forward-looking statements pleaded herein, defendants are liable for those

false forward-looking statements because at the time each of those forward-looking statements wa s

made, the particular speaker knew that the particular forward-looking statement was false, and/or the

forward-looking statement was authorized and/or approved by an executive officer of Remec wh o

knew that those statements were false when made .

FIRST CLAIMViolation of §10(b) of The Exchange Act

And Rule 10b-5 Promulgated Thereunder Against All Defendants

382 . Plaintiffs repeat and reallege each and every allegation contained above as fully se t

forth herein .

383 . During the Class Period, defendants carried out a plan, scheme and course of conduc t

which was intended to and, throughout the Class Period, did : (1) deceive the investing public,

including plaintiffs and other Class members, as alleged herein ; and (2) cause plaintiffs and othe r


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1 members of the Class to purchase Remec securities at artificially inflated prices . In furtherance of

2 this unlawful scheme, plan and course of conduct, defendants and each of them took the actions set

3 forth herein .

4 384. Defendants (a) employed devices, schemes . and artifices to defraud ; (b) made untrue

5 statements of material fact and/or omitted to state material facts necessary to make the statements not

6 misleading ; and (c) engaged in acts, practices, and a course of business which operated as a fraud

7 and deceit upon the purchasers of the Company's securities in an effort to maintain artificially-high

8 market prices for Remec securities in violation of Section 10(b) of the Exchange Act and Rule l0b-5 .

9 All defendants are sued either as primary participants in the wrongful and illegal conduct charged

10 herein or as controlling persons as alleged below .

11 385 . Defendants, individually and in concert, directly and indirectly, by the use, means or

12 instrumentalities of interstate commerce and/or of the mails, engaged and participated in a

13 continuous course of conduct to conceal adverse material information about the business, operations

14 and future prospects of Remec as specified herein .

15 386. These defendants employed devices, schemes, and artifices to defraud, while in

16 possession of material adverse non-public information and engaged in acts, practices, and a course of

17 conduct as alleged herein in an effort to assure investors of Remec value and performance and

18 continued substantial growth, which included the making of, or the participation in the making of,

19 untrue statements of material facts and omitting to state material facts necessary in order to make the

20 statements made about Remec and its business operations and future prospects in the light of the

21 circumstances under which they were made, not misleading, as set forth more particularly herein,

22 and engaged in transactions, practices and a course of business which operated as a fraud and deceit

23 upon the purchasers of Remec securities during the Class Period .

24 387. Each of the Individual Defendants' primary liability, and controlling person liability,

25 arises from the following facts : (1) the Individual Defendants were high-level executives and/or

26 directors at the Company during the Class Period and members of the Company's management team

27 or had control thereof; (2) each of these defendants, by virtue of his responsibilities and activities as

28 a senior officer and/or director of the Company was privy to and participated in the creation ,

FOURTH AMENDED COMPLAINT FOR VIOLATIONS - 157 - CASE NO . 04 CV 1948 JM (AJE)OF THE FEDERAL SECURITIES LAW SDOCS\354922v2

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development and reporting of the Company's internal budgets, plans, projections and/or reports ;

(3) each of these defendants enjoyed significant personal contact and familiarity with the other

defendants and was advised of and had access to other members of the Company's managemen t

team, internal reports and other data and information about the Company's finances, operations, and

sales at all relevant times ; and (4) each of these defendants was aware of the Company's

dissemination of information to the investing public which they knew or recklessly disregarded was

materially false and misleading .

388. The defendants had actual knowledge of the misrepresentations and omissions of

material facts set forth herein, or acted with reckless disregard for the truth in that they failed to

ascertain and to disclose such facts, even though such facts were available to them . Such defendants'

material misrepresentations and/or omissions were done knowingly or recklessly and for the purpose

and effect of concealing Remec operating condition and future business prospects from the investing

public and supporting the artificially inflated price of its securities . As demonstrated by defendants'

overstatements and misstatements of the Company's business, operations and earnings throughout

the Class Period, defendants, if they did not have actual knowledge of the misrepresentations and

omissions alleged, were reckless in failing to obtain such knowledge by deliberately refraining from

taking those steps necessary to discover whether those statements were false or misleading .

389 . As a result of the dissemination of the materially false and misleading information

and failure to disclose material facts, as set forth above, the market price of Remec securities was

artificially inflated during the Class Period . In ignorance of the fact that market prices of Remec

publicly-traded securities were artificially inflated, and relying directly or indirectly on the false and

misleading statements made by defendants, or upon the integrity of the market in which the

securities trades, and/or on the absence of material adverse information that was known to o r

recklessly disregarded by defendants but not disclosed in public statements by defendants during the

Class Period, plaintiffs and the other members of the Class acquired Remec securities during the

Class Period at artificially higl prices and were damaged thereby .

390. At the time of said misrepresentations and omissions, plaintiffs and other members o f

the Class were ignorant of their falsity, and believed them to be true . Had plaintiffs and the other

FOURTH AMENDED COMPLAINT FOR VIOLATIONS - 158- CASE NO . 04 CV 1948 JM (AJB)OF THE FEDERAL SECURITIES LAWSDOCS\354922v2

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members of the Class and the marketplace known the truth regarding the problems that Remec was

experiencing, which were not disclosed by defendants, plaintiffs and other members of the Clas s

I would not have purchased or otherwise acquired their Remec securities, or, if they had acquired suc h

securities during the Class Period, they would not have done so at the artificially inflated prices

which they paid .

391 . By virtue of the foregoing, defendants have violated § 10(b) of the Exchange Act, an d

Rule I Ob-5 promulgated thereunder .

392. As a direct and proximate result of defendants' wrongful conduct, plaintiffs and the

other members of the Class suffered damages in connection with their respective purchases and sales

of the Company's securities during the Class Period .

SECOND CLAIMViolation of §20(a) of The Exchange Act

Against the Individual Defendants

393 . Plaintiffs repeat and reallege each and every allegation contained above as if fully se t

forth herein .

394. The Individual Defendants acted as controlling persons of Remec within the meaning

of Section 20(a) of the Exchange Act as alleged herein . By virtue of their high-level positions, and

their ownership and contractual rights, participation in and/or awareness of the Company's

operations and/or intimate knowledge of the false financial statements filed by the Company with the

SEC and disseminated to the investing public, the Individual Defendants had the power to influenc e

and control and did influence and control , directly or indirectly , the decision -making of the

Company, including the content and dissemination ofthe various statements which plaintiffs contend

are false and misleading . The Individual Defendants were provided with or had unlimited access to

copies of the Company's reports, press releases, public filings and other statements alleged by

plaintiffs to be misleading prior to and/or shortly after these statements were issued and had th e

ability to prevent the issuance of the statements or cause the statements to be corrected .

395 . In particular, each of these defendants had direct and supervisory involvement in th e

day-to-day operations of the Company and, therefore, is presumed to have had the power to contro l

FOURTH AMENDED COMPLAINT FOR VIOLATIONS _ 159 - CASE NO . 04 CV 1948 .1M (AJB)OF THE FEDERAL SECURITIES LAWSDOCSW4922v2

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or influence the particular transactions giving rise to the securities violations as alleged herein, and

exercised the same .

396 . As set forth above, Remec and the Individual Defendants each violated Section 10(b)

and Rule lOb-5 by their acts and omissions as alleged in this Complaint . By virtue of their positions

as controlling persons, the Individual Defendants are liable pursuant to Section 20(a) of the

Exchange Act . As a direct and proximate result of defendants' wrongful conduct, plaintiffs and other

members of the Class suffered damages in connection with their purchases of the Company's

securities during the Class Period.

PRAYER FOR RELIEF

WHEREFORE, plaintiffs pray for relief and judgment, as follows :

A. Determining that this action is a proper class action, certifying plaintiffs as class

representatives under Rule 23 of the Federal Rules of Civil Procedure and plaintiffs' counsel as class

'counsel ;

B. Awarding compensatory damages in favor of plaintiffs and the other Class members

against all defendants, jointly and severally, for all damages sustained as a result of defendants'

wrongdoing, in an amount to be proven at trial, including interest thereon ;

C. Awarding plaintiffs and the Class their reasonable costs and expenses incurred in this

action, including counsel fees and expert fees ; and

D. Such other and further relief as the Court may deem just and proper.

Ju RY DEMAN D

Plaintiffs demand a trial by jury .

DATED: May 4, 2006 MILBERG WEISS BERSHAD& SCHULMAN LL P

JEFF S . WESTERMANKAREN T. ROGERSRAMON M. GONZALEZ

uov,~. 99A---e~-KAREN T . ROGERS

FOURTH AMENDED COMPLAINT FOR VIOLATIONS - 160- CASE NO. 04 CV 1948 ]M (AJB)OF THE FEDERAL SECURITIES LAWSDOCSX1 54922v2

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355 South Grand Avenue, Suite 4170Los Angeles, CA 9007 1Telephone: (213) 617-1200Facsimile : (213) 617-1975

MILBERG WEISS BERSHAD& SCHULMAN LLP

STEVEN G . SCHULMANPETER SEIDMANOne Pennsylvania PlazaNew York, NY 10119Telephone : (212) 594-5300Facsimile : (212) 868-122 9

Lead Counsel for Plaintiffs

LAW OFFICE OF BRUCE G . MURPHYBruce G. Murphy265 Llwyd's LaneVero Beach, FL 32963Telephone : (561) 231-4202Facsimile : (561) 231-4042

Counsel for Plaintiff

FOURTH AMENDED COMPLAINT FOR VIOLATIONS - 161 - CASE NO . 04 CV 1948 JM (A]B)OF THE FEDERAL SECURITIES LAWSDOCS1354922v2

EXHIBIT A

Class Period : 09/08/03 - 09/08/04 Remec, Inc . (NASDAQNM: REMC )

PURCHASE TRANSACTIONS SALES TRANSACTIONSSHARE PURCHASE SHARE

PLAINTIFF DATE SHARES COST AMOUNT DATE SHARES PRICE SALES AMOUNT

Brad Cuvelier 09/10/03 1,250 11 .2800 14,100 .00 10101/04 10,000 4 .0600 40,600 .0009/17/03 1,250 11 .7900 14,737 .5010/22/03 2,500 11 .0500 27,625 .0003/10/04 5,000 7 .4600 37,300 .00

Brad Cuvelier Totals 10,000 93,762 .50 10 ,000 40 , 600.00

John Hu 02/11/04 2,800 7.9000 22,120 .00 07/14/04 3,200 4.9000 15,680 .0002/11/04 6,000 7 .8700 47,220.00 07/14/04 700 4.9100 3,437.0002/11104 200 7.8800 1,576 .00 07/14/04 100 4.9200 492.00

07/14/04 500 4.9300 2,465 .0007/14/04 200 4.9400 988.0007/14/04 1,200 4.9500 5,940.0007/14/04 1,900 4.9600 9,424 .0007/14/04 1,200 4.9700 5,964.00

John Hu Totals 9,000 70,916.00 9 , 000 15 ,680.00

Jerald D. Noblet 1212103 - SD 4,000 11 .2500 45.000 .00

Jerald D. Noblet Totals 4,000 45,000 .00 0 0 .00

Lowell D . Sitton 02/12/04 2,046 8 .1100 16,593 .0602/12/04 1,900 8 .0400 15, 276 .0002/12/04 1,100 8 .0900 8,899 .0002/12/04 200 8.0700 1,614 .0002/12/04 454 8.0800 3,668 .32

Lowell D. Sitton Totals 5,700 46,050 .38 0 0.00

William Kitsonas 02/11/04 9,800 7.8400 76,832 .00 02/18/04 4,800 7.4600 35,808 .00

William Kitsonas Totals 9 , 800 76 , 832.00 4,800 35,808 .00

3511051

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EXHIBIT B

Remec's Gross Profit % Factors used in its Goodwill Impairment Tests

s r

ID

40.0%

35.0%

30.0%

25.0%

20.0%

15.0%

10.0%

5.0%

0.0%

-5 .0%

-10.0%

Annual TeatPerformed for IndicatorsFiscal 2004 on Test12126103. performed

during QIE"2Q& 21. 7130/04.

Gross Profit notuntil 113112003.

6.6%

1-1

P

3/23/2006 12 :01 PM

7

Performed forFiscal 2003 on12127102.

ginning EndClass cta!

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Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q32002 2002 2002 2002 2003 2003 2003 2003 2004 2004 2004 2004 2005 2005 2005

■ Actual Gross Profit %

Reporting Periods■ Assumed Gross

Profit % - Low13 Assumed Gross

Profit %- High

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DECLARATION OF SERVICE BY MAIL

1, the undersigned, declare :

1 . That declarant is and was , at all times herein mentioned , a citizen of the United States

and a resident of the County of Los Angeles , over the age of 18 years , and not a party to or interest

in the within action ; that declarant 's business address is 355 South Grand Avenue, Suite 4170, Los

Angeles, California 90071 .

2. That on May 4, 2006, declarant served the FOURTH AMENDED COMPLAINT

FOR VIOLATIONS OF THE FEDERAL SECURITIES LAWS by depositing a true copy thereof in

a United States mailbox at Los Angeles, California in a sealed envelope with postage thereon fully

prepaid and addressed to the parties listed on the attached Service List .

3 . That there is a regular communication by mail between the place of mailing and the

places so addressed .

I declare under penalty of perjury that the foregoing is true and correct . Executed this 4th

day of May, 2006 , at Los Angeles , Californ ia .

ANN MARIE GENOVESE

FOURTH AMENDED COMPLAINT FOR VIOLATIONSOFTHE FEDERAL SECURITIES LAWSDOCS1354922v2

- 162 - CASE NO. 04 CV 1948 JM (A713)

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Service ListREMEC INCORPORA TED

Counsel for Plaintiffs

Jeff S . Westerman Bruce G . Murph yKaren T . Rogers LAW OFFICE OF BRUCE G. MURPH YRamon M . Gonzalez 265 Llwyd's LaneMILBERG WEISS BERSHAD & Vero Beach , FL 3296 3

SCHULMAN LLP Telephone: (772) 231-420 2355 South Grand Ave ., Suite #4170 Facsimile : (772) 231-4042Los Angeles , CA 9007 1Telephone : (213) 617-1200Facsimile : (213) 617-197 5

Steven G . SchulmanMILBERG WEISS BERSHAD &

SCHULMAN LLPOne Pennsylvania Avenu eNew York, NY 10119-016 5Telephone : (212) 594-5300Facsimile : (212) 868-1229

Blake M . Harpe rHULETT HARPER STEWART550 West C Street , Suite 160 0San Diego , CA 9210 1Telephone : (619) 338-113 3

Travis E . Downs, II ILERACH COUGHLIN STOI AGELLER RUDMAN & ROBBIN S401 B Street , Suite 170 0San Diego, CA 9210 1Telephone : (619) 231-105 8Facsimile : (619) 231-7423

Counsel for Defendant s

Robert W . Brownlie * * Denotes Service via Hand DeliveryPaul A . ReynoldsNoah A. Katsel lDLA PIPER RUDNICK GRA Y

CARY US LL P401 B Street , Suite 170 0San Diego , CA 9210 1Telephone: (619) 699-270 0Facsimile : (619) 699-270 1


Documents

In Re: REMEC, Inc. Securities Litigation 04-CV-1948 …securities.stanford.edu/.../200654_r01c_04CV1948.pdfANTHONY EVANS Individually And On ) Behalf of All Other Similarly Situated,