Fritz Companies, Inc. - CIVIL DOCKET FOR CASE #: 96-CV-2712

Stanford University Law School - Securities Class Action Clearinghouse

Second Amended Consolidated Complaint

MILBERG WEISS BERSHAD
HYNES & LERACH LLP
WILLIAM S. LERACH (68581)
HELEN J. HODGES (131674)
ARTHUR C. LEAHY (149135)
600 West Broadway, Suite 1800
San Diego, CA 92101
Telephone: 619/231-1058
- and -
ALISON M. TATTERSALL (149607)
222 Kearny Street, 10th Floor
San Francisco, CA 94108
Telephone: 415/288-4545

BARRACK, RODOS & BACINE
EDWARD M. GERGOSIAN (105679)
KRISTI A. SHELTON (179400)
600 West Broadway, Suite 1700
San Diego, CA 92101
Telephone: 619/230-0800
BERGER & MONTAGUE, P.C.
SHERRIE R. SAVETT
1622 Locust Street
Philadelphia, PA 19103
Telephone: 215/875-3000
Co-Lead Counsel for Plaintiffs

UNITED STATES DISTRICT COURT

NORTHERN DISTRICT OF CALIFORNIA

SUSAN POLK, Trustee for the F. Felix Polk, a Psychological Corporation Profit Sharing Plan, SAMUEL WEISS, VIC SHACKELFORD, E.M. LAWRENCE LIMITED FROZEN RETIREMENT TRUST dated September 1, 1992, GEORGE LEVENSON, and IRVING ROSENZWEIG, On Behalf of Themselves and All Others Similarly Situated,

Plaintiffs,
vs.

LYNN C. FRITZ, JOHN H. JOHUNG, DENNIS L. PELINO, STEPHEN M. MATTESSICH, and CARSTEN S. ANDERSEN, and FRITZ COMPANIES, INC.,
Defendants.
___________________________________

In re FRITZ COMPANIES SECURITIES LITIGATION
___________________________________

This Document Relates To:

ALL ACTIONS.
___________________________________

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Master File No.
C-96-2712-MHP

CLASS ACTION

SECOND AMENDED CONSOLIDATED CLASS ACTION COMPLAINT FOR VIOLATION OF THE SECURITIES EXCHANGE ACT OF 1934

Plaintiffs Demand A

Trial By Jury

INTRODUCTION AND OVERVIEW

1. This is a securities class action on behalf of all purchasers of the common stock of Fritz Companies, Inc. ("Fritz" or the "Company") between August 28, 1995 and July 23, 1996 (the "Class Period"), seeking to remedy violations of the federal securities laws committed by the Company and certain of its insiders, which violations -- defendants' materially false or misleading public statements about Fritz -- artificially inflated the market price of Fritz common stock and facilitated the use of Company stock to acquire other companies. In addition, Fritz's insiders sold over 166,000 shares of Fritz stock at artificially inflated prices, as high as $43.75 per share, pocketing over $6 million in illegal insider trading proceeds before the truth came out and Fritz's stock price collapsed to $12.25 per share.

2. Fritz is in the transportation logistics business and provides related information services for importers and exporters worldwide. Fritz's principal services include logistics management, customs brokerage, international air and ocean freight consolidations and forwarding, warehousing and distribution services, and other value-added services for the international and domestic movement of goods and logistics information. Defendants repeatedly represented throughout the Class Period that a key component of Fritz's business is its information systems, in which Fritz purportedly invested substantial management and financial resources.

3. In May 1995, Fritz acquired Intertrans Corporation ("Intertrans"), which is in the air and ocean freight forwarding and transportation logistics business. The majority of Intertrans' business is international freight, forwarded from the United States to overseas destinations.

4. Throughout the Class Period, defendants publicly praised the benefits of Fritz's growth-by-acquisition strategy, and in particular, its acquisition of Intertrans. Fritz acquired Intertrans in a stock-for-stock exchange valued at $210 million which Fritz accounted for on a pooling of interest basis. Defendants publicly touted the purported benefits of the Intertrans merger including nearly instantaneous extraction of efficiencies from combining Fritz's and Intertrans' systems, operating synergies and the expansion of Fritz's margins. During the Class Period defendants repeatedly assured the market that Fritz was rapidly and profitably integrating new acquisitions into its operations.

5. Defendants failed to disclose, inter alia, that Fritz's financial statements issued during the Class Period were materially false and misleading due to Fritz's reliance on a variety of improper accounting practices; that Fritz's system of internal accounting controls was inadequate, which was exacerbated by the Intertrans acquisition; that Intertrans' accounting system was not integrated into Fritz's operations and, combined with Fritz's inadequate internal controls and the decision to terminate many key Intertrans employees, prevented Fritz from timely or accurately reporting its financial performance and condition to the market; and that the Intertrans merger would result in millions of dollars of additional undisclosed acquisition charges, due to defendants' decision to improperly disguise ordinary operating expenses as if they were one-time acquisition charges.

6. Defendants caused Fritz to report financial results for the year ended May 31, 1995, and for the quarters ended August 31, 1995, November 30, 1995 and February 29, 1996, that were each materially false or misleading as each overstated Fritz's revenues and earnings for the period in violation of Generally Accepted Accounting Principles ("GAAP"). Defendants violated GAAP during the Class Period by failing to properly account for Intertrans' acquisition charges, by improperly recognizing revenue, capitalizing software development costs and by failing to provide for material amounts of uncollectible accounts receivable. Ultimately, Fritz was compelled to restate its previously publicly reported financial statements for the third quarter of fiscal 1996, ended February 29, 1996, an admission by the Company that its financial statements contained material errors at the time they were disseminated. On July 24, 1996, defendants told the market that, due to accounting "irregularities," third quarter earnings were just $3.1 million and not $10.3 million as previously reported, and that Fritz would report a loss of $3.4 million, or $.10 per share, for the fourth quarter, ended May 31, 1996. In response to this news, Fritz stock price dropped by 55% in a single day and was the third most actively traded U.S. stock that day.

7. The stock has never recovered, nor was the full impact of Fritz's ongoing and unresolved problems revealed to investors in July 1996. In fact, in February 1997, Fritz began to leak additional negative information to the investment community about weakness in its ongoing operations and possible additional reserves for doubtful accounts receivable. In a press release dated April 9, 1997, Fritz announced it would and $17 million to its reserves for uncollectible accounts receivable and would report a $16.831 million net loss for the quarter ended February 28, 1997.

8. Defendants engaged in this scheme to defraud investors in order to artificially inflate the market price of Fritz's common stock, complete a $75 million private debt placement and further defendants' plan to grow Fritz to a $1 billion company through rapid-fire acquisitions. Defendants' scheme worked -- the price of Fritz common soared to as high as $43 per share during the Class Period. Moreover, defendant Carsten Andersen sold over 166,000 shares of his Fritz common stock at these artificially inflated prices for over $6 million dollars. While defendant Andersen made millions, the plaintiffs and the members of the class were not so fortunate. Unaware of defendants' fraud or that Fritz's financial statements were materially false or misleading, they purchased tens, if not hundreds of millions of shares of Fritz common stock at artificial prices as high as $43 per share, and when the truth was finally disclosed, the price of Fritz common stock plummeted 55% in one day to $12.25 per share.

9. The charts below show the increase in the market price of Fritz common while defendants were issuing their false and misleading statements, while Fritz was making acquisitions using artificially inflated Fritz stock, and while defendant Andersen was selling his Fritz stock at prices inflated by defendants' fraud, and illustrate that, when compared to an index of similar stocks, the movement of Fritz stock price was largely due to company specific information as opposed to industry or market factors:

JURISDICTION AND VENUE

10. Jurisdiction exists pursuant to §27 of the Securities Exchange Act of 1934 ("Exchange Act"), 15 U.S.C. §78aa, and 28 U.S.C. §1331. The claims asserted arise under §§10(b) and 20(a) of the Exchange Act, 15 U.S.C. §§78j(b) and 78t(a), and Rule 10b-5.

11. (a) Venue is proper in this District pursuant to §27 of the Exchange Act and 28 U.S.C. §1391(b). Many of the acts giving rise to the violations complained of occurred in this District; and

(b) Assignment of this action to the San Francisco Division is appropriate as a substantial part of the events or omissions identified herein occurred in San Francisco.

12. Defendants used the instrumentalities of interstate commerce, the U.S. mails and the facilities of the national securities markets.

CLASS ACTION ALLEGATIONS

13. Plaintiffs bring this action as a class action pursuant to Federal Rule of Civil Procedure 23(a) and (b)(3) on behalf of all persons who purchased or otherwise acquired Fritz stock (the "Class") from August 28, 1995 through July 23, 1996, excluding the defendants, members of their families and any entity in which a defendant has an interest.

14. The members of the Class are so numerous that joinder of all members is impracticable. The disposition of their claims in a class action will provide substantial benefits to the parties and the Court. During the Class Period, Fritz had more than 30 million shares of stock outstanding, owned by hundreds, if not thousands of shareholders.

15. There is a well-defined community of interest in the questions of law and fact involved in this case. The questions of law and fact common to the members of the Class which predominate over questions which may affect individual Class members include the following:

(a) Whether the federal securities laws were violated by defendants;

(b) Whether defendants omitted and/or misrepresented material facts;

(c) Whether defendants' statements omitted material facts necessary to make the statements made, in light of the circumstances under which they were made, not misleading;

(d) Whether Fritz's financial statements were falsified;

(e) Whether defendants knew or had reasonable grounds to believe that their statements were false and misleading;

(f) Whether the price of Fritz stock was artificially inflated during the Class Period; and

(g) The extent of damage sustained by Class members and the appropriate measure of damages.

16. Plaintiffs' claims are typical of those of the Class because plaintiffs and the Class sustained damages from defendants' wrongful conduct.

17. Plaintiffs will adequately protect the interests of the Class. Plaintiffs have retained counsel who are experienced in class action securities litigation. Plaintiffs have no interests which conflict with those of the Class.

18. A class action is superior to other available methods for the fair and efficient adjudication of this controversy.

19. The prosecution of separate actions by individual Class members would create a risk of inconsistent and varying adjudications.

THE PARTIES

20. (a) Plaintiff Susan Polk, Trustee for the F. Felix Polk, a Psychological Corporation Profit Sharing Plan, purchased 300 shares of Fritz stock on July 18, 1996, at $28.25 per share and was damaged thereby. Plaintiff Polk submitted the certification required by Exchange Act §21D(a)(2)(A) with her original Complaint in this action and has been designated a lead plaintiff by the Court pursuant to Exchange Act §21D(a)(3)(B).

(b) Plaintiff Samuel Weiss purchased 310 shares of Fritz stock on July 23, 1996, at $27.41 per share and was damaged thereby. Plaintiff Weiss submitted the certification required by Exchange Act §21D(a)(2)(A) with his original Complaint and has been designated a lead plaintiff by the Court pursuant to Exchange Act §21D(a)(3)(B).

(c) Plaintiff Vic Shackelford purchased 1,000 shares of Fritz stock on June 28, 1996, at $37.00 per share and was damaged thereby. Plaintiff Shackelford previously submitted the certification required by Exchange Act §21D(a)(2)(A) with Plaintiffs' Motion to be Appointed Lead Plaintiffs Pursuant to Section 21D(a)(3)(B) of the Securities Exchange Act of 1934 and has been designated a lead plaintiff by the Court pursuant to Exchange Act §21D(a)(3)(B).

(d) Plaintiff E.M. Lawrence Limited Frozen Retirement Trust dated September 1, 1992, purchased 400 shares of Fritz stock on January 26, 1996, at $37.00 per share and was damaged thereby. Plaintiff Lawrence submitted the certification required by Exchange Act §21D(a)(2)(A) with his original Complaint in this action.

(e) Plaintiff George Levenson purchased 100 shares of Fritz stock on June 3, 1996, at $34.75 per share and was damaged thereby. Plaintiff Levenson submitted the certification required by Exchange Act §21D(a)(2)(A) with the First Consolidated and Amended Complaint For Violation of the Federal Securities Laws.

(f) Plaintiff Irving Rosenzweig purchased 200 shares of Fritz stock on June 18, 1996, at $33.00 per share and was damaged thereby. Plaintiff Rosenzweig submitted the certification required by Exchange Act §21D(a)(2)(A) to the Court on March 10, 1997.

21. Defendant Fritz Companies, Inc. has its executive offices and principal place of business in San Francisco, California. Fritz shares are traded in an efficient market on the NASDAQ National Market System.

22. (a) At all times relevant hereto, defendant Lynn C. Fritz ("Lynn Fritz") was Chairman of the Board and President and Chief Executive Officer of Fritz. Because of Lynn Fritz's position, he knew the adverse non-public information about Fritz's business, finances, products, markets and present and future business prospects via access to internal corporate documents (including the Company's operating plans, budgets and forecasts and reports of actual operations compared thereto), conversations and connections with other corporate officers and employees, attendance at management and Board of Directors meetings and committees thereof and via reports and other information provided to him in connection therewith. Following Fritz's May 1995 merger with Intertrans, Lynn Fritz owned and to date retains approximately 39% of the outstanding stock of Fritz. Because of his substantial stock ownership, Lynn Fritz has the power to direct the election of the entire Board of Directors and to determine the outcome of any matters submitted to Fritz's stockholders for approval.

(b) At all times relevant hereto, defendant John H. Johung ("Johung") was an Executive Vice President and Chief Financial Officer of Fritz. Because of Johung's position, he knew the adverse non-public information about Fritz's business, finances, products, markets and present and future business prospects via access to internal corporate documents (including the Company's operating plans, budgets and forecasts and reports of actual operations compared thereto), conversations and connections with other corporate officers and employees, attendance at management meetings and via reports and other information provided to him in connection therewith.

(c) At all times relevant hereto, defendant Dennis L. Pelino ("Pelino") was Executive Vice President and Chief Operating Officer and a Director of Fritz. Because of Pelino's position, he knew the adverse non-public information about Fritz's business, finances, products, markets and present and future business prospects via access to internal corporate documents (including the Company's operating plans, budgets and forecasts and reports of actual operations compared thereto), conversations and connections with other corporate officers and employees, attendance at management meetings and via reports and other information provided to him in connection therewith.

(d) At all times relevant hereto, defendant Stephen M. Mattessich ("Mattessich") was a Vice President and Corporate Controller of Fritz. Because of Mattessich's position, he knew the adverse non-public information about Fritz's business, finances, products, markets and present and future business prospects via access to internal corporate documents (including the Company's operating plans, budgets and forecasts and reports of actual operations compared thereto), conversations and connections with other corporate officers and employees, attendance at management meetings and via reports and other information provided to him in connection therewith.

(e) At all times relevant hereto, defendant Carsten S. Andersen ("Andersen") was Executive Vice President and a director of Fritz, and Managing Director of Fritz's air freight operations. Prior to the merger, Andersen was President and a director of Intertrans. Because of Andersen's position, he knew the adverse non-public information about Fritz's business, finances, products, markets and present and future business prospects via access to internal corporate documents (including the Company's operating plans, budgets and forecasts and reports of actual operations compared thereto), conversations and connections with other corporate officers and employees, attendance at management and Board of Directors' meetings and committees thereof and via reports and other information provided to him in connection therewith. During the Class Period, based on inside information, defendant Andersen sold over 166,000 shares of his Fritz holdings for proceeds of over $6 million.

23. The Individual Defendants listed in ¶22(a)-(e) were aware of and approved the false statements issued by or on behalf of Fritz during the Class Period. The Individual Defendants were controlling persons of Fritz due to their positions and large stock ownership.

24. Each of the defendants is liable for making false and misleading statements and willfully participating in a scheme and fraudulent course of business that defrauded and damaged Class members in violation of the federal securities laws. In committing the wrongful acts alleged, the defendants willfully pursued a fraudulent scheme and course of business in order to inflate the price of Fritz stock and deceive the investing public regarding the success and competitive position of its business, the success of its growth by acquisition strategy, the quality of its management and Fritz's future business prospects, thus permitting defendant Andersen to sell over $6 million worth of their Fritz stock at artificially inflated prices.

MOTIVE AND OPPORTUNITY

25. Each defendant had the opportunity to commit and participate in the fraud. The Individual Defendants were the top officers of Fritz and they controlled its press releases, corporate reports, Fritz's filings and its communications with analysts. Thus, they controlled the public dissemination of, and could falsify, the information about Fritz's business, products and future prospects that reached the public and impacted the price of Fritz stock.

26. Each of the defendants also had the motive to commit and participate in the fraud:

(a) Defendant Lynn Fritz frequently expressed his desire that the company bearing his name grow large enough to report at least one billion dollars in revenue per year. Before and during the Class Period, defendants engaged in a scheme to increase Fritz's revenues beyond the billion dollar mark, which Fritz reached following the Intertrans acquisition in fiscal 1996, by rapidly acquiring other freight and cargo companies, at times using Fritz stock as consideration for all or part of the acquisitions.

(b) As detailed below, during the Class Period Fritz issued over 81,000 shares (valued at over $3.1 million at the then-current market price) to acquire T.G. International and Wall Shipping. By artificially inflating the price of Fritz stock during the Class Period through issuance of false and misleading statements and false financial statements, Fritz was able to issue less stock for these acquisitions. Using artificially inflated stock to acquire companies facilitated certain acquisitions for Fritz, and enabled Fritz to continue to acquire more of its competitors than it otherwise could. These acquisitions also allowed Fritz to hide its own deteriorating financial condition including Fritz's failure to properly accrue for its ongoing operating expenses and payables incurred in the ordinary course of its shipping business, by disguising them as unusual "acquisition charges." By disguising its ordinary operating expenses as unusual, one-time merger/acquisition costs, Fritz was able to create and maintain the illusion of a well managed, tightly controlled company with solid margins, manageable expenses and a highly successful acquisition program, and was able to increase or maintain the artificial inflation in Fritz's stock price.

(c) Defendant Carsten Anderson sold over $6 million of Fritz stock during the Class Period at prices artificially inflated by the defendants' fraud.

(d) Each of the Individual Defendants participated in Fritz's bonus compensation plan, which pays bonuses based in whole (in the case of defendant Lynn Fritz) or in substantial part on the financial performance of the Company. In addition each Individual Defendant was eligible, based on "substantial growth" in Fritz's stock value, to receive long-term compensation awards in the form of Fritz common stock and options. During fiscal 1996, defendant Lynn Fritz received long-term compensation award options and shares worth over $800,000; defendant Pelino over $759,000; and defendant Johung over $2.1 million. Each of the Individual Defendants was thus motivated to falsify Fritz's reported profits during the Class Period in order to collect larger payments under the bonus and long-term compensation plans.

27. Finally, Fritz's purported "success" in profitably integrating newly acquired companies caused investors and the market to believe Fritz management, including the defendants, was exceptionally skilled and competent, when actually defendants were simply misrepresenting the success of Fritz's acquisition program and the profits and costs associated therewith. Fritz's false financial results and this view of Fritz management, deliberately fostered by defendants, as exceptionally skilled and competent, caused highly positive articles to be written about Fritz, including Fritz's being listed in The Los Angeles Times Top 100 best performing companies. Defendants knew that if they disclosed Fritz's true profits and costs associated with its acquisition binge, and disclosed Fritz's true financial condition, including its failure to reconcile actual payables to its inadequate accrued payable amounts, that investors and the market would realize that Fritz's financial statements and growth prospects were not as they had been represented, that the stock would plummet in price and further acquisitions using Fritz stock would be extremely difficult if not impossible to complete. Defendants also knew that, if Fritz's true growth rate and financial condition were disclosed, Fritz would be unable to complete its planned $75 million private placement of 6.43% senior notes in May of 1996, or would have been compelled to pay noteholders a much higher interest rate, significantly increasing its interest expense and adversely affecting its profitability.

FRITZ'S AND THE INDIVIDUAL DEFENDANTS' ACTUAL KNOWLEDGE

OR RECKLESS DISREGARD OF THE UNDISCLOSED TRUTH

28. Since as early as 1994, Fritz's financial statements had been materially false and misleading and failed to fairly present, in accordance with GAAP, Fritz's results of operations, due to the following practices: (i) Fritz improperly inflated revenues by recognizing revenue on sales where collection was not reasonably expected, or the services either were not agreed to by the customer or were not performed, and (ii) Fritz failed to properly present its operating expenses, including freight costs, bad debt and software development costs, in its financial statements, which had the effect of making Fritz appear to be more profitable and growing than was actually the case. By the time of the Intertrans merger at the latest, each of the defendants knew about Fritz's use of these improper accounting practices.

29. As part of the due diligence purportedly performed prior to Fritz's acquisition of Intertrans, defendants learned about the Intertrans accounting system (detailed below) which Fritz had decided to adopt for its air freight and ocean freight forwarding businesses. Defendants knew or recklessly disregarded that the Fritz/Intertrans accounting system would not be integrated with Fritz's operations system, which combined with Fritz's inadequate internal controls, would result in the recording of revenue which had not been earned and ultimately caused Fritz's financial statements to be even more materially inaccurate than they already were. Because of this lack of integration and the other problems detailed herein, defendants knew that use of the Intertrans accounting system meant that Fritz would have thousands of open accounting files which (to prepare financial statements) would require (i) accounting assumptions and estimations and (ii) subsequent manual reconciliation. Defendants also knew that these facts, combined with Fritz's own internal control defects and the decision to terminate many key Intertrans employees, meant Fritz would continue to report materially misleading financial statements.

30. Defendants also knew or recklessly disregarded that the $29.995 million "one-time" merger costs would not cover known and anticipated costs, in that it (i) improperly contained material amounts of ordinary operating expenses and payables disguised as merger charges; and (ii) significantly understated the cost of integrating Fritz and Intertrans. Defendants knew that, as part of the merger, Fritz would abandon the software development of components of its Fritz Logistics Expediting System ("FLEX"), in development at a cost of $6.8 million, in favor of adopting Intertrans' system, which defendants knew or recklessly disregarded would require material enhancements and substantial outlays of time, money and manpower to attempt to integrate. Defendants also knew that Fritz's system of accounting for payables incurred in the ordinary course of its shipping business did not reconcile actual payables and related costs to its estimates previously accrued. Defendants knew that Fritz was using reserves created during the Intertrans merger and other acquisitions to disguise these and other ordinary expenses as if they were one-time merger charges, enabling Fritz to appear more profitable and growing than was, in fact, the case. Ultimately Fritz recorded another $14.5 million in actual merger costs due to Fritz's improper classification during the Class Period of ordinary operating expenses as merger costs, which rendered the acquisition charge inadequate to cover the known merger costs, including costly changes to the Intertrans accounting system. Fritz's financial statements for the five months ended May 31, 1995 were also materially false and misleading as they failed to properly present $4.7 million in uncollectible pre-merger Fritz and Intertrans receivables.

31. Defendants also knew or recklessly disregarded that Fritz's financial statements for the periods ended August 31 and November 30, 1995 and February 29, 1996 materially overstated the Company's financial results. Defendants knew or recklessly disregarded that the Intertrans accounting system required substantial assumptions, estimates and subsequent manual reconciliations, which combined with Fritz's inadequate internal controls, meant that manual reconciliations were not undertaken or completed in a timely fashion, rendering Fritz's financial statements materially inaccurate. Thus defendants each knew or recklessly disregarded that the Company's financial statements and their other statements about Fritz, its financial performance, growth and profitability, its merger with and integration of Intertrans, the success of its "growth by acquisition" strategy and its future prospects issued during the Class Period were false and misleading when made.

STATUTORY SAFE HARBOR

32. The statutory safe harbor provided for forward-looking statements under certain circumstances does not apply to any of the allegedly false statements pled in this Complaint. Moreover, the safe harbor does not apply to those statements made prior to the enactment of the Statutory Safe Harbor on December 22, 1995 because that legislation may not be applied retroactively. None of the statements pled in the Complaint were identified as "forward-looking statements" when made. Nor was it stated that actual results "could differ materially from those projected." Nor were the statements accompanied by meaningful cautionary statements identifying important factors that could cause actual results to differ materially from the statements made. Alternatively, to the extent that the statutory safe harbor does apply to any statements pleaded herein, because they are "forward-looking," the defendants are liable for those statements because at the time each of those statements was made, the speaker knew the statement was false and the statement was authorized and/or approved by an executive officer of Fritz who actually knew that those statements were false when made.

BACKGROUND FACTS

33. Since as early as 1994, Fritz had (i) improperly inflated revenues by recognizing revenue on sales where collection was not reasonably expected, or the services were not actually performed or were not authorized by the customer, and (ii) failed to properly present its operating expenses, including freight costs, bad debt and software development costs, in its financial statements, which had the effect of making Fritz appear to be more profitable and growing than was actually the case.

34. On or about April 25, 1995, Fritz and Intertrans filed a Joint Proxy and Prospectus for the Intertrans merger/acquisition. The merger was completed on May 30, 1995, following its approval by both Fritz and Intertrans shareholders. Fritz issued over 4.6 million shares to acquire all of the outstanding shares of Intertrans. Before completing the merger, Fritz purportedly conducted an extensive due diligence evaluation of, interalia, Intertrans' accounting system, a key component in Fritz's decision to acquire Intertrans. Subsequently, Fritz adopted the Intertrans accounting system for much of Fritz's business, despite knowing that when combined with Fritz's inadequate internal controls and its decision to terminate many key Intertrans employees, the Intertrans accounting system would not provide accounting information that was sufficiently reliable for Fritz's financial reporting purposes, and would cause Fritz's published financial information to be materially misstated. For example, defendants knew that the Intertrans accounting system would not be integrated with Fritz's operating system, meaning that revenue which did not exist could be, and in fact was, recorded. Defendants knew that, while Intertrans' system and its requirement of extensive manual reconciliations had worked for the more tightly controlled Intertrans business, implementation of the Intertrans system with Fritz's business, without costly software enhancements and continued close monitoring of the system by personnel familiar with its operation, would cause Fritz to continue to disseminate unreliable and materially misstated financial information. Defendants nonetheless scrapped several software projects for Fritz's FLEX system then under development at a cost of over $6.8 million and decided to shift Fritz's air freight and ocean freight forwarding business to Intertrans' Interdoc and Interact Systems.

35. It was not until July 24, 1996 -- fifteen months after the merger -- that Fritz disclosed its problems with inadequate internal controls and implementation of the Intertrans accounting system. As a result of these problems, and Fritz's own improper accounting for payables, bad debt, software development costs and other ordinary expenses as if they were merger charges, and due to Fritz's improper revenue recognition practices employed during the Class Period, Fritz's financial statements for each period following the merger were materially misstated, as set forth below. Moreover, despite its purportedly extensive due diligence of Intertrans, Fritz materially misstated its acquisition costs in its financial statements for the five-month period ended May 31, 1995.

36. On June 13, 1995, after emerging from a "quiet period" following the Intertrans merger, defendant Johung told the market that in a conference call with analysts to be held the next day (June 14, 1995) the Company would discuss the anticipated synergies from the Intertrans merger. Johung assured the market that investors would not be disappointed because "there is no bad news to tell. The merger is moving along quite well and is seen expanding Fritz's business base as well as offering cost savings." In response to defendant Johung's representations, Fritz common stock jumped $4 3/8, or 9.3% to close at $51 1/4 (pre-split) on June 13, 1995.

37. On June 14, 1995, defendant Johung told the market that Fritz was well on the way to extracting efficiencies from the merger, and that integration of systems was "75% complete" and "should be finished by the end of the month." Johung also reiterated Fritz's announcement in the merger proxy that the Company would take a merger charge of $25 - $28 million, a figure Johung said was "relatively low" given the size of the deal. In response to Johung's remarks and the conference call, Fritz common stock closed up $2 at $53 1/4 (pre-split) on June 14, and up another $2 to $55 1/4 (pre-split) on June 15.

38. On June 14, 1995, defendant Johung also told the public that Fritz expected its profit margins to grow by at least two percentage points in 1995 as a result of the Company's Intertrans acquisition. "`Looking at the acquired business base and looking at the cost savings and expansion on a net revenue basis, we expect to see a minimum two percent expansion during the year 1995,'" Johung stated. He added that this meant margins would rise to about 15% from 13%. Johung forecast further margin growth in 1996.

39. On June 14, 1995, Fritz also announced that its Board of Directors had approved a change in the Company's fiscal year, from a calendar year to a May 31 year-end. Defendant Lynn Fritz represented that: "A calendar year-end closing requires us to go through an extraneous planning process during the third quarter, which is our peak season. Changing to a fiscal year ending May 31, will allow us to concentrate on business management during the peak season and defer the planning process to the first quarter of the calendar year, which is our slowest season. In addition, our acquisition of Intertrans Corporation plays a significant role in our future operations, and our intention therefore is to begin the combined business from the effective date of the acquisition."

40. Defendants' statements in ¶¶36-39 were false and misleading in that defendants knew or recklessly disregarded that these statements misrepresented or failed to disclose the following:

(a) During the purportedly extensive diligence conducted by defendants prior to Fritz's decision to acquire Intertrans, defendants learned that the Intertrans accounting system would not be integrated with Fritz's operations system without substantial and costly enhancements;

(b) During the pre-merger due diligence defendants also learned that information generated by the Intertrans accounting system required substantial accounting assumptions and estimates and subsequent reconciliations, and, when combined with Fritz's lack of internal controls and termination of many key Intertrans employees, would prevent Fritz from timely and accurately preparing financial statements;

(c) The claimed integration of Fritz and Intertrans was not "75% complete" and would not be complete by the end of June 1995, as the Company's attempts to use the Intertrans accounting system for Fritz's air freight forwarding and ocean freight forwarding businesses were unsuccessful throughout the Class Period due to Fritz's decentralized accounting environment and inadequate internal controls, and Fritz's decision to terminate many key Intertrans employees;

(d) The one-time acquisition charge of $25-$28 million was "relatively low" only because defendants had decided to materially understate the costs of the acquisition, as the charge understated what it would cost Fritz to integrate Intertrans into its operations;

(e) Defendants used the acquisition charge to disguise bad debt, payable amounts, software development costs and other ordinary operating expenses as if they were one-time acquisition charges, which enabled Fritz to appear more profitable and growing than was, in fact, the case, enabling Fritz to hide its own deteriorating financial condition and failure to properly recognize its ongoing operating expenses and payables incurred in the ordinary course of its shipping business; and

(f) For these reasons, defendant Johung's forecast of margin expansion was false and misleading and made without a reasonable basis -- in fact, when accurate Fritz financial statements for fiscal 1996 were finally prepared and released, Fritz's margins declined dramatically.

41. On or about July 10, 1995, defendant Lynn Fritz was accurately quoted in an interview reported in Traffic World. In that interview, defendant Lynn Fritz stated the following about Fritz's merger with and the integration of Intertrans:

[T]he systems as of June 1 were being used by all offices. That's amazing. From Feb. 14 to June 1 we integrated the systems of our companies. The importance of that cannot be exaggerated. The systems adoption was really one of the real reasons we did this. In 80 percent of acquisitions, systems are a problem. Maybe 10 or 15 percent of the systems were neutral. In a very, very few in service companies are systems a material plus to the merger.

42. The statements in ¶41 were false and misleading as defendants knew but failed to disclose that:

(b) During the pre-merger due diligence defendants also learned that the information generated by the Intertrans accounting system required substantial accounting assumptions and estimates and subsequent reconciliations, and, when combined with Fritz's inadequate internal controls and termination of many key Intertrans employees, would prevent Fritz from timely and accurately preparing financial statements; and

(c) The claimed integration of Fritz and Intertrans was not complete at the time these statements were made, as the Company's attempts to adopt the Intertrans accounting system were unsuccessful throughout the Class Period due to Fritz's inadequate internal controls, and Fritz's decision to terminate many key Intertrans employees.

43. Defendants' false and misleading statements identified above in ¶¶36-39 and 41 artificially inflated the price of Fritz common stock and were part of the total mix of information in the marketplace about Fritz, its growth by acquisition strategy and its merger with and integration of Intertrans at the beginning of the Class Period.

FALSE AND MISLEADING

STATEMENTS DURING THE CLASS PERIOD

44. On or about August 28, 1995, Fritz filed its Report on Form 10-K with the Securities Exchange Commission (the "SEC") for the five months ended May 31, 1995. The Form 10-K was signed by each of the Individual Defendants, included Fritz's audited financial statements for the five months ended May 31, 1995, and contained the following representations:

A key component of the Company's integrated logistics programs is its information systems, in which the Company has invested substantial management and financial resources.

* * *

The Company believes it is a leader in information processing for integrated transportation logistics and that maintaining and strengthening such leadership position will be critical to its continued success. Since 1971, the Company has invested substantial management and financial resources in the development of its information systems.

* * *

In late 1991, the Company introduced the first module of Fritz Logistics Expediting System (FLEX), an advanced information system designed to manage, process and track international freight transactions. FLEX is an ongoing information research and development project of the Company, and the Company believes that it is the most comprehensive source of information for importers and exporters worldwide for managing the logistics of their global sourcing and distribution activities.

* * *

A primary component of the Company's overall business strategy is the continued development of advanced information systems.

* * *

The Company believes that expanded use of FLEX will be an important tool in achieving its business strategy in the future.

Revenue Recognition -- Revenues and expenses related to the transportation of freight are recognized at the time the freight departs the terminal of origin. This method approximates recognizing revenues and expenses when the shipment is completed. Custom brokerage revenues are recognized upon completing documents necessary for customs entry purposes.

Revenue realized by the Company as an indirect carrier includes the direct carrier's charges to the Company for carrying the shipment. Revenue realized in other capacities includes only the commissions and fees received. Net revenue for air and ocean freight forwarding and the consolidation of surface transportation as an indirect carrier is determined by deducting freight consolidation and transaction costs from such revenue.

* * *

In connection with [the Intertrans] merger, the Company recorded one-time charges in May 1995 for transaction costs of $3.3 million and $26.7 million of other costs relating to combining the operations. The transaction costs consists of fees for investment bankers, attorneys, accountants, financial printing and other related charges. The costs of combining the operations include elimination of duplicate management information systems and facilities (including cancellation of leases); severance and outplacement of 182 terminated employees; cancellation of certain contractual obligations; and, other costs related to the merger. At May 31, 1995, $12.5 million is included in accrued expenses.

45. The statements in the preceding paragraph were false and misleading as defendants knew or recklessly disregarded that these statements misrepresented or failed to disclose that Fritz's financial statements were false and misleading, and did not fairly present Fritz's financial condition in accordance with GAAP, due to the following:

(a) During the purportedly extensive diligence conducted by defendants prior to Fritz's decision to acquire Intertrans, defendants learned that the Intertrans accounting system would not be integrated with Fritz's operating system without substantial and costly enhancements;

(b) During the pre-merger due diligence defendants also learned that information generated by the Intertrans accounting system required substantial accounting assumptions and estimates and subsequent reconciliations, and, when combined with Fritz's lack of internal controls and termination of many key Intertrans employees, prevented Fritz from timely and accurately preparing its financial statements;

(c) During the pre-merger due diligence defendants decided to scrap several software projects for the FLEX system, then under development at a cost of over $6.8 million, in favor of the Intertrans accounting system;

(d) The claimed integration of Fritz and Intertrans was not complete by the time these statements were made, as the Company's attempts to adopt the Intertrans accounting system were unsuccessful throughout the Class Period due to Fritz's lack of internal controls, and its decision to terminate many key Intertrans employees;

(f) In its financial statements for the five months ended May 31, 1995, Fritz had failed to include at least $4.7 million in necessary bad debt reserves; and

(g) Defendants used the Intertrans acquisition charge to disguise bad debt, payable amounts and other ordinary operating expenses as if they were one-time acquisition charges, which enabled Fritz to appear more profitable and growing than was, in fact, the case, enabling Fritz to hide its own deteriorating financial condition and failure to properly accrue for its ongoing operating expenses and payables incurred in the ordinary course of its business.

46. In a press release, disseminated to the financial community on or about September 11, 1995, defendants announced the acquisition of Quick Freight and Quickair, headquartered in Cape Town, South Africa. These companies are involved in air and ocean import and export forwarding, customs brokerage and capital projects.

47. In a press release, disseminated to the financial community on or about September 25, 1995, defendants announced the acquisition of the operations of Rex Air Freight C.A. based in Caracas, Venezuela. Rex Air Freight C.A. provides customs brokerage, air and ocean freight forwarding and consolidation as well as warehousing and distribution services.

48. In a press release, disseminated to the financial community on or about September 26, 1995, defendants announced the acquisition of Robinson & Heath Ltd., headquartered in Toronto, with offices located throughout Ontario and in Montreal and Vancouver. Robinson & Heath Ltd. provides Canadian customs brokerage and consulting services, international freight forwarding and warehousing and distribution services.

49. In a press release, disseminated to the financial community on or about September 28, 1995, defendants announced that Fritz had acquired Stanzione/Stair Cargo's operating subgroup of companies located in Venezuela, Chile, Colombia, Costa Rica, Panama and Peru. The companies provide air import and export services, ocean import, consolidation, inland trucking and bonded warehousing services.

50. The statements regarding acquisitions in the preceding paragraphs were materially misleading, as defendants knew or recklessly disregarded that these statements misrepresented or failed to disclose that: (i) Fritz's purported "success" in profitably integrating new companies in the course of its acquisition binge was illusory, as defendants misrepresented acquisition profits and costs; (ii) defendants used acquisition charges associated with acquiring new companies to disguise Fritz's payable amounts, bad debt, software costs, freight charges and other ordinary operating expenses as if they were one-time acquisition charges, enabling Fritz to hide its deteriorating financial condition and failure to properly accrue for expenses incurred in the ordinary course of its business; and (iii) Fritz's program to grow revenues to over $1 billion by acquisition had and would continue to adversely impact Fritz's margins and freight yields.

51. On or about October 2, 1995, defendants disseminated a press release to the financial community which reported the Company's results from financial operations for its first fiscal quarter, ended August 31, 1995. In the release defendants claimed that Fritz's revenues, net income and earnings per share for the first quarter were $266.4 million, $12.6 million and $.72, respectively, compared with revenues, net income and earnings per share of $187.7 million, $6.8 million and $.44, respectively, for the first quarter of 1995. The release also contained the following representations:

The Company attributes its continued rapid growth to aggressive expansion from internal developments and acquisitions of logistics operations in Europe, Asia, Canada and Latin America, as well as a margin expansion resulting from its merger with Intertrans Corporation ("Intertrans") which was completed on May 30, 1995.

52. On October 2, 1995, Fritz also announced that its Board of Directors declared a two-for-one stock split in the form of 100% common stock dividend, to be distributed to shareholders of record on October 13, 1995.

53. In an October 3, 1995, The San Francisco Chronicle article, based on defendants' October 2, 1995 press release, it was reported that:

Fritz Companies Inc. yesterday showed that a hectic acquisition binge doesn't have to decimate short-term profits.

The San Francisco-based transportation logistics company -- which has announced the purchase of six smaller competitors in the past month, 30 in the past two years -- posted an 85 percent gain in quarterly profits yesterday.

* * *

In many cases, the short-term costs of an acquisition can surpass any immediate addition to profitability. But not in the case of Fritz, which structures many of its buyouts so that the cost of a deal is based on its subsequent performance as a Fritz operating unit.

54. On or about October 15, 1995, Fritz filed its Report on Form 10-Q with the SEC and issued its First Quarter Report to Shareholders for the quarter ended August 31, 1995. Both reports included Fritz's unaudited financial statements for the quarter. The Form 10-Q was signed by defendants Johung and Mattessich, and contained the following representations:

The accompanying condensed consolidated financial statements of Fritz Companies, Inc. (the Company) for the three months ended August 31, 1995 and 1994 are unaudited and, in the opinion of management, contain all adjustments, consisting only of normal and recurring adjustments, necessary for a fair presentation of the results of such periods. . . .

The significant accounting policies followed by the Company are described in Note 1 to the audited consolidated financial statements for five months ended May 31, 1995. . . . The condensed consolidated financial statements should be read in conjunction with the consolidated financial statements, including the notes thereto, for five months ended May 31, 1995 included in the Company's Form 10-K filed on August 28, 1995.

55. On or about October 16, 1995, Fritz issued its Report to Shareholders for the first quarter of fiscal 1996, ended August 31, 1995. The report contained a letter to Fritz stockholders signed by defendant Lynn Fritz which contained the following statements:

The first quarter of our new fiscal year -- which now ends on May 31, 1996 -- was an important period of growth and integration for Fritz Companies, as we successfully merged Intertrans Corporation into our global operations. This acquisition -- the largest in our history -- contributed significantly to our strong first quarter revenue and earnings growth, and will continue to yield operating benefits in the months and years ahead.

* * *

Fritz Companies achieved record financial results for the first fiscal quarter ended August 31, 1995. Revenue increased 47% to $266 million and net revenue -- which excludes our direct transportation costs -- was up 51% to $116 million. This growth reflects the acquisition of Intertrans -- as well as several smaller firms -- our expanding service to existing customers, and the addition of new client companies. With the benefit of these higher revenues and the operating efficiencies created by the Intertrans merger, our profit growth far outpaced revenues in the first quarter.

* * *

The Company's first quarter results -- and the successful integration of Intertrans into the Fritz family -- reflect our strategy of steady, profitable growth.

56. The statements in the preceding paragraphs were false and misleading as defendants knew or recklessly disregarded that these statements misrepresented or failed to disclose that:

(a) Fritz's financial statements for the first quarter of fiscal 1996 (ended August 31, 1995) were materially false and misleading and did not, as set forth below, fairly present the financial results of Fritz's operations for the first quarter;

(b) The Intertrans accounting system, which Fritz adopted for its air freight forwarding and ocean freight forwarding businesses, was not integrated with Fritz's operations system, which, combined with Fritz's inadequate internal controls, meant that revenue which did not exist could be, and in fact was, recorded;

(c) The Intertrans accounting system required substantial accounting assumptions and estimates and subsequent reconciliations, and when combined with Fritz's inadequate system of internal controls and termination of many key Intertrans employees, prevented Fritz from timely and accurately preparing its financial statements;

(d) The claimed integration of Fritz and Intertrans was not complete by the time these statements were made, as the Company's attempts to use the Intertrans accounting system for its air freight forwarding and ocean freight forwarding businesses were unsuccessful throughout the Class Period due to Fritz's faulty implementation plan, inadequate internal controls and the decision to terminate many key Intertrans employees;

(e) In its financial statements for the five months ended May 31, 1995, Fritz's one-time acquisition charge of $29.995 million materially understated merger costs (including what it would cost Fritz to integrate Intertrans into its operations); (f) In its financial statements for the five months ended May 31, 1995, Fritz failed to include at least $4.7 million in bad debt reserve;

(g) Fritz failed to adequately reserve for material amounts of uncollectible accounts receivable during the first quarter of fiscal 1996;

(h) Fritz's financial statements for the first quarter of fiscal 1996 were also materially false and misleading due to Fritz's reliance on improper revenue recognition practices, including recognizing revenue on sales where collection was not reasonably expected or the services were not actually performed;

(i) While Fritz's purported "success" in profitably integrating new companies in the course of its acquisition binge caused investors and the market to believe Fritz management, including the defendants, was exceptionally skilled and competent, in fact defendants simply misrepresented the success of Fritz's acquisition plan and the profits and costs associated with it;

(j) Defendants used the acquisition charges associated with acquiring other companies to disguise Fritz's bad debt, payable amounts, software development costs and other ordinary operating expenses as if they were one-time acquisition charges, which enabled Fritz to appear more profitable and growing than was, in fact, the case; and

(k) Fritz's program to grow revenues to over $1 billion by rapid fire acquisitions had and would continue to adversely impact Fritz's margins and freight yields.

57. In a press release, disseminated to the financial community on or about October 31, 1995, defendants announced that Fritz had established a new export packing and consolidation service in Charleston, South Carolina, by acquiring SEPAC Export Packing & Consolidation business from Westinghouse Electric Corp. In this release, defendants represented that the new service would further Fritz's expansion into integrated project logistics services for turnkey infrastructure projects which Fritz was handling for many clients throughout its global network.

58. In a press release, disseminated to the financial community on or about November 15, 1995, defendants announced the acquisition of Amel Express Limited, a Hong Kong based air and ocean freight forwarder with emphasis on the garment on hanger business from Hong Kong to New York. Through an employee, Fritz represented that "'Amel will provide invaluable expertise and strengthen Fritz Hong Kong's, and thus the entire Fritz network's, breadth in the garment and textile market, and particularly the garment on hanger business.'"

59. In a press release, disseminated to the financial community on or about November 21, 1995, Fritz announced the consolidation of Cargoway Transportes Internacionais Ltda's customer base into the business of Fritz Trans-Shoes. A Fritz spokesperson stated: "`I believe this consolidated business impacts the retail and footwear communities very positively, providing new synergies in logistics solutions. The contribution that . . . [Cargoway] will bring to the Fritz organization is enormous.'"

60. In a press release, disseminated to the financial community on or about November 28, 1995, Fritz announced the integration of operations between Intertrans Japan Limited and Suzuyo Fritz Logistics Services Inc. Dennis Pelino stated that "`[c]ombining the Intertrans and Suzuyo Fritz operations in Japan provides our clients with a unified, integrated logistics resource in Japan as well as around the world and merges the best of both organizations in terms of people and scope of services available.'"

61. The statements regarding the acquisitions in the preceding paragraphs were materially misleading as defendants knew or recklessly disregarded that these statements misrepresented or failed to disclose that: (i) Fritz's purported "success" in profitably integrating new companies in the course of its acquisition binge was illusory, as defendants misrepresented acquisition profits and costs; (ii) defendants used the acquisition charges associated with acquiring new companies to disguise Fritz's payable amounts and other ordinary operating expenses as if they were one-time events, which enabled Fritz to appear more profitable and growing than was, in fact, the case; and (iii) defendants' program to grow Fritz's revenues to over $1 billion through rapid-fire acquisitions had and would continue to adversely impact Fritz's margins and freight yields.

62. On or about January 11, 1996, defendants disseminated a press release to the financial community which reported the Company's results from financial operations for its second fiscal quarter ended November 30, 1995. In the release defendants claimed that Fritz's revenues, net income and earnings per share for the second quarter were $276.1 million, $12.7 million and $.36, respectively, compared with revenues, net income and earnings per share of $213 million, $9.5 million and $.30, respectively, for the second quarter of 1995. The release also contained the following representations:

This growth reflects the continued success of the Company's expanding services to existing customers, the addition of new customers, and margin expansion through its continued acquisitions.

63. On or about January 15, 1996, Fritz filed its Report on Form 10-Q with the SEC and issued its Second Quarter Report to Shareholders for the quarter ended November 30, 1995. Both reports included Fritz's unaudited financial statements for the quarter and six months ended November 30, 1995, and the Form 10-Q was signed by defendants Lynn Fritz, Johung and Mattessich, and contained the following representations:

The accompanying condensed consolidated financial statements of Fritz Companies, Inc. (the Company) for the three and six months ended November 30, 1995 and 1994 are unaudited and, in the opinion of management, contain all adjustments, consisting only of normal and recurring adjustments, necessary for a fair presentation of the results of such periods. . . .

The significant accounting policies followed by the Company are described in Note 1 to the audited consolidated financial statements for the year ended May 31, 1995. . . . The condensed consolidated financial statements should be read in conjunction with the consolidated financial statements, including the notes thereto, for the year ended May 31, 1995 included in the Company's Form 10-K filed on August 28, 1995.

64. The statements in the preceding paragraphs were false and misleading as defendants knew or recklessly disregarded that these statements misrepresented or failed to disclose that:

(a) Fritz's financial statements for the second quarter and first half of fiscal 1996 (ended November 30, 1995) were materially false and misleading and did not, as set forth below, fairly present the results of Fritz's operations for the second quarter or first half of fiscal 1996;

(b) The Intertrans accounting system was not integrated with Fritz's operations system, which, when combined with Fritz's lack of internal controls, meant that revenue which did not exist could be, and in fact was, recorded;

(c) The Intertrans accounting system required substantial accounting assumptions and estimates and subsequent reconciliations, and when combined with Fritz's lack of internal controls and termination of many key Intertrans employees, prevented Fritz from timely and accurately preparing financial statements;

(d) The claimed integration of Fritz and Intertrans was not complete by the time these statements were made, as the Company's attempts to use the Intertrans accounting system for its air freight forwarding and ocean freight forwarding businesses were unsuccessful throughout the Class Period due to Fritz's faulty implementation plan, lack of internal controls and the decision to terminate many key Intertrans employees;

(g) In the second quarter of fiscal 1996, defendants reported inflated revenues and profits, by including merger/acquisition candidates' pre-acquisition revenues in Fritz's reported revenue, before any merger or acquisition took place;

(h) Fritz failed to adequately reserve for material amounts of uncollectible accounts receivable;

(i) Fritz's purported "success" in profitably integrating new companies in the course of its acquisition binge was illusory, and, in fact, defendants misrepresented Fritz's acquisition profits and costs;

(j) Defendants used the acquisition charges associated with acquiring other companies to disguise Fritz's bad debt, payable amounts, software development costs, freight charges and other ordinary operating expenses as if they were one-time acquisition charges, enabling Fritz to appear more profitable and growing than was, in fact, the case; and

(k) Defendants' program to grow Fritz's revenues to over $1 billion by rapid-fire acquisitions had and would continue to adversely impact Fritz's margins and freight yields.

65. On or about March 1, 1996 Fritz issued $350,000 of its common stock (8,917 shares at $39.25 per share) as partial payment to acquire T.G. International.

66. In a press release, disseminated to the financial community on or about March 4, 1996, defendants announced the acquisition of Oy Nielsen Global Freight Corporation, which defendants represented was one of the largest logistics service companies in Finland with approximately 200 employees in Finland and recurring 1995 revenues of $70 million.

67. The statements in the preceding paragraph were materially misleading as defendants knew or recklessly disregarded that these statements misrepresented or failed to disclose that: (i) Fritz's purported "success" in profitably integrating new companies in the course of its acquisition binge was illusory, as defendants were simply misrepresenting acquisition profits and costs; (ii) defendants used the acquisition charges associated with acquiring new companies to disguise Fritz's bad debt, payable amounts and other ordinary operating expenses as if they were one-time charges, which enabled Fritz to appear more profitable and growing than was, in fact, the case; and (iii) defendants' program to grow Fritz's revenues to over $1 billion by rapid fire acquisitions had and would continue to adversely impact Fritz's margins and freight yields.

68. On or about April 2, 1996, defendants disseminated a press release to the financial community which reported the Company's results from financial operations for its third fiscal quarter ended February 29, 1996. In the release defendants claimed that Fritz's revenues, net income and earnings per share for the third quarter were $274.3 million, $10.3 million and $.29, respectively, compared with revenues, net income and earnings per share of $237 million, $8.9 million and $.27, respectively, for the third quarter of 1995. The release also contained the following representations:

This growth reflects the continued success of the Company's expanding logistics customer base with existing and new customers, and margin expansion through its continued acquisitions.

69. On or about April 15, 1996, Fritz filed its Report on Form 10-Q with the SEC and issued its Third Quarter Report to Shareholders for the quarter ended February 29, 1996. Both reports included Fritz's unaudited financial statements for the quarter and nine months ended February 29, 1996, and the Form 10-Q was signed by defendants Lynn Fritz, Johung and Mattessich, and contained the following representations:

As a result of the Company's focus on integrated transportation logistics services for existing and new customers, geographic expansion and strategic acquisitions, all of the Company's principal service areas reported revenue increases.

* * *

Airfreight Forwarding: For the third quarter of fiscal year 1996, revenue increased .6% to $126.8 million from $126.1 million in 1995 and net revenue increased 24.6% to $38.0 million from $30.5 million in 1995. While revenue growth was small, due to change in accounting period, the airfreight margin expansion from the Company's merger with Intertrans continued to improve.

* * *

Operating Expenses: Operating expenses for the third quarter of fiscal year 1996 increased 21.5% to $102.2 million from $84.0 million for the prior period and margins remained constant.

The 10-Q further represented:

The accompanying condensed consolidated financial statements of Fritz Companies, Inc. (the Company) for the three and nine months ended February 29, 1996 and February 28, 1995 are unaudited and, in the opinion of management, contain all adjustments, consisting only of normal and recurring adjustments, necessary for a fair presentation of the results of such periods. . . .

70. The statements in the preceding paragraphs were false and misleading as defendants knew or recklessly disregarded that these statements misrepresented or failed to disclose that:

(a) Fritz's financial statements for the third quarter and first nine months of fiscal 1996 (ended February 29, 1996) were false and misleading and did not, as set forth below, fairly present the financial results of Fritz's operations for the third quarter or first nine months of fiscal 1996;

(c) The Intertrans accounting system required substantial accounting assumptions and estimates and subsequent reconciliations, and, when combined with Fritz's lack of internal controls and termination of many key Intertrans employees, prevented Fritz from timely and accurately preparing financial statements;

(d) The claimed integration of Fritz and Intertrans was not complete by the time these statements were made, as the Company's attempts to adopt the Intertrans accounting system were unsuccessful throughout the Class Period due to Fritz's faulty implementation plan, Fritz's lack of internal controls and the decision to terminate many key Intertrans employees;

(g) Defendants used the acquisition charge associated with the Intertrans merger and other acquisitions of new companies to disguise bad debt, payable amounts, software development costs and other ordinary operating expenses as if they were one-time acquisition charges, which enabled Fritz to hide its deteriorating financial condition and appear more profitable and growing than was, in fact, the case;

(h) Fritz failed to adequately reserve for material amounts of uncollectible accounts receivable;

(i) Fritz improperly recognized revenue during the third quarter and first nine months of fiscal 1996;

(j) Fritz's air freight margins had not improved due to the Intertrans acquisition as defendants claimed;

(k) Fritz's purported "success" in profitably integrating new companies in the course of its acquisition binge was illusory and, in fact, defendants simply misrepresented acquisition profits and costs;

(l) Defendants' program to grow Fritz's revenues to over $1 billion by rapid fire acquisitions had and would continue to adversely impact Fritz's margins and freight yields;

(m) In the third quarter of fiscal 1996, ended February 29, 1996, defendants reported inflated revenues and profits, by including merger/acquisition candidates' pre-acquisition revenues in Fritz's reported revenue, before any merger or acquisition took place; and

(n) Fritz improperly capitalized certain software development costs incurred in the ordinary course of its business during the third quarter and first nine months of fiscal 1996.

71. In a press release, disseminated to the financial community on or about April 16, 1996, defendants announced the acquisition of Wall Shipping Co. Inc., an East Coast freight forwarding Company headquartered in Washington, D.C., which provides air freight forwarding and customs brokerage services at Dulles International Airport and Baltimore. In this release, defendant Lynn Fritz represented that:

"A significant amount of Wall's business has been the logistics management of foreign diplomatic pouches, and Wall has enjoyed a tremendous reputation in the industry. With the addition of Wall Shipping, Fritz Companies realizes a competitive advantage on the East Coast and thus the entire global network is strengthened."

As part of this transaction, on April 12, 1996, Fritz issued $2.8 million of its shares (72,223 shares at $38.77 per share) to acquire Wall Shipping.

72. On May 7, 1996, The Los Angeles Times included Fritz in its list of "The Times 100: The Best Performing Companies in California; The Employer 100."

73. On May 9, 1996, it was reported that Fritz had completed a $75 million private placement of 6.43% senior notes due April 15, 2003.

74. In a press release, disseminated to the financial community on or about May 14, 1996, defendants announced the acquisition of Celadon Jacky Maeder UK Ltd., an air freight and distribution services provider with six offices in the United Kingdom. Through a Company employee, defendant Fritz represented that:

"The acquisition of Celadon UK is very significant to Fritz Companies as this was the crown jewel in the Celadon Jacky Maeder global network. The United Kingdom served as Celadon's hub for the majority of the activity that drove this group and, as such, will enable us to expand significantly on this very stable UK foundation into other logistics areas with Celadon's former air freight client base. Further, Celadon's fashion logistics business base will enhance an already significant penetration into this market by Fritz Companies on a global basis."

75. The statements regarding Fritz's acquisitions in the preceding paragraphs were materially misleading as defendants knew or recklessly disregarded that these statements misrepresented or failed to disclose that: (i) Fritz's purported "success" in profitably integrating new companies in the course of its acquisition binge was illusory, and in fact defendants simply misrepresented acquisition profits and costs; (ii) defendants used the acquisition charges associated with acquiring new companies to disguise Fritz's bad debt, payable amounts and other ordinary operating expenses as if they were one-time charges, which enabled Fritz to hide its deteriorating financial condition and appear more profitable and growing than was, in fact, the case; and (iii) defendants' program to grow Fritz's revenues to over $1 billion by rapid fire acquisitions had and would continue to adversely impact Fritz's margins and freight yields.

76. In a press release, disseminated to the financial community on or about May 24, 1996, Fritz announced that Andersen would leave Fritz and resign from the Board of Directors effective June 1, 1996. In this release, defendant Andersen represented that "Following the very successful integration of Intertrans Corporation into the Fritz global network over the last year, my mission is complete. I am confident that our clients, shareholders and employees realize the full benefits of the Fritz organization."

Defendant Lynn Fritz represented that Andersen had "been an invaluable asset in weaving together our organizations."

77. Suddenly, on July 24, 1996, in sharp contrast to their prior positive statements, defendants stated in a press release that, as a result of major accounting irregularities and internal control failures, Fritz restated its previously reported revenues and earnings for the third quarter (ended February 29, 1996) and reported a loss of $3.4 million -- or $.10 per share -- for the fourth quarter, ended May 31, 1996. Fritz said it would take $11 million in charges in the third quarter, dropping previously reported earnings of $10.3 million to $3.1 million. In total, Fritz took charges of $22.5 million for the third and fourth quarters. The costs include writing off an unspecified amount of bad debt, expenses for correcting its internal accounting control failures, and severance charges associated with the elimination of an additional 200 jobs. The Company claimed the losses were due to problems associated with its 1995 acquisition of Intertrans for $210 million. Defendants claimed they underestimated the costs of the merger and discovered costly problems with the accounting system it inherited from Intertrans. One major problem defendants blamed for the difficulty was that the accounting system did not timely identify delinquent accounts. As a result, defendants claimed, Fritz finally wrote off millions of dollars of uncollectible receivables. In addition, defendants claimed the Intertrans accounting system was already overtaxed at the time of the merger and adding the increased volume from Fritz's customers overwhelmed the system.

78. In a conference call with analysts after the issuance of the July 24, 1996 press release, defendants made the following statements, blaming the Intertrans merger and Fritz's adoption of Intertrans' accounting system for most of Fritz's operational problems:

(a) Fritz's one-time merger costs of $29.995 million reported in May 1995 significantly understated the cost of full integration of Fritz and Intertrans.

(b) During the third quarter, Fritz charged $11 million against earnings -- $4.6 million of merger costs and approximately $6.4 million of other charges, the majority of which was accounts receivable. Some of the receivable write-off was for revenue which did not exist.

(c) Of the purported merger related costs of $4.6 million, Fritz wrote off a $1.2 million Intertrans receivable from the pre-merger period. Information integration costs and personnel redundancy comprised the balance of the $4.6 million reserve.

(d) A major component of the fourth quarter loss was the $11.5 million write-off: additional Intertrans merger costs of $10 million and other charges of $1.5 million, including bad debt, system integration expenses and additional lease and agent terminations.

(e) Thus, of the $22.5 million total charges taken in the third and fourth quarters, approximately $14.5 million was for additional merger costs and approximately $8 million related to other costs ($6.4 million in the third quarter, and approximately $1.5 million in the fourth quarter). Of the $8 million in other costs, approximately 60 or 70 percent ($5-6 million) was related to accounts receivable issues arising from the Intertrans accounting system problems.

(f) Bad debt expense arising from pre-acquisition receivables was improperly charged to merger costs. Of the $14.5 million of additional merger costs, at least $4.7 million was bad debt arising from Intertrans receivables recorded prior to the merger.

(g) Fritz also reduced its net revenue for the third and fourth quarters by $13 to $14 million. There were three factors that contributed to this net revenue reduction: margin pressures, reduction in volume, and approximately $10 million which was written off because there was insufficient documentation to support those revenue transactions.

(h) Defendants claimed that the major contributing factor in the Company's poor financial performance was adoption of the Intertrans accounting system for air freight forwarding and ocean freight forwarding. Defendants stated that the Intertrans accounting system did not provide Fritz with reliable financial information. According to defendants, the Intertrans system was developed based upon an "open architecture" system which has limited edit capabilities and relies heavily on manual reconciliations and the user's discretion. Thus, defendants stated, a business transaction recorded through the Company's operation system was then picked up by accounting and, based upon assumptions, the data was entered into Fritz's accounting system. There were a lot of manual and estimated entries, including accruals to account for revenue as well as receivables and payroll transactions.

(i) Defendants also admitted that the system which Fritz had been using was not fully integrated with the operations system until May of 1996. As a result, it was very common -- even before the merger -- that the accounting system did not pick up the revenue transaction created by the operations system. Thus, according to defendants, the accounting system generally had anywhere from 5,000 to 6,000 open files.

(j) Defendants further stated that the system lacked automatic integration between the operations and accounting systems, and produced irregular data on both the operational and accounting sides. Defendants claimed that this resulted in billing which was not in accordance with Fritz's revenue recognition policies and procedures, and problems dealing with cash visibility (cash that is paid by customers). The system could not identify what invoice the cash related to. Those problems accumulated throughout the year and were not reconciled until year end.

(k) Defendants stated that the accounting system was not adequate to handle the increased volume of both companies' air and ocean freight, particularly air freight.

(l) Defendants stated that the Intertrans system had very limited editing capability. Among other things, editing capability provides a mechanism for identifying input errors. Thus, a great deal of input was handled individually and manually on a central basis, which, according to defendants, resulted in a great deal of confusion and error at Fritz throughout the 1996 fiscal year.

(m) Defendants indicated that they understood from the beginning that there were problems. Defendants were aware from before the Intertrans merger of the aspects of in the Intertrans system which required significant accounting assumptions and manual reconciliations. In response, defendants attempted several significant and expensive corrective enhancements, starting before the acquisition actually occurred, to Interact, the accounting module of the Intertrans system. As of the end of May 1996 -- a year after the merger -- only about 80% of those enhancements had been completed.

(n) While corrective action had been taken, at the conclusion of the system modifications Fritz could not document certain revenue transactions, leading to an increase in the reserve, and a write-down in revenue.

(o) Defendants finally announced that defendant Mattessich had been relieved of his duties as Fritz's principal accounting officer.

79. In response to defendants' disclosures on July 24, 1996, Fritz's stock plunged more than 55%, dropping $15.25 to close at $12.25 per share -- the third most actively traded stock in U.S. trading that day.

80. On August 2, 1996, Fritz announced that John H. Johung had resigned as CFO and been reassigned, and that Dennis L. Pelino had been appointed president and chief operating officer.

81. On or about August 20, 1996, Fritz filed its amended report on Form 10-Q/A for the quarter ended February 29, 1996 with the SEC. In the Form 10-Q/A, defendants made the following additional disclosures about the adjustments leading to the restatement:

Merger and Related Costs

In May 1995, the Company merged with Intertrans in a transaction accounted for as a pooling of interests. In connection with the merger, the Company originally estimated and recorded approximately $30 million of merger and related costs, of which approximately $12.5 million was accrued under applicable accounting guidelines. For the year ended May 31, 1996, the Company identified additional merger and related costs of $14.6 million, of which approximately $4.6 million were incurred in the third quarter of fiscal year 1996, and the remaining balance in the fourth quarter. These third quarter charges consist primarily of EDP systems integration costs that previously had been capitalized.

The Company recorded adjustments which represent the effect of consolidating certain subsidiaries acquired as of the closing date rather than as originally recorded using the effective date provided in the purchase agreement. The effect of these adjustments was to reduce revenue by approximately $26 million, net revenue by approximately $8 million and pre-tax income by approximately $0.9 million.

The Company also recorded adjustments to restate revenue, net revenue and pre-tax income pending receipt of additional documentation and information. The effect of these adjustments was to reduce revenue and net revenue by approximately $5 million and by approximately $3 million of pre-tax income for logistics services provided to a customer through an agent. Although the Company believes the services were performed, it has deferred recognition of revenue pending receipt of additional documentation and payment from the agent to substantiate completion of the earnings process. The remaining adjustment comprises approximately $2 million of revenue and net revenue and $0.5 million of pre-tax income relating to transactions requiring additional documentation and information that the Company is seeking to obtain.

Further, the Company recorded additional operating expenses of approximately $2.0 million primarily related to software development costs that previously had been capitalized.

82. Defendants knew or recklessly disregarded that their positive statements during the Class Period about Fritz, its financial performance, its merger with and integration of Intertrans, its growth and profitability, the success of its "growth by acquisition" strategy, and its prospects were false and misleading when made and failed to disclose the following material adverse information:

(a) That, contrary to the statements in the Company's public reports, to the effect that its financial statements had been prepared in conformity with the rules and regulations of the SEC and fairly presented the Company's financial position, each of Fritz's financial statements that was publicly disseminated during the Class Period, was false and misleading as detailed below in ¶¶95-114, in that each of the financial statements at issue was not prepared pursuant to the rules and regulations of the SEC, and did not reflect all adjustments necessary to present fairly the financial position, results of operations and changes in the financial position of Fritz for the period or periods presented;

(b) The Intertrans accounting system which Fritz adopted for its air freight forwarding and ocean freight forwarding businesses, was not integrated with Fritz's operations system, meaning that, when combined with Fritz's inadequate internal controls, revenue which did not exist could be, and in fact was, recorded;

(c) The Intertrans accounting system required substantial accounting assumptions and estimates and subsequent reconciliations and, when combined with Fritz's inadequate internal controls and termination of many key Intertrans employees, prevented Fritz from timely and accurately preparing financial statements;

(d) The claimed integration of Fritz and Intertrans was not complete when these statements were made, as the Company's attempts to use the Intertrans accounting system for its air freight forwarding and ocean freight forwarding businesses were unsuccessful throughout the Class Period, due to Fritz's faulty implementation plan, lack of internal controls and the decision to terminate many key Intertrans employees;

(f) In its financial statements for the five months ended May 31, 1995, Fritz failed to include at least $4.7 million in bad debt reserve;

(g) Moreover, defendants used the acquisition charges associated with the Intertrans and other acquisitions to disguise bad debt, payable amounts, software development costs and other operating expenses as if they were one-time acquisition charges, which enabled Fritz to appear more profitable and growing than was, in fact, the case, and permitted Fritz to hide its own deteriorating financial condition and failure to properly accrue for its ongoing operating expenses and payables incurred in the ordinary course of its shipping business;

(h) Fritz failed to adequately reserve for material amounts of uncollectible accounts receivable;

(i) Fritz improperly recognized revenue during the Class Period;

(j) Fritz improperly capitalized certain software development costs during the Class Period;

(k) That Fritz scuttled its accounting system, in development at a cost of over $6.8 million, when it converted its air freight forwarding and ocean freight forwarding businesses to the Intertrans accounting system following the completion of the merger;

(l) That Fritz's system of internal financial and accounting controls was inadequate and failed to provide Fritz with a reasonable basis for financial information included in its public disclosure documents;

(m) Fritz's purported "success" in profitably integrating new companies in the course of its acquisition binge was illusory and in fact defendants simply misrepresented the success of Fritz's acquisition plan and the profits and costs associated with it; and

(n) In the second and third quarters of fiscal 1996, ended November 30, 1995 and February 29, 1996, defendants reported inflated revenues and profits, by including merger/acquisition candidates' pre-acquisition revenues in Fritz's reported revenue, before any merger or acquisition took place.

83. The stock has not recovered, nor was the full impact of Fritz's ongoing and unresolved problems revealed to investors in July 1996. In fact, Fritz has never fully explained the cause of the restatement, or the cause of the latest writedowns and revenue shortfall, but has continued to obfuscate the truth in its public disclosures to investors.

84. On or about August 29, 1996, Fritz filed its report on Form 10-K for the fiscal year ended May 31, 1996 with the SEC. In its 1996 Form 10-K, Fritz revealed that its results of operations for the first half of fiscal 1997 would likely be adversely affected by a number of factors (including continuing price competition) and warned of the possibility of a reduced pace of acquisitions.

85. On or about August 29, 1996, Fritz released its Annual Report to Shareholders for the fiscal year ended May 31, 1996. In the annual report, defendant Lynn Fritz disclosed that much of the $22.5 million charge against fiscal 1996 earnings "related to larger than expected costs of integrating Intertrans Corporation into the Fritz family," and that "[t]he balance of the charges reflected a number of issues including bad debts, insufficient documentation on certain transactions and accounting methodology relating to the consolidation. These items resulted in a loss for the fourth quarter and the restatement of our third quarter earnings. . . . The special merger-related charge to pre-tax income of $14.6 million ($9.5 million after tax) includes unanticipated write-downs of bad debts, and higher than expected systems integration expenses, agent and lease terminations and severance pay expenses."

86. In February 1997, Fritz began leaking additional negative information to the investment community about weakness in its ongoing operations. On February 6, 1997, based on information provided by the Company, Morgan Stanley analyst Kevin Murphy reported that, "[a]ccording to a company official Fritz is experiencing weaker than expected revenues for its outbound air freight and its ocean freight forwarding business."

87. On February 18, 1997, based on information provided by the Company, Alex. Brown analyst C. H. Mecray lowered estimates for the third quarter to zero, based on Fritz's ongoing operations weakness and the possibility of further writedowns of accounts receivable.

88. On March 12, 1997, based on information provided by the Company, Smith Barney analyst Helane Becker lowered estimates for the third quarter 1997, ended February 28, from $0.10 per share to zero or a loss. Smith Barney also lowered estimates for fiscal 1998, to $0.80 from $1.00, to reflect Fritz's continued slower growth. Smith Barney reported that additional write-offs of accounts receivable would be taken, which Smith Barney reported were related to the May 1995 merger with Intertrans, and that Fritz would likely report a loss for the quarter. The Smith Barney report stated that the write-offs taken last summer covered only "about 80%" of the merger-related problems.

89. In a press release issued on April 9, 1997, Fritz reported revenue and earnings for the third quarter of fiscal 1997. The press release stated that operating expenses increased 45% during the quarter and that the Company would take a $17 million increase in its allowance for doubtful accounts receivable, while revenue increased 12.1% to $270.3 million from $241.1 million for the comparable prior year period and net revenue increased 13.6% to $118.0 million from $103.8 million for the same prior year period. The press release stated that Fritz would report a $16.831 million net loss for the quarter, or $0.48 per share. The press release did not mention the Intertrans acquisition.

90. On April 14, 1997, Fritz filed its Report on Form 10-Q for the quarter. The 10-Q reiterated the negative financial information contained in the April 9, 1997 press release, and also contained an exhibit, the Third Amendment to Multi-Currency Credit Agreement between Fritz and Bank of America. This exhibit indicated that, at the bank's insistence, (i) Fritz's ability to borrow under the agreement had been reduced by $20 million; (ii) Fritz was prohibited from using cash to make acquisitions in excess of $5 million total after February 28, 1997; and (iii) the bank would now receive copies of Fritz's management letters from its auditors and monthly accounts receivable summary aging reports.

MATERIAL ACCOUNTING AND INTERNAL CONTROL

PROBLEMS RENDERED FRITZ'S FINANCIAL REPORTING

DURING THE CLASS PERIOD FALSE, MISLEADING AND UNRELIABLE

91. Since at least 1994, Fritz management was aware of the Company's inadequate internal accounting and control systems. These internal controls problems were exacerbated by the Intertrans acquisition, which adversely impacted the Company's ability to accurately report financial results from its air freight and other divisions. For example, in connection with its annual audits of Fritz, Fritz's independent auditor KPMG Peat Marwick ("Peat") furnished Fritz's Board of Directors and Audit Committee with "Management Letters" decrying the state of Fritz's accounting and internal controls. For example, the following sample comments, contained in Peat's Management Letter in connection with its 1995 audit, demonstrate that Fritz management was well aware of the problems plaguing accounts receivable and internal controls and that these problems were recurrent and not being corrected:

Accounts Receivable

We noted certain matters relating to accounts receivable function at the Company's primary Asia location (Hong Kong, Singapore and Taiwan), as follows:

Credit Limits

There were various situations in which accounts receivable due from customers exceeded the established credit limits. As in the prior year, we recommend that credit limits for all locations be complied with. They should be exceeded only on approval from senior management.

Follow-up on Outstanding Receivables

We noted certain situations in which follow-up on long outstanding receivables appeared to be informal and on an ad hoc basis. Specific policies and procedures should be instituted to ensure that all receivables are adequately pursued and collected.

Bad Debt Provisions

At most locations, bad debt provisions are not based upon aging categories (i.e. percentages by category) or other general reserve methods, but rather are based upon specific identification only. Further, we noted various examples in which specific bad debt provisions do not appear to be adequate.

It is common practice to provide general reserves for a percentage of receivables that are current but may ultimately become uncollectible based on historical experience. We suggest the Company consider such general reserves. Additionally, the Company should consider increasing its provisions for certain long outstanding accounts.

* * *

Accounts Receivable - Fritz Air Freight (formerly Intertrans)

Fritz Air Freight does not have a formal bad debt policy which addresses both the adequacy of the allowance for doubtful accounts and account write-off procedures. Management currently reviews individual accounts on a periodic basis. This approach allows balances to continue to age as the accounts are in the collection process.

We recommend the Company develop a systematic approach to recording an allowance for doubtful accounts based on the historical bad debt experience of its accounts receivable portfolio. . . . The objective of the methodology should be to provide an adequate reserve level on an ongoing basis while also providing management with a tool to more effectively monitor and manage its collection efforts. A detail listing of accounts written off should also be maintained to assist in collection efforts and provide a chronology of the Company's bad debt history.

The implementation of these procedures would provide management with a consistent method of performing the review of accounts receivable and result in more accurate estimates of the allowance for doubtful accounts and improve periodic financial reporting.

* * *

Accounting System of Acquired Companies

We noted certain of the recently acquired subsidiaries are operating on the systems existing at the acquisition dates, and have not yet been converted to the Company's FAST system. As a result, the monitoring of activities is more cumbersome and certain controls built into the FAST system must be replicated manually. Therefore, we recommend all acquired companies be converted to the Fritz systems (both operating and accounting) as soon as practicable.

* * *

Credit Limits

Certain acquired companies are not in full compliance with the credit limits established by the Company. We noted the Puerto Rico station is outlaying cash to meet its customer obligations before the related receivables are collected.

* * *

Accounts Receivable Aging Reports

The Company's present aging reports used for analyzing open accounts receivable balances utilize detailed aging categories up through 90 days, and have only one category for those receivables older than 90 days. In order to assist in the analysis of receivables and provide better information to management, the Company should consider adding additional aging categories. These aging categories might include 90-180 days, 180-360 days, and greater than 360 days.

92. In response to this last comment, Fritz asserted that management closely monitored its aging accounts receivable:

Management Response:

We agree. The Company considers all receivables important and monitors closely all significant accounts that are more than 90 days. The Company has recently implemented a Monthly Overview report (from the Regional Director) that goes to the Chief Operating Officer for follow up. Included in the report is an aging synopsis for that region and a comment of all accounts greater than $5,000 and over 60 days and all accounts greater than $1,000 and over 90 days.

(Emphasis added.)

93. Assuming this statement to KPMG was truthful at the time, and that Fritz did closely monitor significant accounts receivable during the Class Period, then Fritz necessarily knew that its reserves for bad debt were inadequate during the Class Period. Despite this knowledge, Fritz failed to provide an adequate reserve for both pre- and post-merger receivables during the Class Period. Ultimately, as set forth in ¶¶109-113 below, in connection with Peat's 1996 audit and in April 1997, Fritz was required to record millions of dollars of material bad debt reserves which, had they been recorded properly throughout the Class Period, would have materially affected Fritz's financial results for the year ended May 31, 1995 and the three quarters ended February 29, 1996.

94. These internal control inadequacies were especially critical in the accounts receivable area, as Fritz made significant disbursements, such as customs duties, on behalf of its customers. These disbursements are several times the amount of revenue and earnings derived from the underlying transactions, and while billed to the customer, are not recorded as revenue and expense on the Company's income statement. Because receivables far exceeded amounts due as revenue and earnings, diligent accounts receivable monitoring was essential to avoid the huge receivables write-offs which have plagued Fritz.

FRITZ'S FALSE FINANCIAL STATEMENTS

95. Defendants knew it was essential to their scheme to inflate the price of Fritz's stock to report favorable revenue and earnings growth. Thus, the defendants caused Fritz to present false financial statements for the five months ended May 31, 1995 and during each of the first three quarters of fiscal 1996.

96. In Fritz's Form 10-K for the fiscal period ended May 31, 1995, the financial statements included therein were represented to have been presented in "conformity with generally accepted accounting principles" and in Fritz's Forms 10-Q for the quarters ended August 31 and November 30, 1995 and February 29, 1996, the Company included the following paragraph:

The accompanying condensed consolidated financial statements of Fritz Companies Inc. are unaudited and, in the opinion of management, contain all adjustments, consisting only of normal and recurring adjustments, necessary for a fair presentation of the results of such periods.

(Emphasis added.)

The 10-K was signed on Fritz's behalf by each of the Individual Defendants, and the 10-Qs were signed by defendants Lynn Fritz, Johung, and Mattessich. These statements were false and misleading each time they were made, as defendants knew that the Company's financial statements in those periods were materially false and misleading because, among other things, defendants knew that Fritz improperly reported its revenues, expenses and earnings, causing the Company's financial statements to be presented in violation of GAAP.

97. GAAP are those principles recognized by the accounting profession as the conventions, rules and procedures necessary to define accepted accounting practice at a particular time. Regulation S-X (17 C.F.R. §210.4-01(a)(1)) states that financial statements filed with the SEC which are not prepared in compliance with GAAP are presumed to be misleading and inaccurate.

Fritz reported the following financial results for the fiscal period ended May 31, 1995 and during the first three fiscal quarters of fiscal 1996:

Five Months Ended 05/31/95

Revenues $400.2M

Net Loss $ (8.3M)

Loss per Share $ (.51)

Three Quarters Ended:

(as originally reported)

08/31/95 11/30/95 02/29/96

Revenues $266.4M $276.1M $274.3M

Net Income $ 12.6M $ 12.7M $ 10.3M

Earnings per Share $ .71 $ .36 $ .29

98. As set forth below, these results were materially false because the Company violated GAAP by: improperly accounting for merger and acquisition costs, improperly classifying ordinary operating expenses as merger costs, improperly capitalizing software development costs, improperly recognizing revenue, and failing to write-off bad debt and/or establish an adequate allowance for doubtful accounts receivable.

Improper Accounting For Merger And Acquisition Costs

99. In order to inflate earnings for the five months ended May 31, 1995, and each of the three quarters ended August 31, 1995, November 30, 1995 and February 29, 1996, Fritz improperly failed to record at least $10 million of costs and expenses associated with recent acquisitions and mergers. GAAP and APB 16, ¶58 require that the expenses relating to mergers be deducted from income when incurred. Defendants knew, or were reckless in not knowing, that these costs would be incurred at the time of the merger, yet did not disclose this to its investors until late July 1996, well after the end of the fourth quarter and about 14 months after the merger. That these expenses were incurred prior to the end of the third quarter, ended February 29, 1996, cannot be disputed: The Company restated its third quarter financial statements and reported a loss in the fourth quarter, to belatedly reflect the improper omission of at least $10 million of merger related costs incurred in prior periods.

100. By definition, Fritz's restatement of its third quarter 1996 financial statements was an admission that a material misstatement existed in the financial statements at the time they were disseminated, and needed correction. FASB Statement of Concepts No. 16, ¶41. The Company's auditors' application of their own professional standards, by insisting on restatement, confirms this:

If the auditor has concluded that the financial statements are materially affected by an irregularity, the auditor should insist that the financial statements be revised. . . . (AU §316.26.)

101. As a result of improperly understating the true costs of its recent mergers and acquisitions, defendants violated GAAP and understated Fritz's merger expense by $10 million and inflated earnings by at least $6.6 million or approximately $.40 per share for the five months ended May 31, 1995 and each of the subsequent quarterly reporting periods through the third quarter ended February 29, 1996.

Improper Classification Of Ordinary Operating

Expenses As Merger Costs

102. In order to inflate net revenue and understate expenses and freight consolidation costs for the five months ended May 31, 1995 and during each of the three quarters ended February 29, 1996, Fritz improperly classified a material amount of bad debt and other ordinary recurring operating expenses as Intertrans merger costs. By disguising ordinary operating costs as merger costs, Fritz knew it could create the false appearance that the Company's profits from normal, ongoing operations were higher than was actually the case.

103. For example, in the May 31, 1995 financial statements, Fritz buried at least $1.3 million of Intertrans bad debt as merger/restructuring costs, when the bad debt costs were ordinary business costs, and clearly not incurred as a result of the merger. GAAP specifically prohibits the improper labeling of ordinary business costs as merger/restructuring costs when the cost was not incurred as a direct result of the merger. Financial Accounting Standards Board (FASB) Emerging Issues Task Force (EITF) Issue No. 94-3. Fritz knew or was reckless in not knowing that Intertrans' ordinary bad debt expense was not incurred as a direct result of the merger, and Fritz knew that these receivables were uncollectible long before the merger, as it had identified them during its due diligence.

Improper Revenue Recognition

104. In order to improperly inflate revenues and accounts receivable during the third quarter ended February 29, 1996, if not earlier, defendants (i) fraudulently recorded at least $33 million of potential merger candidates' preacquisition revenues as Fritz's revenue, before the mergers took place, and (ii) recorded revenue on sales that did not even exist.

105. As noted in ¶78, Fritz announced that the $11 million restatement of the February 29, 1996 financial statements would include "other charges" of $6.4 million (in addition to the $4.6 million third quarter restatement for Intertrans merger costs). This belated admission however, was purposely vague and still hid the true character and magnitude of the misstatement. The truth did not begin to be revealed until Fritz actually filed its restated third quarter 10-Q on August 4, 1996 -- one month later. Disclosures in the restated financial statements began to clarify that the $6.4 million write-off of "other charges" was merely the net result of the Company's improper recognition of at least $33 million in revenue and the improper capitalization of $2.1 million in software development costs.

106. Of the $33 million restatement of improperly recognized revenue, $26 million stemmed from Fritz's improper inclusion of merger candidates' pre-acquisition revenues as Fritz's own revenues. For example, on February 29, 1996, the last day of the third quarter, Fritz acquired the Oy Nielsen Global Freight Corporation. Despite the fact that Fritz did not even acquire Nielsen until February 29, 1996, Fritz fraudulently included $6.6 million of Nielsen's previous five months revenues in Fritz's own February 29, 1996 financial statements. In accordance with GAAP and APB 16, ¶93, it is improper to recognize the revenues from another merged company until assets are received, securities are issued, or a written agreement provides that effective control of the acquired Company is transferred without restrictions. Fritz knew at the time it was improper to recognize Nielsen's revenue earned in periods prior to the acquisition because it knew it had not completed the acquisition, transferred assets and securities or received a written agreement providing effective control of the acquired subsidiary. Fritz thus fraudulently inflated revenues and pre-tax earnings by approximately $26 million and $1 million, respectively, in its original February 29, 1996 financial statements filed on Form 10-Q.

107. The remaining $7 million of this $33 million revenue restatement in the third quarter ended February 29, 1996 was attributable to sales that management admitted, in the July 24, 1996 conference call, simply did not exist. In accordance with GAAP, revenue must be earned before it is recognized, usually when the earnings process is complete and the customer has satisfactorily received the goods or services it had contracted for. Further, the earnings process is not complete until collection of the sales price is reasonably assured. GAAP also requires that, if significant uncertainty as to collectability exists, revenue recognition should be postponed until cash is collected. FASB Statement of Concepts No. 5, ¶¶83, 84 and APB 10, ¶12. Fritz knew that the earnings process was not complete and that collection of the sales price was not reasonably assured because much of the eventually reversed $7 million in revenue transactions admittedly, did not exist. Accordingly, by recognizing revenue before the earnings process was complete or payment was reasonably assured, Fritz improperly inflated revenues and pre-tax earnings by $7 million and $3.5 million, respectively, in at least the third quarter ended February 29, 1996, if not earlier.

Improperly Capitalized Software Development Costs

108. During the third quarter ended February 29, 1996, Fritz inflated net income and earnings by improperly recapitalizing $2.1 million in software costs that had previously been written off as merger costs at May 31, 1995. As noted, this is undisputed, as Fritz announced this in its restated 10-Q/A for the third quarter ended February 29, 1996. GAAP and FAS 86, ¶10, the very accounting promulgation Fritz uses to govern its accounting for software development costs, clearly prohibits restoring such previously written-off costs in subsequent accounting periods. Fritz knew or should have known that it was improper to understate expenses by recapitalizing previously written-off software costs. By ignoring GAAP, Fritz improperly reduced expenses and inflated pre-tax earnings in the third quarter ending February 29, 1996 by at least $2.1 million.

Failure To Account For Uncollectible

Accounts Receivable

109. Fritz materially inflated net revenues, accounts receivable and pre-tax earnings by millions of dollars in its May 31, 1995, August 31, 1995, November 30, 1995, and February 29, 1996 financial statements by failing to write-off or establish a reserve for pre- and post-merger uncollectible receivables.

110. Following the fourth quarter ended May 31, 1996, Fritz disclosed that it had written-off $4.7 million of Intertrans' accounts receivables in excess of one year old. Moreover, at the same time Fritz disclosed approximately $5 million of the $8 million in other charges represented write-offs of other receivables. GAAP requires that losses from uncollectible receivables must be accrued when information available prior to the issuance of financial statements indicates that the Company does not expect to collect the full amount of its accounts receivable and the uncollectible amount can be reasonably estimated. FAS 5 and FASB Statement of Concepts No. 5, ¶3. Fritz knew, or was reckless in not knowing, that collection of certain Intertrans accounts receivable was doubtful based an information acquired during its pre-merger due diligence and post-merger conversations with ex-Intertrans, now Fritz employees. In an improper attempt to keep the belated write-off from increasing ordinary operating expenses, Fritz buried the write-off as a "merger expense" instead of an operating expense. GAAP does not permit characterization of normal operating bad debts as a restructuring or merger cost. Fritz should have classified this write-off as a recurring operating cost, thereby reducing the profitability of ongoing operations.

111. Additionally, Fritz knew that its allowance for uncollectible receivables was wholly inadequate to cover anticipated bad debt. Fritz knew that it was continuing to experience an unmanageable rise in the age and size of its accounts receivable balance during the Class Period and that accounts receivable were continuing to demonstrate unfavorable trends and had become harder to collect. For example, accounts receivable grew older on average throughout the Class Period, and the days sales in receivable ratio, the widely accepted indicator of the average number of days it takes to collect accounts receivable, continued to increase unfavorably from 113 days at August 31, 1995, to 135 days on February 29, 1996. In spite of these alarming trends, the Company's allowance for doubtful accounts, as a percentage of its total accounts receivable, actually decreased from 1.4% at May 31, 1995 to 1% at February 29, 1996. This is significant as it indicates that, while receivables continued to grow older and less collectible, Fritz was actually providing a smaller reserve for uncollectible accounts receivable. This inverse relationship is further illustrated in the graph attached as Exhibit A. As noted earlier in ¶¶92-93, Fritz also knew that its aging receivables were uncollectible, because Fritz management professed that it closely monitored such receivables.

112. Ultimately, Fritz's failure to accrue an adequate allowance for the doubtful accounts receivable throughout the Class Period could no longer be hidden or "explained away" by Fritz management. In addition to the $9.7 million bad debt write-off in the 1996 special charge, Fritz announced that it would take a startling $17 million charge against earnings in the third quarter ended February 28, 1997, for uncollectible receivables. A substantial portion of this $17 million bad debt reserve was necessary to write-off uncollectible receivables that should have been, but were not, written-off or reserved during the Class Period as a result of defendants' improper accounting practices.

113. As a result of this failure to adequately provide an allowance for doubtful accounts, Fritz, in violation of GAAP, inflated net revenues and accounts receivable by at least $9.7 million in the financial statements Fritz issued during the Class Period.

114. Due to these and other accounting improprieties, the Company presented its financial results and statements in a manner which violated GAAP, including the following fundamental accounting principles:

(a) The principle that interim financial reporting should be based upon the same accounting principles and practices used to prepare annual financial statements (APB No. 28, ¶10);

(b) The principle that financial reporting should provide information that is useful to present and potential investors and creditors and other users in making rational investment, credit and similar decisions was violated (FASB Statement of Concepts No. 1, ¶34);

(c) The principle that financial reporting should provide information about the economic resources of an enterprise, the claims to those resources, and effects of transactions, events and circumstances that change resources and claims to those resources was violated (FASB Statement of Concepts No. 1, ¶40);

(d) The principle that financial reporting should provide information about how management of an enterprise has discharged its stewardship responsibility to owners (stockholders) for the use of enterprise resources entrusted to it was violated. To the extent that management offers securities of the enterprise to the public, it voluntarily accepts wider responsibilities for accountability to prospective investors and to the public in general (FASB Statement of Concepts No. 1, ¶50);

(e) The principle that financial reporting should provide information about an enterprise's financial performance during a period was violated. Investors and creditors often use information about the past to help in assessing the prospects of an enterprise.