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Medical Costs 15. ADS also accrued monthly for estimated medical costs for its employees, and made adjustments to the accrual throughout the year as actual cost information became available. As with pension costs, the Companys accounting policy was to capitalize in inventory medical costs associated with manufacturing, which became part of COGS, and to expense as part of SG&A medical costs associated with non-manufacturing operations. 16. In March 2015, ADS personnel determined that actual medical costs for February exceeded the Companys accrual by $552,000. Pursuant to the Companys accounting policy, this $552,000 variance should have been apportioned between manufacturing and nonmanufacturing. Sturgeon, however, improperly directed that the entire amount be allocated to manufacturing costs, which were capitalized into inventory. This improper accounting overstated the Companys earnings by failing to account for a portion of the adjustment as an SG&A expense. 17. The following month, ADS personnel determined that actual medical costs for March were approximately $592,000 less than the Companys accrual. With this variance, Sturgeon improperly directed that the entire amount be credited to SG&A accounts. This improper accounting also overstated the Companys earnings by understating SG&A expenses. Together, these two improper accounting entries overstated the Companys fiscal fourth quarter 2015 income before taxes by approximately $401,000. Capitalized Freight Costs 18. ADS ships inventory between plants as part of managing inventory levels. ADSs policy was to capitalize in inventory freight costs associated with intra-company transfers of inventory. In fiscal year 2015, ADS booked two unsupported adjustments to capitalized freight that resulted in overstating the Companys earnings. In September 2014, Sturgeon directed a journal entry that increased the capitalized freight account, and correspondingly decreased COGS, by $500,000. This accounting entry lacked adequate support. In addition, at year-end, accounting personnel booked a journal entry that increased the capital freight account, and correspondingly decreased COGS, by approximately $296,000. This adjustment also lacked adequate support. These two accounting adjustments overstated the Companys 2015 income before taxes by approximately $796,000. Inventory Cost Standards 19. ADS used estimated standard costs to account for raw materials and production costs in inventory and COGS. At year end, ADS updated its standard costs based on updated raw material and production costs. ADSs accounting practice was to make an accounting adjustment to inventory, and corresponding adjustment to COGS, to reflect any changes to the inventory balance resulting from the updated standard costs. ADS also maintained an inventory reserve account to reflect changes between standard and actual costs. From at least 2013, Sturgeon directed or approved frequent adjustments to the reserve account without adequate corroboration or documentation, which resulted in inaccuracies in certain financial statements. 20. At the end of fiscal year 2015, as part of the Companys annual update of standard costs, Sturgeon updated many of the Companys standard costs, resulting in a material increase in inventory and corresponding reduction in COGS. Many of Sturgeons cost adjustments lacked support and in some instances were inconsistent with available cost information. In aggregate, these improper cost adjustments, and other deficiencies in the Companys raw material costing methodology, overstated the Companys fiscal year 2015 income before taxes by $5.9 million.

Other Improper Accounting Lease Accounting 21. As part of its operations, ADS leases significant amounts of equipment. Since at least 2010, the Company had improperly accounted for many of its equipment leases as operating leases, and not capital leases, based largely on the minimum payment terms for the initial twelve-month non-cancellable period of the leases. However, ADS did not consider other relevant lease terms and conditions in its operating or capital classification determination. ADS subsequently determined that the Companys lease accounting did not comply with GAAP [ASC 840]. Under GAAP, most of the Companys equipment leases should have been accounted for as capital leases. This accounting error had the effect of understating the Companys net property, plant and equipment in 2013, 2014, and 2015 by $58 million, $64 million, and $73 million, respectively, understating its financing obligations by $38 million, $46 million, and $61 million, respectively, and overstating its income before taxes by $3.1 million, $2.4 million, and $5.1 million, respectively.

Volume Rebate Liability 22. ADS offered rebates to many of its high-volume customers. The Company accrued monthly for its estimated rebate liabilities. Following the end of fiscal year 2015, a member of the ADS accounting group, using a newly developed methodology, estimated that ADSs rebate liability was under accrued by approximately $1.4 million. A subsequently prepared reconciliation schedule indicated it should be adjusted upwards by approximately $845,000. The Company did not use either of these calculations to adjust the rebate liability account at year-end, and instead, without support, recorded only a partial adjustment of $400,000. The Company later determined, in connection with the Restatement, that the volume rebate account was under accrued by $3.5 million at the end of fiscal year 2015.

Tone at the Top and Other Accounting Control Deficiencies 23. The material misstatements and improper accounting described above were due in part to insufficient internal accounting controls. As ADS acknowledged in its Restatement, the poor tone at the top set by senior management contributed to the Companys ineffective internal accounting controls. Senior management also created a high pressure environment for accounting personnel, and there was an inappropriate emphasis on aggressive and arbitrary timelines. Sturgeon and others in the finance department managed ADSs accounting in a topdown manner, overriding accounting policies and calculations by accounting personnel and directing or approving entries without adequate documentation. All of these factors led to an environment where many employees felt there was no meaningful way to challenge accounting instructions and entries with which they disagreed. 24. ADS also lacked accounting personnel with appropriate experience and training. The Company also had insufficient internal accounting controls over: inventory and lease accounting; segregation of accounting entry and approval duties; and documentation requirements for journal entries. These deficiencies, and others, contributed to the improper accounting and material misstatements of the Companys financial results described above.

The Offer and Sale of Securities 25. ADS offered and sold securities pursuant to an Amended Form S-1 the Company filed on July 14, 2014, that went effective on July 24, 2014. This registration statement contained inaccurate financial statements for fiscal years 2013 and 2014, which the Company later corrected. ADS also offered and sold securities pursuant to a Form S-8 the Company filed on July 30, 2014, as a result of employee exercises of stock options during fiscal year 2015. The Form S-8 incorporated by reference ADSs subsequent periodic filings under the Exchange Act, including the quarterly filings during fiscal year 2015, which the Company later restated. In May 2015, Sturgeon sold a total of 50,000 shares of ADS common stock on the open market.

ADSS REMEDIAL EFFORTS 26. In determining to accept ADSs offer, the Commission considered remedial acts promptly undertaken by ADS and cooperation afforded the Commission staff.