Collins & Aikman

Topics: U.S. Securities and Exchange Commission, Corporate governance, Revenue Pages: 5 (1858 words) Published: January 3, 2013
Background of the Company
Collins and Aikman (C&A) was incorporated in 1891 with Charles Aikman as President and William Collins as Corporate Secretary and Treasurer. In the early years, they were considered specialists in heavy, upholstery-type materials as a retailer in home décor. By the early 1920’s, both original owners had sold out and the company began producing fabrics for the auto industry. Eighty years later, C&A was the largest supplier of seat fabrics, floor mats and convertible tops, and second largest of floor carpets and luggage compartment trim. Being in the auto industry, C&A had gone through lean, and even loss years, especially during the Depression. However, in the early 1940’s under the leadership of Willis McCollough, the company emphasized research and development and prided itself on taking care of its employees, as they were pioneer providers of health care and supporters of the 40 hour work week. Throughout the next 50 years, C&A enjoyed internal growth as well as acquired several of its suppliers. In 1994, they went public and were listed on the New York Stock Exchange. In 2001, Heartland Industrial Partners, a private equity firm, purchased a 60 percent stake in C&A for $260 million. With this infusion of cash, C&A announced several other large acquisitions, and stated that it was focused on global market share! Shortly after this time though, C&A had grown quickly, but had availed itself in varieties of debt financing, including $900 million in notes, term loans of $675 million accounts receivable securitization of $250 million. Growth in operations, pressure from the market place, a waning auto industry, and pressure from the bank to reach their covenant agreements, and investors need to reach their “numbers”, contributed to C&A and management making some unethical and fraudulent decisions. Individuals and Titles Involved

The Securities and Exchange Commission (SEC) filed civil fraud charges against C&A and the following officers, upper management, and Board members: David A. Stockman (Stockman), Chief Executive Officer and Chairman of the Board J. Michael Stepp (Stepp), Chief Financial Officer and Vice-Chairman of the Board Elkin B. McCallum (McCallum), Board member

David R. Cosgrove (Cosgrove), Corporate Controller
John G. Galante (Galante), Corporate Treasurer
Christopher M. Williams (Williams), Executive Vice President - Business Development Group Gerald E. Jones (Jones), Chief Operating Officer & Executive Vice President - Fabrics Division Paul C. Barnaba (Barnaba), Vice President and Director of Purchasing (Plastics Division) Thomas V. Gougherty (Goughterty), Controller (Plastics Division) Allegations

The SEC alleged that from the “fourth quarter of 2001 through 2004, C&A inflated quarterly earnings through improper accounting for payments to suppliers”. Three schemes were described in the case. First, from 2001- 2003, C&A entered into several improper transactions with McCallum, a Board Member and supplier. These were referenced as “round trip” transactions, and there were in excess of $14 million of payments from McCallum that C&A used to increase their net income when these payments were actually loans, and were repaid. Second, in 2002, C&A began improperly recognizing rebates on future sales as income. To satisfy auditors, C&A coerced their suppliers to sign documents (drawn up by C&A) stating that the rebates they recognized that quarter as income were for past sales, not future sales. C&A “promised” the business to the suppliers in return for these letters. Some of these rebates eventually did come to fruition, and some did not due to less volume, but they were always recognized as increases in revenue before they should have been. Third, C&A extended its rebate scheme to purchases of capital equipment. They negotiated rebates on equipment, but recognized it as...
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