-------------------- BEGINNING OF PAGE #1 ------------------- UNITED STATES OF AMERICA Before the SECURITIES AND EXCHANGE COMMISSION SECURITIES EXCHANGE ACT OF 1934 Release No. 36459 / November 6, 1995 ACCOUNTING AND AUDITING ENFORCEMENT Release No. 736 / November 6, 1995 ADMINISTRATIVE PROCEEDING File No. 3-8880 ______________________________ : In the Matter of : ORDER INSTITUTING PROCEEDING : PURSUANT TO SECTION 21C OF THE Everlast Filtration Corp., : SECURITIES EXCHANGE ACT OF : 1934, MAKING FINDINGS AND Respondent. : IMPOSING A CEASE AND DESIST ORDER ______________________________: The Securities and Exchange Commission ("Commission") deems it appropriate that a public administrative proceeding be instituted pursuant to Section 21C of the Securities Exchange Act of 1934 ("Exchange Act"), against Everlast Filtration Corp. ("Everlast"). Accordingly, IT IS ORDERED that a proceeding pursuant to Section 21C of the Exchange Act be, and hereby is, instituted. In anticipation of the institution of this proceeding, Everlast submitted an Offer of Settlement, which the Commission has determined to accept. Solely for the purposes of this proceeding and any other proceeding brought by or on behalf of the Commission or to which the Commission is a party, and without admitting or denying the findings herein, except that Everlast admits the jurisdiction of the Commission over it and over the subject matter of this proceeding, Everlast consents to the entry of this Order Instituting Proceeding Pursuant to Section 21C of the Securities Exchange Act of 1934, Making Findings and Imposing a Cease and Desist Order ("Order") and to the entry of the findings and imposition of the sanctions set forth below. I. On the basis of this Order and Respondent Everlast's Offer, the Commission makes the following findings:-[1]- --------- FOOTNOTES --------- -[1]- The findings herein are made pursuant to Everlast's Offer of Settlement and are not binding on any other person or entity named as a respondent in this or any other proceeding. -------------------- BEGINNING OF PAGE #2 ------------------- A. RESPONDENT Everlast Filtration Corp. ("Everlast") is a Nevada corporation. During 1990-1992, Everlast's offices were located in Carlsbad, California, and Everlast was primarily engaged in the distribution of a patented oil filtration system. Everlast voluntarily filed for bankruptcy under Chapter 11 on May 10, 1994 (Bankr. S.D. Cal. Case No. 94-05101-M11). Everlast was operated as a debtor-in-possession until October 5, 1994, when the Court appointed a Chapter 11 Trustee, who, with his court-approved counsel, had no affiliation with Everlast prior to October 5, 1994. During the period 1989-1992, Everlast's common stock was registered pursuant to Section 12(g) of the Exchange Act and was traded on the over-the-counter market. B. BACKGROUND Everlast was formed as the result of a December 1989 reverse acquisition between Equity Reliance Corp., a public shell corporation, and Oil Refiner & Research Corp. ("ORRD"), a private company. From December 1989 through 1990, Everlast was a small company manufacturing and distributing engine oil filtration products, the patents for which (the "Patents") had originally been issued to the father of Everlast's then President. Then, on December 31, 1990, Everlast acquired interests in two parcels of land located near Branson, Missouri (the "Branson Property"). Everlast materially overstated the values of the Patents and/or the Branson Property in a Form 10 registration statement filed on October 1, 1990 (the "Form 10"), a 1990 Form 10-K filed on May 6, 1991 (the "1990 Form 10-K"), three Forms 10-Q filed during 1991 (the "1991 Forms 10-Q"), and a Form 8-K filed on February 18, 1992 (the "1992 Form 8-K"). Everlast's overstatement of the Patents' value overstated its total assets by as much as 179%, and Everlast's overstatement of the Branson Property's value overstated its total assets by as much as 478%. C. EVERLAST OVERSTATED THE VALUES OF ITS REPORTED ASSETS 1. The Patents Everlast acquired: (1) a 75% interest in the Patents, valued at about $3,750,000, in 1989 from ORRD in exchange for Everlast stock; and (2) the remaining 25% of the Patents in 1990 for a $250,000 note from a third party. In the Form 10, 1990 Form 10-K and the 1991 Forms 10-Q, Everlast reported the Patents' value to be approximately $4 million. In the Form 10, the Patents comprised 64% of Everlast's total assets, and in the 1990 Form 10-K and 1991 Forms 10-Q, the Patents comprised about 18% of Everlast's total assets. Everlast improperly reported the approximate $4 million value for the Patents in its Form 10, 1990 Form 10-K and 1991 Forms 10-Q. Of the $4 million reported value, $250,000 was acquired by a note. Everlast obtained its initial 75% interest in the Patents, comprising about $3,750,000 of the $4 million reported value, in a reverse acquisition from ORRD, an entity under the control of Everlast's then President. ORRD, in turn, had acquired its interest in the Patents at zero cost from another entity under the control of Everlast's then President. Generally Accepted Accounting Principles ("GAAP") require that assets, such as the Patents, acquired in those circumstances -------------------- BEGINNING OF PAGE #3 ------------------- should be recorded at the transferor's cost basis, which in this instance was zero. See American Institute of Certified Public Accountants ("AICPA"), Accounting Interpretations of Accounting Principles Board Opinion No. 16, 39. Therefore, -------------------- BEGINNING OF PAGE #4 ------------------- in its Form 10, 1990 Form 10-K and 1991 Forms 10-Q, Everlast reported an overstated value of the Patents by at least $3,750,000. 2. The Branson Property In its 1990 Form 10-K and 1991 Forms 10-Q, Everlast reported that on December 31, 1990, it issued preferred stock to acquire the Branson Property, which consisted of a 940 acre parcel and a 400 acre parcel of raw land. Everlast reported the Branson Property at $106 million, 84% of Everlast's total assets, based on a purported appraisal. A more realistic value of the Branson Property was, at most, $5 million. Subsequently, in its 1992 Form 8-K, Everlast reported that it had traded the Branson Property for a 30% interest in a partnership newly created to develop the Branson Property. Everlast valued that partnership interest at $29.6 million. At the time that Everlast reported the $106 million value for the Branson Property, and subsequently the $29.6 million for its 30% interest in the partnership, those values were materially overstated. More specifically, among other things: (1) Everlast had originally placed a $17.9 million value on the Branson Property; (2) the preferred shares that Everlast exchanged for the Branson Property had little, if any, value because Everlast was cash poor, reported a $3.3 million loss for 1990, and did not have material operations; (3) few, if any, parties had showed interest in the Branson Property and the sellers hoped Everlast could make the $30,000 monthly payments as a last ditch effort to save the property from foreclosure; (4) Everlast held only an oral option to buy the 400 acre parcel for $650,000; (5) the purported appraisal upon which Everlast based the $106 million value was created for earlier owners of the Branson Property and was not an appropriate basis for Everlast to use in valuing the Branson Property because it assumed: (a) total ownership of all the Branson Property; and (b) access to at least $50 million to develop roads, water lines and other amenities. In addition, in April 1991, prior to Everlast filing the 1990 Form 10-K, Everlast inquired of the Commission staff about the proper accounting for the Branson Property. Everlast knew that the staff had emphatically told Everlast that the $106 million value "was not acceptable." Everlast, nevertheless, reported the value of the Branson Property at $106 million, in part, because Everlast's auditor advised Everlast that it would be "wrong" not to. D. APPLICABLE LAW 1. Registration and Reporting Violations: Sections 12(g) and 13(a) of the Exchange Act and Rules 12b-20, 13a-1, 13a-11 and 13a-13 thereunder Section 12(g) of the Exchange Act provides in part that an issuer may register a class of its securities with the Commission on Form 10. Section 13(a) of the Exchange Act and Rules 13a-1, 13a-11 and 13a-13 thereunder require issuers with securities registered pursuant to Section 12 of the Exchange Act, such as Everlast, to file with the Commission annual reports on Form 10- K, current reports on Form 8-K and quarterly reports on Form 10- Q. Inherent in these requirements is that the filings be accurate; therefore, an issuer violates these provisions if it files a Form 10, 10-K, 8-K or 10-Q that contains materially false or misleading information. SEC v. Falstaff Brewing Corp., 629 -------------------- BEGINNING OF PAGE #5 ------------------- F.2d 62, 72 (D.C. Cir. 1980); SEC v. Savoy Industries, Inc., 587 F.2d 1149, 1165 (D.C. Cir. 1978), cert. denied, 440 U.S. 913 (1979). Rule 12b-20 under the Exchange Act similarly requires that these reports contain any material information necessary to make the statements made in the reports not misleading. -------------------- BEGINNING OF PAGE #6 ------------------- Everlast violated Sections 12(g) and 13(a) of the Exchange Act and Rules 12b-20, 13a-1, 13a-11 and 13a-13 thereunder. Everlast filed its Form 10 on October 1, 1990, 1990 Form 10-K on May 6, 1991, three 1991 Forms 10-Q and Form 8-K on February 18, 1992. Everlast made those Forms false and misleading by materially overstating the values of its assets, in particular the Patents and Branson Property. 2. Record-Keeping Violations: Section 13(b)(2)(A) of the Exchange Act Section 13(b)(2)(A) of the Exchange Act requires every issuer that has securities registered pursuant to Section 12 of the Exchange Act, such as Everlast, to "make and keep books, records, and accounts, which in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the issuer." Everlast violated Section 13(b)(2)(A) of the Exchange Act. By materially overstating the values of the Patents and the Branson Property, Everlast failed to keep books, records and accounts that accurately reflected its assets when it filed its Form 10, 1990 Form 10-K, 1991 Forms 10-Q and 1992 Form 8-K. 3. Internal Control Violations: Section 13(b)(2)(B) of the Exchange Act Section 13(b)(2)(B) of the Exchange Act requires every issuer that has securities registered pursuant to Section 12 of the Exchange Act, such as Everlast, to devise and maintain a system of internal accounting controls sufficient to reasonably assure, among other things, that transactions are executed in accordance with management's general or specific authorization and that transactions are recorded as necessary to permit preparation of financial statements in conformity with GAAP. Everlast violated Section 13(b)(2)(B) of the Exchange Act. Everlast failed to maintain a system of internal controls which reasonably assured that Everlast's transactions were recorded as necessary to allow Everlast to prepare its financial statements in conformity with GAAP. E. CONCLUSION Accordingly, based on the foregoing, the Commission finds that Everlast violated Sections 12(g), 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and Rules 12b-20, 13a-1, 13a-11 and 13a-13 thereunder. -------------------- BEGINNING OF PAGE #7 ------------------- IV. Based on the foregoing, the Commission deems it appropriate to accept the Offer of Settlement of Everlast and accordingly, IT IS HEREBY ORDERED, pursuant to Section 21C of the Exchange Act, that Everlast cease and desist from committing or causing any violations and any future violations of Sections 12(g), 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and Rules 12b-20, 13a-1, 13a-11 and 13a-13 thereunder. By the Commission. Jonathan G. Katz Secretary