UNITED STATES OF AMERICA Before the SECURITIES AND EXCHANGE COMMISSION SECURITIES EXCHANGE ACT OF 1934 Release No. 37031 / March 27, 1996 ACCOUNTING AND AUDITING ENFORCEMENT Release No. 769 / March 27, 1996 ADMINISTRATIVE PROCEEDING File No. 3-8902 ______________________________ : In the Matter of : : ORDER MAKING FINDINGS AND : AND IMPOSING A CEASE-AND- David Sims and : DESIST ORDER PURSUANT TO Lewis Kurtz, : SECTION 21C OF THE SECURITIES : EXCHANGE ACT OF 1934 Respondents. : ______________________________: I. In these proceedings instituted pursuant to Section 21C of the Securities Exchange Act of 1934 ("Exchange Act"), Respondents David Sims ("Sims") and Lewis Kurtz ("Kurtz") have submitted Offers of Settlement ("Offers") which the Commission has determined to accept.1/ II. Solely for the purpose of this proceeding and any other proceeding brought by, or on behalf of, the Commission, or to which the Commission is a party, prior to a hearing pursuant to the Commission's Rules of Practice [17 C.F.R.  201.100 et seq.], and under the terms of the Offer, Sims and Kurtz, without admitting or denying the findings set forth below, except that Sims and Kurtz admit the jurisdiction of the Commission over them and over the subject matter of this proceeding, consent to the entry of this Order Making Findings and Imposing a Cease-and- Desist Order Pursuant to Section 21C of the Securities and Exchange Act of 1934 ("Order"). 1/ An Order Instituting Cease and Desist Proceeding Pursuant to Section 21C of the Securities Exchange Act of 1934; and Notice of Hearing against Respondents Sims and Kurtz was issued by the Commission on December 27, 1995, Admin. Proc. File No. 3-8902. Sims and Kurtz are collectively referred to hereinafter as "Respondents." ==========================================START OF PAGE 2====== III. On the basis of this Order and Respondents' Offers, the Commission makes the following findings:2/ RESPONDENTS A. David Sims ("Sims"), 45, was the President of Everlast Filtration Corp. ("Everlast"), Chief Executive Officer and a director from inception in December 1989 until December 31, 1992. B. Lewis Kurtz ("Kurtz"), 66, was, from inception in December 1989 until December 31, 1992, Everlast's Chief Financial Officer ("CFO"), Treasurer and a director. He is not, however, a certified public accountant ("CPA"). On January 1, 1993, Kurtz was made Everlast's Acting President although the bankruptcy trustee currently operates Everlast. ISSUER C. Everlast is a Nevada corporation located in Carlsbad, California, primarily engaged in the distribution of a patented oil filtration system. Everlast voluntarily filed for bankruptcy under Chapter 11 on May 10, 1994, and is currently operated by a bankruptcy trustee. 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. On November 6, 1995, the Commission entered an Order Instituting Cease and Desist Proceeding Pursuant to Section 21C of the Securities Exchange Act of 1934, Making Findings and Imposing a Cease-and-Desist Order against Everlast for 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. BACKGROUND D. 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 owned by Sims and his brother. From December 1989 through 1990, Everlast was a small company manufacturing and distributing engine oil filtration products, for which patents (the "Patents") were issued to Sims' father. Then, on December 2/ The findings herein are made pursuant to Respondents' Offers of Settlement and are not binding on any other person or entity named as a respondent in this or any other proceeding. ==========================================START OF PAGE 3====== 31, 1990, Everlast acquired interests in two parcels of land located near Branson, Missouri (the "Branson Property"). ==========================================START OF PAGE 4====== E. 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") signed by Sims, a December 31, 1990, Form 10-K filed on May 6, 1991 (the "1990 Form 10-K"), signed by Sims and Kurtz, three Forms 10-Q filed during 1991 (the "1991 Forms 10-Q") signed by Sims and Kurtz, and a Form 8-K filed on February 18, 1992 (the "1992 Form 8-K") signed by Kurtz. 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%. EVERLAST OVERSTATED THE VALUES OF ITS REPORTED ASSETS The Patents F. Everlast acquired: (1) a 75% interest in the Patents, which it valued at about $3,750,000, in 1989 in the reverse acquisition; and (2) the remaining 25% of the Patents, from a third party, in 1990 for a $250,000 note. 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. G. 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 Sims' control. ORRD, in turn, had acquired its interest in the Patents at zero cost from another entity under Sims' control. Generally Accepted Accounting Principles ("GAAP") require that assets, such as the Patents, acquired in those circumstances 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, in its Form 10, 1990 Form 10-K and 1991 Forms 10-Q, Everlast overstated the reported value of the Patents by at least $3,750,000. H. At the time Everlast reported the Patents at approximately $4 million, Sims and Kurtz understood that Sims controlled ORRD when ORRD transferred the 75% interest in the Patents to Everlast. They also understood that ORRD had obtained the 75% interest in the Patents at zero cost. In addition, Kurtz did not research GAAP requirements for recording assets, such as the Patents, acquired in a reverse acquisition or from an entity under Sims' common control. ==========================================START OF PAGE 5====== The Branson Property I. 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 as having a value of $106 million, 84% of Everlast's total assets, based on a purported appraisal. 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. GAAP required that Everlast record the Branson Property and Everlast's subsequent partnership interest, at those assets' fair values, which, given the facts and circumstances cited below, were materially less than Everlast reported. J. 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. Sims and Kurtz had information which justified a substantially lower valuation. For example: (1) Everlast and the seller of the property had placed a $17.9 million value on the Branson Property at the time of the sale; (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 did not own the 400 acre parcel and, instead, 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 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. K. 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. Sims and Kurtz 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. APPLICABLE LAW 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 ==========================================START OF PAGE 6====== L. 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. 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. ==========================================START OF PAGE 7====== M. 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. N. Sims and Kurtz caused Everlast to violate Sections 12(g) and 13(a) of the Exchange Act and Rules 12b-20, 13a-1, 13a- 11 and 13a-13 thereunder. Sims and Kurtz possessed information showing that Everlast materially overstated the values of the Patents and the Branson Property at the time that Everlast filed its Form 10, 1990 Form 10-K, 1991 Forms 10-Q and 1992 Form 8-K. Sims and Kurtz, nevertheless, caused Everlast to file these Forms. Record-keeping Violations: Section 13(b)(2)(A) of the Exchange Act and Rule 13b2-1 thereunder O. 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." Rule 13b2-1 provides that "no person shall, directly or indirectly, falsify or cause to be falsified, any book, record or account subject to Section 13(b)(2)(A)." P. 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. Q. Sims and Kurtz caused Everlast to violate Section 13(b)(2)(A) of the Exchange Act. Sims, as Everlast's President, and Kurtz, as Everlast's CFO and accounting officer, failed to assure that Everlast kept books, records and accounts that accurately reflected its assets at the times it filed its Form 10, 1990 Form 10-K, 1991 Forms 10-Q and 1992 Form 8-K. Sims and Kurtz also violated Rule 13b2-1. They understood that the Patents and the Branson Property comprised most of Everlast's assets and they had substantial evidence that Everlast was reporting those assets at materially overstated values but failed to assure the accuracy of Everlast's records. Kurtz, as CFO, was primarily responsible for the accuracy of Everlast's records and failed to record the Patents and the Branson Property at values in accordance with GAAP. Internal Control Violations: Section 13(b)(2)(B) of the Exchange Act ==========================================START OF PAGE 8====== R. 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. S. 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. T. Sims and Kurtz caused Everlast's violation of the internal control provisions. Sims, as Everlast's President, accepted materially overstated values for the Patents and the Branson Property, while failing to engage a knowledgeable financial officer or to otherwise assure effective controls assuring Everlast's conformity with GAAP. As Everlast's CFO and accounting officer, Kurtz was primarily responsible for assuring the adequacy of Everlast's system of internal controls. Kurtz did not develop effective procedures or a system for Everlast which assured that Everlast's assets were valued in conformity with GAAP. IV. Based on the foregoing, the Commission deems it appropriate and in the public interest to accept the Offers of Settlement of Respondents Sims and Kurtz. Accordingly, IT IS HEREBY ORDERED, pursuant to Section 21C of the Exchange Act, that Respondents Sims and Kurtz cease and desist from causing any violation, and any future violation, 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, and committing or causing any violation, and any future violation, of Rule 13b2-1 thereunder. For the Commission, by its Secretary, pursuant to delegated authority. Jonathan G. Katz Secretary