UNITED STATES OF AMERICA Before the SECURITIES AND EXCHANGE COMMISSION Securities Exchange Act of 1934 Release No. 37128 / April 19, 1996 Accounting and Auditing Enforcement Release No. 775/ April 19, 1996 Administrative Proceeding File No. 3-8988 _______________________________ : In the Matter of : ORDER INSTITUTING PUBLIC : PROCEEDINGS PURSUANT TO : SECTION 21C OF THE : SECURITIES EXCHANGE ACT OF CENTURI, INC., : 1934 AND FINDINGS AND ORDER : OF THE COMMISSON : : Respondent. : : _______________________________ I. The Commission deems it appropriate and in the public interest to institute public administrative proceedings against Centuri, Inc. ("Centuri") pursuant to Section 21C of the Securities Exchange Act of 1934 ("Exchange Act"). Accordingly, IT IS HEREBY ORDERED that these proceedings be, and hereby are, instituted. II. In anticipation of the institution of these administrative proceedings, Centuri has submitted an Offer of Settlement, which the Commission has determined to accept. Solely for the purpose of these proceedings, 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 or conclusions set forth below in Part III, Centuri consents to the issuance of this Order Instituting Public Proceedings Pursuant to Section 21C of the Exchange Act, Making Findings and Order of the Commission ("Order"), and to the findings and imposition of the cease and desist order set forth below. ==========================================START OF PAGE 2====== III. On the basis of this Order and the Respondent's Offer of Settlement, the Commission finds the following:-[1]- A. FACTS 1. Respondent Centuri is a Florida corporation with its principal executive offices located in Vestal, New York. Centuri's common stock is registered with the Commission under Section 12(g) of the Exchange Act, and at the time of the events discussed in this Order, trades in Centuri's common stock were reported on the National Association of Securities Dealers Automated Quotation System ("NASDAQ"). Centuri filed for Chapter 11 bankruptcy protection on July 2, 1991, and was granted such protection on September 13, 1991. Centuri's reorganization plan was approved in November 1993. 2. Related Entity and Individual Outdoor Sports Headquarters, Incorporated ("OSHI") was, at all relevant times, a wholly-owned subsidiary of Centuri, engaged in the wholesale distribution of outdoor sporting goods. OSHI was Centuri's largest subsidiary in 1989 and 1990. In 1989, OSHI accounted for 90% of Centuri's consolidated net sales. OSHI's principal executive offices are located in Dayton, Ohio. OSHI filed for Chapter 11 bankruptcy protection at the same time as Centuri. OSHI's plan of reorganization was approved in June 1992. 3. Summary Centuri violated Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and Rules 13a-1, 13a-13 and 12b-20 by filing materially inaccurate periodic reports with the Commission, failing to file periodic reports with the Commission, failing to keep accurate books and records, and failing to devise and maintain internal controls. In its periodic reports and on its books and records, Centuri materially overstated its net income and accounts receivable and materially understated its accounts payable and accrued liabilities. These misstatements were caused by improper accounting practices at OSHI. 4. Centuri Made Material Misstatements in Its Form 10-K for 1989 -[1]- The Commission's findings herein are not binding upon any other person or entity in this or any other proceeding. ==========================================START OF PAGE 3====== Centuri made material misstatements in the financial statements included in its Form 10-K for the year 1989, filed with the Commission on March 27, 1990 ("1989 Form 10-K"). Specifically, Centuri materially overstated its net income and accounts receivable, and materially understated its accounts payable and accrued liabilities. Each of these misstatements resulted from improper accounting practices at OSHI. For example, OSHI staged sales, booked inventory out of period, failed to timely record certain accounts payable liabilities, and, in some instances, failed to record certain accounts payable liabilities all together. OSHI also made improper journal entries to reduce its accounts payable and increase its accounts receivable. OSHI also failed to accrue for certain liabilities as required by Generally Accepted Accounting Principles ("GAAP"). a. Centuri Overstated Its Net Income Centuri reported in its 1989 Form 10-K net income of $2,343,551 when it should have reported a net loss of $5,200,543. OSHI caused Centuri to understate cost of sales by $5,382,259, understate operating expenses by $1,524,919 and to overstate sales by $928,916 for 1989. Thus, Centuri's net income in its 1989 Form 10-K was overstated by $7,544,094, or 322% of what it reported.-[2]- Centuri understated its cost of sales for 1989 by $5,382,259. Of this $5,382,259 understatement, $3,345,903 related to inventory purchase liabilities which had been improperly omitted from OSHI's books. OSHI double booked certain inventory totaling $370,064. OSHI also had no support for $122,809 of the $123,830 of prepaid inventory it booked in 1989. On December 31, 1989, OSHI recorded $585,869 of rebates allegedly due OSHI from its vendors, but for which there was no support. OSHI also improperly reduced its cost of sales by recording credit memos for which there were no support ($519,694) and credit expected from vendors ($418,292). The remainder of Centuri's $5,382,259 understatement of cost of sales related to OSHI's failure to amortize its catalogue expense ($124,028), provision for LIFO ($68,475), invalid inventory adjustments -[2]- OSHI's deferred state and local tax and federal income tax accounts were overstated by $93,000 and $199,000, respectively. These misstatements caused Centuri to understate its net income by $292,000, the aggregate amount of these two figures. The $292,000 amount was subtracted from $7,836,094, which is the total amount by which Wallin inflated OSHI's 1989 net income, to arrive at the adjustment figure of $7,544,094. ==========================================START OF PAGE 4====== ($38,652) and miscellaneous inventory written off ($11,881).-[3]- Centuri understated its operating expenses for 1989 by $1,524,919. This understatement resulted from OSHI's failure to accrue for health and medical expenses ($495,000), vacation ($278,268), real estate taxes ($85,000) and FICA ($54,411) for 1989. OSHI had an additional $279,100 understatement of nonoperating expenses for 1989. The rest of the $1,524,919 understatement of Centuri's operating expenses related to OSHI's moving expenses, the improper statement of a bond discount at OSHI, and the accrued versus the paid amount of a sales bonus to OSHI's sales manager. Centuri overstated sales by $928,916 for 1989. This overstatement resulted from OSHI's failure to account for cash discounts that were expected to be taken by customers ($398,000) and failure to record a reserve for sales returns and allowances ($247,000). The remainder of the overstatement of sales was due to a $283,916 staged sale at OSHI. b. Centuri Materially Understated Its Accounts Payable and Accrued Liabilities Centuri materially understated its accounts payable liability by $4,869,758, or 37.5% of the $12,982,271 it reported in its 1989 Form 10-K. This understatement was due to OSHI's booking inventory in the wrong period and making improper reconciling journal entries to reduce accounts payable. OSHI received and recorded $3,345,903 in inventory as an asset in 1989, but did not record the corresponding accounts payable liability or pay its vendors for the inventory until 1990 and, in some instances, OSHI failed to record the accounts payable liability altogether. The balance of Centuri's $4,869,758 accounts payable understatement in 1989 ($1,523,855) was due to OSHI's improper journal entries to reduce the accounts payable liability. For example, OSHI's accounts payable was reduced by fabricated items called "Free Goods, Rebates and DM's due." These items were goods, rebates and credits allegedly owed OSHI by vendors based on the volume of OSHI's 1989 and 1990 respective inventory purchases. -[3]- Though the adjustments to cost of sales enumerated above indicate that a $5,605,667 total adjustment to the account was appropriate, that total amount was reduced by a $223,408 credit to reconcile inventory. ==========================================START OF PAGE 5====== Centuri materially understated its accrued liabilities by $910,817 or 14.5% of the $6,296,784 it reported in its 1989 Form 10-K. Centuri's understatement resulted from OSHI's failure to properly accrue for property and income tax and payroll and its failure to accrue for employee vacation, FICA, incurred but not reported medical expenses, and real estate taxes, altogether. c. Centuri Materially Overstated Its Accounts Receivable Asset Centuri overstated its accounts receivable asset by $1,208,016, or 4.3% of the $28,274,773 amount it reported. Centuri's overstatement was a direct result of a staged sale at OSHI, OSHI's failure to accrue for cash discounts and returns and allowances, and miscellaneous entries to OSHI's accounts receivable journal. 5. Centuri Made Material Misstatements in Its Forms 10-Q for the First Three Quarters of 1990 The improper accounting practices described above and other practices of similar purport and object continued at OSHI into 1990. As a result, Centuri materially understated its respective net losses in its Forms 10-Q for the first three quarters of 1990. In the first quarter of 1990, Centuri reported a net loss of $1,382,000 when it should have reported a loss of $2,503,302. In its Form 10-Q for the second quarter of 1990, Centuri reported a net loss of $2,245,000 when it should have reported a loss of $5,104,850. In its Form 10-Q for the third quarter of 1990, Centuri reported a net loss of $486,000 when it should have reported a loss of $3,078,124. Accordingly, Centuri Forms 10-Q for the first three quarters of 1990 were materially misleading. 6. Centuri Failed to Maintain Accurate Books and Records in 1989 and 1990 OSHI failed to maintain accurate books and records in 1989 and 1990. In its books and records, OSHI recorded assets for which there was no support, failed to record certain accounts payable liabilities in the proper reporting period and, in some instances, failed to record certain accounts payable liabilities altogether. Further, OSHI failed to record, in its books and records, asset reserves and certain other liabilities as required by GAAP. OSHI also staged sales, which caused its books, records and accounts to reflect inaccurately its transactions and the disposition of its assets. Additionally, when OSHI voided checks that had been drawn to pay accounts payable, OSHI reinstated the funds to its cash balance, but failed to reinstate the corresponding accounts payable. These accounting practices caused OSHI to maintain inaccurate books and records and led to ==========================================START OF PAGE 6====== Centuri's material misstatements of net income, liabilities and assets described above in Parts III.A.4. and III.A.5. 7. Centuri Failed to Devise and Maintain Internal Controls at OSHI Centuri failed to devise and maintain a system of internal controls at OSHI. OSHI's internal controls had "material weaknesses."-[4]- These material weaknesses allowed and helped to prevent detection of the accounting errors and irregularities which resulted in the material misstatements described above. OSHI did not maintain the segregation of duties normally found in accounting departments. OSHI had virtually no system of internal controls to monitor accounts payable liability. OSHI lacked internal controls to assure that inventory received and booked as assets had the corresponding liability properly recorded. There were no controls in place to assure that when checks were voided off the accounts payable system and cash reinstated to OSHI's cash balance, the corresponding payables were reinstated to the accounts payable system. 8. Centuri Failed to File Forms 10-K for 1990, 1991, 1992 and 1993 and Forms 10-Q During 1991, 1992, 1993 and 1994 Centuri's last periodic report filed with the Commission was a Form 10-Q for the quarter ended September 30, 1990, filed on November 14, 1990. Centuri did not file a Form 15 (Certification and Notice of Termination of Registration under Section 12(g) of the Exchange Act or Suspension of Duty to File Reports Under Section 13 or 15(d) of the Exchange Act) or a Form 12b-25 (Notification of Late Filing). Although Centuri filed a report on Form 8-K on March 15, 1991 that indicated that its 1990 Form -[4]- Generally Accepted Accounting Standards ("GAAS") generally define a material weakness in internal accounting controls as: a condition in which the specific control procedures, or the degree of compliance with them, are not sufficient to achieve a specific control objective--that is, errors or irregularities may occur and not be detected in a timely period by employees in the normal course of performing their assigned functions. A weakness is material if the condition results in more than a relatively low risk of such errors or irregularities in amounts that would be material in relation to the financial statements. [See AU 642 of Statement of Auditing Standards No. 30, .30]. ==========================================START OF PAGE 7====== 10-K would be filed late due to the problems at OSHI, Centuri never filed a Form 10-K for 1990 and has not made any other periodic reports since its Form 10-Q for the ended quarter September 30, 1990. B. LEGAL DISCUSSION 1. Violations of Section 13(a) of the Exchange Act and Rules 13a-1, 13a-13 and 12b-20 Section 13(a) of the Exchange Act requires all issuers subject to the reporting requirements of the Exchange Act to file periodic and other reports with the Commission containing such information as the Commission's rules prescribe. Rule 13a-1 requires such issuers to file annual reports with the Commission and Rule 13a-13 requires such issuers to file quarterly reports. Issuers must disclose their assets, liabilities and net income, among other things, in these reports. See Generally, Regulation S-X. Implicit in the requirements of Section 13(a) of the Exchange Act is that the information supplied be accurate. SEC v. Kalvex, 425 F. Supp. 310, 316 (S.D.N.Y. 1975). The annual and quarterly reports, filed on Forms 10-K and 10-Q, respectively, are required to contain financial statements in accordance with Regulation S-X, which in turn requires conformity with GAAP. 17 C.F.R. 210.4-01(a)(1) (1991) ("Financial statements filed with the Commission which are not prepared in accordance with generally accepted accounting principles will be presumed to be misleading or inaccurate"). Rule 12b-20 requires such reports contain any information necessary to ensure that other statements in the reports are not, under the circumstances, materially misleading. SEC v. Falstaff Brewing Corp., 629 F.2d 62, 71 (D.C. Cir. 1980), cert. denied, 449 U.S. 1012 (1980). Violations of the reporting provisions do not require a showing of scienter. SEC v. Willis, 472 F. Supp. 1250, 1268 (D.D.C. 1978) (citing SEC v. Savoy Industries, Inc., 587 F.2d 1149, 1166-67 (D.C. Cir. 1978), cert. denied, 440 U.S. 913 (1979)). To be actionable, the misstatements or omissions must, however, be material. The materiality element is satisfied by showing that there is a substantial likelihood that, under all the circumstances, the misstated or omitted fact would have assumed actual significance in the deliberations of a reasonable investor. Basic, Inc. v. Levinson, 485 U.S. 224, 232 (1988). Facts concerning a company's true financial condition are material. SEC v. World-Wide Coin Investments, 567 F.Supp. 724, 759 (N.D. Ga. 1983). The Commission has determined that Centuri, in its 1989 Form 10-K, overstated its net income by 322%, understated its accounts payable by 37.5%, understated its accrued liabilities by 14.5% and overstated its accounts receivable by 4.3%. In its Forms 10- Q for the first, second and third quarters of 1990, Centuri ==========================================START OF PAGE 8====== understated its respective net losses by 81.1%, 127.4% and 533.4% of what it reported. These misstatements are material, because, had the information been reported accurately, it certainly would have assumed actual significance in the deliberations of a reasonable investor in Centuri securities. Consequently, the Commission has determined that Centuri violated Section 13(a) of the Exchange Act and Rules 13a-1, 13a-13 and 12b-20. The Commission has also determined that Centuri failed to file Forms 10-K for 1990, 1991, 1992 and 1993 and Forms 10-Q for 1991, 1992, 1993 and 1994. Centuri's last periodic filing was a Form 10-Q for the third quarter of 1990. Therefore, the Commission has determined Centuri violated Section 13(a) of the Exchange Act and Rules 13a-1 and 13a-13. 2. Sections 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act Section 13(b)(2) of the Exchange Act was enacted to promote the reliability and completeness of financial information that issuers are required to file with the Commission or to disseminate to investors pursuant to the Exchange Act. SEC v. World-Wide Coin Investments, 567 F. Supp. at 752. There is no need to show scienter in order to establish a violation of Section 13(b)(2) of the Exchange Act. Id. at 749. When an issuer subject to Section 13(b)(2) of the Exchange Act controls more than 50% of the voting securities of a subsidiary, the Commission expects compliance with Section 13(b)(2) of the Exchange Act by such subsidiary. Interpretive Release on Foreign Corrupt Practices Act, Exchange Act Release No. 17,500, Fed. Sec. L. Rep. (CCH) 23,632H at 17,321-14 (Jan. 29, 1981). Section 13(b)(2)(A) of the Exchange Act requires every issuer of securities registered pursuant to Section 12 of the Exchange Act to make and keep books, records, and accounts, which, in reasonable detail, accurately and fairly reflect its transactions and disposition of assets. OSHI, Centuri's wholly- owned subsidiary, maintained books and records that did not accurately reflect OSHI's liabilities and assets, in contravention of GAAP. OSHI recorded assets for which there was no support, recorded certain accounts payable liabilities in the improper reporting period and, in some instances, failed to record certain accounts payable liabilities altogether. OSHI failed to record asset reserves and certain other liabilities as required by GAAP. OSHI also staged sales, which caused it to books, records and accounts to reflect inaccurately its transactions and the disposition of its assets. Accordingly, the Commission has determined that Centuri violated Section 13(b)(2)(A) of the Exchange Act. Section 13(b)(2)(B) of the Exchange Act requires such issuers to devise and maintain a system of internal accounting ==========================================START OF PAGE 9====== controls sufficient to provide reasonable assurances that transactions are recorded as necessary to permit preparation of financial statements in conformity with GAAP. See SEC v. World-Wide Coin Investments, 567 F. Supp. at 752. The Commission has also determined that Centuri violated Section 13(b)(2)(B) of the Exchange Act. OSHI, Centuri's wholly-owned subsidiary, did not maintain the segregation of duties normally found in accounting departments. OSHI lacked internal controls to assure that inventory received and booked as assets had the corresponding liability properly recorded. There were no controls in place to assure that when checks were voided off the accounts payable system and cash reinstated to OSHI's cash balance, the corresponding payables were reinstated to the accounts payable system. In addition, there were no internal controls in place at OSHI to assure that a deleted check or pulled vendor invoice was reentered into the accounts payable system. The Commission has determined that Centuri's failure to ensure that OSHI had proper internal controls in place resulted in the material misstatements described above in Sections III.A.4, 5 and 6. Accordingly, the Commission has determined that Centuri violated Section 13(b)(2)(B) of the Exchange Act. IV. Based on the foregoing, the Commission finds that: Centuri violated Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and Rules 12b-20, 13a-1 and 13a-13 thereunder. ==========================================START OF PAGE 10====== V. ORDER In view of the foregoing, it is in the public interest to impose the sanctions agreed to in the Offer. Accordingly, IT IS HEREBY ORDERED THAT: Centuri, pursuant to Section 21C of the Exchange Act, cease and desist from committing or causing any violation, and from committing or causing any future violation, of Sections 13(a) and 13(b)(2) of the Exchange Act and Rules 12b-20, 13a-1 and 13a-13 promulgated thereunder. By the Commission. Jonathan G. Katz Secretary