SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
SECURITIES EXCHANGE ACT OF 1934
Rel. No. 42060 / October 26, 1999
Admin. Proc. File No. 3-9667
:
In the Matter of the Application of :
:
HEALTHTECH INTERNATIONAL, INC. :
c/o Gregory A. Larson, Esq. :
Mesa, Arizona 85204 :
:
For Review of Action Taken by the :
:
NATIONAL ASSOCIATION OF SECURITIES DEALERS, INC. :
:
OPINION OF THE COMMISSION REGISTERED SECURITIES ASSOCIATION -- REVIEW OF
DELISTING Denial of Continued Listing
Registered securities association acted consistently with its rules and the
purposes of the federal securities laws in denying an issuer's request to
continue listing its securities on the association's automatic quotation system
because: (1) the value assigned to certain assets raised questions as to the
propriety of the accounting treatment used in the Company's financial
statements; (2) the issuer had consented to entry of final judgment in a
complaint alleging, among other things, fraudulent overstatement of its assets;
and (3) the issuer was seriously delinquent in filing its periodic reports. Held,
review proceeding is dismissed.
APPEARANCES:
Gregory A. Larson, for HealthTech International, Inc.
Robert E. Aber, Arnold P. Golub, and David A. Spotts,
for the Nasdaq Stock Market, Inc.
Appeal Filed: August 5, 1998
Briefing Completed: November 18, 1998
I.
HealthTech International, Inc. ("HealthTech" or the
"Company") has applied for review of a decision by the National
Association of Securities Dealers, Inc. ("NASD"), which denied
HealthTech continued listing on the Nasdaq SmallCap Market. We base our findings
on an independent review of the record.
II.
HealthTech is a health and fitness company that owns and operates health and
fitness clubs in the Southwest. It was listed on Nasdaq's SmallCap Market until
the Commission suspended trading in the Company's securities on November 17,
1997.
A. In mid-1997, Nasdaq staff began to investigate HealthTech in light of a
significant increase in the number of its outstanding shares. By letter dated
August 13, 1997, Nasdaq staff informed HealthTech that the staff's investigation
had revealed substantial concerns regarding the accuracy of HealthTech's
financial statements. Specifically, Nasdaq staff questioned HealthTech's
valuation of certain assets.
1. HealthTech recorded pre-paid advertising credits as an asset valued at
$7.3 million in its annual reports on Form 10-K for fiscal years ending
September 30, 1995 and 1996. 1 Some of
these advertising credits were obtained directly from American Independent
Network, a company that engages in sales of advertising credits for barter and
is affiliated with certain television and radio stations. HealthTech, however,
purchased its advertising air time credits on affiliates of AIN that were not
yet operational. Moreover, AIN honored credits for bartered advertising time
only to the extent that particular advertising time spots had not otherwise been
sold.
HealthTech claimed that it assigned a $7.3 million value to the advertising
credits based in part on the value of the assets exchanged for those credits.
Some of those valuations, however, were questionable.
For example, in 1994, HealthTech acquired advertising credits from Equitas, a
company controlled by Gordon Hall, who was HealthTech's Chairman and CEO.
HealthTech valued the credits at $2.5 million. Equitas, in turn, had obtained
the pre-paid advertising in June 1994 from Essex Park, Inc. in exchange for 4.5
million shares of Equitas' restricted stock. In December 1993, Equitas had
reported total assets of $588,212, consisting of a $300,000 unidentified
investment and a "tax benefit" of $288,212. Equitas had no income for
fiscal years 1991, 1992, and 1993. Moreover, at the time of the exchange, Hall
was a paidconsultant for Essex, and some of the officers, directors, and
shareholders of Essex were affiliated with controlling persons of Equitas. The
attributed value of $2.5 million for the advertising credits, which was based on
the value assigned Equitas' restricted stock in a transaction that does not
appear to have been at arm's length, was unreasonable.
2. Nasdaq staff also questioned the Company's inclusion of forgiveness of
debt as extraordinary income in its report on Form 10-K for fiscal year 1996.
The debt arose from a 1994 transaction with Freeway 405, Inc., a private Wyoming
corporation also controlled by Hall. Freeway had transferred to HealthTech
restricted Equitas stock, advertising credits, and a 40% interest in a second
deed of trust on two buildings that were encumbered with a $1.5 million note. In
1996, Hall forgave $1 million of the note. Nasdaq staff concluded that this debt
forgiveness was not an arms-length transaction and had little economic substance
for the parties involved. Absent this extraordinary income, HealthTech would
have reported a loss rather than net revenue of $373,427 on its 1996 Form 10-K.
3. HealthTech's report on Form 10-K for fiscal year 1996 also included as
revenue a $750,000 promissory note exchanged in the sale to Ulti-Med Health
Centers, Inc. of rights to operate certain medical clinics. Ulti-Med, however,
had filed for bankruptcy under Chapter 11 in January 1996, rendering collection
on this note unlikely. Moreover, while HealthTech claimed that the note was
secured, the agreement with Ulti-Med provided that the promissory note could be
converted, at Ulti-Med's option, into restricted shares of Ulti-Med common
stock.
4. In January 1997, HealthTech acquired Primus, LLC for consideration valued
at $6,620,000, consisting of common stock valued at $1,220,000 and pre-paid
advertising credits valued at $5,400,000. The $6,620,000 in assets attributed to
the Primus acquisition amounted to 22.9% of the Company's total assets and 28.9%
of its stockholders' equity as recorded in its report on Form 10-Q for the
period ending March 31, 1997. As in the other transactions described above,
Nasdaq staff asserted that the advertising credits were overvalued.
B. Nasdaq staff also argued that Company press releases issued from December
1994 through 1997 contained exaggerated and unjustifiable claims, many based on
the Company's misstated financial statements. In early 1997, for example,
HealthTech issued a press release, the headline of which read, "HealthTech
International, Inc. 1996 Year End Results in Net Revenues Are Up 215%."
Nasdaq staff argued that HealthTech reported net income in fiscal 1996 only as a
result of the forgiveness of Freeway debt and the Primus acquisition,
transactions that Nasdaq staff claimed were not at arms length or were
overvalued.
C. On November 25, 1997, the Commission filed a complaint in federal district
court charging HealthTech with fraudulent overstatement of its assets in
financial reports filed with the Commission. 2
The complaint alleged that HealthTech overstated its assets in the amount of at
least $10 million by: (1) reporting a sports club owned by the Company on its
books and financial statements at a cost of $5,875,000 when it should have
reported the property at $725,000; (2) improperly inflating by at least $5
million the value of advertising credits acquired by the Company; and (3)
overstating the value of assets acquired by the Company in exchange for certain
advertising credits.
HealthTech consented to an injunction enjoining it from violating the
antifraud, corporate reporting, and corporate recordkeeping provisions of the
federal securities laws. The consent judgment also required HealthTech: (1) to
correct any misstatements contained in its last five periodic reports and in its
press releases issued since September 30, 1995; and
(2) to restate its financial statements for the fiscal years ended September
30, 1995 and September 30, 1996 and for each of the quarters ended December 31,
1996, March 31, 1997, and June 30, 1997. The judgment required that the
financial restatements be completed by December 30, 1997.
D. On November 25, 1997, the United States Attorney for the Southern District
of New York and other law enforcement agencies indicted, on racketeering and
other charges, Gordon Hall, among others. The Indictment charged that Hall
issued HealthTech stock to members of organized crime families in exchange for
their efforts unlawfully to raise the market price of the securities.
* * *
On November 26, 1997, Nasdaq staff informed the Company that it had
determined to deny HealthTech continued listing, on the Nasdaq SmallCap Market,
based on its authority under NASD Marketplace Rules 4300 and 4330. 3
The staff stated that the Company materially misstated the value of its assets
in its financial statements filed with the Commission.
The Company requested review of the staff's determination. At the hearing
before the Nasdaq Qualifications Panel, William Young, then president of
HealthTech, testified on behalf of the Company. Young claimed that HealthTech
had acquiesced in the Commission's request that it restate its financial
statements even though the Company believed that all relevant information had
been disclosed and that its financial statements were prepared in accordance
with Generally Accepted Accounting Principles. Young also testified, however,
that, in accordance with its agreement with the Commission, HealthTech would
reduce the reported value of its assets by approximately $12.5 million.
Young asserted that the prepaid advertising was not overvalued because
HealthTech could use the $4.6 million worth of prepaid advertising from Hall as
barter credits. Young admitted, however, that, although HealthTech had spent
$200,000 on advertising for fiscal 1996, it had never used the prepaid
advertising credits for advertising purposes. While he contended that the
advertising credits had value as barter, he did not cite any concrete examples
of the value of the credits in specific transactions. 4
On December 10, 1997, the Nasdaq Qualifications Panel denied the Company's
request for continued listing. HealthTech did not file its restated financial
statements by December 30, 1997 as required by the consent judgment, and, in
fact, has not done so to date. On appeal, the Listing and Hearing Review Council
affirmed the Panel's decision.
III.
Section 19(f) of the Securities Exchange Act of 1934 provides that the
Commission will uphold the NASD's action if we find that the specific grounds on
which such denial is based exist in fact, that the denial "is in accordance
with [NASD rules], and that such rules . . . were applied in a manner consistent
with the purposes of" the Exchange Act. 5
We find that, based on the Company's materially misstated financial statements
and its delinquent filings, the NASD's action accords with Exchange Act Section
19(f).
A. NASD Marketplace Rule 4300 provides, in part:
The Association, therefore, in addition to applying the enumerated criteria.
. . will exercise broad discretionary authority over the initial and continued
inclusion of securities in Nasdaq in order to maintain the quality of and public
confidence in its market. Under such broad discretion. . . the Association may
deny initial inclusion or apply additional or more stringent criteria for the
initial or continued inclusion of particular securities based on any event,
condition, or circumstance which exists or occurs that makes initial or
continued inclusion of the securities in Nasdaq inadvisable or unwarranted in
the opinion of the Association, even though the securities meet all enumerated
criteria for initial or continued inclusion in Nasdaq.
Marketplace Rule 4330 further provides that Nasdaq may deny inclusion of an
otherwise qualified security if Nasdaq "deems it necessary to prevent
fraudulent and manipulative acts and practices, to promote just and equitable
principles of trade, or to protect investors and the public interest."
The Listing and Hearing Review Council found that HealthTech made
misstatements with regard to transactions between HealthTech and other companies
controlled by Hall in its financial reports filed for fiscal years 1995, 1996,
and 1997. The record demonstrates that HealthTech's financial statements for the
years 1995, 1996, and 1997 were materially misstated.
A number of the transactions by HealthTech were reported inaccurately. The
advertising credits were substantially overvalued. The agreements with AIN for
advertising credits appear to have little value. While the Company claims that
some of the advertising credits could be exchanged for services, it produced no
evidence that they were used in arms-length transactions. Moreover, the
transaction between Essex, which was controlled by Hall, and Equitas was not an
arms-length transaction and substantially overvalued the resulting assets.
Credits were exchanged for restricted Equitas stock, an interest in a company
with dubious assets and no income. The $750,000 promissory note HealthTech
received in the Ulti-Med transaction was unlikely to be collected because
Ulti-Med filed for bankruptcy prior to the transaction with HealthTech. The
Company not only made material misstatements in its filings with the Commission,
but also further misled investors by issuing highly optimistic press releases
based on these questionable transactions.
On appeal, HealthTech does not directly dispute the NASD's conclusions about
the various misstatements in the Company's financial statements. Rather,
HealthTech contends that the NASDimproperly relied on the order in the
Commission's injunctive action to determine the amount by which HealthTech
needed to restate its financial statements. The Company argues that the NASD's
decision to deny it continued listing has no basis in fact because HealthTech
has not yet filed any restatement, although the consent judgment required
HealthTech to correct misstatements and to restate its financials by December
30, 1997. Therefore, HealthTech argues, the NASD cannot know whether there were
"significant misstatements" in its financial disclosures. Moreover, it
claims that the NASD has denied it continued listing based only on the
"belief" that the Company will restate its assets in the amount of
approximately $10.1 million.
Regardless of the amount of the restatement, the record demonstrates that the
financial statements were inaccurate and misleading. HealthTech itself,
moreover, issued a press release estimating the total reduction in assets to be
approximately $12.9 million. At the hearing, Young testified that the consent
judgment with the Commission called for a restatement of $10.1 million. 6
Thus, the NASD's determination of the approximate amount of the reduction did
not come from its "belief" but rather from HealthTech itself.
Moreover, HealthTech cannot use its refusal to comply with the requirement
that it restate its financial statements as a shield against denial of continued
listing. Rather, HealthTech's delinquency in correcting its financial statements
leaves investors with no accurate historical information on which to rely. This
absence of accurate information supports the NASD's determination to deny
HealthTech continued listing to protect investors and the public interest.
Investors should not be required to rely on misleading financial statements or
to wait endlessly for accurate information. HealthTech cannot avoid the
consequences of its failure to correct and restate its misleading and inaccurate
financial statements.
B. NASD Rule 4310(c)(14) requires members to file with Nasdaq all documents
that must be filed with the Commission on or before the date they are submitted
to the Commission. On January 20, 1998, the Nasdaq Review Council notified
HealthTech that it was delinquent in meeting its public filing obligations. At
the time the Review Council issued its decision in July 1998, HealthTech had not
only failed to file its restated financial statements as required by its consent
judgment with the Commission, it also was delinquent in filing its report on
Form 10-K for the period ended September 30, 1997 and its reports onForm 10-Q
for the quarters ended December 31, 1997 and March 31, 1998.
HealthTech does not deny that it is seriously delinquent in its duty to file
financial statements. 7 The Company
claims, however, that the decision to deny it continued listing cannot be based
on the serious delinquency in its public filings because the Qualifications
Panel did not rely on this basis in its decision.
The Qualifications Panel's decision to deny HealthTech continued listing was
issued before HealthTech was delinquent in making public filings. Moreover, the
Review Council can consider information that was unavailable to the initial
decision
maker. 8 The Review Council
notified HealthTech that additional evidence, such as press releases and public
filings could be considered by it in its review of the Qualifications Panel's
decision, and invited the Company to submit any financial reports not previously
in the record. HealthTech failed to do so. 9
IV.
We find that the NASD's decision to deny HealthTech continued listing on the
Nasdaq SmallCap Market was based in fact, that Nasdaq acted fairly and in
accordance with NASD rules, and that those rules are, and were applied,
consistent with thepurposes of the federal securities laws. Accordingly, we
dismiss this review proceeding.
An appropriate order will issue. 10
By the Commission (Chairman LEVITT and Commissioners JOHNSON,
HUNT, CAREY, and UNGER).
Jonathan G. Katz
Secretary
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
SECURITIES EXCHANGE ACT OF 1934
Rel. No. 42060 / October 26, 1999
Admin. Proc. File No. 3-9667
:
In the Matter of the Application of :
:
HEALTHTECH INTERNATIONAL, INC. :
c/o Gregory A. Larson, Esq. :
Mesa, Arizona 85204 :
:
For Review of Action Taken by the :
:
NATIONAL ASSOCIATION OF SECURITIES DEALERS, INC. :
:
ORDER DISMISSING REVIEW PROCEEDING
On the basis of the Commission's opinion issued this day, it is
ORDERED that the application for review filed by HealthTech International,
Inc. be, and it hereby is, dismissed.
By the Commission.
Jonathan G. Katz
Secretary
Footnotes
1 For fiscal year 1995, pre-paid
advertising constituted 32% of HealthTech's total assets and of shareholder
equity.
2 Securities and Exchange
Commission v. HealthTech International, Inc., Litigation Rel. No. 15572
(Nov. 25, 1997), 65 SEC Docket 2974.
3 NASD Marketplace Rule 4300
authorizes the Nasdaq Stock Market to deny the initial or continued inclusion of
securities in Nasdaq to protect public confidence in the market. NASD
Marketplace Rule 4330 authorizes Nasdaq to deny inclusion or apply additional or
more stringent criteria for inclusion if particular conditions are met.
4 Young testified that the Company
was having a parking lot paved in exchange for certain advertising credits, but
the record contains no documentation of this transaction, including the parties
to the transaction or the terms of the barter arrangement.
5 Exchange Act Section 19(f). See
also JJFN Service, Inc., Securities Exchange Act Rel. No. 39343,
(November 21, 1997), 65 SEC Docket 2055.
6 He stated that the judgment
called for a $10.1 million restatement but because the Company would have to
unwind some transactions, the figure was likely going to be $12.5 million.
7 At the time of its appeal to
the Commission, HealthTech still had not filed these financial statements.
8 See, Transnet Corp.,
Securities Exchange Act Rel. No. 41278, 69 SEC Docket 1600 (April 13, 1999)
(Review Council considered events that took place and materials filed after
initial decision); Ryan-Murphy Inc., Securities Exchange Act Rel. No.
38999, 65 SEC Docket 824 (September 2, 1997) (Listing Review Committee requested
and considered additional material in reviewing the Qualification Committee's
decision). Under NASD Rule 4870, the Listing and Hearing Review Council has the
authority to order additional hearings. One purpose of such a hearing is to
consider additional evidence.
9 The NASD also based its
decision, in part, on the indictment in federal district court of Gordon Hall.
Given the Company's other failures, we find that the NASD had ample grounds to
deny HealthTech continued listing without considering Hall's indictment and
subsequent conviction, and we therefore do not consider the indictment in our
decision.
10 We have considered all of the
parties' contentions. We have rejected or sustained them to the extent that they
are inconsistent or in accord with the views expressed herein.
http://www.sec.gov/litigation/opinions/34-42060.htm
