SECURITIES AND EXCHANGE COMMISSION Washington, D.C. SECURITIES EXCHANGE ACT OF 1934 Rel. No. 37611 \ August 27, 1996 Admin. Proc. File No. 3-8871 -------------------------------------------------- : : In the Matter of the Application of : : CREATIVE MEDICAL DEVELOPMENT, INC. : 870 Gold Flat Road : Nevada City, CA 95959 : : For Review of Action Taken By the : : NATIONAL ASSOCIATION OF SECURITIES DEALERS, INC. : : --------------------------------------------------- OPINION OF THE COMMISSION REGISTERED SECURITIES ASSOCIATION -- DENIAL OF TEMPORARY EXCEPTION FROM NASDAQ SMALLCAP MARKET CONTINUED INCLUSION STANDARDS Financial Condition Where registered securities association properly concluded that issuer of securities included on association's automated quotation system did not qualify for temporary exception to capital and surplus requirement held, review proceeding dismissed. APPEARANCES: John E. Hart, for Creative Medical Development, Inc. T. Grant Callery and Shirley H. Weiss, for the National Association of Securities Dealers, Inc. Appeal Filed: October 24, 1995 Last Brief Received: February 6, 1996 I. Creative Medical Development, Inc. ("CMD" or "Company"), an issuer of securities formerly included in the Nasdaq SmallCap Market ("Nasdaq SmallCap"), appeals from a decision of the National Association of Securities Dealers, Inc. ("NASD" or "Association") denying the Company a temporary exception from Nasdaq SmallCap's requirement that an issuer maintain at least $1 ==========================================START OF PAGE 2====== million in capital and surplus. 1/ Our findings are based on an independent review of the record. II. Until recently, CMD was a company that developed, manufac- tured, and marketed ambulatory infusion therapy products, such as electronic pumps, used for the injection of fluids by home health care providers and health care professionals in nursing homes and clinics. 2/ CMD's securities first were included in Nasdaq SmallCap in May 1994. From its inception in 1992, and throughout the period during which its stock was included in Nasdaq SmallCap, the Company sustained continuing losses. CMD experienced a loss from operations of $587,224 for the nine-month period ended on September 30, 1993, and an additional loss from operations and a net loss of $1,900,785 and $2,140,498, respectively, for fiscal year 1994. Although the Company attributed these losses to development stage costs and other costs associated with producing its initial products, it continued to experience losses from operations throughout fiscal year 1995. For the first six months of that year alone, CMD suffered a loss from operations of $957,287, and a net loss of $1,027,758. 1/ Part II, Section 1(c)(3) of Schedule D to the NASD's By-Laws provides that, for continued inclusion on Nasdaq SmallCap, an issuer must have capital and surplus of at least $1 million. If a company's capital and surplus falls below the minimum required, and the company does not qualify for a temporary exception to that requirement, the NASD can "delist" the company's securities, i.e., remove them from Nasdaq's automated quotation system. See Biorelease Corporation, Securities Exchange Act of 1934 Rel. No. 35575 (April 6, 1995), 59 SEC Docket 84, 85 n.1. 2/ On September 13, 1995, CMD executed an Asset Purchase Agreement with Gish Biomedical, Inc. ("Gish"), by which it agreed to sell all of the Company's manufacturing and related assets, other than the Company's real estate. As of September 13, 1995, the Company's manufacturing business has been "operated for the benefit of and at the risk of Gish," and the Company since has treated its manufacturing business as a discontinued operation. See the Company's Form 10-KSB for fiscal year 1995 at 7, its Form 10-QSB for the period ended December 31, 1995, at 6, and its Proxy Statement for Special Meeting of Stockholders To Be Held February 21, 1996, dated January 31, 1996, at 37. We take official notice of these documents, all of which were filed with us after the NASD's decision. See, e.g., Gunther International Ltd., Exchange Act Rel. No. 37073 (April 5, 1996), 61 SEC Docket 2081, 2085; Biorelease Corporation, 59 SEC Docket at 91 n.16. ==========================================START OF PAGE 3====== As a result, CMD's capital and surplus decreased from $1,310,373 for fiscal year 1994 to $831,935 by December 31, 1994, the end of the first quarter of fiscal year 1995. This decrease was accompanied by a corresponding drop in CMD securities' Nasdaq SmallCap bid price from a high of 4.75 at the start of the first quarter of fiscal year 1995 to a low of 1.12 during the second quarter of that year. After reviewing the Company's Form 10-QSB for the quarter ended December 31, 1994, the NASD notified CMD by letter dated February 27, 1995 that the Company's capital and surplus had fallen below the minimum $1,000,000 required for continued inclusion. The NASD also advised that it would delist CMD's common stock on March 11, 1995 unless CMD demonstrated by that date that the Company complied with the minimum capital and surplus requirement. The NASD further explained that the Company could request a temporary exception from the requirement by submitting by March 11, 1995 a plan of action that would enable the Company to achieve full compliance. CMD responded to this letter by requesting a temporary exception to the capital and surplus requirement. CMD thereafter provided two written submissions to the Nasdaq Listing Qualifications Committee ("Qualifications Committee"). In the first submission, dated April 10, 1995, CMD explained that its capital deficiency was "directly related to delays in product introduction" that "resulted in lower sales income and commensurately higher losses eroding" the Company's capital. The Company further explained that it was pursuing a private placement "of approximately one million dollars" that would bring it into compliance with the minimum capital and surplus requirement. CMD also advised that it was about to sign a new distribution arrangement that would "ensure operating revenues sufficient to maintain compliance." In its second submission, dated April 19, 1995, CMD stated that, in addition to proceeding with the $1,000,000 private placement offering, it had "been in serious negotiations with several potential strategic partner/national distributors for transactions that would involve cash infusions of $1,000,000 or more." The Company explained that, although it had anticipated consummating one of the transactions that week, the other party had placed the negotiations on hold. Because the Company was optimistic that this or one of the other transactions under negotiation would be completed by June 30, 1995, it requested a temporary exception until that time. On May 10, 1995, the Qualifications Committee denied CMD's request for a temporary exception. The Committee based its denial on two grounds. First, the Committee stated that "there was no evidence ensuring the completion of the company's proposed plan in the immediate future." Second, in the Committee's view, even if the Company consummated its proposed plan, "it was ==========================================START OF PAGE 4====== doubtful that the proceeds from the proposed transaction would be sufficient to demonstrate compliance on a current basis, given the company's history of operating losses." Accordingly, on May 11, 1995, the NASD removed CMD's securities from Nasdaq SmallCap. The Company thereafter requested that the Nasdaq Hearing Review Committee ("Review Committee") review the Qualifications Committee's denial of its request for a temporary exception. The NASD informed CMD that the Review Committee would consider the Company's appeal based on the written record, "including any submission [the Company] may wish to make," and instructed CMD to submit such additional information by June 30, 1995. The NASD further informed the Company that the Review Committee would issue its decision following the September 1995 meeting of the NASD's Board of Governors. On the morning of September 18, 1995, the Company sent by facsimile transmission to the NASD its only submission on appeal, a letter that provided the following additional information, with certain supporting documentation: On September 13, 1995, the Company entered into a definitive agreement with Gish Biomedical, Inc. for sale of substantially all of its assets. The consideration to the Company is $2,000,000 value of Gish common stock and $600,000 cash. The Company will retain its real estate asset [sic] and, after the closing of the transaction, have a net worth of approximately $2,000,000. 3/ On September 21, 1995, the Review Committee issued its decision affirming the Qualifications Committee's denial of the Company's temporary exception request. The Review Committee explained that its decision was based on the information in the record before the Qualifications Committee, as the Company had provided no additional submission on appeal -- including no information regarding proposed equity infusions. 4/ The Review Committee 3/ The Company attached to its letter a copy of its Form 10- QSB, for the period ended June 30, 1995. This filing disclosed that the Company had continued to experience losses, including a loss from operations of $197,228 and a net loss of $233,833 for the reporting period. See the Company's Form 10-QSB, for the period ended June 30, 1995, at 2. This filing further disclosed that, for the first three quarters of fiscal year 1995, the Company had suffered a loss from operations totaling $1,154,514 and a net loss of $1,261,590. 4/ The Review Committee observed in its decision that the Company's capital and surplus had plummeted to $313,215 by the end of the second quarter of fiscal year 1995. The Review Committee further observed that, for the second (continued...) ==========================================START OF PAGE 5====== did not acknowledge in its decision the Company's September 18, 1995 letter. Indeed, the NASD specified in the Amended Certification of the Record filed in this matter that the letter was not part of the record before the Review Committee. III. Section 19(f) of the Securities Exchange Act of 1934 (the "Exchange Act") governs our review. Under Section 19(f), if we determine that the specific grounds on which the NASD's action is based exist in fact, that such action is in accordance with applicable NASD rules, and that these rules are and were applied in a manner consistent with the purposes of the Exchange Act, we must dismiss this appeal unless we find that the NASD's action imposes an unnecessary or inappropriate burden on competition. 5/ We conclude that the NASD reasonably determined, in accordance with its applicable rules, to deny the Company a temporary exception to the Nasdaq SmallCap continued inclusion requirements. CMD was provided an opportunity to establish that in the near term it would satisfy the minimum capital and surplus requirement. Having failed to make that showing, it could receive an exception only if CMD provided timely documentation to the Review Committee to demonstrate that it would achieve the requisite minimum capital and surplus levels. The Company, however, failed to submit any such documentation by the June 30, 1995 deadline imposed by the Review Committee, or to request an extension of that deadline. The Review Committee acted reasonably in closing the record when it did and concluding, based on the record before it, that the Qualifications Committee acted properly in denying CMD a temporary exception. 6/ 4/(...continued) quarter ended March 31, 1995, (1) product sales were $140,000 less than those reported for the preceding quarter, and $11,000 less than those reported for the quarter ended on March 31, 1994, and (2) the Company reported a total net loss of $1,027,758 for the first two quarters of fiscal year 1995. 5/ See Biorelease Corporation, 59 SEC Docket at 89 n.10; see also KLH Engineering Group, Inc., Exchange Act Rel. No. 36422 (October 26, 1995), 60 SEC Docket 1714, 1718 n.8. 6/ The company's filings confirm that none of the Company's capital raising proposals in fact were successful by either the June 30, 1995 deadline for compliance that the Company itself proposed, or the date the Review Committee's decision issued (September 21, 1995). ==========================================START OF PAGE 6====== We reject CMD's sole argument on appeal that, because on September 18, 1995 the Company sent by facsimile transmission to the NASD information regarding the sale of its business assets to Gish Biomedical, Inc. ("Gish"), the Review Committee erred when that Committee found, in its decision issued three days later, that the Company had failed to provide an additional submission on appeal including information regarding proposed equity infusions. We conclude that the information about the Gish transaction was provided too late and, in any event, was insufficient to establish the appropriateness of an exception. CMD's Commission filings reveal that: (1) by the end of July 1995, the Company had reached an agreement with Gish concerning the terms of the transaction discussed in its September 18 letter, and (2) on September 13, 1995, the Company executed its final written agreement with Gish embodying those terms. The Company has offered no explanation for its delay in providing the NASD with information about the Gish transaction; it appears that CMD did not take seriously its burden of demonstrating its qualification for a temporary exception. Moreover, the September 18, 1995 letter represented only that the Company had reached a definitive agreement with Gish and that, after the transaction closed, the Company would have a net worth of approximately $2,000,000. The Company submitted no documentation in support of its representations, and failed even to state when the transaction would close. Subsequent filings with this Commission reflect that the Company consummated the Gish transaction eight months after the September 18th letter, and eleven months after the Qualifications Committee's decision denying a temporary exception. 7/ We accordingly reject CMD's request that we vacate the Review Committee's decision and remand this proceeding to the NASD for the Association's consideration of evidence that, the Company proffers, establishes that "the Company now is in compliance and will have the ability to maintain compliance." We agree with the NASD that the Company should not be permitted to use its appeal to demonstrate that it now is in compliance with the Nasdaq SmallCap maintenance requirements. 8/ 7/ The Company represents in a supplemental filing that the Gish transaction closed on April 17, 1996. We have considered this filing, as well as the NASD's responsive filing. 8/ Should the Company determine again to seek inclusion on Nasdaq SmallCap, it will be required to meet the initial inclusion requirements of at least $4 million in total assets and $2 million in capital and surplus. See Part II, Section 1(c)(2) and (3) of Schedule D to the NASD By-Laws. ==========================================START OF PAGE 7====== We find that, in this matter, the NASD applied its rules in a manner consistent with the purposes of the securities laws. As we have stated previously: Though exclusion from the system may hurt existing investors, primary emphasis must be placed on the interests of prospective future investors. The latter group is entitled to assume that the securities in the system meet the system's standards. Hence, the presence in NASDAQ of non-complying securities could have a serious deceptive effect. 9/ In this case, the Company was afforded substantial leeway to demonstrate that it qualified for a temporary exception, but failed to make this showing. We conclude that the NASD's decision to deny the Company a temporary exception comported with investor protection. 10/ IV. For the foregoing reasons, we find that the NASD's determination to deny CMD a temporary exception from Nasdaq SmallCap's continued inclusion criteria comported with Section 19(f) of the Exchange Act. Accordingly, we dismiss this review proceeding. An appropriate order will issue. By the Commission (Chairman LEVITT and Commissioners WALLMAN, JOHNSON, and HUNT). Jonathan G. Katz Secretary 9/ Tassaway, Inc., 45 S.E.C. 706, 709 (1975). Tassaway also involved a company that claimed to be "on the verge of effecting an acquisition" that would cure its capital and surplus deficiency. 10/ See id.; see also ORS Automation, Inc., 48 S.E.C. 490, 494 (1986); Biorelease Corporation, 59 SEC Docket at 92; KLH Engineering Group, Inc., 60 SEC Docket at 1720. UNITED STATES OF AMERICA before the SECURITIES AND EXCHANGE COMMISSION SECURITIES EXCHANGE ACT OF 1934 Rel. No. 37611 \ August 27, 1996 Admin. Proc. File No. 3-8871 : In the Matter of the Application of : : CREATIVE MEDICAL DEVELOPMENT, INC. : 870 Gold Flat Road : Nevada City, CA 95959 : : 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 Creative Medical Development, Inc. be, and it hereby is, dismissed. By the Commission. Jonathan G. Katz Secretary