SEC Company Response from Onstream Media CORP (CIK 0000919130) — Jun 15, 2005
Onstream Media CORP (CIK 0000919130)
Date: June 15, 2005 · CIK: 0000919130 · Accession: 0001144204-05-018988
AI Filing Summary & Sentiment
File numbers found in text: 333-122953
Letter
May 12, 2005 VIA FACSIMILE Mr. Robert Bell United States Securities and Exchange Commission 450 Fifth Street, N.W. Washington, D.C. 20549
Re: Onstream Media Corporation (the "Company") Form S-3 Registration Statement File number 333-122953
Dear Bob:
As a result of our conversation with Mr. Shuman, I am enclosing the following documents:
1. Proposed Risk Factor to be included in the Company's Registration Statement.
2. A financial analysis of the effect of the potential rescission violation.
We are forwarding this to you, by facsimile, and ask that you review this language. Upon your review, we will file this as correspondence and additionally, incorporate the Risk Factor into the present S-3. We are trying to proceed as expeditiously as possible and appreciate your prompt assistance with this matter.
Very truly yours,
/s/ Joel D. Mayersohn
Joel D. Mayersohn
Show Raw Text
<DOCUMENT>
<TYPE>CORRESP
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<TEXT>
ADORNO & YOSS, P.A.
350 East Las Olas Boulevard
Suite 1700
Fort Lauderdale, Florida 33301
telephone 954-763-1200
telecopier 954-766-7800
May 12, 2005
VIA FACSIMILE
Mr. Robert Bell
United States Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Re: Onstream Media Corporation (the "Company")
Form S-3 Registration Statement
File number 333-122953
Dear Bob:
As a result of our conversation with Mr. Shuman, I am enclosing the
following documents:
1. Proposed Risk Factor to be included in the Company's Registration
Statement.
2. A financial analysis of the effect of the potential rescission
violation.
We are forwarding this to you, by facsimile, and ask that you review this
language. Upon your review, we will file this as correspondence and
additionally, incorporate the Risk Factor into the present S-3. We are trying to
proceed as expeditiously as possible and appreciate your prompt assistance with
this matter.
Very truly yours,
/s/ Joel D. Mayersohn
Joel D. Mayersohn
JDM/dcb
Enclosures
cc: Randy Selman
Robert Tomlinson
<PAGE>
PROPOSED RISK FACTOR
The original offer and sale of our 8% Convertible Debentures and Series
A-10 Preferred Stock may be deemed to be in violation of federal securities laws
and as a result the investors in those securities may have the right to rescind
their original purchase of those securities.
On December 23, 2004, we completed a private placement of our 8%
Convertible Debentures and Series A-10 Preferred Stock. In February and April
2005, additional investment rights granted as part of the 8% Convertible
Debentures were exercised. Interest and dividends accrued on these securities
since their issuance have been paid with A-10 Preferred or Common shares. The
gross proceeds from these transactions, including dividends and interest paid in
kind, were $11,413,462.
The resale registration statement of shares of common stock underlying the
8% Convertible Debentures, the Series A-10 Preferred Stock, the additional
investment rights and the warrants was originally filed by us on February 23,
2005. This original registration was subsequently withdrawn and this resale
registration statement, of which this prospectus forms a part, was filed on
April 11, 2005. Pursuant to the Securities Act of 1933 and the related rules and
regulations, as interpreted by the Securities and Exchange Commission, as a
result of a portion of the additional investment rights being unexercised at the
time the resale registration statement was originally filed, the private
offerings have not been completed and accordingly, the public and private
offerings would be integrated and result in a violation of Section 5 of the
Securities Act. Accordingly, the investors who purchased the private placement
securities may have a number of remedies available to them, including the
potential right to rescind the purchase of those securities plus, potentially,
any amount representing damage to such investors.
As of March 31, 2005, and prior to giving effect to the accounting for
this potential rescission, our balance sheet reflected a liability, net of
discount, of $2,012,759 associated with these securities. The remainder of the
proceeds arising from the 8% Convertible Debentures, including the portion of
the additional investment rights exercised through that date, and the Series
A-10 Preferred Stock, including dividends and interest paid in kind, was
$9,400,703, classified as part of stockholders' equity at that date. After
giving effect to the accounting for this potential rescission, the $9,400,703
was reclassified under the caption "Equity Securities Subject to Potential
Rescission", which is located on the balance sheet directly above the equity
section, but not included in it.
We are unable to predict if the investors would attempt to exercise such
potential rescission rights. Each investor's decision would be based upon, among
other things, a decline in the price of our common stock and other factors.
These potential rescission rights would require us to refund at least the gross
proceeds of these private offerings to the investors. In order to satisfy such
potential obligations, we would be required to utilize our available capital
resources and obtain alternate sources of capital for such purposes. We
presently do not have the capital available to satisfy all potential claims for
rescission. The inability to obtain alternative sources of capital would have a
material effect on our business, prospects, financial condition and our results
of operations.
Page 1 of 7
<PAGE>
POTENTIAL RESCISSION OF 8% CONVERTIBLE DEBENTURES AND A-10 PREFERRED SECURITIES
SOLD DEC 2004, FEB 2005, APR 2005
Summary of Accounting Treatment as of March 31, 2005:
-----------------------------------------------------
The rationale for the following treatments is discussed extensively in the
further sections of this memo:
Total Shareholder's Equity will be reduced from $14,928,925 to $5,528,222, with
most of the reduction being reflected in Additional paid in Capital.
The following amounts will be listed separately on the Balance Sheet, presented
directly above the equity section, but not included in it:
Preferred Shares Subject to Potential Rescission $4,775,240
Warrants attached to 8% Convertible Debentures Subject to
Potential Rescission; Beneficial Conversion Rights included in
8% Convertible Debentures Subject to Potential Rescission; and
Potentially Redeemable Common Shares Issued in Lieu of
Interest on 8% Convertible Debentures Subject to Potential
Rescission 4,625,463
----------
Total Equity Securities Subject to Potential Rescission $9,400,703
----------
No changes will be made in the carrying values of the 8% Convertible Debentures
and AIR, including the classification between current and non-current.
The statement of cash flows for the six months ended March 31, 2005 will include
a non-cash item or items totaling $9,400,703 in recognition of the above equity
securities becoming potentially redeemable.
The statement of changes in shareholder's equity for the six months ended March
31, 2005 will show these items being removed from equity.
There will be no impact on the statement of operations from the above. The
impact of the potentially redeemable common shares is considered immaterial for
impact on the reported earnings per share.
Certain of the above numbers include minor amounts related to the portions of
these transactions occurring after March 31, 2005. The actual financial
statement entries will be adjusted so that these minor items are not reflected
until the June 30, 2005 statements.
The financial note disclosure will include the pertinent sections of the
preceding proposed risk factor, as well as a synopsis of the accounting
justifications also contained in further sections of this memo.
Page 2 of 7
<PAGE>
Timeline:
---------
December 23, 2004 - A-10 and 8% Convertible Debentures Issued.
February 15, 2005 - AIR exercised except for $125K.
February 16, 2005 - December 31, 2004 10-Q filed.
February 23, 2005 - S-3 filed including shares underlying entire amount of AIR,
including unexercised portion.
March 24, 2005 - Comment letter received from SEC.
April 5, 2005 - Remaining $125K AIR exercised (and funds received).
April 7, 2005 - S-3 withdrawn.
April 11, 2005 - S-3 refiled reflecting fully exercised AIR.
The gross proceed amounts involved are as follows:
--------------------------------------------------
A-10 Sold to Investors $ 2,150,000
A-10 Exchanged for Deluca Loan 1,000,000
A-10 Exchanged for DeLuca A-8 Preferred 1,396,500
A-10 Issued for Financing Fee 85,632
A-10 Issued for Dividends on Conversion 3,370
A-10 Issued for Dividends on Payment Date 139,738
-----------
Total A-10 Proceeds $ 4,775,240
-----------
8% Convertible Debentures Sold to Investors $ 4,350,000
AIR Sold to Investors 2,175,000
Common Stock Issued for Interest on Conversion 1,111
Common Stock Issued for Interest on Payment Date 112,111
-----------
Total 8% Convertible Debenture Proceeds $ 6,638,222
-----------
Total A-10 and Convertible Debenture Proceeds $11,413,462
-----------
The A-10 and the original 8% Debentures sold to investors were filed on a single
Form D with the SEC on December 28, 2004. The AIR was filed on a Form D with the
SEC on February 16, 2005. On advice of legal counsel, Form D was not considered
necessary for the Deluca A-10 issuances.
A-10 Dividends includes amounts earned through May 15, 2005. 8% Convertible
Debenture interest includes amounts earned through March 31, 2005.
Page 3 of 7
<PAGE>
Previous Accounting for Issuances:
----------------------------------
The Convertible Debentures and AIR were recorded as long-term debt on the
balance sheet, except for $500K classified as a current liability, representing
the portion subject to mandatory redemption within twelve months of issuance.
The face value of the debt was reduced by a discount equal to the value of the
warrants and the beneficial conversion, with the offset recorded as an increase
in equity (additional paid in capital).
The A-10 were recorded as equity (primarily additional paid in capital). A
discount similar to the Convertible Debentures was recorded but it had no net
effect since both the discount and the offset were in equity.
Both discounts are amortized to interest or dividend expense, respectively, over
the four year terms of the securities. In the event of early conversion of the
security, the unamortized discount is recorded to interest or dividend expense,
respectively.
There have been conversions to common shares of A-10, 8% Convertible Debentures
and AIR to date.
As of March 31, the Company's balance sheet (before giving effect to the
proposed accounting for these potential rescission rights) included the
following balances related to these transactions:
Current Portion of Convertible Debentures $ 500,000
-----------
Long-term portion of Convertible Debentures $ 5,750,000
Less: Unamortized discount (4,237,241)
-----------
Long-term portion of Convertible Debentures, net $ 1,512,759
-----------
Total Convertible Debentures, net $ 2,012,759
-----------
The A-10 Preferred shares outstanding are reflected only at $44 for their par
value. The remainder of all amounts arising from the A-10 Preferred shares was
recorded in Additional Paid-in Capital, but is not segregated, and is offset by
an unamortized discount of $2,471,690.
Basis of Proposed Accounting for Potential Rescission Rights:
-------------------------------------------------------------
Management has determined that the event that gives rise to this situation was
the filing of the February 23, 2005 registration statement, since that is when a
public solicitation was arguably made for the first time related to the $125K
then-unexercised AIR, which up until that point had been a private offering.
That public solicitation resulted in the integration, which resulted in the loss
of the Regulation D exemption, which gave rise to the potential rescission
rights. Based on this February 23, 2005 date, the effects of these potential
rescission rights will first be reflected in the Company's financial statements
for the period ended March 31, 2005, which have not yet been filed, and thus no
restatement or reissuance of prior financial statements or SEC filings will be
required.
Page 4 of 7
<PAGE>
The first issue that must be evaluated is whether any contingent liability must
be recorded by the Company in accordance with Statement of Financial Accounting
Standards 5, "Accounting for Contingencies". Since the Company intends to
disclose this matter without regard to whether this pronouncement requires it,
the only remaining decision is whether an accrual is required, and if so, how
much that accrual would be. SFAS 5 sets two criteria for accrual - the loss must
be probable (on a scale of remote, reasonably possible and probable) and the
loss must be reasonably estimable.
Management has evaluated the above factors, plus the scenario outlined in the
proposed risk factor below, and has determined that the ultimate liability to
the company from the potential assertion by investors of rescission rights is
not probable. This conclusion is based on management's determination that the
factors and/or conditions that would encourage an attempt to assert such rights
are significantly outweighed by the factors and/or conditions that would
discourage an attempt to assert such rights. The main factor/condition affecting
the attempt to assert such rights is the Company's share price in relation to
the conversion price of these securities. The closing May 10, 2005 common share
price was $1.23 per share, which exceeds the $1.00 conversion price of the
Convertible Debentures and the A-10 and thus this factor would be currently more
likely to discourage an attempt to assert such rights, although this could
change. Furthermore, the Company's net liquid assets or even net tangible assets
are a small fraction of the amount that would be necessary to reimburse these
investors and this factor would be more likely to discourage an attempt to
assert such rights. In addition, the Company has recently announced the
introduction of its Onstream Media Platform, and this factor would be more
likely to discourage an attempt to assert such rights. The factor that might
encourage an attempt to assert such rights, although much outweighed by the
previous factors, is the quarterly shortfall in expected sales and resulting
increase in cash burn that is reflected in the Company's March 31, 2005
financial statements.
Since we have determined that a loss is not probable, although it may be
possible, no accrual is req