On May
29, 2008, Narrowstep Inc., a Delaware corporation (“
Narrowstep
” or the
“
Company
”),
entered into an Agreement and Plan of Merger (the “
Merger Agreement
”)
with Onstream Media Corporation, a Florida corporation (“
Onstream
”), Onstream
Merger Corp., a newly formed Delaware corporation and a wholly owned subsidiary
of Onstream (“
Merger
Sub
”) and W. Austin Lewis IV, as stockholder representative for the
Narrowstep stockholders. Pursuant to the terms and subject to the
conditions set forth in the Merger Agreement, Onstream will acquire Narrowstep
by means of a merger of Merger Sub with and into Narrowstep (the “
Merger
”), with
Narrowstep continuing as the surviving corporation and a wholly-owned subsidiary
of Onstream after the Merger (the “
Surviving
Corporation
”).
Pursuant
to the Merger Agreement, at the effectiveness of the Merger (the “
Effective Time
”),
each outstanding share of Narrowstep common stock, par value $0.000001 per share
(“
Company Common
Stock
”), other than shares held by stockholders who have perfected their
appraisal rights under Delaware law, shares held by Onstream and shares held by
any subsidiary of the Company (collectively, the “
Shares to be
Converted
”), will be converted into (i) shares of Onstream common stock,
par value $0.0001 per share (“
Onstream Common
Stock
”) based on an exchange ratio determined as described below and (ii)
one contingent value right (a “
Contingent Value
Right
”) having terms and conditions described below. Onstream
Common Stock and Contingent Value Rights issued in respect of Narrowstep Common
Stock subject to certain restricted stock awards will be subject to any vesting
conditions contained in such awards.
The
aggregate number of shares of Onstream Common Stock issuable in the Merger in
exchange for the Shares to be Converted will be the greater of (i) the sum of
(A) two (2) times Annualized Company Revenue (as defined in the Merger
Agreement) and (B) the greater of (1) the amount of the Company’s cash and cash
equivalents immediately prior to the Effective Time and (2) 1,500,000 and (ii)
10,500,000. The exchange ratio will be the amount determined as
described in the prior sentence divided by the Shares to be Converted (the
“
Exchange
Ratio
”).
The final
Exchange Ratio will be determined based on the Company’s consolidated revenues
for the quarter ended May 31, 2008 (as adjusted pursuant to the terms of the
Merger Agreement) and may not be known prior to the Effective
Time. Accordingly, the Merger Agreement provides that the Shares to
be Converted will receive an aggregate of 10,500,000 shares of Onstream Common
Stock (the “
Minimum
Exchange Ratio
”) upon consummation of the Merger. In the event
that the final Exchange Ratio exceeds the Minimum Exchange Ratio, former holders
of Shares to be Converted will receive additional shares of Onstream Common
Stock within 30 days after the final determination of the Exchange
Ratio. No assurance can be given that the Exchange Ratio will exceed
the Minimum Exchange Ratio.
In the
Merger, outstanding shares of the Company’s Series A Preferred Stock, par value
$0.000001 per share (the “
Series A Preferred
Stock
”), will be converted into an aggregate of 600,000 shares of
Onstream Common Stock.
In
connection with the Merger, the Surviving Corporation will assume the Company’s
obligations under its outstanding warrants.
From and
after the Merger, except as summarized below, holders of warrants will have the
right to exercise their warrants for a number of shares of Onstream Common Stock
and at exercise prices appropriately adjusted to give effect to the greater of
the Exchange Ratio and the Minimum Exchange Ratio
. Holders of
warrants to acquire an aggregate of 22,726,400 shares of Company Common Stock
issued by the Company in August 2007 (the “
2007 Warrants
”) will
have the right to exercise their 2007 Warrants for cash only for an aggregate of
1,000,000 shares of Onstream Common Stock at an exercise price of $3.50 per
share. In the event that any of the warrants are exercised prior to
the Final Exercise Date (as defined in the CVR Agreement referenced below), an
exercising holder will also be entitled to receive Contingent Value Rights in an
amount equal to the number of Contingent Value Rights such holder would have
received had its warrants been exercised immediately prior to the Effective
Time. In connection with the Merger Agreement, holders of a majority
of the 2007 Warrants have entered into an Amendment and Waiver Agreement with
the Company (the “
Amendment and Waiver
Agreement
”) pursuant to which such holders, on behalf of themselves and
all other holders of the 2007 Warrants, agreed to amend the terms of the 2007
Warrants as provided above and to waive certain antidilution and other
rights.
The
Contingent Value Rights will be issued pursuant to the terms of a Contingent
Value Rights Agreement to be entered into among Onstream, Mr. Lewis as the CVR
Representative and Interwest Transfer Co., as Rights Agent, in the form attached
to the Merger Agreement (the “
CVR
Agreement
”).
Pursuant
to the terms and subject to the conditions set forth in the CVR Agreement, the
Contingent Value Rights will be converted into shares of Onstream Common Stock
in the event that the Company reaches certain revenue targets for
the initial 12-month and subsequent 6-month periods following the Merger;
provided, however, that the maximum number of shares of Onstream Common Stock
issuable in the Merger, including those pursuant to the Contingent Value Rights
and the conversion of the Series A Preferred Stock, will not exceed
20,000,000
. The number of shares of Onstream Common Stock
issuable upon the conversion of each Contingent Value Right will depend on a
number of factors, including the Company’s business meeting the revenue targets
set forth in the CVR Agreement and the number of warrants, if any, exercised
prior to the final determination of the consideration, if any, to be paid
pursuant to the CVR Agreement.
The
conversion of Contingent Value Rights into Onstream Common Stock will occur in
two stages, shortly following the final determination of whether the initial
12-month and subsequent 6-month targets have been met.
The
Contingent Value Rights will not be transferable by the holders thereof except
by operation of law in limited circumstances. The Company does not
expect a market to develop for the Contingent Value Rights. No
assurance can be given that the Contingent Value Rights will result in the
issuance of additional shares of Onstream Common Stock.
The
Boards of Directors of both Onstream and Narrowstep have unanimously approved
the Merger Agreement and has recommended adoption of the Merger Agreement by
their respective stockholders.
The
Merger is intended to qualify as a tax-free reorganization for federal income
tax purposes.
The
Merger Agreement contains customary representations and warranties of the
Company, Onstream and Merger Sub. The Merger Agreement also contains
customary covenants, including covenants regarding operation of the business of
the Company and its subsidiaries prior to the closing of the
Merger. In addition, the Company has agreed to use its commercially
reasonable efforts to operate its business in accordance with a restructuring
plan attached as an exhibit to the Merger Agreement (the “
Plan
”), which is
designed to significantly reduce or eliminate substantial costs related to
Narrowstep’s facility leases, selling, general and administrative expenses,
public company and headquarters costs, and other professional fees and
services.
The
Merger is subject to customary closing conditions, including obtaining the
approval of Narrowstep’s and Onstream’s stockholders. Each of
Narrowstep and Onstream has agreed, unless the Merger Agreement is terminated
earlier, to cause a stockholders meeting to be held, for the purpose of
considering approval of the Merger and the Merger Agreement, with respect to
Narrowstep’s stockholders and, among other things, for the purpose of
considering approval of the issuance of Onstream’s common stock as provided in
the Merger Agreement, with respect to Onstream’s stockholders. The
Merger Agreement may be terminated under certain specified events, including by
either Onstream or the Company if the Effective Time has not occurred on or
prior to October 31, 2008. If the Merger Agreement is terminated
under certain circumstances specified in the Merger Agreement, Narrowstep may be
required to pay a termination fee of $377,000 to Onstream. Both the
Company and Onstream have entered into voting agreements (“
Voting Agreements
”)
pursuant to which several significant stockholders have agreed to vote their
shares in favor of the adoption of the Merger Agreement. Pursuant to
the Voting Agreements, the holders of approximately 35% of the Company Common
Stock presently outstanding and approximately 42% of the Onstream Common Stock
presently outstanding have agreed to vote their shares in favor of the adoption
of the Merger Agreement.
It is a
condition of closing that Narrowstep obtain an equity investment of at least
$300,000 prior to consummation of the Merger. In order to assure that
this condition would be satisfied, simultaneous with the execution and delivery
of the Merger Agreement, the Company entered into subscription agreements (the
“
Subscription
Agreements
”) with three of its major stockholders, including Mr. Lewis
and David C. McCourt, the Company’s Chairman and Interim Chief Executive
Officer. Under the Subscription Agreements, the three stockholders
agreed to purchase immediately prior to the Merger shares of a to-be-established
Series A Preferred Stock at a purchase price of $100,000 per stockholder.
In connection therewith, each such stockholder is expected to receive 10,000
shores of Series A Preferred Stock. Holders of the Series A Preferred
Stock will be entitled to such dividends, if any, as may be declared by the
Company’s Board of Directors out of funds legally available therefore (no such
dividends are expected to be paid under the terms of the Plan), will not have
any voting rights (except to the extent required by applicable law), will have
no right to convert the Series A Preferred Stock into Common Stock or any other
security of the Company and will have no right to force the redemption or
repurchase of the Series A Preferred Stock by the Company. In the
Subscription Agreements, the purchasers of the Series A Preferred Stock
consented to the Merger. It is expected that a certificate of
designations establishing the terms of the Series A Preferred Stock will be
filed by the Company with the Secretary of State of Delaware shortly prior to
the Effective Time. The sale of the Series A Preferred Stock pursuant
to the Subscription Agreements is exempt from registration pursuant to Section
4(2) of the Securities Act of 1933, as amended, and Regulation D promulgated
thereunder.
The
foregoing descriptions are summaries only, do not purport to be complete and are
qualified in their entirety by reference to the full text of the agreements
described above which are filed as Exhibits to this report and are incorporated
herein by reference. In particular, the assertions embodied in the
representations and warranties contained in the Merger Agreement are qualified
by information in confidential disclosure schedules provided by Narrowstep and
Onstream to each other in connection with the signing of the Merger Agreement.
These disclosure schedules contain information that modifies, qualifies and
creates exceptions to the representations and warranties set forth in the Merger
Agreement. Moreover, certain representations and warranties in the
Merger Agreement were used for the purpose of allocating risk between Narrowstep
and Onstream rather than establishing matters as facts. In addition,
information concerning the subject matter of these representations and
warranties may have changed since the date of the Merger Agreement. Accordingly,
you should not rely on the representations and warranties in the Merger
Agreement as characterizations of the actual state of facts about Narrowstep or
Onstream.
Important
Additional Information Will be Filed with the SEC
Onstream
intends to file with the SEC a Registration Statement on Form S-4, which will
include a joint proxy statement/prospectus of Onstream and Narrowstep and other
relevant materials in connection with the proposed transaction. The joint proxy
statement/prospectus will be mailed to the stockholders of Onstream and
Narrowstep. Investors and security holders of Onstream and Narrowstep are urged
to read the joint proxy statement/prospectus and the other relevant materials
when they become available because they will contain important information about
Onstream, Narrowstep and the proposed transaction. The joint proxy
statement/prospectus and other relevant materials (when they become available),
and any other documents filed by Onstream or Narrowstep with the SEC, may be
obtained free of charge at the SEC’s web site at
www.sec.gov. Investors and security holders may obtain free copies of
the documents filed with the SEC by Narrowstep at narrowstep.com or by
contacting Narrowstep Investor Relations via telephone at (609) 945-1772. In
addition, investors and security holders may obtain free copies of the documents
filed with the SEC by Onstream at www.onstreammedia.com or by contacting
Onstream’s Investor Relations via telephone at (646) 536-7331. Investors and
security holders are urged to read the joint proxy statement/prospectus and the
other relevant materials when they become available before making any voting or
investment decision with respect to the proposed transaction.
Narrowstep
and its respective directors and executive officers may be deemed to be
participants in the solicitation of proxies from the stockholders of Narrowstep
and Onstream in favor of the proposed transaction. Information about the
directors and executive officers of Narrowstep and their respective interests in
the proposed transaction will be available in the joint proxy
statement/prospectus.
Onstream
and its respective directors and executive officers may be deemed to be
participants in the solicitation of proxies from the stockholders of Onstream
and Narrowstep in favor of the proposed transaction. Information about the
directors and executive officers of Onstream and their respective interests in
the proposed transaction will be available in the joint proxy
statement/prospectus.
CAUTIONARY
STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This
filing contains forward-looking statements as defined by the federal securities
laws which are based on the Company’s current expectations and assumptions,
which are subject to a number of risks and uncertainties that could cause actual
results to differ materially from those anticipated, projected or implied,
including, among other things, risks relating to the expected timing of the
completion and financial benefits of the Merger. The Company undertakes no
obligation to publicly update any forward-looking statements, whether as a
result of new information, future events or otherwise.