SCHEDULE 14A
(Rule 14a-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of
1934
Filed by the registrant [ ]
Filed by a party other than the registrant [X]
Check the appropriate box:
[X] Preliminary Proxy Statement.
[ ] Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2)).
[ ] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Under Rule 14a-12.
--------------------------------------------------------------------------------
LIQUID AUDIO, INC.
(Name of Registrant as Specified in Its Charter)
--------------------------------------------------------------------------------
MM COMPANIES, INC.,
JEWELCOR MANAGEMENT, INC., BARINGTON COMPANIES EQUITY PARTNERS, L.P., RAMIUS
SECURITIES, LLC, DOMROSE SONS PARTNERSHIP,
JAMES A. MITAROTONDA and SEYMOUR HOLTZMAN
(Name of Person(s) Filing Proxy Statement if Other Than the Registrant)
--------------------------------------------------------------------------------
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
(1) Title of each class of securities to which transaction applies:
(2) Aggregate number of securities to which transaction applies:
(3) Per unit price or other underlying value of transaction computed pursuant
to Exchange Act Rule 0-11 (set forth the amount on which the filing fee is
calculated and state how it was determined):
(4) Proposed maximum aggregate value of transaction:
1
(5) Total fee paid:
[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number, or
the form or schedule and the date of its filing.
(1) Amount Previously Paid:
(2) Form, Schedule or Registration Statement No.:
(3) Filing Party:
(4) Date Filed:
2
PRELIMINARY COPY; SUBJECT TO COMPLETION
DATED August 29, 2002
2002 ANNUAL MEETING OF
STOCKHOLDERS OF LIQUID AUDIO, INC.
PROXY STATEMENT
OF
THE MM COMPANIES, INC. GROUP
This proxy statement and the enclosed WHITE proxy card are being furnished
to you, the holders of shares of common stock, par value $.001 per share, of
Liquid Audio, Inc., a Delaware corporation, in connection with the solicitation
by MM Companies, Inc. (formerly known as musicmaker.com, Inc.) and other
entities participating with MM Companies for use at the 2002 annual meeting of
stockholders of the Company, and at any adjournments or postponements of the
meeting. The other entities participating with MM Companies are Jewelcor
Management, Inc., Barington Companies Equity Partners, L.P., Ramius Securities,
LLC and Domrose Sons Partnership who, together with MM Companies, are referred
to as the MM Companies group.
The MM Companies group is soliciting proxies to obtain control of the
Company's board of directors and to oppose the Company's issuance of stock in
connection with its proposed merger transaction with Alliance Entertainment
Corp., if this matter is proposed by management for consideration at the 2002
annual meeting.
The Company has entered into a merger agreement with Alliance
Entertainment pursuant to which the Company is making a tender offer for up to
10,000,000 shares of its common stock at $3.00 per share, Alliance Entertainment
would merge with a subsidiary of the Company and the stockholders of Alliance
Entertainment would own 74% of the combined company following the merger. In
order for these transactions to proceed, the Company's stockholders must vote to
approve the issuance of the Company's stock to stockholders of Alliance
Entertainment in the merger. We believe these transactions are not in the best
interest of stockholders of the Company. By the Company's own admission, there
is no assurance that the purported benefits of the merger will be realized and
the merger involves significant risks.
Instead of these transactions, we are proposing that the Company use its
cash to make a substantial distribution to all stockholders. Based upon publicly
available information, we currently believe that the Company can make a
distribution of $3.00 per share. If the Company does not have sufficient cash to
make a $3.00 per share distribution, we believe that the Company should make a
distribution that is as large as possible after reserving funds to satisfy the
Company's obligations and minimal ongoing expenses. We also believe the Company
should immediately discontinue its current cash draining operations, pursue
avenues for monetizing the Company's technology through sale or licensing and
explore other business opportunities to create stockholder value. Our nominees
for director support these proposed actions and, if elected, will seek to
implement them.
1
If our nominees are elected, they intend to advocate a series of
actions to promote corporate democracy and place control of the Company firmly
in the hands of stockholders acting by majority vote. These actions include
elimination of the stockholder rights plan adopted by the current board and
amendment of the Company's charter and by-laws to eliminate the staggered board
and supermajority voting requirements and to allow stockholders to act by
written consent. Further, we believe our nominees will bring to the board the
judgment, experience, energy and objectivity needed to produce the maximum value
for the Company's stockholders.
The Company has recently had five directors divided into three classes. On
August 23, 2002, the Company announced that it had expanded the size of the
board of directors from five to seven members and appointed two individuals to
fill the newly created directorships. MM Companies is challenging these actions
by the Company. See "Background Of and Reasons For the Proxy Solicitation." The
terms of the two Class III directors expire at the 2002 annual meeting. The MM
Companies group is nominating two directors, Seymour Holtzman and James A.
Mitarotonda, for election to this class.
In addition, we are proposing to amend the Company's By-laws to expand the
board of directors by four positions and to provide that only stockholders can
take action to fill the positions created by vacancies, including vacancies
created by an expansion of the board. In order to adopt the amendments to the
By-laws, a vote of two-thirds of the outstanding shares is required. Subject to
the passage of these amendments, we are proposing four additional nominees,
Joseph R. Wright, Jr., Jesse H. Choper, William J. Fox and Thomas E. Constance,
for election as directors. If our proposed amendments to the By-laws are adopted
and all of our nominees are elected, our nominees will represent a majority of
the members of the Company's board of directors.
The MM Companies group recommends that you vote
o to elect each of our six nominees;
o to adopt our proposed amendments to the Company's By-laws; and
o against the Company's proposal to issue stock in the proposed merger
with Alliance Entertainment.
See "The Proposals" for a complete description of the actions that we
propose. See "Information About The MM Companies" and "Certain Other Information
Regarding The MM Companies Group Nominees" for information about the MM
Companies group and about our nominees.
The Company has announced that the 2002 annual meeting will be held at
10:00 a.m. pacific time on September 26, 2002 in Redwood, California and that
the record date for determining stockholders entitled to notice of and to vote
at the 2002 annual meeting is August 12, 2002.
2
Your vote is important, no matter how many or how few shares of common
stock you own. The MM Companies group urges you to mark, sign, date and return
the enclosed WHITE proxy card promptly in accordance with the instructions set
forth below. Please do NOT sign any proxy card you may receive from the Company
even though it may contain one or more of the MM Companies group's proposals.
You are urged to mark, sign and date the enclosed WHITE proxy card and
return it in the enclosed envelope whether or not you plan to attend the 2002
annual meeting. If you need assistance in voting your shares of common
stock, please call the MM Companies group's information agent, D.F. King &
Co., Inc., toll-free at 1-800-431-9643 or if you are a bank or broker please
call collect at 1-212-269-5550.
This Proxy Statement and the accompanying WHITE proxy card are first being
furnished to the Company's stockholders on or about _______, 2002.
On August 9, 2002, MM Companies received a letter from the Division of
Investment Management of the Securities and Exchange Commission raising certain
questions about whether MM Companies might be considered an unregistered
investment company in violation of the Investment Company Act of 1940. MM
Companies does not believe it is an unregistered investment company in violation
of the Investment Company Act of 1940, and the Division of Investment Management
has orally indicated to MM Companies that it is no longer looking at MM
Companies as a possible investment company at the current time. If it were
nevertheless determined that MM Companies is an unregistered investment company
it could be prohibited from engaging in interstate commerce and acting as a
proxy. See "Information About The MM Companies Group."
INTRODUCTION
The MM Companies group seeks to maximize value for all of the Company's
stockholders. The MM Companies group does not believe that such value can be
achieved through the Company's current business model, under which the Company
is spending almost $2 million each month while generating virtually no revenues.
The MM Companies group has expressed its concerns to the Company and has
requested representation on the Company's board of directors. To date, apart
from one brief meeting, the Company has refused to meet with the MM Companies
group or take any action to address our concerns.
In June 2002, the Company announced that it had entered into a merger
agreement with Alliance Entertainment. The Company is seeking stockholder
approval for the issuance of stock in connection with such transaction. The MM
Companies group does not believe the proposed merger is in the best interests of
the Company's stockholders. The MM Companies group has informed the Company of
its opposition to the transaction with Alliance Entertainment. See "Introduction
-- The Proposed Merger With Alliance Entertainment" for additional information
regarding the proposed merger and "Background Of And Reasons For The
Solicitation" for the text of several of our letters setting forth our concerns
about the proposed merger.
3
The Failure of the Current Business Plan
Since its inception in 1996, the Company has depleted $103 million of the
$189 million that it has raised. The Company has accumulated a deficit of $116
million on total revenues of just $10 million, not including so-called "business
development" revenues from related parties. It is no wonder that the Company's
equity market value has declined by approximately 95% in the last two years.
Contrary to what one would expect for a successful development stage
company, the Company's revenues have been declining over the past several
quarters. Indeed, in the most recently completed quarter for which data is
publicly available, the Company realized a grand total of $151,000 in revenues
and a cash burn of $5,340,000. In its report on Form 10-Q for the quarter ended
June 30, 2002, the Company concedes:
"We expect to incur additional losses and negative cash flow from
operations through at least 2003. Our revenues may not increase or even
continue at their current levels and we may not achieve or maintain
profitability or generate cash flow from operations in future periods. The
digital music market may never develop to the extent that we are able to
generate positive cash flows."
In a nod to this bleak outlook, in its report on Form 10-Q for the period
ended June 2001 the Company disclosed that in May 2001 it adopted "a corporate
restructuring program to reduce expenses to preserve the Company's cash position
while the digital music market develops." In the year since adoption of this
plan, the Company has squandered an additional $22 million of its cash and
accumulated losses of over $21 million on revenues of just $871,000, not
including so-called "business development" revenues from related parties.
Our representatives have on various occasions voiced our deep-seated
concerns about the Company's strategic direction, prospects and cash drain with
current management. Over a period of approximately ten months, we sent a series
of letters to the Company. Please see "Background Of And Reasons For The
Solicitation" for the text of several of our letters to the Company. These
letters spoke of the continuing depletion of the Company's assets, our belief of
the absence of any realistic prospects under the current business plan and our
forceful recommendation that the plan should immediately be terminated. We asked
to meet or speak with the Company about these matters. Management did not
respond to our letters or take actions to address our concerns. Both the MM
Companies group and another significant stockholder of the Company, Steel
Partners II, L.P., made offers to current management to acquire all the
outstanding shares of the Company at a price in excess of the public trading
value of the Company's shares. Management did not respond directly to these
offers. Instead, management has characterized spending at a rate of over $20
million a year while it waits for the development of fee generation within the
digital music market as a "restructuring program."
The Proposed Merger with Alliance Entertainment
In June 2002, the Company announced that it had entered into a merger
agreement with Alliance Entertainment. Under the terms of the merger agreement,
the Company will conduct a self-tender offer at $3.00 per share for up to
10,000,000 shares of the Company's common stock
4
and issue shares of its common stock to the current stockholders of Alliance
Entertainment. The self-tender will be consummated only if the Company's
stockholders vote to approve the issuance of stock to Alliance Entertainment
stockholders in the merger. Following the self-tender offer and the merger, the
former Alliance Entertainment stockholders will own 74% and the Company's
stockholders will own 26% of the combined organization. The Company also has
stated that consummation of the self-tender offer and the merger is conditioned
upon, among other things, the approval by the Company's stockholders of the
issuance of shares in the merger to Alliance Entertainment stockholders. The
Company is seeking stockholder approval for such proposed stock issuance.
The MM Companies group does not believe that the proposed merger with
Alliance Entertainment or the related self-tender offer and issuance of stock to
the stockholders of Alliance Entertainment is in the best interests of
stockholders.
The Company's own filings with the SEC identify numerous risks and
uncertainties in connection with the proposed merger with Alliance
Entertainment. For example, by the Company's own admission:
o the lack of a public market for Alliance Entertainment capital stock
makes it difficult to evaluate the fairness of the merger;
o the Nasdaq National Market may delist the Company's common stock
following the merger;
o the Company's stockholders may not realize a benefit from the merger
commensurate with the ownership dilution they will experience in
connection with the merger;
o the combined organization may not realize the expected benefits from
the merger and the market price of the Company's stock may decline
as a result of the merger;
o the Company has never been profitable, Alliance Entertainment has
recently incurred net losses, and there is no certainty that the
combined organization will achieve profitability;
o the combined organization will have a significant stockholder whose
interests may conflict with yours; and
o the businesses in which the combined organization will engage are
extremely competitive, one example of which is the election of
several of Alliance Entertainment's retail chain customers to buy a
substantial amount of their inventory directly from major labels and
studios rather than from Alliance Entertainment.
In its filings with the SEC, the Company identifies numerous other risk
factors, including risk factors that relate specifically to the merger, risk
factors that relate to the business of Alliance Entertainment and risk factors
that relate to the Company's business. You should refer to the Company's filings
to review all of these risk factors in detail. The Company's filings with the
SEC are available on the web site maintained by the SEC at www.sec.gov, in the
SEC's
5
public reference room (for information call 1-800-SEC-0330) and from commercial
document retrieval services. If the Company will be soliciting stockholder
approval of the issuance of Liquid Audio shares in the merger at the 2002 annual
meeting, this risk factor discussion should also be contained in the Company's
proxy materials.
The Company's board and management argue that the anticipated benefits of
the merger outweigh the risks. The MM Companies group does not believe this. In
our view, the Company's current management has not in the past or in connection
with the proposed merger demonstrated a focus on stockholder interests and value
that justifies any confidence in management's judgment or objectivity. We say
this because:
o Having developed and presided over the Company's failed business
plan, we believe the current board lacks the objectivity to redirect
the Company's business plan to one focused on stockholder value and
returns.
o The current board, we believe, has a demonstrated inattentiveness to
stockholder concerns. In the Company's three most recent earnings
calls, Gerald W. Kearby, a founding director and chief executive
officer of the Company whose term as a Class III director expires at
the 2002 annual meeting, did not even entertain questions from
analysts and stockholders.
o The members of the current board and their affiliated entities own
in the aggregate 1,847,338 shares or approximately 8.1% of the
outstanding shares as compared with the 6,179,679 shares or
approximately 28.9% of the outstanding shares that board members and
their affiliated entities owned immediately following the Company's
initial public offering. The collective financial incentive of the
board members as stockholders in the Company to grow the value of
its equity is declining.
o Mr. Kearby and Robert G. Flynn, a director and a senior vice
president of the Company, will each be receiving a $750,000
"retention payment" and a $750,000 payment for "an agreement not to
compete" if the merger is consummated.
o Under the terms of the merger agreement that current management
negotiated with Alliance Entertainment, Alliance Entertainment--but
not the Company--is entitled to receive various payments if the
merger agreement is terminated, including a payment of $1,000,000 if
the Company's stockholders vote not to approve the issuance of the
Company's stock in the merger and an additional $750,000 if the
Company liquidates within six months thereafter.
o In connection with the execution of the merger agreement with
Alliance Entertainment, the board reduced the triggering threshold
under the Company's stockholder rights plan from 15% to 10%, in what
appears to us as an attempt to blunt stockholder opposition to the
Alliance Entertainment merger.
6
Our Alternative Proposal: a $3.00 per share Distribution in Cash
The MM Companies group is proposing, and our nominees will support, a
distribution of $3.00 per share in cash to all stockholders as promptly as
practicable following the 2002 annual meeting. This compares with the Company's
proposed self-tender, in which only 10 million of the Company's approximately
22.75 million shares will be exchanged for a $3.00 cash payment, and the risks
and uncertainties of the proposed merger with Alliance Entertainment, as a
result of which, as the Company states in its filing with the SEC, stockholders
may lose all of their investment.
Based upon current, publicly available information, we believe that the
Company has sufficient available cash and cash equivalents to make the
distribution that we propose. As reported by the Company, it had cash and cash
equivalents of approximately $81.0 million at June 30, 2002. Assuming that the
Company's cash drain in conducting its money losing operations continues at its
recent pace of approximately $5 million a quarter, the Company should have
approximately $76 million in cash at September 30, 2002, less expenses incurred
in connection with the proposed merger. We estimate that approximately $69
million should be required for the proposed $3.00 per share distribution, based
upon the number of shares reported by the Company to be outstanding at June 30,
2002 and the options reported by the Company to be outstanding at December 31,
2001.
If the Company does not have sufficient cash to make a $3.00 per share
distribution, we believe that the Company should make a distribution that is as
large as possible after reserving funds to satisfy the Company's obligations and
minimal ongoing expenses.
We believe that the certainty of a substantial cash distribution to all
stockholders will provide value that is superior to the partial tender offer
proposed by the Company and the risks and uncertainties of the proposed merger
with Alliance Entertainment.
Accordingly, should the Company propose action on the Alliance
Entertainment merger for consideration by stockholders at the 2002 annual
meeting, we urge stockholders to oppose the merger by voting against the
issuance of Company stock in connection with the proposed merger. See Merger
Related Proposal under "The Proposals."
Our Platform
The MM Companies group is focused on the goal of achieving the greatest
return to stockholders in which we will share on a pro rata basis. We have
selected nominees with broad management, professional and financial experience.
They are committed to the principles of our platform, with the goal of promoting
stockholder value in the near term. In furtherance of these principles, if
elected, our nominees intend to pursue:
o an immediate distribution to stockholders of $3.00 per share in
cash, as described above;
o immediate steps to slash the Company's general and administrative
overhead and facility costs and drastically reduce the Company's use
of operating cash;
7
o avenues for the licensing or sale of the Company's technology,
monetizing these assets in a manner that does not burden the
Company's financial resources; and
o depending on the resources available to the Company following the
distribution, alternative business opportunities with prospects for
positive cash flow and current profitability.
In addition, our nominees will act to eliminate the burdens that the
Company's charter documents and current board have imposed on the exercise of
corporate democracy at the Company. These steps include:
o termination of the Company's stockholder rights plan, which imposes
draconian penalties on stockholders or stockholder groups that
beneficially own more than 10% of the Company's stock. Not only does
such plan effectively prohibit accumulation of stockholdings in
excess of this threshold, it may also have the effect of
discouraging stockholders from collectively exercising their
corporate democracy rights out of concern that they will be deemed
to be a group owning more than 10% of the Company's shares;
o subject to stockholder approval, amending the Company's charter to
eliminate the staggered board and allow the Company's stockholders
to elect the entire board on an annual basis;
o subject to stockholder approval, amending the Company's charter to
eliminate the requirement that a two-thirds vote of stockholders is
required to modify the Company's By-laws and certain provisions of
the charter, thereby allowing stockholders to act by no more than a
simple majority of the outstanding shares; and
o subject to stockholder approval, amending the Company's charter to
eliminate the prohibition on stockholder action by written consent.
The nominees of the MM Companies group do not intend to hide behind the
barricades erected by the Company's current board which we believe restrict the
power of stockholders to control their corporation. Unlike the current board,
our director nominees are prepared to submit their performance to the judgment
of stockholders, acting freely in the exercise of their electoral rights.
As of the time of the mailing of this Proxy Statement, we do not know
whether the Company will present its proposal related to the Alliance
Entertainment stockholders at the 2002 annual meeting or will seek to hold a
special meeting for this purpose. The Company has filed alternative proxy
materials with the SEC in this regard. The actions that our nominees propose to
take in respect of the proposed merger will depend on whether the merger
proposal is presented at the 2002 annual meeting and the results of the voting
at such meeting, as set forth in the following charts.
8
The merger proposal is not presented at the 2002 annual meeting
--------------------------------------------------------------------------------
Our elected nominees constitute a Our elected nominees constitute a
minority of the board majority of the board
-------------------------------------------------------------------------------
Our nominees will continue to oppose Our nominees will seek to terminate
the merger and seek to carry out our the merger agreement with Alliance
platform. Entertainment consistent with the
Company's legal rights and obligations
and to carry out our platform.*
--------------------------------------------------------------------------------
*If the merger agreement is terminated, under the terms of such agreement the
Company may be liable for the payment to Alliance Entertainment of certain fees
and expenses. On behalf of the Company, our nominees reserve the right to
challenge the obligation to pay fees and expenses. Please see the Company's
public filings for a discussion of the circumstances under which such fees and
expenses would be payable pursuant to the terms of the merger agreement.
The merger proposal is presented at the 2002 annual meeting
--------------------------------------------------------------------------------
Our elected nominees Our elected nominees
constitute a constitute a
minority of the board majority of the board
--------------------------------------------------------------------------------
The merger proposal is not Our nominees will seek to Our nominees will
approved by stockholders carry out our platform. terminate the merger
agreement and carry
out our platform.
--------------------------------------------------------------------------------
Contrary to our Our nominees will abide Our nominees will abide
recommendation, the merger by the decision of by the decision of
proposal is approved by stockholders and drop stockholders and carry
stockholders opposition to the merger. out the merger.
--------------------------------------------------------------------------------
THE PROPOSALS
The MM Companies group is soliciting proxies from the holders of shares of
common stock to elect nominees who will constitute a majority of the Company's
board of directors. As described in more detail below, the proposals would
accomplish this in two steps:
9
o first, by electing two directors to fill the seats of the two
existing Class III directorships that expire at the 2002 annual
meeting; and
o second, by amending the By-laws to expand the board of directors and
authorize only stockholders to fill the newly created directorships,
and by electing the four nominees of the MM Companies group to fill
these new board positions.
The election of directors to fill the seats of the Class III directorships
requires a plurality of the votes cast in the election. The election of
directors to fill the newly created board positions requires a vote of the
majority of shares outstanding on the record date for the 2002 annual meeting.
The amendments to the By-laws to expand the board and authorize only
stockholders to fill vacancies requires a 66 2/3% majority of the shares
outstanding on the record date for the 2002 annual meeting.
If, at the 2002 annual meeting, the Company's management presents its
proposal for the issuance of stock to Alliance Entertainment stockholders in
connection with the proposed merger, the MM Companies group is also soliciting
proxies from holders of shares of common stock to oppose this proposal.
Consummation of the proposed merger with Alliance Entertainment is contingent
upon stockholder approval of the proposed issuance of shares to Alliance
Entertainment stockholders. The MM Companies group believes that the merger with
Alliance Entertainment is not in the best interests of the Company's
stockholders and urges stockholders to oppose the issuance of shares to Alliance
Entertainment stockholders in the merger.
The MM Companies group recommends that you vote for each of Proposal Nos.
1, 2, 3, 4 and 5 and vote against the Merger Related Proposal by checking the
appropriate boxes and signing, dating and returning the enclosed WHITE proxy
card.
Election of the Existing Class III Directors
Proposal No. 1 -- Election of the MM Companies group nominees as Class III
Directors
Proposal No. 1 provides for the election of James A. Mitarotonda and
Seymour Holtzman to serve as Class III directors until the 2005 annual
meeting of stockholders. See "Certain Other Information Regarding The MM
Companies Group Nominees" for information concerning the background and
experience of Messrs. Mitarotonda and Holtzman.
Ratification of the Appointment of Independent Accountants (Company
Proposal)
Proposal No. 2 -- Ratification of PricewaterhouseCoopers LLP as the Company's
independent accountants
Proposal No. 2 provides for the ratification of the appointment by the
Company's board of directors of PricewaterhouseCoopers LLP as the Company's
independent auditors to audit the Company's financial statements for its fiscal
year ending December 31, 2002. See "Auditors" for further information regarding
PricewaterhouseCoopers LLP.
10
Amendment of the By-laws and Election of an Additional Four Directors
Proposal No. 3 -- Modification of Provision Regarding the Size of the Board
of Directors
Proposal No. 3 provides for the amendment of Article III, Section 3.2 of
the Restated By-laws of the Company to increase the number of members of the
board of directors by four directors. The MM Companies group is proposing to
increase the size of the board to facilitate the election of the MM Companies
group nominees to a majority of the positions on the board.
The Restated By-laws has provided that the board of directors shall
consist of five (5) members, which number may be changed by an amendment to the
Restated By-laws duly adopted by the board of directors or the stockholders or
an amendment to the Company's Restated Certificate of Incorporation. On August
23, 2002, the Company announced that its board of directors amended the By-laws
to increase the size of the board of directors to seven members from five
members and appointed two directors to fill the newly-created directorships. We
believe the action of the Company to expand the board of directors at this time
violates Delaware law, and we commenced a lawsuit against the Company in
Delaware court to invalidate this action. See "Background Of And Reasons For The
Proxy Solicitation."
We originally proposed to expand the board of directors from five members
to nine members. If the action of the Company's board is invalidated or
otherwise rescinded, this remains our proposal. If, however, the action of the
board is not invalidated or rescinded, our proposal is to expand the number of
members of the board of directors from seven to eleven.
In particular, the amendment would delete the first sentence of Article
III, Section 3.2 and substitute in its place a sentence that sets the number of
directors at nine or eleven, as described above. In either case, the board would
be expanded by four directors over the number of directors in office at the time
of the 2002 annual meeting.
Proposal No. 4 -- Modification of Provision for Filling Board Vacancies
Proposal No. 4 provides for the amendment of Article III, Section 3.4 of
the Restated By-laws to provide that any vacancies on the board of directors and
newly created directorships may not be filled by the board of directors but only
by action of the stockholders. The Restated By-laws currently provide that
vacancies and newly created directorships resulting from any increase in the
authorized number of directors elected by the stockholders may be filled by a
majority of the directors then in office. In addition, the Restated By-laws
currently provide that whenever the holders of any class of stock or series
thereof are entitled to elect one or more directors by the certificate of
incorporation, vacancies and newly created directorships of such class or
classes or series may be filled by a majority of the directors elected by such
class or series thereof then in office. Proposal No. 4 would eliminate the power
of the board of directors to fill all vacancies and newly created directorships
and vest such power in the stockholders. In particular, the amendment would
delete the text of Article III, Section 3.4 and replace it with the following:
"Any director may resign at any time upon written notice to the attention
of the Secretary of the corporation. When one or more directors shall
resign from the board of directors, effective at a future date, such
vacancy may only be filled by the stockholders entitled to vote thereon.
11
(a) Vacancies and newly created directorships resulting from any increase
in the authorized number of directors elected by all of the stockholders
having the right to vote as a single class may only be filled by a
majority of the stockholders entitled to vote thereon.
(b) Whenever the holders of any class or classes of stock or series
thereof are entitled to elect one or more directors by the certificate of
incorporation, vacancies and newly created directorships of such class or
classes or series may only be filled by a majority of the stockholders
entitled to vote thereon. If at any time, by reason of death or
resignation or other cause, the corporation should have no directors in
office, then any officer, or any stockholder, or any executor,
administrator, trustee or guardian of a stockholder, or other fiduciary
entrusted with like responsibility for the person or estate of a
stockholder may call a special meeting of the stockholders in accordance
with the provisions of the certificate of incorporation or bylaws, or may
apply to the Court of Chancery for a decree summarily ordering an election
as provided in Section 211 of Delaware General Corporation Law."
The MM Companies group understands that many if not most Delaware
corporations empower both stockholders and existing board members with the
ability to fill vacancies and newly created directorships in the board of
directors, and the inability of the Company's stockholders to do so is
symptomatic of the entrenchment strategy implemented by current management. In
the future, it may be advisable to vest a concurrent power in the board to fill
vacancies. At this time, however, we are proposing that only stockholders may
fill vacancies to facilitate the election of the MM Companies group's nominees
under Proposal No. 5.
Proposal No. 5 -- Election of the MM Companies Group's Nominees to fill the
Four Newly Created Board Seats
Proposal No. 5 provides for the election of Jesse H. Choper and William
J. Fox to serve as Class I directors until the 2003 annual meeting of
stockholders, the election of Thomas E. Constance to serve as a Class II
director until the 2004 annual meeting of stockholders and the election of
Joseph R. Wright, Jr. to serve as a Class III director until the 2005 annual
meeting of stockholders. See "Certain Other Information Regarding The MM
Companies Group Nominees" for information concerning the background and
experience of Messrs. Choper, Fox, Constance and Wright.
While Proposal No. 5 requires the vote of only a majority of the shares
outstanding on the record date for the 2002 annual meeting, it is contingent
on the adoption of Proposals No. 3 and 4, which each require a 66 2/3% vote
of the shares outstanding on the record date for the 2002 annual meeting.
12
Authorization of Issuance of Common Stock (If the Company presents this
proposal at the 2002 annual meeting)
Merger Related Proposal -- Authorization of Issuance of Common Stock in
connection with Proposed Merger with Alliance Entertainment
The merger related proposal provides for the issuance of common stock to
the stockholders of Alliance Entertainment in connection with the proposed
merger with Alliance Entertainment. See "Introduction -- The Proposed Merger
With Alliance Entertainment" for further information regarding the proposed
merger. We do not know at the time of the mailing of this Proxy Statement
whether the Company intends to present this proposal at the 2002 annual meeting.
However, because the Company may do so, we are soliciting your vote against this
proposal. We are opposed to the proposed merger and urge you to vote against
this proposal.
General
Each of the MM Companies group's nominees has consented to being named
herein as a nominee for director of the Company and has agreed to stand for
election as a director.
Although the MM Companies group has no reason to believe that any of the
MM Companies group's nominees will be unable to serve as a director, if any MM
Companies group nominee is not available to serve, the MM Companies group
expects that the remaining MM Companies group nominees, upon taking office, will
fill the vacancy with an individual willing to consider and implement the MM
Companies group's proposals to maximize stockholder value.
The Company has indicated in its public filings that if its proposed
merger with Alliance Entertainment occurs, members designated by the Company
will constitute one-third and members designated by Alliance Entertainment will
constitute two-thirds of the members of the board of directors of the combined
company following the merger. It is possible that stockholders could elect some
or all of our nominees and, contrary to our recommendation, approve the merger
related proposal. None of the MM Companies group nominees have determined if
they would continue to serve on the board of directors of the combined company
if the proposed merger is consummated, assuming such individuals were selected
by the Company to be directors of the combined post-merger company. Further, if
all of the MM Companies group nominees are elected to the Company's board of
directors and the merger proceeds, at least some, if not all, of the MM
Companies group nominees would not continue to serve as directors following the
consummation of the merger. In such case, you would be electing some, if not
all, of the nominees of the MM Companies group to serve as directors of the
Company for a short period of time.
INFORMATION ABOUT THE MM COMPANIES GROUP
Members of the MM Companies group, the MM Companies group nominees and
certain other persons named below may be deemed to be "participants" in this
Proxy Solicitation as such term is defined in Schedule 14A promulgated under the
Securities Exchange Act of 1934. MM Companies is a Delaware corporation that was
formerly engaged in the business of marketing
13
customized compact discs over the internet and is presently exploring
alternative business opportunities. The address of the principal business and
principal offices of MM Companies is c/o Barington Capital Group, L.P., 888
Seventh Avenue, 17th Floor, New York, New York 10019. The officers and directors
of MM Companies and their principal occupations and business addresses are set
forth on Schedule I attached to this Proxy Statement.
Jewelcor Management, Inc. is a Nevada corporation primarily involved in
investment and management services. The address of the principal business
and principal offices of Jewelcor Management, Inc. is 100 North Wilkes Barre
Blvd., Wilkes Barre, Pennsylvania 18702. The officers and directors of
Jewelcor Management, Inc. and their principal occupations and business
addresses are set forth on Schedule II attached to this Proxy Statement.
Barington Companies Equity Partners, L.P. is a Delaware limited
partnership formed to engage in the business of acquiring, holding and
disposing of investments in various companies. The address of the principal
business and principal offices of Barington Companies Equity Partners, L.P.
is 888 Seventh Avenue, 17th Floor, New York, New York 10019.
The general partner of Barington Companies Equity Partners, L.P. is
Barington Companies Investors, LLC. Barington Companies Investors, LLC is a
Delaware limited liability company formed to be the general partner of
Barington Companies Equity Partners, L.P. The address of the principal
business and principal offices of Barington Companies Investors, LLC is 888
Seventh Avenue, 17th Floor, New York, New York 10019. James A. Mitarotonda
is the Managing Member of Barington Companies Investors, LLC. The business
address of Mr. Mitarotonda is c/o Barington Capital Group, L.P., 888 Seventh
Avenue, 17th Floor, New York, New York 10019.
Ramius Securities, LLC is a Delaware limited liability company and a
registered broker-dealer. The address of the principal business and principal
offices of Ramius Securities, LLC is 666 Third Avenue, 26th Floor, New York, New
York 10017.
The Managing Member of Ramius Securities, LLC is Ramius Capital Group,
LLC, a Delaware limited liability company that is engaged in money management
and investment advisory services for third parties and proprietary accounts. The
address of the principal business and principal offices of Ramius Capital Group,
LLC is 666 Third Avenue, 26th Floor, New York, New York 10017.
The Managing Member of Ramius Capital Group, LLC is C4S, LLC, a Delaware
limited liability company formed to be the managing member of Ramius Capital
Group, LLC. The address of the principal business and principal offices of C4S,
LLC is 666 Third Avenue, 26th Floor, New York, New York 10017. Each of Peter A.
Cohen, Morgan B. Stark and Thomas W. Strauss is a Managing Member of C4S, LLC.
The business address of each of Messrs. Cohen, Stark and Strauss is 666 Third
Avenue, 26th Floor, New York, New York 10017.
Domrose Sons Partnership is a New York partnership formed to engage in the
business of acquiring, holding and disposing of investments in various
companies. The address of the principal business and principal offices of
Domrose Sons Partnership is c/o Barington Capital Group, L.P., 888 Seventh
Avenue, 17th Floor, New York, New York 10019.
14
James Mitarotonda and his brothers Mario Mitarotonda and Mike Mitarotonda
are partners in Domrose Sons Partnership. The business address of each of Mario
Mitarotonda and Mike Mitarotonda is c/o Vincci, 70-39 Austin Street, Forest
Hills, New York 11375.
As of the date of this Proxy Statement, the MM Companies group owns an
aggregate of 1,568,100 shares of common stock representing approximately 6.9% of
the outstanding shares of the common stock based upon 22,745,624 shares of
common stock reported by the Company in its proxy materials filed with the
Securities and Exchange Commission on August 28, 2002, to be issued and
outstanding as of August 12, 2002.
Additional information about MM Companies, the MM Companies group and the
MM Companies group nominees including information regarding the beneficial
ownership of common stock is set forth under the heading "Certain Other
Information Regarding The MM Companies Group Nominees" and in Annex A attached
to this Proxy Statement.
The MM Companies group has retained D.F. King to act as an advisor and to
provide consulting and analytic services and solicitation services in connection
with this Proxy Solicitation. D.F. King is a proxy service company. It mails
documents to stockholders, responds to stockholder questions and solicits
stockholder votes for many companies. D.F. King does not believe that it or any
of its directors, officers, employees, affiliates or controlling persons, if
any, is a "participant" in this Proxy Solicitation or that Schedule 14A requires
the disclosure of certain information concerning D.F. King. The business address
of D.F. King is 77 Water Street, 20th Floor, New York, New York 10005. D.F. King
has informed the MM Companies group that, as of the date of this Proxy
Statement, it does not hold any shares of the Company's common stock for its own
account or for the accounts of others.
Investment Company Act
On August 9, 2002, MM Companies received a letter from the SEC's Division
of Investment Management inquiring as to the possible status of MM Companies as
an unregistered "investment company" within the meaning of the Investment
Company Act of 1940. MM Companies believes that, consistent with the discussion
of Investment Company Act matters in its Annual Report on Form 10-K for the year
ended December 31, 2001, MM Companies may have become an inadvertent investment
company during 2001. MM Companies has relied on the "transient investment
company" exemption from the applicable provisions of the Investment Company Act
contained in Rule 3a-2 thereunder, which provides for a one-year "safe harbor."
In light of the pending proxy contest, and the litigation recently
commenced by the Company's management as described below, MM Companies
determined to address any potential question concerning its Investment Company
Act status prior to the expiration of the one-year sale harbor exemption in
September 2002. Accordingly, on August 29, 2002, MM Companies acquired ownership
of $4 million in gold bullion. As a result, any "investment securities" held by
MM Companies no longer exceed 40% of its total assets (minus cash and government
securities), and MM Companies believes that it is no longer within the relevant
definition of "investment company" for purposes of the Investment Company Act.
15
On August 27, 2002, MM Companies was orally advised by the Division of
Investment Management that on the foregoing basis the Division would no longer
look at MM Companies as an investment company, and would revisit MM Companies'
Investment Company Act status in January 2003.
However, on August 20, 2002, the Company commenced a lawsuit against MM
Companies in federal district court alleging, among other things, that MM
Companies should be treated as an unregistered investment company under the
Investment Company Act and that, as such, MM Companies should be prohibited from
engaging in the present proxy solicitation. See "Background And Reasons For The
Proxy Solicitation."
A conclusion that MM Companies is in fact operating as an unregistered
investment company could support, among other things, a position that MM
Companies may be prohibited from engaging in interstate commerce and, as a
result, from holding securities such as the Company's common stock or acting as
a proxy at the 2002 annual meeting. In the event, which we believe to be
unlikely, that MM Companies were to be prohibited from soliciting proxies on the
foregoing theories, certain members of the MM Companies group, which are also
significant stockholders of the Company, would expect to continue to solicit
proxies in favor of the proposals and positions described in this Proxy
Statement. In the event that both MM Companies and all other members of the MM
Companies group were prohibited from soliciting proxies or all persons named as
proxies in connection with this solicitation were prohibited from acting in that
capacity, then stockholders of the Company who execute and return our proxy card
may ultimately be disenfranchised from voting on our proposals.
MM Companies disagrees with these positions and intends to defend itself
vigorously in the pending litigation with the Company. MM Companies believes
that it has been a "transient investment company" exempt from the Investment
Company Act at all relevant times prior to August 29, 2002, and that because of
the character of its assets it does not fall within the definition of an
investment company now.
BACKGROUND OF AND REASONS FOR THE PROXY SOLICITATION
Background
On various dates from August 14, 2001 through March 5, 2002, members of
the MM Companies group purchased a total of 1,568,100 shares of common stock in
the open market for a total purchase price of $3,457,711, excluding commissions
and related costs. The details of these purchases are set forth in Annex A
attached to this Proxy Statement. All of the purchases were funded by working
capital, which may have included margin loans made by brokerage firms in the
ordinary course of business.
On October 8, 2001, MM Companies issued a press release indicating that it
and certain other parties had acquired a 6.3% stock ownership stake in the
Company and intended to acquire up to approximately an additional 8.6% stock
ownership stake in the Company. On October 8, 2001, MM Companies also sent a
letter to Gerald W. Kearby, the President and Chief Executive Officer of the
Company, informing the Company of the acquisition of stock by MM Companies and
certain other reporting persons and the intention of such group to acquire
additional shares.
16
In the letter, MM Companies requested that the number of directors on the
Company's board of directors be increased from five to six and that individuals
proposed by MM Companies be appointed to fill two current vacancies on the
Company's board of directors and the one newly created seat. MM Companies also
requested that the Company meet with MM Companies in order to discuss ways to
enhance stockholder value.
On October 9, 2001, the MM Companies group filed with the SEC its Schedule
13D disclosing that the group members had acquired in excess of 5% of the
outstanding shares of the common stock.
MM Companies received no response to its letter of October 8, 2001.
On October 15, 2001, MM Companies sent a letter to Robert G. Flynn,
Secretary of the Company, and Mr. Kearby. In the letter, MM Companies requested
that the Company call a special meeting of stockholders of the Company on
November 27, 2001 to elect Seymour Holtzman to fill the existing vacancy on the
Company's board of directors, to replace the two directors currently on the
board of directors whose term expires in 2002 with James A. Mitarotonda and
Joseph R. Wright,, Jr. and to make certain amendments to the Company's Restated
By-laws. In addition, MM Companies requested that the Company give MM Companies
the opportunity to inspect and make copies of a complete list of the Company's
stockholders.
On October 22, 2001, Steel Partners II, L.P., an existing stockholder of
the Company, delivered a letter to the Company offering to acquire all the
outstanding stock of the Company for $3.00 per share in cash.
On October 26, 2001, MM Companies sent a letter to Mr. Kearby requesting
that the Company meet with MM Companies to discuss, among other things, an offer
by MM Companies to acquire the Company on terms at least comparable to those
proposed by Steel Partners II, L.P.
On November 5, 2001, the Company issued a press release announcing that
two individuals had been elected to fill the existing vacancies on the Company's
board of directors and that the Company was not interested in pursuing the
acquisition offer previously made by Steel Partners II, L.P. or MM Companies.
As a result of the Company's announcement, MM Companies sent the following
letter to Mr. Kearby, on November 9, 2001:
Dear Mr. Kearby:
As the second largest stockholders of Liquid Audio, Inc., we at
musicmaker.com, Inc. and the others in our group have become increasingly
concerned about Liquid Audio's situation, and management's apparent failure to
respond to the very serious issues facing the Company.
In particular, we were disturbed to see that management has decided to
completely ignore both the premium acquisition proposal publicly announced by
Steel Partners II, L.P., and our own offer to acquire the Company on terms at
least comparable to the Steel Partners proposal (or, alternatively, to work with
you on other approaches to enhance shareholder value). We were also taken aback
to first learn of management's position through public news reports, rather than
receiving the courtesy of a direct
17
response to our October 26 letter to you and the Board. In fact, since we first
contacted you privately more than one month ago to inform you of our stock
ownership, you have refused to respond in any way to our repeated requests to
meet with you.
Our interests are the same as any other public stockholder. Liquid Audio
has never shown a profit and is losing extraordinary amounts of money with each
passing day. In two years, the Company's stock has lost a staggering 95% of its
market value. The consensus of the financial community seems to be that Liquid
Audio's business model will never be successful and that the Company's value
will only decline as it continues to spend money without results. We understand
that at least two separate lawsuits have already been filed by Liquid Audio
stockholders against the Company and its directors individually, alleging
serious breaches of management's fiduciary duties.
In the face of this crisis, investors see management doing nothing to stem
the Company's losses or promote shareholder value. At the same time, management
has rejected out-of-hand serious offers to acquire the Company at a premium of
more than 25% over the prior market price, and is refusing to even communicate
with the Company's two largest stockholders.
Moreover, three weeks ago we requested that all Liquid Audio stockholders
be given an immediate opportunity to vote as a group to fill the long-existing
vacancies on the Company's Board of Directors. Instead of permitting the
Company's stockholders to exercise their franchise, management reacted to our
request by suddenly announcing last Monday that management had privately filled
those long-vacant Board seats with its own designees.
The present situation cannot be good for management or for the Company's
public stockholders, who continue to suffer from management's actions. We are
writing separately, as concerned stockholders, to pursue our request under
Delaware corporate law to inspect certain books and records of the Company. We
also urge you once again to seriously and responsibly consider the acquisition
proposals that have been presented to the Company, and to schedule a meeting
with us promptly to discuss our own acquisition offer as well as other potential
alternatives for the Company and its stockholders.
We look forward to hearing from you soon.
Sincerely,
/s/ Seymour Holtzman
--------------------
Seymour Holtzman
Chairman
/s/ James Mitarotonda
---------------------
James Mitarotonda
President and Chief Executive Officer
MUSICMAKER.COM, INC.
On December 6, 2001, James Mitarotonda met with management of the Company
and expressed concerns about the continuing viability of the Company.
On December 18, 2001, MM Companies sent a letter to Mr. Flynn and Mr.
Kearby informing the Company that at the 2002 annual meeting MM Companies
intended to nominate
18
certain individuals as directors and to propose certain amendments to the
Company's Restated Certificate of Incorporation and Restated By-laws. In
addition, MM Companies requested that it be given an opportunity to inspect the
stockholder list.
As a follow-up to its letter of December 18, 2001, MM Companies sent a
letter to Mr. Flynn and Mr. Kearby on December 20, 2001 notifying the Company
that at the 2002 annual meeting MM Companies intended to propose an amendment to
the Company's Restated By-laws increasing the size of the board of directors to
ten and to fill the four newly created directorships with designated
individuals.
On February 6, 2002, the Company announced that Silvia Kessel had resigned
as a member of the Company's board of directors.
In response to such announcement, on February 12, 2002 MM Companies sent a
letter to the Company's board of directors requesting that the Company schedule
the 2002 annual meeting at the earliest possible date.
On February 22, 2002, MM Companies sent a letter to Mr. Kearby setting
forth MM Companies' willingness to acquire the Company at a price of $2.50 per
share in cash.
In light of the Company's failure to schedule an annual meeting and to
consider MM Companies' proposal to acquire the Company, on April 4, 2002, MM
Companies sent the following letter to the Company's stockholders:
To Stockholders of Liquid Audio, Inc.
Dear Fellow Stockholder:
As you may know, musicmaker.com, Inc. and others in our group beneficially
own an aggregate of approximately 6.9% of Liquid Audio's outstanding common
stock. Together we are the Company's second largest stockholder.
We have repeatedly written to, and on one occasion met with, members of
the Company's management and Board of Directors to express our deep concerns
regarding the Company's financial situation and strategic direction. In our
correspondence, as well as the one brief meeting to which management consented,
we have indicated that we do not believe that management's current plans for the
Company are viable. We think it is unlikely that the Company will realize any
economic value from the license agreements it is entering into or the expensive
litigation it is pursuing to protect technology which it is not able to
successfully exploit. In fact, based on the experience of musicmaker's own
business under its prior management, we question the business model underlying
all of these license agreements and fear that they will yield little or no
revenue for the Company.
We are convinced that the only reasonable path to preserving what value
remains for stockholders is a sale of the Company, either to us or, if a more
attractive opportunity emerges, to a third party. We also believe that, in all
events, it is crucial that the interests of all shareholders be adequately
represented on the Company's Board of Directors at the earliest possible time.
In October 2001, we wrote to the Company to indicate our interest in
pursuing a potential acquisition of Liquid Audio at a price we then anticipated
could be in the range of $3.00 per share - a premium of more than 25% over the
market price at that time. Management eventually responded by
19
rejecting out of hand what we believe was an attractive offer. Unfortunately, we
believe the Company's situation has deteriorated further over the past four
months.
Despite this deterioration, and the fact that the Company has lost 95% of
its equity market value in the last two years while continuing to deplete cash
rapidly under its current operating strategy, we believe that there is still
value inherent in the Company. Accordingly, last month we wrote again to the
Company to state our willingness to acquire the Company on a negotiated basis,
through a merger with an appropriate acquisition entity, for a price of $2.50
per share in cash. This proposal is higher than the current market price of the
Company's stock, and would provide the Company's stockholders with an immediate
opportunity to realize value from their investment in the Company in excess of
any presently available alternative. Once again, however, our proposal has been
ignored by management.
Neither we nor any other potentially interested party can effectively
pursue an acquisition proposal by, for example, making a tender offer directly
to Liquid Audio's stockholders as long as management retains its so-called
"poison pill" or shareholders' rights plan. However, assuming no further
acceleration in the Company's deterioration, we are willing to commit to making
a tender offer for the Company's stock if management would eliminate the "poison
pill" and permit such an offer to proceed.
In the meantime, it is vital that the interests of all stockholders be
recognized at the Board level. We have given notice, in accordance with the
Company's by-laws, of stockholder nominations for directors at the Company's
2002 Annual Meeting. We have also requested that management hold that meeting as
soon as possible. Last year's annual meeting was held on June 1, and the
Company's by-laws require the meeting to be held on the second Tuesday of May
unless the Board of Directors has set a different date. In a February 12, 2002
letter to the Board of Directors, we indicated that if management did not commit
to an expeditious meeting schedule by February 22, we must take that as a sign
that management will attempt to delay holding an annual meeting. From
management's continued silence on the subject, we fear the worst.
We told the Company months ago that we believed time was of the essence in
addressing the Company's problems. That is more true than ever now. With every
passing day, the Company expends substantial additional cash, the Company's
perceived value declines, and the Company's alternatives and prospects are
correspondingly reduced. The time for action has come.
Management's apparent indifference to stockholders - the real owners of
the Company - is deeply disturbing. For two successive quarterly conference
calls with the investor community management has ignored prevailing business
practice and refused to accept questions. Management does not return phone calls
or e-mails. Management's ownership interest in the Company, meanwhile, is
minimal. It is your investment and our investment as stockholders that is at
risk. Where management seems to lack both the will and the economic incentive to
act, then we believe all stockholders must become more involved, and be prepared
to protect their own interests through participation on the Board of Directors.
We believe the Company's public stockholders risk additional substantial
losses if management continues to deplete cash, at a rate of approximately $5.5
million per quarter, while refusing to either discuss serious offers to acquire
the Company at a premium or consider any other potential alternative to maximize
value for the Company and its stockholders. Management has adopted an "ostrich
strategy" of sticking its head in the sand, ignoring the realities facing the
Company and hoping no one will notice. We notice, and we hope other stockholders
will notice as well when they focus on the facts.
20
In your own best interests, we urge you to make your views known to
management now. If you agree with us, let them know that stockholders will not
tolerate a delay in this year's crucial annual meeting. Let them know that
stockholders want the opportunity to consider and accept or reject for
themselves a cash offer for their shares. We understand that Mr. Kearby and the
other senior officers and directors of the Company may be contacted as follows:
Gerald W. Kearby, President & Chief Executive Officer
Liquid Audio, Inc.
800 Chesapeake Drive
Redwood City, California 94063
(650) 549-2000
Robert Flynn, Senior Vice President Business Development
Liquid Audio, Inc.
800 Chesapeake Drive
Redwood City, California 94063
(650) 549-2000
Raymond A. Doig, President
EMV Partners Corporation
c/o Liquid Audio, Inc.
800 Chesapeake Drive
Redwood City, California 94063
Stephen V. Imbler, President and Chief Financial Officer
Hyperion Solutions Corporation
1344 Crossman Avenue
Sunnydale, California 94089
(408) 744-9500
Ann L. Winblad
Hummer Winblad Venture Partners
2 South Park, 2nd Floor
San Francisco, California 94109
(415) 979-9600
If you have any questions or comments, please call me at (212) 974-5701 or
write to me via e-mail at jmitarotonda@barington.com.
Very truly yours,
/s/ James A. Mitarotonda
------------------------
James A. Mitarotonda
President and Chief Executive Officer
On May 3, 2002, MM Companies filed a lawsuit against the Company in the
Court of Chancery in the State of Delaware to compel the Company to hold its
2002 annual meeting and to require the Company to accept the nominations for
directors and other proposals previously submitted by MM Companies.
21
On May 15, 2002, MM Companies sent the following letter to Mr. Flynn,
Mr. Kearby and the board of directors of the Company:
Gentlemen:
We understand that Liquid Audio, Inc. has set July 1, 2002 as the date for
its 2002 Annual Meeting of Stockholders. Accordingly, we will suspend our
lawsuit to compel a meeting, which is currently pending against the Company in
Delaware Chancery Court.
As you are aware, on December 18, 2001 and December 20, 2001, we notified
the Company of our intention to nominate certain individuals as directors of the
Company and to present certain proposals at the 2002 Annual Meeting. For the
avoidance of any doubt, we reaffirm our intention to nominate the named persons
and to present our proposals, as set forth in our prior correspondence (copies
of which are attached), except for the following. We will not be presenting our
proposals to amend the Company's Restated Certificate of Incorporation and to
rescind the Company's "shareholder rights plan." While we continue to believe
that these actions are essential for the Company, we intend to focus our
campaign on the key issue facing the stockholder electorate -- installing
management that is guided by the interests of stockholders and not an
unattainable business (or should we say "non-business") plan.
As we have previously indicated to you, we and other stockholders who have
contacted us to express their views are deeply concerned about the ongoing
depletion of the Company's cash and the other critical issues facing the
Company. We expect that between now and the 2002 Annual Meeting the Company's
board of directors and its management will take no action that will prejudice
the rights of stockholders, including entering into any transaction to buy or
sell the Company or any material amount of its assets or taking action that
would deplete the Company's already dwindling cash supply. On the contrary, we
demand that, even in advance of the Annual Meeting, management close down the
Company's money losing operations and arrest the Company's senseless cash drain.
We also advise you that we will hold the current board and management
strictly accountable for any action taken in advance of the Annual Meeting that
would effectively thwart the exercise of the right of the stockholder electorate
to choose directors who will be responsive to the public owners of the Company
and who will be guided first and foremost by their interests.
Very truly yours,
musicmaker.com, Inc.
By: /s/ James A. Mitarotonda
------------------------
James A. Mitarotonda
President and Chief Executive Officer
On May 15, 2002, based on the Company's public announcement that the
Company's 2002 annual meeting was scheduled to be held on July 1, 2002, MM
Companies suspended its lawsuit to compel a meeting.
On May 30, 2002, MM Companies sent a letter to Mr. Flynn, Mr. Kearby and
the board of directors of the Company, in which it expressed its concern that
the Company had filed a proxy statement with the SEC on May 28, 2002 without
disclosing the MM Companies group's proposed solicitation of proxies in
connection with the Company's 2002 annual meeting. In such letter, MM Companies
noted that such failure constituted a significant omission and demanded
22
that the Company not mail its proxy materials to stockholders without correcting
its materials to accurately disclose the proxy contest to stockholders.
On May 30, 2002, MM Companies filed a lawsuit against the Company in the
Court of Chancery in the State of Delaware pursuant to Section 220(b) of the
Delaware General Corporation Law to compel the Company to permit MM Companies to
inspect and make copies of a complete list of the Company's stockholders and
related materials. On June 5, 2002, the Company provided to MM Companies a list
of the Company's stockholders.
On June 13, 2002, the Company issued a press release announcing that it
had signed a definitive merger agreement with Alliance Entertainment and that
the Company had postponed its 2002 annual meeting scheduled for July 1, 2002. In
response to the Company's public announcement, on June 13, 2002, MM Companies
sent a letter to Mr. Kearby and the board of directors of the Company,
expressing its dissatisfaction with the Company's proposed merger with Alliance
Entertainment and advising the Company to proceed with its 2002 annual meeting
on July 1, 2002.
On June 14, 2002, MM Companies amended its existing complaint against the
Company filed in the Court of Chancery in the State of Delaware pursuant to
Section 211 of the Delaware General Law to seek an order to compel the Company
to hold its 2002 annual meeting on July 1, 2002 and filed a motion with the
Court of Chancery of the State of Delaware for expedited proceedings with
respect to such pending action. On such date, MM Companies also sent the
following letter to Eric Weisman, President and Chief Executive Officer of
Alliance Entertainment:
Dear Mr. Weisman:
Your company, Alliance Entertainment, has purported to enter into an
agreement for the acquisition of a majority interest in Liquid Audio, Inc.
through a merger transaction. Well before you and Liquid Audio announced the
agreement yesterday, musicmaker.com, Inc. and other members of its group
announced and then commenced a proxy solicitation for election of directors of
Liquid Audio and control of its board at an annual meeting of stockholders
scheduled for July 1, 2002. We also publicly cautioned Liquid Audio not to enter
into any agreement or take other action that would commit Liquid Audio to a
major corporate transaction in advance of the stockholders meeting. You
undoubtedly knew both of our solicitation and our cautionary notice to the
company at the time you and Liquid Audio purported to execute your agreement.
You should have known as well that Wilson, Sonsini, Goodrich & Rosati, who
represented Liquid Audio in its negotiations with Alliance Entertainment, has
represented and continues to represent musicmaker.com. In our view Wilson
Sonsini's representation of Liquid Audio in the circumstances is adverse to the
interests of musicmaker.com and a violation of applicable principles of
professional conduct. We have so informed Wilson Sonsini, and this should have
been apparent to you as well.
We note further that the breakup fee provisions of your purported
agreement unconscionably seek to penalize Liquid Audio stockholders for
exercising their rights to reject your transaction and a properly constituted
board of Liquid Audio for exercising its fiduciary duties to do the same.
We therefore inform you that we do not regard your agreement with Liquid
Audio as binding on the company and we will conduct ourselves accordingly.
23
Very truly yours,
/s/ James Mitarotonda
---------------------
James Mitarotonda
President and Chief Executive Officer
On June 14, 2002, MM Companies sent the following letter to Ann Winblad, a
member of the Company's board of directors:
Dear Ms. Winblad:
The reason I am writing to you is that telephonic and written
communications to Mr. Kearby have been fruitless because Mr. Kearby has failed
to respond.
Although shareholders do not have the specific financial information
regarding the proposed transaction with Alliance Entertainment Corp., many
respected individuals in the industry have indicated that Alliance is involved
in an industry that operates on very thin margins, which makes profitability
very difficult. As you may be aware, Alliance filed bankruptcy in 1997, and was
then acquired by Yucaipa Companies in 1998. Furthermore, Yucaipa gave Alliance
an additional $25 million in November 2000, to fund its digital properties.
Why would a company with $600 million in revenues in its most recent
fiscal year merge with Liquid Audio, who only had revenues of $136,000 in the
most recent quarter? I would speculate that Yucaipa's interest in Liquid Audio
is for the approximate $85 million in cash that Liquid Audio has in the bank. I
also suspect that Alliance has a substantial amount of debt, and desperately
needs a cash infusion to continue to operate its business.
The proposed transaction has onerous and ridiculous breakup fees, which in
my opinion, are clearly designed to entrench Liquid Audio's current management
and permit Mr. Kearby to maintain his position with the company and continue
wasting corporate assets. The inclusion of a provision to pay Alliance an
additional $750,000 if the Company decides to liquidate within six months if the
transaction is not approved by shareholders is unconscionable.
I am sure you realize the anger Liquid Audio's shareholders have toward
management and the Board of Directors, as they have lost hundreds of millions of
dollars in market value. We have received numerous calls from large and small
shareholders who are outraged and disgusted with the shabby treatment they have
received from the management of the Company.
It seems to me that as a venture capitalist you would require the
management of the Company to be sensitive to shareholder concerns, especially as
the Company lost over $37 million last year, and had a cash burn in the recent
quarter of $5 million.
The Company did not announce or hold its 2002 Annual Meeting of
Stockholders on a timely basis and has wasted substantial sums of money in an
effort to frustrate and thwart the shareholder process. I respectfully request
that you and your fellow directors permit the Annual Meeting of Shareholders to
occur on Monday, July 1, 2002, as the Company had originally scheduled. The
Company has already spent the money for this meeting and filed its preliminary
proxy with the Securities and Exchange Commission.
24
I sincerely believe that two substantial outside directors, such as James
Mitarotonda and myself, would provide shareholders an avenue in which to express
their views. The Company needs input from "truly independent directors."
In the investment banking industry, your reputation should be sacred. In
my opinion, you have done yourself and your firm a great disservice by
permitting yourself to be involved in the wasteful acts carried out by
management and the Board of Directors of Liquid Audio, Inc. How could you in
good conscience allow the Company to potentially pay up to $3 million in breakup
fees, when you know the shareholders want the Company to liquidate its assets?
The shareholders spoke clearly yesterday when the stock dropped by 10% and
traded more than three times its normal volume.
If you would like to discuss this matter, I can be reached at (570)
822-6277, ext. 23.
Sincerely,
/s/ Seymour Holtzman
--------------------
Seymour Holtzman
Chairman of the Board
On June 20, 2002, the Court of Chancery in the State of Delaware entered
an order setting a trial date of July 15, 2002 on the motion of MM Companies to
require the Company to hold its 2002 annual meeting.
On July 15, 2002, the Court of Chancery in the State of Delaware ordered
that the Company's 2002 annual meeting be held on September 26, 2002 and that
the record date for determining those stockholders entitled to vote at the 2002
annual meeting be August 12, 2002.
Also on July 15, 2002, the Company issued a press release announcing that
it had modified certain terms of its previously announced merger with Alliance
Entertainment. The Company indicated that pursuant to the terms of such amended
agreement, the Company intended to conduct a self-tender offer for 10,000,000
shares of common stock at $3.00 per share and that after the merger Alliance
Entertainment stockholders would own 74% of the combined enterprise. In
addition, the Company announced that it had approved an amendment to the
Company's existing stockholder rights plan to reduce the triggering threshold
from 15% beneficial stock ownership to 10% beneficial stock ownership.
In response to the Company's announcement, on July 16, 2002, MM
Companies sent the following letter to Mr. Kearby, Mr. Flynn and the board of
directors of the Company:
Gentlemen:
Liquid Audio, Inc.'s new proposal of a merger with Alliance
Entertainment combined with a self-tender offer to acquire 10 million shares of
the Company's stock at $3.00 per share does not cure our fundamental objections.
As I am sure you know, the record business is in a shambles with the likelihood
that it will get worse before it gets better. In view of these circumstances, we
are categorically opposed to this transaction.
If the Company's management is serious about enhancing shareholder
value, we believe the Company should distribute $3.00 per share to ALL of Liquid
Audio's shareholders. Thereafter, a
25
determination can be made with the remaining cash in the corporation to either
make a further distribution, or to retain a moderate amount of cash and fold it
into a viable business. Furthermore, this is a matter that the shareholders
should ultimately decide.
We vigorously protest the Board of Directors' decision to amend the
Company's preferred stock rights agreement - the poison pill - to reduce the
triggering threshold from beneficial ownership of 15% of Liquid Audio's
outstanding shares to beneficial ownership of 10%. The Board's conduct is
unconscionable and, in our opinion, may constitute a breach of their fiduciary
duties.
Your immediate response to this letter would be appreciated.
/s/ Seymour Holtzman /s/ James Mitarotonda
-------------------- ---------------------
Seymour Holtzman James Mitarotonda
Chairman President & CEO
On July 23, 2002, MM Companies filed a lawsuit against the Company, its
board of directors and Alliance Entertainment in the Court of Chancery in the
State of Delaware seeking injunctive and other relief with respect to the
consummation of the proposed merger between the Company and Alliance
Entertainment, the effectuation and enforcement of the merger agreement between
the Company and Alliance Entertainment, the consummation of the Company's
proposed self-tender offer, the reduction of the "trigger" of the Company's
stockholder rights plan and the effectuation and enforcement of the Company's
stockholder rights plan to the extent that it interferes with the exercise by
the Company's stockholders of their right to vote. In connection with such
action, MM Companies filed motions for expedited proceedings and for a
preliminary injunction.
On July 23, 2002, the Company filed with the SEC a registration statement
on Form S-4 for the proposed issuance of common stock to the stockholders of
Alliance Entertainment in connection with the merger transaction with Alliance
Entertainment approved by the Company's board of directors which registration
statement included the Company's preliminary proxy materials.
On July 31, 2002, MM Companies sent a letter to the Court of Chancery in
the State of Delaware withdrawing its motions for injunctive relief and
expedited proceedings in the pending litigation. In such letter, MM Companies
indicated that it intended to amend its existing complaint against the Company,
its board of directors and Alliance Entertainment.
On August 2, 2002, MM Companies issued a press release confirming that it
is continuing its pending lawsuit against the Company, its board of directors
and Alliance Entertainment.
On August 20, 2002, the Company filed an action against MM Companies and
Steel Partners II, L.P. in the United States District Court in the Southern
District of New York seeking, among other things, injunctive and other relief to
restrain and enjoin MM Companies from conducting further solicitation of proxies
of the Company's stockholders. On such date, the Company also filed with the
court a motion seeking, among other things, a preliminary injunction enjoining
MM Companies from conducting the solicitation of proxies described in the
preceding sentence. A hearing with respect to the Company's motion has been set
for September
26
5, 2002. In response to the filing of the action by the Company, on August 22,
2002, MM Companies issued the following press release:
MM Companies, Inc. Responds to Liquid Audio, Inc. Lawsuit
NEW YORK, Aug. 22 / -- The following was issued today by MM Companies, Inc.
(OTC Bulletin Board: MMCO):
We are very disappointed to find that Liquid Audio's management is once again
attempting to impede the stockholder meeting process which we have tried for
months to set in motion. The lawsuit Liquid Audio management filed yesterday
appears to us to be another effort to deny Liquid Audio shareholders a fair
chance, finally, to have a voice in the future of their company. We believe that
management's motion in court for a preliminary injunction against our
solicitation of votes in opposition to management at the September 26 Annual
Meeting is without merit, and we will contest it vigorously.
Over the past ten months, Liquid Audio management has rejected out of hand our
repeated proposals to acquire ownership of Liquid Audio, our requests to add
directors to the Board and our demands for a stockholder meeting. We had to go
to Delaware court to force the 2002 Annual Meeting to be scheduled, only to find
that after finally scheduling a meeting for July 1, management maneuvered to
delay the meeting still further, until September 26.
Now, with the meeting finally approaching, management has turned to other
tactics. Their eleventh-hour lawsuit is based principally on Investment Company
Act matters we ourselves publicly discussed in our 2001 Annual Report, and they
now purport to seek expedited relief from the court with respect to proxy
material which we first publicly filed with the SEC in May and last supplemented
in a further filing two weeks ago.
Our position is simple -- Liquid Audio's future should be decided by its
shareholders on the basis of full and fair disclosure of the matters material to
their decision, and the shareholders should be permitted to vote now.
On August 23, 2002, the Company requested that the court issue a temporary
restraining order against MM Companies and Steel Partners II, L.P. prohibiting
MM Companies and Steel Partners II, L.P. from soliciting proxies of the
Company's stockholders pending the hearing on September 5, 2002. On August 26,
2002, after hearing oral arguments from all parties, the court denied the
Company's request for such an order.
Earlier, on August 22, 2002, MM Companies sent a letter to each of Raymond
Doig, Stephen Imbler and Ann Winblad, members of the board of directors of the
Company, in which, among other things, it urged these non-management board
members to reconsider their support of the Company's business strategy and the
proposed merger with Alliance Entertainment Corp.
On August 23, 2002, the Company announced that it had amended its By-laws
to increase the size of the board of directors from five to seven members and
had elected James D. Somes and Judith N. Frank to the Company's board of
directors.
In response to this announcement, on August 26, 2002, MM Companies filed
an action against the members of the board of directors of the Company and the
Company in the Delaware
27
Court of Chancery seeking, among other things, injunctive and other equitable
relief to invalidate the decision of the director defendants to amend the
Company's Bylaws which increased the size of the board of directors from five to
seven members; to invalidate the decision of the director defendants to appoint
two additional members of the board of directors of the Company; and
preliminarily and permanently enjoining the Company and the director defendants
from changing the size of the Company's board of directors until the results of
the election of board members at the 2002 annual meeting is calculated and
certified. A hearing with respect to this action has been set for October 21,
2002.
On August 27, 2002, MM Companies sent the following letter to the board of
directors and the Secretary of the Company:
Gentlemen and Ladies:
We were outraged to learn that, on the eve of the long-delayed 2002
annual meeting of Liquid Audio shareholders, the board of directors of the
Company has purported to expand the size of the board from five to seven
directors and to appoint two new directors for terms expiring in 2003 and 2004.
This further attempt by management to manipulate the corporate
machinery to its own advantage is an insult to the shareholders, who will
finally have a choice in the future of their company at next month's meeting.
The Company's board has consisted of five members for at least ten months. Last
year, our group's request for two seats on the Company's board was summarily
rejected. Under the management-supported Alliance Entertainment merger--which we
continue to oppose--Liquid Audio's representation on the surviving company board
would be reduced to three directors. Why the sudden rush to expand the board
now, with directors who under management's plan for the Company would serve only
six weeks?
We think the answer is self-evident. The purpose of expanding the
board at this time, behind closed doors and without shareholder consent, can
only be to entrench management, disadvantage our group's proxy contest and
further compromise the rights of shareholders to elect representatives of their
choice to direct the destiny of their company.
Accordingly, we believe the board's action has no legitimate
corporate purpose and flies in the face of settled principles of Delaware law.
We have commenced a challenge to the board's action in Delaware court, which we
intend to vigorously pursue.
We are confident in our position that the court should invalidate
management's unconscionable board expansion gambit. However, If the action of
the board is for any reason not rescinded or invalidated, we inform the Company
that we are making a conforming change in our long-standing proposal to expand
the size of the board, for presentation to shareholders at the upcoming annual
meeting. Our proposal will be to increase the size of the board by four
directors in addition to the directors in office at the time of the meeting. If
the Company persists in maintaining that the number of incumbent directors is
now seven, our proposal is to increase the size of the board to 11. If the size
of the board reverts, as it should, to five, our proposal will revert to
increasing the size of the board to 9. In all other respects, our proposals for
the upcoming annual meeting remain unchanged, including the number and identity
of our nominees for election as director.
Finally, we indignantly note the continuing waste of corporate
assets resulting from management's "no-holds-barred, fight-at-all-costs"
strategy in the pending proxy contest. We demand
28
public disclosure of all costs that management is incurring for these purposes
and hold management strictly accountable for the accelerating depletion of the
Company's cash.
Very truly yours,
/s/ James Mitarotonda
---------------------
James Mitarotonda
On August 28, 2002, the Company filed with the SEC preliminary proxy
materials with respect to the 2002 annual meeting. Such materials do not provide
for the solicitation of proxies by the Company with respect to the merger
related proposal.
CERTAIN OTHER INFORMATION REGARDING
THE MM COMPANIES GROUP NOMINEES
Set forth below are the name, age, business address, present principal
occupation, employment history and directorships of each of the MM Companies
group's nominees for at least the past five years. This information has been
furnished to the MM Companies group by the respective MM Companies group
nominees. Each of the MM Companies group nominees has consented to serve as a
director of the Company. Each of the MM Companies group nominees is at least 18
years of age. None of the entities referenced below is a parent or subsidiary of
the Company.
Present Principal Occupation, Five Year
Name, Age and Business Address Employment History and Directorships
------------------------------------- ---------------------------------------
Jesse H. Choper, 64 Mr. Choper has been the Earl Warren
University of California at Berkeley Professor of Public Law at the
School of Law University of California at Berkeley
Berkeley, California 94720 School of Law since 1965. Professor
Choper was the Dean of the Law School
from 1982 to 1992. In 1996, he was a
visiting Professor at Harvard Law
School, University of Milan in Italy
Law School and Universidad Autonoma in
Barcelona, Spain. From 1960 to 1961,
Professor Choper was a law clerk for
Chief Justice Earl Warren. Mr. Choper
is a member of the board of directors
of Casual Male Retail Group, Inc.
(formerly known as Designs, Inc.)
(NASDAQ:CMRG) and MM Companies, Inc.
(OTCBB:MMCO).
William J. Fox, 45 Mr. Fox is Chairman, President and
c/o Arcade Marketing Inc. Chief Executive Officer of Arcade
120 East 56th Street Marketing Inc., a company which
Suite 1200 specializes in consumer product
New York, New York 10022 multi-sensory marketing sample systems
and related consumer communication
printing. Mr. Fox was President,
Strategic and Corporate Development of
Revlon Worldwide, Senior Executive
Vice President of Revlon, Inc. and
Revlon Consumer Products
29
Corporation ("RCPC") (collectively,
"Revlon") and Chief Executive Officer,
Revlon Technologies, a division of
Revlon, from January 1998 through
January 1999. He was Executive Vice
President from 1991 through January
1997 and Senior Executive Vice
President from January 1997 through
January 1999 and Chief Financial
Officer of Revlon from 1991 to 1997.
Mr. Fox served as a director from
November 1995 of Revlon, Inc. and from
September 1994 of RCPC, until April
1999. He was Senior Vice President of
MacAndrews and Forbes Holding Inc., the
indirect majority shareholder of
Revlon, from August 1990 through
January 1999. Mr. Fox currently serves
as a director, Co-Chairman of the board
and Chairman of the Audit Committee of
Loehmanns Holdings Inc.
(OTCBB:LHMS.OB). Mr. Fox also is a
member of the board of directors of the
Fragrance Foundation, the Executive
Board of the Dwight Englewood School,
the Executive Board of the Federal Drug
Agents Foundation and the Advisory
Board of the Hope & Hero's Children's
Cancer Fund at Columbia University NY
Presbyterian Medical Center.
Seymour Holtzman, 66 Mr. Holtzman has been involved in the
100 North Wilkes Barre Blvd. retail business for over 30 years.
4th Floor For many years he has been the
Wilkes Barre, Pennsylvania 18702 President and Chief Executive Officer
of Jewelcor, Inc., a former New York
Stock Exchange company that operated a
chain of retail stores. From 1986 to
1988, Mr. Holtzman was the Chairman of
the Board and the Chief Executive
Officer of Gruen Marketing
Corporation, an American Stock
Exchange company involved in the
nationwide distribution of watches.
For at least the last five years, Mr.
Holtzman has served as Chairman and
Chief Executive Officer of each of
Jewelcor Management, Inc., a company
primarily involved in investment and
management services; C.D. Peacock,
Inc., a Chicago, Illinois retail
jewelry establishment; and S.A. Peck &
Company, a retail and mail order
jewelry company based in Chicago,
Illinois. Mr. Holtzman is currently
the
30
Chairman of the Board of two publicly
traded companies: Casual Male Retail
Group, Inc. (formerly known as Designs,
Inc.) (NASDAQ:CMRG) and MM Companies,
Inc. (OTCBB:MMCO). Mr. Holtzman is a
former Chairman of the Board and a
current director of Little Switzerland,
Inc. (OTCBB:LSVI), a leading jewelry
retailer in the Caribbean, Alaska and
Key West, Florida. Mr. Holtzman is a
well-known shareholder activist who
specializes in the banking industry and
the retail industry.
James A. Mitarotonda, 48 Mr. Mitarotonda is Chairman of the
c/o Barington Capital Group, L.P. Board, President and Chief Executive
888 Seventh Avenue Officer of Barington Capital Group,
17th Floor L.P., an investment firm which he
New York, New York 10019 co-founded in November 1991. Mr.
Mitarotonda is also President and
Chief Executive Officer of Barington
Companies Investors, LLC, the general
partner of Barington Companies Equity
Partners, L.P., a small capitalization
value fund which seeks to be actively
involved with its portfolio companies
in order to enhance shareholder
value. Mr. Mitarotonda is also
President, Chief Executive Officer and
a director of MM Companies, Inc.
(OTCBB:MMCO). In May 1988, Mr.
Mitarotonda co-founded Commonwealth
Associates, an investment banking,
brokerage and securities trading
firm. Mr. Mitarotonda served as
Chairman of the Board and Co-Chief
Executive Officer of JMJ Management
Company Inc., the general partner of
Commonwealth Associates. From
December 1984 to May 1988, Mr.
Mitarotonda was employed as Senior
Vice President/Investments by D.H.
Blair & Co., an investment bank,
brokerage and securities trading firm
focused on micro-capitalization
companies. From July 1981 to November
1984, Mr. Mitarotonda was employed by
Citibank, N.A. with management
responsibility for two of Citibank's
business banking branches and became
Regional Director of Citibank's Home
Equity Financing and Credit Services.
Mr. Mitarotonda is a member of the
Alumni Advisory Council of New York
University's Stern School of Business
and is a member of the Executive
Committee and Co-
31
Chairman of Membership of the Gotham
Chapter of the Young President's
Organization. He graduated from Queens
College with a BA honors degree in
economics and with an MBA from New York
University's Graduate School of
Business Administration (now known as
the Stern School of Business).
Joseph R. Wright, Jr., 63 Mr. Wright is President and Chief
c/o PanAmSat Corp. Executive Officer of PanAmSat Corp.
20 Westport Road (NASDAQ:SPOT), a public company that
Wilton, Connecticut 06897 provides global video and data
broadcasting services via satellite.
Mr. Wright is also Vice Chairman of
Terremark Worldwide Inc. (AMEX:TWW), a
public company that develops and
operates Network Access Point (NAP)
telecommunications data centers in the
U.S. and internationally. From 1995
to May 2000, Mr. Wright was Chairman,
CEO and Director of AmTec, Inc., a
public company providing
telecommunications and Internet
services to and from the U.S. and the
Far East, which merged with Terremark
Holdings, Inc. From 1996 to May 2000,
Mr. Wright was Chairman and Director
of GRC International, Inc., a public
information technology company which
was sold to AT&T. From 1989 to 1994,
Mr. Wright was Vice Chairman, EVP and
Director of W. R. Grace & Company,
Chairman and Director of Grace Energy
Company, and President of Grace
Environmental Company. Prior to his
tenure at Grace, he was Deputy
Director then Director of the Federal
Office of Management and Budget (OMB)
under President Reagan, serving in the
Cabinet and the Executive Office of
the President from 1982 to 1989. He
was Deputy Secretary of the Department
of Commerce, with oversight of the
International Trade Administration,
from 1981 to 1982 and later was on the
President's Export Council as Chairman
of the Export Control Subcommittee.
Prior to the 1980s, Mr. Wright was
President of Citicorp Retail Services
and Retail Consumer Services, credit
card subsidiaries of Citibank, N.A.,
following positions in the Departments
of Commerce and
32
Agriculture in various management and
economic roles, including acting
Assistant Secretary for Economic
Affairs. He began his career at Booz,
Allen and Hamilton, Inc. Mr. Wright is
Chairman of the Advisory Board of
Barington Companies Equity Partners,
L.P. Mr. Wright also currently serves
on the board of directors of PanAmSat
Corp., Titan Corporation, Baker &
Taylor, Verso Technologies, Inc.,
Jefferson Consulting Group, RealMed and
Fairmarket, Inc. (NASDAQ:FAIM) and the
AT&T Washington Advisory Board.
Thomas E. Constance, 65 Mr. Constance is Chairman of the law
Chairman firm of Kramer Levin Naftalis &
Kramer Levin Naftalis & Frankel LLP Frankel LLP in New York City. Prior
919 Third Avenue to joining Kramer Levin, Mr. Constance
New York, New York 10022 was formerly Chairman of Shea & Gould,
a New York City based law firm. He
serves as a director of St. Vincent's
Services Inc. and MD Sass Foundation.
He also is a director of Uniroyal
Technologies, Inc., Kroll-O'Gara and
Siga and a member of the advisory
board of Barington Companies Equity
Partners, L.P.
33
The number of shares of the Company's common stock beneficially owned and
percentage beneficial ownership of each of the MM Companies group nominees as of
the date of this Proxy Statement are as follows:
Number of Shares
MM Companies group Beneficially Owned Percentage
Nominee (1) (2) Ownership (3)
------------------------- ------------------ ----------
Jesse H. Choper 0 0%
Thomas E. Constance 0 0%
William J. Fox 0 0%
Seymour Holtzman 1,131,400(4)(6) 4.1%
James A. Mitarotonda 1,003,100(5)(6) 4.4%
Joseph R. Wright, Jr. 0 0%
------------------ ----------
Total 1,478,600(7) 6.5%
--------------------
(1) Beneficial ownership is determined in accordance with the rules of the
SEC and generally includes voting or investment power with respect to
securities. Shares of common stock subject to stock options and
warrants currently exercisable or exercisable within 60 days are deemed
outstanding for purposes of computing the percentage ownership of any
group of which the holder is a member, but are not deemed outstanding
for computing the percentage ownership of any other person. Except as
indicated by footnote, and subject to community property laws where
applicable, the persons named in the table have sole voting and
investment power with respect to all shares of common stock shown as
beneficially owned by them.
(2) Under the rules of the SEC, the MM Companies group nominees may be
deemed to be members of a group and, as a result, each MM Companies
group nominee may be deemed to beneficially own shares of common stock
beneficially owned by each of the other MM Companies group nominees.
Each of the MM Companies group nominees disclaims beneficial ownership
of the shares of common stock beneficially owned by any of the other MM
Companies group nominees.
(3) Calculated based on 22,745,624 shares of common stock outstanding as of
August 12, 2002 as reported in the Company's proxy materials filed with
the SEC on August 28, 2002.
(4) Includes 475,500 shares of common stock owned by Jewelcor
Management, Inc. Mr. Holtzman is the Chairman and Chief Executive
Officer of Jewelcor Management, Inc. and has shared voting and
dispositive power with respect to the 475,500 shares of common stock
owned by Jewelcor Management, Inc.
(5) Includes 339,200 shares of common stock owned by Barington Companies
Equity Partners, L.P. and 8,000 shares of common stock owned by Domrose
Sons Partnership. Mr. Mitarotonda is the Managing Member of the general
partner of Barington Companies Equity Partners, L.P. and has sole
voting and dispositive power with respect to the 339,200 shares of
common stock owned by Barington Companies Equity Partners, L.P. Mr.
Mitarotonda is a partner of Domrose Sons Partnership and
34
has shared voting and dispositive power with respect to the 8,000
shares of common stock owned by Domrose Sons Partnership.
(6) Includes 655,900 shares owned by MM Companies, of which Mr. Holtzman
is the Chairman of the Board and Mr. Mitarotonda is President and
Chief Executive Officer.
(7) Consists of 655,900 shares owned by MM Companies, 475,500 shares of
common stock owned by Jewelcor Management, Inc., 339,200 shares of
common stock owned by Barington Companies Equity Partners, L.P. and
8,000 shares of common stock owned by Domrose Sons Partnership.
Except as set forth in this Proxy Statement or in the Annexes hereto, to
the best knowledge of the MM Companies group , none of the MM Companies group
nominees is employed by the Company. All of the MM Companies group nominees are
citizens of the United States.
Except as set forth in this Proxy Statement or in the Annexes hereto, to
the best knowledge of the MM Companies group, none of the MM Companies group,
any of the persons participating in this Proxy Solicitation on behalf of the MM
Companies group, the MM Companies group nominees and, with respect to items (i),
(vii) and (viii) of this paragraph, any associate (within the meaning of Rule
14a-1 of the Securities Exchange Act of 1934) of the foregoing persons (i) owns
beneficially, directly or indirectly, any securities of the Company, (ii) owns
beneficially, directly or indirectly, any securities of any parent or subsidiary
of the Company, (iii) owns any securities of the Company of record but not
beneficially, (iv) has purchased or sold any securities of the Company within
the past two years, (v) has incurred indebtedness for the purpose of acquiring
or holding securities of the Company, (vi) is or has within the past year been a
party to any contract, arrangement or understanding with respect to any
securities of the Company, (vii) since the beginning of the Company's last
fiscal year has been indebted to the Company or any of its subsidiaries in
excess of $60,000 or (viii) has any arrangement or understanding with respect to
future employment by the Company or with respect to any future transactions to
which the Company or any of its affiliates will or may be a party. In addition,
except as set forth in this Proxy Statement or in the Annexes hereto, to the
best knowledge of the MM Companies group, none of the MM Companies group, any of
the persons participating in this Proxy Solicitation on behalf of the MM
Companies group, the MM Companies group nominees and any associates of the
foregoing persons, has had or is to have a direct or indirect material interest
in any transaction or proposed transaction with the Company in which the amount
involved exceeds $60,000, since the beginning of the Company's last fiscal year.
Except as set forth in this Proxy Statement or in the Annexes hereto, to
the best knowledge of the MM Companies group, none of the MM Companies group
nominees, since the beginning of the Company's last fiscal year, has been
affiliated with (i) any entity that made or received, or during the Company's
current fiscal year proposes to make or receive, payments to or from the Company
or its subsidiaries for property or services in excess of five percent of either
the Company's or such entity's consolidated gross revenues for its last full
fiscal year, or (ii) any entity to which the Company or its subsidiaries were
indebted at the end of the Company's last full fiscal year in an aggregate
amount exceeding five percent of the Company's
35
total consolidated assets at the end of such year. None of the MM Companies
group nominees is or during the Company's last fiscal year has been affiliated
with any law or investment banking firm that has performed or proposes to
perform services for the Company.
To the best knowledge of the MM Companies group, none of the corporations
or organizations in which the MM Companies group nominees have conducted their
principal occupation or employment was a parent, subsidiary or other affiliate
of the Company, and the MM Companies group nominees do not hold any position or
office with the Company or have any family relationship with any executive
officer or director of the Company or have been involved in any proceedings,
legal or otherwise, of the type required to be disclosed by the rules governing
this solicitation.
The MM Companies group has agreed to indemnify each of the MM Companies
group nominees against certain liabilities, including liabilities under the
federal securities laws, in connection with this Proxy Solicitation and such
person's involvement in the operation of the Company and to reimburse such MM
Companies group nominee for his out-of-pocket expenses.
AUDITORS
According to information contained in the Company's proxy statement, the
Company's board of directors has appointed PricewaterhouseCoopers LLP as the
independent accountants to audit the Company's financial statements for the
fiscal year ending December 31, 2002. PricewaterhouseCoopers LLP has audited the
Company's financial statements since 1996. The Company has stated in its proxy
statement that a representative of PricewaterhouseCoopers LLP is expected to be
available at the 2002 annual meeting and will have an opportunity to make a
statement if such representative so desires and is expected to be available to
respond to appropriate questions. The Company also has stated in its proxy
statement that in the event the stockholders fail to ratify the appointment, the
Company's board of directors and its audit committee will reconsider whether or
not to retain PricewaterhouseCoopers LLP and that even if the selection is
ratified by the Company's stockholders, the board of directors of the Company,
at its discretion, may direct the appointment of a different independent
accounting firm at any time during the year if it determines that such a change
would be in the best interests of the Company and its stockholders.
The MM Companies group recommends that you vote for the ratification of
the appointment of PricewaterhouseCoopers LLP as the Company's independent
auditors for the fiscal year ended December 31, 2002. See Proposal No. 2
under "The Proposals."
SOLICITATION OF PROXIES
The MM Companies group has retained D.F. King to act as an advisor in
connection with this Proxy Solicitation. In connection with its retention by the
MM Companies group, D.F. King has agreed to provide consulting and analytic
services and solicitation services with respect to banks, brokers, institutional
investors and individual stockholders. The MM Companies group has agreed to pay
D.F. King a fee for its services estimated to be not more than $________ and to
reimburse D.F. King for its reasonable out-of-pocket expenses. The MM Companies
group has also agreed to indemnify D.F. King against certain liabilities and
expenses in connection
36
with this Proxy Solicitation, including liabilities under the federal securities
laws. Approximately 20 employees of D.F. King will engage in the solicitation.
Proxies may be solicited by mail, advertisement, telephone, facsimile or in
person. Solicitations may be made by persons employed by or affiliated with the
members of the MM Companies group. However, no person will receive additional
compensation for such solicitation other than D.F. King.
Banks, brokerage houses and other custodians, nominees and fiduciaries
will be requested to forward the proxy materials to the beneficial owners of
shares of common stock for which they hold of record and the MM Companies group
will reimburse them for their reasonable out-of-pocket expenses.
The expenses related directly to this Proxy Solicitation are expected to
aggregate approximately [$_________ ] and will be borne by the MM Companies
group. These expenses include fees and expenses for attorneys, proxy solicitors,
printing, postage, filing expenses and other costs incidental to the
solicitation. Of this estimated amount, approximately [$200,000] has been spent
to date. The actual costs and expenses could be materially different than the
estimated amounts and, in particular, could be substantially higher if for any
reason further litigation is instituted in connection with the matters related
to this Proxy Statement.
The purpose of the proposals in this Proxy Statement is to advance the
interests of all the Company's stockholders. Therefore, the MM Companies group
believes that its expenses related to this Proxy Solicitation should be borne by
the Company and it intends to seek reimbursement of such expenses from the
Company whether or not this Proxy Solicitation is successful. The question of
reimbursement of the expenses of the MM Companies group by the Company will not
be submitted to a stockholder vote.
If you have any questions about this Proxy Solicitation or voting your
shares or require assistance, please contact:
D.F. King & Co., Inc.
77 Water Street, 20th Floor
New York, New York 10005
Toll Free: (800) 431-9643
Banks and Brokers call collect: (212) 269-5550
OTHER MATTERS
This proxy solicitation is being made by the MM Companies group and not on
behalf of the board of directors or management of the Company. The MM Companies
group is not aware of any other matters to be brought before the Company's 2002
annual meeting, except as set forth herein. Should other matters be brought
before the 2002 annual meeting, by having signed and returned the enclosed WHITE
proxy card, you will have authorized the persons named as proxies in the
enclosed WHITE proxy card to vote on all such matters in their discretion.
37
The Company's filings with the SEC contains information regarding (1)
Alliance Entertainment; (2) the proposed merger with Alliance Entertainment; (3)
financial information regarding the Company and Alliance Entertainment; (4)
securities ownership of certain beneficial owners and management of the Company;
(5) the committees of the board of directors; (6) the meetings of the board of
directors and all committees thereof; (7) the business background and employment
biographies of the Company's nominees for election to the board of directors;
(8) the compensation and remuneration paid and payable to the Company's
directors and management; and (9) the Company's stock price performance in
relation to an assumed group of "peers" or market-based indices. The Company's
stockholders are referred to such filings for such information.
STOCKHOLDER PROPOSALS FOR 2003 ANNUAL MEETING
The Company's proxy statement with respect to the 2002 annual meeting
indicates that proposals of the Company's stockholders intended to be presented
at the Company's 2003 annual meeting must be received by the Company no later
than 120 days prior to the 2003 annual meeting in order for them to be
considered for inclusion in the Company's proxy statement. The Company's
stockholders are hereby referred to the Company's proxy statement in connection
with the 2002 annual meeting for such information.
If you have any questions, or if you require assistance, please contact
D.F. King at (800) 431-9643 or collect at (212) 269-5550
INFORMATION REGARDING THE COMPANY
The information concerning the Company contained in this Proxy Statement
has been taken from or is based upon documents and records on file with the SEC
and other publicly available information. The MM Companies group has no
knowledge that would indicate that statements relating to the Company contained
in this Proxy Statement in reliance upon publicly available information are
inaccurate or incomplete. The MM Companies group, however, has not been given
access to the books and records of the Company, was not involved in the
preparation of such information and statements, and is not in a position to
verify, or make any representation with respect to the accuracy or completeness
of, any such information or statements.
VOTING PROCEDURES
Who is entitled to vote?
If the Company's stock records show that you are a stockholder as of the
close of business on the record date for the 2002 annual meeting, you are
entitled to vote the shares of common stock that you held on such date. Even if
you sell your shares after the record date for the 2002 annual meeting, you will
retain the right to execute a proxy in connection with the 2002 annual meeting.
Each outstanding share of common stock entitles its holder to cast one vote for
each matter to be voted upon.
38
Can I attend the meeting?
All stockholders of record of the Company's common stock at the close of
business on August 12, 2002, the record date for the 2002 annual meeting, or
their designated proxies, are authorized to attend the 2002 annual meeting. If
your shares are held of record by a bank, broker or other nominee, you will need
to obtain a "legal proxy" form from your bank or broker if you wish to vote at
the 2002 annual meeting.
What constitutes a quorum?
The holders of a majority of the Company's common stock outstanding and
entitled to vote, present in person or represented by proxy, will constitute a
quorum at the 2002 annual meeting. Votes cast in person or by proxy at the 2002
annual meeting will be tabulated by the inspector of elections appointed for the
2002 annual meeting to determine whether or not a quorum is present. The
inspector of elections will treat abstentions as shares that are present and
entitled to vote for purposes of determining the presence of a quorum, but
abstentions will neither be counted as votes for, nor the withholding of
authority for, the election of directors, but will have the effect of a vote
against any other matter submitted to a vote of stockholders.
Shares held by nominees for beneficial owners will be counted for purposes
of determining whether a quorum is present if the nominee has the discretion to
vote on at least one of the matters presented at the 2002 annual meeting, even
if the nominee may not exercise discretionary voting power with respect to other
matters and voting instructions have not been received from the beneficial owner
(a "broker non-vote"). Broker non-votes will not be counted as votes for or
against any matter submitted to a vote of stockholders.
How do I vote?
Voting by proxy for holders of shares registered in the name of a
brokerage firm or bank. If your shares are held by a broker, bank or other
nominee (i.e., in "street name"), only your bank or broker can give a proxy with
respect to your shares. You should receive a proxy card from your bank or broker
which you must return in the envelope provided in order to have your shares
voted. If you have not received a proxy card from your bank or broker, you may
contact it directly to provide it with instructions on how you wish to vote. If
you need assistance in dealing with your bank or broker, please contact D.F.
King at (800) 431-9643 or collect at (212) 269-5550.
Voting by proxy for holders of shares registered directly in the name of
the stockholder. If you hold your shares in your own name as a holder of record,
you may vote your shares by marking, signing, dating and mailing the WHITE proxy
card in the postage-paid envelope that has been provided to you by the MM
Companies group. To vote your shares in accordance with your instructions at the
2002 annual meeting, we must receive your proxy as soon as possible but, in any
event, prior to the 2002 annual meeting.
Vote in person. If you are a registered stockholder and attend the 2002
annual meeting you may deliver your completed WHITE proxy card in person.
"Street name" stockholders who wish to vote at the 2002 annual meeting will need
to obtain a "legal proxy" form from the
39
broker, bank or other nominee that holds their shares of record and must bring
that document to the meeting in order to vote in person at the 2002 annual
meeting. If you need assistance, please contact D.F. King at (800) 431-9643 or
collect at (212) 269-5550.
What should I do if I receive a proxy card which is not WHITE?
If you submit a proxy to us by signing and returning the enclosed WHITE
proxy card, do NOT sign or return the proxy card or follow any voting
instructions provided by the Company's board of directors unless you intend to
change your vote, because only your latest-dated proxy will be counted.
Can I revoke my proxy instructions?
You may revoke your proxy at any time before it has been exercised by:
o submitting a written revocation with the Corporate Secretary
of the Company or D.F. King;
o submitting a duly executed proxy bearing a later date with the
Corporate Secretary of the Company or D.F. King; or
o appearing in person and voting by ballot at the 2002 annual
meeting as described above under "How do I vote? -- Vote in
Person."
Any stockholder of record as of the record date of the 2002 annual meeting
attending the 2002 annual meeting may vote in person whether or not a proxy has
been previously given, but the presence (without further action) of a
stockholder at the 2002 annual meeting will NOT constitute revocation of a
previously given proxy.
If you choose to revoke a proxy by giving written notice or a later-dated
proxy to the Corporate Secretary of the Company, we would appreciate if you
would assist us in representing the interests of stockholders on an informed
basis by sending us a copy of your revocation or proxy or by calling D.F. King,
at (800) 431-9643 or collect at (212) 269-5550. Remember, your latest-dated
proxy is the only one that counts.
Will other matters be voted on at the annual meeting?
We are not now aware of any matters to be presented at the 2002 annual
meeting other than the election of directors, the ratification of the
appointment of the Company's independent auditors, our proposals and possibly,
the merger related proposal. If any other matters not described in the proxy
statement are properly presented at the 2002 annual meeting, including matters
incidental to the conduct of the 2002 annual meeting, proxies will be voted in
accordance with the best judgment of the proxy holders.
40
If I plan to attend the annual meeting, should I still submit a proxy?
Whether you plan to attend the 2002 annual meeting or not, we urge you to
submit a proxy. Returning the enclosed WHITE proxy card will not affect your
right to attend the 2002 annual meeting.
How will my shares be voted?
If you give a proxy on the accompanying WHITE proxy card, your shares will
be voted as you direct. If you submit a proxy to us without instructions, our
representatives will vote your shares in favor of Proposal Nos. 1, 2, 3, 4 and 5
and against the Merger Related Proposal. Submitting a WHITE proxy card will
entitle our representatives to vote your shares in accordance with their
discretion on matters not described in this Proxy Statement that may arise at
the 2002 annual meeting, including matters incident to the conduct of the 2002
annual meeting. Unless a proxy specifies otherwise, it will be presumed to
relate to all shares held of record on the record date for the 2002 annual
meeting by the person who submitted it.
What happens if I vote against the merger related proposal and it is not
presented at the meeting?
The Company's management has indicated that it intends to submit to
stockholders a proposal to approve the issuance of the Company's shares in the
proposed merger with Alliance Entertainment. As described in this Proxy
Statement, we are opposed to this merger. At the time of mailing this Proxy
Statement, we do not know if the Company's management will present its merger
related proposal at the 2002 annual meeting or whether it intends to call a
special meeting for this purpose. Because of this uncertainty, we are asking
stockholders to give us a proxy to vote against the merger related proposal
should it be presented at the annual meeting.
If the merger related proposal is not presented at the 2002 annual meeting
but is presented at a later special meeting of stockholders, the proxy that you
give to us to vote on this proposal at the annual meeting will have no effect on
your ability to vote on the proposal at the special meeting.
41
How can I receive more information?
If you have any questions about giving your proxy or about our
solicitation, or if you require assistance, please call D.F. King at (800)
431-9643 or collect at (212) 269-5550.
--------------------------------------
Your vote is important. No matter how many or how few shares you own, please
vote (i) to amend the Restated By-laws to set the number of directors at nine or
eleven, as described above, (ii) to authorize stockholders to fill vacancies on
the board of directors and newly created directorships, (iii) to elect the MM
Companies group nominees and (iv) against the issuance of stock in connection
with the proposed merger with Alliance Entertainment by marking, signing, dating
and mailing the enclosed WHITE proxy card promptly.
THE MM COMPANIES, INC. GROUP
__________________, 2002
42
SCHEDULE I
Directors and Officers of MM Companies, Inc.
Name and Position Principal Occupation Principal Business Address
----------------- -------------------- --------------------------
James Mitarotonda, Chairman and Chief c/o Barington Capital Group,
President, Chief Executive Officer, L.P.
Executive Officer and Barington Capital 888 Seventh Avenue, 17th
Director Group, L.P. Floor
New York, New York 10019
Jesse Choper, Professor of Public Univ. of California Law
Director Law, University of School
California at Berkeley Boalt Hall
School of Law Berkeley, California 94720
Seymour Holtzman, Chairman and Chief 100 North Wilkes Barre Blvd.
Chairman Executive Officer, Wilkes Barre, Pennsylvania
Jewelcor Management, 18702
Inc.
Devarajan S. Puthukarai, Former Chief Executive MM Companies, Inc.
Director Officer, President and c/o Barington Capital Group,
Chief Operating L.P.
Officer, 888 Seventh Avenue, 17th
musicmaker.com, Inc. Floor
New York, New York 10019
William Scranton III, Head of Scranton 201 Penn Avenue
Director Family Office PNE Bank Building
Scranton, PA 18503
Irwin Steinberg, Former Vice Chairman, MM Companies, Inc.
Director musicmaker.com, Inc. c/o Barington Capital Group,
L.P.
888 Seventh Avenue, 17th
Floor
New York, New York 10019
Joseph Wright, Jr., President & Chief c/o PanAmSat Corp.
Director Executive Officer, 20 Westport Road
PanAmSat Corp. Wilton, Connecticut 06897
Melvyn Brunt, Chief Financial c/o Barington Capital Group,
Chief Financial Officer Officer, L.P.
Barington Capital 888 Seventh Avenue, 17th
Group, L.P. Floor
New York, New York 10019
43
SCHEDULE II
Directors and Officers of Jewelcor Management, Inc.
Name and Position Principal Occupation Principal Business Address
----------------- -------------------- --------------------------
Seymour Holtzman, Chairman, Chief 100 North Wilkes Barre Blvd.
Chairman, Chief Executive Officer, Wilkes Barre, Pennsylvania
Executive Officer, President Jewelcor 18702
President Management, Inc.
Joseph F. Litchman, Vice 100 North Wilkes Barre Blvd.
Director, Vice President/Treasurer Wilkes Barre, Pennsylvania
President/Treasurer 18702
Maria Sciandra, Corporate Secretary 100 North Wilkes Barre Blvd.
Corporate Secretary, Wilkes Barre, Pennsylvania
Director 18702
44
ANNEX A
TRANSACTIONS IN COMMON STOCK
The following table sets forth information with respect to all purchases
of common stock of the Company by the MM Companies group during the past two
years. Except as set forth below, to the knowledge of the MM Companies group, no
participant in this solicitation or MM Companies group nominee has purchased or
sold securities of the Company within the past two years.
Transaction Number Price
Name Date Type of Shares Per Share
------------------------------------ ------- ----------- --------- ---------
MM Companies 8/14/01 Purchase 2,000 $2.25*
MM Companies 8/15/01 Purchase 100,000 $2.33*
MM Companies 8/16/01 Purchase 5,000 $2.30*
MM Companies 8/21/01 Purchase 10,000 $2.30*
MM Companies 8/27/01 Purchase 20,000 $2.33*
MM Companies 8/28/01 Purchase 15,000 $2.38*
MM Companies 8/28/01 Purchase 5,000 $2.28*
MM Companies 9/4/01 Purchase 12,000 $2.37*
MM Companies 9/5/01 Purchase 2,500 $2.31*
MM Companies 9/5/01 Purchase 1,000 $2.32*
MM Companies 9/6/01 Purchase 10,000 $2.33*
MM Companies 9/17/01 Purchase 7,000 $2.14*
MM Companies 9/17/01 Purchase 5,000 $2.06*
MM Companies 9/18/01 Purchase 10,000 $2.135*
MM Companies 9/19/01 Purchase 10,000 $2.197*
MM Companies 9/20/01 Purchase 10,000 $2.18*
MM Companies 9/21/01 Purchase 6,500 $2.07*
MM Companies 9/24/01 Purchase 25,000 $2.12*
MM Companies 9/24/01 Purchase 10,000 $2.10*
MM Companies 9/25/01 Purchase 50,000 $2.048*
MM Companies 9/26/01 Purchase 25,000 $2.035*
MM Companies 9/27/01 Purchase 30,000 $2.052*
MM Companies 9/28/01 Purchase 27,500 $2.07*
45
MM Companies 10/1/01 Purchase 30,000 $2.075*
MM Companies 10/4/01 Purchase 30,000 $2.13*
MM Companies 10/5/01 Purchase 50,000 $2.135*
MM Companies 10/5/01 Purchase 7,000 $2.13*
MM Companies 11/16/01 Purchase 25,000 $2.34*
MM Companies 11/21/01 Purchase 5,000 $2.35*
MM Companies 11/30/01 Purchase 3,600 $2.32*
MM Companies 12/14/01 Purchase 3,000 $2.31*
MM Companies 12/17/01 Purchase 50,000 $2.33*
MM Companies 12/18/01 Purchase 25,000 $2.34*
MM Companies 12/28/01 Purchase 5,000 $2.31*
MM Companies 12/28/01 Purchase 2,900 $2.31*
MM Companies 12/28/01 Purchase 5,000 $2.31*
MM Companies 12/31/01 Purchase 3,200 $2.30*
MM Companies 2/25/02 Purchase 1,500 $2.22*
MM Companies 2/27/02 Purchase 2,000 $2.23*
MM Companies 2/27/02 Purchase 2,000 $2.21*
MM Companies 2/27/02 Purchase 3,800 $2.24*
MM Companies 2/27/02 Purchase 2,000 $2.24*
MM Companies 2/28/02 Purchase 1,200 $2.21*
MM Companies 3/5/02 Purchase 200 $2.25*
Jewelcor Management, Inc. 8/16/01 Purchase 10,000 $2.30*
Jewelcor Management, Inc. 8/16/01 Purchase 50,000 $2.32*
Jewelcor Management, Inc. 8/20/01 Purchase 20,000 $2.30*
Jewelcor Management, Inc. 8/21/01 Purchase 20,000 $2.30*
Jewelcor Management, Inc. 8/22/01 Purchase 12,500 $2.29*
Jewelcor Management, Inc. 8/23/01 Purchase 13,000 $2.30*
Jewelcor Management, Inc. 8/24/01 Purchase 10,000 $2.312*
Jewelcor Management, Inc. 8/27/01 Purchase 25,000 $2.33*
Jewelcor Management, Inc. 9/7/01 Purchase 10,000 $2.316*
Jewelcor Management, Inc. 9/17/01 Purchase 3,000 $2.03*
46
Jewelcor Management, Inc. 9/17/01 Purchase 7,000 $2.14*
Jewelcor Management, Inc. 9/18/01 Purchase 20,000 $2.135*
Jewelcor Management, Inc. 9/19/01 Purchase 12,000 $2.197*
Jewelcor Management, Inc. 9/20/01 Purchase 10,500 $2.18*
Jewelcor Management, Inc. 9/25/01 Purchase 75,000 $2.048*
Jewelcor Management, Inc. 9/26/01 Purchase 25,000 $2.035*
Jewelcor Management, Inc. 9/27/01 Purchase 40,000 $2.052*
Jewelcor Management, Inc. 9/28/01 Purchase 10,000 $2.07*
Jewelcor Management, Inc. 10/1/01 Purchase 27,500 $2.0752*
Jewelcor Management, Inc. 10/4/01 Purchase 50,000 $2.13*
Jewelcor Management, Inc. 10/5/01 Purchase 25,000 $2.13*
Barington Companies Equity Partners, L.P. 8/16/01 Purchase 50,000 $2.32*
Barington Companies Equity Partners, L.P. 8/16/01 Purchase 10,000 $2.30*
Barington Companies Equity Partners, L.P. 8/20/01 Purchase 15,000 $2.30*
Barington Companies Equity Partners, L.P. 8/20/01 Purchase 2,000 $2.30*
Barington Companies Equity Partners, L.P. 8/21/01 Purchase 20,000 $2.30*
Barington Companies Equity Partners, L.P. 8/22/01 Purchase 12,500 $2.29*
Barington Companies Equity Partners, L.P. 8/23/01 Purchase 10,000 $2.30*
Barington Companies Equity Partners, L.P. 8/24/01 Purchase 7,500 $2.312*
Barington Companies Equity Partners, L.P. 8/27/01 Purchase 15,000 $2.33*
Barington Companies Equity Partners, L.P. 8/29/01 Purchase 1,500 $2.31*
Barington Companies Equity Partners, L.P. 9/6/01 Purchase 5,000 $2.30*
Barington Companies Equity Partners, L.P. 9/7/01 Purchase 10,000 $2.316*
Barington Companies Equity Partners, L.P. 9/10/01 Purchase 2,500 $2.25*
Barington Companies Equity Partners, L.P. 9/17/01 Purchase 5,000 $2.01*
Barington Companies Equity Partners, L.P. 9/18/01 Purchase 20,000 $2.135*
Barington Companies Equity Partners, L.P. 9/19/01 Purchase 14,000 $2.197*
Barington Companies Equity Partners, L.P. 9/25/01 Purchase 25,000 $2.048*
Barington Companies Equity Partners, L.P. 9/26/01 Purchase 25,000 $2.035*
Barington Companies Equity Partners, L.P. 9/27/01 Purchase 30,000 $2.052*
Barington Companies Equity Partners, L.P. 9/28/01 Purchase 10,000 $2.07*
47
Barington Companies Equity Partners, L.P. 10/1/01 Purchase 10,000 $2.075*
Barington Companies Equity Partners, L.P. 10/4/01 Purchase 14,200 $2.11*
Barington Companies Equity Partners, L.P. 10/4/01 Purchase 20,000 $2.13*
Barington Companies Equity Partners, L.P. 10/5/01 Purchase 2,000 $2.12*
Barington Companies Equity Partners, L.P. 10/5/01 Purchase 3,000 $2.12*
Ramius Securities, LLC 8/20/01 Purchase 15,000 $2.30*
Ramius Securities, LLC 8/21/01 Purchase 20,000 $2.30*
Ramius Securities, LLC 8/23/01 Purchase 10,000 $2.30*
Ramius Securities, LLC 8/24/01 Purchase 7,500 $2.312*
Ramius Securities, LLC 8/27/01 Purchase 15,000 $2.33*
Ramius Securities, LLC 9/6/01 Purchase 10,000 $2.33*
Ramius Securities, LLC 9/7/01 Purchase 12,000 $2.316*
Domrose Sons Partnership 9/27/01 Purchase 8,000 $2.04*
* Excludes commissions and execution related costs
48
ANNEX B
OWNERSHIP OF COMMON STOCK
Each share of common stock is entitled to one vote on each of the
proposals and the common stock is the only class of securities of the Company
entitled to vote on the proposals. According to the Company's proxy materials
filed with the SEC on August 28, 2002, as of August 12, 2002 there were
22,745,624 shares of common stock outstanding.
The following table sets forth the share ownership of all persons who, to
the knowledge of the MM Companies group, beneficially own more than 5% of the
outstanding shares of common stock as of the date of this Proxy Statement. The
information with respect to each stockholder, other than the MM Companies group,
The K2 Arbitrage Fund L.P. and JMB Capital Partners, L.P., is derived from the
proxy materials filed by the Company with the SEC on August 28, 2002. The
information with respect to The K2 Arbitrage Fund L.P. is derived from the
Schedule 13D filed on behalf of such entity with the SEC on August 28, 2002. The
information with respect to JMB Capital Partners, L.P. is derived from the
Schedule 13D filed on behalf of such entity with the SEC on July 23, 2002.
Number of Shares Percentage
Stockholder Beneficially Owned Ownership
(1)
----------------------------- --------------------- ---------------
Steel Partners II, L.P. 2,062,866 9.1%
The MM Companies group 1,568,100 6.9%
Coghill Capital Management 1,516,988 6.7%
The K2 Arbitrage Fund L.P. 1,266,300 5.6%
JMB Capital Partners, L.P. 1,163,800 5.1%
----------------------
(1) Beneficial ownership is determined in accordance with the rules of the SEC
and generally includes voting or investment power with respect to
securities. Shares of common stock subject to stock options and warrants
currently exercisable or exercisable within 60 days are deemed outstanding
for purposes of computing the percentage ownership of the person holding
the options and the percentage ownership of any group of which the holder
is a member, but are not deemed outstanding for computing the percentage
ownership of any other person. Subject to community property laws where
applicable, to the knowledge of the MM Companies group, the persons named
in the table have sole voting and investment power with respect to all
shares of common stock shown as beneficially owned by them.
49
ANNEX C
FORM OF PROXY SOLICITED ON BEHALF OF
THE MM COMPANIES, INC. GROUP
The undersigned stockholder of Liquid Audio, Inc., a Delaware corporation
(the "Company"), on August 12, 2002 (the "record date"), hereby appoints James
A. Mitarotonda or Seymour Holtzman or either of them, each with full power of
substitution to act as proxies for the undersigned, and to vote all shares of
common stock, par value $.001 per share, of the Company, which the undersigned
would be entitled to vote if personally present at the 2002 Annual Meeting of
Stockholders of the Company to be held on September 26, 2002, and at any and all
postponements and adjournments thereof as indicated on this proxy.
IF YOU SIGN, DATE AND RETURN THIS CARD WITHOUT INDICATING YOUR VOTE ON ONE
OR MORE OF THE FOLLOWING PROPOSALS, YOU WILL BE DEEMED TO HAVE VOTED IN FAVOR OF
PROPOSAL NOS. 1, 2, 3,4, AND 5 AND AGAINST THE MERGER RELATED PROPOSAL. IF YOU
VOTE OR ABSTAIN WITH RESPECT TO ONE OR MORE OF THE FOLLOWING PROPOSALS, THIS
PROXY CARD WILL REVOKE ANY PREVIOUSLY EXECUTED REVOCATION OF PROXY WITH RESPECT
TO SUCH PROPOSALS.
[X] PLEASE MARK VOTES AS IN THIS EXAMPLE.
THE MM COMPANIES GROUP STRONGLY RECOMMENDS THAT STOCKHOLDERS VOTE IN
FAVOR OF PROPOSAL NOS. 1, 2, 3, 4 AND 5 AND VOTE AGAINST MERGER RELATED
PROPOSAL.
Proposal No. 1 -- Election of Seymour Holtzman and James A.
Mitarotonda as Class III directors
FOR [ ] AGAINST [ ] ABSTAIN [ ]
(Instruction: If you wish to vote for the election of one of the nominees,
but not both of them, check the "FOR" box above and write the name of the person
you do not wish elected in the following
space:________________________________________. If no box is marked above with
respect to this Proposal, the undersigned will be deemed to vote for such
Proposal, except that the undersigned will not be deemed to vote for the
election of any candidate whose name is written in the space provided above.)
Proposal No. 2 -- Ratification of Appointment of PricewaterhouseCoopers
LLP as Independent Accountants
FOR [ ] AGAINST [ ] ABSTAINS [ ]
Proposal No. 3 -- Increase the Size of the Board of Directors by Four
Directors
FOR [ ] AGAINST [ ] ABSTAINS [ ]
50
Proposal No. 4-- Authorize Only Stockholders to Fill Board Vacancies
and Newly Created Directorships
FOR [ ] AGAINST [ ] ABSTAINS [ ]
Proposal No. 5-- Election of Jesse H. Choper and William J. Fox as
Class I directors, Thomas E. Constance as a Class II director and Joseph R.
Wright, Jr. as a Class III director, contingent upon the approval of Proposal
4 and Proposal 5.
FOR [ ] AGAINST [ ] ABSTAINS [ ]
Merger Related Proposal (if presented at the 2002 annual meeting) --
Authorize Issuance of Stock in Merger with Alliance Entertainment Corp.
FOR [ ] AGAINST [ ] ABSTAINS [ ]
(Instruction: If you wish to vote for the election of certain of the
nominees, but not all of them, check the "FOR" box above and write the name of
each such person you do not wish elected in the following
space:________________________________________. If no box is marked above with
respect to this Proposal, the undersigned will be deemed to vote for such
Proposal, except that the undersigned will not be deemed to vote for the
election of any candidate whose name is written in the space provided above.)
And in the discretion of the proxies appointed hereunder, on such other
business as may properly come before the meeting.
IMPORTANT: THIS PROXY MUST BE SIGNED AND DATED TO BE VALID.
Dated:
---------------------------
---------------------------
Signature:
---------------------------
Signature (if held jointly):
---------------------------
Title or Authority
Please sign exactly as name appears hereon. If shares are registered in more
than one name, the signature of all such persons should be provided. A
corporation should sign in its full corporate name by a duly authorized officer,
stating his or her title. Trustees, guardians, executors and administrators
should sign in their official capacity, giving their full title as such. If a
51
partnership, please sign in the partnership name by an authorized person. The
proxy card votes all shares in all capacities.
PLEASE MARK, SIGN AND DATE THIS PROXY BEFORE MAILING THE PROXY IN THE ENCLOSED
ENVELOPE.
If you have any questions or need assistance in voting your shares,
please contact D.F. King & Co., Inc. toll-free at 1-800-431-9643 or if you
are a bank or broker please call collect at 1-212-269-5550.
52