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:
[ ] Preliminary Proxy Statement.
[ ] Confidential, for Use of the Commission Only (as permitted by
Rule 14a-6(e)(2)).
[X ] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Under Rule 14a-12.
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LIQUID AUDIO, INC.
(Name of Registrant as Specified in Its Charter)
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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)
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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:
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(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:
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(4) Date Filed:
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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 would make 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.
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
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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.
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.
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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 September 6, 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. 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.
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The Failure of the Current Business Plan
Since its inception in 1996, the Company has depleted $108 million of
the $189 million that it has raised. The Company has accumulated a deficit of
$121 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
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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
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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, the current board, we believe, 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 four
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.
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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 on August
12, 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;
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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.
Our nominees have no specific plans for the Company to engage in an acquisition,
sale of assets or other extraordinary transaction.
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 merger 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.
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The merger proposal is not presented at the 2002 annual meeting
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Our elected nominees constitute a Our elected nominees constitute a
minority of the board majority of the board
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Our nominees will continue to oppose the merger Our nominees will seek to terminate the merger
and seek to carry out our platform. agreement with Alliance Entertainment, consistent
with the Company's legal rights and obligations,
and to carry out our platform.*
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*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 such 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 terminate
approved by stockholders carry out our platform. the merger agreement and
carry out our platform.
------------------------------- ------------------------------- ------------------------------
Contrary to our recommendation, Our nominees will abide by Our nominees will abide by
the merger proposal is the decision of stockholders the decision of stockholders
approved by stockholders and drop opposition to the and carry out the merger.
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:
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
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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. Approval of this proposal would require the
affirmative vote of a majority of the outstanding shares of Liquid Audio stock
voting on the proposal at the meeting. 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.
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.
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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.
(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,
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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.
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
12
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 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.
13
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.
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
14
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 (excluding 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. Notwithstanding the fact that MM Companies has purchased gold and
"investment securities" held by MM Companies no longer exceed 40% of its total
assets (excluding cash and government securities), MM Companies may be deemed to
be an investment company under Section 3(a)(1)(A) of the Investment Company Act.
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
15
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. 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
16
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 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.
17
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 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.
18
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 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
19
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.
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
20
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.
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
21
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 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
22
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.
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.
23
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.
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.
24
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 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.
25
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 was set for
September 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
26
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 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 By-laws 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
27
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 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
28
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.
On August 29, 2002, the Company issued a press release relating to the
lawsuit filed by MM Companies against Liquid Audio and its board of directors on
August 26, 2002 in the Court of Chancery in the State of Delaware.
In response to such press release, on September 4, 2002 MM Companies
issued the following press release:
Court Grants MM Companies, Inc. Motion for Expedited Proceeding
NEW YORK, Sept. 4 -- MM Companies, Inc. (OTC Bulletin Board: MMCO) believes that
the August 29, 2002 press release by Liquid Audio, Inc.'s management incorrectly
describes action taken by the Delaware court in MM Companies' pending
litigation, and is misleading to shareholders.
On August 26, 2002, MM Companies went to Delaware court to protect the franchise
of Liquid Audio, Inc.'s public shareholders by challenging management's attempt
to expand the size of the board of directors on the eve of the long-delayed
annual shareholders meeting. MM Companies believes that management's last-minute
attempt to add two new directors, who will not be subject to a shareholder vote
at the meeting, is a further effort to disadvantage MM Companies' proxy contest
and impede shareholder democracy, and MM Companies has sued to invalidate
management's actions.
Management's August 29 press release inaccurately suggested that the court had
denied a motion by MM Companies for a hearing in this matter. That is not the
case.
In fact, the court granted MM Companies' request for an expedited hearing in MM
Companies' lawsuit. And, while the court's schedule did not permit a hearing to
occur prior to the September 26, 2002 meeting date, the court indicated that
there is a question as to the legality of management's conduct, and scheduled a
trial to be held on October 21, 2002 (the earliest date that the court had
available) to determine whether management's purported expansion of the size of
the board of directors should be invalidated.
On September 5, 2002, a hearing was held in the United States District
Court for the Southern District of New York with respect to the Company's
pending motion filed in connection with the action instituted by the Company
against MM Companies and Steel Partners II, L.P. At the conclusion of the
hearing, the Court reserved decision on the Company's motion.
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.
29
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 Professor
University of California at Berkeley of Public Law at the University of California
School of Law at Berkeley School of Law since 1965.
Berkeley, California 94720 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 Chief
c/o Arcade Marketing Inc. Executive Officer of Arcade Marketing Inc., a
120 East 56th Street company which specializes in consumer product
Suite 1200 multi-sensory marketing sample systems and
New York, New York 10022 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 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
30
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 retail
100 North Wilkes Barre Blvd. business for over 30 years. For many years
4th Floor he has been the President and Chief Executive
Wilkes Barre, Pennsylvania 18702 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 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 Board,
c/o Barington Capital Group, L.P. President and Chief Executive Officer of
888 Seventh Avenue Barington Capital Group, L.P., an investment
17th Floor firm which he co-founded in November 1991.
New York, New York 10019 Mr. Mitarotonda is also President and Chief
Executive Officer of Barington Companies
Investors, LLC, the general partner of
31
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-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 Executive
c/o PanAmSat Corp. Officer of PanAmSat Corp. (NASDAQ:SPOT), a
20 Westport Road public company that provides global video and
Wilton, Connecticut 06897 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
32
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 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 firm of
Chairman Kramer Levin Naftalis & Frankel LLP in New
Kramer Levin Naftalis & Frankel LLP York City. Prior to joining Kramer Levin,
919 Third Avenue Mr. Constance was formerly Chairman of Shea &
33
New York, New York 10022 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, Inc. and Siga Technologies,
Inc. and a member of the advisory board of
Barington Companies Equity Partners, L.P.
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:
MM Companies group Nominee Number of Shares Percentage
Beneficially Owned (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.
34
(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 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.
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.
35
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 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
36
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 $20,000 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 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, including
litigation expenses (see "Background Of And Reasons For The Proxy
Solicitation"), are expected to aggregate approximately $700,000 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 $600,000
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
37
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.
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 this 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.
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? How will abstentions and broker non-votes be counted?
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 our two nominees (Proposal No. 1), but will have
the effect of a vote against all other matters 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, nor the withholding of authority for, the election of our two
nominees (Proposal No. 1), the ratification of accountants (Proposal No.2), or,
if submitted at the meeting, the proposal to issue shares to Alliance
Entertainment stockholders in the merger (the Merger Related Proposal), but will
have the effect of a vote against all other matters 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.
39
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 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.
40
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.
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 of 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 2002 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
September 6, 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, L.P.
President, Chief Executive Executive Officer, 888 Seventh Avenue, 17th Floor
Officer and Director Barington Capital Group, New York, New York 10019
L.P.
Jesse Choper, Professor of Public Law, Univ. of California Law School
Director University of California Boalt Hall
at Berkeley School of Law Berkeley, California 94720
Seymour Holtzman, Chairman and Chief 100 North Wilkes Barre Blvd.
Chairman Executive Officer, Wilkes Barre, Pennsylvania 18702
Jewelcor Management, Inc.
Devarajan S. Puthukarai, Former Chief Executive MM Companies, Inc.
Director Officer, President and c/o Barington Capital Group, L.P.
Chief Operating Officer, 888 Seventh Avenue, 17th Floor
musicmaker.com, Inc. New York, New York 10019
William Scranton III, Head of Scranton Family 201 Penn Avenue
Director 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 Officer, c/o Barington Capital Group, L.P.
Chief Financial Officer Barington Capital Group, 888 Seventh Avenue, 17th Floor
L.P. 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 Executive 100 North Wilkes Barre Blvd.
Chairman, Chief Executive Officer, President Wilkes Barre, Pennsylvania 18702
Officer, President Jewelcor Management, Inc.
Joseph F. Litchman, Director, Vice President/Treasurer 100 North Wilkes Barre Blvd.
Vice President/Treasurer Wilkes Barre, Pennsylvania 18702
Maria Sciandra, Corporate Corporate Secretary 100 North Wilkes Barre Blvd.
Secretary, Director Wilkes Barre, Pennsylvania 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 of Price Per
Name Date Type Shares 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,
Steel Partners II, L.P., 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 Steel Partners II, L.P. is
derived from the Schedule 13D,as amended, filed on behalf of such entity with
the SEC on August 9, 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 (1) Ownership
---------------------------- ---------------------- ----------
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.
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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 THE 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 [ ]
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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 No. 3 and
Proposal No. 4.
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, write the name of each
such person you do not wish elected in the following space and indicate whether
you are abstaining or voting against such
person:________________________________________. 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.)
Merger Related Proposal (if presented at the 2002 annual meeting) --
Authorize Issuance of Stock in Merger with Alliance Entertainment Corp.
FOR [ ] AGAINST [ ] ABSTAINS [ ]
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
51
administrators should sign in their official capacity, giving their full title
as such. If a 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.
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