SCHEDULE 14A
(RULE 14a-101)
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE
SECURITIES EXCHANGE ACT OF 1934
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[X] Preliminary Proxy Statement
[ ] Definitive Proxy Statement
[ ] Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to sec.240.14a-11(c) or sec.240.14a-12
Liquid Audio, Inc.
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(Name of Registrant as Specified In Its Charter)
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(Name of Person(s) Filing Proxy Statement, if Other Than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
(1) Title of each class of securities to which transaction applies:
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(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):
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[ ] 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.
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[LIQUID AUDIO LOGO]
LIQUID AUDIO, INC.
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
SEPTEMBER [ ], 2002
TO THE STOCKHOLDERS:
NOTICE IS HEREBY GIVEN that the Annual Meeting of Stockholders of Liquid
Audio, Inc., a Delaware corporation, will be held on Thursday, September 26,
2002 at 10:00 a.m., local time, at Hotel Sofitel, 223 Twin Dolphin Drive,
Redwood City, California 94065, for the following purposes:
1. To elect two (2) Class III directors for a term of three (3) years
or until their successors are duly elected and qualified;
2. To ratify the appointment by our Board of Directors of
PricewaterhouseCoopers LLP as our independent accountants for the fiscal
year ending December 31, 2002; and
3. If properly presented at the Annual Meeting, to vote on three
proposals of a stockholder of Liquid Audio:
- To amend Liquid Audio's By-laws to expand the size of the Board of
Directors;
- To amend Liquid Audio's By-laws to authorize only stockholders to fill
newly created directorships; and
- Contingent on approval of the above two proposals, to elect four (4)
additional nominees to the Board of Directors.
4. To transact such other business as may properly come before the
meeting or any adjournment thereof.
The foregoing items of business are more fully described in the Proxy
Statement accompanying this Notice.
Only stockholders of record at the close of business on August 12, 2002 are
entitled to notice of and to vote at the Annual Meeting.
By order of the Board of Directors of
Liquid Audio, Inc.
ROBERT G. FLYNN
Secretary
Redwood City, California
September [ ], 2002
THIS ANNUAL MEETING IS OF PARTICULAR IMPORTANCE TO ALL STOCKHOLDERS OF LIQUID
AUDIO IN LIGHT OF THE ATTEMPT BY THE MM COMPANIES, INC. GROUP TO TAKE CONTROL OF
YOUR BOARD OF DIRECTORS WITH A SLATE OF DIRECTOR NOMINEES DOMINATED BY THEIR
AFFILIATES. WHETHER OR NOT YOU EXPECT TO ATTEND, YOU ARE REQUESTED TO VOTE YOUR
SHARES BY SIGNING, DATING AND RETURNING THE ENCLOSED GREEN FORM OF PROXY IN THE
ENVELOPE PROVIDED, WHICH IS POSTAGE PAID IF MAILED IN THE UNITED STATES.
THE BOARD OF DIRECTORS ALSO URGES YOU NOT TO SIGN ANY PROXY CARDS SENT TO YOU BY
THE MM COMPANIES, INC. GROUP. EVEN IF YOU HAVE PREVIOUSLY SIGNED THE WHITE PROXY
CARD SENT TO YOU BY THE MM COMPANIES, INC. GROUP, YOU CAN REVOKE IT BY SIGNING,
DATING AND MAILING THE ENCLOSED GREEN PROXY CARD IN THE ENVELOPE PROVIDED.
LIQUID AUDIO, INC.
800 CHESAPEAKE DRIVE
REDWOOD CITY, CALIFORNIA 94063
TEL: (650) 549-2000
PROXY STATEMENT
FOR 2002 ANNUAL MEETING OF STOCKHOLDERS
INFORMATION CONCERNING SOLICITATION AND VOTING
GENERAL
The enclosed proxy is solicited on behalf of the board of directors (the
"Board") of Liquid Audio, Inc., a Delaware corporation (the "Company" or "Liquid
Audio"), for use at our Annual Meeting of Stockholders to be held on Thursday,
September 26, 2002 at 10:00 a.m., or at any adjournment thereof (the "Annual
Meeting"), for the purposes set forth herein and in the accompanying Notice of
Annual Meeting of Stockholders. Our Annual Meeting will be held at Hotel
Sofitel, 223 Twin Dolphin Drive, Redwood City, California 94065. The telephone
number at that location is (650) 598-9000.
These proxy solicitation materials and the Annual Report on Form 10-K for
the year ended December 31, 2001, including financial statements, were first
mailed on or about September [ ], 2002 to all stockholders entitled to vote
at the Annual Meeting.
WE SHALL PROVIDE WITHOUT CHARGE TO EACH STOCKHOLDER SOLICITED BY THESE
PROXY SOLICITATION MATERIALS A COPY OF THE ANNUAL REPORT ON FORM 10-K TOGETHER
WITH THE FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES REQUIRED TO BE
FILED WITH THE ANNUAL REPORT UPON REQUEST OF THE STOCKHOLDER MADE IN WRITING TO
LIQUID AUDIO, INC., 800 CHESAPEAKE DRIVE, REDWOOD CITY, CALIFORNIA 94063, ATTN:
SECRETARY.
PURPOSE OF THE MEETING
At the Annual Meeting, stockholders will consider and vote upon the
election of two (2) Class III directors to hold office for three (3) years. THE
BOARD HAS NOMINATED GERALD W. KEARBY AND RAYMOND A. DOIG (TOGETHER, THE "LIQUID
NOMINEES") TO SERVE AS CLASS III DIRECTORS.
As you may know, MM Companies, Inc., a Delaware corporation ("MMC",
formerly musicmaker.com, Inc.), Jewelcor Management, Inc., a Nevada corporation,
Barington Companies Equity Partners, L.P., a Delaware limited partnership,
Ramius Securities, LLC, a Delaware limited liability company, and Domrose Sons
Partnership, a New York partnership (collectively, the "MMC group"), have
commenced a proxy solicitation to take control of your Board by nominating their
own two (2) Class III directors, proposing to increase the size of the Board
from seven (7) to eleven (11), authorizing stockholders only to fill Board
vacancies and newly created directorships and electing, contingent on their
other proposals being approved, four (4) additional nominees to serve as
directors .
YOUR BOARD STRONGLY URGES YOU NOT TO RETURN ANY WHITE PROXY CARD SENT TO
YOU BY THE MMC GROUP. THE BEST WAY TO SUPPORT THE LIQUID NOMINEES AND THE
BOARD'S DETERMINATIONS IS TO VOTE "FOR" THE LIQUID NOMINEES ON THE GREEN PROXY
CARD.
WHY YOU SHOULD VOTE FOR THE LIQUID NOMINEES
The Board has unanimously concluded that the MMC proposals are not in the
best interests of Liquid Audio and its stockholders. ACCORDINGLY, THE BOARD
UNANIMOUSLY RECOMMENDS A VOTE "FOR" THE LIQUID NOMINEES. Set forth below are the
principal reasons to vote "FOR" the Liquid Nominees.
- The current Board has created a merger transaction that gives
stockholders the opportunity to participate in Liquid Audio's $30 million
self-tender offer.
- Liquid Audio's current slate of directors, Raymond A. Doig and Gerald W.
Kearby, should be re-elected to the Board. Their collective experience in
the entertainment and technology industries makes them best suited to
realize the strategic and financial worth of the Company's assets in
order to maximize long-term stockholder value. Mr. Doig offers a wealth
of experience in the entertainment field having served as president of
20th Century Fox and on the board of directors of many well-established
companies such as Coca-Cola Bottling of the Midwest and Act III Theaters.
Mr. Kearby has an intimate understanding of Liquid Audio's technology and
operations having served as Chairman of the Board, CEO and President
since the Company's inception in 1996. Mr. Doig and Mr. Kearby have been
active in providing corporate guidance and are the best candidates to
represent Liquid Audio's stockholders.
- Under the current Board, Liquid Audio has created and implemented a
concrete plan to effectively reduce operating expenses and enhance
stockholder value. Liquid Audio has aggressively reduced its operating
expenses from $13.4 million in the first quarter of 2001 to $5.6 million
in the second quarter of 2002, and reduced the net loss per share from
$0.50 per share in the first quarter of 2001 to $0.25 per share in the
second quarter of 2002. This was well in advance of the general market
downturn and represents management's strong desire to conserve its cash
in preparation of a longer-term growth horizon for digital entertainment.
Liquid Audio signed key distribution deals with four out of the five
major record labels, including Universal, the largest record company in
the world. In addition, Liquid Audio teamed with EMI to launch the
industry's first full-ownership, digital music subscription service.
These recent developments are signs of momentum that offer some evidence
of the long-term viability of the digital music industry.
GIVEN THESE REASONS, YOUR BOARD STRONGLY RECOMMENDS THAT YOU SUPPORT THE
LIQUID NOMINEES, WHO THE BOARD BELIEVES ARE HIGHLY QUALIFIED, BY VOTING "FOR"
THE LIQUID NOMINEES ON THE ENCLOSED GREEN PROXY CARD.
YOUR BOARD URGES YOU NOT TO RETURN ANY WHITE PROXY CARD SENT TO YOU BY THE
MMC GROUP. THE BEST WAY TO SUPPORT THE LIQUID NOMINEES AND THE BOARD'S
DETERMINATIONS IS TO VOTE "FOR" THE LIQUID NOMINEES ON THE GREEN PROXY CARD.
YOUR VOTE IS IMPORTANT, REGARDLESS OF HOW MANY SHARES YOU OWN. PLEASE SIGN
AND DATE THE ACCOMPANYING GREEN PROXY CARD AND MAIL IT IN THE ENCLOSED
SELF-ADDRESSED ENVELOPE AS PROMPTLY AS POSSIBLE, WHETHER OR NOT YOU EXPECT TO
ATTEND THE ANNUAL MEETING.
RECORD DATE; OUTSTANDING SHARES
Stockholders of record at the close of business on August 12, 2002 are
entitled to notice of and to vote at the Annual Meeting. We have one series of
voting shares outstanding, designated common stock, $0.001 par value. As of
August 12, 2002, 22,745,624 shares of our common stock were issued and
outstanding. Each holder of shares of common stock is entitled to one (1) vote
on each proposal presented in this Proxy Statement for each share of stock held.
The closing price of our common stock on September , 2002, as reported by
Nasdaq, was $[ ] per share.
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QUORUM; ABSTENTIONS; BROKER NON-VOTES
A majority of the shares of Liquid Audio common stock issued and
outstanding on the record date, present in person or represented by proxy,
constitutes the required quorum for the transaction of business at the Annual
Meeting. Abstentions and broker non-votes each will be included in determining
the number of shares present and voting at the Annual Meeting for the purpose of
determining the presence of a quorum.
On the record date for the Annual Meeting, directors and executive officers
of Liquid Audio and their affiliates held approximately 1,994,302 shares of
Liquid Audio common stock representing approximately 8.8% of all outstanding
shares of Liquid Audio common stock.
Shares abstaining from the vote on the proposal to elect two (2) Class III
directors and broker non-votes will not be counted for any purpose in
determining whether this proposal has been approved. However, shares abstaining
from the vote on the proposal to ratify PricewaterhouseCoopers, LLP
("PricewaterhouseCoopers") as Liquid Audio's independent accountants for the
fiscal year ending December 31, 2002 will be counted toward the tabulation of
votes cast on this proposal and will have the same effect as negative votes,
while broker non-votes will not be counted for any purpose in determining
whether this proposal has been approved. Shares abstaining from the vote and
broker non-votes on the MMC proposals will have the same effect as negative
votes.
If your shares are held in the name of a broker, only your broker can
execute a proxy and vote your shares and only after receiving your specific
instructions. PLEASE SIGN, DATE AND PROMPTLY MAIL THE GREEN PROXY CARD IN THE
ENVELOPE PROVIDED BY YOUR BROKER. Remember, your shares cannot be voted unless
you return a signed and executed proxy card to your broker. However, please be
advised that broker non-votes with respect to any matter to be voted on at the
Annual Meeting will not be voted but will be counted as present to determine
whether there is a quorum for voting purposes on such matters at the Annual
Meeting. Broker non-votes occur when a broker, bank or other nominee holding
shares for a beneficial owner does not vote on a particular proposal because the
nominee does not have discretionary voting power for that particular proposal
and has not received instructions from the beneficial owner. Under applicable
rules of conduct, brokers do not have discretionary authority over any proposal
to be presented at the Annual Meeting when the matter to be voted upon is being
opposed by management or subject to a contest.
VOTING PROCEDURES
WHETHER OR NOT YOU PLAN TO ATTEND THE ANNUAL MEETING, YOU ARE URGED TO VOTE
BY SUBMITTING THE GREEN PROXY CARD. When proxies are properly dated, executed
and returned, the shares represented by such proxies will be voted at the Annual
Meeting in accordance with the instructions of the stockholder. If no specific
instructions are given, the shares will be voted (i) FOR the election of the
nominees for directors set forth herein; (ii) FOR the ratification of
PricewaterhouseCoopers as our independent accountants for the fiscal year ending
December 31, 2002; and (iii) AGAINST any proposal made by the MMC group as may
properly come before the Annual Meeting or any adjournment thereof.
Any stockholder giving a proxy may revoke it at any time prior to voting at
the Annual Meeting by filing with the Secretary of Liquid Audio a duly executed
revocation, by submitting a later-dated proxy with respect to the same shares or
by attending the Annual Meeting and voting in person (although attendance at the
Annual Meeting will not in and of itself constitute a revocation of your proxy).
A stockholder may, with respect to the election of directors, (i) vote for
the election of the Liquid Nominees, (ii) withhold authority to vote for both of
the Liquid Nominees or (iii) withhold authority to vote for any of the Liquid
Nominees by so indicating in the appropriate space on the GREEN proxy.
Stockholders who have received the MMC group's proxy statement or who attend the
Annual Meeting will also have each of the foregoing options in respect of the
MMC nominees. Liquid Audio's By-laws provide that at each meeting of
stockholders at which a quorum is present, directors shall be elected by a
plurality of votes cast by stockholders holding shares entitled to vote in the
election at a meeting. The two nominees receiving the highest vote totals will
be elected as directors of Liquid Audio.
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Consequently, votes that are withheld in the election of directors and
broker non-votes will not be taken into account for purposes of determining the
outcome of the election. THE ONLY WAY TO VOTE BY PROXY "FOR" THE LIQUID NOMINEES
IS TO COMPLETE AND RETURN THE GREEN PROXY CARD. IN THAT EVENT, THE BOARD URGES
YOU NOT TO SIGN OR RETURN ANY WHITE PROXY CARD SENT TO YOU BY THE MMC GROUP.
WITHHOLDING AUTHORITY TO VOTE FOR THE MMC NOMINEES ON THE WHITE MMC GROUP PROXY
CARD IS NOT THE SAME AS VOTING "FOR" THE LIQUID NOMINEES.
With respect to the MMC proposals, a stockholder may vote for or against
such matters or abstain from voting. Pursuant to the Company's By-laws, each MMC
proposal relating to a By-law amendment will be approved if the votes cast
favoring a proposal represent at least 66 2/3% of the shares outstanding as of
August 12, 2002, the record date for the Annual Meeting. Assuming the approval
of the By-law amendment, the proposal to elect the four (4) nominees of the MMC
group to fill the new Board positions will be approved if the votes cast
favoring the proposal represent more than 50% of the shares outstanding as of
August 12, 2002, the record date for the Annual Meeting. An abstention or broker
non-vote on any MMC proposal will be treated as a vote against such MMC
proposal. ACCORDINGLY, IF YOU ARE OPPOSED TO THE MMC PROPOSALS, YOU SHOULD NOT
SIGN OR RETURN ANY WHITE PROXY CARD SENT TO YOU BY THE MMC GROUP.
TRANSACTION WITH ALLIANCE
GENERAL TERMS
On June 13, 2002, Liquid Audio and privately-held Alliance Entertainment
Corp. ("Alliance"), one of the largest home entertainment product distribution,
fulfillment and infrastructure companies in the U.S., announced that they had
signed the Agreement and Plan of Merger dated June 12, 2002 (the "Merger
Agreement") by and among Liquid Audio, Alliance and April Acquisition Corp.
("Merger Sub"). Under the original terms of the Merger Agreement, the
stockholders of Alliance would have received approximately 46.2 million newly
issued shares of Liquid Audio common stock and would have owned approximately
67% of the new company's outstanding shares and 33% would have been held by
Liquid Audio stockholders. AEC Associates LLC, a limited liability company
controlled by The Yucaipa Companies, is Alliance's controlling shareholder and
had entered into a voting agreement to vote in favor of the merger. On July 15,
2002, Liquid Audio and Alliance announced that they had modified certain terms
of their previously announced Merger Agreement. Pursuant to the Merger
Agreement, at the completion of the merger Merger Sub will be merged with and
into Alliance, and Alliance will continue as the surviving corporation of the
merger and a wholly-owned subsidiary of Liquid Audio. Upon completion of the
merger, each outstanding share of Alliance common stock will be converted into
the right to receive a number of shares of Liquid Audio stock which will result
in the former stockholders of Alliance holding 74% of the outstanding voting
power of the combined organization after the merger, without giving effect to
any then outstanding options or warrants. After converting all outstanding
Alliance options and warrants, the options and warrants that would be
exercisable at $2.40 or less (so-called "in the money" options and warrants)
would result in pre-merger Liquid Audio stockholders being diluted in their
ownership of the combined organization by 1.150%.
Liquid Audio and Alliance expect to complete the merger when all of the
conditions to completion of the merger contained in the Merger Agreement have
been satisfied or waived. Liquid Audio and Alliance are working toward
satisfying the conditions to the merger, and hope to complete the merger as soon
as practicable following the special stockholders meeting that will be called in
order to vote on the issuance of Liquid Audio stock in the merger.
In connection with the merger, Liquid Audio will make an offer to purchase
10,000,000 shares of its common stock at a purchase price of $3.00 per share. If
more than 10 million shares of Liquid Audio common stock are tendered, Liquid
Audio will purchase 10 million shares of its common stock on a pro rata basis
from those stockholders tendering shares. If all Liquid Audio stockholders
(other than the two management stockholders, Gerald W. Kearby and Robert G.
Flynn, who have committed not to tender their holdings of
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1,506,600 shares of Liquid Audio common stock unless the tender offer is
undersubscribed) were to tender their shares in the tender offer, approximately
21,239,024 shares of Liquid Audio common stock will have been tendered and only
10 million shares will be accepted in the tender offer. In such case, each
tendering stockholder would effectively receive a prorated cash amount of $1.42
per share and would retain its ownership of shares of Liquid Audio common stock
not accepted in the tender offer. Liquid Audio stockholders will continue to
hold the Liquid Audio stock that they currently own and do not tender or that is
not purchased to proration. After the merger, these shares will represent 26% of
the voting power in the combined organization. If the issuance of shares of
Liquid Audio stock in the merger is not approved and the other conditions to the
merger are not capable of being satisfied, then the tender offer will not be
consummated and the stockholders of Liquid Audio will continue to own their
shares of common stock and will not receive cash in the tender offer.
COMBINED BUSINESS
The combined organization will evaluate the evolving digital media needs of
its trading partners and will incorporate Liquid Audio's digital media
technology and capabilities into Alliance's portfolio of business solutions.
Alliance's existing physical entertainment distribution business will serve as a
platform for continued revenue and cash flow growth.
The combined organization expects to integrate the existing Liquid Audio
technology into Alliance's portfolio of business solutions in a manner
consistent with maintaining Alliance's stand-alone revenue and cash flow growth
trajectory. The combined organization expects to immediately and significantly
reduce its cost structure and continue to rationalize such cost structure over
time. For instance, in addition to Liquid Audio's July 2002 workforce reduction
of thirty-two employees, Liquid Audio intends to eliminate an additional
thirty-four positions in September and October. The aggregate annualized direct
cost savings of all such reductions is expected to be approximately $7,660,000.
These workforce reductions focus upon the areas of Liquid Audio's business that
are not dedicated to the development of digital music distribution technology.
Upon completion of the merger, the board of directors of Liquid Audio is
expected to be comprised of nine individuals, 1/3 of whom will be designated by
Liquid Audio and 2/3 of whom will be designated by Alliance. The Board has
designated Raymond A. Doig, Robert G. Flynn and Gerald W. Kearby to serve on the
post-merger board of directors as the designees of Liquid Audio as provided for
in the Merger Agreement. All other current directors have agreed to resign from
the Board. We cannot be certain that the nominees recommended for election by
the Board, Gerald W. Kearby and Raymond A. Doig, will be elected at the Annual
Meeting. If nominees other than Gerald W. Kearby and Raymond A. Doig are
elected, then the Board has determined that such directors, unless they resign
from the Board would replace Raymond A. Doig and Gerald W. Kearby as the
designees of Liquid Audio on the board of directors of the combined
organization.
POTENTIAL RISKS OF THE MERGER
There are risks associated with the merger including the following:
- The capital stock of Alliance is privately held and is not traded in any
public market. The lack of a public market makes it extremely difficult
to determine the fair market value of Alliance's capital stock. Since the
percentage of Liquid Audio equity to be received by Alliance stockholders
was determined based on negotiations between the parties, it is possible
that either the Liquid Audio or the Alliance stockholders will receive
consideration in the merger that is below the fair market value of the
common stock they currently hold.
- Until the completion of the merger, with limited exceptions, Liquid Audio
is prohibited from initiating or engaging in discussions with a third
party regarding specified types of extraordinary transactions, such as a
merger, business combination or sale of a material amount of assets or
capital stock. In addition, Liquid Audio agreed to pay a termination fee
of up to $3 million to Alliance in specific circumstances. These
provisions of the Merger Agreement could discourage other companies from
trying to acquire Liquid Audio even though those other companies might be
willing to offer greater value to Liquid Audio stockholders than Alliance
has offered in the merger agreement.
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- Some of Liquid Audio's officers and directors have conflicts of interest
that may influence their decision to support or approve the merger.
Gerald W. Kearby, president, chief executive officer and director of
Liquid Audio, and Robert G. Flynn, senior vice president of business
development, secretary and director of Liquid Audio, have interests in
the merger that are different from your interests. In connection with the
execution of the original Merger Agreement in June 2002, Messrs. Kearby
and Flynn each entered into employment agreements with Alliance. These
agreements will become effective upon the consummation of the merger.
Pursuant to these agreements, each of Mr. Kearby and Mr. Flynn will have
a three (3) year term of employment. In addition, each of Mr. Kearby and
Mr. Flynn will receive a retention payment of $750,000, in the aggregate,
to be paid over a two (2) year period and a payment of $750,000, in the
aggregate, to be paid over a three (3) year period as compensation for an
agreement not to compete. Each of Mr. Kearby and Mr. Flynn may also be
eligible for discretionary bonuses granted by the combined organization's
board of directors or by its compensation committee. SEE "EXECUTIVE
COMPENSATION -- CHANGE OF CONTROL ARRANGEMENTS.
Other officers of Liquid Audio also may have conflicts of interest that
may influence them to support or approve the merger. In addition to the
foregoing employment agreements, Liquid Audio has agreed to pay severance
to each of Mr. Leon Rishniw, Vice President of Engineering, Mr. Richard W.
Wingate, Senior Vice President of Content Development and Label Relations,
Mr. H. Thomas Blanco, Vice President of Human Resources, and Mr. Michael
R. Bolcerek, Senior Vice President and Chief Financial Officer, in the
event that his employment with Liquid Audio is terminated without cause or
he is constructively terminated. Liquid Audio has agreed to pay six
months' salary for each of Messrs. Wingate, Blanco and Bolcerek, which
amounts $115,000, $87,500 and $87,500, respectively. In the case of Leon
Rishniw, Liquid Audio has agreed to pay $170,000, which is one year's
salary. SEE "EXECUTIVE COMPENSATION -- CHANGE OF CONTROL ARRANGEMENTS.
Mr. Bolcerek's employment agreement provides that 25% of the unvested
options to purchase Liquid Audio stock held by Mr. Bolcerek will vest upon
consummation of a change of control, as defined in the employment
agreement, and an additional 12.5% of his unvested options to purchase
Liquid Audio stock will vest in the event he is terminated or
constructively terminated due to a change of control. Pursuant to the
terms of such employment agreement, the merger will constitute a change of
control that would result in an acceleration of the vesting of options to
purchase an aggregate of 50,000 shares of Liquid Audio common stock at an
exercise price of $1.84 per share.
- The Nasdaq staff has determined that the proposed merger would constitute
a "reverse merger" under National Association of Securities Dealers Rule
4330(f). Following the announcement of the merger in June 2002, Liquid
Audio received correspondence from the Nasdaq staff indicating that the
staff believed that the merger might result in a change of control that
would require Liquid Audio to submit an initial listing application
following the consummation of the merger and, at the time of the
application, meet all of the criteria applicable to a company initially
requesting inclusion in The Nasdaq National Market. On August 15, 2002,
Liquid Audio received correspondence from the Nasdaq staff stating that
the staff had determined that the merger would indeed result in a change
of control requiring Liquid Audio to satisfy the requirements for initial
inclusion on The Nasdaq National Market and that Liquid Audio does not
satisfy the minimum bid requirements of the initial listing criteria.
Liquid Audio has appealed the determination of the Staff and at the
hearing for such appeal intends to present a plan pursuant to which a
reverse split of the Liquid Audio common stock would be effected
following the merger in order to meet the minimum bid price requirement
and satisfy the criteria for initial inclusion on the Nasdaq National
Market. If the Nasdaq appeal board does not accept such a proposal or
otherwise denies Liquid Audio's appeal and Liquid Audio does not meet
these requirements upon completion of the merger, Liquid Audio common
stock will be delisted from The Nasdaq National Market following the
completion of the merger. If Liquid Audio is delisted from The Nasdaq
National Market System, it may be allowed to transfer its securities from
The Nasdaq National Market to The Nasdaq SmallCap Market.
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Any of the foregoing may adversely impact Liquid Audio's stock price, as
well as its liquidity and the ability of Liquid Audio's stockholders to
purchase and sell Liquid Audio's shares in an orderly manner, or at all.
Furthermore, a delisting of Liquid Audio's shares could damage Liquid
Audio's general business reputation and impair its ability to raise
additional funds. Any of the foregoing events could have a material
adverse effect on Liquid Audio's business, financial condition and
operating results.
- Upon completion of the merger, the combined organization's largest
stockholder, AEC Associates, LLC, will beneficially own approximately 57%
of the combined organization's outstanding voting power. As a result,
this stockholder will be able to exercise effective control over all
matters requiring stockholder approval.
- The combined organization will retain Liquid Audio's charter documents,
which contain provisions that may have the effect of delaying or
preventing a change of control or changes in the combined organization's
management, including a third-party takeover, acquisition or merger.
These provisions could limit the price that investors might be willing to
pay in the future for shares of the combined organization's common stock.
ADDITIONAL INFORMATION
Stockholders will have the opportunity to vote whether to approve the
issuance of Liquid Audio stock in the merger at a special meeting to be held on
a later date. Providing a proxy in connection with this Annual Meeting will have
no impact on your ability to vote separately in that special meeting, for which
proxies will be separately solicited.
Liquid Audio has filed a Registration Statement on Form S-4 in connection
with the merger and plans to file a Tender Offer Statement on Schedule TO in
connection with the offer. INVESTORS AND STOCKHOLDERS OF LIQUID AUDIO ARE URGED
TO READ THE REGISTRATION STATEMENT AND THE TENDER OFFER STATEMENT CAREFULLY WHEN
IT IS AVAILABLE. THE REGISTRATION STATEMENT CONTAINS IMPORTANT INFORMATION ABOUT
THE COMPANIES, THE MERGER AND RELATED MATTERS. Investors and stockholders will
be able to obtain free copies of these documents through the web site maintained
by the Securities and Exchange Commission ("SEC") at http://www.sec.gov. Free
copies of the Registration Statement and these other documents may also be
obtained from Liquid Audio by directing a request through the Liquid Audio web
site at http://www.liquidaudio.com or by mail to Liquid Audio, Inc., Attention:
Investor Relations.
THIS PROXY STATEMENT DOES NOT CONSTITUTE A SOLICITATION OF PROXIES FOR ANY
MEETING OF STOCKHOLDERS OF LIQUID AUDIO WITH RESPECT TO THE MERGER WITH ALLIANCE
OR ANY OFFER TO SELL OR SOLICITATION OF OFFERS TO BUY SHARES OR OTHER
SECURITIES. ANY SUCH SOLICITATION WILL BE MADE ONLY PURSUANT TO SEPARATE PROXY
MATERIALS PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934,
AS AMENDED (THE "EXCHANGE ACT"), ANY SUCH OFFER TO SELL WILL BE MADE ONLY
THROUGH A REGISTRATION STATEMENT AND PROSPECTUS PURSUANT TO THE REQUIREMENTS OF
THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), AND ANY SUCH
OFFER TO BUY WILL BE MADE ONLY THROUGH A TENDER OFFER STATEMENT PURSUANT TO THE
REQUIREMENTS OF THE EXCHANGE ACT.
PROPOSAL ONE
ELECTION OF DIRECTORS
GENERAL
We have a classified Board of seven (7) members divided into three (3)
classes with overlapping three-year terms. Each director serves in office until
his or her respective successor is duly elected and qualified or until his or
her earlier death or resignation. Any additional directorships resulting from an
increase in the number of directors will be distributed among the three (3)
classes so that, as nearly as possible, each class will consist of an equal
number of directors.
7
NOMINEES FOR CLASS III DIRECTOR
Two (2) Class III directors are to be elected at the Annual Meeting for a
three-year term ending in 2005. OUR BOARD HAS NOMINATED GERALD W. KEARBY AND
RAYMOND A. DOIG FOR RE-ELECTION AS CLASS III DIRECTORS. The proxy holders may
not vote the proxies for a greater number of persons than the number of nominees
named. Unless otherwise instructed, the persons named in the enclosed proxy will
vote proxies received by them for the re-election of Mr. Kearby and Mr. Doig.
Messrs. Kearby and Doig have consented to being named in this Proxy Statement
and to serve if elected; however, in the event that either nominee or both are
unable to or decline to serve as a director at the time of the Annual Meeting,
proxies will be voted for a substitute nominee designated by our present Board.
In the event that additional persons are nominated for election as directors,
the proxy holders intend to vote all proxies received by them in such a manner
as will assure the election of as many of the nominees listed below as possible,
and, in such event, the specific nominees to be voted for will be determined by
the proxy holders. The term of office of each person elected as a director will
continue until such director's term expires in 2005 or until such director's
successor has been elected and qualified.
OUR BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE NOMINEES LISTED ABOVE
REQUIRED VOTE
Liquid Audio's By-laws provide that at each meeting of stockholders at
which a quorum is present, directors shall be elected by a plurality of votes
cast by stockholders holding shares entitled to vote in the election at a
meeting. The two nominees receiving the highest vote totals will be elected as
directors of Liquid Audio. Assuming the approval of the By-law amendment, the
proposal to elect the four (4) nominees of the MMC group to fill the new Board
positions will be approved if the vote cast favoring the proposal exceeds a
majority of the shares outstanding as of August 12, 2002, the record date for
the Annual Meeting. See "INFORMATION CONCERNING SOLICITATION AND
VOTING -- VOTING PROCEDURES."
INFORMATION REGARDING NOMINEE AND OTHER DIRECTORS
Set forth below is certain information regarding the nominees for Class III
directors and each of our other directors whose term of office continues after
the Annual Meeting. Information as to the stock ownership of each director and
all of our current directors and executive officers as a group is set forth
below under "SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT."
NAME AGE PRINCIPAL OCCUPATION DIRECTOR SINCE
---- --- -------------------- --------------
CLASS III DIRECTORS
Gerald W. Kearby.................... 54 President and Chief Executive 1996
Officer of Liquid Audio, Inc
Raymond A. Doig..................... 64 Consultant 2001
CLASS I DIRECTORS
Robert G. Flynn..................... 48 Senior Vice President of Business 2001
Development of Liquid Audio, Inc.
Stephen V. Imbler................... 50 Advisor of Hyperion Solutions 2001
Corporation
Judith N. Frank..................... 61 Principal, Asset Strategies 2002
CLASS II DIRECTORS
Ann Winblad......................... 51 General Partner of Hummer Winblad 1996
Venture Partners
James D. Somes...................... 50 Founder and Managing Director of 2002
Alexander Dunham Capital Group, Inc.
8
NOMINEES FOR CLASS III DIRECTORS FOR A TERM EXPIRING IN 2005
Mr. Kearby co-founded Liquid Audio in January 1996. Since January 1996, Mr.
Kearby has served as our President and Chief Executive Officer and one of our
directors. From June 1995 to December 1995, Mr. Kearby was co-founder and Chief
Executive Officer of Integrated Media Systems, a manufacturer of computer-based
professional audio equipment. From January 1989 until June 1995, Mr. Kearby
served as Vice President of Sales and Marketing at Studer Editech Corporation, a
professional audio recording equipment company. Mr. Kearby holds a B.A. in
broadcast management and audio engineering from San Francisco State University.
Mr. Doig has served as one of our directors since November 2001. Mr. Doig
has served as President of EMV Partners Corp., a company engaged in business
consulting and as the general partner of a venture capital limited partnership,
from 1986 to 1998. From 1983 to 1986, Mr. Doig was co-founder and Chief
Operating Officer of Stanfill, Doig & Co., a consulting firm. From March 1977 to
August 1983, Mr. Doig served as President and CEO of 20th Century Fox
International and as Vice President of Corporate Development for 20th Century
Fox Film Corp. During 1998 and 1999, Mr. Doig served as a fulltime operations
consultant to Entertainment Properties, Inc., a wholly-owned privately held
company. Mr. Doig continues to act as a consultant to Entertainment Properties,
Inc. on an as needed basis. Mr. Doig holds an M.B.A., an M.S. in Public
Administration and a B.S. in Physical Sciences from the University of Southern
California.
INCUMBENT CLASS I DIRECTORS WHOSE TERMS EXPIRES IN 2003
Mr. Flynn co-founded Liquid Audio in January 1996. Since July 1999, Mr.
Flynn has served as our Senior Vice President of Business Development and
Secretary. From January 1996 to July 1999, Mr. Flynn served as our Vice
President of Business Development and Secretary. Mr. Flynn also served as our
Chief Financial Officer from January 1996 to August 1997 and as one of our
directors from January 1996 to June 1996. From March 1987 until November 1995,
Mr. Flynn served as a general partner of Entertainment Media Venture Partners I,
L.P., an institutional venture capital fund investing in the entertainment,
media and communications technology industries. During this time, Mr. Flynn also
served on the board of directors of Integrated Media Systems. Mr. Flynn holds a
B.A. in English from Stanford University and an M.B.A. from University of
California at Los Angeles.
Mr. Imbler has served as one of our directors since November 2001. Mr.
Imbler has held a variety of positions at Hyperion Solutions Corporation, a
business intelligence software company, since July 1995, including Advisor from
October 2001 to present, President and Chief Operating Officer from April 1999
to October 2001 and Senior Vice President and Chief Financial Officer from July
1995 to April 1999. Mr. Imbler served as Senior Vice President and Chief
Financial Officer for Gupta Corporation, an enterprise database software
company, from November 1994 to July 1995, Vice President and Chief Financial
Officer for QuickResponse Services Inc., a developer of supply chain software
applications, from May 1993 to October 1994, and Vice President of Finance for
Oracle Corporation, an enterprise database and software developer, from July
1987 to May 1993. Mr. Imbler also serves on the board of directors for Wavecom,
Inc., a French telecommunications company. Mr. Imbler holds an M.B.A. from
University of Texas at Austin and a B.M. in piano performance from Wichita State
University.
Ms. Frank has served as a director since August 22, 2002. Ms. Frank is a
Principal of Asset Strategies for the past seven years. Asset Strategies focuses
on strategic, transactional, and implementation matters for corporate,
governmental and institutional clients. Ms. Frank is one of a few corporate real
estate professionals who is both skilled as a senior executive in P & L
management, operations, business development, strategic planning and management
consulting. Since 1994, Ms. Frank has also been a part-time employee of the
Department of General Services of the State of California working in the asset
planning and enhancement group. Ms. Frank has an A.B. from the University of
California, Berkeley, a M.S. from the University of Southern California and a
M.B.A. from the Anderson School of Management, UCLA.
9
INCUMBENT CLASS II DIRECTORS WHOSE TERMS EXPIRE IN 2004
Ms. Winblad has served as one of our directors since May 1996. Ms. Winblad
has been a general partner of Hummer Winblad Venture Partners, a venture capital
investment firm, since 1989. She is a member of the board of trustees of the
University of St. Thomas and is an advisor to numerous entrepreneurial groups
such as the Software Development Forum and Software Industry Business Practices.
Ms. Winblad also serves on the boards of directors of Net Perceptions Inc., a
developer and supplier of real-time recommendation technology for the Internet,
The Knot, Inc., an Internet-based wedding services company, and several private
companies. Ms. Winblad holds a B.S. in mathematics and business administration
from the College of Saint Catherine and an M.A. in education with an economics
focus from the University of St. Thomas.
Mr. Somes has served as a director since August 22, 2002. Mr. Somes is a
founder and Managing Director of Alexander Dunham Capital Group, Inc. since
1994. Alexander Dunham Capital is a boutique merchant bank advising high-growth
technology and healthcare companies on capital formation (public and private
companies), acquisitions, mergers, and general corporate finance issues.
Previously, he helped establish Security Pacific's west coast mezzanine fund. In
addition, he was a Vice President at Citicorp's Leveraged Capital Group in Los
Angeles and at Citicorp's Asian Merchant Bank in Hong Kong. Also, he was a
Managing Director and Founder of Ambient Capital Group, a middle market
Investment Bank. He began his finance career at Morgan Guaranty Trust Company
(J.P. Morgan). He has originated, structured and placed over 60 leveraged
transactions, acquisitions, private equity and mezzanine transactions amounting
to over $5 billion over the past 20 years. He has agented and managed a debt
portfolio in excess of $400 million and served as a director in 7 companies. He
has a B.A. from Tufts University and an M.B.A. from Columbia University (and
completed course work for an M.S. in Urban and Regional Planning under the Joint
Masters Program at Columbia).
There are no family relationships among any of our directors or executive
officers.
BOARD MEETINGS AND COMMITTEES
Our Board held a total of twelve (12) meetings during 2001. During 2001, no
director attended fewer than 75% of the meetings of our Board or the meetings of
committees, if any, upon which such director served. Certain matters approved by
our Board were approved by unanimous written consent.
AUDIT COMMITTEE
The audit committee makes recommendations to our Board regarding the
selection of independent accountants, reviews the results and scope of audit and
other services provided by our independent accountants and reviews the
accounting principles and auditing practices and procedures to be used for our
financial statements. The rules of the National Association of Securities
Dealers ("NASD") require audit committees to have at least three members who are
"independent," as that term is defined under the NASD listing standards.
The audit committee of our Board currently is composed of Stephen V.
Imbler, Ann Winblad and Raymond A. Doig. All three directors qualify as
independent. Our audit committee held a total of five (5) meetings during fiscal
2001. A copy of the audit committee charter is attached to this Proxy Statement
as Appendix A.
COMPENSATION COMMITTEE
The compensation committee of our Board currently is composed of Ann
Winblad and Raymond A. Doig. Our compensation committee reviews and recommends
the compensation and benefits of all of our executive officers, administers our
stock and option plans and establishes and reviews general policies relating to
compensation and benefits of our employees. Our compensation committee held a
total of two (2) meetings during fiscal 2001. Our Board does not have a
nominating committee or any committee performing such function.
10
DIRECTOR COMPENSATION
In February 2002, our Board approved a plan that provides our non-employee
directors with cash compensation of $10,000 upon initial election and on each
anniversary of becoming a director during their term of service, and $1,000 per
meeting of the Board attended during their term of service. Previously, our
directors did not receive cash compensation for their service as members of the
Board. Ann Winblad declined to accept the cash compensation under this plan. Our
directors are reimbursed for certain expenses in connection with attendance at
Board and committee meetings. Non-employee directors are granted a fully vested
option to purchase 30,000 shares of common stock upon initial election and a
fully vested option to purchase 10,000 shares of common stock on each
anniversary of becoming a director during their term of service. We do not
provide additional compensation for committee participation or special
assignments of the Board. In June 2001, we granted Ann Winblad an option to
purchase 10,000 shares of common stock, and in November 2001, we granted each of
Stephen V. Imbler and Raymond A. Doig an option to purchase 30,000 shares of
common stock.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
None of the members of our compensation committee is currently or has been,
at any time since our formation as a company, one of our officers or employees.
None of our executive officers: (i) has served as a member of the compensation
committee (or other Board committee performing similar functions or, in the
absence of any such committee, the Board) of another entity, one of whose
executive officers served on our compensation committee; (ii) has served as a
director of another entity, one of whose executive officers served on our
compensation committee; or (iii) served as a member of the compensation
committee (or other Board committee performing similar functions or, in the
absence of any such committee, the Board) of another entity, one of whose
executive officers served as one of our directors.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires our officers
and directors, and persons who own more than 10% of a registered class of the
our equity securities, to file certain reports regarding ownership of, and
transactions in, our securities with the SEC and with Nasdaq. Such officers,
directors and 10% stockholders are also required by SEC rules to furnish us with
copies of all Section 16(a) forms that they file.
Based solely on our review of copies of Forms 3, 4, 5 and amendments
thereto furnished to us pursuant to Rule 16(a)-(e) with respect to the last
fiscal year and any written representations referred to in Item 405(b)(2)(i) of
Regulation S-K stating that no Forms 5 were applicable to our officers,
directors and 10% stockholders were complied with, we believe that all reports
required to be filed under Section 16(a) have been filed on a timely basis by
the foregoing persons for our 2001 fiscal year, except as follows: a late filing
of a Form 3 by Stephen V. Imbler, resulting in his initial holdings not being
timely reported; a late filing of a Form 3 by Raymond A. Doig, resulting in his
initial holdings not being timely reported; late filings of a Form 4 and a Form
5 by Gerald W. Kearby, resulting in one sales transaction and one option grant
not being timely reported; late filings of a Form 4 and a Form 5 by Philip R.
Wiser, resulting in three sales transactions and one option grant not being
timely reported; a late filing of a Form 5 by Ann Winblad, resulting in an
option grant not being timely reported; a late filing of a Form 5 by Robert G.
Flynn, resulting in an option grant not being timely reported; a late filing of
a Form 5 by Michael R. Bolcerek, resulting in an option grant not being timely
reported; a late filing of a Form 5 by Silvia Kessel, resulting in an option
grant not being timely reported; a late filing of a Form 5 by Mathieu Prevost,
resulting in an option grant not being timely reported; a late filing of a Form
5 by Leon Rishniw, resulting in two option grants not being timely reported; and
a late filing of a Form 5 by Richard W. Wingate, resulting in an option grant
not being timely reported.
11
PROPOSAL TWO
RATIFICATION OF APPOINTMENT OF INDEPENDENT ACCOUNTANTS
Our Board has selected PricewaterhouseCoopers as our independent
accountants to audit our financial statements for our fiscal year ending
December 31, 2002. PricewaterhouseCoopers has audited our financial statements
since 1996. Our Board recommends that stockholders vote for ratification of such
appointment. In the event of a negative vote on ratification, our Board will
reconsider its selection. A representative of PricewaterhouseCoopers is expected
to be available at our Annual Meeting with the opportunity to make a statement
if such representative desires to do so, and is expected to be available to
respond to appropriate questions. The following is a summary of fees billed to
us by PricewaterhouseCoopers during fiscal 2001:
AUDIT FEES
Aggregate fees for professional services rendered by PricewaterhouseCoopers
in connection with its audit of our consolidated financial statements as of and
for the year ended December 31, 2001 and its limited reviews of our unaudited
condensed consolidated interim financial statements were $245,527, of which an
aggregate amount of $30,000 has been billed through December 31, 2001.
FINANCIAL INFORMATION SYSTEMS DESIGN AND IMPLEMENTATION FEES
During the year ended December 31, 2001, PricewaterhouseCoopers rendered no
professional services to us in connection with the design and implementation of
financial information systems.
ALL OTHER FEES
In addition to the fees described above, aggregate fees of $170,312 were
billed by PricewaterhouseCoopers during the year ended December 31, 2001,
primarily for the following professional services:
Audit-related services...................................... $120,000
Income tax compliance and related tax services.............. $ 50,312
The audit committee has determined that the rendering of non-audit services
by PricewaterhouseCoopers was compatible with maintaining their independence.
REQUIRED VOTE
Stockholder ratification of the selection of PricewaterhouseCoopers as our
independent public accountants is not required by our By-laws or other
applicable legal requirement. However, the Board is submitting the selection of
PricewaterhouseCoopers to the stockholders for ratification as a matter of good
corporate practice. If the stockholders fail to ratify the selection, the audit
committee and the Board will reconsider whether or not to retain that firm. Even
if the selection is ratified, the Board 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 our and our stockholders'
best interests. The affirmative vote of the holders of a majority of the shares
represented and entitled to vote at the Annual Meeting will be required to
ratify the selection of PricewaterhouseCoopers as our independent public
accountants for the fiscal year ending December 31, 2002. Abstentions will be
counted toward the tabulation of votes cast on proposals presented to the
stockholders and will have the same effect as negative votes. Broker non-votes
are counted towards a quorum, but are not counted for any purpose in determining
whether this matter has been approved.
OUR BOARD RECOMMENDS A VOTE "FOR" THE RATIFICATION OF THE APPOINTMENT OF
PRICEWATERHOUSECOOPERS AS OUR INDEPENDENT ACCOUNTANTS FOR THE 2002 FISCAL YEAR.
12
OTHER PROPOSALS
SOLICITATION BY MMC
The MMC group has commenced a proxy solicitation to take control of your
Board by:
- electing the MMC group's nominees for the Board (the "MMC nominees") as
Class III directors;
- amending Liquid Audio's By-laws to expand the Board and authorize only
stockholders to fill the newly created directorships; and
- electing four nominees of the MMC group to fill these new Board positions
(together, the "MMC proposals").
In connection with the MMC proposals, the MMC nominees have indicated their
intention to discontinue Liquid Audio's present operations and to distribute
"excess cash" to the Company's stockholders. If the MMC nominees are elected and
the MMC proposals are not approved by the requisite vote of the stockholders,
the MMC nominees will constitute 2 of 7 directors on the Board and, other than
attempting to influence the other members of the Board, will have no direct or
indirect effect upon the Merger Agreement. If the MMC nominees are elected and
the MMC proposals are approved by the requisite vote of the stockholders,
directors designated by the MMC group will control a majority of the Board. We
are not proposing nominees to fill the four (4) newly created directorships
assuming approval of the two By-law amendments proposed by MMC. However, we are
soliciting votes against the election of these additional four (4) MMC nominees
and the election of any of these additional nominees will require approval of a
majority of the shares outstanding. There is no assurance that all or any of
these additional nominees will receive the requisite vote of the stockholders.
See "Required Vote" below.
WHY YOU SHOULD REJECT THE MMC PROPOSALS
The Board has unanimously concluded that the MMC proposals are not in the
best interests of Liquid Audio and its stockholders. The MMC proposals are an
attempt by the MMC group to take control of your Board with a slate of director
nominees dominated by affiliates of the MMC group. ACCORDINGLY, THE BOARD
UNANIMOUSLY RECOMMENDS A VOTE "FOR" THE LIQUID NOMINEES AND "AGAINST" THE MMC
PROPOSALS.
YOUR BOARD STRONGLY URGES YOU TO REJECT THE MMC NOMINEES AND TO REJECT THE
MMC PROPOSALS.
YOUR BOARD STRONGLY URGES YOU NOT TO RETURN ANY WHITE PROXY CARD SENT TO
YOU BY THE MMC GROUP. THE BEST WAY TO SUPPORT THE LIQUID NOMINEES AND THE
BOARD'S DETERMINATIONS IS TO VOTE "FOR" THE LIQUID NOMINEES ON THE GREEN PROXY
CARD.
GIVEN THESE REASONS, YOUR BOARD STRONGLY RECOMMENDS THAT YOU SUPPORT THE
LIQUID NOMINEES, WHO THE BOARD BELIEVES ARE HIGHLY QUALIFIED, BY VOTING "FOR"
THE LIQUID NOMINEES ON THE ENCLOSED GREEN PROXY CARD.
REQUIRED VOTE
With respect to the MMC proposals, a stockholder may vote for or against
such matters or abstain from voting. Pursuant to the Company's By-laws, the MMC
proposal relating to a By-law amendment will be approved if the votes cast
favoring a proposal represent at least 66 2/3% of the shares outstanding as of
August 12, 2002, the record date for the Annual Meeting. Assuming approval of
the By-law amendment, the proposal to elect the four (4) nominees of the MMC
group to fill the new Board positions will be approved if the votes cast
favoring the proposal represent more than 50% of the shares outstanding as of
August 12, 2002, the record date for the Annual Meeting. See "INFORMATION
CONCERNING SOLICITATION AND VOTING -- VOTING PROCEDURES."
13
OTHER INFORMATION
EXECUTIVE OFFICERS
In addition to Messrs. Kearby and Flynn, the following persons are our
executive officers:
NAME AGE POSITION
---- --- --------
Michael R. Bolcerek....................... 40 Senior Vice President and Chief Financial
Officer
Richard W. Wingate........................ 49 Senior Vice President of Content
Development and Label Relations
Leon Rishniw.............................. 36 Vice President of Engineering
Mr. Bolcerek has served as our Senior Vice President and Chief Financial
Officer since April 2001. From June to September 2000, Mr. Bolcerek was Chief
Operating Officer and Vice President of Finance for Mongomusic.com, an online
music service provider. From January 1999 to June 2000, Mr. Bolcerek was a
finance consultant to several high technology and Internet companies. From June
1997 to September 1998, Mr. Bolcerek was President, Chief Financial Officer and
Vice President of Finance for Spatializer Audio Laboratories Inc., an audio
technology licensing company. From January 1997 to May 1997, Mr. Bolcerek was
acting Corporate Controller for Novadigm, Inc., a software company. From June
1995 to July 1996, Mr. Bolcerek was Controller for Nokia Display Products, Inc.,
a computer monitor manufacturer and division of Nokia Group. From January 1994
to March 1995, Mr. Bolcerek was Acting Chief Financial Officer and Treasurer for
Axil Computer, Inc., a computer hardware manufacturer. Prior to January 1994,
Mr. Bolcerek held finance positions at NeXT Computer, Inc. and Oracle
Corporation. Mr. Bolcerek holds a B.A. in economics from Brown University.
Mr. Wingate has served as our Senior Vice President of Content Development
and Label Relations since November 1999 and as our Vice President of Content
Development and Label Relations since August 1998. Mr. Wingate operated his own
new media marketing consulting company, Wingate Marketing, from July 1996 until
June 1998. From August 1997 to June 1998, Mr. Wingate was also a private music
industry consultant. From June 1994 to July 1996, Mr. Wingate was Senior Vice
President, Marketing for Arista Records Incorporated, a music recording company.
Prior to June 1994, Mr. Wingate held several senior management positions with
major music industry record labels, including Polygram, Inc. and Columbia
Records. Mr. Wingate holds a B.A. in communications from Brown University.
Mr. Rishniw has served as our Vice President of Engineering since October
1999. He was originally employed by us as a software engineer in August 1996,
became one of our Development Managers in January 1997 and Director of
Engineering in November 1998. From May 1995 until August 1996, Mr. Rishniw
served as a senior software engineer for Studer Editech, a professional audio
recording equipment company. From August 1994 until May 1995, Mr. Rishniw served
as a software engineer for Signal Stream Technology, a medical imaging
technology provider. Mr. Rishniw holds a B.S. in engineering from Melbourne
Institute of Technology.
There are no family relationships among any of our directors or executive
officers.
14
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table presents information with respect to beneficial
ownership of our common stock as of August 12, 2002 by:
- each person known by us who beneficially owns more than 5% of the common
stock;
- each of our executive officers;
- each of our directors and nominees for director; and
- all executive officers and directors as a group.
Except as otherwise noted, the address of each 5% stockholder listed in the
table is c/o Liquid Audio, Inc., 800 Chesapeake Drive, Redwood City, CA 94063.
The table includes all shares of common stock issuable within 60 days of August
12, 2002 upon the exercise of options and other rights beneficially owned by the
indicated stockholders on that date. Beneficial ownership is determined in
accordance with the rules of the SEC and includes voting and investment power
with respect to all shares of common stock. To our knowledge, except under
applicable community property laws or as otherwise indicated, the persons named
in the table have sole voting and sole investment control with respect to all
shares of common stock beneficially owned. The applicable percentage of
ownership for each stockholder is based on 22,745,624 shares of common stock
outstanding as of August 12, 2002, together with applicable options for that
stockholder. Shares of common stock issuable upon exercise of options and other
rights beneficially owned are deemed outstanding for the purpose of computing
the percentage ownership of the person holding those options and other rights,
but are not deemed outstanding for computing the percentage ownership of any
other person.
SHARE BENEFICIALLY
OWNED
-------------------
NAME OF BENEFICIAL OWNER NUMBER PERCENT
------------------------ --------- -------
Steel Partners II, L.P...................................... 2,062,866 9.1
150 East 52nd Street, 21st Floor
New York, NY 10022
MMC and related entities(1)................................. 1,568,100 6.9
c/o Barington Capital Group, L.P.
888 Seventh Avenue, 17th Floor
New York, NY 10019
Coghill Capital Management(2)............................... 1,516,988 6.7
225 W. Washington Street
Suite 2200
Chicago, IL 60606
JMB Capital Partners, L.P. and related entities(3).......... 1,163,800 5.1
1999 Avenue of the Stars, Suite 2040
Los Angeles, CA 90067
Gerald W. Kearby(4)......................................... 914,411 4.0
Robert G. Flynn(5).......................................... 738,539 3.2
Richard W. Wingate(6)....................................... 179,040 *
Leon Rishniw(7)............................................. 141,828 *
H. Thomas Blanco(8)......................................... 74,796 *
Ann Winblad(9).............................................. 360,738 1.6
Stephen V. Imbler(10)....................................... 30,000 *
Raymond A. Doig(10)......................................... 30,000 *
James D. Somes(10).......................................... 30,000 *
Judith N. Frank(10)......................................... 30,000 *
All executive officers and directors as a group (8
persons)(11).............................................. 2,529,352 11.1
15
---------------
(1) On September 28, 2001, the MMC group jointly filed a Schedule 13D pursuant
to Rule 13d-1 of the Securities Exchange Act of 1934 with the Securities
and Exchange Commission, reporting combined ownership of 1,478,100 shares
of the Company's common stock as the total owned by the five entities.
According to that Schedule 13D, as amended on May 10, 2002, MMC owns
655,900 shares of common stock; Jewelcor Management, Inc., owns 475,500
shares of common stock; Barington Companies Equity Partners, L.P. owns
339,200 shares of common stock; Ramius Securities, LLC owns 89,000 shares
of common stock; and Domrose Sons Partnership owns 8,000 shares of common
stock. Barington Companies Investors, LLC is the general partner of
Barington Companies Equity Partners, L.P. James Mitarotonda is the managing
member of Barington Companies Investors, LLC. Each of James Mitarotonda,
Mano Mitarotonda and Mike Mitarotonda is a partner in Domrose Sons
Partnership.
(2) On May 30, 2002, Coghill Capital Management, a limited partnership, filed a
Schedule 13D pursuant to Rule 13d-1 of the Securities Exchange Act of 1934
with the Securities and Exchange Commission, reporting combined ownership
of 1,173,143 shares of the Company's common stock as the total owned.
(3) On July 23, 2002, JMB Capital Partners, L.P., a California limited
partnership, Smithwood Partners, LLC, a California limited liability
company, and Jonathan Brooks, the sole member and manager of Smithwood
Partners LLC, filed a Schedule 13D pursuant to Rule 13d-1 of the Securities
Exchange Act of 1934 with the Securities and Exchange Commission, reporting
combined ownership of 1,163,800 shares of the Company's common stock as the
total owned by the entities.
(4) Includes 82,811 shares of common stock issuable upon the exercise of
options exercisable within 60 days of August 12, 2002.
(5) Includes 63,539 shares of common stock issuable upon the exercise of
options exercisable within 60 days of August 12, 2002.
(6) Includes 131,707 shares of common stock issuable upon the exercise of stock
options exercisable within 60 days of August 12, 2002.
(7) Includes 110,329 shares of common stock issuable upon the exercise of stock
options exercisable within 60 days of August 12, 2002.
(8) Includes 66,664 shares of common stock issuable upon the exercise of
options exercisable within 60 days of August 12, 2002.
(9) Includes 80,943 shares of common stock owned by Hummer Winblad Venture
Partners II, L.P., 488 shares of common stock owned by Hummer Winblad
Technology Fund II, L.P. (collectively, the "Hummer Winblad Funds") and
20,000 shares of common stock issuable upon the exercise of stock options
exercisable within 60 days of August 12, 2002. Ann Winblad is a general
partner of Hummer Winblad Equity Partners II, L.P. ("HWII"), the general
partner of each of the Hummer Winblad Funds. Consequently, Ms. Winblad may
be deemed to beneficially own all of the shares held by the Hummer Winblad
Funds. Ms. Winblad disclaims beneficial ownership of such shares, except to
the extent of her respective pecuniary interest therein.
(10) Includes 30,000 shares of common stock issuable upon the exercise of stock
options exercisable within 60 days of August 12, 2002.
(11) Includes 535,050 shares of common stock issuable upon the exercise of stock
options exercisable within 60 days of August 12, 2002.
* Does not exceed 1%.
16
EXECUTIVE COMPENSATION
The following table sets forth the total compensation received for services
rendered to us for the years ended December 31, 2001, 2000 and 1999 by our Chief
Executive Officer and our four other most highly compensated executive officers
who received salary and bonus in 2001 in excess of $100,000 (Named Executive
Officers).
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION ------------
-------------------------------------------- # SECURITIES
OTHER ANNUAL UNDERLYING
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION(1) OPTIONS/SARS
--------------------------- ---- -------- -------- --------------- ------------
Gerald W. Kearby..................... 2001 $238,423 $ 52,000 $ 2,000 75,000
President and Chief Executive
Officer 2000 216,963 105,685 2,000 125,000
1999 167,692 100,000 -- --
Robert G. Flynn...................... 2001 187,646 40,000 12,800 50,000
Senior Vice President of Business 2000 161,053 73,520 4,433 100,000
Development 1999 136,154 75,000 -- --
Leon Rishniw......................... 2001 163,423 26,000 2,000 100,000
Vice President of Engineering 2000 144,445 71,223 2,000 63,780
1999 114,615 17,500 -- 30,000
Richard W. Wingate................... 2001 216,846 60,000 2,000 50,000
Senior Vice President of Content 2000 293,255 86,900 2,000 109,000
Development and Label Relations 1999 179,099 75,000 -- 25,000
H. Thomas Blanco..................... 2001 167,404 26,000 2,000 50,000
Vice President of Human Resources 2000 115,192 20,000 2,000 100,000
1999 -- -- -- --
---------------
(1) Amounts represent matching contributions to our 401(k) savings plan, and for
Robert G. Flynn, also include reimbursement of relocation costs.
We granted stock options to certain Named Executive Officers during 2001.
We have never granted any stock appreciation rights.
OPTION GRANTS IN LAST FISCAL YEAR
The following table provides information relating to stock options awarded
to each of the Named Executive Officers and Non-employee Directors during the
year ended December 31, 2001. All such options were awarded under our 1996
Equity Incentive Plan.
INDIVIDUAL GRANTS POTENTIAL REALIZABLE
--------------------------------------------------- VALUE AT ASSUMED
NUMBER OF ANNUAL RATES OF STOCK
SECURITIES PERCENT OF PRICE APPRECIATION FOR
UNDERLYING TOTAL OPTIONS OPTIONS TERM (4)
OPTIONS GRANTED IN EXERCISE EXPIRATION -----------------------
NAME GRANTED(1) FISCAL 2001(2) PRICE(3) DATE 5% 10%
---- ---------- -------------- -------- ---------- ---------- ----------
Gerald W. Kearby.................. 75,000 4.5% $2.70 6/19/11 $127,351 $322,733
Robert G. Flynn................... 50,000 3.0 2.70 6/19/11 84,901 215,155
Richard W. Wingate................ 50,000 3.0 2.70 6/19/11 84,901 215,155
Leon Rishniw...................... 50,000 3.0 1.84 4/24/11 57,858 146,624
Leon Rishniw...................... 50,000 3.0 2.70 6/19/11 84,901 215,155
H. Thomas Blanco.................. 50,000 3.0 1.84 4/24/11 57,858 146,624
Ann Winblad....................... 10,000 0.6 2.51 5/31/11 15,785 40,003
Stephen V. Imbler................. 30,000 1.8 2.72 11/1/11 51,318 130,049
Raymond A. Doig................... 30,000 1.8 2.72 11/1/11 51,318 130,049
17
---------------
(1) Options were granted under our 1996 Equity Incentive Plan and generally vest
over four years from the date of grant.
(2) Based on an aggregate of 1,650,750 options granted by us in the year ended
December 31, 2001 to our employees, directors and consultants, including the
Named Executive Officers.
(3) Options were granted at an exercise price equal to the fair market value per
share of common stock on the grant date, as determined by our Board
according to the provisions of the 1996 Equity Incentive Plan.
(4) The potential realizable value is calculated based on the term of the option
at its time of grant, or 10 years. In accordance with the rules of the
Securities and Exchange Commission, the following table also sets forth the
potential realizable value over the term of the options, the period from the
grant date to the expiration date, based on assumed rates of stock
appreciation of 5% and 10% compounded annually. These amounts do not
represent our estimate of future stock price performance. Actual realizable
values, if any, of stock options will depend on the future performance of
the common stock.
FISCAL YEAR END OPTION VALUES
The following table provides summary information concerning stock options
held as of December 31, 2001 by each of the Named Executive Officers and
Non-employee Directors. No officers or directors exercised options in 2001.
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
SHARES OPTIONS AT FISCAL YEAR-END AT FISCAL YEAR-END(1)
ACQUIRED ON VALUE --------------------------- ---------------------------
NAME EXERCISE REALIZED($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ------------ ----------- ------------- ----------- -------------
Gerald W. Kearby....... -- $-- 56,250 143,750 $ -- $ --
Robert G. Flynn........ -- -- 43,749 106,251 -- --
Richard W. Wingate..... -- -- 113,292 99,375 24,367 --
Leon Rishniw........... -- -- 55,477 58,303 19,250 21,250
H. Thomas Blanco....... -- -- 47,916 102,084 4,250 21,250
Ann Winblad............ -- -- 20,000 -- -- --
Stephen V. Imbler...... -- -- 30,000 -- -- --
Raymond A. Doig........ -- -- 30,000 -- -- --
---------------
(1) The value of unexercised in-the-money options at fiscal year-end is based on
a price per share of $2.35 less the exercise price.
CHANGE OF CONTROL ARRANGEMENTS
The compensation committee of our Board has approved a plan that provides
that in the event that (1) Liquid Audio enters into an agreement to dispose of
all or substantially all of its assets, or (2) its stockholders dispose of 50%
or more of its outstanding common stock, then the greater of one year or 25% of
all of the outstanding/unvested stock options held by each of its executive
officers and certain members of the Board will immediately vest. Executive
officers qualifying under this plan include Gerald W. Kearby and Robert G.
Flynn; Michael R. Bolcerek (Senior Vice President and Chief Financial Officer),
Richard W. Wingate (Senior Vice President of Content Development and Label
Relations), Leon Rishniw (Vice President of Engineering); and H. Thomas Blanco
(Vice President of Human Resources), Matthew Smith (Vice President of Product
Marketing) and Kay Marsh (Vice President of Information Technology). Under a
separate employment agreement, 25% of the unvested the stock options held by
Michael R. Bolcerek will vest upon consummation of a change of control and an
additional 12.5% of his unvested stock options will vest in the event of his
termination or constructive termination as a result of a change of control of
Liquid Audio. For purposes of Mr. Bolcerek's employment agreement, a change of
control is defined as the occurrence of any of the following events: (i) any
"person" (as such term is used in Sections 13(d) and 14(d) of the Exchange Act)
becoming the "beneficial owner" (as defined in Rule 13d-3 under said Act),
directly or indirectly, of
18
securities of Liquid Audio representing 50% or more of the total voting power
represented by Liquid Audio's then outstanding voting securities, other than in
a private financing transaction approved by the Board; (ii) the direct or
indirect sale or exchange by the stockholders of Liquid Audio of all or
substantially all of the stock of Liquid Audio; (iii) a merger or consolidation
in which Liquid Audio is a party and in which the stockholders of Liquid Audio
before such merger or consolidation do not retain, directly or indirectly, at
least a majority of the beneficial interest in the voting stock of Liquid Audio
after the transaction; or (iv) the sale or disposition by Liquid Audio of all or
substantially all Liquid Audio's assets. Pursuant to the terms of such
employment agreement, the proposed merger with Alliance would constitute a
change of control that would result in an acceleration of the vesting of options
to purchase an aggregate of 50,000 shares of Liquid Audio common stock at an
exercise price of $1.84 a share.
Liquid Audio has agreed to pay severance to each of Messrs. Rishniw,
Wingate, Blanco and Bolcerek in the event that his employment with Liquid Audio
is terminated without cause or he is constructively terminated. Liquid Audio has
agreed to pay six months' salary for each of Messrs. Wingate, Blanco and
Bolcerek, which amounts $115,000, $87,500 and $87,500, respectively. In the case
of Leon Rishniw, Liquid Audio has agreed to pay $170,000, which is one year's
salary.
REPORT OF THE COMPENSATION COMMITTEE OF THE BOARD
The compensation committee of the board of directors establishes the
general compensation policies of the Company as well as the compensation plans
and specific compensation levels for executive officers. It also administers the
Company's employee stock benefit plan for executive officers. The compensation
committee is currently composed of independent, non-employee directors who,
except as disclosed under "Compensation Committee Interlocks and Insider
Participation," have no interlocking relationships as defined by the Securities
and Exchange Commission.
The compensation committee believes that the compensation of the executive
officers, including that of the Chief Executive Officer (each, an "Executive
Officer" and collectively, the "Executive Officers"), should be influenced by
the Company's performance. The compensation committee establishes the salaries
and bonuses of all of the Executive Officers by considering: (i) the Company's
financial performance for the past year; (ii) the achievement of certain revenue
and operating loss objectives related to the particular Executive Officer's area
of responsibility; (iii) the salaries and bonuses of Executive Officers in
similar positions of comparably-sized companies; and (iv) the relationship
between revenue and Executive Officer compensation.
In 2001, the compensation committee reviewed management's recommendations
and a third party report on Executive Officer compensation that concluded that
the Company was at risk due to discrepancies between the compensation paid to
some of its management team and the market rate of compensation paid to
similarly-situated executives. The third party report compiled compensation data
from two surveys prepared by companies specializing in compensation data for
technology companies. The third party report was based on the compensation data
for over 150 companies in the software and e-commerce industries and further
refined the survey based on the revenues and geographic location of these
companies. This survey extended beyond the peer group companies used in the
Company's stock price performance graph in order to get a larger more
representative sample of high-technology companies that might compete for Liquid
Audio's Executive Officers. Based on that report and a review of the Company's
recent performance, the compensation committee approved minimum increases to the
base and incentive bonus compensation of many of the Company's Executive
Officers. These increases were made effective as of June 1, 2001. The committee
believes that, with these increases in place, the Company's Executive Officer
salaries and bonuses in 2001 were comparable in the industry for similarly-sized
businesses. Given the size of the survey, the actual performance of the other
companies was not considered by the compensation committee.
In 2001, the compensation committee established bonus targets for the
Executive Officers equal to either 30% or 50% of base salary. Bonus payouts were
based on both corporate and individual performance measurements. The corporate
performance measurements were based on revenue and operating loss targets. Due
to the Company's performance in 2001, especially the level by which revenue was
below target, the compensation committee reduced the actual bonus payouts that
would have been payable under the incentive
19
plan so that the amount of the actual bonus payouts for the Executive Officers
represented on average approximately 30% of their bonus targets. The bonus
payouts for 2001 were significantly lower than the bonus payouts for 2000,
reflecting the lower corporate performance measures.
In addition to salary and bonus, the compensation committee, from time to
time, grants options to Executive Officers. The compensation committee views
option grants as an important component of its long-term, performance-based
compensation philosophy. In granting stock options to the Executive Officers,
the compensation committee considered the need to retain the Executive Officer,
market data from the third party report reflecting ongoing grants of options by
comparable companies, the current market value of unexercised options held by
the Executive Officer and potential values of new grants based on increases in
the Company's stock price. Since the value of an option bears a direct
relationship to the Company's stock price, the compensation committee believes
that options motivate Executive Officers to manage the Company in a manner that
will also benefit stockholders. As such, options are granted at the current
market price. One of the principal factors considered in granting options to an
Executive Officer is the Executive Officer's ability to influence the Company's
long-term growth and profitability.
In approving the Chief Executive Officer's salary and stock option grants,
the compensation committee generally followed the policies set forth above. Mr.
Kearby's base annual salary of $245,000 and target bonus of 50% of base salary
were established to reflect the median of the base salaries and bonus targets of
chief executive officers of the comparable companies in the third party survey.
The grant of 75,000 options to Mr. Kearby reflected the compensation committee's
view that options are an important component of compensation and is important to
further align the interests of management with the stockholders. Mr. Kearby's
cash bonus of $52,000 was lower than his target bonus because corporate
performance measurements of revenue and operating loss were below targets
established by the compensation committee reflects his position, duties and
responsibilities.
Compensation Committee of the Board of
Directors
ANN WINBLAD
RAYMOND A. DOIG
THE FOREGOING COMPENSATION COMMITTEE REPORT SHALL NOT BE DEEMED TO BE
"SOLICITING MATERIAL" OR TO BE FILED WITH THE SEC, NOR SHALL SUCH INFORMATION BE
INCORPORATED BY REFERENCE INTO ANY PAST OR FUTURE FILING UNDER THE SECURITIES
ACT OR THE EXCHANGE ACT, EXCEPT TO THE EXTENT THE COMPANY SPECIFICALLY
INCORPORATES IT BY REFERENCE INTO SUCH FILING.
20
PERFORMANCE GRAPH
The following graph compares the cumulative total return to stockholders on
our common stock with the cumulative total return of the Nasdaq Stock Market
Index-U.S. and a group of peer issuers selected in good faith and comprised of
Intertrust Technologies Corporation (ITRU), MMC (HITS), Preview Systems, Inc.
(PRVW) and RealNetworks, Inc. (RNWK). The graph assumes that $100 was invested
on July 9, 1999, the date of our initial public offering, in our common stock,
the Nasdaq Stock Market Index-U.S. and the peer group, including reinvestment of
dividends. No dividends have been declared or paid on our common stock. Historic
stock price performance is not necessarily indicative of future stock price
performance.
COMPARISON OF 30 MONTH CUMULATIVE TOTAL RETURN*
AMONG LIQUID AUDIO, THE NASDAQ STOCK MARKET (U.S.) INDEX AND A PEER GROUP
[PERFORMANCE GRAPH]
---------------
* $100 invested on July 9, 1999 in stock or index, including reinvestment of
dividends. Fiscal year ending December 31.
THE INFORMATION CONTAINED IN THE STOCK PERFORMANCE GRAPH SHALL NOT BE DEEMED TO
BE "SOLICITING MATERIAL" OR TO BE FILED WITH THE SEC, NOR SHALL SUCH INFORMATION
BE INCORPORATED BY REFERENCE INTO ANY FUTURE FILING UNDER THE SECURITIES ACT OR
THE EXCHANGE ACT, EXCEPT TO THE EXTENT THE COMPANY SPECIFICALLY INCORPORATES IT
BY REFERENCE INTO SUCH FILING.
21
CERTAIN TRANSACTIONS
Since our inception in January 1996, we have never been a party to any
transaction or series of similar transactions in which the amount involved
exceeded or will exceed $60,000 and in which any director, executive officer or
holder of more than 5% of our common stock had or will have an interest, other
than as described under "SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT" and the transactions described below.
Gerald W. Kearby, Philip R. Wiser and Robert G. Flynn were involved in our
founding and organization and may be considered as our promoters. Mr. Kearby and
Mr. Flynn are current executives and Mr. Wiser is a former executive. Following
our inception in January 1996, we issued 937,500 shares of common stock to Mr.
Kearby, 843,750 shares of common stock to Mr. Wiser and 750,000 shares of common
stock to Mr. Flynn. Mr. Kearby, Mr. Wiser and Mr. Flynn each contributed a
nominal amount of capital for our initial capitalization.
From May to July 1996, we sold an aggregate of 3,049,989 shares of Series A
preferred stock to certain investors at a purchase price of $0.656 per share. In
May 1997, we sold an aggregate of 3,186,888 shares of Series B preferred stock
to certain investors at a purchase price of $1.96 per share. In July and
September 1998, we sold an aggregate of 3,507,322 shares of Series C preferred
stock to certain investors at a purchase price of $6.14 per share. The shares of
Series A, Series B and Series C preferred stock automatically converted into
9,744,199 shares of common stock upon the closing of our initial public offering
on July 8, 1999.
The investors in the preferred stock included the following entities, which
are 5% stockholders or are affiliated with our directors:
SHARES OF SHARES OF
SERIES A SERIES B
PREFERRED PREFERRED SHARES OF SERIES C
INVESTOR STOCK STOCK PREFERRED STOCK
-------- --------- --------- ------------------
Entities Affiliated with Directors:
Entities affiliated with Ann Winblad(1)................. 1,829,272 788,928 81,431
(Entities affiliated with Hummer Winblad Venture
Partners)(2)
---------------
(1) Ann Winblad is a member of our Board. Ms. Winblad is a general partner of
Hummer Winblad Venture Partners.
(2) Hummer Winblad Venture Partners II, L.P. purchased 1,756,098 shares of
Series A preferred stock, 757,370 shares of Series B preferred stock and
80,943 shares of Series C preferred stock. Hummer Winblad Technology Fund
II, L.P. purchased 62,198 shares of Series A preferred stock and 26,825
shares of Series B preferred stock. Hummer Winblad Technology Fund II, L.P.
purchased 10,976 shares of Series A preferred stock, 4,733 shares of Series
B preferred stock and 488 shares of Series C preferred stock.
In fiscal year 2001, the Company adopted a preferred stock rights agreement
and Alexander Dunham Capital Group, Inc., where Mr. Somes is the Managing
Director, provided limited investment banking services to the Company.
In the past, we have granted options to our executive officers and
directors. We intend to grant options to our officers and directors in the
future. See "PROPOSAL ONE -- Director Compensation" and "EXECUTIVE
COMPENSATION -- Option Grants in Last Fiscal Year."
We have entered into indemnification agreements with our officers and
directors containing provisions which may require us, among other things, to
indemnify our officers and directors against certain liabilities that may arise
by reason of their status or service as officers or directors (other than
liabilities arising from willful misconduct of a culpable nature) and to advance
their expenses incurred as a result of any proceeding against them as to which
they could be indemnified. We also intend to execute such agreements with our
future directors and executive officers.
All of our securities referenced above were purchased or sold at prices
equal to the fair market value of such securities, as determined by our Board,
on the date of issuance.
22
REPORT OF THE AUDIT COMMITTEE OF THE BOARD
The audit committee of the board of directors consists of three
non-employee directors, Mr. Imbler, Ms. and Mr. Doig, each of whom has been
determined to be independent under the National Association of Securities
Dealers' Listing Standards. The audit committee is a standing committee of the
board of directors and operates under a written charter adopted by the board of
directors. Among its other functions, the audit committee recommends to the
board of directors, subject to stockholder ratification, the selection of
independent accountants.
Management is responsible for the Company's internal controls and the
financial reporting process. The independent accountants are responsible for
performing an independent audit of the Company's consolidated financial
statements in accordance with generally accepted accounting principles in the
United States and to issue a report thereon. The audit committee's
responsibility is to monitor and oversee these processes.
During fiscal 2001, at each of its meetings, the audit committee met with
the senior members of the Company's financial management team and the
independent accountants. The audit committee's agenda is established by the
audit committee and senior members of the Company's financial management team.
The audit committee has reviewed with management and the independent accountants
the audited consolidated financial statements in the Annual Report, including a
discussion of the quality, not just the acceptability, of the accounting
principles, the reasonableness of significant judgments and the clarity of
disclosures in the consolidated financial statements. Management represented to
the audit committee that the consolidated financial statements were prepared in
accordance with generally accepted accounting principles. The audit committee
discussed with the independent accountants matters required to be discussed by
Statement on Auditing Standards No. 61, "Communication with Audit Committees."
The independent accountants also provided to the audit committee the
written disclosure required by Independence Standards Board Standard No. 1,
"Independence Discussions with Audit Committees." The audit committee discussed
with the independent accountants that firm's independence and considered whether
the non-audit services provided by the independent accountants are compatible
with maintaining its independence.
Based on the audit committee's discussion with management and the
independent accountants, and the audit committee's review of the representation
of management and the report of the independent accountants to the audit
committee, the audit committee recommended that the board of directors include
the audited consolidated financial statements in the Company's Annual Report on
Form 10-K for the year ended December 31, 2001 filed with the Securities and
Exchange Commission.
Audit Committee of the Board of
Directors
STEPHEN V. IMBLER
ANN WINBLAD
RAYMOND A. DOIG
THE FOREGOING AUDIT COMMITTEE REPORT SHALL NOT BE DEEMED TO BE "SOLICITING
MATERIAL" OR TO BE FILED WITH THE SEC, NOR SHALL SUCH INFORMATION BE
INCORPORATED BY REFERENCE INTO ANY PAST OR FUTURE FILING UNDER THE SECURITIES
ACT OR THE EXCHANGE ACT, EXCEPT TO THE EXTENT THE COMPANY SPECIFICALLY
INCORPORATES IT BY REFERENCE INTO SUCH FILING.
23
LEGAL PROCEEDINGS
In November 2001, two lawsuits were filed in Delaware Chancery Court naming
Liquid Audio and certain of its officers and directors as defendants. Both
actions related to Liquid Audio's response to recent acquisition offers and
purported to be class actions brought on behalf of Liquid Audio's stockholders.
On February 1, 2002, the two complaints were consolidated into a single action,
titled In Re Liquid Audio, Inc., Shareholders Litigation, Consolidated Civil
Action No. 19212-NC. That action was brought against Gerald W. Kearby, Silvia
Kessel, Ann L. Winblad and Liquid Audio. The complaint alleges that defendants
had breached their fiduciary duties owed to Liquid Audio's stockholders in
connection with Liquid Audio's response to acquisition offers from Steel
Partners II, LLP and an investor group formed by MMC. The complaint seeks, among
other things, a Court order barring Liquid Audio from adopting or maintaining
measures that would make Liquid Audio less attractive as a takeover candidate
or, alternatively, awarding compensatory damages to the purported plaintiff
class. To date, Liquid Audio has not responded to the complaint, nor has the
Court set a date for discovery cutoff or trial. Liquid Audio intends to
vigorously defend the action. There is no assurance concerning the outcome of
either action, or whether either action would have a material effect on Liquid
Audio's financial condition or business operations.
On May 3, 2002, MMC filed an action in the Delaware Chancery Court,
pursuant to Title 8 Delaware Code section 211, seeking to compel Liquid Audio to
hold an annual meeting of stockholders. Liquid Audio moved to dismiss on the
grounds that the Court lacked subject matter jurisdiction as 13 months had not
elapsed since the Company's last annual stockholder meeting, held on June 1,
2001. On May 10, 2002, the Board set July 1, 2002 as the date for the Annual
Meeting and Liquid Audio's motion to dismiss was held in abeyance. On June 13,
2002, Liquid Audio publicly announced the execution of the Merger Agreement and
announced that, in light of this merger, the Board had determined to postpone
the Annual Meeting. The next day, MMC filed an amended complaint requesting that
the Court order Liquid Audio to hold its Annual Meeting on July 1, 2002. The
Court allowed the parties to take expedited discovery and scheduled a hearing
for July 15, 2002. At the hearing, the Court granted Liquid Audio's request that
the Annual Meeting be scheduled for September 26, 2002.
On July 23, 2002, MMC filed an action in Delaware Chancery Court against
us, each member of our Board and Alliance. The complaint alleges that the
directors of Liquid Audio and Alliance violated their fiduciary duties by
entering into the merger and approving the Merger Agreement, and that our
directors further violated their fiduciary duties by making certain changes to
our shareholders rights plan. Alliance is alleged to have aided and abetted the
alleged breaches of fiduciary duty by the Liquid Audio directors. According to
the complaint, the plaintiff is seeking, among other things, to (i) invalidate
the Merger Agreement, (ii) prevent us or Alliance from taking any actions to
effectuate or enforce the Merger Agreement, the merger of Liquid Audio or
Alliance, or the Company's self tender-offer, (iii) direct our Board to restore
the "trigger" of our shareholders rights plan to 15%, (iv) prevent enforcement
of our shareholders rights plan to the extent it prohibits the plaintiff and
other stockholders from cooperating to assist in the solicitation of proxies for
our annual meeting, (v) damages for incidental injuries, and (vi) costs and
expenses, including attorneys' fee and experts' fees. In connection with its
complaint, MMC filed a motion for a preliminary injunction and a motion for
expedited proceedings. On July 31, 2002, MMC withdrew its motion for a
preliminary injunction and for expedited proceedings, and stated that it would
file an amended complaint. To date, no amended complaint has been filed. If MMC
elects to pursue its claims in this matter, we intend to vigorously defend the
action.
Liquid Audio filed a lawsuit on August 21, 2002 against MMC and Steel
Partners II, L.P. ("Steel Partners") in U.S. District Court for the Southern
District of New York. Liquid Audio is asking the Court to prohibit MMC and Steel
Partners from violating the federal securities laws in connection with their
campaigns to take control of Liquid Audio, as well as seeking compensatory and
punitive damages as a result of their alleged violations. Liquid Audio's
complaint alleges that MMC has failed to register as an investment company under
the Investment Company Act of 1940, and that its purchase of Liquid Audio shares
and subsequent proxy contest to take control of the Board is therefore in
violation of that Act. The complaint also charges that Steel Partners is
conducting an illegal proxy contest by failing to make the proper filings with
the SEC and that, in the course of its contest, Steel Partners has distributed
false and misleading statements to
24
Liquid Audio stockholders. Liquid Audio is seeking to enjoin MMC from continuing
its campaign to take control of Liquid Audio and from communicating with Liquid
Audio stockholders. In addition, Liquid Audio is seeking to require Steel
Partners to comply with the SEC's proxy rules, to retract its recent press
release concerning Liquid Audio's proposed merger with Alliance and to
disseminate corrective disclosure. On September 5, 2002, a hearing was held in
the United States District Court for the Southern District of New York. At the
conclusion of this hearing, the Court reserved decision on the Liquid Audio's
motion.
On August 27, 2002, MMC filed a lawsuit against Liquid Audio, Raymond A.
Doig, Gerald W. Kearby, Robert G. Flynn, Stephen V. Imbler and Ann Winblad in
the Delaware Chancery Court seeking injunctive and other equitable relief to
prevent the defendants from appointing two additional directors to the Board.
MMC's complaint alleges that the defendants' decision to expand the Board was in
violation of Delaware law. MMC further alleges that the defendants' actions were
taken solely to interfere with the vote of the stockholders of Liquid Audio and
to deny MMC and other stockholders of Liquid Audio a substantial presence on the
Board. The complaint alleges that the defendants' actions are a disproportionate
defensive response to a third party offer for Liquid Audio and to the current
proxy contest. MMC charges that the expansion of the Board constitutes a breach
of the directors' fiduciary duties of loyalty, care and good faith to the
stockholders of Liquid Audio. On August 29, 2002, the Court denied MMC's request
for a hearing before the Annual Meeting. The Court scheduled a hearing for
October 21, 2002. We intend to vigorously defend against MMC's claims.
COSTS AND METHOD OF SOLICITATION
Proxies may be solicited by mail, advertisement, telephone, via the
Internet or in person. Solicitations may be made by directors, officers,
investor relations personnel and other employees of Liquid Audio, none of whom
will receive additional compensation for such solicitations.
Liquid Audio has retained Georgeson Shareholder Communication ("Georgeson")
to provide solicitation and advisory services in connection with the proxy
solicitation, for which Georgeson is to receive a fee estimated at $75,000,
together with reimbursement for its reasonable out-of-pocket expenses and for
payments made to brokers and other nominees for their expenses in forwarding
soliciting material. Georgeson will distribute proxy materials to beneficial
owners and solicit proxies by personal interview, mail, telephone and telegram,
and via the Internet, and will request brokerage houses and other custodians,
nominees and fiduciaries to forward soliciting material to the beneficial owners
of shares of Liquid Audio common stock. Liquid Audio has also agreed to
indemnify Georgeson against certain liabilities and expenses. It is anticipated
that Georgeson will employ approximately 35 persons to solicit stockholders for
the Annual Meeting.
Costs incidental to these solicitations of proxies will be borne by Liquid
Audio and include expenditures for printing, postage, legal, accounting, public
relations, soliciting, advertising and related expenses and are expected to be
approximately $300,000 in addition to the fees of Georgeson described above
(excluding the amount normally expended by Liquid Audio for the solicitation of
proxies at its annual meetings). Total costs incurred to date for, in
furtherance of, or in connection with these solicitations of proxies are
approximately $150,000.
Certain information about the directors and executive officers of Liquid
Audio and certain employees and other representatives of Liquid Audio who may
also solicit proxies is set forth in the attached Schedule I. Schedule II sets
forth certain information relating to shares of Liquid Audio common stock owned
by such parties and certain transactions between any of them and Liquid Audio.
DEADLINE FOR RECEIPT OF STOCKHOLDER PROPOSALS
Pursuant to Rule 14a-8 under the Exchange Act, stockholders may present
proper proposals for inclusion in a company's proxy statement and for
consideration at the next annual meeting of its stockholders by submitting their
proposals to the company in a timely manner.
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Liquid Audio has not yet determined the date upon which it will hold its
annual meeting of stockholders for 2003. When the 2003 annual meeting is held,
stockholder proposals must be received by Liquid Audio no later than 120 days
prior to the annual meeting and must otherwise comply with the requirements of
Rule 14a-8, to be included in Liquid Audio's proxy statement for the 2003 annual
meeting. All stockholder proposals should be marked for the attention of the
Secretary, Liquid Audio, Inc., 800 Chesapeake Drive, Redwood City, California
94063.
Our By-laws establish an advance notice procedure for proposals to be
brought by stockholders before an annual meeting. For nominations or other
business to be properly brought before an annual meeting by a stockholder, such
stockholder must provide timely notice as provided above, and the notice must
contain specified information concerning the matters to be brought before such
meeting and concerning the stockholder proposing such matters. A copy of the
full text of the By-law provision discussed above may be obtained by writing to
our Secretary. All notices of proposals by stockholders, whether or not included
in our proxy materials, should be sent to Liquid Audio, Inc., 800 Chesapeake
Drive, Redwood City, California 94063.
PARTICIPANTS IN THE SOLICITATION
Under applicable regulations of the SEC, each member of the Board and
certain officers of Liquid Audio may be deemed to be a "participant" in Liquid
Audio's solicitations of proxies in connection with the Annual Meeting. For
information with respect to each participant in Liquid Audio's solicitation of
proxies in connection with the Annual Meeting please refer to (i) the table of
security ownership of directors and executive officers under the heading
"SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT" in this Proxy
Statement, (ii) the discussion under the heading "Change of Control
Arrangements" in this Proxy Statement and (iii) Schedules I and II to this Proxy
Statement.
OTHER MATTERS
The Board does not intend to present any other matters at the Annual
Meeting. If any other matters properly come before the Annual Meeting, it is the
intention of the persons named in the enclosed form of proxy to vote the shares
they represent as the Board may recommend.
It is important that your shares be represented at the meeting, regardless
of the number of shares which you hold. You are, therefore, urged to execute and
return, at your earliest convenience, the accompanying GREEN proxy in the
envelope which has been enclosed.
THE BOARD OF DIRECTORS
Redwood City, California
September [ ], 2002
26
APPENDIX A
CHARTER FOR THE AUDIT COMMITTEE
OF THE BOARD OF DIRECTORS
OF
LIQUID AUDIO, INC.
PURPOSE:
The purpose of the Audit Committee of the Board of Directors of Liquid
Audio, Inc. (the "Company") shall be:
- to provide oversight and monitoring of Company management and the
independent accountants and their activities with respect to the
Company's financial reporting process;
- to provide the Company's Board of Directors with the results of its
monitoring and recommendations derived therefrom;
- to nominate to the Board of Directors independent accountants to audit
the Company's financial statements and oversee the activities and
independence of the accountants; and
- to provide to the Board of Directors such additional information and
materials as it may deem necessary to make the Board of Directors aware
of significant financial matters that require the attention of the Board
of Directors.
The Audit Committee will undertake those specific duties and
responsibilities listed below and such other duties as the Board of Directors
may from time to time prescribe.
MEMBERSHIP:
The Audit Committee members will be appointed by, and will serve at the
discretion of, the Board of Directors and will consist of at least three members
of the Board of Directors. On or before June 14, 2001, the members will meet the
following criteria:
- Each member will be an independent director, in accordance with the
Nasdaq National Market Audit Committee requirements;
- Each member will be able to read and understand fundamental financial
statements, in accordance with the Nasdaq National Market Audit Committee
requirements; and
- At least one member will have past employment experience in finance or
accounting, requisite professional certification in accounting, or other
comparable experience or background, including a current or past position
as a chief executive or financial officer or other senior officer with
financial oversight responsibilities.
RESPONSIBILITIES:
The responsibilities of the Audit Committee shall include:
- providing oversight and monitoring of Company management and the
independent accountants and their activities with respect to the
Company's financial reporting process;
- recommending the selection and, where appropriate, replacement of the
independent accountants to the Board of Directors;
- reviewing fee arrangements with the independent accountants;
- reviewing the independent accountants' proposed audit scope, approach and
independence;
- reviewing the performance of the independent accountants, who shall be
accountable to the Board of Directors and the Audit Committee;
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- requesting from the independent accountants of a formal written statement
delineating all relationships between the auditor and the Company,
consistent with Independent Standards Board Standard No. 1, and engaging
in a dialogue with the accountants with respect to any disclosed
relationships or services that may impact the objectivity and
independence of the accountants;
- directing the Company's independent accountants to review before filing
with the SEC the Company's interim financial statements included in
Quarterly Reports on Form 10-Q, using professional standards and
procedures for conducting such reviews;
- discussing with the Company's independent accountants the matters
required to be discussed by Statement on Accounting Standard No. 61, as
it may be modified or supplemented;
- reviewing with management, before release, the audited financial
statements and Management's Discussion and Analysis in the Company's
Annual Report on Form 10-K;
- providing a report in the Company's proxy statement in accordance with
the requirements of Item 306 of Regulation S-K and Item 7(e)(3) of
Schedule 14A;
- reviewing the Audit Committee's own structure, processes and membership
requirements; and
- performing such other duties as may be requested by the Board of
Directors.
MEETINGS:
The Audit Committee will meet at least quarterly. The Audit Committee may
establish its own schedule, which it will provide to the Board of Directors in
advance.
The Audit Committee will meet separately with the independent accountants
as well as members of the Company's management as it deems appropriate in order
to review the financial controls of the Company.
MINUTES:
The Audit Committee will maintain written minutes of its meetings, which
minutes will be filed with the minutes of the meetings of the Board of
Directors.
REPORTS:
Apart from the report prepared pursuant to Item 306 of Regulation S-K and
Item 7(e)(3) of Schedule 14A, the Audit Committee will summarize its
examinations and recommendations to the Board from time to time as may be
appropriate, consistent with the Committee's charter.
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SCHEDULE I
INFORMATION CONCERNING THE DIRECTORS AND CERTAIN EXECUTIVE OFFICERS
AND EMPLOYEES OF THE COMPANY
The following table sets forth the name and present principal occupation or
employment (except with respect to directors, whose principal occupation is set
forth under the heading "INFORMATION REGARDING THE NOMINEE AND OTHER
DIRECTORS"), and the name, principal business and address of any corporation or
other organization in which such employment is carried on, of (1) the directors
of Liquid Audio and (2) certain executive officers and other employees of Liquid
Audio who may assist in soliciting proxies from stockholders of Liquid Audio.
Unless otherwise indicated, the principal business address of each such person
is c/o Liquid Audio, Inc., 800 Chesapeake Drive, Redwood City, CA 94063. Ages
shown are as of March 9, 2002.
NAME AND PRINCIPAL BUSINESS ADDRESS PRESENT OFFICE OR OTHER PRINCIPAL OCCUPATION OR EMPLOYMENT
----------------------------------- ----------------------------------------------------------
Gearld W. Kearby (age 54) President, Chief Executive Officer and Director of Liquid
Audio, Inc.
Raymond A. Doig (age 64) Consultant and Director of Liquid Audio, Inc.
Robert G. Flynn (age 48) Senior Vice President of Business Development and Director
of Liquid Audio, Inc.
Stephen V. Imbler (age 50) Advisor of Hyperion Solutions Corporation and Director of
Liquid Audio, Inc.
Ann Winblad (age 51) General Partner of Hummer Winblad Venture Partners and
Director of Liquid Audio, Inc.
James D. Somes (age 50) Founder and Managing Director of Alexander Dunham Capital
and Director of Liquid Audio, Inc.
Judith N. Frank (age 61) Principal of Asset Strategies and Director of Liquid Audio,
Inc.
Michael R. Bolcerek (age 40) Senior Vice President and Chief Financial Officer of Liquid
Audio, Inc.
Richard W. Wingate (age 49) Senior Vice President of Content Development and Label
Relations of Liquid Audio, Inc.
Leon Rishniw (age 36) Vice President of Engineering of Liquid Audio, Inc.
H. Thomas Blanco (age 52) Vice President of Human Resources of Liquid Audio, Inc.
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SCHEDULE II
INFORMATION REGARDING OWNERSHIP OF THE COMPANY'S SECURITIES BY PARTICIPANTS
The number of shares of Liquid Audio common stock held by directors and the
named executive officers is set forth in the Proxy Statement under the caption,
"SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT." The number of
shares of Liquid Audio common stock beneficially held by Michael R. Bolcerek as
of June 30, 2002 is 66,666, all of which are shares of common stock issuable
within 60 days of June 30, 2002 upon the exercise of options and other rights
beneficially owned by Mr. Bolcerek on that date. Beneficial ownership is
determined in accordance with the rules of the SEC and includes voting and
investment power with respect to all shares of common stock. To our knowledge,
except under applicable community property laws or as otherwise indicated, Mr.
Bolcerek has sole voting and sole investment control with respect to all shares
of common stock beneficially owned.
PURCHASES AND SALES OF SECURITIES
The following table sets forth information concerning all purchases and
sales of securities of Liquid Audio by the participants listed below during the
past two years.
NATURE OF NUMBER OF SHARES
NAME DATE OF TRANSACTION TRANSACTION OF COMMON STOCK
---- ------------------- ----------- ----------------
Gearld W. Kearby 2/28/01 Sale 12,500
H. Thomas Blanco 10/31/00 Purchase 1,063
4/30/01 Purchase 2,500
10/31/01 Purchase 2,069
4/30/02 Purchase 2,500
Michael R. Bolcerek and Robert G. Flynn have agreed to serve as the proxies
on Liquid Audio's GREEN proxy card.
Other than as disclosed in this Schedule or in the Proxy Statement, none of
Liquid Audio, any of its directors, executive officers or the employees of
Liquid Audio named in Schedule I owns any securities of Liquid Audio or any
subsidiary of Liquid Audio, beneficially or of record, has purchased or sold any
of such securities within the past two years or is or was within the past year a
party to any contract, arrangement or understanding with any person with respect
to any such securities. Except as disclosed in this Schedule or in the Proxy
Statement, to the best knowledge of Liquid Audio, its directors and executive
officers or the employees of Liquid Audio named in Schedule I, none of their
associates beneficially owns, directly or indirectly, any securities of Liquid
Audio.
Other than as disclosed in this Schedule or in the Proxy Statement, to the
knowledge of Liquid Audio, none of Liquid Audio, any of its directors, executive
officers or the employees of Liquid Audio named in Schedule I has any
substantial interest, direct or indirect, by security holdings or otherwise, in
any matter to be acted upon at the Annual Meeting.
Other than as disclosed in this Schedule or in the Proxy Statement, to the
knowledge of Liquid Audio, none of Liquid Audio, any of its directors, executive
officers or the employees of Liquid Audio named in Schedule I is, or has been
within the past year, a party to any contract, arrangement or understanding with
any person with respect to any securities of Liquid Audio, including, but not
limited to, joint ventures, loan or option arrangements, puts or calls,
guarantees against loss or guarantees of profit, division of losses or profits,
or the giving or withholding of proxies.
Other than as set forth in this Schedule or in the Proxy Statement, to the
knowledge of Liquid Audio, none of Liquid Audio, any of its directors, executive
officers or the employees of Liquid Audio named in Schedule I, or any of their
associates, has had or will have a direct or indirect material interest in any
transaction or series of similar transactions since the beginning of Liquid
Audio's last fiscal year or any
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currently proposed transactions, or series of similar transactions, to which
Liquid Audio or any of its subsidiaries was or is to be a party in which the
amount involved exceeds $60,000.
Other than as set forth in this Schedule or in the Proxy Statement, to the
knowledge of Liquid Audio, none of Liquid Audio, any of its directors, executive
officers or the employees of Liquid Audio named in Schedule I, or any of their
associates, has any arrangements or understandings with any person with respect
to any future employment by Liquid Audio or its affiliates or with respect to
any future transactions to which Liquid Audio or any of its affiliates will or
may be a party.
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IMPORTANT
1. Your proxy is important no matter how many Liquid Audio shares you own. Be
sure to vote on the GREEN proxy card. The Company urges you NOT to sign any
WHITE proxy card sent to you by the MMC group.
2. If you have already submitted a proxy card to the Company for the Annual
Meeting, you may change your vote to a vote "FOR" the election of Liquid
Audio's nominees and "Against" the MMC group's slate by signing, dating and
returning Liquid Audio's GREEN proxy card, which must be dated after any
proxy card you may previously have submitted to the Company. Only your last
dated proxy card for the Annual Meeting will count at the Annual Meeting.
3. If any of your shares is held in the name of a bank, broker or other
nominee, please contact the person responsible for your account and direct
him or her to vote on the GREEN proxy card "FOR" the election of Liquid
Audio's nominees.
4. If you hold your shares in more than one type of account or your shares are
registered differently, you may receive more than one GREEN proxy card. We
encourage you to vote each GREEN proxy card that you receive.
5. If you have any questions or need assistance in voting your shares, please
contact our proxy solicitors, Georgeson, at the number set forth below:
[GEORGESON LOGO]
17 STATE STREET, 10(TH )FLOOR
NEW YORK, NY 10004
BANKS AND BROKERS: (212) 440-9800
STOCKHOLDER'S CALL TOLL FREE: (866) 367-5519
GREEN PROXY LIQUID AUDIO, INC. GREEN PROXY
ANNUAL MEETING OF STOCKHOLDERS -- SEPTEMBER 26, 2002
THIS GREEN PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF LIQUID
AUDIO, INC.
The undersigned stockholder of Liquid Audio, Inc., a Delaware corporation,
acknowledges receipt of the Notice of Annual Meeting of Stockholders and Proxy
Statement with respect to the 2002 Annual Meeting and appoints Michael R.
Bolcerek and Robert G. Flynn, or either of them, as the proxies and
attorneys-in-fact, with full power to each of substitution on behalf and in the
name of the undersigned to vote and otherwise represent all of the shares
registered in the name of the undersigned at the 2002 Annual Meeting of
Stockholders of the Company to be held on Thursday, September 26, 2002 at 10:00
a.m. (local time) at Hotel Sofitel, 223 Twin Dolphin Drive, Redwood City,
California 94065, and any adjournment thereof with the same effect as if the
undersigned were present and voting such shares, on the following matters and in
the following manner:
TO ASSURE YOUR REPRESENTATION AT THE ANNUAL MEETING, PLEASE MARK, SIGN
AND DATE THIS PROXY AND RETURN IT PROMPTLY IN THE ENCLOSED ENVELOPE.
THIS PROXY WILL BE VOTED AS DIRECTED, OR IF NO DIRECTION IS INDICATED, WILL BE
VOTED "FOR" PROPOSALS 1 AND 2 AND "AGAINST" PROPOSALS 4, 5 AND 6.
PLEASE MARK VOTE IN BOX IN THE FOLLOWING MANNER USING DARK INK ONLY. [X]
THE BOARD RECOMMENDS A VOTE "FOR" PROPOSALS 1 AND 2.
1. The election of the following persons as Class III director of Liquid Audio, Inc. to serve for a term of three years
and until his successor shall be duly elected and qualified.
NOMINEES: GERALD W. KEARBY AND RAYMOND A. DOIG [ ] FOR [ ] WITHHOLD
INSTRUCTION: To withhold authority to vote for any nominee in this Item 1, write that nominee's name in the space
provided below.
--------------------------------------------------------------------------------
2. To ratify the appointment of PricewaterhouseCoopers LLP as independent accountants for Liquid Audio, Inc. for the
fiscal year ending December 31, 2002.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
(Continued and to be signed on reverse side.)
THE BOARD RECOMMENDS A VOTE "AGAINST" PROPOSALS 3, 4 AND 5.
3. To increase the size of the Board.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
4. To authorize only stockholders to fill Board vacancies and newly created directorships.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
5. To elect 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 3 and Proposal 4.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
INSTRUCTION: To vote against any nominee in this Item 5, write that nominee's name in the space provided
below.
-------------------------------------------------------------------------------------------------------------
6. To vote or otherwise represent the shares on any other business which may properly come before the meeting or
any adjournment thereof, according to their discretion and in their discretion.
The shares represented by this proxy will be voted
in accordance with the specification made. If no
specification is made, the shares represented by
this proxy will be voted for each of the above
persons and proposals, and for such other matters
as may properly come before the meeting as the
proxy holders deem advisable.
-----------------------------------------------
Signature(s)
-----------------------------------------------
(Title, if appropriate) Dated: , 2002
Sign exactly as your name(s) appear on the stock certificate. A corporation is
requested to sign its name by its President or other authorized officer, with
the office held designated. Executors, administrators, trustees, etc., are
requested to so indicate when signing, if stock is registered in two names, both
should sign.