Liquid Audio Merges with Alliance Entertainment

With antsy shareholders pushing for an outright sale of the company, online music firm Liquid Audio on Thursday announced all-stock deal to merge with privately-held Alliance Entertainment.

When terms of the stock swap agreement are settled, Liquid Audio said it
would issue about 46.2 million new shares to Alliance, which would own a 67
percent majority stake in the new entity. Liquid Audio would assume all
outstanding stock options and warrants to purchase shares of Alliance
Entertainment and would take a 33 percent ownership stake.

The Redwood City, Calif.-based firm said the transaction would be accounted
for as a purchase and is intended to qualify as tax-free to the stockholders
of both companies.

The acquisition of Alliance Entertainment, which distributes media products
and accessories — like CDs, DVDs, VHS movies and video games — would give
Liquid Media a physical outlet to deliver its software and entertainment
media products.

It also comes on the heels of a public call by a minority owner for Liquid
Audio to be sold after a disappointing revenue drop. According to reports,
Josh Schechter of Steel Partners II wrote a scathing letter to Liquid
Audio’s board, demanding the company be sold to the highest bidder because
of its “pathetic performance.”

“If the company truly has valuable technology, prove us wrong and sell it
immediately to the highest bidder and distribute all of the cash to
shareholders,” Schechter said, pointing to the disappointing $135,000 of
revenue during the first quarter.

However, by opting to merge with Coral Springs, Fla.-based Alliance
Entertainment, Liquid Audio is making its push for survival, gambling on the
physical distribution channels to prop up faltering sales.

“This merger will firmly position the combined company to become a leading
provider of commerce solutions for entertainment media through physical and
digital channels,” said Alliance CEO Eric Weisman.

Weisman said Alliance generated close to $690 million and $538 million in gross
sales for the fiscal year 2001 and 2000 respectively. “Combining the two
businesses enables us to provide a unique solution for both content owners
and retailers of home entertainment products as we see their digital and
physical delivery needs converging. We believe that our core fulfillment
business will serve as a stable cash flow generating platform, enabling us
to continue deploying the Liquid Audio technology as the digital media
delivery market matures,” he said.

Liquid Audio CEO Gerald Kearby said the company held discussions with
“numerous potential partners over the last year” and settled on the merger
with Alliance because it offered the most significant return of value
stockholders

On the operational side, Kearby said the merger combines Alliance’s physical
media distribution base of 5,000 retailers running more than 25,000 physical
and online stores, with Liquid Audio’s portfolio of technology and
intellectual property for digital media distribution and rights management.

Liquid Audio said the deal would force the postponement of its annual
stockholder meeting scheduled for July 1. Once the merger gets regulatory
and shareholder clearance, Liquid Audio’s board of directors would be
increased to nine positions, six to be chosen by Alliance three from Liquid
Audio.

Alliance Entertainment’s Weisman would assume the title of president and
chief executive officer of the new company and Kearby would remain CEO of
Liquid Audio and lead the company’s digital businesses.

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