Filed by Liquid Audio, Inc.
Pursuant to Rule 425 under the Securities Act of 1933
and deemed filed pursuant to Rule 13e-4(c) and Rule 14a-12
under the Securities Act of 1934
August 15, 2002
Subject Company: Alliance Entertainment Corp.
Commission File No. 001-13054
LIQUID AUDIO, INC.
SECOND-QUARTER 2002 FINANCIAL RESULTS
TELECONFERENCE SCRIPT
2:00 P.M. PT / 5:00 P.M. ET
AUGUST 14, 2002
(Teleconference operator introduces call, welcomes attendees and introduces
Michael Bolcerek as call moderator.)
MICHAEL BOLCEREK:
1) Good afternoon, and thank you for joining us today for Liquid Audio's
regular quarterly teleconference. Approximately 45 minutes ago, we
released our financial results for the second quarter ended June 30, 2002.
Joining me on today's call is Gerry Kearby, president and chief executive
officer.
2) In the course of this teleconference, we may make projections or other
forward-looking statements regarding future events or the future financial
performance of the company. In addition, we may give you estimates of
market potential and growth, describe new business arrangements, and share
our goals and strategies for growth. We wish to caution you that these
statements involve risks and uncertainties, such as those detailed in the
`Company Risk Factors' section of the Annual Report on Form 10-K dated
March 29, 2002 and other documents filed from time to time with the
Securities and Exchange Commission. These documents contain and identify
important risks, uncertainties and other factors that could cause the
actual results to differ materially from those contained in our
projections or forward-looking statements. The company disclaims any
intent or obligation to update these statements. This teleconference is
being webcast live for all investors on our
corporate website at www.liquidaudio.com. The webcast will be archived on
our site, and a call replay will be available at 706-645-9291, code
#5034003, for seven days.
3) Today, I'll run through our second-quarter financials, and then Gerry will
discuss recent business developments and, specifically, our proposed
merger with Alliance Entertainment Corp.
4) Total net revenues for the second quarter were $151,000, compared with
$135,000 for the first quarter. License revenues were $40,000, compared
sequentially with $36,000, and services revenues were $111,000, compared
with $99,000 for the prior quarter.
5) Gross margin was negative for the second consecutive quarter, reflecting
the continued underabsorption of music delivery costs, especially cost of
services. Total operating expenses for the second quarter were $5.8
million, up from $5.3 million for the first quarter. The sequential
increase was due principally to higher legal and investment banking
expenses related to our proposed merger with Alliance Entertainment and
recorded under general and administrative, which grew from $1.1 million
for the first quarter to $1.9 million for the second quarter. Research and
development was down slightly at $2.9 million, compared with $3.0 million
for the first quarter, while sales and marketing decreased sequentially
from $1.2 million to $1.0 million.
6) Net loss for the second quarter was $5.6 million, or 25 cents per share,
both as reported under GAAP and on a pro forma basis. This compared
sequentially with net loss of $4.9 million as reported and $4.8 million
pro forma, excluding non-cash cost of revenues and stock compensation
amortization.
7) Our balance sheet at June 30, 2002 included total assets of $85.1 million,
compared with $91.4 million at March 31 and with $97.4 million at December
31, 2001. Cash and cash equivalents were $81.0 million, and cash burn for
the second quarter was $5.3 million, consistent with $5.2 million for the
first quarter. Recently, we closed our offices in Japan and Europe, and
executed a 35% reduction in force, leaving us with approximately 70
employees. We're now in discussions with technology companies regarding
the potential sale of certain portions of our digital music distribution
technology. This sale would result in an additional reduction in force
involving the engineering organization that currently supports this
technology. We believe that these actions will enable us to further reduce
our quarterly cash burn rate, as we position the business for the
completion of our proposed merger and subsequent integration with Alliance
Entertainment Corp.
8) And, with that, I'll turn the call over to Gerry.
GERRY KEARBY:
1) Thanks, Michael. Rather than focus on the business events of the second
quarter, I'll devote my commentary today to what is perhaps the single
most important event in Liquid Audio's history since the initial public
offering in 1999. Last year, our board
of directors retained Broadview International, the global mergers and
acquisitions advisor and investment bank, to assist the company in
reviewing its strategic alternatives. In addition to M&A, these
alternatives included recapitalization, liquidation and going private. We
held discussions, both formal and informal, with numerous potential
partners for such transactions. We also received tentative buy-out offers
from certain stockholders. After careful consideration, and in
consultation with Broadview, our board determined that these offers did
not reflect the intrinsic value of the company and were therefore not in
the best interests of all stockholders.
2) Our ongoing discussions with potential partners resulted in a definitive
merger agreement with Alliance Entertainment Corp., which we announced on
June 13. Alliance Entertainment is one of the largest providers of
distribution, fulfillment and infrastructure services for home
entertainment products in the United States, and privately held. You'll
find a full description of the company in a registration statement that we
filed with the SEC on July 23. Based on financial statements provided by
Alliance Entertainment, the company's net sales for 2001 were $588.6
million, up 27% from 2000, with EBITDA of $18.7 million, up 34% from the
prior year.
3) Industry sources estimate the total size of the U.S. home entertainment
products market at $46 billion. As a leading distributor of physical media
products and accessories -- including audio CDs, DVDs, VHS movies, and
video games -- Alliance Entertainment has a distribution base of more than
5,000 retailers operating more than
25,000 brick-and-mortar and online stores. These include BJ's Wholesale,
Barnes & Noble, CVS, Circuit City, Musicland, Toys R' Us, Transworld
Entertainment, and thousands of independent retailers, as well as
e-commerce customers including Amazon.com, barnesandnoble.com,
BestBuy.com, CDNow.com, CircuitCity.com, Costco.com, QVC.com, and
Univision.com. Alliance Entertainment also commands a leading market share
in physical fulfillment services, serving national retail chains,
independent retailers, consumer direct fulfillment services, and plug-in
e-commerce engines for retail. In addition, the company offers an
e-commerce service solution called theStore24, which enables both
traditional and non-traditional retailers to sell and deliver a wide range
of physical entertainment products through the Internet.
4) Those of you who have followed Liquid Audio will readily see the
complementary relationship of Alliance Entertainment's business and our
business -- as well as the potential synergies and leverage points.
Essentially, Alliance Entertainment is to physical media what Liquid Audio
is to digital media. However, physical media is the established form of
delivery from content provider to retailer to consumer -- a $46-billion
market in the U.S. alone -- while digital media has yet to emerge at
commercially significant levels. The combination of our two businesses has
compelling financial, operational and strategic implications.
5) Financially, the proposed merger combines Alliance Entertainment's revenue
and EBITDA growth with Liquid Audio's cash position, resulting in strong
capitalization to fund the increasing penetration of the physical media
segment and eventual
acceleration of the digital media segment. We believe that the core
physical media distribution and fulfillment business will provide a
stable, cash-generating platform to complement the higher growth and
margin potential of digital media distribution and licensing.
6) Operationally, the deal leverages Alliance Entertainment's infrastructure
of content and retail channels with our digital distribution partnerships
with 1,800 record labels, 17,000 recording artists, leading commercial
websites, and major consumer electronics manufacturers -- as well as our
portfolio of intellectual property for digital media delivery and rights
management. This combination should open new revenue streams from existing
relationships and enable new market opportunities in a cost effective
manner.
7) From a strategic perspective, we believe that the combined company will be
positioned to become the total solutions provider of entertainment media
to a growing retail market, through both physical and digital channels. In
order to remain competitive, brick-and-mortar retailers are expanding
their in-store inventories to offer a broader range of entertainment
products. These same retailers are also expanding their websites to
provide a new channel of online commerce. Consumer electronics and device
manufacturers whose products support consumer usage of entertainment media
and who increasingly market their own products through these retailers are
pursuing opportunities of recurring revenue. For example, through our
licensing agreements we've secured distribution of more than 12 million
desktop music players, with each player representing a potential $19.95
license fee and even more importantly, sales of digital and physical
entertainment products. Combining the
complementary infrastructures and technologies of Alliance Entertainment
and Liquid Audio capitalizes on these market trends by enabling both
traditional and non-traditional retailers of entertainment products to
migrate easily and cost-effectively from physical to digital media
delivery.
8) We believe that the proposed merger transaction is structured for
the benefit of all Liquid Audio stockholders. Liquid Audio would issue new
shares of common stock, the amount to be determined, in exchange for Alliance
Entertainment shares and assume all outstanding stock options and warrants to
purchase Alliance shares. We would also repurchase 10 million shares of our own
common stock at $3.00 per share. In addition to the $30 million Tender Offer,
Liquid Audio stockholders would own 26% of the common stock of the combined
company, with the remaining 74% going to Alliance Entertainment stockholders.
9) The board of the combined company would consist of nine directors
-- two-thirds to be designated by Alliance Entertainment and one-third to be
designated by the current Liquid Audio board. Eric Weisman, the president and
chief executive officer of Alliance Entertainment -- would become president and
CEO of the combined company, while I would become president and CEO of the
digital media business unit.
10) The due diligence of our board of directors, in consultation
with Broadview, has proven to us that for Liquid Audio stockholders, this
transaction is clearly superior to any alternative that has been proposed. Our
2002 annual meeting of
stockholders and a special meeting of stockholders to vote on the transaction is
scheduled for September 26 in Redwood City, California. A Form S-4 and
prospectus for this combined meeting have been filed with the SEC and will be
mailed as soon as possible, following SEC approval, to all Liquid Audio
stockholders. We look forward to this meeting, to stockholder approval of the
proposed merger and to the subsequent integration of Alliance Entertainment and
Liquid Audio as the new power in the physical and digital delivery of
entertainment media.
11) Thank you, and good afternoon.
(Operator concludes call.)
THE COMPANY
Liquid Audio, Inc. is a leading provider of software, infrastructure and
services for the secure digital delivery of media over the Internet. The Liquid
Audio solution gives content owners, websites and companies the ability to
publish, syndicate and securely sell digital media online with copy protection
and copyright management. Using the Liquid(TM) Player software, available for
free download at www.liquidaudio.com, consumers can preview and purchase
downloadable music from hundreds of affiliate websites in the Liquid Music
Network(SM).
EDITOR'S NOTE: Liquid; Liquid Audio; Liquid Audio, Inc.; the Liquid Audio logo;
Liquid Music Network; and Liquid Player are trademarks and service marks of
Liquid Audio, Inc. All other trademarks and service marks are the property of
their respective owners.
FORWARD-LOOKING STATEMENTS
All statements made in this release, other than statements of historical fact,
are forward-looking statements. The words "anticipate," "believe," "estimate,"
"expect," "intend," "will," "guidance" and similar expressions typically are
used to identify forward-looking statements. Forward-looking statements are
based on the then-current expectations, beliefs, assumptions, estimates and
forecasts about the businesses of Liquid Audio and Alliance Entertainment Corp.
and the industries and markets in which the companies
operate. Those statements are not guarantees of future performance and involve
risks, uncertainties and assumptions that will be difficult to predict.
Therefore, actual outcomes and results may differ materially from what is
expressed or implied by those forward-looking statements. Factors that may
affect Liquid Audio's and Alliance Entertainment's businesses, financial
condition and operating results include the effects of changes in the economy,
consumer spending, the stock market and the industries in which they operate
generally, changes affecting the Internet and e-commerce, the ability of the
companies to maintain relationships with strategic partners and suppliers, the
ability of the companies to timely and successfully develop, maintain and
protect their technology and product and service offerings and execute
operationally and the ability of the companies to attract and retain qualified
personnel. These factors may also include, but are not limited to, general
market conditions, our ability to develop new products to meet market demand,
our ability to successfully combine two geographically dispersed businesses, our
ability to realize synergies of the merger; our ability to maintain cost
controls; the mix of products and services our customers require and the effects
of natural disasters, international conflicts and other events beyond our
control. More information about potential factors that could affect Liquid Audio
can be found in its most recent Form 10-K, Form 10-Q and other reports and
statements filed by Liquid Audio with the Securities and Exchange Commission
("SEC"). Each of Liquid Audio and Alliance Entertainment expressly disclaims any
intent or obligation to update those forward-looking statements, except as
otherwise specifically stated by it.
ADDITIONAL INFORMATION AND WHERE TO FIND IT
Liquid Audio has filed a Registration Statement on SEC 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 and
Alliance Entertainment 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 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.
In addition to the Registration Statement and the Tender Offer Statement, Liquid
Audio files annual, quarterly and special reports, proxy statements and other
information with the SEC. You may read and copy any reports, statements or other
information filed by Liquid Audio at the SEC's public reference rooms at 450
Fifth Street, N.W., Washington, D.C. 20549 or at any of the SEC's other public
reference rooms in New York and Chicago. Please call the SEC at 1-800-SEC-0330
for further information on the public reference rooms. Liquid Audio's filings
with the SEC are also available to the public from commercial document-retrieval
services and at the Web site maintained by the SEC at http://www.sec.gov.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
The directors and executive officers of Liquid Audio and Alliance Entertainment
have interests in the merger, some of which may differ from, or may be in
addition to, those of the stockholders of Liquid Audio and Alliance
Entertainment generally. A description of the interests that the directors and
executive officers of the companies have in the merger is available in the
Registration Statement.
SOLICITATION OF PROXIES
Liquid Audio and Alliance Entertainment, their respective directors, executive
officers and certain other members of their management and employees may be
soliciting proxies from stockholders of Liquid Audio and Alliance Entertainment
in favor of the merger. Information concerning the participants is set forth in
the Registration Statement filed with the SEC.