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SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a)
of the Securities Exchange Act of 1934 (Amendment No. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [_]
Check the appropriate box:
[X]Preliminary Proxy Statement
[_] Confidential, for Use of the Commission
Only (as permitted by Rule 14a-6(e)(2))
[_] Definitive Proxy Statement
[_] Definitive Additional Materials
[_] Soliciting Material Pursuant to Rule 14a-12
musicmaker.com, Inc.
(Name of Registrant as Specified in its Charter)
(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)(4) and 0-11.
(1) Title of each class of securities to which transaction applies:
(2) Aggregate number of securities to which transaction applies:
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined):
(4) Proposed maximum aggregate value of transaction:
(5) Total fee paid:
[_] Fee paid previously with preliminary materials:
[_] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
(2) Form, Schedule or Registration Statement No.:
(3) Filing Party:
(4) Date Filed:
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PRELIMINARY COPY
SUBJECT TO COMPLETION, DATED JANUARY 8, 2001
MUSICMAKER.COM, INC.
Dear musicmaker.com, Inc. stockholder:
This Consent Revocation Statement and the accompanying Blue Consent
Revocation Card are being furnished by the Board of Directors of
musicmaker.com, Inc., a Delaware corporation, to the holders of the
outstanding shares of musicmaker.com common stock, par value $0.01 per share,
in opposition to the solicitation by BCG Strategic Investors, LLC, Barington
Capital Group, L.P., Barington Companies Equity Partners, L.P. and dot com
Investment Corporation, collectively referred to herein as the Insurgents, of
written consents from the stockholders of musicmaker.com.
On January 8, 2001, the Insurgents filed a Preliminary Schedule 14A under
the Securities Exchange Act of 1934 (the "Consent Solicitation") that
commenced a consent solicitation in an effort to take control of the
musicmaker.com board of directors by increasing the number of directors to
fifteen and to elect eight new members to the musicmaker.com board of
directors, along with certain other matters. The current musicmaker.com board
of directors has unanimously determined that the proposals set forth in the
Consent Solicitation are not in the best interests of musicmaker.com and its
stockholders. Accordingly, the musicmaker.com board of directors has
unanimously recommended that musicmaker.com stockholders reject the proposals
set forth in the Consent Solicitation.
The musicmaker.com board of directors has adopted a Plan of Complete
Liquidation and Dissolution which will, when approved by the Musicmaker.com's
stockholders, provide the Board of Directors with the authority to liquidate
the Musicmaker.com's assets. The Board of Directors announced on January 3,
2001, the proposed liquidation of the Musicmaker.com, and has already taken
substantial steps in the liquidation process to maximize stockholder value,
including closing the Musicmaker.com's New York City office, terminating all
unnecessary employees and closing down all operations and the Company's
website. The Board of Directors believes it is in the best position to
complete the liquidation of musicmaker.com in an efficient manner and to
decide on the courses of action that are in the best interests of the
stockholders and musicmaker.com. We are concerned that the Insurgent's
proposals may disrupt the orderly completion of the liquidation of
musicmaker.com.
YOUR MUSICMAKER.COM BOARD OF DIRECTORS UNANIMOUSLY OPPOSES THE CONSENT
SOLICITATION AND URGES YOU NOT TO SIGN THE CONSENT CARD SENT TO YOU BY THE
INSURGENTS.
EVEN IF YOU PREVIOUSLY SIGNED AND RETURNED THE INSURGENTS' CONSENT CARD, YOU
HAVE EVERY RIGHT TO CHANGE YOUR VOTE. WE URGE YOU TO SIGN, DATE AND MAIL THE
ENCLOSED BLUE CONSENT REVOCATION CARD IN THE POSTAGE-PAID ENVELOPE PROVIDED.
YOUR PROMPT ACTION IS IMPORTANT. PLEASE RETURN THE BLUE CONSENT REVOCATION
CARD TODAY.
IF YOUR SHARES ARE HELD IN "STREET NAME,' ONLY YOUR BROKER OR BANKER CAN
VOTE YOUR SHARES. PLEASE CONTACT THE PERSON RESPONSIBLE FOR YOUR ACCOUNT AND
INSTRUCT HIM OR HER TO VOTE A BLUE CONSENT REVOCATION CARD ON YOUR BEHALF
TODAY.
If you have any questions about giving your revocation of consent or require
assistance, please call [proxy solicitor], the firm assisting musicmaker.com
in this solicitation, at the phone number set forth below:
[ ]
Thank you for your continuing support and encouragement.
By Order of the Board of Directors
January , 2001 Devarajan S. Pathukarai,
Reston, Virginia Chief Executive Officer, President
and Chief Operating Officer
This Consent Revocation Statement and the enclosed BLUE Consent Revocation
Card are first being mailed to stockholders on or about January , 2001.
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Questions and Answers about this Request for Consent Revocations
Q: Why is musicmaker.com making the request for revocations? What are we
asking you to do?
A: The request is being made by your duly elected board of directors. We are
asking you to oppose the solicitation made by BCG Strategic Investors, LLC,
Barington Capital Group, L.P., Barington Companies Equity Partners, L.P.
and dot com Investment Corporation, collectively referred to herein as the
Insurgents. The Insurgents are seeking to increase the number of directors
of musicmaker.com by eight to a total of fifteen, and to elect eight
nominees chosen by them to fill the newly created directorships. To oppose
the Insurgents, you can simply not return any consent solicitation card
from the Insurgents, or, if you have already sent them a consent card, you
can revoke it by returning musicmaker.com's Blue Consent Revocation Card,
enclosed.
Q: Why are we asking you to oppose the Insurgent's solicitation?
A: We are asking you to oppose the Insurgents' solicitation because we do not
believe that it is in the best interest of musicmaker.com or its
stockholders. The current board of directors of musicmaker.com has
initiated action to liquidate musicmaker.com, and the winding down of
musicmaker.com's operations is well under way. We are concerned that the
Insurgents may disrupt the orderly completion of the liquidation of
musicmaker.com. The Insurgents correspondence and public filings do not
describe any plan or proposal of any sort for musicmaker.com, other than
the election of their nominees for director.
Q: Who is entitled to consent, withhold consent, or revoke a previously given
consent with respect to the Insurgents' proposals?
A: Only the record holders of musicmaker.com common stock on the record date
for the action by written consent are entitled to consent, withhold consent
or revoke a previously given consent with respect to the Insurgent's
proposals. Based on the Bylaws of musicmaker.com as in effect on January 8,
2001 and the receipt of the initial written consent on Janaury 8, 2001, the
record date is January 18, 2001.
Q: What should you do to revoke a consent?
A: Please sign, date and return the enclosed Blue Consent Revocation Card
immediately to [ ] in the postage paid envelope provided.
Q: Who do you call if you have questions about the consent revocation?
A: Please call Mark Fowler at musicmaker.com at (703) 860-2289.
Q: What should I do if my shares are held in "street name"?
A: If any of your shares of musicmaker.com common stock are held in the name
of a brokerage firm, bank, bank nominee, or other institution, you should
contact the institution to instruct them how to vote your shares.
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MUSICMAKER.COM, INC.
10780 Parkridge Boulevard
Suite 50
Reston, Virginia 20191
----------------
CONSENT REVOCATION STATEMENT
----------------
Information Concerning Solicitation and Voting
General
The enclosed consent revocation card is solicited on behalf of
musicmaker.com, Inc. in response to an action by written consent solicited by
the Insurgents.
The musicmaker.com board of directors currently consists of four directors.
The Insurgents have proposed to take control of the board by, among other
things, increasing the maximum number of directors of musicmaker.com to
fifteen, and filling the eight newly created positions with nominees of the
Insurgents. THE MUSICMAKER.COM BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT
YOU REJECT THE INSURGENTS' PROPOSALS AND THAT YOU NOT SIGN ANY CONSENT CARD
FURNISHED BY THE INSURGENTS.
Background to the Consent Solicitation
In January 2000, musicmaker.com engaged Allen & Company to assist
musicmaker.com in finding potential acquisition and merger opportunities for
musicmaker.com as well as to examine other strategic alternatives. These
efforts continued through January 2001 which resulted in Allen & Company
contacting more than 20 prospects on musicmaker.com's behalf. In addition,
during this time, musicmaker.com independently contacted numerous potential
prospects and explored various options to sell musicmaker.com.
On November 30, 2000, the musicmaker.com board of directors met to discuss
musicmaker.com's response to certain acquisition proposals and possible
alternatives to the sale of musicmaker.com. The board concluded that none of
the proposals were in the best interests of musicmaker.com's stockholders. In
addition, the musicmaker.com board of directors had a detailed discussion
regarding the benefits and risks associated with the adoption of a
shareholders' rights plan. The board also discussed the possibility of
liquidation.
On December 6, 2000, Mr. Jay Samit and Mr. Jonathan Smith, two directors
appointed by Virgin Holdings, Inc., delivered to musicmaker.com their
resignations from the board. On such date, Mr. Samit telephoned Mr. Puthukarai
to inform him of the resignations. In addition, he disclosed that Virgin
Holdings had sold all of its shares of common stock in musicmaker.com to the
Insurgents.
On December 7, 2000, the musicmaker.com board of directors held a meeting to
discuss the resignations of Mr. Samit and Mr. Smith, the sale of Virgin
Holdings' stock and a proposed shareholders' rights plan (the "Rights Plan").
The musicmaker.com board of directors unanimously adopted the Rights Plan
after concluding that the Rights Plan would serve to enhance stockholder
value.
Under the Rights Plan, musicmaker.com will issue a dividend of one right for
each share of common stock of musicmaker.com held by stockholders of record as
of the close of business on December 29, 2000. The Rights Plan is designed to
assure stockholders fair value in the event of a future unsolicited business
combination or similar transaction involving musicmaker.com. Each right will
initially entitle stockholders to purchase a fractional share of
musicmaker.com's preferred stock for $40.00. However, the rights are not
immediately exercisable and will become exercisable only upon the occurrence
of certain events. Upon certain other events,
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unless redeemed for $0.001 per right, the rights will become exercisable by
holders, other than rights held by an unsolicited third party acquirer, for
shares of musicmaker.com or of the third party acquirer having a value of
twice the right's then-current exercise price.
On December 11, 2000, the musicmaker.com board of directors met again to
discuss its strategic alternatives. Prior to the board meeting, Mr. Seymour
Holtzman and Mr. James Mitarotomba, representatives of the Insurgents, met
with the musicmaker.com board of directors. Mr. Holtzman made a request to
serve on the board. At the board meeting, the board discussed, among other
things, the status of any strategic alliances, mergers and acquisitions, the
possibility of liquidation and Mr. Holtzman's request to be on the board. With
respect to Mr. Holtzman's proposal, the members of the board concluded that
they needed additional information with respect to the Insurgents and their
intentions as well as the specifics of the terms of the deal with Virgin
Holdings before reaching a decision.
On December 13, 2000, Mr. Mitarotonda, as a representative of the
Insurgents, met with the chief executive officer of musicmaker.com. The
Insurgents requested that musicmaker.com's three vacant seats on its board of
directors be filled by the Insurgents appointees. In addition, the Insurgents
expressed their view that all current business operations of musicmaker.com
should be shut down immediately and that the capital of musicmaker.com should
be redeployed in a manner that will preserve and enhance stockholder value.
On December 18, 2000, the Insurgents filed a Schedule 13D under the
Securities Exchange Act of 1934, pursuant to which the Insurgents reported the
purchase by them on December 6, 2000, of 1,209,866 shares of musicmaker.com
common stock from Virgin Holdings, Inc, as well as purchases in the open
market of an additional 61,600 shares of musicmaker.com common stock during
the period beginning November 24, 2000 through December 7, 2000.
On December 19, 2000, the Insurgents filed an amended Schedule 13D.
On December 20, 2000, the board met to discuss musicmaker.com's future
course of action. Allen & Company gave a detailed presentation of
musicmaker.com's strategic alternatives, an overview of the current operating
environment for musicmaker.com and an analysis of liquidation. The board also
discussed the Rights Plan and its implications to the Insurgents' acquisition.
The board unanimously approved an amendment of the Rights Plan to ensure that
the Insurgents' acquisition did not trigger the Rights Plan.
On January 3, 2001, the board concluded that liquidating musicmaker.com was
in the best interests of musicmaker.com and its stockholders. In determining
to liquidate musicmaker.com, the board considered a number of factors
including that the music industry and e-commerce in general are in a period of
rapid change and uncertainty; the potential for growth and availability of
financing in the current environment is extremely limited; musicmaker.com's
inability, despite significant efforts, to identify a buyer or strategic
partner willing to offer greater value than that expected to be derived from
liquidation; and that musicmaker.com's stock has traded well below the net
asset value of its shares. Based on this information, the board concluded that
distributing musicmaker.com's net assets would return the greatest value to
stockholders as compared to examined alternatives. At the meeting, the board
unanimously approved, subject to stockholder approval, a Plan of Complete
Liquidation and Dissolution (the "Plan of Liquidation") that authorizes the
board of directors to liquidate the assets of musicmaker.com and recommended
the submission of the Plan of Liquidation to stockholders for their approval
by written consent. The Board also approved a resolution that musicmaker.com
obtain additional officers' and directors' insurance and indemnify the board
to the fullest extent provided by musicmaker.com's certificate of
incorporation and bylaws in connection with the liquidation.
On January 4, 2001, the Insurgents filed an amended Schedule 13D under the
Exchange Act, which set forth that on such date the Insurgents telephoned Mr.
Devarajan S. Puthukarai, the chief executive officer of musicmaker.com and
requested that musicmaker.com's three vacant seats on its board of be filled
by the Insurgent's nominees. Attached as an exhibit to the Schedule 13D was
the following letter:
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BCG Strategic Investors, LLC
c/o Barington Capital Group, L.P.
888 Seventh Avenue, 17th Floor
New York,
New York 10019
January 4, 2001
musicmaker.com, Inc.
1740 Broadway 23rd Floor
New York, New York 10019
Attention: Devarajan S. Puthukarai
Chairman, Chief Executive Officer and President
Gentlemen:
We applaud the decision of the Company's board of directors, announced
yesterday, to engage in a prompt liquidation of the Company rather than pursue
a course of operation that had no prospects of profitability and is rapidly
dissipating the Company's remaining assets. We were deeply disappointed,
however, by the Company's failure to honor our request for board
representation that I communicated to you earlier today.
As you know, with over 38% of the Company's outstanding stock, our group is
by far the Company's largest stockholder. We have an overriding interest in a
liquidation process that will maximize the return to stockholders. In this
regard, we seek no special treatment, and indeed cannot receive such treatment
under Section 203 of the Delaware corporation law. Our interest is to obtain
the greatest possible return to all stockholders, in which we will share on a
pro rata basis.
We reiterate therefore our request for representation on the board of
directors. Commensurate with our holdings, we are asking the board to appoint
our representatives to fill the three existing vacancies on the board. Our
representatives will bring to the musicmaker board the judgment, experience,
energy, objectivity and incentive to produce the greatest liquidation
distribution to the Company's stockholders. We understand, for example, that
the Company is a party to costly leases and other contractual arrangements,
whose value to the Company was highly questionable even at the outset. Some of
these arrangements will require great skill and determination to terminate on
terms that are financially favorable to the Company. Our representatives will
have that skill and determination.
Virgin Holdings, from whom BCG purchased its shares, had three
representatives on the board. The Company's refusal to grant us equal
representation is unreasonable, unfair and suspect.
Time is now of the essence. With each passing day, the Company's assets
diminish. Given our financial interest in the Company and our ability to bring
substantial value to the liquidation process, we reiterate our demand that the
board act promptly and affirmatively on our request for board representation.
Please call me as soon as possible at (212) 974-5701 to discuss.
Very truly yours,
/s/ James Mitarotonda
James A. Mitarotonda
On January 4, 2001, Mr. Seymour telephoned counsel for musicmaker.com and
inquired as to the timing of a response by musicmaker.com to the letter.
Counsel replied that one of the members of the board was unavailable until
Monday, January 8, 2001 and that the board would consider the proposals set
forth in the letter on such date.
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On January 5, 2001, the Insurgents filed an amended Schedule 13D under the
Securities Exchange Act of 1934. The Insurgents filed a Schedule 14A
preliminary consent solicitation statement on January 8, 2001 pursuant to
which the Insurgents may solicit the written consent of the stockholders of
musicmaker.com to take certain actions, including:
(1) the amendment of the By-laws of musicmaker.com to set the number of
directors at fifteen,
(2) the amendment of the By-laws of musicmaker.com to authorize only
stockholders to fill vacancies on the board of directors created by an
increase in the number of board seats effected through a stockholder
consent solicitation,
(3) the election of eight individuals, including James Mitarotonda and
Seymour Holtzman, to the board of directors of musicmaker.com, and
(4) the repeal of any By-laws adopted by the board of directors of
musicmaker.com subsequent to February 17, 1999.
In the amended Schedule 13D, the Insurgents also indicated that they had
delivered their signed written consent with respect to the proposed actions
set forth in the preliminary consent solicitation statement and a demand
letter requesting a list of musicmaker.com's stockholders. The demand letter
was attached as an exhibit to the Schedule 13D and is set forth below:
BCG Strategic Investors, LLC
888 Seventh Avenue
17th Floor
New York, New York 10019
January 5, 2001
Mr. Devarajan S. Puthukarai
Chairman, Chief Executive Officer and President
Musicmaker.com, Inc.
1740 Broadway
23rd Floor
New York, New York 10019
Request for Stockholder List
Dear Mr. Puthukarai:
The undersigned, being the record owner of an aggregate of 1,209,866
shares of common stock, par value $.01 per share (the "Company Stock"), of
musicmaker.com, Inc., a Delaware corporation (the "Company"), hereby
demands, pursuant to Section 220 of the Delaware General Corporation Law,
the right to inspect, during the Company's usual business hours, the
following records and documents of the Company and to make copies or
extracts therefrom:
A. A complete record of list of the Company's stockholders certified
by its transfer agent, which sets forth the name and address of each
stockholder and the number of shares of Company Stock registered in the
name of each stockholder as of the most recent practicable date.
B. A magnetic computer tape list of the Company's stockholders as of
the most recent practicable date, which sets forth the name and address
of each stockholder and the number of shares of Company Stock
registered in the name of each stockholder, together with any computer
processing information that may be relevant to the use of such computer
tape, and a printout of such magnetic computer tape for verification
purpose.
C. All information in or which comes into the Company's possession or
control, or which can reasonably be obtained from nominees of any
central certificate depository system, concerning the number and
identity of the actual beneficial owners of Company Stock, including a
list of all owners who hold Company Stock in the name of Cede & Company
or other similar nominees and any
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respondent bank listings obtained pursuant to the requirements of Rule
14b-2 promulgated under the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), and a list or lists containing the name, address,
and number of shares of Company Stock attributable to participants in
any employee stock ownership, incentive, profit sharing, savings,
retirement, stock option, stock purchase, restricted stock or other
comparable plan of the Company in which the voting of shares held by
such plan is made, directly or indirectly, individually or
collectively, by participants in the plan.
D. As promptly as practicable, any and all omnibus proxies and
correspondent participant listings with respect to all nominees and
respondent banks which are currently in effect.
E. All lists, tapes and other data in or which come into the
possession or control of the Company, or which can reasonably be
obtained pursuant to Rules 14b-1 and 14b-2 promulgated under the
Exchange Act, which sets forth the name and address of, and the number
of shares owned by, each beneficial owner of Company Stock who has not
objected to having his or her name disclosed (the "non-objecting
beneficial owners" or "NOBO" list).
F. A "stop transfer" list or stop list relating to the shares of
Company Stock.
G. All additions, changes and corrections to any of the information
requested pursuant to paragraphs 1 through 6 from the date hereof until
the undersigned requests termination of the transmission of such
materials.
The undersigned agrees to bear the reasonable costs incurred by the
Company in connection with the production of the requested materials.
The purpose of this demand is to permit the undersigned to communicate
with other stockholders of the Company on matters relating to their
interests as stockholders, including the solicitation of consents to amend
the By-laws of the Company and to elect nominees of the undersigned and
certain other persons as directors.
The undersigned hereby designates Kramer Levin Naftalis & Frankel LLP and
its partners, employees and other persons designated by it acting together,
singly or in any combination, to conduct the requested examination and
copying of materials.
Please advise Julie K. Horowitz of Kramer Levin Naftalis & Frankel LLP
(Tel: 212-715-7783) as to the time and place that the requested information
will be made available in accordance with this request. As you are no doubt
aware, Delaware law requires your response to our request within five
business days of the date of this letter.
An affidavit relating to this demand has been attached to this letter.
Please acknowledge receipt of this letter by signing and dating the
enclosed copy of this letter and returning the same to the undersigned in
the enclosed envelope.
Very truly yours,
/s/ James Mitarotonda
_____________________________________
James Mitarotonda
RECEIPT ACKNOWLEDGED ON
On January , 2001
MUSICMAKER.COM, INC.
By: _________________________________
Name:
Title:
On January 7, 2001, the musicmaker.com board of directors adopted a bylaw
amendment to provide that only directors shall have the authority to set a
record date as to matters submitted to stockholders for written consent which
record date shall be 10 days from the first date on which a signed written
consent setting forth the action taken or proposed to be taken is properly
delivered.
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Recommendation of the musicmaker.com Board of Directors
musicmaker.com's duly elected board of directors unanimously recommends that
you:
1. Return the Blue Consent Revocation Card enclosed with this Consent
Revocation Statement;
2. Reject the Insurgents' proposals; and
3. Not return any consent solicitation cards from the Insurgents.
musicmaker.com's Reasons for Opposing the Insurgents' Proposals
musicmaker.com and the musicmaker.com board of directors opposes the
Insurgents' proposals because we believe that the proposals are not in the
best interests of you, the stockholders or musicmaker.com.
The proposals of the Insurgents are as follows:
(1) to amend the By-laws of musicmaker.com to set the number of directors
at fifteen,
(2) to amend the By-laws of musicmaker.com to authorize only stockholders
to fill vacancies on the board of directors created by an increase in the
number of board seats effected through a stockholder consent solicitation,
(3) to elect eight individuals, Barry J. Booth, Jesse H. Choper, William
J. Fox, Seymour Holtzman, Allan R. Lyons, Michael J. McManus, Jr., James A.
Mitarotonda, and Joseph R. Wright, Jr., to the board of directors of
musicmaker.com, and
(4) to repeal any By-laws adopted by the board of directors of
musicmaker.com subsequent to February 17, 1999.
The foregoing proposals, taken together, are designed to enable the
Insurgents' to take control of the musicmaker.com board of directors. While
musicmaker.com recognizes that the Insurgents' nominees, if elected, would
have certain fiduciary obligations under Delaware law to musicmaker.com and
its stockholders, the musicmaker.com board of directors is concerned that the
Insurgents' nominees would act in furtherance of the interests of the
Insurgents. In particular, if the Insurgents' nominees are elected as your
directors, conflicts of interests are inevitable and could likely be
detrimental to the interests of musicmaker.com and its stockholders. Given
that the liquidation process of musicmaker.com is well under way, the
musicmaker.com board of directors is skeptical that the Insurgents' nominees
would be able to add value to the liquidation process, even if they had an
incentive to do so.
Proposal 4 is designed to nullify unspecified bylaws which have been or may
be adopted by your musicmaker.com board of directors in its efforts to act in,
and protect, the interests of, musicmaker.com's stockholders. On January 7,
2001, the musicmaker.com board of directors adopted such a bylaw amendment to
provide that only directors shall have the authority to set a record date as
to matters submitted to stockholders for written consent which record date
shall be 10 days from the first date on which a signed written consent setting
forth the action taken or proposed to be taken is properly delivered.
It is vital that musicmaker.com have in place a board of directors that will
act solely in the best interests of musicmaker.com and its stockholders and
not be influenced by the unknown motives of the Insurgents. We believe that
the current musicmaker.com board of directors, not a board controlled by the
Insurgents, is in the best position to evaluate musicmaker.com's strategic
alternatives, decide on the course of action that are in the best interests
musicmaker.com's stockholders and to implement those decisions.
musicmaker.com's Liquidation Procedures are Well Under Way
Pursuant to the Plan of Liquidation, musicmaker.com intends to distribute
pro rata to its stockholders, in cash or in-kind, or sell or otherwise dispose
of, all its property and assets. The sale of assets will be concluded prior to
the third anniversary of the filing of the Certificate of Dissolution with the
Delaware Secretary of State by a final liquidating distribution either
directly to the stockholders or to one or more liquidating trusts. Any sales
of musicmaker.com's assets have been and will be made in private or public
transactions and on such terms as are approved by the board.
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Subject to the payment or the provision for payment of musicmaker.com's
indebtedness and other obligations, musicmaker.com's cash on hand, together
with the cash proceeds of any sales of musicmaker.com's other assets, will be
distributed from time to time pro rata to the holders of the common stock.
musicmaker.com intends to establish a reasonable reserve (a "Contingency
Reserve") in an amount determined by the board to be sufficient to satisfy the
liabilities, expenses and obligations of musicmaker.com not otherwise paid,
provided for or discharged. The net balance, if any, of any such Contingency
Reserve remaining after payment, provision or discharge of all such
liabilities, expenses and obligations will also be distributed to
musicmaker.com's stockholders pro rata. No assurances can be given that
available cash and amounts received from the sale of assets will be adequate
to provide for musicmaker.com's obligations, liabilities, expenses and claims
and to make cash distributions to stockholders.
If deemed necessary by the board for any reason, musicmaker.com may, from
time to time, transfer any of its unsold assets to one or more trusts
established for the benefit of the stockholders of musicmaker.com, which
property would thereafter be sold or distributed on terms approved by its
trustees. If all of musicmaker.com's assets (other the musicmaker.com board of
than the Contingency Reserve) are not sold or distributed prior to the third
anniversary of the effectiveness of the dissolution of musicmaker.com,
musicmaker.com will transfer in final distribution such remaining assets to a
trust. The board may also elect in its discretion to transfer the Contingency
Reserve, if any, to such a trust. The Plan of Liquidation authorizes the board
to appoint one or more individuals or entities to act as trustee or trustees
of the liquidating trust or trusts and to cause musicmaker.com to enter into a
liquidating trust agreement or agreements with such trustee or trustees on
such terms and conditions as may be approved by the board.
musicmaker.com will finally close its stock transfer books and discontinue
recording transfers of common stock on the earliest to occur of (1) the close
of business on the record date fixed by the board of directors for the final
liquidating distribution, (2) the close of business on the date on which the
remaining assets of musicmaker.com are transferred to a trust or (3) the date
on which musicmaker.com files its certificate of dissolution under the DGCL
(following any post-dissolution continuation period thereunder), and
thereafter certificates representing common stock will not be assignable or
transferable on the books of musicmaker.com except by will, intestate
succession, or operation of law.
Following approval of the Plan of Liquidation by the stockholders, a
certificate of dissolution will be filed with the State of Delaware dissolving
musicmaker.com. The dissolution of musicmaker.com will become effective, in
accordance with the DGCL, upon proper filing of the certificate of dissolution
with the Secretary of State or upon such later date as may be specified in the
certificate of dissolution. Pursuant to the DGCL, musicmaker.com will continue
to exist for three years after the dissolution becomes effective or for such
longer period as the Delaware Court of Chancery shall direct, for the purpose
of prosecuting and defending suits, whether civil, criminal or administrative,
by or against it, and enabling musicmaker.com gradually to settle and close
its business, to dispose of and convey its property, to discharge its
liabilities and to distribute to its stockholders any remaining assets, but
not for the purpose of continuing the business for which musicmaker.com was
organized.
Under the Plan of Liquidation, the board of directors may modify, amend or
abandon the Plan of Liquidation, notwithstanding stockholder ratification and
approval, to the extent permitted by the DGCL.
Although the board of directors has not established a firm timetable for
distributions to stockholders if the Plan of Liquidation is ratified and
approved by the stockholders, the board intends, subject to contingencies
inherent in winding up musicmaker.com's business, to make such distributions
as promptly as practicable. The board is, however, currently unable to predict
the precise nature, amount or timing of this distribution or any other
distributions pursuant to the Plan of Liquidation. The actual nature, amount
and timing of all distributions will be determined by the board, in its sole
discretion, and will depend in part upon musicmaker.com's ability to convert
its remaining assets into cash and pay and settle its significant remaining
liabilities and obligations.
Uncertainties as to the net value of musicmaker.com's non-cash assets, the
price that can be obtained for such assets and the ultimate amount of
liabilities, including liabilities and expenses incurred in the future, make
it impossible to predict the aggregate net cash value that would ultimately be
distributable to stockholders if they approve the Plan of Liquidation. Claims,
liabilities and expenses will be significantly reduced in light of
7
<PAGE>
musicmaker.com's decision to cease operations, but will continue to be
incurred until musicmaker.com is formally dissolved. Such liabilities and
expenses could significantly reduce the amount of any distributions to
stockholders.
In accordance with the Plan of Liquidation, musicmaker.com commenced the
winding down of musicmaker.com's business, including the layoff of
approximately 43 of its 53 employees on January 3, 2001, the shutting down of
its Web site and ceasing of all sales transactions effective January 3, 2000,
and the commencement of efforts to sell the majority of musicmaker.com's
assets, terminate commercial agreements and relationships and exit its
commercial obligations. As of January 8, 2001, musicmaker.com had 10 full-time
employees remaining.
The Insurgents Have Not Presented An Alternative Plan
By contrast, the Insurgents have not presented to musicmaker.com any plans
for musicmaker.com. musicmaker.com is concerned that the Insurgents' nominees
to the musicmaker.com board of directors may have a conflict of interest and
would not act in the best interests of musicmaker.com or its stockholders.
How You Can Revoke a Previously Given Consent
Any holder of shares of musicmaker.com common stock has the right to revoke
a previously given consent. You can revoke a consent by signing and dating the
BLUE Consent Revocation Card enclosed hereto and mailing it in the postage-
paid envelope enclosed. In order to revoke a prior consent, you may either
mark the "Revoke Consent" boxes on the BLUE Consent Revocation Card or sign,
date, and mail the BLUE Consent Revocation Card without marking any boxes. If
the BLUE Consent Revocation Card is signed, dated, and returned, any
previously executed consent will be revoked unless the "Do Not Revoke Consent"
box is marked.
If your shares of musicmaker.com common stock are held in the name of a
bank, broker, or other nominee, only your bank, broker, or nominee can execute
a revocation of consent for your shares of musicmaker.com common stock, and
only pursuant to your specific instructions. Accordingly, you are urged to
support your board of directors and management and reject the Insurgents, by
signing, dating, and returning the enclosed BLUE Consent Revocation Card
promptly, using the accompanying postage paid envelope provided by your bank,
broker, or nominee.
Any holder of shares of musicmaker.com common stock may revoke a consent
revocation by signing, dating, and returning a consent dated later than the
consent revocation.
The Consent Procedure
Under the Delaware General Corporation Law, or DGCL, unless otherwise
provided in a corporation's certificate of incorporation, any corporate action
that may be taken by stockholders may be taken without a meeting, without
prior notice, and without a vote, if (1) a written consent or consents,
setting forth the action so taken, are signed by the holders of outstanding
stock having not less than the minimum number of votes that would be necessary
to authorize such action at a meeting at which all shares entitled to vote
thereon were present and voted, and (2) such written consent or consents are
delivered to the corporation at the time and in the manner provided by
statute. Under musicmaker.com's certificate of incorporation, the holders of
shares of musicmaker.com's common stock are entitled to vote on the election
of musicmaker.com's directors. Pursuant to the DGCL and musicmaker.com's
certificate of incorporation, in order for the Insurgent's proposals to be
effective, valid, unrevoked written consents signed by the holders of a
majority of shares of the musicmaker.com common stock must be delivered to
musicmaker.com within the time provided by law. As of September 30, 2000,
there were outstanding 3,314,042 shares of musicmaker.com common stock.
Abstentions, failures to sign and return the Insurgent's consent card, and
broker non-votes will have the same effect as a vote against the Insurgent's
proposals.
Pursuant to the DGCL and musicmaker.com's bylaws and based on the receipt of
the Insurgent's written consent on January 8, 2001, the record date of the
written consent will be January 18, 2001. Accordingly, only holders of shares
of musicmaker.com common stock at the close of business on January 18, 2001
are entitled to consent, withhold consent, or revoke their consent to the
Insurgents' proposals.
8
<PAGE>
On January 8, 2001, a consent in the form proposed by the Insurgents was
delivered to the registered agent for musicmaker.com. Under Delaware law, no
written consent shall be effective to take the action described therein unless
written consents signed by the holders of the requisite number of shares are
delivered to the corporation within 60 days of the earliest dated consent
delivered to the corporation. Thus, the Insurgents' consent solicitation will
not be effective unless the Insurgents deliver to musicmaker.com valid,
unrevoked consents executed by the holders of the requisite number of shares
of musicmaker.com common Stock within 60 days of January 8, 2001.
Under the musicmaker.com certificate of incorporation, each share of
musicmaker.com common Stock is entitled to one vote on all matters on which
the holders of musicmaker.com common stock vote.
Directors and Executive Officers
Set forth below is certain information regarding the directors and executive
officers of musicmaker.com, also referred to as the Company.
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Devarajan S. 56 Chairman of the Board of Directors, Chief Executive
Puthukarai............. Officer, President, Chief Operating Officer
Mark A. Fowler.......... 40 Chief Financial Officer, Senior Vice President of
Finance and Administration, Secretary
William W. Scranton, 53 Director
III....................
John A. Skolas.......... 48 Director
Irwin H. Steinberg...... 78 Director, Vice Chairman of the Board of Directors
</TABLE>
Executive Officers and Directors
Devarajan S. Puthukarai. Mr. Puthukarai is the Company's Chairman of the
Board, President, Chief Executive Officer, Chief Operating Officer and served
as the Company's Co-Chief Executive Officer from April 1997 until December
1999. Mr. Puthukarai has served as a director since April 1997. From 1991 to
April 1997, Mr. Puthukarai was President of Warner Music Media, a division of
Warner Music Enterprises, a Time Warner Inc. company engaged in the business
of promoting new and upcoming artists. From 1984 to 1990, Mr. Puthukarai was
President of RCA Direct Marketing Inc./BMG Direct Marketing Inc., launching
one of the country's first CD music clubs and building the world's largest
classical music club. Mr. Puthukarai earned his Bachelor of Science and
Bachelor of Law degrees from Madras University in India. Mr. Puthukarai earned
a Master of Business Administration degree from the Indian Institute of
Management, a Harvard/Ford Foundation school in Ahemadabad, India.
Mark A. Fowler. Mr. Fowler has served as the Company's Secretary, Chief
Financial Officer and Senior Vice President of Finance and Administration
since January 1999 and was the Company's Director of Finance and
Administration from April 1998 to January 1999. From 1995 to 1998, Mr. Fowler
was the Controller at BioReliance Corporation, a publicly-held international
contract research organization. From 1994 to 1995, Mr. Fowler was the
Controller at Fusion Lighting, Inc., an international research and development
company. From 1991 to 1994, Mr. Fowler was the Controller at Excalibur
Technologies Corporation, a publicly-held software development firm. Prior to
1991, Mr. Fowler held several positions, including a consultant position with
Booz, Allen & Hamilton, Inc. Mr. Fowler is a certified public accountant in
the Commonwealth of Virginia. He earned a Bachelor of Science degree in
Finance from Radford University and is currently enrolled at the Johns Hopkins
University pursuing a Masters degree in Business Administration.
William W. Scranton, III. Mr. Scranton has served as a Company director
since May 2000. Since 1994, Mr. Scranton has headed the Scranton Family
Office, a family office managing investments and civic initiatives.
9
<PAGE>
From 1987 to 1994, he served in various senior executive officer positions at
two direct marketing companies and one mail order company. Mr. Scranton served
as Lieutenant Governor of Pennsylvania from 1979 to 1987. Mr. Scranton
received a Bachelor of Arts degree in American Studies from Yale University.
John A. Skolas. Mr. Skolas has served as a Company director since June 1999.
Mr. Skolas also serves as Chief Financial Officer of ValiGen (U.S.), Inc.
Prior to serving as Chief Financial Officer of Valigen (U.S.), Inc., Mr.
Skolas served as Chief Financial Officer of Coelacanth Corporation, where he
was responsible for oversight of its financial and administrative matters.
From February 1998 until June 1999, Mr. Skolas served as Chief Financial
Officer and General Counsel of PhytoWorks Inc., responsible for writing
significant portions of the company's business plan, negotiating transactions,
structuring intellectual property licenses and handling a wide range of
financial and administrative matters. From February 1992 until March 1997, Mr.
Skolas served as President/Corporate Officer of the Americas of EMI Group,
Inc., the finance, treasury, tax and administrative subsidiary of EMI Group
plc serving its U.S. subsidiaries. From February 1992 until January 1999, Mr.
Skolas also served as President and General Counsel of EMI Group North America
Inc., responsible for overseeing licensing of semiconductor patents held by
EMI Group. Mr. Skolas holds a Masters degree in Business Administration from
Harvard Business School, a Juris Doctor from the University of Wisconsin Law
School and a Bachelor of Arts degree from Luther College. He holds a certified
public accountant certificate from the Iowa Board of Accountancy and is
admitted to practice law in Minnesota and Wisconsin.
Irwin H. Steinberg. Mr. Steinberg has served as a Company director and Vice
Chairman of the Board of Directors since January 1997. Mr. Steinberg also
serves as a consultant to the Company. Since 1982, Mr. Steinberg has been
President of IHS Corporation, a consulting firm specializing in the music
industry. From 1975 to 1982, Mr. Steinberg was Chairman and Chief Executive
Officer of PolyGram Records, Inc. Mr. Steinberg was co-founder of Mercury
Records Corporation. From 1946 to 1975, Mr. Steinberg was employed with
Mercury Records Corporation where he progressed from Chief Financial Officer
to Executive Vice President to President, which later position he held from
1968 to 1975. Mr. Steinberg currently serves as an adjunct Professor at
Columbia College of the Arts in Chicago, where he teaches graduate courses in
the music business. Mr. Steinberg holds a Bachelors degree from the University
of Chicago Business School and a Masters degree from the California State
University at Domingo Hills.
Termination of Stockholders' Agreement
On December 6, 2000, the Company's stockholders' agreement with Virgin
Holdings, Rho Management Trust I, Messrs. Bernardi, Puthukarai, Steinberg and
RHL Ventures, LLC terminated as a result of the sale by Virgin Holdings to BCG
of all its shares of common stock in musicmaker.com.
Committees of the Board of Directors and Compensation
The Board of Directors has designated an Audit Committee of the Board of
Directors, which consists of Mr. Skolas, Mr. Steinberg and Mr. Scranton. The
Audit Committee is responsible for reviewing, along with the Company's
independent public accountants, the scope of the Company's accounting audits,
as well as the Company's corporate accounting practices and policies. The
Audit Committee reviews the Company's accounting and financial controls, and
makes themselves available to the Company's independent public accountants for
any necessary consultation.
The Board of Directors has also designated a Compensation Committee of the
Board of Directors, which consists of Mr. Scranton. The Compensation Committee
reviews the performance of our management and recommends and approves the
compensation of and the issuance of stock options to executive officers and
employees under our stock option plan.
There is no standing Nominating Committee of the Board of Directors.
The Company's directors currently do not receive a fee for their service on
the Board of Directors or any committee of the board. Directors are eligible
to receive stock options under the Company's stock option plan.
10
<PAGE>
Members of the Board of Directors have received options under the Company's
stock option plan as disclosed in "Security Ownership of Certain Beneficial
Owners and Management" herein. All of these options were issued with an
exercise price equal to the fair market value of the common stock on the date
of grant. Directors receive reimbursement to cover their reasonable expenses
incurred in attending Board meetings.
During 2000, there were 14 meetings of the Board of Directors, 2 meetings of
the Audit Committee and 3 meetings of the Compensation Committee. Each
director attended 75% or more of the meetings of the Board of Directors and of
the committees of the Board on which the director served during the period for
which he was a director or committee member.
Compensation Interlocks and Insider Participation
The current member of the Compensation Committee is Mr. Scranton. To date,
the Compensation Committee, including directors who are or were executive
officers of the Company, has made all determinations concerning compensation
of the Company's executive officers.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
officers and directors, and persons who own more than 10% of the Company's
Common Stock to file reports of ownership and changes in ownership of the
Company's Common Stock with the Securities and Exchange Commission and Nasdaq.
Based solely on a review of the copies of such reports and written
representations from the reporting persons that no other reports were
required, the Company believes that during the fiscal year ended December 31,
2000, its executive officers, directors and greater than 10% stockholders
filed on a timely basis all reports due under Section 16(a) of the Securities
Exchange Act of 1934.
Executive Compensation
The following table sets forth all compensation awarded to, earned by, or
paid for services rendered to the Company in all capacities by the Company's
chief executive officer and other executive officers whose salary and bonus
exceeded $100,000 (the "Named Executive Officers") during the fiscal years
ended December 31, 1998, 1999 and 2000.
Summary Compensation Table
<TABLE>
<CAPTION>
Long-Term
Annual Compensation
Compensation Awards
----------------- ------------
Number of
Shares
Salary Bonus Underlying
Name and Principal Position ($) ($) Options
--------------------------- -------- -------- ------------
<S> <C> <C> <C> <C>
Devarajan S. Puthukarai................. 2000 $250,000 $100,000(1) 33,500
President, Chief Executive Officer and 1999 $250,000 $100,000 --
Chief Operating Officer 1998 $250,000 $100,000 30,259
Robert P. Bernardi(2)................... 2000 $145,834 0 33,500
Former Chairman of the Board of 1999 $175,000 0 --
Directors
1998 $175,000 0 30,259
Mark A. Fowler.......................... 2000 $135,060 $ 85,000 13,500
Secretary, Chief Financial Officer, 1999 $125,000 $ 50,000(3) 3,025
Senior Vice President of Finance and
Administration
William Crowley(4)...................... 2000 $202,926 $ 80,000 10,000
Senior Vice President, U.S. Marketing 1999 $144,230 $ 50,000 --
</TABLE>
--------
(1) Does not include $51,667 paid to Mr. Puthukarai for a bonus earned in
1998.
(2) Mr. Bernardi resigned as Chairman of the Board effective September 1,
2000. Mr. Bernardi's salary does not include $382,522 paid to him in
connection with his severance agreement with the Company.
(3) Net of $20,000 used for the payment of taxes.
(4) Mr. Crowley resigned as Senior Vice President of Marketing, U.S. effective
January 5, 2001.
11
<PAGE>
The following table sets forth information regarding the grant of options to
purchase the Company's Common Stock to each of the Named Executive Officers
during the fiscal year ended December 31, 2000.
Option Grants in 2000
<TABLE>
<CAPTION>
Individual Grants
-------------------------------------------------- Potential Realizable
Number of Percentage of Value at
Securities Total Options Assumed Annual
Underlying Granted to Rates of Stock Price
Options Employees in Exercise Price Expiration Appreciation for
Name Granted Fiscal 2000 Per Share Date Option Term (1)
---- ---------- ------------- -------------- ---------- ---------------------
5% 10%
--------- -----------
<S> <C> <C> <C> <C> <C> <C>
Mark A. Fowler.......... 3,000 3.0% $20.65 2004 $ 17,116 $ 38,960
5,000 $59.40 2005 $ 82,050 $ 181,300
8,500 $19.38 2005 $ 45,475 $ 100,555
William Crowley......... 5,000 2.2% $59.40 2005 $ 82,050 $ 181,300
5,000 $19.38 2005 $ 26,750 $ 59,150
Devarajan S.
Puthukarai............. 33,500 7.5% $59.40 2005 $ 549,735 $ 1,214,710
Robert P. Bernardi...... 33,500 7.5% $59.40 2005 $ 549,735 $ 1,214,710
</TABLE>
--------
(1) Potential Realizable Value assumes that the Common Stock appreciates at
the indicated annual rate (compounded annually) from the grant date until
the expiration of the option term and is calculated based on the
requirements promulgated by the Securities and Exchange Commission.
Potential Realizable Value does not represent the Company's estimate of
future stock price growth.
The following table sets forth information regarding the number and value of
securities underlying options held by each of the Named Executive Officers at
the end of the fiscal year ended December 31, 2000. No options were exercised
by any of the Named Executive Officers during the fiscal year ended December
31, 2000.
Aggregate Option Exercises and Year End Option Values
<TABLE>
<CAPTION>
Number of
Securities Underlying Value of Unexercised
Unexercised Options "In-the-Money" Options
at December 31, 2000 at December 31, 2000 (1)
------------------------- -------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Robert P. Bernardi......... 52,593 11,166 $0 $ 0
Devarajan S. Puthukarai.... 52,593 11,166 $0 $ 0
Mark A. Fowler............. 11,209 8,342 $0 $ 0
William Crowley............ 17,411 1,666 $0 $ 0
</TABLE>
--------
(1) Value for "in-the-money" options represents the positive spread between
the exercise price of outstanding options and the fair market value of
$3.125 per share on December 31, 2000.
Employment Agreements and Consulting Agreements
Mr. Fowler has an employment agreement which terminates on the first to
occur of January 2002, the final distribution under the Company's Plan of
Liquidation or the retention of a third party to coordinate the liquidation of
the Company. This agreement requires that he commit substantially all of his
time and effort to winding up the affairs of the Company in accordance with
the Plan of Liquidation. Under the employment agreement, Mr. Fowler receives a
salary of $165,000 per annum. Upon termination by the Company without cause or
for death or incapacity, or termination by Mr. Fowler for good reason, the
employment agreement provides for payment of all accrued salary, benefits and
bonuses plus a sum equal to $160,050.
Key Man Insurance
The Company has key man insurance covering Mr. Puthukarai in the amount of
$1 million. The Company is named as beneficiary for the policy.
12
<PAGE>
Indemnification of Directors and Officers
The Company's Charter and Bylaws provide that it shall indemnify all of its
directors and officers to the full extent permitted by the Delaware General
Corporation Law. Under these provisions, any director or officer who, in his
or her capacity as such, is made or threatened to be made a party to any suit
or proceeding, may be indemnified if the Board determines the director or
officer acted in good faith and in a manner the director reasonably believed
to be in, or not opposed to, the best interests of the Company. The Charter,
Bylaws, and Delaware law further provide that indemnification is not exclusive
of any other rights to which directors and officers may be entitled under our
Charter, Bylaws, any agreement, any vote of stockholders or disinterested
directors, or otherwise.
The Company has the power to purchase and maintain insurance on behalf of
any person who is or was a director, officer, employee, or agent of the
Company, or is or was serving at the request of the Company as a director,
officer, employee or agent of another corporation, partnership, joint venture,
trust, or other enterprise, against any expense, liability, or loss incurred
by that person in the capacity he served for the Company or arising out of his
status as such, whether or not the Company would have the power to indemnify
that person against similar liability under Delaware law. The Company has
director and officer insurance coverage. Our directors and officers are
insured against liability of up to $10,000,000 in the aggregate each policy
year.
Security Ownership of Certain Beneficial Owners and Management
The following table sets forth information regarding shares of our Common
Stock beneficially owned as of January 8, 2001. Beneficial ownership is
calculated in accordance with Rule 13d-3(d) under the Securities Exchange Act
of 1934. Shares of Common Stock subject to options and warrants that are
currently exercisable or are exercisable within 60 days of January 8, 2001,
are deemed outstanding with respect to the person holding those options but
are not deemed outstanding for purposes of computing the percentage ownership
of any other person. Unless otherwise indicated, each person possesses sole
voting and investment power with respect to the shares identified as
beneficially owned. Except as otherwise indicated in the table, the address of
the stockholders listed below is that of the Company's principal executive
office. Directors not included in the table below do not hold Company
securities.
<TABLE>
<CAPTION>
Shares Beneficially
Owned as of
January 8, 2001
--------------------------
Name and Address Number Percent
---------------- ------------ ----------
<S> <C> <C>
BCG Strategic Investors, LLC....................... 1,271,466(1) 38.3%
338 North Foothill Road
Beverly Hills, CA 90210
Rho Management Trust I............................. 281,432(2) 8.5%
767 Fifth Avenue
New York, NY 10053
Devarajan S. Puthukarai............................ 142,005(3) 4.2%
Irwin H. Steinberg................................. 40,101(4) 1.2%
Mark Fowler........................................ 11,209(5) *
John A. Skolas..................................... 7,500(6) *
William W. Scranton, III........................... 4,583(7) *
All executive officers and directors as a group (5
persons).......................................... 205,398(8) 5.9%
</TABLE>
--------
* Less than 1%.
(1) Includes 18,500 shares acquired by Barington Capital Group L.P., a member
of BCG Strategic Investors LLC, whose general partner is LNA Capital
Corp., and of which the Chairman, President and CEO is James Mitarotonda;
26,200 shares acquired by dot com Investment Corporation, a member of BCG
Strategic Investors, LLC, and of which the President and sole director is
Seymour Holtzman; and 16,900 shares acquired by Barington Companies
Equity Partners, L.P., whose general partner is Barington Companies
Investors, LLC, of which the managing member is James Mitaronda.
13
<PAGE>
(2) Includes 78,790 shares of Common Stock issuable upon exercise of Series B
warrants and 43,828 shares of Common Stock issuable upon exercise of
Series C warrants. Rho Management Partners L.P., a Delaware limited
partnership may be deemed the beneficial owner of shares registered in the
name of Rho Management Trust I, under an investment advisory relationship
by which Rho Management Partners L.P. exercises sole voting and investment
control over Rho Management Trust I's shares and warrants.
(3) Includes 45,389 shares of Common Stock issuable upon the exercise of
warrants with an exercise price of $16.50 per share, 6,820 shares of
Common Stock issuable upon the exercise of Series B warrants, 1,515 shares
of Common Stock issuable in connection with Series C warrants, and 52,593
shares of Common Stock issuable upon exercise of vested options with
exercise prices ranging from $20.60 to $59.40 per share.
(4) Includes 22,997 shares of Common Stock issuable upon the exercise of
warrants with exercise prices ranging from $16.50 to $19.80 per share.
(5) Includes 11,209 shares of Common Stock issuable upon the exercise of
vested options with exercise prices ranging from $20.60 to $59.40 per
share.
(6) Includes 7,500 shares of Common Stock issuable upon the exercise of vested
options with exercise prices ranging from $59.40 to $130 per share.
(7) Includes 4,583 of Common Stock issuable upon the exercise of vested
options with an exercise price of $19.80 per share.
(8) Includes 6,820 shares of Common Stock issuable upon the exercise of Series
B warrants, 1,515 shares of Common Stock issuable upon the exercise of
Series C warrants, 68,386 shares of Common Stock issuable upon the
exercise of outstanding common stock warrants and 94,299 shares of Common
Stock issuable upon the exercise of vested options.
Certain Relationships and Related Transactions.
In December 1998, the Company advanced Mr. Puthukarai $81,519. The advance
is payable on or before January 1, 2003 and bears interest at 8% per annum.
On June 8, 1999, the Company executed a license agreement with EMI. Under
this agreement, the Company will make royalty payments in connection with
sales of our custom CDs including any music content provided under license by
EMI. In exchange for our rights under the license agreement, the Company
issued 1,517,086 shares of our Common Stock to Virgin Holdings. Virgin
Holdings received approximately $40,000,000 from the sale of 307,219 shares of
its stock by participating as a selling shareholder in our initial public
offering.
On July 1, 1999, the Company issued a demand promissory note to Rho
Management Trust I for financing in the principal amount of $1,000,000 in the
form of a subordinated note bearing interest at 12% and maturing on January 1,
2000. The Company repaid the principal and interest on the above loan
immediately following its initial public offering out of the proceeds
therefrom.
The Company entered into a severance agreement with Robert P. Bernardi, the
Chairman of the Board, in which Mr. Bernardi and the Company agreed to
terminate his employment agreement with the Company effective September 1,
2000. The agreement provided for, among other things, the lump sum payment to
Mr. Bernardi of (i) all of his accrued salary through September 1, 2000; and
(ii) a sum equal to the full amount, discounted by 3% of the salary Mr.
Bernardi would have received through December 7, 2002, at the rate of $175,000
per annum. In addition, the terms of the agreement continue in force the
indemnification protections afforded by the Company's charter and bylaws as
they pertain to Mr. Bernardi for his actions on behalf of the Company in his
capacity as an officer and/or director or otherwise related to his duties for
the Company. Mr. Bernardi also agreed to cooperate with the Company in
connection with any claims or suits that have been or may be filed against any
officers and/or directors of the Company related to their performance or
conduct on behalf of the Company.
The Company also entered into a letter agreement with Lawrence A. Lieberman,
President of the Company's Global Marketing Group, in which Mr. Lieberman
agreed to terminate his employment with the Company, effective October 26,
2000. The agreement provided for, among other things, the payment of $175,000
to Mr. Lieberman as follows: $58,333 on October 27, 2000, $87,500 on January
3, 2001 and $29,167 on April 3, 2001.
14
<PAGE>
The Company agreed to release Mr. Lieberman from any non-competition agreement
with the Company, provided however that the provisions of the non-competition
agreement shall continue with respect to IMIX.com and Emusic.com, Inc. until
July 30, 2001.
The Company entered into a severance agreement with Devarajan Puthukarai,
the Chairman of the Board, Chief Executive Officer, President ad Chief
Operating Officer, in which Mr. Puthukarai and the Company agreed to terminate
his employment agreement with the Company effective January 31, 2001. The
Company agreed to pay Mr. Puthukarai in a lump sum form: (i) all of his
accrued salary, bonuses and accrued benefits; (ii) a sum equal in the
aggregate to the full amount, discounted by three percent (3%) of the salary
which Mr. Puthukarai would have received during the through December 7, 2002,
at the rate of Two Hundred Fifty Thousand Dollars ($250,000) per annum; and
(iii) the annual bonuses which Mr. Puthukarai would have received during the
remainder of his employment agreement, at the rate of the minimum guaranteed
bonus of $100,000. The Company also agreed to provide medical and health
insurance for Mr. Puthukarai through December 7, 2002 consistent with past
practices. In addition, the Company shall deduct the amount of life insurance
premiums (grossed up to account for federal and state income taxes) payable by
the Company under the employment agreement for which Mr. Puthukarai is the
beneficiary from the amount due to the Company by Mr. Puthukarai pursuant to
the advance of $81,519 by the Company to Mr. Puthukarai in December 1998.
On January 5, 2001, the Company entered into a severance agreement with
William Crowley pursuant to which Mr. Crowley received a severance payment of
$165,000.
The Company believes that the above-described transactions are as fair to
the Company as could have been obtained with unaffiliated parties. The Company
intends that all future transactions with officers, directors or principal
stockholders of the Company will be approved or ratified by a majority of the
Board of Directors, including a majority of the disinterested, independent
directors. Moreover, the Company intends that future transactions with
affiliates will be on terms no less favorable to the Company than could be
obtained from unaffiliated third parties.
Report of the Compensation Committee of the Board of Directors.
The Compensation Committee of the Board of Directors reviews the performance
of the Company's management and recommends and approves the compensation of
and the issuance of stock options to executive officers and employees under
the Company's stock option plan. In addition, the Compensation Committee
reviews compensation levels of other management level employees and reviews
other compensation-related issues.
General Compensation Policy. The fundamental policy of the Compensation
Committee is to provide the Company's executive officers with competitive
compensation opportunities based upon their contribution to the Company's
development and financial success and their personal performance. The
compensation package for each executive officer is comprised of three
elements: (i) base salary, (ii) bonus and (iii) equity incentive awards.
Base Salary. The Compensation Committee strives to offer salaries to its
executive officers, which are competitive with salaries offered by companies
of similar size and capitalization in the Company's industry. Base salaries
are reviewed on an annual basis and are subject to adjustment based upon the
individual's contribution to the Company and changes in salary levels offered
by comparable companies. Executive officers' salaries are determined by the
Chief Executive Officer based on information from various sources and approved
by the Compensation Committee.
Bonuses. The amount of awards granted to the executive officers are
contingent upon the Company achieving certain performance goals established by
the Board of Directors. For executive officers, awards are also contingent on
the achievement of individual performance objectives. Target and minimum
amounts of bonuses for each executive officer are set annually by the
Compensation Committee and are specifically weighted for identified financial,
management, strategic and operational goals. The minimum annual bonus for Mr.
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<PAGE>
Puthukarai as set forth in his employment agreement is $100,000. The minimum
bonus for all other executive officers is $50,000. The Compensation Committee
reviews performance against the goals and approves payment of the bonuses.
Equity Incentives. The Compensation Committee believes that employee equity
ownership is highly motivating, provides a major incentive to employees to
build stockholder value and serves to align the interests of employees with
the interests of the Company's stockholders. In determining the amount of
equity compensation to be awarded to executive officers in any fiscal year,
the Compensation Committee considers the position of the officer, the current
stock ownership of the officer, the number of shares which continue to be
subject to vesting under outstanding options and the expected future
contribution of the officer to the Company's performance, giving primary
weight to the officer's position and his expected future contributions. In
addition, the Compensation Committee compares the stock ownership and options
held by each officer with the other officers' equity positions and each
officer's experience and value to the Company.
CEO Compensation. In accordance with his employment agreement, the Company's
Chief Executive Officer, Mr. Puthukarai received a base salary of $250,000 for
the fiscal year ended December 31, 2000 and a bonus of $100,000. The
Compensation Committee believes that Mr. Puthukarai's salary and bonus are
competitive with that paid by other companies in the same or similar
industries as the Company.
Compliance with Internal Revenue Code Section 162(m). As a result of Section
162(m) of the Internal Revenue Code, which was enacted into law in 1993, the
Company will not be allowed a federal income tax deduction for compensation
paid to certain executive officers to the extent that compensation exceeds $1
million per officer in any one year. This limitation will apply to all
compensation paid to the covered executive officers which is not considered to
be performance-based. Compensation which does qualify as performance-based
compensation will not have to be taken into account for purposes of this
limitation. The Company's stock option plan contains certain provisions which
are intended to assure that any compensation deemed paid in connection with
the exercise of stock options granted under that plan with an exercise price
equal to the market price of the option shares on the grant date will qualify
as performance-based compensation. The Compensation Committee does not expect
that the compensation to be paid to any of the Company's executive officers
for 2001 will exceed the $1 million limit per officer.
THE COMPENSATION COMMITTEE
William W. Scranton, III
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<PAGE>
COMPANY STOCK PRICE PERFORMANCE
The graph below compares the cumulative total stockholder return on the
Company's Common Stock, the Russell 2000 Index and the S&P Retail (Specialty)
Index. Cumulative total stockholder return represents share value appreciation
through December 29, 2000, assuming the investment of $100 in the Common Stock
of the Company at the initial public offering on July 7, 1999 and in each of
the other indexes on the same date, and reinvestment to all dividends. The
comparisons in the graph below are based on historical data and are not
intended to forecast the possible future performance of our common stock.
[GRAPH]
MUSICMAKER.COM, INC. RUSSELL 2000 S&P RETAIL (SPECIALTY)
7/7/99 100 100 100
12/31/99 24.54 111.50 67.66
12/29/2000 1.31 106.81 56.50
The above graph was plotted using the following data:
<TABLE>
<CAPTION>
Cumulative Total Return
------------------------
7/7/99 12/31/99 12/29/00
------ -------- --------
<S> <C> <C> <C>
MUSICMAKER.COM, INC. .................................. 100.00 24.54 1.31
RUSSELL 2000........................................... 100.00 111.50 106.81
S & P RETAIL (SPECIALTY)............................... 100.00 67.66 56.50
</TABLE>
Report of the Audit Committee of the Board of Directors
The Audit Committee of the Board of Directors serves as the representative
of the Board for the Company's financial accounting and reporting process,
system of internal control, audit process, and process for monitoring
compliance with laws and regulations and the Company's standards of business.
The Company's management has primary responsibility for preparing the
Company's financial statements and the Company's financial reporting process.
The Company's independent accountants, Ernst & Young LLP, are responsible for
expressing an opinion on the conformity of the Company's audited financial
statements to generally accepted accounting principles.
The Board of Directors has adopted a charter for the Audit Committee, which
is attached hereto as Exhibit A.
In this context, the Audit Committee hereby reports as follows:
1. The Audit Committee has reviewed and discussed the audited financial
statements with management.
2. The Audit Committee has discussed with the independent accountants the
matters required to be discussed by SAS 61 (Codification of Statements on
Auditing Standard, AU 380).
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<PAGE>
3. The Audit Committee has received the written disclosures and the
letter from the independent accountants required by Independence Standards
Board Standard No. 1 (Independence Standards Board Standards No. 1,
Independence Discussions with Audit Committees) and has discussed with the
independent accountants the independent accountants' independence.
Each of the members of the Audit Committee is independent as defined under
Rule 4200(a)(15) of the National Association of Securities Dealers' ("NASD")
listing standards.
The undersigned members of the Audit Committee have submitted this Report to
the Audit Committee.
William W. Scranton, III
John A. Skolas
Irwin H. Steinberg
SOLICITATION OF CONSENT REVOCATIONS
Consent revocations may be solicited by mail, telephone, facsimile
transmission or other electronic media and in person. Solicitation of consent
revocations may be made by directors, officers and regular employees of
musicmaker.com for which they will receive no additional compensation.
In addition, musicmaker.com has retained to assist in the
solicitation of the consent revocations, for which will receive a fee of
plus reasonable out-of-pocket expenses. musicmaker.com has also agreed to
indemnify for certain liabilities in connection with this solicitation.
Approximately persons will be employed by to solicit stockholders.
Banks, brokers, custodians, nominees and fiduciaries will be requested to
forward solicitation material to beneficial owners of shares of musicmaker.com
common stock. musicmaker.com will reimburse banks, brokers, custodians,
nominees and fiduciaries for their reasonable expenses for sending
solicitation material to the beneficial owners.
The entire cost of soliciting the consent revocations, including, without
limitation, costs, if any, relating to advertising, printing, fees of
attorneys, financial advisors, proxy solicitors, accountants, public
relations, transportation, litigation and related expenses and filing fees,
will be borne by musicmaker.com. musicmaker.com estimates that total
expenditures relating to the solicitation of the consent revocations will be
approximately $1,000,000. Such costs do not include the amount normally
expended for a solicitation for an uncontested election of directors or costs
represented by salaries and wages of regular employees and officers. To date,
no fees have been paid by musicmaker.com in connection with its solicitation
of revocations of consents.
ABSENCE OF APPRAISAL RIGHTS
Under Delaware law, the stockholders of musicmaker.com are not entitled to
appraisal rights in connection with the solicitation of revocations of consent
with respect to the Insurgents' proposals.
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<PAGE>
Information Concerning the Directors and Certain Executive Officers and
Employees of
The Company and Other Persons Who May Also Solicit Revocations of Consents
In connection with the Company's solicitation of revocations of consents
from its stockholders, certain persons may be deemed to be participants in the
solicitation.
Directors and Executive Officers of the Company
The following table sets forth the name, principal business address and the
present employment or other principal occupation, and the name, principal
business and the address of any corporation or other organization in which
such employment is carried on, of the directors and executive officers of the
Company who may be deemed to be participants in the solicitation of
revocations of consents. Unless otherwise indicated, the principal occupation
refers to such person's position with the Company.
<TABLE>
<CAPTION>
Principal Occupation and
Name Business Address Business
---- ---------------- ------------------------
<S> <C> <C>
Devarajan S. 1740 Broadway Chairman of the Board
Puthukarai............. 23rd Floor
New York, New York 10019
Mark A. Fowler.......... 10780 Parkridge Blvd. Chief Financial Officer, Senior
Suite 50 Vice President of Finance,
Reston, VA 20191 Secretary
William W. Scranton, 1740 Broadway Head of the Scranton Family
III.................... 23rd Floor Office; The Scranton Family
New York, New York 10019 Office manages investments and
civic initiatives
John A. Skolas.......... 1740 Broadway Chief Financial Officer of
23rd Floor ValiGen (U.S.), Inc.; ValiGen
New York, New York 10019 (U.S.), Inc. is a
European/American life science
business dedicated to improving
healthcare and agriculture.
Irwin H. Steinberg...... President of IHS Corporation.
1740 Broadway IHS Corporation is a consulting
23rd Floor firm specializing in the music
New York, New York 10019 industry.
</TABLE>
Information regarding ownership of the Company's securities by participants
Except as otherwise provided in the Consent Revocation Statement, none of
the persons listed above owns any of the Company's securities of record but
not beneficially. The number of shares of common stock held by directors and
certain executive officers of the Company is set forth in "Security Ownership
of Certain Beneficial Owners and Management" on pages 13 and 14 of this
consent revocation statement.
Information regarding transactions in the Company's common stock by
participants
There were no purchases and sales of the Company's common stock by the
participants during the past two years.
19
<PAGE>
STOCKHOLDER PROPOSALS
Proposals of stockholders of musicmaker.com which are intended to be
presented by such stockholders at musicmaker.com's 2001 annual meeting must be
received by musicmaker.com no later than April 16, 2001 in order that they may
be included in the proxy statement and form of proxy relating to that meeting.
Any such proposal should be addressed to musicmaker.com's Secretary and
delivered to musicmaker.com's offices at 10780 Parkridge Boulevard, Suite 50,
Reston, VA 20191.
If a musicmaker.com stockholder wishes to present a proposal before the 2001
annual meeting, but does not wish to have the proposal considered for
inclusion in musicmaker.com's proxy statement and proxy card, such stockholder
must also give written notice to the Secretary of musicmaker.com at the
address noted above. The Secretary must receive such notice no later than June
30, 2001. If a stockholder fails to provide timely notice of a proposal to be
presented at the 2001 annual meeting, the proxies designated by the Board of
Directors of musicmaker.com will have discretionary authority to vote on any
such proposal.
BY ORDER OF THE BOARD OF DIRECTORS
Devarajan Puthukarai,
Chief Executive Officer, President,
and Chief Operating Officer
January , 2001
Reston, Virginia
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<PAGE>
Appendix A
Musicmaker.com, Inc.
Audit Committee Charter
September 18, 2000
Organization
This charter governs the operations of the audit committee. The committee
shall review and reassess the charter at least annually and obtain the
approval of the board of directors. The committee shall be appointed by the
board of directors and shall comprise at least three directors, each of whom
are independent of management and the Company. Members of the committee shall
be considered independent if they have no relationship that may interfere with
the exercise of their independence from management and the Company. All
committee members shall be financially literate, [or shall become financially
literate within a reasonable period of time after appointment to the
committee,] and at least one member shall have accounting or related financial
management expertise.
Statement of Policy
The audit committee shall provide assistance to the board of directors in
fulfilling their oversight responsibility to the shareholders, potential
shareholders, the investment community, and others relating to the Company's
financial statements and the financial reporting process, the systems of
internal accounting and financial controls, the internal audit function, the
annual independent audit of the Company's financial statements, and the legal
compliance and ethics programs as established by management and the board. In
so doing, it is the responsibility of the committee to maintain free and open
communication between the committee, independent auditors, the internal
auditors and management of the Company. In discharging its oversight role, the
committee is empowered to investigate any matter brought to its attention with
full access to all books, records, facilities, and personnel of the Company
and the power to retain outside counsel, or other experts for this purpose.
Responsibilities and Processes
The primary responsibility of the audit committee is to oversee the
Company's financial reporting process on behalf of the board and report the
results of their activities to the board. Management is responsible for
preparing the Company's financial statements, and the independent auditors are
responsible for auditing those financial statements. The committee in carrying
out its responsibilities believes its policies and procedures should remain
flexible, in order to best react to changing conditions and circumstances. The
committee should take the appropriate actions to set the overall corporate
"tone" for quality financial reporting, sound business risk practices, and
ethical behavior.
The following shall be the principal recurring processes of the audit
committee in carrying out its oversight responsibilities. The processes are
set forth as a guide with the understanding that the committee may supplement
them as appropriate.
. The committee shall have a clear understanding with management and the
independent auditors that the independent auditors are ultimately
accountable to the board and the audit committee, as representatives of
the Company's shareholders. The committee shall have the ultimate
authority and responsibility to evaluate and, where appropriate, replace
the independent auditors. The committee shall discuss with the auditors
their independence from management and the Company and the matters
included in the written disclosures required by the Independence
Standards Board. Annually, the committee shall review and recommend to
the board the selection of the Company's independent auditors, subject
to shareholders' approval.
. The committee shall discuss with the internal auditors and the
independent auditors the overall scope and plans for their respective
audits including the adequacy of staffing and compensation. Also, the
committee shall discuss with management, the internal auditors, and the
independent auditors the
21
<PAGE>
adequacy and effectiveness of the accounting and financial controls,
including the Company's system to monitor and manage business risk, and
legal and ethical compliance programs. Further, the committee shall meet
separately with the internal auditors and the independent auditors, with
and without management present, to discuss the results of their
examinations.
. The committee shall review the interim financial statements with
management and the independent auditors prior to the filing of the
Company's Quarterly Report on Form 10-Q. Also, the committee shall
discuss the results of the quarterly review and any other matters
required to be communicated to the committee by the independent auditors
under generally accepted auditing standards. The chair of the committee
may represent the entire committee for the purposes of this review.
. The committee shall review with management and the independent auditors
the financial statements to be included in the Company's Annual Report
on Form 10-K (or the annual report to shareholders if distributed prior
to the filing of Form 10-K), including their judgment about the quality,
not just acceptability, of accounting principles, the reasonableness of
significant judgments, and the clarity of the disclosures in the
financial statements. Also, the committee shall discuss the results of
the annual audit and any other matters required to be communicated to
the committee by the independent auditors under generally accepted
auditing standards.
22
<PAGE>
MUSICMAKER.COM, INC.
CONSENT REVOCATION CARD
This revocation of consent is solicited on behalf of the Board of Directors of
musicmaker.com, Inc. ("musicmaker.com") in opposition to the consent
solicitation by BCG Strategic Investors, LLC, Barington Capital Group, L.P.,
Barington Companies Equity Partners, L.P. and dot com Investment Corporation
(collectively, "BCG").
The undersigned, a holder of shares of common stock, par value $0.01 per
share, of musicmaker.com, is acting with respect to all the shares of common
stock of musicmaker.com held by the undersigned, and hereby revokes any and all
consents that the undersigned may have given in respect of the following
proposals:
[X] PLEASE MARK VOTE AS IN THIS EXAMPLE.
THE BOARD OF DIRECTORS OF MUSICMAKER.COM UNANIMOUSLY RECOMMENDS A "REVOKE
CONSENT" ON EACH PROPOSAL SET FORTH BELOW. PLEASE COMPLETE, THEN SIGN, DATE AND
MAIL THIS CONSENT REVOCATION CARD TODAY.
1. Proposal made by BCG to amend the By-laws of musicmaker.com to set the
number of directors at fifteen.
[_] REVOKE CONSENT [_] DO NOT REVOKE CONSENT [_] ABSTAIN
2. Proposal made by BCG to amend the By-laws of musicmaker.com to authorize
only stockholders to fill vacancies on the board of directors created by an
increase in the number of board seats effected through a stockholder consent
solicitation.
[_] REVOKE CONSENT [_] DO NOT REVOKE CONSENT [_] ABSTAIN
3. Proposal made by BCG to elect eight individuals, Barry J. Booth, Jesse H.
Choper, William J. Fox, Seymour Holtzman, Allan R. Lyons, Michael J. McManus,
Jr., James A. Mitarotonda and Joseph R. Wright, Jr. to the Board of Directors
of musicmaker.com.
[_] REVOKE CONSENT [_] DO NOT REVOKE CONSENT [_] ABSTAIN
<PAGE>
INSTRUCTIONS: To revoke consent, withhold revocation of consent or abstain from
consenting to the removal of all the persons named in the above
proposal, check the appropriate box. If you wish to revoke the
consent to the removal of certain of the persons named above, but not
all of them, check the "revoke consent" box and write the name of
each such person as to whom you do not wish to revoke consent in the
following space:
___________________________________________
4. Proposal made by BCG to repeal any By-laws adopted by the Board of
Directors of musicmaker.com subsequent to February 17, 1999.
[_] REVOKE CONSENT [_] DO NOT REVOKE CONSENT [_] ABSTAIN
5. Any other proposal made by BCG pursuant to an action by written consent of
the stockholders of musicmaker.com.
[_] REVOKE CONSENT [_] DO NOT REVOKE CONSENT [_] ABSTAIN
If no direction is made with respect to one or more of the foregoing proposals,
or if you mark either the "revoke consent" or "abstain" box with respect to one
or more of the foregoing proposals, this revocation of consent will revoke all
previously executed consents with respect to such proposals.
Dated: __________________
_________________________
Signature
_________________________
Signature, if held
jointly
_________________________
Title of Authority
Please sign exactly as name appears hereon. If shares are held jointly, each
stockholder should sign. When signing as attorney, executor, administrator,
trustee, guardian, corporate officer, etc., give full title as such. Please
sign, date and mail your Consent Revocation Card promptly in the enclosed
postage-paid envelope.
If you have any questions or need assistance, please contact
.
