EXHIBIT 1
JMB Capital Partners, L.P.
1999 Avenue of the Stars, Xxxxx 0000
Xxx Xxxxxxx, Xxxxxxxxxx 00000
July 23, 2002
Board of Directors
Liquid Audio, Inc.
000 Xxxxxxxxxx Xxxxx
Xxxxxxx Xxxx, Xxxxxxxxxx 00000
Ladies and Gentlemen:
Let's not wait until September 26th. In our view, the proposed merger agreement
with Alliance Entertainment, even as recently modified, is not in the best
interests of the shareholders and should be terminated immediately. Instead,
Liquid Audio, Inc. (the "Company") should discontinue its operations and
distribute its cash to its shareholders. In the current environment of corporate
mismanagement, the Company should focus its efforts on maximizing shareholder
values rather than engaging in transactions such as the proposed merger which do
not have the support of its shareholders. The distribution of the Company's cash
to its shareholders is the best course of action for the Company to take in
order to preserve the remaining, albeit, greatly diminished, equity value for
its shareholders.
Although the Company's financial performance during the first quarter of 2002
was awful, most shocking is the substantial amount of cash being wasted by
management, cash that should be returned to the shareholders. For example, the
Company burned through more than $100,000,000 of cash to generate, in the most
recent quarter, slightly over $100,000 of revenues.
One would expect that the Company's poor financial performance would encourage
management to show a greater interest in its shareholder base. However, this
sadly does not seem to be the case. After the first proposed merger agreement, I
had a brief phone conversation with a member of the senior management team of
the Company to express my discontent for the proposed merger with Alliance
Entertainment. I was told that during the week following my call, I would be
called to schedule a meeting with the management of Alliance Entertainment, such
member of senior management, and me. To date, no phone call or meeting has been
arranged.
The concept of accountability is as foreign to the Company's board and
management team as is profitability. If management and the board are so enamored
with the Alliance Entertainment business plan, they should feel free to invest
directly in that entity with their own money, not with the cash which belongs to
the true owners of the Company, the shareholders. While we believe the
shareholders will vote the proposed merger down (if management took the time for
an informal poll, they would know that their current shareholder base has no
appetite for the current merger proposal), management will have managed to
destroy further value by continuing to burn cash at a shocking rate. Therefore,
the Company should act in the best interests of the shareholders by terminating
the merger agreement and distributing its cash to the shareholders.
Sincerely,
/s/ Xxxxxxxx Xxxxxx
JMB Capital Partners, L.P.
