RNWK » Topics » The integration strategy we plan to implement with respect to the assets that have been combined in Rhapsody America may fail or be less successful than anticipated and the management of these assets creates operational complexities.

These excerpts taken from the RNWK 10-K filed Feb 29, 2008.
The integration strategy we plan to implement with respect to the assets that have been combined in Rhapsody America may fail or be less successful than anticipated and the management of these assets creates operational complexities.
 
Our realization of the anticipated benefits of Rhapsody America will depend on our ability to integrate the assets contributed by us and MTVN. Neither we nor the current management of Rhapsody America have extensive experience in managing and operating complex joint ventures of this nature and the integration and operational activities may strain our internal resources, distract us from managing our day-to-day operations, and impact our ability to retain key employees in Rhapsody America. Our business, results of operations and financial condition could be materially and adversely affected if we are unable to successfully integrate and manage these assets.
 
The nature of our and MTVN’s contributions of services and assets to Rhapsody America required detailed cost allocation agreements that are complex to implement and manage and may result in significant costs that could adversely affect our operating results. For example, the advertising commitment from MTVN includes direct and integrated marketing services and programs, some of which may be difficult to value and may not generate expected returns. In addition, we are required to provide various support services, including facilities, information technology systems, personnel and other corporate administrative support, to Rhapsody America. The allocation of these support service costs is based on various measures depending on the service provided, much of which must be tracked and then accounted for and reported to Rhapsody America on a periodic basis. Tracking and reporting these costs require significant internal resources, and many of the allocation methodologies are complicated, which may result in inaccuracies in the total charges to be billed to Rhapsody America. In addition, the variable nature of these costs to be allocated to Rhapsody America may result in fluctuations in the period-over-period results of our Music business.


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We and MTVN have certain contractual rights relating to the purchase and sale of MTVN’s membership interest in Rhapsody America that may be settled in part through the issuance of additional shares of our capital stock, which would dilute our other shareholders’ voting and economic interests in us, and may require us to pay MTVN a price that exceeds the appraised value of their proportionate interest in Rhapsody America.
 
Pursuant to the terms of the Rhapsody America limited liability company agreement, we have a right to purchase from MTVN, and MTVN has a right to require us to purchase, MTVN’s membership interest in Rhapsody America. These call and put rights are exercisable upon the occurrence of certain events and during certain periods in each of 2012, 2013 and 2014 and every two years thereafter and may be settled, in part, through the issuance of shares of our capital stock, subject to specified limitations. If a portion of the purchase price for MTVN’s membership interest is payable in shares of our capital stock, such shares could represent up to 15% of the outstanding shares of our common stock immediately prior to the transaction. In addition, we may also be obligated to issue shares of our non-voting stock representing up to an additional 4.9% of the outstanding shares of our common stock immediately prior to the transaction. If we pay a portion of the purchase price for MTVN’s membership interest in shares of our common stock and non-voting stock, our other shareholders’ voting and economic interests in us will be diluted, and MTVN will become one of our significant shareholders. In certain situations, if MTVN exercises its right to require us to purchase its membership interests in Rhapsody America, we may be required to pay MTVN a price that provides a return to MTVN over the appraised value of MTVN’s proportionate interest in Rhapsody America.
 
The
integration strategy we plan to implement with respect to the
assets that have been combined in Rhapsody America may fail or
be less successful than anticipated and the management of these
assets creates operational complexities.



 



Our realization of the anticipated benefits of Rhapsody America
will depend on our ability to integrate the assets contributed
by us and MTVN. Neither we nor the current management of
Rhapsody America have extensive experience in managing and
operating complex joint ventures of this nature and the
integration and operational activities may strain our internal
resources, distract us from managing our
day-to-day
operations, and impact our ability to retain key employees in
Rhapsody America. Our business, results of operations and
financial condition could be materially and adversely affected
if we are unable to successfully integrate and manage these
assets.


 



The nature of our and MTVN’s contributions of services and
assets to Rhapsody America required detailed cost allocation
agreements that are complex to implement and manage and may
result in significant costs that could adversely affect our
operating results. For example, the advertising commitment from
MTVN includes direct and integrated marketing services and
programs, some of which may be difficult to value and may not
generate expected returns. In addition, we are required to
provide various support services, including facilities,
information technology systems, personnel and other corporate
administrative support, to Rhapsody America. The allocation of
these support service costs is based on various measures
depending on the service provided, much of which must be tracked
and then accounted for and reported to Rhapsody America on a
periodic basis. Tracking and reporting these costs require
significant internal resources, and many of the allocation
methodologies are complicated, which may result in inaccuracies
in the total charges to be billed to Rhapsody America. In
addition, the variable nature of these costs to be allocated to
Rhapsody America may result in fluctuations in the
period-over-period
results of our Music business.





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Table of Contents







We and
MTVN have certain contractual rights relating to the purchase
and sale of MTVN’s membership interest in Rhapsody America
that may be settled in part through the issuance of additional
shares of our capital stock, which would dilute our other
shareholders’ voting and economic interests in us, and may
require us to pay MTVN a price that exceeds the appraised value
of their proportionate interest in Rhapsody
America.



 



Pursuant to the terms of the Rhapsody America limited liability
company agreement, we have a right to purchase from MTVN, and
MTVN has a right to require us to purchase, MTVN’s
membership interest in Rhapsody America. These call and put
rights are exercisable upon the occurrence of certain events and
during certain periods in each of 2012, 2013 and 2014 and every
two years thereafter and may be settled, in part, through the
issuance of shares of our capital stock, subject to specified
limitations. If a portion of the purchase price for MTVN’s
membership interest is payable in shares of our capital stock,
such shares could represent up to 15% of the outstanding shares
of our common stock immediately prior to the transaction. In
addition, we may also be obligated to issue shares of our
non-voting stock representing up to an additional 4.9% of the
outstanding shares of our common stock immediately prior to the
transaction. If we pay a portion of the purchase price for
MTVN’s membership interest in shares of our common stock
and non-voting stock, our other shareholders’ voting and
economic interests in us will be diluted, and MTVN will become
one of our significant shareholders. In certain situations, if
MTVN exercises its right to require us to purchase its
membership interests in Rhapsody America, we may be required to
pay MTVN a price that provides a return to MTVN over the
appraised value of MTVN’s proportionate interest in
Rhapsody America.


 




EXCERPTS ON THIS PAGE:

10-K (2 sections)
Feb 29, 2008
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