Edgar Filing: Warner Music Group Corp.

Form 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2009

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number 001-32502

Warner Music Group Corp.

(Exact name of Registrant as specified in its charter)

Delaware

13-4271875

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

75 Rockefeller Plaza

New York, NY 10019

(Address of principal executive offices)

(212) 275-2000

(Registrant’s telephone number, including area code)

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ¨ No ¨

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.


Large accelerated filer	¨	Accelerated filer x
Non-accelerated filer	¨ (Do not check if a smaller reporting company)	Smaller reporting company ¨

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.) Yes ¨ No x

As of May 5, 2009, the number of shares of the Registrant’s common stock, par value $0.001 per share, outstanding was 154,596,051.

WARNER MUSIC GROUP CORP.

INDEX


		Page
Part I.	Financial Information
Item 1.	Financial Statements (unaudited)	3
	Consolidated Balance Sheets as of March 31, 2009 and September 30, 2008	3
	Consolidated Statements of Operations for the Three and Six Months Ended March 31, 2009 and 2008	4
	Consolidated Statements of Cash Flows for the Six Months Ended March 31, 2009 and 2008	5
	Consolidated Statement of Shareholders’ Deficit for the Six Months Ended March 31, 2009	6
	Notes to Consolidated Interim Financial Statements	7
	Supplementary Information—Consolidating Financial Statements	17
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	24
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	52
Item 4.	Controls and Procedures	53
Part II.	Other Information
Item 1.	Legal Proceedings	55
Item 1A.	Risk Factors	55
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	68
Item 3.	Defaults Upon Senior Securities	68
Item 4.	Submission of Matters to a Vote of Security Holders	68
Item 5.	Other Information	69
Item 6.	Exhibits	69
Signatures		70

ITEM 1.

FINANCIAL STATEMENTS

Warner Music Group Corp.

Consolidated Balance Sheets


	March 31, 2009			September 30, 2008
	(unaudited)			(audited)
	(in millions)
Assets
Current assets:
Cash and equivalents	$	658		$	411
Accounts receivable, less allowances of $135 and $159 million		349			538
Inventories		51			57
Royalty advances expected to be recouped within one year		169			174
Deferred tax assets		30			30
Other current assets		44			38

Total current assets		1,301			1,248
Royalty advances expected to be recouped after one year		207			212
Investments		19			155
Property, plant and equipment, net		104			117
Goodwill		1,090			1,085
Intangible assets subject to amortization, net		1,375			1,539
Intangible assets not subject to amortization		100			100
Other assets		61			70

Total assets	$	4,257		$	4,526

Liabilities and Shareholders’ Deficit
Current liabilities:
Accounts payable	$	186		$	219
Accrued royalties		1,117			1,189
Taxes and other withholdings		4			16
Current portion of long-term debt		17			17
Deferred income		136			117
Other current liabilities		235			313

Total current liabilities		1,695			1,871
Long-term debt		2,205			2,242
Deferred tax liabilities		225			237
Other noncurrent liabilities		242			262

Total liabilities		4,367			4,612

Commitments and Contingencies (See Note 11)
Shareholders’ deficit:
Common stock ($0.001 par value; 500,000,000 shares authorized; 154,596,051 and 154,012,885 shares issued and outstanding)		—			—
Additional paid-in capital		595			590
Accumulated deficit		(731	)		(686	)
Accumulated other comprehensive income, net		26			10

Total shareholders’ deficit		(110	)		(86	)

Total liabilities and shareholders’ deficit	$	4,257		$	4,526

See accompanying notes.

Warner Music Group Corp.

Consolidated Statements of Operations (Unaudited)


	Three Months Ended March 31,						Six Months Ended March 31,
	2009			2008			2009			2008
	(in millions, except per share data)
Revenues	$	668		$	800		$	1,546		$	1,789
Costs and expenses:
Cost of revenues		(339	)		(413	)		(823	)		(958	)
Selling, general and administrative expenses (a)		(258	)		(304	)		(553	)		(635	)
Other income, net		—			—			—			3
Amortization of intangible assets		(56	)		(55	)		(114	)		(109	)

Total costs and expenses		(653	)		(772	)		(1,490	)		(1,699	)

Operating income from continuing operations		15			28			56			90
Interest expense, net		(41	)		(47	)		(85	)		(95	)
Minority interest income (expense)		—			—			7			(2	)
Gain on sale of equity investment		—			—			36			—
Gain on foreign exchange transaction		—			—			9			—
Impairment of cost-method investments		(29	)		—			(29	)		—
Impairment of equity investment		—			—			(10	)		—
Other expense, net		(3	)		(2	)		(3	)		(2	)

Loss from continuing operations before income taxes		(58	)		(21	)		(19	)		(9	)
Income tax expense		(10	)		(13	)		(26	)		(23	)

Loss from continuing operations		(68	)		(34	)		(45	)		(32	)
Loss from discontinued operations, net of taxes		—			(3	)		—			(21	)

Net loss	$	(68	)	$	(37	)	$	(45	)	$	(53	)

Net loss per common share:
Basic earnings per share:
Loss from continuing operations	$	(0.45	)	$	(0.23	)	$	(0.30	)	$	(0.22	)
Loss from discontinued operations		—			(0.02	)		—			(0.14	)

Net loss	$	(0.45	)	$	(0.25	)	$	(0.30	)	$	(0.36	)

Diluted earnings per share:
Loss from continuing operations	$	(0.45	)	$	(0.23	)	$	(0.30	)	$	(0.22	)
Loss from discontinued operations		—			(0.02	)		—			(0.14	)

Net loss	$	(0.45	)	$	(0.25	)	$	(0.30	)	$	(0.36	)

Weighted average common shares:
Basic		149.5			147.9			149.3			147.5
Diluted		149.5			147.9			149.3			147.5
(a) Includes depreciation expense of:	$	(9	)	$	(13	)	$	(17	)	$	(26	)

See accompanying notes.

Warner Music Group Corp.

Consolidated Statements of Cash Flows (Unaudited)


	Six Months Ended March 31, 2009			Six Months Ended March 31, 2008
	(in millions)
Cash flows from operating activities
Net loss	$	(45	)	$	(53	)
Loss from discontinued operations		—			21

Loss from continuing operations		(45	)		(32	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization		131			135
Deferred taxes		(3	)		(15	)
Gain on sale of equity investment		(36	)		—
Gain on foreign exchange transaction		(9	)		—
Impairment of equity investment		10			—
Impairment of cost-method investments		29			—
Non-cash interest expense		22			24
Non-cash stock-based compensation expense		5			4
Minority interest (income) expense		(7	)		2
Other non-cash items		(1	)		(2	)
Changes in operating assets and liabilities:
Accounts receivable		166			94
Inventories		2			—
Royalty advances		(18	)		(38	)
Accounts payable and accrued liabilities		(51	)		(69	)
Other balance sheet changes		(8	)		(7	)

Net cash provided by operating activities		187			96

Cash flows from investing activities
Repayments by (loans to) third parties		3			(3	)
Investments and acquisitions of businesses		(14	)		(117	)
Acquisition of publishing rights		(6	)		(17	)
Proceeds from the sale of investments		124			5
Capital expenditures		(9	)		(20	)

Net cash provided by (used in) investing activities		98			(152	)

Cash flows from financing activities
Debt repayments		(8	)		(8	)
Dividends paid		—			(42	)

Net cash used in financing activities		(8	)		(50	)
Effect of foreign currency exchange rate changes on cash		(30	)		22

Net increase (decrease) in cash and equivalents		247			(84	)
Cash and equivalents at beginning of period		411			333

Cash and equivalents at end of period	$	658		$	249

See accompanying notes.

Warner Music Group Corp.

Consolidated Statement of Shareholders’ Deficit (Unaudited)


	Shares	Value		Additional Paid-in Capital		Accumulated Deficit			Accumulated Other Comprehensive Income		Total Shareholders’ Deficit
	(in millions, except number of common shares)
Balance at September 30, 2008	154,012,885	$	0.001	$	590	$	(686	)	$	10	$	(86	)
Comprehensive loss:
Net loss	—		—		—		(45	)		—		(45	)
Foreign currency translation adjustment	—		—		—		—			12		12
Deferred gains on derivative financial instruments	—		—		—		—			4		4

Total comprehensive loss												(29	)
Issuance of stock options and restricted shares of common stock	583,166		—		5		—			—		5

Balance at March 31, 2009	154,596,051	$	0.001	$	595	$	(731	)	$	26	$	(110	)

See accompanying notes.

Warner Music Group Corp.

Notes to Consolidated Interim Financial Statements (Unaudited)

1. Description of Business

Warner Music Group Corp. (the “Company” or “Parent”) was formed by a private equity consortium of investors (the “Investor Group”) on November 21, 2003. The Company is the direct parent of WMG Holdings Corp. (“Holdings”), which is the direct parent of WMG Acquisition Corp. (“Acquisition Corp.”). Acquisition Corp. is one of the world’s major music-based content companies and the successor to substantially all of the interests of the recorded music and music publishing businesses of Time Warner Inc. (“Time Warner”). Effective March 1, 2004, Acquisition Corp. acquired such interests from Time Warner for approximately $2.6 billion (the “Acquisition”). The original Investor Group included affiliates of Thomas H. Lee Partners (“THL”), affiliates of Bain Capital Investors, LLC (“Bain”), affiliates of Providence Equity Partners, Inc. (“Providence”) and Music Capital Partners, L.P. (“Music Capital”). Music Capital’s partnership agreement required that the Music Capital partnership dissolve and commence winding up by the second anniversary of the Company’s May 2005 initial public offering. As a result, on May 7, 2007, Music Capital made a pro rata distribution of all shares of common stock of the Company held by it to its partners. The shares held by Music Capital had been subject to a stockholders agreement among Music Capital, THL, Bain and Providence and certain other parties. As a result of the distribution, the shares distributed by Music Capital ceased to be subject to the voting and other provisions of the stockholders agreement and Music Capital was no longer part of the Investor Group subject to the stockholders agreement.

The Company classifies its business interests into two fundamental operations: Recorded Music and Music Publishing. A brief description of these operations is presented below.

Recorded Music Operations

The Company’s Recorded Music business primarily consists of the discovery and development of artists and the related marketing, distribution and licensing of recorded music produced by such artists. In addition to the more traditional methods of discovering and developing artists, following the Acquisition the Company established Independent Label Group (“ILG”) to discover artists earlier in the process and at lower cost by leveraging the Company’s independent distribution network.

The Company is also diversifying its revenues beyond its traditional businesses by partnering with artists in other areas of their careers. The Company is building capabilities and platforms for exploiting a broader set of music-related rights to participate across the artist brands it helps create. Expansion of the Company’s capabilities in this area have included strategic acquisitions and partnerships with companies involved in artist management, merchandising, strategic marketing and brand management, ticketing, touring, fan clubs, original programming and video entertainment. The Company believes enhancement of these capabilities will permit it to diversify revenue streams to better capitalize on the growth areas of the music industry, permit it to build stronger, long-term relationships with artists and more effectively connect artists and fans.

In the U.S., Recorded Music operations are conducted principally through the Company’s major record labels—Warner Bros. Records and The Atlantic Records Group. The Company’s Recorded Music operations also include Rhino Entertainment (“Rhino”), a division that specializes in marketing the Company’s music catalog through compilations and reissuances of previously released music and video titles, as well as in the licensing of recordings to and from third parties for various uses, including film and television soundtracks. Rhino is also transitioning into our primary licensing division focused on acquiring broader licensing rights from certain catalog artists. For example, we have an exclusive license with The Grateful Dead to manage the band’s intellectual property and have recently acquired a 50% interest in Frank Sinatra Enterprises, an entity that administers licenses for use of Frank Sinatra’s name and likeness and manages all aspects of his music, film and stage content. The Company also conducts its Recorded Music operations through a collection of additional record labels, including, among others, Asylum, Bad Boy, Cordless, East West, Elektra, Nonesuch, Reprise, Roadrunner, Rykodisc, Sire and Word.

Outside the U.S., Recorded Music activities are conducted in more than 50 countries, primarily through Warner Music International (“WMI”) and its various subsidiaries, affiliates and non-affiliated licensees. WMI engages in the same activities as the Company’s U.S. labels: discovering and signing artists and distributing, marketing and selling their recorded music. In most cases,

WMI also markets and distributes the records of those artists for whom the Company’s domestic record labels have international rights. In certain smaller countries, WMI licenses to unaffiliated third-party record labels the right to distribute its records. Recorded Music activities in Canada and Latin America are conducted through Warner Music’s North American operations.

Recorded Music distribution operations include WEA Corp., which markets and sells music and DVD products to retailers and wholesale distributors in the U.S.; ADA, which distributes the products of independent labels to retail and wholesale distributors in the U.S.; various distribution centers and ventures operated internationally; an 80% interest in Word Entertainment, which specializes in the distribution of music products in the Christian retail marketplace and ADA Global, which provides ADA’s distribution services to independent labels outside of the U.S. through a network of affiliated and non-affiliated distributors.

The Company plays an integral role in virtually all aspects of the music value chain from discovering and developing talent to producing albums and promoting artists and their products. After an artist has entered into a contract with one of the Company’s record labels, a master recording of the artist’s music is created. The recording is then replicated for sale to consumers primarily in the CD and digital formats. In the U.S., WEA Corp., ADA and Word market, sell and deliver product, either directly or through sub-distributors and wholesalers, to thousands of record stores, mass merchants and other retailers. The Company’s recorded music products are also sold in physical form to online physical retailers such as Amazon.com, barnesandnoble.com and bestbuy.com and in digital form to online digital retailers like Apple’s iTunes and mobile full-track download stores such as those operated by Verizon or Sprint. In the case of expanded rights deals where we acquire broader rights in an artist’s career, we provide more comprehensive career support and actively develop new opportunities for an artist through touring, fan clubs, merchandising and sponsorships, among other areas.

The Company has integrated the sale of digital content into all aspects of its Recorded Music and Music Publishing businesses including A&R, marketing, promotion and distribution. The Company’s new media executives work closely with A&R departments to make sure that while a record is being made, digital assets are also created with all of our distribution channels in mind, including subscription services, social networking sites, Internet portals and music-centered destinations. The Company also works side by side with its mobile and online partners to test new concepts. The Company believes existing and new digital businesses will be a significant source of growth for the next several years and will provide new opportunities to monetize its assets and create new revenue streams. As a music-based content company, the Company has assets that go beyond its recorded music and music publishing catalogs, such as its music video library, which it now has the opportunity to monetize through digital channels. The proportion of digital revenues attributed to each distribution channel varies by region and since digital music is in the relatively early stages of growth, proportions may change as the roll-out of new technologies continues. As an owner of musical content, the Company believes it is well positioned to take advantage of growth in digital distribution and emerging technologies to maximize the value of its assets.

Music Publishing Operations

Where recorded music is focused on exploiting a particular recording of a song, music publishing is an intellectual property business focused on the exploitation of the song itself. In return for promoting, placing, marketing and administering the creative output of a songwriter, or engaging in those activities for other rights holders, our Music Publishing business garners a share of the revenues generated from use of the song.

Our Music Publishing operations include Warner/Chappell, our global Music Publishing company headquartered in New York with operations in over 50 countries through various subsidiaries, affiliates and non-affiliated licensees. We own or control rights to more than one million musical compositions, including numerous pop hits, American standards, folk songs and motion picture and theatrical compositions. Assembled over decades, our award-winning catalog includes over 65,000 songwriters and composers and a diverse range of genres including pop, rock, jazz, country, R&B, hip-hop, rap, reggae, Latin, folk, blues, symphonic, soul, Broadway, techno, alternative, gospel and other Christian music. Warner/Chappell also administers the music and soundtracks of several third-party television and film producers and studios, including Lucasfilm, Ltd., Hallmark Entertainment, Disney Music Publishing and HBO. In 2007, we entered the production music library business with the acquisition of Non-Stop Music. Production music is a complementary alternative to licensing standards and contemporary hits for television, film and advertising producers.

2. Basis of Presentation

Interim Financial Statements

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the U.S. (“U.S. GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and six month periods ended March 31, 2009 are not necessarily indicative of the results that may be expected for the fiscal year ending September 30, 2009.

The consolidated balance sheet at September 30, 2008 has been derived from the audited consolidated financial statements at that date but does not include all of the information and footnotes required by U.S. GAAP for complete financial statements.

For further information, refer to the consolidated financial statements and footnotes thereto included in our Annual Report on Form 10-K for the fiscal year ended September 30, 2008 (File No. 001-32502).

Basis of Consolidation

The accompanying financial statements present the consolidated accounts of all entities in which the Company has a controlling voting interest and/or variable interest entities required to be consolidated in accordance with U.S. GAAP. Significant inter-company balances and transactions have been eliminated. Certain reclassifications have been made to the prior fiscal years’ consolidated financial statements to conform with the current fiscal year presentation.

The Company maintains a 52-53 week fiscal year ending on the Friday nearest to each reporting date. As such, all references to March 31, 2009 and 2008 relate to the three and six month periods ended March 27, 2009 and March 28, 2008, respectively. For convenience purposes, the Company continues to date its financial statements as of March 31.

New Accounting Pronouncements

In September 2006, the FASB issued FASB Statement No. 157, “Fair Value Measurements” (“FAS 157”). FAS 157 defines fair value, establishes a framework for measuring fair value under U.S. GAAP and expands disclosures about fair value measurements. FAS 157 is effective for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. The Company adopted the provisions of FAS 157 as of October 1, 2008. The impact of adopting SFAS No. 157 effective October 1, 2008 was not material to our financial statements. Refer to Note 15.

In February 2007, the FASB issued FASB Statement No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities”, (“FAS 159”)—including an Amendment of SFAS 115, which permits but does not require the Company to measure financial instruments and certain other items at fair value. Unrealized gains and losses on items for which the fair value option has been elected are reported in earnings. This statement is effective for financial statements issued for fiscal years beginning after November 15, 2007. The Company adopted the provisions of FAS 159 as of October 1, 2008. Upon initial adoption, Statement 159 provides entities with a one-time chance to elect the fair value option for existing eligible items. The Company has elected not to apply the fair value option to the eligible items.

In December 2007, the FASB issued SFAS 141R, “Business Combinations” (“FAS 141R”). FAS 141R changes the accounting for business combinations in several areas including contingent consideration, acquisition-related costs, restructuring costs and deferred income taxes. Acquisition costs will generally be expensed as incurred. Restructuring costs associated with a business combination will generally be expensed subsequent to the acquisition date. Changes in deferred tax asset valuation allowances and uncertain tax positions after the acquisition date will generally impact income tax expense. FAS 141R is effective for fiscal years beginning after December 15, 2008 on a prospective basis. The Company will adopt FAS 141R beginning in the first quarter of fiscal

year 2010. This standard will change the Company’s accounting treatment for business combinations on a prospective basis.

In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements—an amendment of ARB No. 51” (“FAS 160”). FAS No. 160 requires the recognition of a noncontrolling (minority) interest as a component of equity in the consolidated financial statements as opposed to as a liability or mezzanine equity. FAS 160 also changes the computation of net income of a consolidated group such that earnings attributed to the noncontrolling interest will no longer be deducted in determining net income. Instead, it must be separately presented on the face of the consolidated income statement. FASB requires that FAS 160 and FAS 141R to be adopted concurrently and thus, FAS 160 is also effective for fiscal years beginning after December 15, 2008. The Company will adopt the provisions of this statement beginning the first quarter of fiscal year 2010. This standard will change the Company’s accounting treatment of business combinations with noncontrolling interests on a prospective basis, except for the presentation and disclosure requirements, which will be adopted on a retrospective basis.

3. Net Loss Per Common Share

The Company computes net loss per common share in accordance with FASB Statement No. 128, “Earnings per Share” (“FAS 128”). Under the provisions of FAS 128, basic net loss per common share is computed by dividing the net loss applicable to common shares after preferred dividend requirements, if any, by the weighted average of common shares outstanding during the period. Diluted net loss per common share adjusts basic net loss per common share for the effects of stock options, warrants and other potentially dilutive financial instruments, only in the periods in which such effect is dilutive.

The following table sets forth the computation of basic and diluted net loss per common share (in millions, except per share amounts):


	Three Months Ended March 31, 2009			Three Months Ended March 31, 2008			Six Months Ended March 31, 2009			Six Months Ended March 31, 2008
Numerator:
Basic and diluted net loss per common share:
Net loss	$	(68	)	$	(37	)	$	(45	)	$	(53	)

Denominator:
Weighted average common shares outstanding for basic calculation (a)		149.5			147.9			149.3			147.5

Dilutive effect of options and restricted stock		—			—			—			—
Weighted average common outstanding shares for diluted calculation		149.5			147.9			149.3			147.5

Net loss per common share—basic	$	(0.45	)	$	(0.25	)	$	(0.30	)	$	(0.36	)

Net loss per common share—diluted	$	(0.45	)	$	(0.25	)	$	(0.30	)	$	(0.36	)

(a)	The denominator excludes the effect of unvested common shares subject to repurchase or cancellation.

The calculation of diluted net loss per common share for the three and six months ended March 31, 2009 excludes an adjustment to the weighted-average common shares outstanding for the potential dilution that would occur if the Company’s stock options were exercised or the Company’s restricted stock had vested. As a result of the Company’s net loss for the three and six months ended March 31, 2009, the effect of the assumed exercise of any outstanding stock options and the assumed vesting of shares of restricted shares would have been anti-dilutive and accordingly, the following share amounts were excluded from the calculation of diluted net

loss per share (in millions):


	Three Months Ended March 31, 2009	Three Months Ended March 31, 2008	Six Months Ended March 31, 2009	Six Months Ended March 31, 2008
Stock options	0.4	1.0	0.3	2.0
Restricted stock	0.6	1.0	0.5	1.0

During the quarter ended March 31, 2009, 46,312 shares of restricted stock purchased by or awarded to certain employees of the Company vested.

4. Significant Acquisitions and Dispositions

Acquisition of Interest in Frank Sinatra Estate

The Company acquired a 50% interest in Frank Sinatra Enterprises, LLC (“FSE”) on November 19, 2007 for $50 million. FSE is a limited liability company established to administer licenses for use of Frank Sinatra’s name and likeness and manage all aspects of his music, film and stage content. The transaction was accounted for under the purchase method of accounting, based on the provisions of FASB Interpretation No. 46 (R), “Consolidation of Variable Interest Entities” and the results of operations of FSE have been included in the Company’s results of operations from the date of the acquisition. The purchase price has been allocated to the underlying net assets acquired in proportion to the estimated fair value, principally recorded music catalog of $66 million, trademarks of $20 million and goodwill of $14 million.

Discontinued Operations

During fiscal 2008, the Company shut down the operations of Bulldog Entertainment (“Bulldog”), an entertainment services company, which was recorded in our Recorded Music operations. As a result of this triggering event, the Company performed an impairment test and determined that an $18 million impairment charge was necessary to adjust the assets to fair market value, based on the discounted value of future cash flows. The Company shut down this operation in January 2008 and recorded an additional $3 million in shut down costs during the three months ended March 31, 2008. Bulldog’s results are reported as discontinued operations in the consolidated statement of operations.

5. Investments

The Company’s investments consist of the following (in millions):


	March 31, 2009		September 30, 2008
	(unaudited)		(audited)
Cost-method investments	$	14	$	43
Equity-method investments		5		112

	$	19	$	155

During the quarter ended March 31, 2009, the Company determined that its cost-method investments in digital venture capital companies were impaired largely due to the current economic environment and changing business conditions from the time of the initial investment. In accordance with FAS 157, the Company used Level 3 inputs to determine the fair value of these investments, which include management’s estimates of assumptions that market participants would use in pricing these assets. As a result, the Company recorded charges of $29 million, including $16 million to write-off its investment in imeem, inc. (“imeem”) and $11 million to write-down its investment in lala media, inc (“lala”) to its estimated fair value.

During the quarter ended December 31, 2008, the Company chose not to continue its participation in Equatrax, L.P. (formerly known as Royalty Services, L.P.) and Equatrax, LLC (formerly known as Royalty Services, LLC), which were formed in 2004 to develop an outsourced royalty platform. As a result, the Company wrote-off the remaining $10 million related to its investment in the joint venture.

On October 22, 2008, the Company entered into an agreement to sell its remaining equity stake in Front Line Management to Ticketmaster for $123 million in cash. The transaction closed on October 29, 2008 and the Company recorded a gain on the sale of its equity investment of $36 million for the six months ended March 31, 2008.

6. Inventories

Inventories consist of the following (in millions):


	March 31, 2009		September 30, 2008
	(unaudited)		(audited)
Compact discs and other music-related products	$	50	$	55
Published sheet music and song books		1		2

	$	51	$	57

7. Goodwill and Intangible Assets

Goodwill

The following analysis details the changes in goodwill for each reportable segment during the six months ended March 31, 2009 (in millions):


	Recorded Music			Music Publishing		Total
Balance at September 30, 2008 (audited)	$	494		$	591	$	1,085
Acquisitions		11			—		11
Dispositions		—			—		—
Other adjustments		(6	)		—		(6	)

Balance at March 31, 2009 (unaudited)	$	499		$	591	$	1,090

The acquisition of goodwill primarily relates to purchase accounting adjustments recorded during the six months ended March 31, 2009 for a few small acquisitions. The other adjustments to goodwill represent foreign currency translation adjustments.

Other Intangible Assets

Other intangible assets consist of the following (in millions):


	September 30, 2008			Acquisitions	Other (a)		March 31, 2009
	(audited)						(unaudited)
Intangible assets subject to amortization:
Recorded music catalog	$	1,384		—	(16	)	$	1,368
Music publishing copyrights		948		5	(37	)		916
Artist contracts		76		1	(3	)		74
Trademarks		31		—	—			31
Other intangible assets		8		—	—			8

		2,447						2,397
Accumulated amortization		(908	)					(1,022	)

Total net intangible assets subject to amortization		1,539						1,375
Intangible assets not subject to amortization:
Trademarks and brands		100						100

Total net other intangible assets	$	1,639					$	1,475

(a)	Other represents foreign currency translation adjustments.

8. Restructuring Costs

Acquisition-Related Restructuring Costs

In connection with the Acquisition that was effective as of March 1, 2004, the Company reviewed its operations and implemented several plans to restructure its operations. As part of these restructuring plans, the Company recorded a restructuring liability during 2004, which included costs to exit and consolidate certain activities of the Company, costs to exit certain leased facilities and operations such as international distribution operations, costs to terminate employees, and costs to terminate certain artist, songwriter, co-publisher and other contracts. The number of employees identified to be involuntarily terminated approximated 1,600. Such liabilities were recognized as part of the cost of the Acquisition. As of March 31, 2009, the Company had approximately $14 million of liabilities outstanding primarily related to long-term lease obligations for vacated facilities, which are expected to be settled by 2019 and $99 million of liabilities outstanding primarily related to revaluations of artist and other contracts.

9. Debt

The Company’s long-term debt consists of (in millions):


	March 31, 2009			September 30, 2008
	(unaudited)			(audited)
Senior secured credit facility:
Term loan (a)	$	1,371		$	1,379
7.375% U.S. dollar-denominated Senior Subordinated Notes due 2014—Acquisition Corp.		465			465
8.125% Sterling-denominated Senior Subordinated Notes due 2014—Acquisition Corp. (b)		144			184
9.5% Senior Discount Notes due 2014—Holdings (c)		242			231

Total debt		2,222			2,259
Less current portion		(17	)		(17	)

Total long-term debt	$	2,205		$	2,242

(a)	Decrease in debt is a result of quarterly principal payments of our term loans under our senior secured credit facility.

(b)	Change represents the impact of foreign currency exchange rates on the carrying value of the Sterling-denominated notes.

(c)	Change represents the accrual of interest on the discount notes in the form of an increase in the accreted value of the discount notes.

Restricted Net Assets

The Company is a holding company that conducts substantially all its business operations through its subsidiary, Acquisition Corp. and its subsidiaries. Accordingly, the ability of the Company to obtain funds from its subsidiaries is restricted by the senior secured credit facility of Acquisition Corp., the indenture for the 7.375% U.S. dollar-denominated Senior Subordinated Notes due 2014 and the 8.125% Sterling-denominated Senior Subordinated Notes due 2014 issued by Acquisition Corp. (collectively, the

“Acquisition Corp. Senior Subordinated Notes”) and the indenture for the 9.5% Senior Discount Notes due 2014 issued by Holdings (the “Holdings Discount Notes”).

10. Stock-based Compensation

The following table represents the expense recorded by the Company with respect to its stock-based awards for the three and six months ended March 31, 2009 and 2008 (in millions):


	Three Months Ended March 31, 2009		Three Months Ended March 31, 2008		Six Months Ended March 31, 2009		Six Months Ended March 31, 2008
Recorded Music	$	2	$	—	$	3	$	2
Music Publishing		—		—		—		—
Corporate expenses		1		1		2		2

Total	$	3	$	1	$	5	$	4

During the six months ended March 31, 2009, the Company awarded 554,700 shares of restricted stock and 1,870,000 stock options to its employees.

11. Commitments and Contingencies

Pricing of Digital Music Downloads

On December 20, 2005 and February 3, 2006, the Attorney General of the State of New York served the Company with requests for information in connection with an industry-wide investigation as to whether the practices of industry participants concerning the pricing of digital music downloads violate Section 1 of the Sherman Act, New York State General Business Law §§ 340 et seq., New York Executive Law §63(12), and related statutes. On February 28, 2006, the Antitrust Division of the U.S. Department of Justice served the Company with a request for information in the form of a Civil Investigative Demand as to whether its activities relating to the pricing of digitally downloaded music violate Section 1 of the Sherman Act. Both investigations have now been closed. Subsequent to the announcements of the above governmental investigations, more than thirty putative class action lawsuits concerning the pricing of digital music downloads were filed and were later consolidated for pre-trial proceedings in the Southern District of New York. The consolidated amended complaint, filed on April 13, 2007, alleges conspiracy among record companies to delay the release of their content for digital distribution, inflate their pricing of CDs and fix prices for digital downloads. The complaint seeks unspecified compensatory, statutory and treble damages. All defendants, including the Company, filed a motion to dismiss the consolidated amended complaint on July 30, 2007. This motion was granted on October 9, 2008. Plaintiffs appealed the decision. The Company intends to defend against these lawsuits vigorously, but is unable to predict the outcome of these suits. Any litigation the Company may become involved in as a result of the inquiries of the Attorney General and Department of Justice, regardless of the merits of the claim, could be costly and divert the time and resources of management.

In addition to the matter discussed above, the Company is involved in other litigation arising in the normal course of business. Management does not believe that any legal proceedings pending against the Company will have, individually, or in the aggregate, a material adverse effect on its business. However, the Company cannot predict with certainty the outcome of any litigation or the potential for future litigation. Regardless of the outcome, litigation can have an adverse impact on the Company, including its brand value, because of defense costs, diversion of management resources and other factors.

12. Derivative Financial Instruments

During the six months ended March 31, 2009, the Company did not enter into additional interest rate swap agreements to hedge the variability of its expected future cash interest payments. However, the Company entered into additional foreign exchange contracts to hedge its foreign currency royalty payments during the six months ended March 31, 2009. As of March 31, 2009, the Company had interest rate swap agreements to hedge a total notional debt amount of $897 million and other comprehensive income includes $4 million of deferred net gains related to hedging on its interest rate swaps and foreign currency forward exchange contracts.

13. Segment Information

As discussed more fully in Note 1, based on the nature of its products and services, the Company classifies its business interests into two fundamental operations: recorded music and music publishing. Information as to each of these operations is set forth below. The Company evaluates performance based on several factors, of which the primary financial measure is operating income (loss) before non-cash depreciation of tangible assets, non-cash amortization of intangible assets and non-cash impairment charges to reduce the carrying value of goodwill and intangible assets (“OIBDA”). The Company has supplemented its analysis of OIBDA results by segment with an analysis of operating income (loss) by segment.

The accounting policies of the Company’s business segments are the same as those described in the summary of significant accounting policies included in the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2008. The Company accounts for intersegment sales at fair value as if the sales were to third parties. While intercompany transactions are treated like third-party transactions to determine segment performance, the revenues (and corresponding expenses recognized by the segment that is counterparty to the transaction) are eliminated in consolidation, therefore, do not themselves impact the consolidated results. Segment information consists of the following (in millions):


Three Months Ended	Recorded music			Music publishing			Corporate expenses and eliminations			Total
March 31, 2009
Revenues	$	537		$	135		$	(4	)	$	668
OIBDA		46			54			(20	)		80
Depreciation of property, plant and equipment		(5	)		(1	)		(3	)		(9	)
Amortization of intangible assets		(38	)		(17	)		(1	)		(56	)

Operating income (loss)	$	3		$	36		$	(24	)	$	15

March 31, 2008
Revenues	$	652		$	155		$	(7	)	$	800
OIBDA		70			54			(28	)		96
Depreciation of property, plant and equipment		(10	)		(1	)		(2	)		(13	)
Amortization of intangible assets		(38	)		(17	)		—			(55	)

Operating income (loss)	$	22		$	36		$	(30	)	$	28


Six Months Ended	Recorded music			Music publishing			Corporate expenses and eliminations			Total
March 31, 2009
Revenues	$	1,286		$	269		$	(9	)	$	1,546
OIBDA		154			75			(42	)		187
Depreciation of property, plant and equipment		(10	)		(2	)		(5	)		(17	)
Amortization of intangible assets		(81	)		(32	)		(1	)		(114	)

Operating income (loss)	$	63		$	41		$	(48	)	$	56

March 31, 2008
Revenues	$	1,502		$	299		$	(12	)	$	1,789
OIBDA		206			75			(56	)		225
Depreciation of property, plant and equipment		(19	)		(2	)		(5	)		(26	)
Amortization of intangible assets		(76	)		(33	)		—			(109	)

Operating income (loss)	$	111		$	40		$	(61	)	$	90

14. Additional Financial Information

Cash Interest and Taxes

The Company made interest payments of approximately $66 million and $80 million during the six months ended March 31, 2009 and 2008, respectively. The Company paid approximately $26 million and $36 million of income and withholding taxes in the six months ended March 31, 2009 and 2008, respectively. The Company received $9 million and $3 million of income tax refunds in the six months ended March 31, 2009 and 2008, respectively.

15. Fair Value Measurements

FAS 157 defines fair value as the price that would be received upon sale of an asset or paid upon transfer of a liability in an orderly transaction between market participants at the measurement date and in the principal or most advantageous market for that asset or liability. The fair value should be calculated based on assumptions that market participants would use in pricing the asset or liability, not on assumptions specific to the entity.

In addition to defining fair value, FAS 157 expands the disclosure requirements around fair value and establishes a fair value hierarchy for valuation inputs. The hierarchy prioritizes the inputs into three levels based on the extent to which inputs used in measuring fair value are observable in the market. Each fair value measurement is reported in one of the three levels which is determined by the lowest level input that is significant to the fair value measurement in its entirety. These levels are:

•

Level 1 – inputs are based upon unadjusted quoted prices for identical instruments traded in active markets.

•

Level 2 – inputs are based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

•

Level 3 – inputs are generally unobservable and typically reflect management’s estimates of assumptions that market participants would use in pricing the asset or liability. The fair values are therefore determined using model-based techniques that include option pricing models, discounted cash flow models, and similar techniques.

The Company does not have any significant assets or liabilities measured at fair value using Level 1 or Level 3 inputs as of March 31, 2009. In accordance with the fair value hierarchy, described above, the following table shows the fair value of the Company’s financial instruments that are required to be measured at fair value as of March 31, 2009, which represent current assets ($2 million), other current liabilities ($12 million), and other long-term liabilities ($9 million). Derivatives not designated as hedging instruments of $8 million are included in other current liabilities. The gains and losses of these financial instruments were not significant to the statement of operations.


	Fair Value Measurements as of March 31, 2009
	(Level 1)	(Level 2)		(Level 3)	Total
Liabilities:
Interest Rate Swaps (a)	—	$	13	—	$	13
Foreign Currency Forward Exchange Contracts (b)	—		6	—		6

Total	—	$	19	—	$	19

(a)	The fair value of the interest rate swaps is based on dealer quotes using relevant market interest rates.

(b)	The fair value of the foreign currency forward exchange contracts is based on dealer quotes of market forward rates and reflects the amount that the Company would receive or pay at their maturity dates for contracts involving the same currencies and maturity dates.

WARNER MUSIC GROUP CORP.

Supplementary Information

Consolidating Financial Statements

The Company is the direct parent of Holdings, which is the direct parent of Acquisition Corp.

Holdings has issued and outstanding the Holdings Discount Notes. The Holdings Discount Notes are guaranteed by the Company. These guarantees are full, unconditional, joint and several. The following consolidating financial statements are presented for the information of the holders of the Holdings Discount Notes and present the results of operations, financial position and cash flows of (i) the Company, which is the guarantor of the Holdings Discount Notes, (ii) Holdings, which is the issuer of the Holdings Discount Notes, (iii) the subsidiaries of Holdings (Acquisition Corp. is the only direct subsidiary of Holdings) and (iv) the eliminations necessary to arrive at the information for the Company on a consolidated basis. Investments in consolidated subsidiaries are presented under the equity method of accounting.

The Company and Holdings are holding companies that conduct substantially all their business operations through Acquisition Corp. Accordingly, the ability of the Company to obtain funds from its subsidiaries is restricted by the senior secured credit facility of Acquisition Corp., the indenture for the Acquisition Corp. Senior Subordinated Notes and the indenture for the Holdings Discount Notes.

WARNER MUSIC GROUP CORP.

Supplementary Information

Consolidating Balance Sheet (unaudited)

March 31, 2009


	Warner Music Group Corp.			WMG Holdings Corp. (issuer)			WMG Acquisition Corp.		Eliminations		Warner Music Group Corp. Consolidated
	(in millions)
Assets:
Current assets:
Cash and equivalents	$	98		$	—		$	560	$	—	$	658
Accounts receivable, net		—			—			349		—		349
Inventories		—			—			51		—		51
Royalty advances expected to be recouped within one year		—			—			169		—		169
Deferred tax assets		—			—			30		—		30
Other current assets		—			—			44		—		44

Total current assets		98			—			1,203		—		1,301
Royalty advances expected to be recouped after one year		—			—			207		—		207
Investments in and advances (from) to consolidated subsidiaries		(209	)		30			—		179		—
Investments		—			—			19		—		19
Property, plant and equipment, net		—			—			104		—		104
Goodwill		—			—			1,090		—		1,090
Intangible assets subject to amortization, net		—			—			1,375		—		1,375
Intangible assets not subject to amortization		—			—			100		—		100
Other assets		—			3			58		—		61

Total assets	$	(111	)	$	33		$	4,156	$	179	$	4,257

Liabilities and Shareholders’ (Deficit) Equity:
Current liabilities:
Accounts payable	$	—		$	—		$	186	$	—	$	186
Accrued royalties		—			—			1,117		—		1,117
Taxes and other withholdings		2			—			2		—		4
Current portion of long-term debt		—			—			17		—		17
Deferred income		—			—			136		—		136
Other current liabilities		—			—			235		—		235

Total current liabilities		2			—			1,693		—		1,695
Long-term debt		—			242			1,963		—		2,205
Deferred tax liabilities, net		—			—			225		—		225
Other noncurrent liabilities		(3	)		—			245		—		242

Total liabilities		(1	)		242			4,126		—		4,367

Shareholders’ (deficit) equity		(110	)		(209	)		30		179		(110	)

Total liabilities and shareholders’ (deficit) equity	$	(111	)	$	33		$	4,156	$	179	$	4,257

WARNER MUSIC GROUP CORP.

Supplementary Information

Consolidating Balance Sheet (audited)

September 30, 2008


	Warner Music Group Corp.			WMG Holdings Corp. (issuer)			WMG Acquisition Corp.		Eliminations		Warner Music Group Corp. Consolidated
	(in millions)
Assets:
Current assets:
Cash and equivalents	$	98		$	—		$	313	$	—	$	411
Accounts receivable, net		—			—			538		—		538
Inventories		—			—			57		—		57
Royalty advances expected to be recouped within one year		—			—			174		—		174
Deferred tax assets		—			—			30		—		30
Other current assets		—			—			38		—		38

Total current assets		98			—			1,150		—		1,248
Royalty advances expected to be recouped after one year		—			—			212		—		212
Investments in and advances (from) to consolidated subsidiaries		(185	)		43			—		142		—
Investments		—			—			155		—		155
Property, plant and equipment, net		—			—			117		—		117
Goodwill		—			—			1,085		—		1,085
Intangible assets subject to amortization, net		—			—			1,539		—		1,539
Intangible assets not subject to amortization		—			—			100		—		100
Other assets		—			3			67		—		70

Total assets	$	(87	)	$	46		$	4,425	$	142	$	4,526

Liabilities and Shareholders’ (Deficit) Equity:
Current liabilities:
Accounts payable	$	—		$	—		$	219	$	—	$	219
Accrued royalties		—			—			1,189		—		1,189
Taxes and other withholdings		2			—			14		—		16
Current portion of long-term debt		—			—			17		—		17
Deferred income		—			—			117		—		117
Other current liabilities		1			—			312		—		313

Total current liabilities		3			—			1,868		—		1,871
Long-term debt		—			231			2,011		—		2,242
Deferred tax liabilities, net		—			—			237		—		237
Other noncurrent liabilities		(4	)		—			266		—		262

Total liabilities		(1	)		231			4,382		—		4,612

Shareholders’ (deficit) equity		(86	)		(185	)		43		142		(86	)

Total liabilities and shareholders’ (deficit) equity	$	(87	)	$	46		$	4,425	$	142	$	4,526

WARNER MUSIC GROUP CORP.

Supplementary Information

Consolidating Statements of Operations


	Three Months Ended March 31, 2009
	Warner Music Group Corp.			WMG Holdings Corp. (issuer)			WMG Acquisition Corp.			Eliminations		Warner Music Group Corp. Consolidated
	(in millions)
Revenues	$	—		$	—		$	668		$	—	$	668
Costs and expenses:
Cost of revenues		—			—			(339	)		—		(339	)
Selling, general and administrative expenses		—			—			(258	)		—		(258	)
Other income		—			—			—			—		—
Amortization of intangible assets		—			—			(56	)		—		(56	)

Total costs and expenses		—			—			(653	)		—		(653	)

Operating income		—			—			15			—		15
Interest expense, net		—			(6	)		(35	)		—		(41	)
Minority interest income		—			—			—			—		—
Other (expense) income, net		(68	)		(62	)		(3	)		130		(3	)
Gain on sale of equity investment		—			—			—			—		—
Gain on foreign exchange transaction		—			—			—			—		—
Impairment of cost investments		—			—			(29	)		—		(29	)
Impairment of equity investment		—			—			—			—		—

(Loss) income from continuing operations before income taxes		(68	)		(68	)		(52	)		130		(58	)
Income tax expense		—			—			(10	)		—		(10	)

Net (loss) income from continuing operations		(68	)		(68	)		(62	)		130		(68	)
Loss from discontinuing operations		—			—			—			—		—

Net (loss) income	$	(68	)	$	(68	)	$	(62	)	$	130	$	(68	)


	Three Months Ended March 31, 2008
	Warner Music Group Corp.			WMG Holdings Corp. (issuer)			WMG Acquisition Corp.			Eliminations		Warner Music Group Corp. Consolidated
	(in millions)
Revenues	$	—		$	—		$	800		$	—	$	800
Costs and expenses:
Cost of revenues		—			—			(413	)		—		(413	)
Selling, general and administrative expenses		—			—			(304	)		—		(304	)
Other income		—			—			—			—		—
Amortization of intangible assets		—			—			(55	)		—		(55	)

Total costs and expenses		—			—			(772	)		—		(772	)

Operating income		—			—			28			—		28
Interest expense, net		—			(5	)		(42	)		—		(47	)
Minority interest expense		—			—			—			—		—
Other (expense) income, net		(37	)		(32	)		(2	)		69		(2	)

(Loss) income from continuing operations before income taxes		(37	)		(37	)		(16	)		69		(21	)
Income tax expense		—			—			(13	)		—		(13	)

Net (loss) income from continuing operations		(37	)		(37	)		(29	)		69		(34	)
Loss from discontinuing operations		—			—			(3	)		—		(3	)

Net (loss) income	$	(37	)	$	(37	)	$	(32	)	$	69	$	(37	)

WARNER MUSIC GROUP CORP.

Supplementary Information

Consolidating Statements of Operations (unaudited)


	Six Months Ended March 31, 2009
	Warner Music Group Corp .			WMG Holdings Corp. (issuer)			WMG Acquisition Corp.			Eliminations		Warner Music Group Corp. Consolidated
	(in millions)
Revenues	$	—		$	—		$	1,546		$	—	$	1,546
Costs and expenses:
Cost of revenues		—			—			(823	)		—		(823	)
Selling, general and administrative expenses		—			—			(553	)		—		(553	)
Other income		—			—			—			—		—
Amortization of intangible assets		—			—			(114	)		—		(114	)

Total costs and expenses		—			—			(1,490	)		—		(1,490	)

Operating income		—			—			56			—		56
Interest expense, net		—			(11	)		(74	)		—		(85	)
Minority interest income		—			—			7			—		7
Gain on sale of equity investment		—			—			36			—		36
Gain on foreign exchange transaction		—			—			9			—		9
Impairment of cost investments		—			—			(29	)		—		(29	)
Impairment of equity investment		—			—			(10	)		—		(10	)
Other (expense) income, net		(45	)		(34	)		(3	)		79		(3	)

(Loss) income from continuing operations before income taxes		(45	)		(45	)		(8	)		79		(19	)
Income tax expense		—			—			(26	)		—		(26	)

Net (loss) income from continuing operations		(45	)		(45	)		(34	)		79		(45	)
Loss from discontinuing operations		—			—			—			—		—

Net (loss) income	$	(45	)	$	(45	)	$	(34	)	$	79	$	(45	)


	Six Months Ended March 31, 2008
	Warner Music Group Corp.			WMG Holdings Corp. (issuer)			WMG Acquisition Corp.			Eliminations		Warner Music Group Corp. Consolidated
	(in millions)
Revenues	$	—		$	—		$	1,789		$	—	$	1,789
Costs and expenses:
Cost of revenues		—			—			(958	)		—		(958	)
Selling, general and administrative expenses		—			—			(635	)		—		(635	)
Other income		—			—			3			—		3
Amortization of intangible assets		—			—			(109	)		—		(109	)

Total costs and expenses		—			—			(1,699	)		—		(1,699	)

Operating income		—			—			90			—		90
Interest expense, net		—			(10	)		(85	)		—		(95	)
Minority interest expense		—			—			(2	)		—		(2	)
Gain on sale of equity investment		—			—			—			—		—
Gain on foreign exchange transaction		—			—			—			—		—
Impairment of equity investment		—			—			—			—		—
Other (expense) income, net		(53	)		(43	)		(2	)		96		(2	)

(Loss) income from continuing operations before income taxes		(53	)		(53	)		1			96		(9	)
Income tax expense		—			—			(23	)		—		(23	)

Net (loss) income from continuing operations		(53	)		(53	)		(22	)		96		(32	)
Loss from discontinuing operations		—			—			(21	)		—		(21	)

Net (loss) income	$	(53	)	$	(53	)	$	(43	)	$	96	$	(53	)

WARNER MUSIC GROUP CORP.

Supplementary Information

Consolidating Statement of Cash Flows (unaudited)

For The Six Months Ended March 31, 2009


	Warner Music Group Corp.			WMG Holdings Corp. (issuer)			WMG Acquisition Corp.			Eliminations			Warner Music Group Corp. Consolidated
	(in millions)
Cash flows from operating activities:
Net (loss) income	$	(45	)	$	(45	)	$	(34	)	$	79		$	(45	)
Loss from discontinued operations		—			—			—			—			—

(Loss) income from continuing operations		(45	)		(45	)		(34	)		79			(45	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization		—			—			131			—			131
Deferred taxes		—			—			(3	)		—			(3	)
Gain on sale of equity investment		—			—			(36	)		—			(36	)
Gain on foreign exchange transaction		—			—			(9	)		—			(9	)
Impairment of equity investment		—			—			10			—			10
Impairment of cost-method investments		—			—			29			—			29
Non-cash interest expense		—			11			11			—			22
Non-cash, stock-based compensation expense		—			—			5			—			5
Minority interest income		—			—			(7	)		—			(7	)
Other non-cash items		45			34			(1	)		(79	)		(1	)
Changes in operating assets and liabilities:
Accounts receivable		—			—			166			—			166
Inventories		—			—			2			—			2
Royalty advances		—			—			(18	)		—			(18	)
Accounts payable and accrued liabilities		—			—			(51	)		—			(51	)
Other balance sheet changes		—			—			(8	)		—			(8	)

Net cash provided by operating activities		—			—			187			—			187

Cash flows from investing activities:
Repayment of loans by third parties		—			—			3			—			3
Investments and acquisitions of businesses		—			—			(14	)		—			(14	)
Acquisition of publishing rights		—			—			(6	)		—			(6	)
Proceeds from the sale of investments		—			—			124			—			124
Capital expenditures		—			—			(9	)		—			(9	)

Net cash provided by investing activities		—			—			98			—			98

Cash flows from financing activities:
Debt repayments		—			—			(8	)		—			(8	)
(Decrease) increase in intercompany		—			—			—			—			—
Dividends paid		—			—			—			—			—

Net cash used in financing activities		—			—			(8	)		—			(8	)

Effect of foreign currency exchange rate changes on cash		—			—			(30	)		—			(30	)

Net increase in cash and equivalents		—			—			247			—			247
Cash and equivalents at beginning of period		98			—			313			—			411

Cash and equivalents at end of period	$	98		$	—		$	560		$	—		$	658

WARNER MUSIC GROUP CORP.

Supplementary Information

Consolidating Statement of Cash Flows (unaudited)

For The Six Months Ended March 31, 2008


	Warner Music Group Corp.			WMG Holdings Corp. (issuer)			WMG Acquisition Corp.			Eliminations			Warner Music Group Corp. Consolidated
	(in millions)
Cash flows from operating activities:
Net (loss) income	$	(53	)	$	(53	)	$	(43	)	$	96		$	(53	)
Loss from discontinued operations		—			—			21			—			21

(Loss) income from continuing operations		(53	)		(53	)		(22	)		96			(32	)
Adjustments to reconcile net income (loss) to net cash (used in) provided by operating activities:
Depreciation and amortization		—			—			135			—			135
Deferred taxes		—			—			(15	)		—			(15	)
Gain on sale of equity investment		—			—			—			—			—
Gain on sale of foreign exchange transaction		—			—			—			—			—
Impairment of equity investment		—			—			—			—			—
Non-cash interest expense		—			10			14			—			24
Non-cash stock compensation expense		—			—			4			—			4
Minority interest expense		—			—			2			—			2
Other non-cash items		53			43			(2	)		(96	)		(2	)
Changes in operating assets and liabilities:
Accounts receivable		—			—			94			—			94
Inventories		—			—			—			—			—
Royalty advances		—			—			(38	)		—			(38	)
Accounts payable and accrued liabilities		—			—			(69	)		—			(69	)
Other balance sheet changes		(5	)		—			(2	)		—			(7	)

Net cash (used in) provided by operating activities		(5	)		—			101			—			96

Cash flows from investing activities:
Loans to third parties		—			—			(3	)		—			(3	)
Investments and acquisitions of businesses		—			—			(117	)		—			(117	)
Acquisition of publishing rights		—			—			(17	)		—			(17	)
Proceeds from the sale of investments		—			—			5			—			5
Capital expenditures		—			—			(20	)		—			(20	)

Net cash used in investing activities		—			—			(152	)		—			(152	)

Cash flows from financing activities:
Debt repayments		—			—			(8	)		—			(8	)
(Decrease) increase in intercompany		3			—			(3	)		—			—
Dividends paid		(42	)		(68	)		(68	)		136			(42	)
Return of capital received		68			68			—			(136	)		—

Net cash provided by (used in) financing activities		29			—			(79	)		—			(50	)

Effect of foreign currency exchange rate changes on cash		—			—			22			—			22

Net increase (decrease) in cash and equivalents		24			—			(108	)		—			(84	)
Cash and equivalents at beginning of period		74			—			259			—			333

Cash and equivalents at end of period	$	98		$	—		$	151		$	—		$	249

ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion of our results of operations and financial condition with the unaudited interim financial statements included elsewhere in this Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 2009 (the “Quarterly Report”). This discussion contains forward-looking statements and involves numerous risks and uncertainties. Actual results may differ materially from those contained in any forward-looking statements.

We maintain an Internet site at www.wmg.com. We use our website as a channel of distribution for material company information. Financial and other material information regarding Warner Music Group is routinely posted on and accessible at http://investors.wmg.com. In addition, you may automatically receive email alerts and other information about Warner Music Group by enrolling your email by visiting the “email alerts” section at http://investors.wmg.com. We make available on our website free of charge our annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K as soon as practicable after we electronically file such reports with the Securities and Exchange Commission (the “SEC”). Our website and the information posted on it or connected to it shall not be deemed to be incorporated by reference into this communication.

This Quarterly Report includes “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All statements other than statements of historical facts included in this Quarterly Report, including, without limitation, statements regarding our future financial position, business strategy, budgets, projected costs, cost savings, industry trends and plans and objectives of management for future operations, are forward-looking statements. In addition, forward-looking statements generally can be identified by the use of forward-looking terminology such as “may,” “will,” “expect,” “intend,” “estimate,” “anticipate,” “believe” or “continue” or the negative thereof or variations thereon or similar terminology. Such statements include, among others, statements regarding our ability to develop talent and attract future talent, our ability to reduce future capital expenditures, our ability to monetize our music content, including through new distribution channels and formats to capitalize on the growth areas of the music industry, our ability to effectively deploy our capital, the development of digital music and the effect of digital distribution channels on our business, including whether we will be able to achieve higher margins from digital sales, the success of strategic actions we are taking to accelerate our transformation as we redefine our role in the music industry, our success in limiting piracy, our ability to compete in the highly competitive markets in which we operate, the growth of the music industry and the effect of our and the music industry’s efforts to combat piracy on the industry, our intention to pay quarterly dividends, our ability to fund our future capital needs and the effect of litigation on us. Although we believe that the expectations reflected in such forward-looking statements are reasonable, we can give no assurance that such expectations will prove to have been correct.

There are a number of risks and uncertainties that could cause our actual results to differ materially from the forward-looking statements contained in this Quarterly Report. Additionally, important factors could cause our actual results to differ materially from the forward-looking statements we make in this Quarterly Report. As stated elsewhere in this Quarterly Report, such risks, uncertainties and other important factors include, among others:

•

the impact of our substantial leverage on our ability to raise additional capital to fund our operations, on our ability to react to changes in the economy or our industry and on our ability to meet our obligations under our indebtedness;

•

the continued decline in the global recorded music industry and the rate of overall decline in the recorded music industry;

•

current uncertainty in global economic conditions could adversely affect our prospects and our results of operations;

•

our ability to continue to identify, sign and retain desirable talent at manageable costs;

•

the threat posed to our business by piracy of music by means of home CD-R activity, Internet peer-to-peer file-sharing and sideloading of unauthorized content;

•

the significant threat posed to our business and the music industry by organized industrial piracy;

•

the popular demand for particular recording artists and/or songwriters and albums and the timely completion of albums by major recording artists and/or songwriters;

•

the diversity and quality of our portfolio of songwriters;

•

the diversity and quality of our album releases;

•

significant fluctuations in our results of operations and cash flows due to the nature of our business;

•

our involvement in intellectual property litigation;

•

the possible downward pressure on our pricing and profit margins;

•

the seasonal and cyclical nature of recorded music sales;

•

our ability to continue to enforce our intellectual property rights in digital environments;

•

the ability to develop a successful business model applicable to a digital environment;

•

the impact of heightened and intensive competition in the recorded music and music publishing businesses and our inability to execute our business strategy;

•

risks associated with our non-U.S. operations, including limited legal protections of our intellectual property rights and restrictions on the repatriation of capital;

•

the impact of legitimate music distribution on the Internet or the introduction of other new music distribution formats;

•

the reliance on a limited number of online music stores and their ability to significantly influence the pricing structure for online music stores;

•

the impact of rate regulations on our Recorded Music and Music Publishing businesses;

•

the impact of rates on other income streams that may be set by arbitration proceedings on our business;

•

the impact an impairment in the carrying value of goodwill or other intangible and long-lived assets could have on our operating results and shareholders’ equity;

•

risks associated with the fluctuations in foreign currency exchange rates;

•

our ability and the ability of our joint venture partners to operate our existing joint ventures satisfactorily;

•

the enactment of legislation limiting the terms by which an individual can be bound under a “personal services” contract;

•

potential loss of catalog if it is determined that recording artists have a right to recapture recordings under the U.S. Copyright Act;

•

changes in law and government regulations;

•

trends that affect the end uses of our musical compositions (which include uses in broadcast radio and television, film and advertising businesses);

•

the growth of other products that compete for the disposable income of consumers;

•

risks inherent in relying on one supplier for manufacturing, packaging and distribution services in North America and Europe;

•

risks inherent in our acquiring or investing in other businesses including our ability to successfully manage new businesses that we may acquire as we diversify revenue streams within the music industry;

•

the fact that we have engaged in substantial restructuring activities in the past, and may need to implement further restructurings in the future and our restructuring efforts may not be successful;

•

the fact that we are outsourcing certain back office functions, such as IT infrastructure and development, which will make us more dependent upon third parties;

•

the possibility that our owners’ interests will conflict with ours or yours;

•

failure to attract and retain key personnel; and

•

the effects associated with the formation of Live Nation Entertainment.

There may be other factors not presently known to us or which we currently consider to be immaterial that may cause our actual results to differ materially from the forward-looking statements.

All forward-looking statements attributable to us or persons acting on our behalf apply only as of the date of this Quarterly Report and are expressly qualified in their entirety by the cautionary statements included in this Quarterly Report. We disclaim any duty to publicly update or revise forward-looking statements to reflect events or circumstances after the date made or to reflect the occurrence of unanticipated events.

INTRODUCTION

Warner Music Group Corp. was formed by the Investor Group on November 21, 2003. The Company is the direct parent of Holdings, which is the direct parent of Acquisition Corp. Acquisition Corp. is one of the world’s major music companies and the successor to substantially all of the interests of the recorded music and music publishing businesses of Time Warner. Effective March 1, 2004, Acquisition Corp. acquired such interests from Time Warner for approximately $2.6 billion. The original Investor Group included THL, Bain, Providence and Music Capital. Music Capital’s partnership agreement required that the Music Capital partnership dissolve and commence winding up by the second anniversary of the Company’s May 2005 initial public offering. As a result, on May 7, 2008, Music Capital made a pro rata distribution of all shares of common stock of the Company held by it to its partners. The shares held by Music Capital had been subject to a stockholders agreement among Music Capital, THL, Bain and Providence and certain other parties. As a result of the distribution, the shares distributed by Music Capital ceased to be subject to the voting and other provisions of the stockholders agreement and Music Capital was no longer part of the Investor Group subject to the stockholders agreement.

The Company and Holdings are holding companies that conduct substantially all of their business operations through their subsidiaries. The terms “we,” “us,” “our,” “ours,” and the “Company” refer collectively to Warner Music Group Corp. and its consolidated subsidiaries, except where otherwise indicated.

Management’s discussion and analysis of results of operations and financial condition (“MD&A”) is provided as a supplement to the audited financial statements and footnotes included elsewhere herein to help provide an understanding of our financial condition, changes in financial condition and results of our operations. MD&A is organized as follows:

•

Overview. This section provides a general description of our business, as well as recent developments that we believe are important in understanding our results of operations and financial condition and in anticipating future trends.

•

Results of operations. This section provides an analysis of our results of operations for the three and six months ended March 31, 2009 and 2008. This analysis is presented on both a consolidated and segment basis.

•

Financial condition and liquidity. This section provides an analysis of our cash flows for the six months ended March 31, 2009 and 2008, as well as a discussion of our financial condition and liquidity as of March 31, 2009. The discussion of our financial condition and liquidity includes (i) our available financial capacity under the revolving credit portion of our senior secured credit facility and (ii) a summary of our key debt compliance measures under our debt agreements.

Use of OIBDA

We evaluate our operating performance based on several factors, including our primary financial measure of operating income (loss) before non-cash depreciation of tangible assets, non-cash amortization of intangible assets and non-cash impairment charges to reduce the carrying value of goodwill and intangible assets (which we refer to as “OIBDA”). We consider OIBDA to be an important indicator of the operational strengths and performance of our businesses, including the ability to provide cash flows to service debt. However, a limitation of the use of OIBDA as a performance measure is that it does not reflect the periodic costs of certain capitalized tangible and intangible assets used in generating revenues in our businesses. Accordingly, OIBDA should be considered in addition to, not as a substitute for, operating income, net income (loss) and other measures of financial performance reported in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). In addition, our definition of OIBDA may differ from similarly titled measures used by other companies. A reconciliation of consolidated historical OIBDA to operating income and net income (loss) is provided in our “Results of Operations.”

Use of Constant Currency

As exchange rates are an important factor in understanding period to period comparisons, we believe the presentation of results on a constant-currency basis in addition to reported results helps improve the ability to understand our operating results and evaluate our performance in comparison to prior periods. Constant-currency information compares results between periods as if exchange rates had remained constant period-over-period. We use results on a constant-currency basis as one measure to evaluate our performance. We calculate constant-currency by calculating prior-year results using current year foreign currency exchange rates. We generally refer to such amounts calculated on a constant-currency basis as “excluding the impact of foreign currency exchange rates.” These results should be considered in addition to, not as a substitute for, results reported in accordance with U.S. GAAP. Results on a constant-currency basis, as we present them, may not be comparable to similarly titled measures used by other companies and are not a measure of performance presented in accordance with U.S. GAAP.

OVERVIEW

We are one of the world’s major music content companies. We classify our business interests into two fundamental operations: Recorded Music and Music Publishing. A brief description of each of those operations is presented below.

Recorded Music Operations

Our Recorded Music business primarily consists of the discovery and development of artists and the related marketing, distribution and licensing of recorded music produced by such artists. In addition to the more traditional methods of discovering and developing artists, following the Acquisition we established ILG to discover artists earlier in the process and at a lower cost by leveraging our independent distribution network.

We are also diversifying our revenues beyond our traditional businesses by partnering with artists in other areas of their career. We are building capabilities and platforms for exploiting a broader set of music-related rights to participate across the artist brands we help create. Expansion of our capabilities in this area have included strategic acquisitions and partnerships with companies involved in artist management, merchandising, strategic marketing and brand management, ticketing, touring, fan clubs, original programming and video entertainment. We believe enhancement of these capabilities will permit us to diversify revenue streams to better capitalize on the growth areas of the music industry, permit us to build stronger, long-term relationships with artists and more effectively connect artists and fans.

In the U.S., our Recorded Music operations are conducted principally through our major record labels—Warner Bros. Records and The Atlantic Records Group. Our Recorded Music operations also include Rhino, a division that specializes in marketing our music catalog through compilations and reissuances of previously released music and video titles, as well as in the licensing of recordings to and from third parties for various uses, including film and television soundtracks. Rhino is also transitioning into our primary licensing division focused on acquiring broader licensing rights from certain catalog artists. For example, we have an exclusive license with The Grateful Dead to manage the band’s intellectual property and have recently acquired a 50% interest in Frank Sinatra Enterprises, an entity that administers licenses for use of Frank Sinatra’s name and likeness and

manages all aspects of his music, film and stage content. The Company also conducts its Recorded Music operations through a collection of additional record labels, including, among others, Asylum, Bad Boy, Cordless, East West, Elektra, Nonesuch, Reprise, Roadrunner, Rykodisc, Sire and Word.

Outside the U.S., our Recorded Music activities are conducted in more than 50 countries primarily through WMI and its various subsidiaries, affiliates and non-affiliated licensees. WMI engages in the same activities as our U.S. labels: discovering and signing artists and distributing, marketing and selling their recorded music. In most cases, WMI also markets and distributes the records of those artists for whom our domestic record labels have international rights. In certain smaller countries, WMI licenses to unaffiliated third-party record labels the right to distribute its records. Recorded Music activities in Canada and Latin America are conducted though Warner Music’s North American operations.

Our Recorded Music distribution operations include WEA Corp, which markets and sells music and DVD products to retailers and wholesale distributors in the U.S.; ADA, which distributes the products of independent labels to retail and wholesale distributors in the U.S.; various distribution centers and ventures operated internationally; an 80% interest in Word Entertainment, which specializes in the distribution of music products in the Christian retail marketplace and ADA Global, which provides ADA’s distribution services outside of the U.S. through a network of affiliated and non-affiliated distributors.

The Company plays an integral role in virtually all aspects of the music value chain from discovering and developing talent to producing albums and promoting artists and their products. After an artist has entered into a contract with one of the Company’s record labels, a master recording of the artist’s music is created. The recording is then replicated for sale to consumers primarily in the CD and digital formats. In the U.S., WEA Corp., ADA and Word market, sell and deliver product, either directly or through sub-distributors and wholesalers, to thousands of record stores, mass merchants and other retailers. The Company’s recorded music products are also sold in physical form to online physical retailers such as Amazon.com, barnesandnoble.com and bestbuy.com and in digital form to online digital retailers like Apple’s iTunes and mobile full-track download stores such as those operated by Verizon or Sprint. In the case of expanded–rights deals where we acquire broader rights in an artist’s career, we may provide more comprehensive career support and actively develop new opportunities for an artist through touring, fan clubs, merchandising and sponsorships, among other areas.

Recorded Music revenues are derived from three main sources:

•

Physical and other: the rightsholder receives revenues with respect to sales of physical products such as CDs and DVDs. We are also diversifying our revenues beyond sales of physical products and receive other revenues from our participation in expanded rights associated with our artists and other artists, including sponsorship, fan club, websites, merchandising, touring, ticketing, and artist and brand management;

•

Digital: the rightsholder receives revenues with respect to online and mobile downloads, mobile ringtones and online and mobile streaming; and

•

Licensing: the rightsholder receives royalties or fees for the right to use the sound recording in combination with visual images such as in films or television programs, television commercials and videogames.

The principal costs associated with our Recorded Music operations are as follows:

•

Royalty costs and artist and repertoire costs—the costs associated with (i) paying royalties to artists, producers, songwriters, other copyright holders and trade unions, (ii) signing and developing artists, (iii) creating master recordings in the studio and (iv) creating artwork for album covers and liner notes;

•

Product costs—the costs to manufacture, package and distribute product to wholesale and retail distribution outlets as well as those principal costs related to expanded rights;

•

Selling and marketing costs—the costs associated with the promotion and marketing of artists and recorded music products, including costs to produce music videos for promotional purposes and artist tour support; and

•

General and administrative costs—the costs associated with general overhead and other administrative costs.

Music Publishing Operations

Publishing revenues are derived from five main sources:

•

Mechanical: the licensor receives royalties with respect to compositions embodied in recordings sold in any format or configuration, including physical recordings (e.g., CDs and DVDs);

•

Performance: the licensor receives royalties if the composition is performed publicly through broadcast of music on television, radio, cable and satellite, live performance at a concert or other venue (e.g., arena concerts, nightclubs), online and wireless streaming and performance of music in staged theatrical productions;

•

Synchronization: the licensor receives royalties or fees for the right to use the composition in combination with visual images such as in films or television programs, television commercials and videogames as well as from other uses such as in toys or novelty items and merchandise;

•

Digital: the licensor receives royalties or fees with respect to Internet and mobile downloads, mobile ringtones and online and mobile streaming; and

•

Other: the licensor receives royalties for other uses such as in sheet music.

The principal costs associated with our Music Publishing operations are as follows:

•

Artist and repertoire costs—the costs associated with (i) signing and developing songwriters and (ii) paying royalties to songwriters, co-publishers and other copyright holders in connection with income generated from the exploitation of their copyrighted works; and

•

General and administrative costs— the costs associated with general overhead and other administrative costs.

Factors Affecting Results of Operations and Financial Condition

Market Factors

Since 1999, the recorded music industry has been in transition and the worldwide market has contracted considerably, which has adversely affected our operating results. The industry-wide decline can be attributed to digital piracy, the bankruptcies of record retailers and wholesalers, growing competition for consumer discretionary spending and retail shelf space and the maturation of the CD format, which has slowed the historical growth pattern of recorded music sales. While CD sales still generate most of the recorded music revenues, CD sales continue to decline industry-wide and we expect that trend to continue. While new formats for selling recorded music product have been created, including the legal downloading of digital music using the Internet and the distribution of music on mobile devices, significant revenue streams from these new formats are just beginning to emerge and have not yet reached a level where they offset the declines in CD sales. The recorded music industry performance may continue to negatively impact our operating results. In addition, a declining recorded music industry could continue to have an adverse impact on the music publishing business. This is because our Music Publishing business generates a portion of its revenues from mechanical royalties received from the sale of music in physical recorded music formats such as the CD.

Current ongoing uncertainty in global economic conditions poses a risk to the overall economy, which has negatively affected demand for our products and other related matters. The current uncertainty in global economic conditions makes it particularly difficult to predict future product demand and other related matters and makes it more likely that our actual results could differ materially from our expectations. Even in the midst of the global economic slowdown, we remain committed to executing on our strategic initiatives and plan to continue our transformation to adapt to the changing music industry in order to maximize cash flow and profitability. Given this economic slowdown, we continue to be conservative and focus on increasing cash and liquidity. We will monitor current events closely and take advantage of our flexible cost structure to minimize any impact.

Settlements

In September 2006, the major record companies reached a global out-of-court settlement of copyright litigation against the operators of the KaZaA peer-to-peer network. Under the terms of the settlement, the KaZaA defendants agreed to pay compensation to the record companies that brought the action, including us. We recorded approximately $13 million of other income related to this settlement in the fiscal year ended September 30, 2006. These amounts were recorded net of the estimated amounts payable to our artists in respect of royalties. The cash related to this settlement was received in the first quarter of fiscal 2008. We recorded approximately $3 million of other income in conjunction with a contingent payment related to this settlement in fiscal year 2008.

RESULTS OF OPERATIONS

Three Months Ended March 31, 2009 Compared with Three Months Ended March 31, 2008

Consolidated Historical Results

Revenues

Our revenues were composed of the following amounts (in millions):


	For the Three Months Ended March 31,						*2009 vs 2008*
	2009			2008			$ Change			% Change
Revenue by Type
Physical and other	$	309		$	442		$	(133	)	-30	%
Digital		166			155			11		7	%
Licensing		62			55			7		13	%

Total Recorded Music		537			652			(115	)	-18	%
Mechanical		41			57			(16	)	-28	%
Performance		59			61			(2	)	-3	%
Synchronization		25			24			1		4	%
Digital		7			9			(2	)	-22	%
Other		3			4			(1	)	-25	%

Total Music Publishing		135			155			(20	)	-13	%
Intersegment elimination		(4	)		(7	)		3		-43	%

Total Revenues	$	668		$	800		$	(132	)	-17	%

Revenue by Geographical Location
U.S. Recorded Music	$	268		$	297		$	(29	)	-10	%
U.S. Publishing		58			64			(6	)	-9	%

Total U.S.		326			361			(35	)	-10	%
International Recorded Music		269			355			(86	)	-24	%
International Publishing		77			91			(14	)	-15	%

Total International		346			446			(100	)	-22	%
Intersegment eliminations		(4	)		(7	)		3		-43	%

Total Revenues	$	668		$	800		$	(132	)	-17	%

Total Revenues

Total revenues decreased by $132 million, or 17%, to $668 million for the three months ended March 31, 2009 from $800 million for the three months ended March 31, 2008. Recorded Music and Music Publishing revenues represented 80% and 20% of total revenues for the three months ended March 31, 2009, respectively, compared to 81% and 19% for the three months ended March 31, 2008, respectively. U.S. and international revenues represented 49% and 51% of total revenues for the three months ended March 31, 2009, respectively, compared to 45% and 55% for the three months ended March 31, 2008, respectively. Excluding the unfavorable impact of foreign currency exchange rates, total revenues decreased $72 million, or 10%, for the three months ended March 31, 2009.

Total digital revenues increased by $9 million, or 5%, to $173 million for the three months ended March 31, 2009 from $164 million for the three months ended March 31, 2008. Total digital revenues represented 26% and 21% of consolidated revenues for the three months ended March 31, 2009 and 2008, respectively. Total digital revenues for the three months ended March 31, 2009 were comprised of U.S. revenues of $113 million, or 65% of total digital revenues, and international revenues of $60 million, or 35% of total digital revenues. Excluding the unfavorable impact of foreign currency exchange rates, total digital revenues increased by $17 million, or 11%, for the three months ended March 31, 2009.

Recorded Music revenues decreased by $115 million, or 18%, to $537 million for the three months ended March 31, 2009 from $652 million for the three months ended March 31, 2008. The decrease in physical and other revenues (which, as mentioned above in Overview, includes expanded-rights revenues) of $133 million was a result of a lighter release schedule versus the prior-year quarter as well as the as the ongoing transition in the recorded music industry characterized by a shift in consumption patterns from sales of physical products to new forms of digital music. Additionally, the weak global economy and retail environment continued to have an impact on our results. In addition, the decrease in sales of physical products and other revenues was also partially offset by an increase in digital revenues of $11 million. The increase in digital revenues was driven by global growth of downloads. Digital revenues were impacted by the timing of our release schedule, the timing and success of new product introductions and continued worldwide economic pressures. As digital revenues become a greater percentage of overall revenues, fluctuations in digital revenues between periods is becoming increasingly driven by the timing of releases. Licensing revenues increased $7 million versus the prior-year quarter. Excluding the unfavorable impact of foreign currency exchange rates, total Recorded Music revenues decreased $69 million, or 11%, for the three months ended March 31, 2009.

Music Publishing revenues decreased by $20 million, or 13%, to $135 million for the three months ended March 31, 2009 from $155 million for the three months ended March 31, 2008. The decrease was due primarily to declines in mechanical as a result of the continued decline in physical sales in the overall recorded music industry. Excluding the unfavorable impact of foreign currency exchange rates, total Music Publishing revenues decreased $7 million, or 5%, for the three months ended March 31, 2009.

Revenue by Geographical Location

U.S. revenues decreased by $35 million, or 10%, to $326 million for the three months ended March 31, 2009 from $361 million for the three months ended March 31, 2008 primarily due to decreases of $45 million in physical and other revenues. The overall decline in the U.S. Recorded Music business was the result of a back-end weighted release schedule in the fiscal year as well as the ongoing transition in the Recorded Music industry characterized by a shift in consumption patterns from sales of physical products to new forms of digital music.

International revenues decreased by $100 million, or 22%, to $346 million for the three months ended March 31, 2009 from $446 million for the three months ended March 31, 2008 due in part to decreases of $88 million in physical and other revenues and $11 million in mechanical revenues. These decreases were driven by continued contracting demand for physical product by retailers. In addition, the prior-year quarter reflected a strong release schedule in Japan. Offsetting these decreases were $2 million from increased digital revenues and increased expanded-rights revenues as we continue to broaden our revenue mix into growing areas of the music business, including sponsorship, fan club, websites, merchandising, touring, ticketing and artist management. Excluding the unfavorable impact of foreign currency exchange rates, total international revenues decreased $41 million, or 11%, for the three months ended March 31, 2009.

Cost of revenues

Our cost of revenues is composed of the following amounts (in millions):


	For the Three Months Ended March 31,				*2009 vs 2008*
	2009		2008		$ Change			% Change
Artist and repertoire costs	$	214	$	268	$	(54	)	-20	%
Product costs		99		121		(22	)	-18	%
Licensing costs		26		24		2		8	%

Total cost of revenues	$	339	$	413	$	(74	)	-18	%

Our cost of revenues decreased by $74 million, or 18%, to $339 million for the three months ended March 31, 2009 from $413 million for the three months ended March 31, 2008. Expressed as a percentage of revenues, cost of revenues were 51% and 52% for each of the three months ended March 31, 2009 and 2008, respectively.

Artist and repertoire costs decreased as a percentage of current year revenues from 34% in the prior-year quarter to 32% in the current-year quarter driven primarily by the timing of artist and repertoire spending, offset in part by higher royalty expense related to artist profit-sharing arrangements.

Product costs remained flat as a percentage of revenues for the three months ended March 31, 2009 and 2008. The decrease in absolute dollar of product costs was driven primarily by a decrease in third-party distribution revenue versus the prior-year quarter as well as the continued change in mix from physical to digital revenues.

Licensing costs increased $2 million, or 8%, to $26 million for the three months ended March 31, 2009 from $24 million for the three months ended March 31, 2008, and licensing costs represented 42% and 44% of licensing revenues for the three months ended March 31, 2009 and 2008, respectively.

Selling, general and administrative expenses

Our selling, general and administrative expenses are composed of the following amounts (in millions):


	For the Three Months Ended March 31,				*2009 vs 2008*
	2009		2008		$ Change			% Change
General and administrative expense (1)	$	143	$	151	$	(8	)	-5	%
Selling and marketing expense		101		132		(31	)	-23	%
Distribution expense		14		21		(7	)	-33	%

Total selling, general and administrative expense	$	258	$	304	$	(46	)	-15	%

(1)	Includes depreciation expense of $9 million and $13 million for the three months ended March 31, 2009, and 2008, respectively.

Total selling, general and administrative expense decreased by $46 million, or 15%, to $258 million for the three months ended March 31, 2009 from $304 million for the three months ended March 31, 2008. Expressed as a percentage of revenues, selling, general and administrative expenses increase from 38% for the three months ended March 31, 2008 to 39% for the three months ended March 31, 2009.

General and administrative expenses decreased by $8 million, or 5%, to $143 million for the three months ended March 31, 2009 from $151 million for the three months ended March 31, 2008. The decrease in general and administrative expense was primarily the result of our continued cost-management efforts, resulting in decreased IT, consulting and legal costs, as well as a decrease in depreciation expense. Partially offsetting the decrease was a $4 million charge to bad debt expense to reserve for a receivable from imeem, a digital venture investee for which we wrote off our cost-method investment as of March 31, 2009.

Selling and marketing expense decreased by $31 million, or 23%, to $101 million for the three months ended March 31, 2009 from $132 million for the three months ended March 31, 2008. This decrease was primarily the result of our efforts to better align spending on selling and marketing expense with revenues earned. Expressed as a percentage of revenues, selling and marketing expense decreased to 15% for the three months ended March 31, 2009 from 17% for the three months ended March 31, 2008.

Distribution expense decreased by $7 million, or 33%, to $14 million for the three months ended March 31, 2009 from $21 million for the three months ended March 31, 2008. This decrease was primarily the result of decreased sales of physical products.

Reconciliation of Consolidated Historical OIBDA to Operating Income from continuing operations and Net Income (Loss)

As previously described, we use OIBDA as our primary measure of financial performance. The following table reconciles OIBDA to operating income, and further provides the components from operating income to net income (loss) for purposes of the discussion that follows (in millions):


	For the Three Months Ended March 31,						*2009 vs 2008*
	2009			2008			$ Change			% Change
OIBDA	$	80		$	96		$	(16	)	-17	%
Depreciation expense		(9	)		(13	)		4		-31	%
Amortization expense		(56	)		(55	)		(1	)	2	%

Operating income from continuing operations		15			28			(13	)	-46	%
Interest expense, net		(41	)		(47	)		6		-13	%
Impairment of cost-method investments		(29	)		—			(29	)	—
Other expense, net		(3	)		(2	)		(1	)	50	%

Loss from continuing operations before income taxes		(58	)		(21	)		(37	)	—
Income tax expense		(10	)		(13	)		3		-23	%

Loss from continuing operations		(68	)		(34	)		(34	)	—
Loss from discontinued operations, net of taxes		—			(3	)		3		—

Net loss	$	(68	)	$	(37	)	$	(31	)	84	%

OIBDA

Our OIBDA decreased by $16 million to $80 million for the three months ended March 31, 2009 as compared to $96 million for the three months ended March 31, 2008. Expressed as a percentage of revenues, total OIBDA margin remained unchanged at 12% for the three months ended March 31, 2009 and 2008. The decline in OIBDA reflects a decline in sales. The decrease in OIBDA includes a $4 million charge to bad debt expense to reserve for a receivable from imeem, a digital venture investee in which we wrote off our cost-method investment as of March 31, 2009. Our flat OIBDA margin is the result of effective cost-management efforts and revenue mix.

See “Business Segment Results” presented hereinafter for a discussion of OIBDA by business segment.

Depreciation expense

Our depreciation expense decreased by $4 million, or 31%, to $9 million for three months ended March 31, 2009. The decrease primarily related the effects of lower capital spending as well as lower expenses related to projects that have been fully depreciated.

Amortization expense

Amortization expense increased by $1 million, or 2%, to $56 million for the three months ended March 31, 2009. The increase was due amortization expense on newly acquired intangible assets.

Operating income from continuing operations

Our operating income decreased $13 million, or 46%, to $15 million for the three months ended March 31, 2009 as compared to $28 million for the prior-year quarter. The decrease in operating income was due to the decline in OIBDA noted above, partially offset by decreased depreciation expense noted above.

Interest expense, net

Our interest expense, net, decreased $6 million, or 13%, to $41 million for the three months ended March 31, 2009 as compared to $47 million for the three months ended March 31, 2008. This was the result of decreases in the interest rates on our floating rate debt obligations.

See “—Financial Condition and Liquidity” for more information.

Impairment of cost-method investments

During the quarter ended March 31, 2009, we determined that our cost-method investments in digital venture capital companies, including imeem and lala, were impaired largely due to the current economic environment and changing business conditions from the time of the initial investment. As a result, we recorded charges of $29 million, including $16 million to write-off our investment in imeem and $11 million to write-down our investment in lala.

Other expense, net

Other expense, net for the three months ended March 31, 2009 included net hedging losses on foreign exchange contracts, which represented currency exchange movements associated with inter-company receivables and payables that are short term in nature. These losses were offset by equity in earnings on our share of net income on investments recorded in accordance with the equity method of accounting for an unconsolidated investee.

Income tax expense

We provided income tax expense of $10 million and $13 million for the three months ended March 31, 2009 and 2008, respectively. The decrease in the income tax expense primarily relates to a decrease in income earned by our foreign affiliates compared to the prior-year quarter.

During the quarter ended March 31, 2009, we settled our federal income tax audit with the Internal Revenue Service (“IRS”) for the fiscal years ended September 30, 2004 through September 30, 2006. The IRS commenced its audit of the fiscal year ended September 30, 2007. Various tax years are currently under examination by state and local and foreign tax authorities. With respect to open examinations, we do not expect the total reserve for uncertain tax positions to change significantly in the next twelve months.

Loss from continuing operations

Our loss from continuing operations increased by $34 million, to $68 million for the three months ended March 31, 2009 as compared to $34 million for the three months ended March 31, 2008. The increase was primarily the result of impairment of cost-method investments and a decrease in OIBDA as discussed above, partially offset by decreases in interest expense and income tax expense.

Loss from discontinued operations, net of taxes

Our loss from discontinued operations for the three months ended March 31, 2008 represented the costs associated with shutting down the operations of Bulldog.

Business Segment Results

Revenues, OIBDA and operating income (loss) by business segment are as follows (in millions):


	For the Three Months Ended March 31,				*2009 vs 2008*
	2009		2008		$ Change			% Change
Recorded Music
Revenues	$	537	$	652	$	(115	)	-18	%
OIBDA		46		70		(24	)	-34	%
Operating income from continuing operations	$	3	$	22	$	(19	)	-86	%

Music Publishing
Revenues	$	135	$	155	$	(20	)	-13	%
OIBDA		54		54		—		—


	For the Three Months Ended March 31,						*2009 vs 2008*
	2009			2008			$ Change			% Change
Operating income from continuing operations	$	36		$	36		$	—		—

Corporate expenses and eliminations
Revenues	$	(4	)	$	(7	)	$	3		-43	%
OIBDA		(20	)		(28	)		8		-29	%
Operating loss from continuing operations	$	(24	)	$	(30	)	$	6		-20	%

Total
Revenues	$	668		$	800		$	(132	)	-17	%
OIBDA		80			96			(16	)	-17	%
Operating income from continuing operations	$	15		$	28		$	(13	)	-46	%

Recorded Music

Revenues

Recorded Music revenues decreased by $115 million, or 18%, to $537 million for the three months ended March 31, 2009 from $652 million for the three months ended March 31, 2008. Recorded Music revenues represented 80% and 82% of consolidated revenues for the three months ended March 31, 2009 and 2008, respectively. International Recorded Music revenues were $269 million and $355 million, or 50% and 54% of consolidated Recorded Music revenues for the three months ended March 31, 2009 and 2008, respectively.

The decrease in Recorded Music revenues was primarily a result of a decline in physical and other revenues of $133 million related to a light release schedule versus the prior-year quarter as well as a continued contracting global demand for physical product and the weak economic and retail environment. In addition, the decrease in sales of physical products was partially offset by an increase in digital sales of $11 million, resulting from global growth of downloads.

OIBDA and Operating Income from continuing operations

Recorded Music OIBDA was $46 million for the three months ended March 31, 2009 as compared to $70 million for the three months ended March 31, 2008. Recorded Music operating income from continuing operations included the following (in millions):


	For the Three Months Ended March 31,						*2009 vs 2008*
	2009			2008			$ Change			% Change
OIBDA	$	46		$	70		$	(24	)	-34	%
Depreciation and amortization		(43	)		(48	)		5		-10	%

Operating income from continuing operations	$	3		$	22		$	(19	)	-86	%

Recorded Music OIBDA decreased by $24 million, or 34%, to $46 million for the three months ended March 31, 2009 compared to $70 million for the three months ended March 31, 2008. Expressed as a percentage of Recorded Music revenues, Recorded Music OIBDA was 9% and 11% for the three months ended March 31, 2009 and 2008, respectively. Our OIBDA margin decrease largely reflects negative operating leverage from lower sales on a similar fixed—cost base. The decrease in OIBDA includes a $4 million charge to bad debt expense to reserve for a receivable from imeem, a digital venture investee in which we wrote off our cost-method investment as of March 31, 2009.

Recorded Music operating income from continuing operations decreased by $19 million due to the decreases in Recorded Music OIBDA described above.



Recorded Music cost of revenues is composed of the following amounts (in millions):

	For the Three Months Ended March 31,				*2009 vs 2008*
	2009		2008		$ Change			% Change
Artist and repertoire costs	$	153	$	189	$	(36	)	-19	%
Product costs		99		121		(22	)	-18	%
Licensing costs		25		24		1		4	%

Total cost of revenues	$	277	$	334	$	(57	)	-17	%

Cost of revenues

Recorded Music cost of revenues decreased $57 million, or 17%, for the three months ended March 31, 2009 and increased 1% as a percentage of sales compared with the three months ended March 31, 2008. The decrease was comprised primarily of decreases in product costs of $22 million and artist and repertoire costs of $36 million. The decrease in product costs was driven primarily by a decrease in third-party distribution revenue versus the prior-year quarter. Artist and repertoire costs remained flat as a percentage of revenue.

Recorded Music selling, general and administrative expenses are composed of the following amounts (in millions):


	For the Three Months Ended March 31,				*2009 vs 2008*
	2009		2008		$ Change			% Change
General and administrative expense (1)	$	107	$	116	$	(9	)	-8	%
Selling and marketing expense		99		127		(28	)	-22	%
Distribution expense		13		15		(2	)	-13	%

Total selling, general and administrative expense	$	219	$	258	$	(39	)	-15	%

(1)	Includes depreciation expense of $5 million and $10 million for the three months ended March 31, 2009 and 2008, respectively.

Selling, general and administrative expense

Recorded Music selling, general and administrative expense decreased $39 million, or 15%, for the three months ended March 31, 2009. Expressed as a percentage of Recorded Music revenues, selling, general and administrative expenses were 41% and 40% for the three months ended March 31, 2009 and 2008, respectively.

Music Publishing

Revenues

Music Publishing revenues decreased by $20 million, or 13%, to $135 million for the three months ended March 31, 2009 compared to $155 million for the three months ended March 31, 2008. Music Publishing revenues represented 20% and 19% of consolidated revenues, for the three months ended March 31, 2009 and 2008, respectively. International Music Publishing revenues were $77 million and $91 million, or 57% and 59% of consolidated Music Publishing revenues for the three months ended March 31, 2009 and 2008, respectively.

The decrease in Music Publishing revenues was primarily attributable to decreased mechanical revenues as a result of continued decline in physical sales in the overall recorded music industry. Digital sales represented 5% and 6% of Music Publishing revenues for the three months ended March 31, 2009 and 2008, respectively.

OIBDA and Operating Income

Music Publishing operating income from continuing operations remained flat at $36 million for the three months ended March 31, 2009 as compared to the three months ended March 31, 2008. Music Publishing operating income from continuing operations includes the following (in millions):


	For the Three Months Ended March 31,						*2009 vs 2008*
	2009			2008			$ Change		% Change
OIBDA	$	54		$	54		$	—	—
Depreciation and amortization		(18	)		(18	)		—	—

Operating income from continuing operations	$	36		$	36		$	—	—

Music Publishing OIBDA remained flat at $54 million for the three months ended March 31, 2009 and 2008, respectively. Expressed as a percentage of Music Publishing revenues, Music Publishing OIBDA was 40% and 35% for the three months ended March 31, 2009 and 2008, respectively.

Music Publishing cost of revenues is composed of the following amounts (in millions):


	For the Three Months Ended March 31,				*2009 vs 2008*
	2009		2008		$ Change			% Change
Artist and repertoire costs	$	65	$	86	$	(21	)	-24	%

Total cost of revenues	$	65	$	86	$	(21	)	-24	%

Cost of revenues

Music Publishing cost of revenues decreased by $21 million for the three months ended March 31, 2009. Expressed as a percentage of Music Publishing revenues, cost of revenues were 48% and 55% for the three months ended March 31, 2009 and 2008, respectively. The decrease was due in part to a change in revenue mix as different royalty rates apply to different revenue streams as well as our continued focus to efficiently direct current and future spending on publishing deals that maximize profitability.

Music Publishing selling, general and administrative expenses are comprised of the following amounts (in millions):


	For the Three Months Ended March 31,				*2009 vs 2008*
	2009		2008		$ Change		% Change
General and administrative expense (1)	$	17	$	16	$	1	6	%

Total selling, general and administrative expense	$	17	$	16	$	1	6	%

(1)	Includes depreciation expense of $1 million for the three months ended March 31, 2009 and 2008, respectively.

Selling, general and administrative expense

Music Publishing selling, general and administrative expense increased by $1 million for the three months ended March 31, 2009. Expressed as a percentage of Music Publishing revenues, Music Publishing selling, general and administrative expense increased 3% for the three months ended March 31, 2009 as compared to the three months ended March 31, 2008.

Corporate Expenses and Eliminations

Corporate expenses before depreciation and amortization expense decreased by $8 million to $20 million for the three months ended March 31, 2009, compared to $28 million for the three months ended March 31, 2008. The decrease was primarily driven by a decrease in selling, general and administrative expense, which was down primarily as a result of our continued cost-management efforts, resulting in decreased IT, consulting and legal costs.

Six Months Ended March 31, 2009 Compared with Six Months Ended March 31, 2008

Consolidated Historical Results

Revenues

Our revenues were composed of the following amounts (in millions):


	For the Six Months Ended March 31,						*2009 vs 2008*
	2009			2008			$ Change			% Change
Revenue by Type
Physical and Other	$	846		$	1,107		$	(261	)	-24	%
Digital		322			287			35		12	%
Licensing		118			108			10		9	%

Total Recorded Music		1,286			1,502			(216	)	-14	%
Mechanical		87			117			(30	)	-26	%
Performance		108			111			(3	)	-3	%
Synchronization		47			45			2		4	%
Digital		22			19			3		16	%
Other		5			7			(2	)	-29	%

Total Music Publishing		269			299			(30	)	-10	%
Intersegment elimination		(9	)		(12	)		3		-25	%

Total Revenues	$	1,546		$	1,789		$	(243	)	-14	%

Revenue by Geographical Location
U.S. Recorded Music	$	583		$	697		$	(114	)	-16	%
U.S. Publishing		106			111			(5	)	-5	%

Total U.S.		689			808			(119	)	-15	%
International Recorded Music		703			805			(102	)	-13	%
International Publishing		163			188			(25	)	-13	%

Total International		866			993			(127	)	-13	%
Intersegment eliminations		(9	)		(12	)		3		-25	%

Total Revenues	$	1,546		$	1,789		$	(243	)	-14	%

Total Revenues

Total revenues decreased by $243 million, or 14%, to $1,546 million for the six months ended March 31, 2009 from $1,789 million for the six months ended March 31, 2008. Recorded Music and Music Publishing revenues represented 83% and 17% of total revenues for the six months ended March 31, 2009, respectively, compared to 84% and 16% for the six months ended March 31, 2008, respectively. U.S. and international revenues represented 45% and 55% of total revenues for the six months ended March 31, 2009, respectively, compared to 45% and 55% for the six months ended March 31, 2008, respectively. Excluding the unfavorable impact of foreign currency exchange rates, total revenues decreased $135 million, or 8%, for the six months ended March 31, 2009.

Total digital revenues increased by $38 million, or 12%, to $344 million for the six months ended March 31, 2009 from $306 million for the six months ended March 31, 2008. Total digital revenues represented 22% and 17% of consolidated revenues for the

six months ended March 31, 2009 and 2008, respectively. Total digital revenues for the six months ended March 31, 2009 were comprised of U.S. revenues of $225 million, or 65% of total digital revenues, and international revenues of $119 million, or 35% of total digital revenues. Total digital revenues for the six months ended March 31, 2008 were comprised of U.S. revenues of $201 million, or 66% of total digital revenues, and international revenues of $105 million, or 34% of total digital revenues. Excluding the unfavorable impact of foreign currency exchange rates, total digital sales increased by $51 million, or 17%, for the six months ended March 31, 2009.

Recorded Music revenues decreased by $216 million, or 14%, to $1,286 million for the six months ended March 31, 2009 from $1,502 million for the six months ended March 31, 2008. The net decrease in physical and other revenues of $261 million was a result of a back-end weighted release schedule in the current year as well as the ongoing transition in the recorded music industry characterized by a shift in consumption patterns from sales of physical products to new forms of digital music. Additionally, the weak global economy and retail environment continued to have an impact on our results. In addition to being mitigated by increased expanded-rights revenues, the decrease in sales of physical products and other revenues was also partially offset by an increase in digital revenues of $35 million. The increase in digital revenues was driven by global growth of downloads. Digital revenues were impacted by the timing of our release schedule, the timing and success of new product introductions and continued worldwide economic pressures. As digital revenues become a greater percentage of overall revenues, fluctuations in digital revenues between periods is becoming increasingly driven by the timing of releases. Licensing revenues increased $10 million versus the prior-year quarter. Excluding the unfavorable impact of foreign currency exchange rates, total Recorded Music revenues decreased $132 million, or 9%, for the six months ended March 31, 2009.

Music Publishing revenues decreased by $30 million, or 10%, to $269 million for the six months ended March 31, 2009 from $299 million for the six months ended March 31, 2008. The decrease was due primarily to a decrease in mechanical revenues as a result of the continued decline in physical sales in the overall recorded music industry, partially offset by the increases in digital and synchronization revenues. Excluding the unfavorable impact of foreign currency exchange rates, total Music Publishing revenues decreased $6 million, or 2%, for the six months ended March 31, 2009.

Revenue by Geographical Location

U.S. revenues decreased by $119 million, or 15%, to $689 million for the six months ended March 31, 2009 from $808 million for the six months ended March 31, 2008 primarily due to a decrease of $136 million in sales of physical products. Licensing revenues increased $2 million along with growth in U.S. digital revenues of $24 million, which was driven by growth of downloads. The overall decline in the U.S. Recorded Music business was a result of a back-end weighted release schedule in the fiscal year, as well as the ongoing transition in the Recorded Music industry characterized by a shift in consumption patterns from sales of physical products to new forms of digital music. In addition, U.S. sales in the prior-year period included stronger releases as compared to the current-year period, most notably Josh Groban’s “Noel” which sold approximately five million units in the prior-year period.

International revenues decreased by $127 million, or 13%, to $866 million for the six months ended March 31, 2009 from $993 million for the six months ended March 31, 2008 due in part to decreases of $125 million in physical and other revenues and $21 million in mechanical revenues. These decreases were driven by continued contracting demand for physical product by retailers. In addition, the six months ended March 31, 2008 reflected a strong release schedule in Japan. Offsetting these decreases were $15 million from increased digital revenues and increased licensing revenues of $8 million versus the prior-year period. Excluding the unfavorable impact of foreign currency exchange rates, total international revenues decreased by $19 million, or 2%, for the six months ended March 31, 2009.

Cost of revenues

Our cost of revenues is composed of the following amounts (in millions):


	For the Six Months Ended March 31,				*2009 vs 2008*
	2009		2008		$ Change			% Change
Artist and repertoire costs	$	527	$	612	$	(85	)	-14	%
Product costs		254		303		(49	)	-16	%
Licensing costs		42		43		(1	)	-2	%

Total cost of revenues	$	823	$	958	$	(135	)	-14	%

Our cost of revenues decreased by $135 million, or 14%, to $823 million for the six months ended March 31, 2009 from $958 million for the six months ended March 31, 2008. Expressed as a percentage of revenues, cost of revenues was 53% for the six months ended March 31, 2009 and 54% for the six months ended March 31, 2008.

Artist and repertoire costs decreased by $85 million, or 14%, to $527 million for the six months ended March 31, 2009 from $612 million for the six months ended March 31, 2008. The decrease was primarily driven by the overall decrease in revenues as described above. Artist and repertoire costs as a percentage of revenues is relatively flat versus the prior year period.

Product costs decreased as a percentage of revenues from 17% for the six months ended March 31, 2008 to 16% for the six months ended March 31, 2009. The decrease in product costs was due primarily to change in mix from sale of physical products to digital music offset by increased touring and merchandising costs associated with expanded—rights initiatives.

Licensing costs decreased $1 million, or 2%, to $42 million for the six months ended March 31, 2009 from $43 million for the six months ended March 31, 2008, and licensing costs represented 36% and 40% of licensing revenues for the six months ended March 31, 2009 and 2008, respectively.

Selling, general and administrative expenses

Our selling, general and administrative expenses are composed of the following amounts (in millions):


	For the Six Months Ended March 31,				*2009 vs 2008*
	2009		2008		$ Change			% Change
General and administrative expense (1)	$	283	$	303	$	(20	)	-7	%
Selling and marketing expense		238		293		(55	)	-19	%
Distribution expense		32		39		(7	)	-18	%

Total selling, general and administrative expense	$	553	$	635	$	(82	)	-13	%