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, 2010

¨	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 4, 2010, the number of shares of the Registrant’s common stock, par value $0.001 per share, outstanding was 154,728,400.

WARNER MUSIC GROUP CORP.

INDEX


		Page
Part I.	Financial Information
Item 1.	Financial Statements (Unaudited)	3
	Consolidated Balance Sheets as of March 31, 2010 and September 30, 2009	3
	Consolidated Statements of Operations for the Three and Six Months Ended March 31, 2010 and 2009	4
	Consolidated Statements of Cash Flows for the Six Months Ended March 31, 2010 and 2009	5
	Consolidated Statement of Equity (Deficit) for the Six Months Ended March 31, 2010	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	54
Item 4.	Controls and Procedures	55
Part II.	Other Information
Item 1.	Legal Proceedings	56
Item 1A.	Risk Factors	56
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	66
Item 3.	Defaults Upon Senior Securities	67
Item 4.	(Removed and Reserved)	67
Item 5.	Other Information	67
Item 6.	Exhibits	68
Signatures		69

ITEM 1.

FINANCIAL STATEMENTS

Warner Music Group Corp.

Consolidated Balance Sheets (Unaudited)


	March 31, 2010			September 30, 2009
	(in millions)
Assets
Current assets:
Cash and equivalents	$	383		$	384
Accounts receivable, less allowances of $107 and $135 million		406			550
Inventories		38			46
Royalty advances expected to be recouped within one year		157			171
Deferred tax assets		29			29
Other current assets		53			48

Total current assets		1,066			1,228
Royalty advances expected to be recouped after one year		192			209
Investments		9			18
Property, plant and equipment, net		95			100
Goodwill		1,026			1,027
Intangible assets subject to amortization, net		1,203			1,317
Intangible assets not subject to amortization		100			100
Other assets		61			64

Total assets	$	3,752		$	4,063

Liabilities and Deficit
Current liabilities:
Accounts payable	$	160		$	219
Accrued royalties		1,103			1,185
Accrued liabilities		216			282
Accrued interest		59			57
Deferred revenue		82			113
Other current liabilities		3			16

Total current liabilities		1,623			1,872
Long-term debt		1,934			1,939
Deferred tax liabilities		159			164
Other noncurrent liabilities		152			172

Total liabilities		3,868			4,147

Commitments and Contingencies (See Note 11)
Shareholders’ equity (deficit):
Common stock ($0.001 par value; 500,000,000 shares authorized; 154,717,503 and 154,590,926 shares issued and outstanding)		—			—
Additional paid-in capital		606			601
Accumulated deficit		(828	)		(786	)
Accumulated other comprehensive income, net		51			42

Total Warner Music Group Corp. shareholders’ equity (deficit)		(171	)		(143	)
Noncontrolling interest		55			59

Total equity (deficit)		(116	)		(84	)

Total liabilities and deficit	$	3,752		$	4,063

See accompanying notes.

Warner Music Group Corp.

Consolidated Statements of Operations (Unaudited)


	Three Months Ended March 31,						Six Months Ended March 31,
	2010			2009			2010			2009
	(in millions, except per share data)
Revenues	$	662		$	671		$	1,580		$	1,558
Costs and expenses:
Cost of revenues		(323	)		(341	)		(834	)		(834	)
Selling, general and administrative expenses (a)		(261	)		(259	)		(565	)		(554	)
Amortization of intangible assets		(54	)		(56	)		(110	)		(114	)

Total costs and expenses		(638	)		(656	)		(1,509	)		(1,502	)

Operating income		24			15			71			56
Interest expense, net		(46	)		(41	)		(97	)		(85	)
Gain on sale of equity-method investment		—			—			—			36
Gain on foreign exchange transaction		—			—			—			9
Impairment of cost-method investment		—			(29	)		—			(29	)
Impairment of equity-method investment		—			—			—			(10	)
Other expense, net		(4	)		(3	)		(3	)		(3	)

Loss before income taxes		(26	)		(58	)		(29	)		(26	)
Income tax expense		(2	)		(10	)		(15	)		(26	)

Net loss		(28	)		(68	)		(44	)		(52	)
Less: loss attributable to noncontrolling interest		3			—			2			7

Net loss attributable to Warner Music Group Corp.	$	(25	)	$	(68	)	$	(42	)	$	(45	)

Net loss per common share attributable to Warner Music Group Corp.:

Basic	$	(0.17	)	$	(0.45	)	$	(0.28	)	$	(0.30	)

Diluted	$	(0.17	)	$	(0.45	)	$	(0.28	)	$	(0.30	)

Weighted average common shares:
Basic		149.6			149.5			149.6			149.3
Diluted		149.6			149.5			149.6			149.3
(a) Includes depreciation expense of:	$	(9	)	$	(9	)	$	(18	)	$	(17	)

See accompanying notes.

Warner Music Group Corp.

Consolidated Statements of Cash Flows (Unaudited)


	Six Months Ended March 31, 2010			Six Months Ended March 31, 2009
	(in millions)
Cash flows from operating activities
Net loss	$	(44	)	$	(52	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization		128			131
Deferred taxes		(6	)		(3	)
Gain on sale of equity investment		—			(36	)
Gain on foreign exchange transaction		—			(9	)
Impairment of equity investment		—			10
Impairment of cost-method investment		1			29
Non-cash interest expense		14			22
Non-cash stock-based compensation expense		5			5
Other non-cash items		1			(1	)
Changes in operating assets and liabilities:
Accounts receivable		136			166
Inventories		6			2
Royalty advances		4			(18	)
Accounts payable and accrued liabilities		(191	)		(49	)
Accrued interest		2			(2	)
Other balance sheet changes		(5	)		(8	)

Net cash provided by operating activities		51			187

Cash flows from investing activities
Repayments of loans to third parties		—			3
Investments and acquisitions of businesses		(6	)		(14	)
Acquisition of publishing rights		(29	)		(6	)
Proceeds from the sale of investments		9			124
Capital expenditures		(15	)		(9	)

Net cash (used in) provided by investing activities		(41	)		98

Cash flows from financing activities
Debt repayments		—			(8	)
Distribution to noncontrolling interest holder		(2	)		—

Net cash used in financing activities		(2	)		(8	)
Effect of foreign currency exchange rate changes on cash		(9	)		(30	)

Net (decrease) increase in cash and equivalents		(1	)		247
Cash and equivalents at beginning of period		384			411

Cash and equivalents at end of period	$	383		$	658

See accompanying notes.

Warner Music Group Corp.

Consolidated Statement of Equity (Deficit) (Unaudited)


	Common Stock			Additional Paid-in		Accumulated			Accumulated Other Comprehensive		Total Warner Music Group Corp. Shareholders’			Noncontolling			Total Equity
	Shares	Value		Capital		Deficit			Income		Deficit			Interests			(Deficit)
	(in millions, except number of common shares)
Balance at September 30, 2009	154,590,926	$	0.001	$	601	$	(786	)	$	42	$	(143	)	$	59		$	(84	)
Comprehensive loss:
Net loss	—		—		—		(42	)		—		(42	)		(2	)		(44	)
Foreign currency translation adjustment	—		—		—		—			8		8			—			8
Minimum pension liability	—		—		—		—			—		—			—			—
Deferred gains on derivative financial instruments	—		—		—		—			1		1			—			1
Other	—		—		—		—			—		—			(2	)		(2	)

Total comprehensive loss												(33	)		(4	)		(37	)
Stock based compensation	35,309		—		5		—			—		5			—			5
Exercises of stock options	91,268		—		—		—			—		—			—			—

Balance at March 31, 2010	154,717,503	$	0.001	$	606	$	(828	)	$	51	$	(171	)	$	55		$	(116	)

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.

The Company is also diversifying its revenues beyond its traditional businesses by entering into expanded-rights deals with recording artists in order to partner with artists in other areas of their careers. Under these agreements, the Company provides services to and participates in artists’ activities outside the traditional recorded music business. The Company is building artist services capabilities and platforms for exploiting this broader set of music-related rights and participating more broadly in the monetization of the artist brands it helps create. In developing the Company’s artist services business, the Company has both built and expanded in-house capabilities and expertise and has acquired a number of existing artist services companies involved in artist management, merchandising, strategic marketing and brand management, ticketing, concert promotion, fan clubs, original programming and video entertainment. The Company believes that entering into expanded-rights deals and enhancing its artist services capabilities will permit it to diversify revenue streams to better capitalize on the growth areas of the music industry and 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, 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 has also become the Company’s primary licensing division focused on acquiring broader licensing rights from certain catalog artists. For example, the Company has an exclusive license with The Grateful Dead to manage the band’s intellectual property and 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, 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 U.S. record labels have international rights. In certain smaller countries, WMI licenses to unaffiliated third-party record labels the right to distribute its records. The Company’s international artist services operations also include a network of concert promoters through which WMI provides resources to coordinate tours.

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 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 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 the Company acquires broader rights in a recording artist’s career, the Company may 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 believes expanded-rights deals create better partnerships with its artists, which allow the Company and its artists to work together more closely to create and sustain artistic and commercial success.

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 its distribution channels in mind, including subscription services, social networking sites, online portals and music-centered destinations. The Company 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 has begun 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 rightsholders, the Company’s Music Publishing business garners a share of the revenues generated from use of the song.

The Company’s Music Publishing operations include Warner/Chappell, its global Music Publishing company, headquartered in New York with operations in over 50 countries through various subsidiaries, affiliates and non-affiliated licensees. The Company owns or controls 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, its 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, HBO and Turner Music Publishing. In 2007, the Company entered the production music library business with the acquisition of Non-Stop Music and has more recently expanded its activities in this area through further acquisitions in both the U.S. and Europe. 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, 2010 are not necessarily indicative of the results that may be expected for the fiscal year ending September 30, 2010.

The consolidated balance sheet at September 30, 2009 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, 2009 (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, 2010 and 2009 relate to the three and six month periods ended March 26, 2010 and March 27, 2009, respectively. For convenience purposes, the Company continues to date its financial statements as of March 31.

The Company has performed a review of all subsequent events through the date the financial statements were issued, and has deemed that no additional disclosures are necessary.

New Accounting Pronouncements

In December 2007, the Financial Accounting Standards Board (“FASB”) revised the authoritative guidance for business combinations. The new guidance 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. The new guidance is effective for fiscal years beginning after December 15, 2008 on a prospective basis. The Company adopted the revised guidance as of October 1, 2009. The adoption of this guidance did not affect the Company’s historical consolidated financial statements but it will change the Company’s accounting treatment for business combinations on a prospective basis.

In December 2007, the FASB revised the authoritative guidance for accounting and reporting for the noncontrolling interest in a subsidiary (previously referred to as minority interest) and for the deconsolidation of a subsidiary. The new guidance requires the recognition of a noncontrolling interest as a component of equity in the consolidated financial statements as opposed to as a liability or mezzanine equity. The new guidance 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. The carrying amount of the noncontrolling interest is adjusted to reflect the change in ownership interest, and any difference between the amount by which the noncontrolling interests are adjusted and the fair value of the consideration paid or received is recognized directly in equity attributable to the controlling interest (i.e., as additional paid in capital). Any transaction that results in the loss of control of a subsidiary is considered a remeasurement event with any retained interest remeasured at fair value. The gain or loss recognized in income includes both the realized gain or loss related to the portion of the ownership interest sold and the gain or loss on the remeasurement to fair value of the retained interest. FASB requires that the new guidance for noncontrolling interests and the new guidance on business combinations be adopted concurrently and thus, this guidance is also effective for fiscal years beginning after December 15, 2008. The Company adopted the provisions of this guidance effective October 1, 2009. This guidance changes the Company’s accounting treatment of business combinations and dispositions with noncontrolling interests on a prospective basis, except for the presentation and disclosure requirements, which were applied on a retrospective basis. As of March 31, 2010 and September 30, 2009, noncontrolling interests of $55 million and $59 million have been classified as a component of equity in the consolidated balance sheet. Losses attributable to noncontrolling interests of $3 million and $2 million are included in net loss for the three and six months ended March 31, 2010. Losses attributable to noncontrolling interests of $7 million are included in net income for the six months ended March 31, 2009.

In June 2009, the FASB issued Statement No. 167, Amendments to FASB Interpretation No. 46(R) (“FAS 167”), which amends the consolidation guidance for variable interest entities. The amendments include: (1) the elimination of the exemption from consolidation for qualifying special purpose entities, (2) a new approach for determining the primary beneficiary of a VIE, which requires that the primary beneficiary have both (i) the power to control the most significant activities of the VIE and (ii) either the obligation to absorb losses or the right to receive benefits that could potentially be significant to the VIE, and (3) the requirement to continually reassess who should consolidate a variable-interest entity. FAS 167 is effective for the beginning of an entity’s first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period and for interim and annual reporting periods thereafter. We have not completed our analysis of the impact of this new standard, if any, which will be adopted effective October 1, 2010.

3. Comprehensive (Loss) Income

Comprehensive (loss) income consists of net loss and other gains and losses affecting equity that, under U.S. GAAP, are excluded from net (loss) income. For the Company, the components of other comprehensive (loss) income primarily consist of foreign currency translation gains and losses and deferred gains and losses on financial instruments designated as hedges under FASB ASC Topic 815, Derivatives and Hedging (“ASC 815”), which include foreign exchange contracts. The following summary sets forth the components of comprehensive loss, net of related taxes (in millions):


	Three Months Ended March 31, 2010			Three Months Ended March 31, 2009			Six Months Ended March 31, 2010			Six Months Ended March 31, 2009
Net loss	$	(28	)	$	(68	)	$	(44	)	$	(52	)
Foreign currency translation adjustments (a)		6			(11	)		8			12
Derivative financial instruments gains		1			7			1			4
Other		(1	)		—			(2	)		—

Comprehensive loss	$	(22	)		(72	)		(37	)	$	(36	)

(a)	The foreign currency translation adjustments are not adjusted for income taxes as they relate to permanent investments in international subsidiaries.

4. Net (Loss) Income Per Common Share

The Company computes net (loss) income per common share in accordance with FASB ASC Topic 260, Earnings per Share (“ASC 260”). Under the provisions of ASC 260, basic net (loss) income per common share is computed by dividing the net (loss) income applicable to common shares after preferred dividend requirements, if any, by the weighted average of common shares outstanding during the period. Diluted net (loss) income per common share adjusts basic net (loss) income 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) income per common share (in millions, except per share amounts):


	Three Months Ended March 31, 2010			Three Months Ended March 31, 2009			Six Months Ended March 31, 2010			Six Months Ended March 31, 2009
Numerator:
Basic and diluted net loss per common share:
Net loss attributable to Warner Music Group Corp.	$	(25	)	$	(68	)	$	(42	)	$	(45	)

Denominator:
Weighted average common shares outstanding for basic calculation (a)		149.6			149.5			149.6			149.3

Dilutive effect of options and restricted stock		—			—			—			—

Weighted average common outstanding shares for diluted calculation		149.6			149.5			149.6			149.3

Net loss per common share attributable to Warner Music Group Corp.—basic	$	(0.17	)	$	(0.45	)	$	(0.28	)	$	(0.30	)

Net loss per common share attributable to Warner Music Group Corp.—diluted	$	(0.17	)	$	(0.45	)	$	(0.28	)	$	(0.30	)

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

The calculation of diluted net loss per share excludes the following weighted average number of stock options and restricted stock because to include them in the calculation would be anti-dilutive:


	Three Months Ended March 31, 2010	Three Months Ended March 31, 2009	Six Months Ended March 31, 2010	Six Months Ended March 31, 2009
Stock options	13.6	0.4	13.6	0.3
Restricted stock	—	0.6	—	0.5

5. Investments

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


	March 31, 2010		September 30, 2009
Cost-method investments	$	3	$	13
Equity-method investments		6		5

	$	9	$	18

During the three months ended December 31, 2009, the Company sold its equity interest in lala media, inc. and terminated a memorandum of terms related to the formation of an international joint venture. The Company received cash consideration of approximately $9 million, which resulted in an immaterial gain.

6. Inventories

Inventories consist of the following (in millions):


	March 31, 2010		September 30, 2009
Compact discs and other music-related products	$	36	$	44
Published sheet music and song books		2		2

	$	38	$	46

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, 2010 (in millions):


	Recorded Music			Music Publishing		Total
Balance at September 30, 2009	$	436		$	591	$	1,027
Acquisitions		—			7		7
Dispositions		—			—		—
Other (a)		(8	)		—		(8	)

Balance at March 31, 2010	$	428		$	598	$	1,026

(a)	Other represents foreign currency translation adjustments.

Other Intangible Assets

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


	September 30, 2009			Acquisitions	Other (a)		March 31, 2010
Intangible assets subject to amortization:
Recorded music catalog	$	1,379		—	(6	)	$	1,373
Music publishing copyrights		952		31	(28	)		955
Artist contracts		80		—	(1	)		79
Trademarks		31		—	—			31
Other intangible assets		8		—	—			8

		2,450		31	(35	)		2,446
Accumulated amortization		(1,133	)					(1,243	)

Total net intangible assets subject to amortization		1,317						1,203
Intangible assets not subject to amortization:
Trademarks and brands		100						100

Total net other intangible assets	$	1,417					$	1,303

(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. Such liabilities were recognized as part of the cost of the Acquisition. As of March 31, 2010, the Company had approximately $9 million of liabilities outstanding primarily related to long-term lease obligations for vacated facilities, which are expected to be settled by 2019 and $71 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, 2010		September 30, 2009
9.5% Senior Secured Notes due 2016—Acquisition Corp (a)	$	1,063	$	1,060
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)		148		161
9.5% Senior Discount Notes due 2014—Holdings (c)		258		253

Total debt	$	1,934	$	1,939

(a)	9.5% Senior Secured Notes due 2016; face amount of $1.1 billion less unamortized discount of $37 million at March 31, 2010 and $40 million at September 30, 2009.

(b)	Change represents the impact of foreign currency exchange rates on the carrying value of the £100 million Sterling-denominated notes.

(c)

Change represents the accrual of interest in the form of an increase in the accreted value of the discount notes. During the six months ended March 31, 2010, the Holdings Notes accreted to the full principal amount due at maturity of $258 million. The Company has started accruing interest which is to be paid semi-annually in cash beginning June 15, 2010.

Restricted Net Assets

The Company is a holding company with no independent operations or assets other than through its interests in its subsidiaries, such as Holdings and Acquisition Corp. Accordingly, the ability of the Company to obtain funds from its subsidiaries is restricted by the indenture for the Acquisition Corp. Senior Secured Notes due 2016, the indenture for the Acquisition Corp. Senior Subordinated Notes due 2014, and the indenture for the Holdings Senior Discount Notes due 2014.

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, 2010 and 2009 (in millions):


	Three Months Ended March 31, 2010		Three Months Ended March 31, 2009		Six Months Ended March 31, 2010		Six Months Ended March 31, 2009
Recorded Music	$	1	$	2	$	3	$	3
Music Publishing		—		—		—		—
Corporate expenses		1		1		2		2

Total	$	2	$	3	$	5	$	5

During the six months ended March 31, 2010, the Company awarded 35,309 shares of restricted stock and 185,000 stock options to its employees. 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. On October 9, 2008, the District Court issued an order dismissing the case as to all defendants, including the Company. On November 20, 2008, plaintiffs filed a Notice of Appeal from the order of the District Court to the Circuit Court for the Second Circuit. Oral argument took place before the Second Circuit Court of Appeals on September 21, 2009. On January 12, 2010, the Second Circuit vacated the judgment of the District Court and remanded the case for further proceedings. On January 27, 2010, all defendants, including the Company, filed a petition for rehearing en banc with the Second Circuit. On March 26, 2010, the Second Circuit denied the petition for rehearing en banc. The Company intends to defend against these lawsuits, including the appeal, 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

The Company uses derivative financial instruments primarily foreign currency forward exchange contracts (“FX Contracts”) for the purpose of managing foreign currency exchange risk by reducing the effects of fluctuations in foreign currency exchange rates.

The Company enters into FX Contracts primarily to hedge its royalty payments and balance sheet items denominated in foreign currency. The Company applies hedge accounting to FX Contracts for cash flows related to royalty payments. The Company records these FX Contracts in the consolidated balance sheet at fair value and changes in fair value are recognized in Other Comprehensive Income (“OCI”) for unrealized items and recognized in earnings for realized items. The Company elects to not apply hedge accounting to foreign currency exposures related to balance sheet items. The Company records these FX Contracts in the consolidated balance sheet at fair value and changes in fair value are immediately recognized in earnings. Fair value is determined by using observable market transactions of spot and forward rates (i.e., Level 2 inputs). Refer to Note 15.

Netting provisions are provided for in existing International Swap and Derivative Association Inc. (“ISDA”) agreements in situations where the Company executes multiple contracts with the same counterparty. As a result, net assets or liabilities resulting from foreign exchange derivatives subject to these netting agreements are classified within other current assets or other current liabilities in the Company’s balance sheet. The Company monitors its positions with, and the credit quality of, the financial institutions that are party to any of its financial transactions.

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, 2009. 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, 2010
Revenues	$	534		$	134		$	(6	)	$	662
OIBDA		49			61			(23	)		87
Depreciation of property, plant and equipment		(6	)		(1	)		(2	)		(9	)
Amortization of intangible assets		(37	)		(17	)		—			(54	)

Operating income (loss)	$	6		$	43		$	(25	)	$	24

March 31, 2009
Revenues	$	539		$	136		$	(4	)	$	671
OIBDA		45			55			(20	)		80
Depreciation of property, plant and equipment		(5	)		(1	)		(3	)		(9	)
Amortization of intangible assets		(38	)		(17	)		(1	)		(56	)

Operating income (loss)	$	2		$	37		$	(24	)	$	15


Six Months Ended	Recorded music			Music publishing			Corporate expenses and eliminations			Total
March 31, 2010
Revenues	$	1,317		$	275		$	(12	)	$	1,580
OIBDA		162			83			(46	)		199
Depreciation of property, plant and equipment		(12	)		(2	)		(4	)		(18	)
Amortization of intangible assets		(76	)		(34	)		—			(110	)

Operating income (loss)	$	74		$	47		$	(50	)	$	71

March 31, 2009
Revenues	$	1,296		$	271		$	(9	)	$	1,558
OIBDA		152			77			(42	)		187
Depreciation of property, plant and equipment		(10	)		(2	)		(5	)		(17	)
Amortization of intangible assets		(81	)		(32	)		(1	)		(114	)

Operating income (loss)	$	61		$	43		$	(48	)	$	56

14. Additional Financial Information

Cash Interest and Taxes

The Company made interest payments of approximately $81 million and $66 million during the six months ended March 31, 2010 and 2009, respectively. The Company previously made quarterly interest payments under its senior secured credit facility which was retired in May 2009. The Company now pays interest only semi-annually in the first and third quarters of the fiscal year. The Company paid approximately $21 million and $26 million of income and withholding taxes in the six months ended March 31, 2010 and 2009, respectively. The Company received $6 million and $9 million of income tax refunds in the six months ended March 31, 2010 and 2009, respectively.

15. Fair Value Measurements

ASC 820 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, ASC 820 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.

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, 2010. Derivatives not designated as hedging instruments primarily represent the balances below and the gains and losses on these financial instruments are included as other expenses of $14 million and royalty expense of $1 million in the statement of operations. Derivatives designated as hedging instruments are not material to the Company’s financial statements.


	Fair Value Measurements as of March 31, 2010
	(Level 1)		(Level 2)			(Level 3)			Total
	(in millions)
Other Current Assets:
Foreign Currency Forward Exchange Contracts (a)	$	—	$	20		$	—		$	20
Other Current Liabilities:
Foreign Currency Forward Exchange Contracts (a)	$	—	$	(7	)	$	—		$	(7	)
Other Non-current Liabilities:
Purchase Obligation (b)	$	—	$	—		$	(6	)	$	(6	)

(a)	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.

(b)

The fair value of this purchase obligation is based on a discounted cash flow (“DCF”) approach and it is adjusted to fair value on an annual basis. The assumptions used in preparing the DCF model were based on data available as of September 30, 2009 and includes estimates of timing of the payment obligation, amount of cash flows, and discount rate.

The majority of the Company’s non-financial instruments, which include goodwill, intangible assets, inventories, and property, plant, and equipment, are not required to be remeasured to at fair value on a recurring basis. These assets are evaluated for impairment if certain triggering events occur. If such evaluation indicates that an impairment exists, the asset is written down to its fair value. In addition, an impairment analysis is performed at least annually for goodwill and indefinite-lived intangible assets.

Fair Value of Debt

Based on the level of interest rates prevailing at March 31, 2010, the fair value of the Company’s fixed-rate debt exceeded the carrying value by approximately $108 million. Unrealized gains or losses on debt do not result in the realization or expenditure of cash and generally are not recognized for financial reporting purposes unless the debt is retired prior to its maturity.

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 Senior Discount Notes due 2014. 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 and Holdings to obtain funds from its subsidiaries is restricted by the indentures for the Acquisition Corp. Senior Secured Notes due 2016 and the Acquisition Corp. Senior Subordinated Notes due 2014, and, with respect to the Company, the indenture for the Holdings Discount Notes.

WARNER MUSIC GROUP CORP.

Supplementary Information

Consolidating Balance Sheet (Unaudited)

March 31, 2010


	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	$	188		$	—		$	195		$	—	$	383
Accounts receivable, net		—			—			406			—		406
Inventories		—			—			38			—		38
Royalty advances expected to be recouped within one year		—			—			157			—		157
Deferred tax assets		—			—			29			—		29
Other current assets		—			—			53			—		53

Total current assets		188			—			878			—		1,066
Royalty advances expected to be recouped after one year		—			—			192			—		192
Investments in and advances (from) to consolidated subsidiaries		(360	)		(99	)		—			459		—
Investments		—			—			9			—		9
Property, plant and equipment, net		—			—			95			—		95
Goodwill		—			—			1,026			—		1,026
Intangible assets subject to amortization, net		—			—			1,203			—		1,203
Intangible assets not subject to amortization		—			—			100			—		100
Other assets		(2	)		2			61					61

Total assets	$	(174	)	$	(97	)	$	3,564		$	459	$	3,752

Liabilities and (Deficit) Equity:
Current liabilities:
Accounts payable	$	—		$	—		$	160		$	—	$	160
Accrued royalties		—			—			1,103			—		1,103
Accrued liabilities		—			—			216			—		216
Accrued interest		—			7			52			—		59
Deferred revenue		—			—			82			—		82
Other current liabilities		—			—			3			—		3

Total current liabilities		—			7			1,616			—		1,623
Long-term debt		—			258			1,676			—		1,934
Deferred tax liabilities, net		—			—			159			—		159
Other noncurrent liabilities		(3	)		(2	)		157			—		152

Total liabilities		(3	)		263			3,608			—		3,868

Total Warner Music Group Corp. shareholders’ (deficit) equity		(171	)		(360	)		(99	)		459		(171	)
Noncontrolling interest		—			—			55			—		55

Total equity (deficit)		(171	)		(360	)		(44	)		459		(116	)

Total liabilities and (deficit) equity	$	(174	)	$	(97	)	$	3,564		$	459	$	3,752

WARNER MUSIC GROUP CORP.

Supplementary Information

Consolidating Balance Sheet (Unaudited)

September 30, 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	$	188		$	—		$	196		$	—	$	384
Accounts receivable, net		—			—			550			—		550
Inventories		—			—			46			—		46
Royalty advances expected to be recouped within one year		—			—			171			—		171
Deferred tax assets		—			—			29			—		29
Other current assets		—			—			48			—		48

Total current assets		188			—			1,040			—		1,228
Royalty advances expected to be recouped after one year		—			—			209			—		209
Investments in and advances to (from) consolidated subsidiaries		(332	)		(81	)		—			413		—
Investments		—			—			18			—		18
Property, plant and equipment, net		—			—			100			—		100
Goodwill		—			—			1,027			—		1,027
Intangible assets subject to amortization, net		—			—			1,317			—		1,317
Intangible assets not subject to amortization		—			—			100			—		100
Other assets		(2	)		2			64			—		64

Total assets	$	(146	)	$	(79	)	$	3,875		$	413	$	4,063

Liabilities and (Deficit) Equity:
Current liabilities:
Accounts payable	$	—		$	—		$	219		$	—	$	219
Accrued royalties		—			—			1,185			—		1,185
Accrued liabilities		—			—			282			—		282
Accrued interest		—			—			57			—		57
Deferred revenue		—			—			113			—		113
Other current liabilities		2			—			14			—		16

Total current liabilities		2			—			1,870			—		1,872
Long-term debt		—			253			1,686			—		1,939
Deferred tax liabilities, net		—			—			164			—		164
Other noncurrent liabilities		(5	)		—			177			—		172

Total liabilities		(3	)		253			3,897			—		4,147

Total Warner Music Group Corp. shareholders’ (deficit) equity		(143	)		(332	)		(81	)		413		(143	)
Noncontrolling interest		—			—			59			—		59

Total equity (deficit)		(143	)		(332	)		(22	)		413		(84	)

Total liabilities and (deficit) equity	$	(146	)	$	(79	)	$	3,875		$	413	$	4,063

WARNER MUSIC GROUP CORP.

Supplementary Information

Consolidating Statements of Operations (Unaudited)

For The Three Months Ended March 31, 2010 and 2009


	Three months ended March 31, 2010
	Warner Music Group Corp.			WMG Holdings Corp. (issuer)			WMG Acquisition Corp.			Eliminations		Warner Music Group Corp. Consolidated
	(in millions)
Revenues	$	—		$	—		$	662		$	—	$	662
Costs and expenses:
Cost of revenues		—			—			(323	)		—		(323	)
Selling, general and administrative expenses		—			—			(261	)		—		(261	)
Amortization of intangible assets		—			—			(54	)		—		(54	)

Total costs and expenses		—			—			(638	)		—		(638	)

Operating income		—			—			24			—		24
Interest expense, net		—			(6	)		(40	)		—		(46	)
Equity (losses) gains from consolidated subsidiaries		(25	)		(19	)		—			44		—
Other (expense) income, net		—			—			(4	)		—		(4	)

Loss before income taxes		(25	)		(25	)		(20	)		44		(26	)
Income tax expense		—			—			(2	)		—		(2	)

Net loss		(25	)		(25	)		(22	)		44		(28	)
Less: loss attributable to noncontrolling interest		—			—			3			—		3

Net loss attributable to Warner Music Group Corp.	$	(25	)	$	(25	)	$	(19	)	$	44	$	(25	)


	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	$	—		$	—		$	671		$	—	$	671
Costs and expenses:
Cost of revenues		—			—			(341	)		—		(341	)
Selling, general and administrative expenses		—			—			(259	)		—		(259	)
Amortization of intangible assets		—			—			(56	)		—		(56	)

Total costs and expenses		—			—			(656	)		—		(656	)

Operating income		—			—			15			—		15
Interest expense, net		—			(6	)		(35	)		—		(41	)
Gain on sale of equity investment		—			—			—			—		—
Gain on foreign exchange transaction		—			—			—			—		—
Impairment of cost investment								(29	)				(29	)
Impairment of equity investment		—			—			—			—		—
Equity (losses) gains from consolidated subsidiaries		(68	)		(62	)		—			130		—
Other income (expense), net		—			—			(3	)		—		(3	)

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

Net loss		(68	)		(68	)		(62	)		130		(68	)
Less: loss attributable to noncontrolling interest		—			—			—			—		—

Net loss attributable to Warner Music Group Corp.	$	(68	)	$	(68	)	$	(62	)	$	130	$	(68	)

WARNER MUSIC GROUP CORP.

Supplementary Information

Consolidating Statements of Operations (Unaudited)

For The Six Months Ended March 31, 2010 and 2009


	Six months ended March 31, 2010
	Warner Music Group Corp.			WMG Holdings Corp. (issuer)			WMG Acquisition Corp.			Eliminations		Warner Music Group Corp. Consolidated
	(in millions)
Revenues	$	—		$	—		$	1,580		$	—	$	1,580
Costs and expenses:
Cost of revenues		—			—			(834	)		—		(834	)
Selling, general and administrative expenses		—			—			(565	)		—		(565	)
Amortization of intangible assets		—			—			(110	)		—		(110	)

Total costs and expenses		—			—			(1,509	)		—		(1,509	)

Operating income		—			—			71			—		71
Interest expense, net		—			(12	)		(85	)		—		(97	)
Equity (losses) gains from consolidated subsidiaries		(42	)		(30	)		—			72		—
Other (expense) income, net		—			—			(3	)		—		(3	)

Loss before income taxes		(42	)		(42	)		(17	)		72		(29	)
Income tax expense		—			—			(15	)		—		(15	)

Net loss		(42	)		(42	)		(32	)		72		(44	)
Less: loss attributable to noncontrolling interest		—			—			2			—		2

Net loss attributable to Warner Music Group Corp.	$	(42	)	$	(42	)	$	(30	)	$	72	$	(42	)


	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	$	—		$	—		$	1,558		$	—	$	1,558
Costs and expenses:
Cost of revenues		—			—			(834	)		—		(834	)
Selling, general and administrative expenses		—			—			(554	)		—		(554	)
Amortization of intangible assets		—			—			(114	)		—		(114	)

Total costs and expenses		—			—			(1.502	)		—		(1,502	)

Operating income		—			—			56			—		56
Interest expense, net		—			(11	)		(74	)		—		(85	)
Gain on sale of equity investment		—			—			36			—		36
Gain on foreign exchange transaction		—			—			9			—		9
Impairment of cost investment								(29	)				(29	)
Impairment of equity investment		—			—			(10	)		—		(10	)
Equity (losses) gains from consolidated subsidiaries		(45	)		(34	)		—			79		—
Other income (expense), net		—			—			(3	)		—		(3	)

Loss before income taxes		(45	)		(45	)		(15	)		79		(26	)
Income tax expense		—			—			(26	)		—		(26	)

Net loss		(45	)		(45	)		(41	)		79		(52	)
Less: loss attributable to noncontrolling interest		—			—			7			—		7

Net loss attributable to Warner Music Group Corp.	$	(45	)	$	(45	)	$	(34	)	$	79	$	(45	)

WARNER MUSIC GROUP CORP.

Supplementary Information

Consolidating Statement of Cash Flows (Unaudited)

For The Six Months Ended March 31, 2010


	Warner Music Group Corp.			WMG Holdings Corp. (issuer)			WMG Acquisition Corp.			Eliminations			Consolidated
	(in millions)
Cash flows from operating activities:
Net (loss) income	$	(44	)	$	(44	)	$	(32	)	$	76		$	(44	)
Adjustments to reconcile net (loss) income to net cash used in operating activities:
Depreciation and amortization		—			—			128			—			128
Deferred taxes		—			—			(6	)		—			(6	)
Impairment of cost-method investments		—			—			1			—			1
Non-cash interest expense		—			5			9			—			14
Non-cash, stock-based compensation expense		—			—			5			—			5
Equity losses (gains) from consolidated subsidiaries		44			32						(76	)		—
Other non-cash items		—			—			1			—			1
Changes in operating assets and liabilities:
Accounts receivable		—			—			136			—			136
Inventories		—			—			6			—			6
Royalty advances		—			—			4			—			4
Accounts payable and accrued liabilities		—			—			(191	)		—			(191	)
Accrued interest		—			7			(5	)		—			2
Other balance sheet changes		—			—			(5	)		—			(5	)

Net cash used in operating activities		—			—			51			—			51

Cash flows from investing activities:
Investments and acquisitions of businesses		—			—			(6	)		—			(6	)
Acquisition of publishing rights		—			—			(29	)		—			(29	)
Proceeds from the sale of investments		—			—			9			—			9
Capital expenditures		—			—			(15	)		—			(15	)

Net cash used in investing activities		—			—			(41	)		—			(41	)

Cash flows from financing activities:
Distributions to noncontrolling interest holders		—			—			(2	)		—			(2	)

Net cash (used in) provided by financing activities		—			—			(2	)		—			(2	)
Effect of foreign currency exchange rate changes on cash		—			—			(9	)		—			(9	)

Net decrease in cash and equivalents		—			—			(1	)		—			(1	)
Cash and equivalents at beginning of period		188			—			196			—			384

Cash and equivalents at end of period	$	188		$	—		$	195		$	—		$	383

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			Consolidated
	(in millions)
Cash flows from operating activities:
Net income (loss)	$	(45	)	$	(45	)	$	(41	)	$	79		$	(52	)
Adjustments to reconcile net income 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
Equity losses (gains) from consolidated subsidiaries		45			34						(79	)		—
Other non-cash items		—			—			(1	)		—			(1	)
Changes in operating assets and liabilities:
Accounts receivable		—			—			166			—			166
Inventories		—			—			2			—			2
Royalty advances		—			—			(18	)		—			(18	)
Accounts payable and accrued liabilities		—			—			(49	)		—			(49	)
Accrued interest		—			—			(2	)		—			(2	)
Other balance sheet changes		—			—			(8	)		—			(8	)

Net cash provided by operating activities		—			—			187			—			187

Cash flows from investing activities:
Repayment of loans to 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	)

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

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, 2010 (the “Quarterly Report”).

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 Quarterly Report.

“SAFE HARBOR” STATEMENT UNDER PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995

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 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 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;

•

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 and to enter into expanded-rights deals with recording artists in order to broaden our revenue streams in growing segments of the music business;

•

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’ deficit;

•

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 and certain finance and accounting functions, which will make us more dependent upon third parties;

•

that changes to our information technology infrastructure to harmonize our systems and processes may fail to operate as designed and intended;

•

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-based content 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, 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 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 unaudited 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, 2010 and 2009. 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, 2010 and 2009, as well as a discussion of our financial condition and liquidity as of March 31, 2010. The discussion of our financial condition and liquidity includes (i) a summary of our debt agreements 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 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 is not a measure of performance presented in accordance with U.S. GAAP.

OVERVIEW

We are one of the world’s major music-based 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.

We are also diversifying our revenues beyond our traditional businesses by entering into expanded-rights deals with recording artists in order to partner with artists in other areas of their careers. Under these agreements, we provide services to and participate in artists’ activities outside the traditional recorded music business. We are building artist services capabilities and platforms for exploiting this broader set of music-related rights and participating more broadly in the monetization of the artist brands we help create. In developing our artist services business, we have both built and expanded in-house capabilities and expertise and have acquired a number of existing artist services companies involved in artist management, merchandising, strategic marketing and brand management, ticketing, concert promotion, fan club, original programming and video entertainment. We believe that entering into expanded-rights deals and enhancing our artist services capabilities will permit us to diversify revenue streams to better capitalize on the growth areas of the music industry and 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 has also become our primary licensing division focused on acquiring broader licensing rights from certain recording artists. For example, we have an exclusive license with The Grateful Dead to manage the band’s intellectual property and 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. We also conduct our Recorded Music operations through a collection of additional record labels, including, among others, Asylum, 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 U.S. record labels have international rights. In certain smaller countries, WMI licenses to unaffiliated third-party record labels the right to distribute its records. Our international artist services operations also include a network of concert promoters through which WMI provides resources to coordinate tours.

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 distribution services outside of the U.S. through a network of affiliated and non-affiliated distributors.

We play 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 our 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 record stores, mass merchants and other retailers. Our 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 a recording 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. We believe expanded-rights deals create better partnerships with our artists, which allows us and our artists to work together more closely to create and sustain artistic and commercial success.

We have integrated the sale of digital content into all aspects of our Recorded Music and Music Publishing businesses including A&R, marketing, promotion and distribution. Our 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, online portals and music-centered destinations. We work side by side with our mobile and online partners to test new concepts. We believe existing and new digital businesses will be a significant source of growth for the next several years and will provide new opportunities to monetize our assets and create new revenue streams. As a music-based content company, we have assets that go beyond our recorded music and music publishing catalogs, such as our music video library, which we have begun 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, we believe we are well positioned to take advantage of growth in digital distribution and emerging technologies to maximize the value of our assets.

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 artist services business and our participation in expanded rights associated with our artists and other artists, including sponsorship, fan club, artist 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

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 rightsholders, 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, HBO and Turner Music Publishing. In 2007, we entered the production music library business with the acquisition of Non-Stop Music and have more recently expanded our activities in this area through further acquisitions in both the U.S. and Europe. Production music is a complementary alternative to licensing standards and contemporary hits for television, film and advertising producers.

Publishing revenues are derived from five main sources:

•

Mechanical: the licensor receives royalties with respect to compositions embodied in recordings sold in any physical format or configuration (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 online and mobile downloads, mobile ringtones and online and mobile streaming; and

•

Other: the licensor receives royalties for use 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 administration 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 unstable and the worldwide market has contracted considerably, which has adversely affected our operating results. The industry-wide decline can be attributed primarily to digital piracy. Other drivers of this decline are 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, revenue streams from these new formats have not yet reached a level where they fully 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 the music publishing business generates a significant portion of its revenues from mechanical royalties from the sale of music in CD and other physical recorded music formats.

Current Economic Conditions

Ongoing uncertainty in global economic conditions poses a risk to the overall economy, which could continue to negatively affect demand for our products and other related matters. While the music industry has been relatively resilient in prior financial downturns as its products are low priced relative to other entertainment goods, we have been negatively impacted by these global economic conditions, which have resulted in significant recessionary pressures and lower consumer confidence and lower retail sales in general. The current uncertainty in global economic conditions makes it particularly difficult to predict 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. We expect to adapt to the impact of the economic slowdown with a particular focus on cash and liquidity. We will monitor current events closely and take advantage of our flexible cost structure to minimize any impact.

Expanding Business Models to Offset Declines in Physical Sales

Digital Sales

A key part of our strategy to offset declines in physical sales is to expand digital sales. New digital models have enabled us to find additional ways to generate revenues from our music content. In the early stages of the transition from physical to digital sales, overall sales have decreased as the increases in digital sales have not yet met or exceeded the decrease in physical sales. Part of the reason for this gap is the shift in consumer purchasing patterns made possible from new digital models. In the digital space, consumers are now presented with the opportunity to not only purchase entire albums, but to “unbundle” albums and purchase only favorite tracks as single-track downloads. While to date, sales of online and mobile downloads have constituted the majority of our digital Recorded Music and Music Publishing revenue, that may change over time as new digital models, such as access models (models that typically bundle the purchase of a mobile device with access to music) and streaming subscription services, continue to develop. In the aggregate, we believe that growth in revenue from new digital models has the potential to offset physical declines and drive overall future revenue growth. In the digital space, certain costs associated with physical products, such as manufacturing, distribution, inventory and return costs, do not apply. Partially eroding that benefit are increases in mechanical copyright royalties payable to music publishers which apply in the digital space. While there are some digital-specific variable costs and infrastructure investments necessary to produce, market and sell music in digital formats, we believe it is reasonable to expect that digital margins will generally be higher than physical margins as a result of the elimination of certain costs associated with physical products. As consumer purchasing patterns change over time and new digital models are launched, we may see fluctuations in contribution margin depending on the overall sales mix.

Expanded-Rights Deals

We have also been seeking to expand our relationships with recording artists as another means to offset declines in physical revenues in Recorded Music. For example, we have been signing recording artists to expanded-rights deals for the last several years. Under these expanded-rights deals, we participate in the recording artist’s revenue streams, other than from recorded music sales, such as live performances, merchandising and sponsorships. We believe that additional revenue from these revenue streams will help to offset declines in physical revenue over time. As we have generally signed newer artists to these deals, increased non-traditional revenue from these deals is expected to come several years after these deals have been signed as the artists become more successful and are able to generate revenue other than from recorded music sales. While non-traditional Recorded Music revenue, which

includes revenue from expanded-rights deals as well as revenue from our artist services business, was less than 10% of our total revenue in fiscal 2009, we believe this revenue should continue to grow and represent a larger proportion of our revenue over time. We also believe that the strategy of entering into expanded-rights deals and continuing to develop our artist services business will contribute to Recorded Music growth over time. Margins for the various non-traditional Recorded Music revenue streams can vary significantly. The overall impact on margins will, therefore, depend on the composition of the various revenue streams in any particular period. For instance, revenue from touring under our expanded-rights deals typically flows straight through to net income with little cost. Revenue from our management business and revenue from sponsorship and touring under expanded-rights deals are all high margin, while merchandise revenue under expanded-rights deals and concert promotion revenue from our concert promotion businesses tend to be lower margin than our traditional revenue streams from recorded music and music publishing.

RESULTS OF OPERATIONS

Three Months Ended March 31, 2010 Compared with Three Months Ended March 31, 2009

Consolidated Historical Results

Revenues

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


	For the Three Months Ended March 31,						*2010 vs 2009*
	2010			2009			$ Change			% Change
Revenue by Type
Physical and other	$	293		$	311		$	(18	)	-6	%
Digital		189			166			23		14	%
Licensing		52			62			(10	)	-16	%

Total Recorded Music		534			539			(5	)	-1	%
Mechanical		40			41			(1	)	-2	%
Performance		55			59			(4	)	-7	%
Synchronization		24			25			(1	)	-4	%
Digital		13			7			6		86	%
Other		2			4			(2	)	-50	%

Total Music Publishing		134			136			(2	)	-1	%
Intersegment elimination		(6	)		(4	)		(2	)	50	%

Total Revenue	$	662		$	671		$	(9	)	-1	%

Revenue by Geographical Location
U.S. Recorded Music	$	250		$	268		$	(18	)	-7	%
U.S. Publishing		53			58			(5	)	-9	%

Total U.S.		303			326			(23	)	-7	%
International Recorded Music		284			271			13		5	%
International Publishing		81			78			3		4	%

Total International		365			349			16		5	%
Intersegment eliminations		(6	)		(4	)		(2	)	50	%

Total Revenue	$	662		$	671		$	(9	)	-1	%

Total Revenue

Total revenues decreased by $9 million, or 1%, to $662 million for the three months ended March 31, 2010 from $671 million for the three months ended March 31, 2009. Excluding the favorable impact of foreign currency exchange rates, total revenues decreased $42 million, or 6%, period-to-period. Prior to intersegment eliminations, Recorded Music and Music Publishing revenues represented 80% and 20% of total revenues for the three months ended March 31, 2010 and 2009, respectively. Prior to intersegment eliminations, U.S. and international revenues represented 45% and 55% of total revenues for the three months ended March 31, 2010, respectively, compared to 48% and 52% for the three months ended March 31, 2009, respectively.

Total digital revenues after intersegment eliminations increased by $26 million, or 15%, to $199 million for the three months ended March 31, 2010 from $173 million for the three months ended March 31, 2009. Total digital revenues represented 30% and 26% of consolidated revenues for the three months ended March 31, 2010 and 2009, respectively. Prior to intersegment eliminations, total digital revenues for the three months ended March 31, 2010 were comprised of U.S. revenues of $127 million, or 63% of total digital revenues, and international revenues of $75 million, or 37% of total digital revenues. 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 favorable impact of foreign currency exchange rates, total digital revenues increased by $21 million, or 12%, for the three months ended March 31, 2010.

Recorded Music revenues decreased by $5 million, or 1%, to $534 million for the three months ended March 31, 2010 from $539 million for the three months ended March 31, 2009. Excluding the favorable impact of foreign currency exchange rates, total Recorded Music revenues decreased $31 million, or 5%, for the three months ended March 31, 2010. This performance reflected continued general economic pressures, the transition from physical sales to digital sales in the recorded music industry and a light release schedule. Economic pressures have resulted in decreased discretionary spending by consumers and a reduction by retailers in the amount of floor and shelf space dedicated to music. Retailers still account for the majority of sales of our physical product; however, as the number of physical music retailers has declined significantly, there is increased competition for available

display space. This has led to a decrease in the amount and variety of product on display. In addition, increases in digital revenue have not yet fully offset the decline in physical revenue. We believe this is attributable to the ability of consumers in the digital space to purchase individual tracks from an album rather than purchase the entire album, the economic pressures described above and the ongoing issue of piracy.

Digital revenues increased by $26 million, or 15%, for the three months ended March 31, 2010, largely due to strong global download growth. Licensing revenues decreased $10 million, or 16%, to $52 million for the three months ended March 31, 2010, primarily as a result of the previously noted general economic pressures which continue to impact advertising spending.

Music Publishing revenues decreased by $2 million, or 1%, to $134 million for the three months ended March 31, 2010 from $136 million for the three months ended March 31, 2009. Excluding the favorable impact of foreign currency exchange rates, total Music Publishing revenues decreased by $9 million, or 6%, for the three months ended March 31, 2010. The increase in digital revenue, which was primarily driven by growth in revenues from streaming and Internet radio, was more than offset by a decrease in performance, mechanical, synchronization and other revenues. The decrease in performance revenues was driven by smaller contributions from the radio industry due to reductions in advertising spending. Mechanical revenue performance was impacted by the overall weakness in the physical recorded music business. Synchronization revenue decreases were driven by the impact of the previously mentioned economic pressures on the film, TV production and advertising markets, which have resulted in decreased spending on song licensing, primarily in the U.S.

Revenue by Geographical Location

U.S. revenues decreased by $23 million, or 7%, to $303 million for the three months ended March 31, 2010 from $326 million for the three months ended March 31, 2009. The overall decline in the U.S. Recorded Music business reflected the continued general economic pressures noted above, the transition from physical sales to digital sales in the recorded music industry and a light release schedule.

International revenues increased by $16 million, or 5%, to $365 million for the three months ended March 31, 2010 from $349 million for the three months ended March 31, 2009. Excluding the favorable impact of foreign currency exchange rates, total international revenues decreased $17 million, or 4%, for the three months ended March 31, 2010. An increase in digital revenue, primarily as a result of digital downloads, was more than offset by contracting demand for physical product. The contracting demand for physical product reflected the economic pressures noted above, the transition from physical sales to digital sales in the recorded music industry and a light release schedule. Revenue growth in the U.K. was more than offset by weakness in certain Asia Pacific territories and parts of Europe.

Cost of revenues

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


	For the Three Months Ended March 31,				*2010 vs 2009*
	2010		2009		$ Change			% Change
Artist and repertoire costs	$	205	$	214	$	(9	)	-4	%
Product costs		100		101		(1	)	-1	%
Licensing costs		18		26		(8	)	-31	%

Total cost of revenues	$	323	$	341	$	(18	)	-5	%

Our cost of revenues decreased by $18 million, or 5%, to $323 million for the three months ended March 31, 2010 from $341 million for the three months ended March 31, 2009. Expressed as a percentage of revenues, cost of revenues were 49% and 51% for the three months ended March 31, 2010 and 2009, respectively.

Artist and repertoire costs decreased as a percentage of revenues from 32% for the three months ended March 31, 2009 to 31% in the three months ended March 31, 2010 as a result of the timing of our artist and repertoire spending partially offset by higher royalty expense related to certain artist profit-sharing agreements and timing of artist and repertoire spend. In addition, we received a cost-recovery benefit related to an early termination of an artist contract in the current period.

Product costs remained relatively flat as a percentage of revenues at 15% for the three months ended March 31, 2010 and 2009.

Licensing costs decreased $8 million, or 31%, to $18 million for the three months ended March 31, 2010 from $26 million for the three months ended March 31, 2009. The decrease in licensing costs was driven primarily by the decrease in licensing revenue and changes in revenue mix. Licensing costs as a percentage of licensing revenues decreased from 42% for the three months ended March 31, 2009 to 35% for the three months ended March 31, 2010, primarily as a result of changes in revenue mix.

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,				*2010 vs 2009*
	2010		2009		$ Change			% Change
General and administrative expense (1)	$	138	$	143	$	(5	)	-3	%
Selling and marketing expense		107		101		6		6	%
Distribution expense		16		15		1		7	%

Total selling, general and administrative expense	$	261	$	259	$	2		1	%

(1)	Includes depreciation expense of $9 for the three months ended March 31, 2010 and 2009.

Total selling, general and administrative expense increased by $2 million, or 1%, to $261 million for the three months ended March 31, 2010 from $259 million for the three months ended March 31, 2009. Expressed as a percentage of revenues, selling, general and administrative expenses remained flat at 39% for the three months ended March 31, 2010 and 2009.

General and administrative expenses decreased by $5 million, or 3%, to $138 million for the three months ended March 31, 2010 from $143 million for the three months ended March 31, 2009, primarily as a result of continued cost management efforts partially offset by severance charges taken in the current period. Expressed as a percentage of revenues, general and administrative expenses remained flat at 21% for the three months ended March 31, 2010 and 2009.

Selling and marketing expense increased by $6 million, or 6%, to $107 million for the three months ended March 31, 2010 from $101 million for the three months ended March 31, 2009, primarily as a result of marketing initiatives associated with upcoming new releases. Expressed as a percentage of revenues, selling and marketing expense increased slightly from 15% for the three months ended March 31, 2009 to 16% for the three months ended March 31, 2010.

Distribution expense increased by $1 million, or 7% to $16 million for the three months ended March 31, 2010 from $15 million for the three months ended March 31, 2009. Expressed as a percentage of revenues, distribution expense remained flat at 2% for the three months ended March 31, 2010 and 2009.

Reconciliation of Consolidated Historical OIBDA to Operating Income and Net Loss Attributable to Warner Music Group Corp.

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 loss attributable to Warner Music Group Corp. for purposes of the discussion that follows (in millions):


	For the Three Months Ended March 31,						*2010 vs 2009*
	2010			2009			$ Change			% Change
OIBDA	$	87		$	80		$	7		9	%
Depreciation expense		(9	)		(9	)		—		—
Amortization expense		(54	)		(56	)		2		4	%

Operating income		24			15			9		60	%
Interest expense, net		(46	)		(41	)		(5	)	-12	%
Impairment of cost-method investment		—			(29	)		29		—
Other expense, net		(4	)		(3	)		(1	)	-33	%

Loss before income taxes		(26	)		(58	)		32		55	%
Income tax expense		(2	)		(10	)		8		80	%
Net loss		(28	)		(68	)		40		59	%
Less: loss attributable to noncontrolling interest		3			—			3		—

Net loss attributable to Warner Music Group Corp.	$	(25	)	$	(68	)	$	43		63	%

OIBDA

Our OIBDA increased by $7 million to $87 million for the three months ended March 31, 2010 as compared to $80 million for the three months ended March 31, 2009. Expressed as a percentage of revenues, total OIBDA margin increased from 12%, for the three months ended March 31, 2009, to 13%, for the three months ended March 31, 2010. Our OIBDA increase was primarily driven by the realization of cost savings from management initiatives taken in prior periods and our ability to leverage our highly variable cost structure.

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

Depreciation expense

Our depreciation expense remained flat at $9 million for three months ended March 31, 2010 and 2009.

Amortization expense

Amortization expense decreased by $2 million, or 4%, to $54 million for the three months ended March 31, 2010. The decrease was primarily related to certain intangibles assets being fully amortized during the current period.

Operating income

Our operating income increased $9 million, or 60%, to $24 million for the three months ended March 31, 2010 as compared to $15 million for the prior period. The increase in operating income was primarily due to the growth in OIBDA noted above.

Interest expense, net

Our interest expense, net, increased $5 million, or 12%, to $46 million for the three months ended March 31, 2010 as compared to $41 million for the three months ended March 31, 2009. This was primarily a result of the change in interest terms related to our refinancing in May 2009.

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

Impairment of cost-method investments

During the three months 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 investments. As a result, we recorded one-time 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, 2010 and 2009 include net hedging gains on foreign exchange contracts, which represent currency exchange movements associated with inter-company receivables and payables that are short term in nature.

Income tax expense

We provided income tax expense of $2 million for the three months ended March 31, 2010 as compared to $10 million for the three months ended March 31, 2009. The decrease in income tax expense primarily relates to lower pre-tax income in our foreign jurisdictions and the inclusion of a $4 million tax expense attributable to additional goodwill tax amortization in the three months ended March 31, 2009 that resulted from the settlement of the IRS tax audit for the periods ended September 30, 2004, 2005 and 2006.

We are currently under examination by the Internal Revenue Service for the fiscal years ended September 30, 2007 through September 30, 2008. We expect that $5 million of the total accrual for uncertain tax positions, which was $7 million as of March 31, 2010, will be paid during the next twelve months.

Net loss

Our net loss decreased by $40 million, to a net loss of $28 million for the three months ended March 31, 2010 as compared to net loss of $68 million for the three months ended March 31, 2009. The decrease was primarily a result of the impairment of cost-method investments recognized in the prior year quarter, the current year quarter increase in OIBDA described above and lower income tax expense, partially offset by increased interest expense.

Noncontrolling interest

Net loss attributable to noncontrolling interests was $3 million for the three months ended March 31, 2010.

Business Segment Results

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


	For the Three Months Ended March 31,						*2010 vs 2009*
	2010			2009			$ Change			% Change
Recorded Music
Revenue	$	534		$	539		$	(5	)	-1	%
OIBDA		49			45			4		9	%
Operating income	$	6		$	2			4		—
Music Publishing
Revenue	$	134		$	136		$	(2	)	-1	%
OIBDA		61			55			6		11	%
Operating income	$	43		$	37		$	6		16	%
Corporate expenses and eliminations
Revenue	$	(6	)	$	(4	)	$	(2	)	-50	%
OIBDA		(23	)		(20	)		(3	)	-15	%
Operating loss	$	(25	)	$	(24	)	$	(1	)	-4	%
Total
Revenue	$	662		$	671		$	(9	)	-1	%
OIBDA		87			80			7		9	%
Operating income	$	24		$	15		$	9		60	%

Recorded Music

Revenues

Recorded Music revenues decreased by $5 million, or 1%, to $534 million for the three months ended March 31, 2010 from $539 million for the three months ended March 31, 2009. Excluding the favorable impact of foreign currency exchange rates, total Recorded Music revenues decreased $31 million, or 5%, for the three months ended March 31, 2010. Prior to intersegment eliminations, Recorded Music revenues represented 80% of total revenues for the three months ended March 31, 2010 and 2009. U.S. Recorded Music revenues were $250 million and $268 million, or 47% and 50% of Recorded Music revenues for the three months ended March 31, 2010 and 2009, respectively. International Recorded Music revenues were $284 million and $271 million, or 53% and 50% of consolidated Recorded Music revenues for the three months ended March 31, 2010 and 2009, respectively.

The decrease in Recorded Music revenues reflected the continued general economic pressures described above, the transition from physical sales to digital sales in the recorded music industry and a light release schedule. Economic pressures have resulted in decreased discretionary spending by consumers and a reduction by retailers in the amount of floor and shelf space dedicated to music. Retailers still account for the majority of sales of our physical product; however, as the number of physical music retailers has declined significantly, there is increased competition for available display space. This has led to a decrease in the amount and variety of product on display. In addition, increases in digital revenue have not yet fully offset the decline in physical revenue. We believe this is attributable to the ability of consumers in the digital space to purchase individual tracks from an album rather than purchase the entire album, the economic pressures described above and the ongoing issue of piracy.

OIBDA and Operating Income

Recorded Music OIBDA was $49 million for the three months ended March 31, 2010 as compared to $45 million for the three months ended March 31, 2009. Recorded Music operating income included the following (in millions):


	For the Three Months Ended March 31,						*2010 vs 2009*
	2010			2009			$ Change		% Change
OIBDA	$	49		$	45		$	4	9	%
Depreciation and amortization		(43	)		(43	)		—	—

Operating income	$	6		$	2		$	4	—

Recorded Music OIBDA increased by $4 million, or 9%, to $49 million for the three months ended March 31, 2010 compared to $45 million for the three months ended March 31, 2009. Expressed as a percentage of Recorded Music revenues, Recorded Music OIBDA margin increased to 9% for the three months ended March 31, 2010 from 8% for the three months ended March 31, 2009. Our OIBDA increase was primarily driven by the realization of cost savings from management initiatives taken in prior periods and our ability to leverage our highly variable cost structure.

Recorded Music operating income increased by $4 million, due to the increase in OIBDA described noted above.

Cost of revenues

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


	For the Three Months Ended March 31,				*2010 vs 2009*
	2010		2009		$ Change			% Change
Artist and repertoire costs	$	154	$	153	$	1		1	%
Product costs		100		101		(1	)	-1	%
Licensing costs		18		25		(7	)	-28	%

Total cost of revenues	$	272	$	279	$	(7	)	-3	%

Recorded Music cost of revenues decreased $7 million, or 3%, for the three months ended March 31, 2010. The decrease was comprised of decreases in licensing costs of $7 million and product costs of $1 million partially offset by an increase of $1 million in artist and repertoire costs. The decrease in licensing costs was driven primarily by the decrease in licensing revenue and changes in revenue mix. Artist and repertoire costs as a percentage of Recorded Music revenues increased to 29% during the three months ended March 31, 2010 from 28% in the three months ended March 31, 2009 as a result of higher royalty expense related to certain artist profit-sharing agreements, offset by the benefit received related to an early termination of an artist contract in the current period.

Selling, general and administrative expense

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


	For the Three Months Ended March 31,				*2010 vs 2009*
	2010		2009		$ Change			% Change
General and administrative expense (1)	$	98	$	107	$	(9	)	-8	%
Selling and marketing expense		105		99		6		6	%
Distribution expense		16		14		2		14	%

Total selling, general and administrative expense	$	219	$	220	$	(1	)	—

(1)	Includes depreciation expense of $6 million and $5 million for the three months ended March 31, 2010 and 2009, respectively.

Recorded Music selling, general and administrative expense decreased $1 million, for the three months ended March 31, 2010. Expressed as a percentage of Recorded Music revenues, selling, general and administrative expense remained flat at 41% for the three months ended March 31, 2010 and 2009. The decrease in general and administrative expense was primarily the result of the realization of cost savings from management initiatives taken in prior periods partially offset by severance charges taken in the current period. The increase in selling and marketing expense was primarily the result of marketing initiatives associated with upcoming new releases.

Music Publishing

Revenues

Music Publishing revenues decreased by $2 million, or 1%, to $134 million for the three months ended March 31, 2010 compared to $136 million for the three months ended March 31, 2009. Excluding the favorable impact of foreign currency exchange rates, total Music Publishing revenues decreased $9 million, or 6% for the three months ended March 31, 2010. Music Publishing revenues represented 20% of consolidated revenue, for the three months ended March 31, 2010 and 2009. An increase in digital revenue, which was driven primarily by growth in revenues from streaming and Internet radio, was more than offset by a decrease in performance, mechanical, synchronization and other revenues. A decrease in performance revenues was driven by smaller contributions from the radio industry due to reductions in advertising spending. Mechanical revenue performance was impacted by the overall weakness in the physical recorded music business. Synchronization revenue decreases were driven by the impact of the previously mentioned economic pressures on the film, TV production and advertising markets, which have resulted in decreased spending on song licensing, primarily in the U.S.

OIBDA and Operating Income

Music Publishing operating income increased to $43 million for the three months ended March 31, 2010 as compared to $37 million for the three months ended March 31, 2009. Music Publishing operating income includes the following (in millions):


	For the Three Months Ended March 31,						*2010 vs 2009*
	2010			2009			$ Change		% Change
OIBDA	$	61		$	55		$	6	11	%
Depreciation and amortization		(18	)		(18	)		—	—

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