Edgar Filing: Warner Music Group Corp.

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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 June 30, 2012

¨	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 x 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.

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange

Act.) Yes ¨ No x

There is no public market for the Registrant’s common stock. As of August 9, 2012 the number of shares of the Registrant’s common stock, par value $0.001 per share, outstanding was 1,000. All of the Registrant’s common stock is owned by affiliates of Access Industries, Inc.

WARNER MUSIC GROUP CORP.

INDEX


		Page
Part I.	Financial Information
Item 1.	Financial Statements (Unaudited)		3
	Consolidated Balance Sheets as of June 30, 2012 and September 30, 2011		3
	Consolidated Statements of Operations for the Three and Nine Months Ended June 30, 2012 (Successor) and June 30, 2011 (Predecessor)		4
	Consolidated Statements of Cash Flows for the Nine Months Ended June 30, 2012 (Successor) and June 30, 2011 (Predecessor)		5
	Consolidated Statement of Equity for the Nine Months Ended June 30, 2012		6
	Notes to Consolidated Interim Financial Statements		7
	Supplementary Information—Consolidating Financial Statements		19
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		32
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		69
Item 4.	Controls and Procedures		69
Part II.	Other Information		70
Item 1.	Legal Proceedings		70
Item 1A.	Risk Factors		72
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		82
Item 3.	Defaults Upon Senior Securities		82
Item 4.	Mine Safety Disclosures		82
Item 5.	Other Information		82
Item 6.	Exhibits		83
Signatures			84

ITEM 1.

FINANCIAL STATEMENTS

Warner Music Group Corp.

Consolidated Balance Sheets (Unaudited)


	June 30, 2012			September 30, 2011
	(in millions)
Assets
Current assets:
Cash and equivalents	$	219		$	154
Accounts receivable, less allowances of $63 and $40 million		327			385
Inventories		27			29
Royalty advances expected to be recouped within one year		121			135
Deferred tax assets		54			54
Other current assets		50			45

Total current assets		798			802
Royalty advances expected to be recouped after one year		148			173
Property, plant and equipment, net		156			182
Goodwill		1,379			1,372
Intangible assets subject to amortization, net		2,512			2,678
Intangible assets not subject to amortization		102			102
Other assets		68			71

Total assets	$	5,163		$	5,380

Liabilities and Equity
Current liabilities:
Accounts payable	$	117		$	165
Accrued royalties		1,016			974
Accrued liabilities		214			217
Accrued interest		32			55
Deferred revenue		95			101
Other current liabilities		1			10

Total current liabilities		1,475			1,522
Long-term debt		2,209			2,217
Deferred tax liabilities		374			411
Other noncurrent liabilities		144			148

Total liabilities		4,202			4,298

Commitments and Contingencies (See Note 8)
Equity:
Common stock ($0.001 par value; 10,000 shares authorized; 1,000 shares issued and outstanding)		—			—
Additional paid-in capital		1,129			1,129
Accumulated deficit		(125	)		(31	)
Accumulated other comprehensive loss, net		(60	)		(33	)

Total Warner Music Group Corp. equity		944			1,065
Noncontrolling interest		17			17

Total equity		961			1,082

Total liabilities and equity	$	5,163		$	5,380

See accompanying notes.

Warner Music Group Corp.

Consolidated Statements of Operations (Unaudited)


	Successor			Predecessor			Successor			Predecessor
	Three Months Ended June 30,						Nine Months Ended June 30,
	2012			2011			2012			2011
	(in millions, except per share data)
Revenues	$	654		$	688		$	2,061		$	2,150
Costs and expenses:
Cost of revenues		(356	)		(380	)		(1,103	)		(1,170	)
Selling, general and administrative expenses (a)		(244	)		(237	)		(745	)		(755	)
Transaction costs		—			(5	)		—			(7	)
Amortization expense		(47	)		(56	)		(145	)		(165	)

Total costs and expenses		(647	)		(678	)		(1,993	)		(2,097	)

Operating income		7			10			68			53
Interest expense, net		(56	)		(47	)		(169	)		(141	)
Other income, net		6			6			6			5

Loss before income taxes		(43	)		(31	)		(95	)		(83	)
Income tax benefit (expense)		11			(15	)		3			(20	)

Net loss		(32	)		(46	)		(92	)		(103	)
Less: (income) loss attributable to noncontrolling interest		—			—			(2	)		1

Net loss attributable to Warner Music Group Corp.	$	(32	)	$	(46	)	$	(94	)	$	(102	)

Net loss per common share attributable to Warner Music Group Corp.:
Basic				$	(0.30	)				$	(0.68	)

Diluted				$	(0.30	)				$	(0.68	)

Weighted average common shares:
Basic					151.8						150.8
Diluted					151.8						150.8
(a) Includes depreciation expense of:	$	(12	)	$	(11	)	$	(37	)	$	(31	)

See accompanying notes.

Warner Music Group Corp.

Consolidated Statements of Cash Flows (Unaudited)


	Successor			Predecessor
	Nine Months Ended June 30, 2012			Nine Months Ended June 30, 2011
	(in millions)
Cash flows from operating activities
Net loss	$	(92	)	$	(103	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortization expense		182			196
Deferred income taxes		(11	)		(11	)
Gain on sale of building		(1	)		—
Non-cash interest (income) expense		(2	)		9
Non-cash share-based compensation expense		—			10
Other non-cash items		(1	)		(2	)
Changes in operating assets and liabilities:
Accounts receivable		49			93
Inventories		1			10
Royalty advances		33			(15	)
Accounts payable and accrued liabilities		(79	)		(146	)
Royalties payable		58			(23	)
Accrued interest		(23	)		(44	)
Other balance sheet changes		(7	)		8

Net cash provided by (used in) operating activities		107			(18	)

Cash flows from investing activities
Investments and acquisitions of businesses		(5	)		(59	)
Acquisition of publishing rights		(21	)		(58	)
Proceeds from the sale of music catalog		2			—
Proceeds from sale of building		12			—
Capital expenditures		(24	)		(34	)

Net cash used in investing activities		(36	)		(151	)

Cash flows from financing activities
Proceeds from exercise of stock options		—			6
Distributions to noncontrolling interest holders		(2	)		(1	)

Net cash (used in) provided by financing activities		(2	)		5

Effect of exchange rate changes on cash and equivalents		(4	)		15

Net increase (decrease) in cash and equivalents		65			(149	)
Cash and equivalents at beginning of period		154			439

Cash and equivalents at end of period	$	219		$	290

See accompanying notes.

Warner Music Group Corp.

Consolidated Statement of Equity (Unaudited)


	Common Stock				Additional Paid-in		Accumulated			Accumulated Other Comprehensive			Total Warner Music Group Corp.			Noncontrolling			Total
	Shares		Value		Capital		Deficit			Loss			Equity			Interests			Equity
	(in millions, except per share amounts)
Balance at September 30, 2011		1,000	$	0.001	$	1,129	$	(31	)	$	(33	)	$	1,065		$	17		$	1,082
Comprehensive loss:
Net loss						—		(94	)		—			(94	)		2			(92	)
Foreign currency translation adjustment						—		—			(28	)		(28	)		—			(28	)
Deferred loss on derivative financial instruments						—		—			1			1			—			1

Total comprehensive loss														(121	)		2			(119	)
Noncontrolling interests														—			(2	)		(2	)

Balance at June 30, 2012		1,000	$	0.001	$	1,129	$	(125	)	$	(60	)	$	944		$	17		$	961

See accompanying notes.

Warner Music Group Corp.

Notes to Consolidated Interim Financial Statements (Unaudited)

1. Description of Business

Warner Music Group Corp. (the “Company”) was formed 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.

Pursuant to the Agreement and Plan of Merger, dated as of May 6, 2011 (the “Merger Agreement”), by and among the Company, AI Entertainment Holdings LLC (formerly Airplanes Music LLC), a Delaware limited liability company (“Parent”) and an affiliate of Access Industries, Inc. (“Access”), and Airplanes Merger Sub, Inc., a Delaware corporation and a wholly owned subsidiary of Parent (“Merger Sub”), on July 20, 2011 (the “Closing Date”), Merger Sub merged with and into the Company with the Company surviving as a wholly owned subsidiary of Parent (the “Merger”).

On the Closing Date, in connection with the Merger, each outstanding share of common stock of the Company (other than any shares owned by the Company or its wholly owned subsidiaries, or by Parent and its affiliates, or by any stockholders who were entitled to and who properly exercised appraisal rights under Delaware law, and shares of unvested restricted stock granted under the Company’s equity plan) was cancelled and converted automatically into the right to receive $8.25 in cash, without interest and less applicable withholding taxes (collectively, the “Merger Consideration”).

Parent funded the Merger Consideration through cash on hand at the Company at closing, equity financing obtained from Parent and debt financing obtained from third-party lenders.

On the Closing Date, the Company notified the New York Stock Exchange, Inc. (the “NYSE”) of its intent to remove the Company’s common stock from listing on the NYSE and requested that the NYSE file with the SEC an application on Form 25 to report the delisting of the Company’s common stock from the NYSE. On July 21, 2011, in accordance with the Company’s request, the NYSE filed the Form 25 with the SEC in order to provide notification of such delisting and to effect the deregistration of the Company’s common stock under Section 12(b) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). On August 2, 2011 the Company filed a Form 15 with the SEC in order to provide notification of a suspension of its duty to file reports under Section 15(d) of the Exchange Act. The Company has continued to file reports with the SEC pursuant to the Exchange Act in accordance with certain covenants contained in the instruments governing the Company’s outstanding indebtedness. Additionally, the Company filed two exchange offer registration statements with the SEC in connection with the registration of its guarantee of the 11.50% Senior Notes due 2018 issued by Acquisition Corp. and the 13.75% Senior Notes due 2019 issued by Holdings, both of which became effective on March 16, 2012. As a result, the Company is currently required to file reports pursuant to Section 15(d) of the Exchange Act. The Company has included condensed consolidating financial information as a condition to omitting separate financial statements for Acquisition Corp. and Holdings under Section 15(d) of the Exchange Act as permitted by Rule 3-10 of Regulation S-X.

Although the Company continued as the same legal entity after the Merger, the accompanying consolidated financial statements are presented for the “Predecessor” and “Successor” relating to the periods preceding and succeeding the Merger, respectively. As a result of the Company applying the acquisition method of accounting, the Successor period financial statements reflect a new basis of accounting, while the Predecessor financial statements have been prepared using the Company’s historical cost basis of accounting. As a result, the Predecessor and Successor financial statements are not comparable. There have been no changes in the business operations of the Company due to the Merger.

See Note 4 for further discussion on the Merger and purchase price. The accounting for this transaction has been “pushed down” to the Company’s financial statements.

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 has built 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 associated with the Company’s artists and other artists 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, 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 various subsidiaries, affiliates and non-affiliated licensees, which the Company sometimes refers to collectively as Warner Music International, or WMI. 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 markets, 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 for the Company’s artists and other artists.

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, 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 recorded 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 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. The Company is also selling recorded music products through other digital distribution channels such as streaming or subscription services. 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 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 composition, music publishing is an intellectual property business focused on the exploitation of the composition itself. In return for promoting, placing, marketing and administering the creative output of a songwriter, or engaging in those activities for other rights holders, the Company’s Music Publishing business garners a share of the revenues generated from use of the composition.

The Company’s Music Publishing operations include Warner/Chappell, its global Music Publishing company, headquartered in Los Angeles 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. In January 2011, the Company acquired Southside Independent Music Publishing, a leading independent music publishing company, further adding to its catalog. Warner/Chappell also administers the music and soundtracks of several third-party television and film producers and studios, including Lucasfilm, Ltd., Hallmark Entertainment, Disney Music Publishing and Turner Music Publishing. In July 2012, the Company announced it had acquired Miramax Films music library, which contains the film scores and certain masters from numerous critically acclaimed films. In 2007, the Company entered the production music library business with the acquisition of Non-Stop Music and further expanded its production music operations with the acquisitions of Groove Addicts Production Music Library and Carlin Recorded Music Library in 2010 and 615 Music in 2011, collectively branded as Warner/Chappell Production Music.

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 nine month periods ended June 30, 2012 are not necessarily indicative of the results that may be expected for the twelve months ended September 30, 2012.

The consolidated balance sheet at September 30, 2011 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 twelve months ended September 30, 2011(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.

Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 810, Consolidation (“ASC 810”) requires the Company first evaluate its investments to determine if any investments qualify as a variable interest entity (“VIE”). A VIE is consolidated if the Company is deemed to be the primary beneficiary of the VIE, which is the party involved with the VIE that has 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. If an entity is not deemed to be a VIE, the Company consolidates the entity if the Company has a controlling voting interest.

The Company maintains a 52-53 week fiscal year ending on the Friday nearest to each reporting date. As such, all references to June 30, 2012 and June 30, 2011 relate to the three and nine-month periods ended June 29, 2012 and June 24, 2011, respectively. For convenience purposes, the Company continues to date its financial statements as of June 30.

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

New Accounting Pronouncements

During the second quarter of fiscal 2012, the Company adopted ASU 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS. ASU 2011-04 provides a consistent definition of fair value and ensures that the fair value measurement and disclosure requirements are similar between U.S. GAAP and International Financial Reporting Standards. ASU 2011-04 changes certain fair value measurement principles and enhances the disclosure requirements particularly for level 3 fair value measurements. The adoption of this standard update did not have a significant impact on the Company’s consolidated financial statements.

In June 2011, the FASB issued ASU 2011-05, Presentation of Comprehensive Income. ASU 2011-05 requires entities to present items of net income and other comprehensive income either in one continuous statement, referred to as the statement of comprehensive income, or in two separate, but consecutive, statements of net income and other comprehensive income. In addition, in December 2011, the FASB issued ASU 2011-12, Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05. ASU 2011-12 defers the requirement to present components of reclassifications of comprehensive income on the statement of comprehensive income, with all other requirements of ASU 2011-05 unaffected. Both ASU 2011-05 and 2011-12 will be effective as of October 1, 2012 for the Company and are not expected to have a significant impact on the Company’s financial statements, other than presentation.

In September 2011, the FASB issued ASU 2011-08, Testing Goodwill for Impairment. ASU 2011-08 provides entities with an option to perform a qualitative assessment to determine whether further impairment testing is necessary. ASU 2011-08 is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011, with early adoption permitted. This standard is not expected to have a significant impact on the Company’s financial statements.

In July 2012, the FASB issued ASU 2012-02, Intangibles-Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment, which provides the option to perform a qualitative, rather than quantitative, assessment to determine whether it is more likely than not that the indefinite-lived intangible asset is impaired. ASU 2012-02 will be effective for the Company on October 1, 2012 and is not expected to have a material impact on the Company’s financial statements.

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 accumulated other comprehensive loss, net of related taxes:


	Foreign Currency Translation Loss			Minimum Pension Liability Adjustment		Derivative Financial Instruments Gain		Accumulated Other Comprehensive Loss
	(in millions)
Balance at September 30, 2011	$	(35	)	$	1	$	1	$	(33	)

Activity through June 30, 2012		(28	)		—		1		(27	)

Balance at June 30, 2012	$	(63	)	$	1	$	2	$	(60	)

4. Merger

As further described in Note 1, as a result of the Merger, effective as of July 20, 2011, the Company was acquired by Parent. Transaction costs of approximately $53 million were expensed as follows: $10 million and $43 million from July 20, 2011 to September 30, 2011 (Successor) and from October 1, 2010 to July 19, 2011 (Predecessor), respectively.

The Merger was accounted for in accordance with FASB ASC Topic 805, Business Combinations, using the acquisition method of accounting. The assets and liabilities of the Company, including identifiable intangible assets, have been measured at their fair value primarily using Level 3 inputs (see Note 12 for additional information on fair value inputs). Determining the fair value of the assets acquired and liabilities assumed requires judgment and involves the use of significant estimates and assumptions, including assumptions with respect to future cash inflows and outflows, discount rates, asset lives and market multiples, among other items. The use of different estimates and judgments could yield materially different results.

The table below presents the consideration transferred and the final allocation of purchase price to the assets and liabilities acquired as a result of the Merger:


	(in millions)
Cash paid to acquire outstanding WMG shares	$	1,228
Cash paid to settle equity awards		50

Total cash consideration		1,278
Less: Cash paid by WMG		(179	)

Net Investment		1,099
WMG shares previously held by Parent		30

Total consideration to be allocated	$	1,129

Fair Value of assets acquired and liabilities assumed:
Cash	$	140
Accounts receivable		331
Inventory		28
Artist advances*		341
Property, plant and equipment		182
Intangible assets		2,879
Other assets*		117
Current liabilities*		(1,544	)
Deferred income tax liabilities		(363	)
Deferred revenue		(115	)
Other noncurrent liabilities*		(173	)
Debt		(2,049	)
Noncontrolling interests		(17	)

Fair value of net assets acquired		(243	)
Goodwill recorded*	$	1,372

Total consideration allocated	$	1,129

During the three months ended December 31, 2011, amounts were adjusted as a result of changes in the final purchase price allocation related to the Merger.

Goodwill is calculated as the excess of the consideration paid over the net assets recognized. The goodwill recorded as part of the Merger primarily reflects the expected value to be generated from the continued transition of the music industry and the expected resulting cost savings, as well as any intangible assets that do not qualify for separate recognition. Goodwill has been allocated to our reportable segments as follows: Recorded Music $908 million and Music Publishing $464 million.

The components of the intangible assets identified in the table above and the related useful lives, segregated by our reportable segments, are as follows:


	Value		Useful Life
	(in millions)
Recorded Music
Trademarks/trade names	$	51		Indefinite
Trademarks/trade names		7		7 years
Catalog		560		5-11 years
Artist contracts		520		8-12 years
Music Publishing
Trademarks/trade names	$	51		Indefinite
Copyrights		1,530		28 years
Songwriter contracts		160		29 years

5. Goodwill and Intangible Assets

Goodwill

The following analysis details the changes in goodwill for each reportable segment during the nine months ended June 30, 2012:


	Recorded Music		Music Publishing		Total
	(in millions)
Balance at September 30, 2011*	$	908	$	464	$	1,372
Acquisitions		5		—		5
Dispositions		—		—		—
Other adjustments		2		—		2

Balance at June 30, 2012	$	915	$	464	$	1,379

*	During the three months ended December 31, 2011 amounts were adjusted as a result of changes in the final purchase price allocation related to the Merger.

The Company performs its annual goodwill impairment test in accordance with ASC 350 during the fourth quarter of each fiscal year. The Company may conduct an earlier review if events or circumstances occur that would suggest the carrying value of the Company’s goodwill may not be recoverable. No indicators of impairment were identified during the current period that required the Company to perform an interim assessment or recoverability test.

Other Intangible Assets

Other intangible assets consist of the following:


	June 30, 2012			September 30, 2011
	(in millions)
Intangible assets subject to amortization:
Recorded music catalog (a)	$	542		$	551
Music publishing copyrights (a)		1,483			1,486
Artist and songwriter contracts (a)		659			672
Trademarks		7			7

		2,691			2,716
Accumulated amortization		(179	)		(38	)

Total net intangible assets subject to amortization		2,512			2,678
Intangible assets not subject to amortization:
Trademarks and brands		102			102

Total net other intangible assets	$	2,614		$	2,780

(a)

During the six months ended March 31, 2012, the Company finalized the allocation of intangible assets on a legal entity basis as of the Closing Date. As a result of the allocation to entities with foreign currencies, the September 30, 2011 balance sheet was adjusted to reflect the foreign currency translation of these assets since the acquisition date. The aggregate adjustments included a decrease to intangible assets of approximately $40 million, a decrease to deferred income taxes of approximately $9 million and a decrease to Other Comprehensive Income of approximately $31 million, net of tax.

6. Debt

Debt Capitalization

Long-term debt consisted of the following:


	June 30, 2012		September 30, 2011
	(in millions)
Revolving Credit Facility (a)	$	—	$	—
9.5% Existing Secured Notes due 2016—Acquisition Corp (b)		1,154		1,162
9.5% Secured WMG Notes due 2016—Acquisition Corp (c)		156		157
11.5% Unsecured WMG Notes due 2018—Acquisition Corp (d)		749		748
13.75% Holdings Notes due 2019—Holdings (e)		150		150

Total long term debt	$	2,209	$	2,217

(a)	Reflects $60 million of commitments under the Revolving Credit Facility, less letters of credit outstanding of approximately $1 million at June 30, 2012. There were no loans outstanding under the Revolving Credit Facility as of June 30, 2012.

(b)	9.5% Existing Secured Notes due 2016; face amount of $1.1 billion plus unamortized premiums of $54 million and $62 million at June 30, 2012 and September 30, 2011, respectively.

(c)	9.5% Secured WMG Notes due 2016; face amount of $150 million plus unamortized premiums of $6 million and $7 million at June 30, 2012 and September 30, 2011, respectively.

(d)	11.5% Unsecured WMG Notes due 2018; face amount of $765 million less unamortized discounts of $16 million and $17 million at June 30, 2012 and September 30, 2011, respectively.

(e)	13.75% Holdings Notes due 2019; face amount of $150 million.

Revolving Credit Facility

In connection with the Merger, Acquisition Corp. (“Borrower”) entered into a credit agreement for a senior secured revolving credit facility with Credit Suisse AG, as administrative agent, and the other financial institutions and lenders from time to time party thereto (the “Revolving Credit Facility”). The Revolving Credit Facility provides for a revolving credit facility in the amount of up to $60 million for general corporate purposes and includes a letter of credit sub-facility. The final maturity of the Revolving Credit Facility is July 19, 2016.

Interest Rates and Fees

Borrowings under the Revolving Credit Facility bear interest at Borrower’s election at a rate equal to (i) the rate for deposits in U.S. dollars in the London interbank market (adjusted for maximum reserves) for the applicable interest period (“LIBOR rate”), plus 4% per annum, or (ii) the base rate, which is the highest of (x) the corporate base rate established by the administrative agent from time to time, (y) the overnight federal funds rate plus 0.5% and (z) the one-month LIBOR rate plus 1.0% per annum, plus, in each case, 3% per annum. The LIBOR rate shall be deemed to be not less than 1.5%. If there is a payment default at any time, then the interest rate applicable to overdue principal will be the rate otherwise applicable to such loan plus 2.00% per annum. Default interest will also be payable on other overdue amounts at a rate of 2.00% per annum above the amount that would apply to an alternative base rate loan.

The Credit Agreement bears a commitment fee on the unutilized portion equal to 0.50%, payable quarterly in arrears, based on the utilization of the Revolving Credit Facility. The Revolving Credit Facility bears customary letter of credit fees. WMG Acquisition Corp. is also required to pay certain upfront fees to lenders and agency fees to the agent under the Credit Agreement, in the amounts and at the times agreed between the relevant parties.

Guarantee; Security

Acquisition Corp. and certain of its domestic subsidiaries entered into a Subsidiary Guaranty, dated as of the Closing Date (the “Subsidiary Guaranty”) pursuant to which all obligations under the Credit Agreement are guaranteed by Acquisition Corp.’s existing subsidiaries that guarantee the Existing Secured Notes and each other direct and indirect wholly owned U.S. subsidiary, other than certain excluded subsidiaries.

All obligations of the Borrower and each guarantor are secured by substantially all assets of the Borrower, Holdings and each subsidiary guarantor to the extent required under the security agreement securing the Existing Secured Notes and the Secured WMG Notes, including a perfected pledge of all the equity interests of the Borrower and of any subsidiary guarantor, mortgages on certain real property and certain intellectual property.

Covenants, Representations and Warranties

The Credit Agreement contains customary representations and warranties and customary affirmative and negative covenants. There are no financial covenants included in the Revolving Credit Facility, other than a springing leverage ratio, which is being tested only when there are loans outstanding under the Revolving Credit Facility in excess of $5 million (excluding letters of credit).

Maturities

As of June 30, 2012, there are no scheduled maturities of long-term debt until 2016 ($1.250 billion). Thereafter, $915 million is scheduled to mature. In addition, the final maturity of the Revolving Credit Facility is July 19, 2016.

Interest Expense

Total interest expense, net was $56 million and $47 million for the three months ended June 30, 2012 (Successor) and June 30, 2011 (Predecessor), respectively, and $169 million and $141 million for the nine months ended June 30, 2012 (Successor) and June 30, 2011 (Predecessor), respectively. The weighted-average interest rate of the Company’s total debt was 10.5% for the three and nine months ended June 30, 2012 (Successor) and 8.9% for the three and nine months ended June 30, 2011 (Predecessor).

7. Share-based Compensation

In connection with the Merger, the vesting of all outstanding unvested Predecessor options and certain unvested restricted stock awards was accelerated immediately prior to closing. As a result of the acceleration there were no outstanding equity awards of the Company as of July 20, 2011 and thereafter.

In total, the Company recognized non-cash compensation expense related to its stock-based compensation plans of $3 million and $10 million for the three and nine months ended June 30, 2011 (Predecessor), respectively. As there were no outstanding equity awards subsequent to July 20, 2011 the Company did not recognize any non-cash compensation expense for the three and nine months ended June 30, 2012.

8. Commitments and Contingencies

The Company is involved in various litigation and regulatory proceedings arising in the normal course of business. Where it is determined, in consultation with counsel based on litigation and settlement risks, that a loss is probable and estimable in a given matter, the Company establishes an accrual. In none of the currently pending proceedings is the amount of accrual material. An estimate of the reasonably possible loss or range of loss in excess of the amounts already accrued cannot be made at this time due to various factors typical in contested proceedings, including (1) uncertain damage theories and demands; (2) a less than complete factual record; (3) uncertainty concerning legal theories and their resolution by courts or regulators; and (4) the unpredictable nature of the opposing party and its demands. As such, the Company cannot predict with certainty the outcome of any litigation or the potential for future litigation. Therefore, it continuously monitors these proceedings as they develop and adjusts any accrual or disclosure as needed. Regardless of the outcome, litigation could have an adverse impact on the Company, including its brand value, because of defense costs, diversion of management resources and other factors and it could have a material effect on its results of operations for a given reporting period.

Pricing of Digital Music Downloads

On December 20, 2005 and February 3, 2006, the Attorney General of the State of New York served us with requests for information in connection with an industry-wide investigation as to the pricing of digital music downloads. On February 28, 2006, the Antitrust Division of the U.S. Department of Justice served us with a Civil Investigative Demand, also seeking information relating to the pricing of digitally downloaded music. Both investigations were ultimately closed, but subsequent to the announcements of the investigations, more than thirty putative class action lawsuits were filed concerning the pricing of digital music downloads. The lawsuits were consolidated 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. On October 9, 2008, the District Court issued an order dismissing the case as to all defendants, including us. But on January 12, 2010, the Second Circuit vacated the judgment of the District Court and remanded the case for further proceedings and on January 10, 2011, the Supreme Court denied the defendants’ petition for Certiorari.

Upon remand to the District Court, all defendants, including the Company, filed a renewed motion to dismiss challenging, among other things, plaintiffs’ state law claims and standing to bring certain claims. The renewed motion was based mainly on arguments made in defendants’ original motion to dismiss, but not addressed by the District Court. On July 18, 2011, the District Court granted defendants’ motion in part, and denied it in part. Notably, all claims on behalf of the CD-purchaser class were dismissed with prejudice. However, a wide variety of state and federal claims remain, for the class of Internet Music purchasers. The parties have filed amended pleadings complying with the court’s order, and the case is currently in discovery. The parties are scheduled to confer at the end of August 2012 on a class certification briefing schedule, for a determination by the District Court as to whether class treatment is appropriate. The case will proceed into discovery, based on a schedule to be determined by the District Court. The Company intends to defend against these lawsuits vigorously, but is unable to predict the outcome of these suits. Regardless of the merits of the claims, this and any related litigation could continue to be costly, and divert the time and resources of management.

Music Download Putative Class Action Suits

Five putative class action lawsuits have been filed against the Company in Federal Court in the Northern District of California. The lawsuits, which were brought by various recording artists, all allege that the Company has improperly calculated the royalties due them for certain digital music sales under the terms of their recording contracts. The named plaintiffs purport to raise these claims on their own behalf and, as a putative class action, on behalf of other similarly situated artists. Plaintiffs base their claims on a previous ruling that held another recorded music company had breached the specific recording contracts at issue in that case through its payment of royalties for music downloads and ringtones. In the wake of that ruling, a number of recording artists have initiated suits seeking similar relief against all of the major record companies. Here too, plaintiffs seek to have the interpretation of the contracts in that prior case applied to their different and separate contracts.

On April 10, 2012, the Company filed a motion to dismiss various claims in one of the lawsuits, with the intention of filing similar motions in the remaining suits, on the various applicable response dates. Meanwhile, certain plaintiffs’ counsel moved to be appointed as interim lead counsel, and other plaintiffs’ counsel moved to consolidate the various actions. On April 23, 2012, the court issued an order setting out a more orderly process for dealing with the various cases. It set May 24, 2012 for a Case Management Conference for all five actions, and set the same day as the hearing date for the Plaintiffs’ various outstanding motions. In addition, the Court removed the Company’s motion to dismiss from the calendar, with new dates to be set on or after May 24, 2012. In a June 1, 2012 order, the court consolidated the cases. Plaintiffs will file a consolidated, master complaint on or before August 21, 2012.

No other dates have been set in the litigation. The Company intends to defend against these lawsuits vigorously, but is unable to predict the outcome of these suits. Regardless of the merits of the claims, this and any related litigation could continue to be costly, and divert the time and resources of management.

Final Settlement of Class Actions Related to the Merger

The Company awaits a decision on the application for approval by the Supreme Court for the State of New York of the previously disclosed settlement of the claims filed against, inter alia, the Company and its directors in 2011 on behalf of a class of the Company’s shareholders in the action entitled Cournoyer v. Warner Music Group Corp. et al., Index No. 651367/2011 (the “Cournoyer Action”). The Cournoyer Action, as well as two related actions, were brought in connection with the Merger.

As previously disclosed, the settlement did not involve any monetary payment to the class of shareholders. Instead, the Company agreed to publicly disclose additional information about the Merger in a filing that it made with the SEC on June 13, 2011 and pay up to $500,000 for plaintiffs counsel fees.

9. 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) which is discussed further in Note 12.

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 consolidated balance sheets. The Company monitors its positions with, and the credit quality of, the financial institutions that are party to any of its financial transactions.

Interest Rate Risk Management

The Company has $2.209 billion of debt outstanding at June 30, 2012. Based on the level of interest rates prevailing at June 30, 2012, the fair value of this fixed-rate debt was approximately $2.377 billion. The fair value of the Company’s debt instruments are determined using quoted market prices from less active markets or by using quoted market prices for instruments with identical terms and maturities; both approaches are considered a Level 2 measurement.

Further, based on the amount of its fixed-rate debt, a 25 basis point increase or decrease in the level of interest rates would increase or decrease the fair value of the fixed-rate debt by approximately $13 million. This potential increase or decrease is based on the simplified assumption that the level of fixed-rate debt remains constant with an immediate increase or decrease in the level of interest rates with no subsequent changes in rates for the remainder of the period.

The Company monitors its positions with, and the credit quality of, the financial institutions that are party to any of its financial transactions.

Foreign Currency Risk Management

Historically, the Company has used, and continues to use, foreign exchange forward contracts and foreign exchange options primarily to hedge the risk that unremitted or future royalties and license fees owed to its domestic companies for the sale, or anticipated sale, of U.S.-copyrighted products abroad may be adversely affected by changes in foreign currency exchange rates. The Company focuses on managing the level of exposure to the risk of foreign currency exchange rate fluctuations on its major currencies, which include the euro, British pound sterling, Japanese yen, Canadian dollar, Swedish krona and Australian dollar. In addition, the Company currently hedges foreign currency risk associated with financing transactions such as third-party and inter-company debt and other balance sheet items.

For royalty related hedges, the Company records foreign exchange contracts at fair value on its balance sheet and the related gains or losses on the effective portion of these contracts are deferred in equity (as a component of comprehensive loss). These deferred gains and losses are recognized in income in the period in which the related royalties and license fees being hedged are received and recognized in income. However, to the extent that any of these contracts are not considered to be perfectly effective in offsetting the change in the value of the royalties and license fees being hedged, any changes in fair value relating to the ineffective portion of these contracts are immediately recognized in income, and have been immaterial, including for the three and nine months ended June 30, 2012 and June 30, 2011. For hedges of financing transactions and other balance sheet items, hedge gains and losses are taken directly to the statement of operations since there is an equal and offsetting statement of operations entry related to the underlying exposure. Gains and losses on foreign exchange contracts generally are included as a component of other income (expense), net, in the Company’s consolidated statement of operations.

As of June 30, 2012, the Company had outstanding hedge contracts for the sale of $254 million and the purchase of $16 million of foreign currencies at fixed rates. As of June 30, 2012, there was no material impact to the Company’s comprehensive loss related to foreign exchange hedging. As of September 30, 2011, the Company had outstanding hedge contracts for the sale of $211 million and the purchase of $37 million of foreign currencies at fixed rates. As of June 30, 2012, the Company had $2 million of deferred losses in comprehensive loss related to foreign exchange hedging. As of September 30, 2011, the Company had $1 million of deferred losses in comprehensive loss related to foreign exchange hedging.

10. 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 reportable segments: Recorded Music and Music Publishing. Information as to each of these reportable segments are 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 reportable 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 twelve months ended September 30, 2011. The Company accounts for intersegment sales at fair value as if the sales were to third parties. While inter-company 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:


Three Months Ended	Recorded Music			Music Publishing			Corporate expenses and eliminations			Total
	(in millions)
June 30, 2012 (Successor)
Revenues	$	518		$	140		$	(4	)	$	654
OIBDA		56			26			(16	)		66
Depreciation expense		(7	)		(1	)		(4	)		(12	)
Amortization expense		(32	)		(15	)		—			(47	)

Operating income (loss)	$	17		$	10		$	(20	)	$	7

June 30, 2011 (Predecessor)
Revenues	$	547		$	146		$	(5	)	$	688
OIBDA		84			22			(29	)		77
Depreciation expense		(7	)		(1	)		(3	)		(11	)
Amortization expense		(37	)		(19	)		—			(56	)

Operating income (loss)	$	40		$	2		$	(32	)	$	10


Nine Months Ended	Recorded Music			Music Publishing			Corporate expenses and eliminations			Total
	(in millions)
June 30, 2012 (Successor)
Revenues	$	1,682		$	391		$	(12	)	$	2,061
OIBDA		206			98			(54	)		250
Depreciation expense		(22	)		(4	)		(11	)		(37	)
Amortization expense		(99	)		(46	)		—			(145	)

Operating income (loss)	$	85		$	48		$	(65	)	$	68

June 30, 2011 (Predecessor)
Revenues	$	1,761		$	403		$	(14	)	$	2,150
OIBDA		228			90			(69	)		249
Depreciation expense		(20	)		(3	)		(8	)		(31	)
Amortization expense		(111	)		(54	)		—			(165	)

Operating income (loss)	$	97		$	33		$	(77	)	$	53

11. Additional Financial Information

Cash Interest and Taxes

The Company made interest payments of approximately $193 million and $176 million during the nine months ended June 30, 2012 (Successor) and June 30, 2011 (Predecessor), respectively. The Company paid approximately $32 million and $17 million of income and withholding taxes, net of refunds, during the nine months ended June 30, 2012 (Successor) and June 30, 2011 (Predecessor), respectively. The $32 million of cash tax payments during the nine months ended June 30, 2012 (Successor) includes a $15 million payment relating to the settlement of an income tax audit in Germany. This payment was fully reimbursed to the Company by Time Warner Inc. under the terms of the 2004 acquisition of substantially all of the interests of the recorded music and music publishing businesses of Time Warner Inc.

12. 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 June 30, 2012 and September 30, 2011. Derivatives not designated as hedging instruments represent the balances in other current assets and other current liabilities below and the gains and losses on these financial instruments are included as a component of other income, net in the statement of operations.


	Fair Value Measurements as of June 30, 2012
	(Level 1)		(Level 2)			(Level 3)			Total
	(in millions)
Other Current Assets:
Foreign Currency Forward Exchange Contracts (a)	$	—	$	5		$	—		$	5
Other Current Liabilities:
Foreign Currency Forward Exchange Contracts (a)	$	—	$	(1	)	$	—		$	(1	)
Other Non-Current Liabilities:
Contractual Obligations (b)	$	—	$	—		$	(12	)	$	(12	)

	Fair Value Measurements as of September 30, 2011
	(Level 1)		(Level 2)			(Level 3)			Total
	(in millions)
Other Current Assets:
Foreign Currency Forward Exchange Contracts (a)	$	—	$	9		$	—		$	9
Other Current Liabilities:
Foreign Currency Forward Exchange Contracts (a)	$	—	$	(3	)	$	—		$	(3	)
Other Non-Current Liabilities:
Contractual Obligations (b)	$	—	$	—		$	(13	)	$	(13	)

(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)

This represents purchase obligations and contingent consideration related to our various acquisitions. This is based on a discounted cash flow (“DCF”) approach and it is adjusted to fair value on a recurring basis and any adjustments are included as a component of operating income in the statement of operations. This amount was mainly calculated using unobservable inputs such as the future earnings performance of our various acquisitions and the expected timing of the payment.

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 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.

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 13.75% Senior Notes due 2019 (the “Holdings Notes”). In addition, Acquisition Corp. has issued and outstanding two separate series of 9.5% Senior Secured Notes due 2016 (the “Secured WMG Notes” and the “Existing Secured Notes” and together the “Secured WMG Notes”) and the 11.5% Senior Unsecured Notes due 2018 (the “Unsecured WMG Notes”) (together, the “Acquisition Corp. Notes”).

The Holdings Notes are guaranteed by the Company. These guarantees are full, unconditional, joint and several. The following condensed consolidating financial statements are presented for the information of the holders of the Holdings Notes and present the results of operations, financial position and cash flows of (i) the Company, which is the guarantor of the Holdings Notes, (ii) Holdings, which is the issuer of the Holdings 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 or combined subsidiaries are presented under the equity method of accounting.

The Acquisition Corp. Notes are also guaranteed by the Company and, in addition, are guaranteed by all of Acquisition Corp.’s domestic wholly owned subsidiaries. The Secured WMG Notes are guaranteed on a senior secured basis and the Unsecured WMG Notes are guaranteed on an unsecured senior basis. These guarantees are full, unconditional, joint and several. The following condensed consolidating financial statements are also presented for the information of the holders of the Acquisition Corp. Notes and present the results of operations, financial position and cash flows of (i) Acquisition Corp., which is the issuer of the Acquisition Corp. Notes, (ii) the guarantor subsidiaries of Acquisition Corp., (iii) the non-guarantor subsidiaries of Acquisition Corp. and (iv) the eliminations necessary to arrive at the information for Acquisition Corp. on a consolidated basis. Investments in consolidated subsidiaries are presented under the equity method of accounting. There are no restrictions on Acquisition Corp.’s ability to obtain funds from any of its wholly owned subsidiaries through dividends, loans or advances.

The Company and Holdings are holding companies that conduct substantially all of their business operations through Acquisition Corp. Accordingly, the ability of the Company and Holdings to obtain funds from their subsidiaries is restricted by the indentures for the Existing Secured Notes, the Secured WMG Notes, the Unsecured WMG Notes and the Acquisition Corp. Revolving Credit Facility, and, with respect to the Company, the indenture for the Holdings Notes.

WARNER MUSIC GROUP CORP.

Supplementary Information

Consolidating Balance Sheet (Unaudited)

June 30, 2012


	WMG Acquisition Corp. (issuer)			Guarantor Subsidiaries			Non- Guarantor Subsidiaries			Eliminations			WMG Acquisition Corp. Consolidated			WMG Holdings Corp. (issuer)		Warner Music Group Corp.			Eliminations			Warner Music Group Corp. Consolidated
	(in millions)
Assets:
Current assets:
Cash and equivalents	$	—		$	51		$	168		$	—		$	219		$	—	$	—		$	—		$	219
Accounts receivable, net		—			157			170			—			327			—		—			—			327
Inventories		—			11			16			—			27			—		—			—			27
Royalty advances expected to be recouped within one year		—			71			50			—			121			—		—			—			121
Deferred tax assets		—			38			16			—			54			—		—			—			54
Other current assets		3			14			33			—			50			—		—			—			50

Total current assets		3			342			453			—			798			—		—			—			798
Royalty advances expected to be recouped after one year		—			87			61			—			148			—		—			—			148
Investments in and advances to (from) consolidated subsidiaries		3,278			626			—			(3,904	)		—			1,015		1,260			(2,275	)		—
Property, plant and equipment, net		—			114			42			—			156			—		—			—			156
Goodwill		—			1,374			5			—			1,379			—		—			—			1,379
Intangible assets subject to amortization, net		—			1,109			1,403			—			2,512			—		—			—			2,512
Intangible assets not subject to amortization		—			92			10			—			102			—		—			—			102
Due (to) from parent companies		(1,343	)		(1,943	)		(626	)		3,835			(77	)		393		(316	)		—			—
Other assets		35			14			12			—			61			7		—			—			68

Total assets	$	1,973		$	1,815		$	1,360		$	(69	)	$	5,079		$	1,415	$	944		$	(2,275	)	$	5,163


	WMG Acquisition Corp. (issuer)			Guarantor Subsidiaries		Non- Guarantor Subsidiaries			Eliminations			WMG Acquisition Corp. Consolidated		WMG Holdings Corp. (issuer)		Warner Music Group Corp.		Eliminations			Warner Music Group Corp. Consolidated
	(in millions)
Liabilities and (Deficit) Equity:
Current liabilities:
Accounts payable	$	—		$	63	$	54		$	—		$	117	$	—	$	—	$	—		$	117
Accrued royalties		—			586		430			—			1,016		—		—		—			1,016
Accrued liabilities		—			95		119			—			214		—		—		—			214
Accrued interest		27			—		—			—			27		5		—		—			32
Deferred revenue		—			39		56			—			95		—		—		—			95
Other current liabilities		—			18		(17	)		—			1		—		—		—			1

Total current liabilities		27			801		642			—			1,470		5		—		—			1,475
Long-term debt		2,059			—		—			—			2,059		150		—		—			2,209
Deferred tax liabilities		—			169		205			—			374		—		—		—			374
Other noncurrent liabilities		13			46		77			8			144		—		—		—			144

Total liabilities		2,099			1,016		924			8			4,047		155		—		—			4,202

Total Warner Music Group Corp. (deficit) equity		(126	)		799		419			(77	)		1,015		1,260		944		(2,275	)		944
Noncontrolling interest		—			—		17			—			17		—		—		—			17

Total (deficit) equity		(126	)		799		436			(77	)		1,032		1,260		944		(2,275	)		961

Total liabilities and (deficit) equity	$	1,973		$	1,815	$	1,360		$	(69	)	$	5,079	$	1,415	$	944	$	(2,275	)	$	5,163

WARNER MUSIC GROUP CORP.

Supplementary Information

Consolidating Balance Sheet (Unaudited)

September 30, 2011


	WMG Acquisition Corp. (issuer)			Guarantor Subsidiaries			Non- Guarantor Subsidiaries			Eliminations			WMG Acquisition Corp. Consolidated			WMG Holdings Corp. (issuer)		Warner Music Group Corp.			Eliminations			Warner Music Group Corp. Consolidated
	(in millions)
Assets:
Current assets:
Cash and equivalents	$	17		$	61		$	72		$	—		$	150		$	4	$	—		$	—		$	154
Accounts receivable, net		9			178			198			—			385			—		—			—			385
Inventories		—			11			18			—			29			—		—			—			29
Royalty advances expected to be recouped within one year		—			80			55			—			135			—		—			—			135
Deferred tax assets		—			38			16			—			54			—		—			—			54
Other current assets		—			23			22			—			45			—		—			—			45

Total current assets		26			391			381			—			798			4		—			—			802
Royalty advances expected to be recouped after one year		—			106			67			—			173			—		—			—			173
Investments in and advances to (from) consolidated subsidiaries		3,203			419			—			(3,622	)		—			1,130		1,371			(2,501	)		—
Property, plant and equipment, net		—			136			46			—			182			—		—			—			182
Goodwill		—			1,372			—			—			1,372			—		—			—			1,372
Intangible assets subject to amortization, net		—			1,252			1,426			—			2,678			—		—			—			2,678
Intangible assets not subject to amortization		—			92			10			—			102			—		—			—			102
Due (to) from parent companies		(1,200	)		(1,951	)		(556	)		3,630			(77	)		383		(306	)		—			—
Other assets		40			9			14			—			63			8		—			—			71

Total assets	$	2,069		$	1,826		$	1,388		$	8		$	5,291		$	1,525	$	1,065		$	(2,501	)	$	5,380


	WMG Acquisition Corp. (issuer)			Guarantor Subsidiaries		Non- Guarantor Subsidiaries		Eliminations		WMG Acquisition Corp. Consolidated		WMG Holdings Corp. (issuer)		Warner Music Group Corp.		Eliminations			Warner Music Group Corp. Consolidated
	(in millions)
Liabilities and (Deficit) Equity:
Current liabilities:
Accounts payable	$	—		$	88	$	77	$	—	$	165	$	—	$	—	$	—		$	165
Accrued royalties		—			586		388		—		974		—		—		—			974
Accrued liabilities		—			98		119		—		217		—		—		—			217
Accrued interest		51			—		—		—		51		4		—		—			55
Deferred revenue		—			46		55		—		101		—		—		—			101
Other current liabilities		—			7		3		—		10		—		—		—			10

Total current liabilities		51			825		642		—		1,518		4		—		—			1,522
Long-term debt		2,067			—		—		—		2,067		150		—		—			2,217
Deferred tax liabilities		—			169		242		—		411		—		—		—			411
Other noncurrent liabilities		6			60		76		6		148		—		—		—			148

Total liabilities		2,124			1,054		960		6		4,144		154		—		—			4,298

Total Warner Music Group Corp. (deficit) equity		(55	)		772		411		2		1,130		1,371		1,065		(2,501	)		1,065
Noncontrolling interest		—			—		17		—		17		—		—		—			17

Total (deficit) equity		(55	)		772		428		2		1,147		1,371		1,065		(2,501	)		1,082

Total liabilities and (deficit) equity	$	2,069		$	1,826	$	1,388	$	8	$	5,291	$	1,525	$	1,065	$	(2,501	)	$	5,380

WARNER MUSIC GROUP CORP.

Supplementary Information

Consolidating Statements of Operations (Unaudited)

For The Three Months Ended June 30, 2012 (Successor)


	WMG Acquisition Corp. (issuer)			Guarantor Subsidiaries			Non- Guarantor Subsidiaries			Eliminations			WMG Acquisition Corp. Consolidated			WMG Holdings Corp. (issuer)			Warner Music Group Corp.			Eliminations		Warner Music Group Corp. Consolidated
	(in millions)
Revenues	$	—		$	313		$	379		$	(38	)	$	654		$	—		$	—		$	—	$	654
Costs and expenses:
Cost of revenues		—			(154	)		(236	)		34			(356	)		—			—			—		(356	)
Selling, general and administrative expenses		—			(112	)		(136	)		4			(244	)		—			—			—		(244	)
Amortization expense		—			(26	)		(21	)		—			(47	)		—			—			—		(47	)

Total costs and expenses		—			(292	)		(393	)		38			(647	)		—			—			—		(647	)

Operating (loss) income		—			21			(14	)		—			7			—			—			—		7
Interest (expense) income, net		(49	)		2			(4	)		—			(51	)		(5	)		—			—		(56	)
Equity gains (losses) from consolidated subsidiaries		15			16			—			(31	)		—			(27	)		(32	)		59		—
Other (expense) income, net		—			10			(4	)		—			6			—			—			—		6

(Loss) income before income taxes		(34	)		49			(22	)		(31	)		(38	)		(32	)		(32	)		59		(43	)
Income tax (expense) benefit		11			9			17			(26	)		11			—			—			—		11

Net (loss) income		(23	)		58			(5	)		(57	)		(27	)		(32	)		(32	)		59		(32	)
Less: income attributable to noncontrolling interest		—			—			—			—			—			—			—			—		—

Net (loss) income attributable to Warner Music Group Corp	$	(23	)	$	58		$	(5	)	$	(57	)	$	(27	)	$	(32	)	$	(32	)	$	59	$	(32	)

WARNER MUSIC GROUP CORP.

Supplementary Information

Consolidating Statements of Operations (Unaudited)

For The Three Months Ended June 30, 2011 (Predecessor)


	WMG Acquisition Corp. (issuer)			Guarantor Subsidiaries			Non- Guarantor Subsidiaries			Eliminations			WMG Acquisition Corp. Consolidated			WMG Holdings Corp. (issuer)			Warner Music Group Corp.			Eliminations		Warner Music Group Corp. Consolidated
	(in millions)
Revenues	$	—		$	292		$	429		$	(33	)	$	688		$	—		$	—		$	—	$	688
Costs and expenses:
Cost of revenues		—			(145	)		(267	)		32			(380	)		—			—			—		(380	)
Selling, general and administrative expenses		—			(120	)		(119	)		2			(237	)		—			—			—		(237	)
Transaction costs		—			(5	)		—			—			(5	)		—			—			—		(5	)
Amortization expense		—			(33	)		(23	)		—			(56	)		—			—			—		(56	)

Total costs and expenses		—			(303	)		(409	)		34			(678	)		—			—			—		(678	)

Operating (loss) income		—			(11	)		20			1			10			—			—			—		10
Interest (expense) income, net		(35	)		(2	)		(3	)		—			(40	)		(7	)		—			—		(47	)
Equity (losses) gains from consolidated subsidiaries		(1	)		23			(1	)		(21	)		—			(39	)		(46	)		85		—
Other income(expense), net		5			(21	)		22			—			6			—			—			—		6

(Loss) income before income taxes		(31	)		(11	)		38			(20	)		(24	)		(46	)		(46	)		85		(31	)
Income tax (expense) benefit		(14	)		(10	)		(12	)		21			(15	)		—			—			—		(15	)

Net (loss) income		(45	)		(21	)		26			1			(39	)		(46	)		(46	)		85		(46	)
Less: loss attributable to noncontrolling interest		—			—			—			—			—			—			—			—		—

Net (loss) income attributable to Warner Music Group Corp	$	(45	)	$	(21	)	$	26		$	1		$	(39	)	$	(46	)	$	(46	)	$	85	$	(46	)

WARNER MUSIC GROUP CORP.

Supplementary Information

Consolidating Statements of Operations (Unaudited)

For The Nine Months Ended June 30, 2012 (Successor)


	WMG Acquisition Corp. (issuer)			Guarantor Subsidiaries			Non- Guarantor Subsidiaries			Eliminations			WMG Acquisition Corp. Consolidated			WMG Holdings Corp. (issuer)			Warner Music Group Corp.			Eliminations		Warner Music Group Corp. Consolidated
	(in millions)
Revenues	$	—		$	958		$	1,248		$	(145	)	$	2,061		$	—		$	—		$	—	$	2,061
Costs and expenses:
Cost of revenues		—			(482	)		(750	)		129			(1,103	)		—			—			—		(1,103	)
Selling, general and administrative expenses		—			(348	)		(413	)		16			(745	)		—			—			—		(745	)
Amortization expense		—			(87	)		(58	)		—			(145	)		—			—			—		(145	)

Total costs and expenses		—			(917	)		(1,221	)		145			(1,993	)		—			—			—		(1,993	)

Operating income		—			41			27			—			68			—			—			—		68
Interest (expense) income, net		(147	)		5			(11	)		—			(153	)		(16	)		—			—		(169	)
Equity gains (losses) from consolidated subsidiaries		73			(11	)		—			(62	)		—			(78	)		(94	)		172		—
Other (expense) income, net		—			1			5			—			6			—			—			—		6

(Loss) income before income taxes		(74	)		36			21			(62	)		(79	)		(94	)		(94	)		172		(95	)
Income tax (expense) benefit		3			1			16			(17	)		3			—			—			—		3

Net (loss) income		(71	)		37			37			(79	)		(76	)		(94	)		(94	)		172		(92	)
Less: income attributable to noncontrolling interest		—			—			(2	)		—			(2	)		—			—			—		(2	)

Net (loss) income attributable to Warner Music Group Corp	$	(71	)	$	37		$	35		$	(79	)	$	(78	)	$	(94	)	$	(94	)	$	172	$	(94	)

WARNER MUSIC GROUP CORP.

Supplementary Information

Consolidating Statements of Operations (Unaudited)

For The Nine Months Ended June 30, 2011 (Predecessor)


	WMG Acquisition Corp. (issuer)			Guarantor Subsidiaries			Non- Guarantor Subsidiaries			Eliminations			WMG Acquisition Corp. Consolidated			WMG Holdings Corp. (issuer)			Warner Music Group Corp.			Eliminations		Warner Music Group Corp. Consolidated
	(in millions)
Revenues	$	—		$	934		$	1,339		$	(123	)	$	2,150		$	—		$	—		$	—	$	2,150
Costs and expenses:
Cost of revenues		—			(462	)		(820	)		112			(1,170	)		—			—			—		(1,170	)
Selling, general and administrative expenses		—			(303	)		(466	)		14			(755	)		—			—			—		(755	)
Transaction costs		—			(7	)		—			—			(7	)		—			—			—		(7	)
Amortization expense		—			(98	)		(67	)		—			(165	)		—			—			—		(165	)

Total costs and expenses		—			(870	)		(1,353	)		126			(2,097	)		—			—			—		(2,097	)

Operating income (loss)		—			64			(14	)		3			53			—			—			—		53
Interest (expense) income, net		(113	)		—			(9	)		—			(122	)		(19	)		—			—		(141	)
Equity gains (losses) from consolidated subsidiaries		42			(3	)		(1	)		(38	)		—			(82	)		(101	)		183		—
Other income (expense), net		5			(19	)		19			—			5			—			—			—		5

(Loss) income before income taxes		(66	)		42			(5	)		(35	)		(64	)		(101	)		(101	)		183		(83	)
Income tax (expense) benefit		(18	)		(16	)		(17	)		32			(19	)		—			(1	)		—		(20	)

Net (loss) income		(84	)		26			(22	)		(3	)		(83	)		(101	)		(102	)		183		(103	)
Less: loss attributable to noncontrolling interest		—			—			1			—			1			—			—			—		1

Net (loss) income attributable to Warner Music Group Corp	$	(84	)	$	26		$	(21	)	$	(3	)	$	(82	)	$	(101	)	$	(102	)	$	183	$	(102	)

WARNER MUSIC GROUP CORP.

Supplementary Information

Consolidating Statement of Cash Flows (Unaudited)

For The Nine Months Ended June 30, 2012 (Successor)


	WMG Acquisition Corp. (issuer)			Guarantor Subsidiaries			Non- Guarantor Subsidiaries			Eliminations			WMG Acquisition Corp. Consolidated			WMG Holdings Corp. (issuer)			Warner Music Group Corp.			Eliminations			Warner Music Group Corp. Consolidated
	(in millions)
Cash flows from operating activities:
Net (loss) income	$	(71	)	$	37		$	37		$	(79	)	$	(76	)	$	(94	)	$	(94	)	$	172		$	(92	)
Adjustments to reconcile net (loss) income to net cash used in operating activities:
Depreciation and amortization expense		—			114			68			—			182			—			—			—			182
Deferred income taxes		—			—			(11	)		—			(11	)		—			—			—			(11	)
Gain on sale of building		—			(1	)		—			—			(1	)		—			—			—			(1	)
Non-cash interest expense		(2	)		—			—			—			(2	)		—			—			—			(2	)
Non-cash, share-based compensation expense		—			—			—			—			—			—			—			—			—
Other non-cash items		—			(1	)		—			—			(1	)		—			—			—			(1	)
Equity (gains) losses from consolidated subsidiaries		(73	)		11			—			62			—			78			94			(172	)		—
Changes in operating assets and liabilities:
Accounts receivable		9			22			18			—			49			—			—			—			49
Inventories		—			—			1			—			1			—			—			—			1
Royalty advances		—			28			5			—			33			—			—			—			33
Accounts payable and accrued liabilities		111			(162	)		(53	)		25			(79	)		—			—			—			(79	)
Royalties payable		—			—			58			—			58			—			—			—			58
Accrued interest		(24	)		—			—			—			(24	)		1			—			—			(23	)
Other balance sheet changes		33			(31	)		(2	)		(8	)		(8	)		1			—			—			(7	)


	WMG Acquisition Corp. (issuer)			Guarantor Subsidiaries			Non- Guarantor Subsidiaries			Eliminations		WMG Acquisition Corp. Consolidated			WMG Holdings Corp. (issuer)			Warner Music Group Corp.		Eliminations		Warner Music Group Corp. Consolidated
	(in millions)
Net cash provided by (used in) operating activities		(17	)		17			121			—		121			(14	)		—		—		107

Cash flows from investing activities:
Investments and acquisitions of businesses		—			—			(5	)		—		(5	)		—			—		—		(5	)
Acquisition of publishing rights		—			(13	)		(8	)		—		(21	)		—			—		—		(21	)
Proceeds from the sale of music catalog		—			2			—			—		2			—			—		—		2
Proceeds from the sale of building		—			12			—			—		12			—			—		—		12
Capital expenditures		—			(18	)		(6	)		—		(24	)		—			—		—		(24	)

Net cash used in investing activities		—			(17	)		(19	)		—		(36	)		—			—		—		(36	)

Cash flows from financing activities:
Dividend by Acquisition Corp. to Holdings Corp.		—			(10	)		—			—		(10	)		10			—		—		—
Distributions to noncontrolling interest holders		—			—			(2	)		—		(2	)		—			—		—		(2	)

Net cash used in financing activities		—			(10	)		(2	)		—		(12	)		10			—		—		(2	)

Effect of foreign currency exchange rate changes on cash		—			—			(4	)		—		(4

Large accelerated filer

Accelerated filer

Non-accelerated filer

x (Do not check if a smaller reporting company)

Smaller reporting company