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Warner Music Group Annual Report 2007 NYSE: WMG www.wmg.com A Message from Chairman and CEO Edgar Bronfman, Jr. Dear Fellow Shareholders: Industry transitions are times of great opportunity, and there is no doubt that the recorded music industry is in the midst of a significant and fundamental transformation. Of course, opportunity does not come without its challenges and this year, Warner Music Group continued to meet and address the challenges of this transition head on, laying the groundwork for future growth. The transformation of the recorded music industry will require not only a clear vision and a progressive strategy to radically alter traditional business models, but also leadership, continued financial discipline and resilience. At Warner Music Group, we are creating the foundation for future growth and believe we have the right strategy in place not only to effectively navigate through these difficult times, but also to reap the rewards of the recorded music industry’s evolution. Looking back on our fiscal 2007, we made meaningful progress in many different areas. Sustaining Digital Leadership During fiscal 2007, digital revenue grew 30% to $460 million or 14% of total revenue and, in the U.S. we once again reported digital SoundScan album share substantially above our physical share. Building upon our digital leadership is essential as the recorded music business rapidly shifts from physical to digital. We entered into selective partnerships across business models that are aimed at driving expanded monetization of our content through new products in the digital space. These partnerships included the acquisition of a majority stake in Zebralution, a German digital distribution company, as well as deals with social networking site, imeem, and online retailer and music discovery site, Lala.com. We expanded our global footprint of 1.9 billion mobile subscribers with deals in the Middle East, North Africa and several regions throughout Europe and South East Asia. As we move into fiscal 2008, we continue to advance our digital agenda. In October, we orchestrated the digital launch of the Led Zeppelin catalog, making the repertoire of this iconic band available digitally for the first time. In December, we began offering DRM-free audio downloads on Amazon.com’s Amazon MP3 digital music store, where every track and album is playable on virtually any personal digital music-capable device. This move not only underscores our commitment to make fundamental changes to our business model to enhance the competitiveness of the digital marketplace, but also the resolve we have demonstrated in satisfying consumers’ needs for flexibility. Accelerating Transformation Through Realignment In May, we announced a global realignment plan designed to advance our digital strategy and to ensure that our organization remains the most progressive and best equipped to take advantage of the changing recorded music market. The total restructuring-related charges of $63 million taken over the course of the year were better than our forecasted range of $65 million to $80 million. We will continue to closely monitor our staffing so that it remains aligned with industry trends. Continuing A&R Success We remain vigilant in focusing on our core capabilities which are finding and developing artists with long-term market potential. We continue to build our roster of outstanding recording artists and songwriters and to realize significant achievements in A&R. In calendar year 2007, our U.S. SoundScan album share rose two points year over year to 20.3% – a level not seen in 10 years. Furthermore, our U.S. labels, Warner Bros. Records and Atlantic Records, were ranked number one and two in U.S. SoundScan album share. The January acquisition of a majority stake in Roadrunner Music Group, one of the world’s leading hard rock and heavy metal labels, was another A&R highlight, bringing us acts such as Nickelback and Slipknot. Expanding Our Revenue Base Our ongoing success requires true partnership with artists and a commitment to nurturing and growing all facets of their careers. Over the course of the fiscal year, we concluded numerous expanded rights deals with our recording artists, giving us participation in revenue streams beyond recorded music and music publishing, such as merchandising, fan clubs, sponsorship and touring. We also closed several acquisitions which will expand our revenue base beyond recorded music and music publishing. These efforts are ongoing in fiscal 2008. In November, we established a groundbreaking partnership with the family of Frank Sinatra to consolidate under a single entity the library content, rights management and preservation of this legendary entertainer’s inspirational personality and prodigious body of work. This deal is another important step in the broad-based diversification of our business models. Stabilizing the Performance of Warner/Chappell We made real progress towards our goal of establishing more consistent operating performance at Warner/Chappell. The fourth fiscal quarter of 2007 was Warner/Chappell’s third consecutive quarter of improving revenue and OIBDA on a year-over-year basis. Warner/Chappell, which boasts one of the world’s most valuable libraries of musical compositions, enjoys a diversified revenue stream from its more than 1.3 million copyrights and more than 65,000 songwriters and composers. Warner/Chappell also has strong OIBDA to free cash flow conversion, favorable working capital dynamics and low capital requirements. Looking ahead, our agenda over the next fiscal year will be focused on the following strategic objectives: • Continuing to be the most innovative, responsive and nimble major music company; • Remaining vigilant in managing costs and generating significant free cash flow while transitioning the recorded music business back to a growth trajectory; • Broadening our partnerships with artists and building relationships with consumers to add new revenue streams from growing segments of the music business; • Enhancing our digital leadership through innovative business models; • Expanding our business models to take advantage of new opportunities resulting from the technological transformation of the music business; and • Increasing our market share while maximizing our margin potential. Our goal is to drive shareholder value and improve our competitive positioning over the next fiscal year and beyond. While recognizing we still have much work to do, we continue to view the long- term future of the music business with optimism. More music is being consumed today than ever before and in more ways than ever before, and we believe we are still in a strong position to benefit from those trends over the long term. The pace of technological change and our ability to develop or support innovative business models to diversify our revenue streams remains a key factor in the progress of our business. We firmly believe these efforts will be successful over time. Discovering and promoting artists – and developing artist brands – is the foundation upon which Warner Music Group was built and the driving principle that guides us today. It is through the collaboration of our artists and employees that our artists’ creative work comes to life. Despite the record industry’s changing economics and the entrance of new competitors into our traditional business, we see our value to artists as an enduring one and the role of record companies in the music business expanding. As always, it is a pleasure to report to you on our progress over the past fiscal year and we look forward to a more productive fiscal 2008. Thank you for your continued support. Edgar Bronfman, Jr. Chairman and CEO, Warner Music Group Corp. January 2008 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) È ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended September 30, 2007 OR ‘ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to 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 (I.R.S. Employer incorporation or organization) Identification No.) 75 Rockefeller Plaza New York, NY 10019 (Address of principal executive offices) (Zip Code) Registrant’s telephone number, including area code: (212) 275-2000 Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered Common Stock, $.001 par value New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes È No ‘ Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ‘ No È 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 È No ‘ Indicate by check mark if the disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendments to this Form 10-K. È Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.