UNITED STATES SECURITIES and EXCHANGE COMMISSION Washington, D.C

Table of Contents UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) ☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2006 OR ☐ 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 (I.R.S. Employer incorporation or organization) 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 ☒ No ☐ 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. Large accelerated filer ☐ Accelerated filer ☐ Non-accelerated filer ☒ Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.) Yes ☐ No ☒ As of July 27, 2006, the number of shares of the Registrant’s common stock, par value $0.001 per share, outstanding was 148,505,691.787. Table of Contents WARNER MUSIC GROUP CORP. INDEX Page Part I. Financial Information Item 1. Financial Statements (unaudited) 2 Consolidated Balance Sheets as of June 30, 2006 and September 30, 2005 2 Consolidated Statements of Operations for the Three Months Ended June 30, 2006 and 2005 3 Consolidated Statements of Operations for the Nine Months Ended June 30, 2006 and 2005 4 Consolidated Statements of Cash Flows for the Nine Months Ended June 30, 2006 and 2005 5 Consolidated Statement of Shareholders’ Equity for the Nine Months Ended June 30, 2006 6 Notes to Consolidated Interim Financial Statements 7 Supplementary Information—Condensed Consolidating Financial Statements 22 Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 29 Item 3. Quantitative and Qualitative Disclosures About Market Risk 56 Item 4. Controls and Procedures 57 Part II. Other Information Item 1. Legal Proceedings 60 Item 1A. Risk Factors 61 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 72 Item 3. Defaults Upon Senior Securities 72 Item 4. Submission of Matters to a Vote of Security Holders 72 Item 5. Other Information 72 Item 6. Exhibits 73 Signatures 74 1 Table of Contents ITEM 1. FINANCIAL STATEMENTS Warner Music Group Corp. Consolidated Balance Sheets June 30, September 30, 2006 2005 (unaudited) (audited) (in millions) Assets Current assets: Cash and equivalents $ 306 $ 288 Short-term investments 29 — Accounts receivable, less allowances of $205 and $218 million 524 637 Inventories 50 52 Royalty advances expected to be recouped within one year 209 190 Deferred tax assets 40 36 Other current assets 47 39 Total current assets 1,205 1,242 Royalty advances expected to be recouped after one year 209 190 Investments 24 21 Property, plant and equipment, net 144 157 Goodwill 946 869 Intangible assets subject to amortization, net 1,746 1,815 Intangible assets not subject to amortization 100 100 Other assets 109 104 Total assets $ 4,483 $ 4,498 Liabilities and Shareholders’ Equity Current liabilities: Accounts payable $ 202 $ 247 Accrued royalties 1,146 1,057 Taxes and other withholdings 34 23 Current portion of long-term debt 17 17 Dividends payable 22 — Other current liabilities 336 404 Total current liabilities 1,757 1,748 Long-term debt 2,234 2,229 Dividends payable 3 5 Deferred tax liabilities, net 193 201 Other noncurrent liabilities 216 226 Total liabilities 4,403 4,409 Commitments and Contingencies (See Note 10) Shareholders’ equity: Common stock ($0.001 par value; 500,000,000 shares authorized; 148,503,900 and 148,455,313 shares issued and outstanding) — — Additional paid-in capital 560 548 Accumulated deficit (509) (480) Accumulated other comprehensive income, net 29 21 Total shareholders’ equity 80 89 Total liabilities and shareholders’ equity $ 4,483 $ 4,498 See accompanying notes. 2 Table of Contents Warner Music Group Corp. Consolidated Statements of Operations (Unaudited) Three Months Ended June 30, 2006 and 2005 Three Months Three Months Ended Ended June 30, 2006 June 30, 2005 (in millions, except per share amounts) Revenues (b) $ 822 $ 742 Costs and expenses: Cost of revenues (a) (445) (396) Selling, general and administrative expenses (a) (b) (301) (318) Amortization of intangible assets (48) (47) Loss on termination of management agreement — (73) Total costs and expenses (794) (834) Operating income (loss) 28 (92) Interest expense, net (45) (50) Net investment related gains — 1 Loss on repayment of Holdings Notes — (35) Other income, net 1 1 Loss before income taxes (16) (175) Income tax benefit (expense) 2 (4) Net loss $ (14) $ (179) Net loss per common share: Basic and diluted $ (0.10) $ (1.41) Weighted average common shares: Basic and diluted 143.7 127.0 (a) Includes depreciation expense of $ (10) $ (12) (b) Includes the following expenses resulting from transactions with related companies: Revenues $ 8 $ — Selling, general and administrative expense $ (2) $ (1) See accompanying notes. 3 Table of Contents Warner Music Group Corp. Consolidated Statements of Operations (Unaudited) Nine Months Ended June 30, 2006 and 2005 Nine Months Nine Months Ended Ended June 30, 2006 June 30, 2005 (in millions, except per share amounts) Revenues (b) $ 2,662 $ 2,597 Costs and expenses: Cost of revenues (a) (1,384) (1,377) Selling, general and administrative expenses (a) (b) (918) (942) Amortization of intangible assets (143) (140) Loss on termination of management agreement — (73) Total costs and expenses (2,445) (2,532) Operating income 217 65 Interest expense, net (b) (135) (140) Net investment related gains — 1 Equity in the gains (losses) of equity-method investees, net 1 (1) Loss on repayment of Holdings Notes — (35) Unrealized gain on warrants — 17 Minority interest expense (b) — (5) Other income, net 3 5 Income (loss) before income taxes 86 (93) Income tax expense (38) (46) Net income (loss) $ 48 $ (139) Net income (loss) per common share: Basic $ 0.34 $ (1.22) Diluted $ 0.32 $ (1.22) Weighted average common shares: Basic 142.3 114.1 Diluted 150.8 114.1 (a) Includes depreciation expense of $ (32) $ (40) (b) Includes the following expenses resulting from transactions with related companies: Revenues 12 — Selling, general and administrative expense (10) (6) Interest expense — (1) Minority interest expense — (5) See accompanying notes. 4 Table of Contents Warner Music Group Corp. Consolidated Statements of Cash Flows (Unaudited) Nine Months Ended June 30, 2006 and 2005 Nine Months Nine Months Ended Ended June 30, 2006 June 30, 2005 (in millions) Cash flows from operating activities Net income (loss) $ 48 $ (139) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization 175 180 Non-cash interest expense 39 52 Non-cash, stock-based compensation expense 12 18 Deferred taxes (17) (7) Net investment related gains — (1) Equity in the (gains) losses of equity-method investees, including distributions (1) 1 Loss on repayment of debt — 35 Unrealized gain on warrants — (17) Minority interest expense — 5 Changes in operating assets and liabilities: Accounts receivable 121 77 Inventories 3 6 Royalty advances (54) (2) Accounts payable and accrued liabilities (81) (22) Other balance sheet changes (22) (14) Net cash provided by operating activities 223 172 Cash flows from investing activities Investments and acquisitions (95) (84) Investments in short-term investments (29) — Investment proceeds — 50 Capital expenditures (18) (20) Net cash used in investing activities (142) (54) Cash flows from financing activities Borrowings, net of financing costs — 926 Debt repayments (13) (584) Cash paid to repurchase warrant — (138) Proceeds from the issuance of common stock — 554 Costs to issue common stock — (27) Proceeds from the issuance of restricted shares — 1 Repurchase of subsidiary preferred stock — (200) Dividends paid on subsidiary preferred stock — (9) Dividends and returns of capital paid (55) (917) Loans to third parties — (10) Other — (3) Net cash used in financing activities (68) (407) Effect of foreign currency exchange rate changes on cash 5 (1) Net increase (decrease) in cash and equivalents 18 (290) Cash and equivalents at beginning of period 288 555 Cash and equivalents at end of period $ 306 $ 265 See accompanying notes. 5 Table of Contents Warner Music Group Corp. Consolidated Statement of Shareholders’ Equity (Unaudited) Nine Months Ended June 30, 2006 Common Stock Accumulated Additional Retained Other Total Paid-in Earnings Comprehensive Shareholders’ Shares Value Capital (Deficit) Income (Loss) Equity (in millions, except number of common shares) Balance at September 30, 2005 148,455,313 $— $ 548 $ (480) $ 21 $ 89 Comprehensive income: Net income — — — 48 — 48 Foreign currency translation adjustment — — — — (4) (4) Deferred gains on derivative financial instruments — — — — 12 12 Total comprehensive income — — — 48 8 56 Dividends — — — (76) — (76) Issuance of stock options and restricted shares of common stock, net 48,587 — 12 — — 12 Other — — — (1) — (1) Balance at June 30, 2006 148,503,900 $— $ 560 $ (509) $ 29 $ 80 See accompanying notes. 6 Table of Contents Warner Music Group Corp. Notes to Consolidated Interim Financial Statements (Unaudited) 1. Description of Business Warner Music Group Corp. (the “Company”) 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.

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