Warner Music Group Reports 10 Month Results Ended September 2004

12/13/04

Continued Success of the Company's New Operating Plan Drives Solid Performance

NEW YORK, December 13, 2004 -- Warner Music Group (WMG) today announced financial results for the 10 month period ended September 2004. The company is reporting results for a 10 month transition period due to the change in 2004 of its fiscal year end from November 30 to September 30.

Highlights

Revenue for the period was $2.5 billion, up two percent from the 10 months ended September 2003. Operating income increased to $7 million from a loss of $197 million in the prior year period. Net loss improved to $136 million in 2004 from a net loss of $239 million in 2003. Operating income before depreciation and amortization, OIBDA, increased to $219 million from $75 million in the prior year. OIBDA includes certain restructuring and other one-time costs of $26 million in 2004 and $39 million in 2003. In fiscal year 2004, OIBDA replaced EBITDA as the Company's non-GAAP measure of financial performance.

"Warner Music Group has continued to make significant progress on a number of fronts since our last earnings announcement. The financial results reflect the continued successful implementation of the restructuring plan and the total commitment of our colleagues in positioning Warner Music Group for success in a changing market," said Edgar Bronfman, Jr., Chairman and CEO of Warner Music Group. "Now that the lion's share of the restructuring has been completed, we can turn our entire focus to building and developing the company's roster of recording artists and songwriters."

The restructuring program remains ahead of schedule. Based on results to date, WMG forecasts at least $250 million of recurring annualized savings will be realized by the end of 2005. Annualized cost savings implemented through September 30, 2004 are approximately $240 million. Furthermore, the cost to implement the program is now projected between $225 million and $250 million, below the original budget of $310 million.

10 Months Ended September 2004

Total revenue was $2.5 billion for the 10 months ended September 2004, up two percent, from the same 10 month period in the prior year. Excluding favorable foreign exchange, total revenue declined 3% versus 2003. International revenue increased six percent compared with the prior year, while U.S. revenue was down slightly. Excluding favorable foreign exchange, international revenue declined four percent.

Worldwide recorded music revenue increased one percent versus the same 10 month period in the prior year to $2.06 billion. Excluding favorable foreign exchange, worldwide recorded music revenue decreased approximately four percent. The results were driven primarily by lower sales volume attributable to the timing and number of new releases as compared with the prior year. International recorded music revenue was $1.09 billion and increased five percent compared with the prior period. Excluding favorable foreign exchange, international recorded music revenue declined five percent. U.S. recorded music revenue declined approximately three percent to $977 million. The company's major sellers in 2004 included albums by Josh Groban, Green Day, Big & Rich, Twista, Jet and Michael Bublé, among others. Last year's major selling albums included multi-platinum hits from Linkin Park, Sean Paul, Madonna and Metallica.

Worldwide publishing revenue increased to $505 million for the 10 months ended September 2004, up eight percent versus 2003. Mechanical, performance and synchronization revenues all increased, while print revenue declined. Excluding favorable foreign exchange, worldwide publishing revenue increased one percent, driven principally by the U.S. market which grew four percent to $218 million. International publishing revenue increased 11 percent to $287 million. Excluding favorable foreign exchange, international music publishing revenue declined one percent.

OIBDA for the 10 month period ended September 30, 2004 was $219 million, compared with $75 million for the 10 month period last year. The increase in OIBDA was driven principally by cost savings associated with our restructuring program and lower manufacturing costs. After factoring in lower depreciation and amortization costs, operating income grew to $7 million for the 10 month period ended September 30, 2004, compared to a loss of $197 million in the comparable period of last year.

Net loss improved to $136 million for the 10 month period ended September 30, 2004, compared to a net loss of $239 million for the same 10 month period in the prior year. The improvement was due to the operating income gains mentioned above, offset in part by higher interest expense principally relating to acquisition-related debt.

Liquidity

Adjusted EBITDA, a measure calculated in accordance with the terms of the company's credit agreement, was $378 million on a rolling 12 month basis for the period ended September 30, 2004.

Cash flow from operations for the 10 months ended September 30, 2004 was $407 million and cash on hand as of September 30, 2004 was $555 million. As noted in the Company's October 4th press release, the Company returned $350 million of capital to its equity investors on September 30, 2004 as permitted by the Company's bond indenture and by an amendment to the Company's credit agreement. $342 million of the $350 million return of capital was paid subsequent to September 30, 2004 and reduced the cash position accordingly.

On December 6, 2004, we amended our senior secured credit facility to make certain changes. In particular, the changes:

  • Allow WMG Holdings Corp., the direct parent of WMG Acquisition Corp., the issuer of our outstanding notes, to incur permitted indebtedness that accrues up to $35 million in cash interest in any fiscal year. Prior to the change, any permitted indebtedness incurred by Holdings was required to be pay-in-kind interest for at least the first five years.
  • Remove a constraint based upon a maximum leverage ratio at WMG Acquisition Corp. that limited our ability to incur permitted indebtedness at Holdings.
  • Adjust the method of calculating EBITDA (as defined in the credit agreement) when measuring the leverage ratio of Holdings so that it is consistent with the method of calculation used in the indenture for our notes. In order for Holdings to incur permitted indebtedness under the senior secured credit facility, it must show compliance with a leverage ratio test on a pro forma basis for the incurrence of such indebtedness.

Note to Financial Information

As a result of the change in accounting basis that occurred relating to Warner Music Group's acquisition from Time Warner Inc., financial information for the 10 month period is separated into pre-acquisition and post-acquisition periods. The attached selected financial information is, therefore, for the three month pre-acquisition period ended February 29, 2004 and the seven month post-acquisition period ended September 30, 2004. The selected pro forma financial information for the 10 months ended September 2004 discussed above represents the mathematical addition of the three month pre-acquisition period ended February 29, 2004 and the seven month post-acquisition period ended September 30, 2004. This approach is not consistent with GAAP, and may yield results that are not strictly comparable on a period-to-period basis primarily due to (i) the impact of required purchase accounting adjustments and (ii) the new basis of accounting established on the closing date of the acquisition. We believe this is the most meaningful way to present our results of operations. Such results are not necessarily indicative of what the results for the respective periods would have been had the acquisition not occurred. In order to enhance comparability, unaudited selected financial information for the comparable ten month period in the prior year is also attached. Based on how our closing schedule occurred in 2003, the selected financial information for the period ended September 30, 2003 consists of 43 weeks, as compared to 44 weeks contained in the ten month period ended September 30, 2004.

About Warner Music Group
Warner Music Group, with its broad roster of new stars and legendary artists, is the world's largest privately-held independent music company. The company is home to a collection of the best-known record labels in the music industry including Atlantic, Elektra, Lava, Maverick, Nonesuch, Reprise, Rhino, Sire, Warner Bros. and Word. Warner Music International, a leading company in national and international repertoire operates through 37 affiliates and numerous licensees in more than 50 countries. Warner Music Group also includes Warner/Chappell Music, one of the world's leading music publishers, with a catalog of more than one million copyrights worldwide. For more information about Warner Music Group, visit our corporate website at www.wmg.com.

"Safe Harbor" Statement under Private Securities Litigation Reform Act of 1995:

This communication includes forward-looking statements that reflect the current views of Warner Music Group about future events and financial performance. Words such as "estimates," "expects," "anticipates," "projects," "plans," "intends," "believes," "forecasts" and variations of such words or similar expressions that predict or indicate future events or trends, or that do not relate to historical matters, identify forward-looking statements. Our expectations, beliefs and projections are expressed in good faith and we believe there is a reasonable basis for them. However, there can be no assurance that management's expectations, beliefs and projections will result or be achieved. Investors should not rely on forward-looking statements because they are subject to a variety of risks, uncertainties, and other factors that could cause actual results to differ materially from our expectations.

Note to bondholders: Warner Music Group will hold a 10 month earnings update conference call for bondholders today, December 13, 2004 at 4:15pm EST. Bondholders may participate in the conference call by dialing 888/398-1687 or 517/308-9013 and asking for the Warner Music Group earnings call.

# # #

Media Contact:
Will Tanous
212-275-2244
will.tanous@wmg.com

Investor Contact:
Jeremy Zweig
646-805-2805

Warner Music Group
(Otherwise known as WMG Acquisition Corp.)

Consolidated and Combined Balance Sheets>

Warner Music Group
(Otherwise known as WMG Acquisition Corp.)

Consolidated and Combined Statements of Operations

Warner Music Group
(Otherwise known as WMG Acquisition Corp.)

Consolidated and Combined Statements of Cash Flows

Supplemental Disclosures Regarding Non-GAAP Financial Information

OIBDA

We evaluate our operating performance based on several factors, including our primary financial measure of operating income (loss) before non-cash depreciation of tangible assets, non-cash amortization of intangible assets and non-cash impairment charges to reduce the carrying value of goodwill and other intangible assets (which we refer to as "OIBDA"). We consider OIBDA to be an important indicator of the operational strengths and performance of our businesses, including the ability to provide cash flows to service debt. However, a limitation of the use of OIBDA as a performance measure is that it does not reflect the periodic costs of certain capitalized tangible and intangible assets used in generating revenues in our businesses. Accordingly, OIBDA should be considered in addition to, not as a substitute for, operating income (loss), net income (loss) and other measures of financial performance reported in accordance with accounting principles generally accepted in the U.S. Note that OIBDA as defined above is different from Adjusted EBITDA as defined below, which is presented herein as a covenant compliance measure.

The following table reconciles OIBDA to operating income (loss) and further provides the components from operating income (loss) to net loss.

(All figures in $ millions)

Combined

Seven Months Ended

Three Months Ended

Ten
Months Ended

Ten
Months Ended

September 30, 2004

February 29, 2004

September 30, 2004

September 30, 2003

OIBDA

158

61

219

75

Depreciation expense:

(36)

(16)

(52)

(71)

Amortization expense......................................

(104)

(56)

(160)

(201)

Operating income (loss)...................................

18

(11)

7

(197)

Interest expense, net.......................................

(80)

(2)

(82)

(5)

Net investment‑related losses...........................

-

-

-

(17)

Equity in the losses of equity‑method investees, net

(2)

(2)

(4)

(32)

Deal-related transaction and other costs

-

-

-

(7)

Loss on repayment of bridge loan......................

(6)

-

(6)

-

Other expense, net..........................................

(4)

-

(4)

(10)

Loss before income taxes................................

(74)

(15)

(89)

(268)

Income tax (expense) benefit............................

(30)

(17)

(47)

29

Net loss .........................................................

(104)

(32)

(136)

(239)

Adjusted EBITDA

Our borrowing arrangements, including the senior secured credit facility and our outstanding notes, contain certain financial covenants which are tied to ratios based on Adjusted EBITDA, which is defined under the indenture governing the notes as "EBITDA." Adjusted EBITDA (as defined in the indenture) differs from the term "EBITDA" as it is commonly used. In addition to adjusting net income to exclude interest expense, income taxes, and depreciation and amortization, Adjusted EBITDA (as defined in indenture) also adjusts net income by excluding items or expenses not typically excluded in the calculation of "EBITDA" such as (1) any reasonable expenses or charges related to any issuance of securities, investments permitted, permitted acquisitions, recapitalizations, asset sales permitted or indebtedness permitted to be incurred; (2) the amount of any restructuring charges or reserves; (3) any non-cash charges (including any impairment); (4) any gain or loss resulting from hedging currency exchange risks; (5) the amount of management, monitoring, consulting and advisory fees paid to our Investors; and (6) any net after-tax income or loss from discontinued operations.

Adjusted EBITDA is presented herein because it is a material component of the covenants contained within the aforementioned credit agreement and the indenture governing our notes. Non-compliance with those covenants could result in the requirement to immediately repay all amounts outstanding under those agreements which could have a material adverse effect on our results of operations, financial position and cash flow. Adjusted EBITDA does not represent net income or cash flow from operations as those terms are defined by GAAP and does not necessarily indicate whether cash flows will be sufficient to fund cash needs. While Adjusted EBITDA and similar measures are frequently used as measures of operations and the ability to meet debt service requirements, these terms are not necessarily comparable to other similarly titled captions of other companies due to the potential inconsistencies in the method of calculation. Adjusted EBITDA does not reflect the impact of earnings or charges resulting from matters that we may consider not to be indicative of our ongoing operations. In particular, the definition of Adjusted EBITDA in our borrowing arrangements allows us to add back certain non-cash, extraordinary, unusual or non-recurring charges that are deducted in calculating net income. However, these are expenses that may recur, vary greatly and are difficult to predict.

Adjusted pro forma EBITDA as presented below is not a measure of the performance of our business and should not be used by investors as an indicator of performance for any future period. Further, our debt instruments require that it be calculated for the most recent four fiscal quarters. As a result, the measure can be disproportionately affected by a particularly strong or weak quarter. Further, it may not be comparable to the measure for any subsequent four-quarter period or any complete fiscal year.

The following is a reconciliation of net loss, which is a GAAP measure of our operating results to Adjusted EBITDA for the last 12 months ended September 30, 2004. The terms and related calculations are defined in the indenture governing our notes.

(a) Reflects management fees paid to the Investors for management advisory services.

(b) During the fourth quarter of 2003, in connection with Time Warner's agreement to sell us, we recorded a $1.019 billion impairment charge. The charge was necessary to reduce the carrying value of our intangible assets to fair value, based on the consideration to be exchanged in the transaction.

(c) Reflect costs associated with our Restructuring Plan and pre-acquisition restructurings.

(d) Principally reflects the reduction of the carrying value of certain investments in November 2003, including our interest in Telstar.

(e) Represents our share of the net income of investments in companies accounted for using the equity method.

(f) In connection with our sale, we incurred approximately $63 million of costs, as follows: Transaction costs, primarily legal, accounting and investment banking fees -- $23 million; loss on executive contractual obligations -- $25 million; and loss on pension curtailment -- $15 million.

(g) Reflects loss incurred on the repayment of the bridge loan.

(h) Includes foreign currency hedging losses allocated to us by Time Warner under Time Warner's foreign currency risk management program in the amount of $10 million during the five-month period ended February 29, 2004 and certain foreign currency transaction losses arising from inter-company transactions that are not expected to be settled.

(i) Reflects costs of stock-based compensation accounted for under FAS 123 and representative costs of services provided by employees of the Investor Group who have filled in management roles on an interim basis.

(j) Reflects adjustments to decrease cost of revenues in the amount of $5 million for the October 2003 period in which the more favorable, market-based pricing arrangements under the third-party Cinram Agreements for manufacturing, packaging and physical distribution services were not in effect.

(k) Reflects reduction in operating expenses from restructurings already implemented for which the cost savings have not been fully reflected in our Statement of Operations.