Announcement of Full Year Results

HMV Group plc

Announcement of Full Year Results

Summary

Ø Like for like sales were down 12.1%

Ø Pro forma* sales of £923.2m (2011: £1,149.1m), a decrease of 19.7%

Ø Pro forma* loss before tax and exceptional items of £16.2m (2011: profit of £17.6m)

Ø On a statutory basis for continuing operations sales were £873.1m (2011: £1,102.2m) and loss before tax and exceptional items was £16.2m (2011: profit of £16.2m)

Ø Exceptional charge before tax (operating and financing) for continuing operations of £22.4m (2011: £16.2m)

Ø HMV Live and aNobii joint venture reclassified as discontinued operation resulting in non-cash impairment charge of £38.7m

Ø Total Group loss after tax and exceptional items (including impairment charges) of £80.4m (2011: £122.6m)

Ø Adjusted eps from continuing operations down to loss of (3.4)p (2011: profit of 3.4p). Basic loss per share for total Group of (19.3p (2011: loss of (29.3)p)

Ø Underlying net debt at £166.7m (2011: £170.7m)

*Pro forma adjustment treats HMV Live as a continuing operation throughout the current and previous financial year and excludes Waterstone's and HMV Canada.

Highlights

Ø Strong increase in technology sales continues, as we become a credible destination for an expanding range of entertainment devices such as Google's Nexus tablet

Ø Good market share performance in music, film and games

Ø HMV Retail gross margin increased by 90 basis points compared to previous financial year

Ø Successful £220m bank refinancing to September 2014 following completion of the Hammersmith Apollo sale for £32m

Outlook and Strategic Review

Ø Looking forward into 2012/13, with the changes we have made to our relationships with our suppliers and the continuing progress in developing our technology sales, the Company remains confident that it will return to profitability. We expect pro forma PBT to be at least £10m for 2012/13

Ø The strategic review of the remaining Live business is ongoing and the Company is currently in preliminary discussions regarding potential options for its disposal

Ø The strategy of the company is to be the UK's leading entertainment brand, offering our customers the best technology devices, products and services

Ø Entertainment devices will grow to become the most significant part of our business. Our offer will be differentiated through the quality of our in-store experience and the digital entertainment content that will be bundled with devices. Music, film and games will remain at the heart of our offer delivered in both physical and digital form and through increasingly deep partnerships with our suppliers

Ø New CEO Trevor Moore and Group FD Ian Kenyon appointed to take over from 3 September 2012

Simon Fox, Chief Executive, said:

"The last year has been a difficult and challenging one for HMV and, as expected, this is reflected in our annual results. However, we are confident that the actions we have taken will enable us to significantly improve cash generation and make profits of at least £10 million in the year ahead.

Although we have clearly been through a turbulent period, our financial position is now stable thanks to the support of our suppliers, banks and colleagues, and I am confident, as I hand over the reins to Trevor Moore, that HMV has a secure future under his leadership."

Enquiries

*All enquiries on 9 August 2012 should be directed via Brunswick.

The Group's next trading update will be with an Interim Management Statement to coincide with the Annual General Meeting.

Chairman's Statement

The Group has come through another challenging year, but one in which it has proved that HMV justifies the support of key stakeholders such as suppliers, banks, employees and shareholders. With this support a number of important hurdles have been surmounted and I would like to thank our stakeholders for the contribution they have made.

Following the sale in 2011 of both Waterstone's and HMV Canada and the successful refinancing of the Group, the business continued to operate in markets where there was and remains significant structural change driven by digital delivery and intense price competition from supermarkets and internet mail order. Whilst HMV Retail has enjoyed a strengthening market share in its core CD and DVD markets, ongoing structural changes combined with the worsening economic climate, led to continued steep declines in these markets. In addition HMV Retail experienced a particularly disappointing Christmas performance in video games, both hardware and software, largely as a result of reduced stock availability. Whilst sales of portable digital technology products continue to grow strongly, particularly in the stores which have been refitted to accommodate additional technology ranges, the rate of growth of these products was insufficient to offset the declines elsewhere in the business.

Following poor Christmas trading, the period when substantially most of HMV's annual profit is earned, HMV changed the nature of its relationships with its key music and film suppliers with a view to materially improving the Group's profitability and cash flows over a two year period. Further, the Group announced that the economic environment and these trading circumstances had created material uncertainties which might cause significant doubt on the Group's ability to continue as a going concern in the future. Due to these uncertainties the Board initiated a strategic review of its Live Business with the intention that any proceeds of sale for all or part of the Live Business would be used to reduce the Group's overall level of debt with a view to securing the long tem financial stability of the Group. Further to this process and in order to maximise value, the Board took the decision to sell Hammersmith Apollo Limited (the company which owns and operates the Hammersmith Apollo) and announced, in May 2012 that it had conditionally agreed to sell Hammersmith Apollo Limited, to a company jointly owned by Anschutz Entertainment Group and CTS Eventim for a total cash consideration of £32m. The disposal was approved by shareholders in July, and completed on 7 August, together with the amendment of the terms of the Group's existing £220m bank facility with its existing lenders. The facility was extended by a further year to 30 September 2014.

The disposal of the Hammersmith Apollo, the associated improvement in HMV's financial structure, and the strengthening of supplier relationships all represent significant progress. Along with the ongoing strategic review of the remainder of the HMV Live business the Board believes that the HMV management team will be able to focus ever more closely on HMV's strategy for its core business, developing HMV's retail offering with a view to maximising value for all stakeholders.

Despite these challenging times the Board has remained aware of the importance of good governance and has ensured that this remains a key focus to ensure that the Company is operated in the best interests of its key stakeholders. Our attention to risk management, internal and external audit, controls, reporting and review remains undiminished.

Alongside an increasingly sound financial footing for the business, we continue to focus on sustaining the quality of the management team. Within the HMV Retail business we have made some strong appointments in the marketing, ecommerce and commercial teams. As successors to Simon Fox and David Wolffe, in Trevor Moore and Ian Kenyon we have experienced retailers who have the right skills and background for the coming years.

I would like to thank Simon and David for their contribution to HMV and for leaving the Group with a profitable future ahead of it. In addition we owe Chris Rogers our thanks for his able tenure as Chairman of the Audit Committee and I look forward to working with David Adams in his stead.

For the year ended 28 April 2012 the Group's pro forma profit before tax and exceptional items declined from a profit of £17.6m to a loss of £16.2m. On a statutory basis for continuing operations, profit before tax and exceptional items declined from a profit of £16.2m to a loss of £16.2m. On revenues from continuing operations which decreased by 20.8% to £873.1m our adjusted earnings per share from continuing operations fell to a loss of 3.4p from a profit of 3.4p last year. Basic earnings per share from continuing operations before exceptional items fell to a loss of 8.7p from a loss of 1.5p in 2011. Whilst our financial performance this past year has evidently been disappointing the Board is confident that the year ahead will see a significant financial improvement.

Philip Rowley, Chairman

Business Review

The Directors believe that there is substantial further potential in the retail operation based on a strategy that has three key priorities: (i) the further expansion of Technology as a category; (ii) the optimisation of Audio and Visual that emerges out of enhanced supplier relationships; and (iii) the opportunity to grow Games sales as a result of the contraction of competition in the games market. Other opportunities also exist as detailed below.

Expansion of Technology

Last year the amount of space allocated to technology products was significantly expanded in 144 HMV stores. Technology products include headphones, tablets, mp3 players, speaker docks and related accessories. The space expansion enabled the range of products stocked to be significantly widened and for many products to be displayed in an interactive way enabling customers to experience the products in a hands-on manner. Sales of these technology products performed very strongly (technology like-for-like sales increased 51% in the 5 weeks to 31 December 2011 for these stores). These products have grown to become approximately £90 million of HMV's turnover and 11% of its sales as at 28 April 2012.

HMV intends to further capitalise on this category in the years ahead. The Directors expect that the launch of new products (including the new iPad; Windows 8 and wireless headphones) will drive further sales growth from this category. In response to these opportunities the programme of store refits will be extended to a further 25 stores over the next six months.

Capitalising on the improved relationship with Audio and Visual suppliers

Over the next twelve months, the high street physical audio market is expected to decline in value by approximately 20%. The Directors expect this trend to continue over the next three years as both physical music sold by internet mail order and digital downloads continue to take market share. The value of the physical audio market is forecasted to have an annual value of around £400 million in 2014. In visual, the Directors expect the market to decline at a rate of between 10-13% per annum but the market is still forecasted to have an annual value of approximately £1.3 billion in 2014.

However, the Group has taken steps to strengthen its relationship with Audio and Visual suppliers. As announced on 20 January 2012, the Group has changed the nature of its relationship with key music and film suppliers (which includes the grant of warrants to these suppliers in respect of ordinary shares representing up to 2.5% of its fully diluted share capital). The Directors believe that this new basis of working with music and film suppliers will deliver a significantly enhanced financial performance from these categories.

In addition this strategic partnership is leading to improved availability of catalogue product, more stock being supplied on a consignment basis, and enhanced customer propositions. The Directors believe that these developments will protect and develop the Group's competitive positioning and will underpin its recent market share gains in Audio and Visual.

The Directors expect HMV Retail to remain the leading music and film market specialist through its strong brand and high street presence.

Growth in Games

Recent changes to the competitive environment in the Games market represent the beginning of a material new opportunity for HMV. As a result of the reduction in competitor High Street outlets HMV has already seen an increase in market share. The Directors expect these market share improvements to continue as the restructuring of a competitor takes further effect.

The Games market is expected to decline by 8% in the next year but is still forecasted to have an annual value of approximately £2.4 billion in 2014. The market decline is expected to slow and stabilise over the next three years with the prospect of the next generation of consoles from leading manufacturers being launched in the UK.

The Group also intends to build on the opportunities created by its pre-played games offer, which provides a significantly higher margin than new games.

Other opportunities

The Group continues to own a 50% stake in 7Digital, a digital media delivery company offering downloadable content both direct to customers, along similar lines to other service providers, or as branded digital solutions to business-to-business clients. 7Digital is the white label service provider behind a wide range of services. Furthermore, 7Digital's software is now pre-installed on a growing number of tablet and other consumer electronics devices, such as those marketed by Samsung, RIM (BlackBerry), Acer, Toshiba and Pure. Through this partnership with 7Digital, the Directors believe the Company is therefore well placed to participate in the forecast increase in digital content demand arising from the consumption on these devices.

In addition, the Directors believe that there are opportunities to develop other revenue channels within the Group's business. These include:

·; Leveraging further the value of the HMV brand and its retail presence through partnerships with technology device suppliers and other industry participants;

·; Developing HMV's online and multichannel offerings, particularly in light of the removal of LVCR (low value consignment relief) which will assist HMV to compete on a level playing field with pure internet competitors , and to offer improved services such as click-and-collect in stores;

·; Through further exploitation of customer relationship management strategies. HMV has since May 2009 acquired over 2 million loyalty card holders.

These opportunities and strategy represent an evolution in our thinking over the past 18 months. In March 2010 the Group outlined its strategy for the next three years, which was intended to deliver sustainable growth over the medium and long term. The plans for the HMV business included continuing to evolve HMV's product mix and growing in Live and Digital.

The disposal of a significant part of the Live business impacts on one element of previous strategic plans. However the disposal of Hammersmith Apollo Limited was a critical requirement to establish a stable capital structure for the Group.

It is expected that in the period following the disposal of the Hammersmith Apollo, management will continue the strategic review of the remaining Live business and the Company is currently in preliminary discussions regarding potential options for its disposal. During this period the Live business will be managed to maintain its value to potential bidders.

Outlook

Whilst the immediate economic environment looks no easier the change in the nature of HMV's relationship with its key music and film suppliers will have a materially positive impact on the Group's profitability and cash flow in the year ahead. On the basis of our current plans we continue to expect to be able to address the losses of the last year and return the business to profitability in the next financial year.

Financial Review

The period under review is the 52 weeks ended 28 April 2012, whilst the prior period covers the 53 weeks to 30 April 2011.

The result of the Group is presented on the basis of continuing and discontinued operations. The discontinued operations represent Waterstone's and HMV Canada, both of which were sold during the year and HMV Live and the associate aNobii, which were reclassified as held for sale following the commencement of a disposal process. In order to aid performance analysis, results are also presented below on a pro forma basis, which treats HMV Live and aNobii as if they were continuing operations for the whole period (excluding the impairment charge in respect of HMV Live and aNobii) and excludes Waterstone's and HMV Canada from both periods, along with the profit on their disposal..

Pro forma results

On a pro forma basis, total Group sales decreased by £225.9m or 19.6% to £923.2m, including a 12.1% decline in like for like sales. At constant exchange rates, total sales fell by 20.8%. An adverse movement in the Hong Kong dollar, offset by favourable movements in the Euro and Singapore dollar, impacted sales by £0.4m and operating profit by £nil.

Pro forma operating profit before exceptional charges decreased by £24.5m to £1.8m. This reflects a downturn in trading in HMV Retail of £23.0m and a reduced contribution from HMV Live of £1.8m compared with £3.0m last year.

Joint ventures and associates of 7digital and aNobii contributed a loss after tax of £1.1m (2011: £1.0m).

Net finance charges on a pro forma basis increased to £18.0m from £8.5m, reflecting the impact of higher average net debt at higher interest rates, the £6.4m (2011: nil) accrual of the exit fee on the bank facility entered into on 28 June 2011 and the £0.8m (2011: £nil) accretion of the value of the loan in respect of the warrants issued to the Company's banks at that time. Finance income of £1.7m (2011: £0.2m) mainly comprises the movement in the valuation of those warrants. In addition, exceptional finance charges of £6.4m (2011: £1.9m) were incurred in the period in connection with the refinancing of the Group's banking facilities.

The loss before tax and exceptional items on a pro forma basis was £16.2m, compared with a profit of £17.6m in the prior period.

Statutory results

For continuing operations, sales decreased from £1,102.2m to £873.1m and loss before tax and exceptional items was £16.2m, down from a profit of £16.2m in the prior period. For discontinued operations, loss before tax and exceptional items was £10.0m (2011: £14.6m profit).

Operating exceptional charges in continuing operations of £16.0m (2011: £14.3m) were incurred in the year. These included £11.1m of restructuring costs, store closure costs of £2.1m and £2.8m of fixed asset impairment charges in HMV UK and Ireland. In addition, exceptional charges in respect of discontinued operations of £33.5m (2011: £124.0m) were incurred in the year. These include an impairment charge of £37.1m arising on the reclassification of HMV Live as a disposal group, £1.6m on the reclassification of the aNobii joint venture as held for sale (2011: £111.5m Waterstone's and HMV Canada) and a net profit of £5.5m on the disposal of Waterstone's and HMV Canada. Full details of exceptional charges by business are given in Note 3.

Underlying net debt at £166.7m (2010: £170.7m) is £4.0m lower than last year, primarily reflecting the receipt of £49.5m of net cash for Waterstone's and HMV Canada, offset by higher interest payments and an outflow of working capital reflecting tightening of credit terms.

The Board is not recommending the payment of a dividend (2011: 0.9p per share).

The segmental results presented below have been restated to reflect the reorganisation of the Group. HMV Retail comprises HMV UK & Ireland, HMV Hong Kong and HMV Singapore. HMV Live has been reclassified as a discontinued operation as a disposal process was underway at 28 April 2012. The results of HMV Retail for 2011 have also been restated to reflect an error identified during the current period, further details of which are given in Note 1.

1. Total sales in 2012 are for 52 weeks compared with 53 weeks in 2011.

2. Year on year growth for the 52 week period compared with the corresponding 53 week period last year is based on results translated at the actual exchange rates being the weighted average exchange rates for the year ended 28 April 2012 and year ended 30 April 2011 respectively.

3. Constant exchange growth for the 52 week period compared with the corresponding 53 week period last year is based on the weighted average exchange rates for the year ended 30 April 2011.

4. HMV Group's like for like sales performance is calculated at constant exchange rates and measures stores that were open at the beginning of the previous financial year (i.e. open at the beginning of May 2010) and that have not been resized, closed or re-sited during that time. It includes sales from internet sites and is only ever the net amount received.

5. Operating profit is presented on a statutory basis. Pro forma operating profit of £1.8m consists of continuing operations presented above, HMV Live and share of post-tax loss of associate adjusted by £0.2m of additional depreciation in respect of HMV Live for the period after which it was identified as held for sale.

HMV Retail

HMV Retail's total sales fell by 20.8% at statutory exchange rates, including a like for like sales decline of 12.1%, as tough trading conditions reflected the difficult UK consumer environment and the ongoing structural decline in our core markets. This sales performance resulted in an operating profit of £1.3m, £23.0m lower than last year.

All three core UK entertainment markets declined in value over the period, with physical music down 19%, visual down 13% and games down 17%. Within all of these markets, HMV's share declined against last year largely as a result of the ongoing store closure programme, albeit with an improving trend that saw share growth in all three categories in the fourth quarter.

Other products now account for 14% of total sales, up from 12% in the prior year. This reflected strong growth in technology sales, including in the 144 stores that were refitted with an extended technology range of portable digital products in October and November.

HMV Hong Kong and Singapore traded well throughout the period, with like for like sales up 19.5% on prior year.

The decrease in HMV Retail's operating profit was primarily a result of the sales decline. Given the sales performance, we have supplemented our inventory control procedures with additional measures and taken actions to sell through older inventory, partly funded by suppliers. In addition, our initiative to purchase back catalogue inventory on a consignment basis is progressing well. We have also changed the nature of our relationships with our key music and film suppliers. This new relationship includes the provision of warrants to the suppliers and the development of supplier forums. The above actions have produced a c.£15.0m credit to the income statement in the year ended 28 April 2012. Inclusive of this credit, gross margin increased by 90 basis points in the period reflecting the measures taken above, which have allowed us to make our pricing more relevant, particularly in visual and games, albeit there has been some dilution from new sales categories. Continued focus has also been given to reducing costs both at a store and head office level and significant further progress has been made in this area.

Net exceptional costs totalling £9.1m have been incurred in the period (2011: £13.5m) relating to the restructuring of the business, fixed asset impairment charges and store closure costs.

In line with the store closure programme previously announced, HMV UK closed 23 stores and opened one in the period. HMV Hong Kong closed one store and opened two stores, and HMV Singapore closed one store and opened one store. The total retail portfolio stood at 252 stores at 28 April 2012.

Joint ventures

The Group's investments in joint ventures and associates accounted for using the equity method included in continuing operations represents the 50% stake in 7digital. Various investments in the Live division and aNobii, an eBook venture have been classified as discontinued operations. The Group's share of continuing joint venture and associate post tax losses in the period amount to £0.3m (2011: £0.2m) and discontinued activities amount to £0.8m (2011: £0.8m). In addition a review of the carrying value of investments has been performed which resulted in an impairment charge of £1.6m.

Discontinued operations

HMV Live

HMV Live is the second largest multiple live music venue operator in the UK, with a portfolio of 13 venues. In addition, HMV Live also operates five UK festivals and has management fee arrangements in place with third parties for approximately 30 overseas festivals. During the period, a strategic review of the business was carried out and in March 2012 a Board decision was made to pursue a disposal, from which date the business has been held as a disposal group.

An assessment was made of the carrying value of the assets against fair value, which resulted in an impairment charge of £37.1m. In addition, the results of HMV Live have been classified as a discontinued operation and the comparative period has been restated accordingly.

Sales in HMV Live for the year were £50.1m, a 7% increase on the prior year, with operating profit of £1.8m. The venues division traded strongly with an increased number of events held this year and higher spend per head. Following the opening of G-A-Y Manchester in April 2011, the expansion of the venue operation continued with the successful opening of the 1,500 capacity Manchester Ritz in September 2011.

The festivals division performed in line with expectations, with operating profit £1.0m higher than prior year. The new Wilderness festival achieved critical acclaim in its first year while the two key established festivals, Lovebox and Global Gathering, increased ticket sales significantly with improved profitability.

On 31 May 2012 the Group announced that it had conditionally agreed to sell the Hammersmith Apollo for £32.0m. Shareholder approval was received and the transaction completed on 7 August 2012. Options continue to be explored with regard to the remainder of the HMV Live business.

Waterstone's and HMV Canada

On 27 June 2011 the Company sold the entire share capital of HMV Canada Inc for a total cash consideration of £2.0m. On 28 June 2011 the Company completed the sale of the Waterstone's group of companies for a total cash consideration of £53.0m, of which £40.0m was paid on completion and £13.0m was paid on 31 October 2011. Prior to disposal, the two businesses reported total sales of £78.4m and made a combined loss before tax of £10.2m. The net profit on disposal was £5.5m.

The results of HMV Canada and Waterstone's have been presented in the income statement as discontinued operations. Further details are given in Note 6.

Net finance charges

Net finance costs for continuing operations increased from £7.9m to £17.2m. This reflected higher average net debt at higher interest rates, the £6.4m (2011: £nil) accrual of the exit fee on the Facility B element of the bank facility entered into in June 2011 and the £0.8m (2011: £nil) accretion of the value of the bank loan in respect of the warrants issued as a component of the new bank facility (see bank financing section below). Partially offsetting this increase is non-cash income of £1.6m (2011: nil) representing the movement in the fair value of these warrants. In addition, exceptional finance charges of £6.4m (2011: £1.9m) were incurred in respect of the refinancing of the Group's debt, at both June 2011 and costs incurred in agreeing the new facility, which completed post year end on 8 August 2012.

Arrangement fees of £4.4m have been deferred and are being amortised over the 27-month term of the facility.

Taxation

The underlying effective tax rate on continuing operations before exceptional items is 11.7% (2011: 12.1%), which is lower than the statutory rate due to no benefit being taken for the current period loss and over provision in prior periods. The total tax credit in the current year of £1.7m includes a charge of £0.2m in respect of discontinued operations (2011: £6.8m) and excludes any credit (2011: £7.3m) in relation to the exceptional items in continuing operations of £22.4m (2011: £28.7m).

Earnings per share

Adjusted earnings per share for continuing operations, excluding the effect of exceptional items, was a loss of (3.4)p, compared with a profit of 3.4p last year. Basic earnings per share for continuing operations was a loss of (8.7)p, compared with a loss of (1.5)p last year. Adjusted earnings per share excluding the effect of exceptional items for the total group was a loss of (6.1)p and basic earnings per share for the total group was a loss of (19.3)p compared to a loss of (29.3)p last year.

Dividend

The Board is not recommending the payment of a dividend (2011: 0.9p per share).

Under the terms of the refinancing effective on 28 June 2011, the Company is prohibited from making distributions to shareholders until such time as the £90m Facility 'B' tranche of term debt has been repaid in full. Following such repayment of the facility, dividends are permitted subject to certain restrictions, primarily relating to the indebtedness of the Company and existing and forecast compliance with all other facility terms. Consequently, no payment of dividends is anticipated in the forthcoming financial year.

Bank financing

On 28 June 2011 the Group entered into a new £220m bank facility, comprising a £70m term loan (Facility A), a £90m term loan (Facility B) and a £60m revolving credit facility (Facility C), each with a final maturity date of 30 September 2013. The margin payable on the facility is 4% per annum and an arrangement fee of £4.4m was paid and deferred to be amortised over the 27-month life of the facility. In addition, an exit fee (initially at 5% per annum, increasing to 8% on 1 April 2012 and 14% on 1 January 2013) accrues on the amount outstanding under Facility B and is payable upon repayment of Facility B or final maturity. The Company also issued warrants representing 5% of the Company's share capital to the lending banks effective 28 June 2011. The warrants are convertible into ordinary shares by a lending bank at any time from 30 June 2012 until the tenth anniversary of the issue of the warrants. The warrants were valued at £0.6m at 28 April 2012 and have been classified as a financial liability. The facility became fully effective from 28 June 2011.

On 8 August 2012 the Group completed the amendment of its banking facilities and extended the facility to 30 September 2014 or if certain conditions are satisfied, to 30 September 2015. The terms of the amendment, together with relevant financial covenants are set out in Note 14.

Cash flow and net debt

Underlying closing net debt of £166.7m was £4.0m lower than last year. This primarily reflected adverse trading combined with a working capital outflow of £7.4m, higher interest payments and contributions to the pension scheme, offset by lower capital expenditure, taxation receipts and cash received on business disposals. Free cash outflow was £43.2m (2011: £68.7m).

1. EBITDA - Earnings before interest, taxation, depreciation, amortisation and exceptional items.

2. Free cashflow - Cashflow from operating activities after capital expenditure and net interest

3. Underlying net debt - Underlying net debt is stated before unamortised deferred financing fees

Working capital

Working capital outflow of £7.4m (£2011: £96.7m) includes the positive impact of the disposal of Waterstone's and HMV Canada on working capital. It reflects lower stock holdings in the continuing business, the introduction of consignment stock, offset by accelerated payments to suppliers due to tightening credit terms.

Capital expenditure

Total capital expenditure in the period was £18.3m (2011: £28.2m), including £14.6m (£14.7m) for continuing activities and £3.7m (2011: £13.5m) for discontinued activities. Expenditure on continuing activities reflected £4.8m on stores including short lease stores, resites and refits, and £9.8m on IT and other projects. £1.9m (2011: £3.7m) was spent at HMV Live.

Following the Group's refinancing, capital expenditure is restricted to certain agreed levels, albeit these are believed to be adequate to fund the Group's strategic plans.

Operating leases

All the Group's retail stores are held under operating leases. In the UK, whilst the majority of leases are on typical institutional lease terms, lease flexibility has increased over recent years through natural ageing and the agreement of shorter lease lengths on both renewals and new store openings. Consequently, the average UK lease length is now five years. Lease flexibility is even greater in Hong Kong and Singapore, where the majority of stores operate through turnover-related leases with an average length of less than three years.

The Group's net operating lease rentals in continuing operations were £71.8m in the financial year (2011: £82.0m). The total continuing future rental commitment at the balance sheet date amounted to £431.8m, or £313.9m at net present value.

Pensions

The Group has a number of pension schemes in operation. These primarily include various defined contribution arrangements and a defined benefit scheme which, following a period of consultation, closed to future service accrual on 31 March 2011.

Under IAS 19 'Employee Benefits', the HMV defined benefit scheme had a deficit, net of deferred tax, of £16.2m (2011: £26.7m) at 28 April 2012. The most recently completed actuarial valuation was as at 30 June 2010 when a funding deficit of £62.5m (2007: £5.1m) was identified. This significant funding decline reflects adverse investment returns and major changes to actuarial assumptions. Finalisation of the funding valuation and an appropriate deficit recovery plan was dependant on the disposal of Waterstone's as a substantial proportion of the scheme liabilities relate to the Waterstone's business. On 6 June 2011 a scheme apportionment arrangement was entered into between the Company, Waterstone's and the scheme trustees, such that on Waterstone's ceasing to participate in the Scheme, their share of the Scheme's deficit (instead of becoming immediately payable) transferred to the Company. In return for so agreeing, the Trustees and the Company agreed certain payments to, and additional protection for, the Scheme. These payments are as follows:

·; £1.0m within three weeks of completion of the Waterstone's disposal and £1.5m within three weeks of receipt of the deferred consideration paid on 30 October 2011;

·; £5.0m per annum from 1 July 2011 until the end of the recovery period to be agreed with the Trustees;

·; £0.5m per annum from 1 May 2013 to 30 April 2021, and £3.0m on 1 January 2014; and

·; an additional share of Group's annual cash generation, subject to a cap of £1.0m.

Supporting financial information

Consolidated income statement

For the 52 weeks ended 28 April 2012 and 53 weeks ended 30 April 2011

For details of the exceptional items included above, see Note 3.

Consolidated income statement

For the 52 weeks ended 28 April 2012 and 53 weeks ended 30 April 2011

For details of the exceptional items included above, see Note 3.

Statements of comprehensive income

For the 52 weeks ended 28 April 2012 and 53 weeks ended 30 April 2011

Balance Sheets

Statements of changes in equity

Cash flow statements

For the 52 weeks ended 28 April 2012 and 53 weeks ended 30 April 2011

Notes to the financial statements

1. Basis of preparation

The financial statements of the Group and the Company have been prepared in accordance with International Financial Reporting Standards (IFRS) as adopted by the European Union and as applied in accordance with the provisions of the Companies Act 2006. The principal accounting policies adopted by the Group are set out in the Group's Annual Report and have been applied consistently throughout the reporting period.

The income statement for the comparative period, the 53 weeks ended 30 April 2011, has been restated to reclassify the results of HMV Live as a discontinued operation. See Note 6 for further details. In addition, the income statement, statement of comprehensive income, balance sheet, statement of changes in equity, cash flow statement and related notes for the 53 weeks ended 30 April 2011 have been restated to reflect an error identified during the current period, where in a small number of stores output VAT had not initially been recorded on some transactions. Sales, trade and other payables and related corporation tax balances have been restated to correct this, based on best available information at this time. Opening retained earnings and net assets at 24 April 2010 have been adjusted by £2.2m, the income statement for the 53 weeks ended 30 April 2011 by £0.9m and the balance sheet by £3.1m. The impact on earnings per share was 0.2p for the 53 weeks ended 30 April 2011.

Going concern

In determining the appropriate basis of preparation of financial statements, the Directors are required to consider whether the Group can continue in operational existence for the foreseeable future.

Following the successful disposal of Waterstone's and HMV Canada and the restructuring and refinancing of the Group in the first quarter of the year, the Group agreed with its banks a revised two year £220m credit facility. The new facility contained financial covenants in respect of gearing and fixed charge cover. In addition, an exit fee would accrue on the amount outstanding under the £90m Facility B term loan, which would be repayable upon repayment of Facility B or final maturity, with rates between 5% to 14% depending on the repayment profile of this tranche of debt.

In the second quarter of the year, the business experienced a significantly more challenging trading period, with deteriorating sales performance, hampered by continued constraints on inventory management as a result of reduced supplier credit terms. In our interim results statement, we reported that the degree of uncertainty over our ability to deliver profitable future trading performance, improve commercial terms with suppliers and reduce our core debt such that a subsequent refinancing would be possible, were such that a material uncertainty existed which may have cast significant doubt upon the Company's and the Group's ability to continue as a going concern.

In the third quarter good progress continued to be made across a number of projects to mitigate the uncertainty. These have included the launch of the 'Fast Forward' initiative to refit stores for a wider technology offering, a greater move to consignment stock arrangements and greater activity in respect of core activity sales through working with suppliers to offer more competitive price points. The management team to execute these initiatives was also strengthened. The launch of the fast forward initiative to increase the technology offering to 144 stores has driven up technology as a proportion of total sales. Strategic relationships have been strengthened with our key suppliers and through closer partnering we have achieved better inventory control and grown our market share, contributing to the beneficial impact on earnings of c.£15m referred to in the financial statements.

In the fourth quarter the Group announced the disposal process of HMV Live in order to generate cash proceeds to reduce the core debt levels. The Hammersmith Apollo disposal completed on 7 August and will realise net cash proceeds of £23m for the Group.

The completion of the Hammersmith Apollo transaction enabled the Group to secure revised terms for the core debt and working capital facilities that were originally implemented in the first quarter of the year. The revised terms include an extension to the maturity date from September 2013 to September 2014, with an option to extend the maturity date by a further year subject to scheduled repayments totalling £40m having been made.

Details of the principal risks and uncertainties monitored by the Board are set out in the Directors' Report in the Group Annual Report and Accounts. The Directors are aware that the following uncertainties impacting the consideration of liquidity and solvency risk continue to face the business:

a) future trading may not be in line with the assumptions in the Group's latest forecasts the achievability of which is dependent upon the current economic environment, the rate of decline of core physical product markets, HMV's market share performance, the peak Christmas trading period and the continued success of our three strategic key priorities;

b) the Group may be unable to sustain the improved commercial terms negotiated in the second quarter with supportive suppliers, although these are underpinned by written agreements that extend beyond the next 12 months. If future trading, particularly across the Christmas period, and the commercial terms support from suppliers is not in line with forecasts then there is a risk that the Group may breach its banking covenants. These are next tested at the end of October 2012 and quarterly thereafter and a breach could trigger a recall of the Group's banking facilities. However, the revised facility terms agreed on 8 August 2012 included a reset of the two main covenant test ratios, based on management's most recent risk adjusted forecasts, in order to provide increased headroom to enable management to execute the strategy over the next two to three years;

c) the ability to successfully refinance the revised credit facility (maturing in September 2014) which may be dependent upon the factors above in sections (a) and (b), as well as our ability to drive operating cashflow and raise cash proceeds from future business disposals. In this regard, operating cashflow performance has been enhanced by continuing focus on working capital and stock efficiency. The Board have also completed the sale of the Hammersmith Apollo post year end and continue to pursue the strategic review of the remainder of the HMV Live business. The Directors continue to maintain regular discussions with the Group's banks and these discussions remain constructive, as demonstrated by the revised terms of the debt facility.

As a result of the significant favourable developments achieved in the last half year, together with the current trading performance compared to forecasts upon which the revised covenant test ratios were set, the Directors have concluded that the combination of these circumstances no longer represents a material uncertainty which may cast significant doubt upon the Company's and the Group's ability to continue as a going concern.

However, the current economic conditions and in particular the difficult consumer and retail environment continue to create a degree of uncertainty as to the level of trading results that will be achieved in the year ahead. In particular, for HMV Retail, trading levels in the 9 weeks to 1 January, which typically account for some 37% of annual revenues, have a significant bearing on the profitability of the Group. Accordingly, the Directors have reviewed current trading and cashflow projections as part of their assessment, and after making enquiries and carefully considering the matters described above, the Directors have a reasonable expectation that the Group and the Company will be able to meet their liabilities as they fall due and will have adequate resources to continue in operational existence for the foreseeable future. 

2. Segmental information

For both management and financial reporting purposes the continuing operations of the Group are organised into one operating business, HMV Retail, which is a retailer of pre-recorded music, video and electronic games that primarily trade under the HMV brand.

At 28 April 2012 HMV Live has been classified as a disposal group held for sale and as a discontinued operation as it is expected to be sold within 12 months of its reclassification. HMV Live's activities include the operation of live music venues and events, including festivals, together with sponsorship income relating to brands held within the business. It also includes the management of recording artists and other related activities.

The segmental results for the 53 weeks ended 30 April 2011 have been restated to reflect the reclassification of HMV Live. Discontinued operations therefore comprises the results of HMV Live, Waterstone's and HMV Canada, both of which were disposed of during the period. In addition, the results of the associate, aNobii Limited, have also been classified as discontinued. Finance costs, finance income and income taxes are managed on a Group basis.

The following tables present revenue (all from third parties), profit, employee numbers and certain asset information regarding the Group's reportable segments, for the periods ended 28 April 2012 and 30 April 2011.

1 Exceptional items from continuing operations totalling £16.0m comprise £9.1m allocated to HMV Retail and £6.9m of Corporate costs not allocated to a segment.

2 Total exceptional items £49.5m comprise £41.0m allocated to segments plus £6.9m of Corporate costs and £1.6m of impairment costs

The following tables present revenue and certain asset information regarding the Group's geographic locations for the periods ended 28 April 2012 and 30 April 2011.

3. Exceptional items (before taxation)