Preliminary Results

The following replaces HMV preliminary results released Thursday 30th June at 7am under 4126J. Amendements have been made to note 7. Discontinued operations - The net cash flows attributable to Waterstone's and HMV Canada table.

HMV Group plc

Announcement of Full Year Results

Summary

Ø Total Group sales fell 7.4%, with total sales from continuing operations down 10.1%

Ø Like for like sales were down 11.0%, with like for like sales for continuing operations down 14.5%

Ø Pro forma* profit before tax and exceptional items of £28.9m (2010: £74.2m)

Ø Reported profit before tax and exceptional items of £18.8m (2010: £68.9m)

Ø Exceptional charge (operating and financing) of £28.7m (2010: £5.3m)

Ø Waterstone's and HMV Canada reclassified as discontinued operations, resulting in non-cash impairment charge of £111.5m. Disposals completed post year end

Ø Total Group loss after tax and exceptional items (including impairment charges) of £121.7m (2010: profit £49.2m)

Ø Adjusted eps down 67% to 3.8p (2010: 11.7p). Basic loss per share of 1.1p (2010: eps of 11.3p)

Ø Net debt at £170.7m (2010: £67.6m)

Ø Successful £220m bank refinancing to September 2013

*Pro forma adjustment treats Waterstone's and HMV Canada as continuing operations throughout the financial year.

Strategic update

Ø Having restructured and refinanced the Group, our clear focus is to:

Ø Drive for cash and continue to reduce costs across the business

Ø Reinvigorate our stores with the expansion of our range of portable digital products

Ø Increase our activities in the high-growth markets of live, ticketing and digital

Simon Fox, Chief Executive, said:

"We have taken decisive action to restructure and successfully refinance the Group.

"HMV remains a world-class entertainment brand, and we now have a very clear focus and strategy to drive cash generation and cost reduction, reinvigorate the customer offer and further diversify the Group into the growth areas of live, ticketing and digital".

Enquiries

*All enquiries on 30 June 2011 should be directed via Brunswick.

Slides to accompany this announcement are available for viewing or download at www.hmvgroup.com/investors/presentations.

The Group's next trading update will be with an Interim Management Statement on 9 September 2011, the date of the Annual General Meeting.

Chairman's Statement

This has been, unquestionably, a difficult and turbulent year for the Group, as we experienced further changes in our core product markets, particularly in HMV, overlaid with a progressive deterioration of the macro-economic environment. These challenging conditions were compounded by unprecedented weak trading in our UK businesses at Christmas, a period which typically accounts for 40% of the Group's full year sales and a significant proportion of annual profit. The summary effect of these factors was that the Group's operating and financial performance was significantly adverse to the Board's expectations, and we confirmed that the Group did not expect to meet certain of the covenant tests in its existing bank facility when they fell due.

We commenced discussions with our lending banks regarding potential changes to our existing bank facility to ensure appropriateness for future trading conditions and to support delivery of the Group's strategy. During the course of these negotiations, the Board became aware that the Group would need to reduce leverage in the short term in order to achieve a satisfactory refinancing, and concluded that the most decisive way to achieve this was through the disposal of Waterstone's. After fully exploring all of the options available to us for Waterstone's, the Group announced on 20 May 2011 that a conditional agreement had been entered into to sell Waterstone's to A&NN Capital fund Management for a total cash consideration of £53 million. This transaction was successfully delivered on 28 June 2011, following the approval of shareholders, the pension trustee, pensions regulator and the Group's lending banks. The restructuring of the Group was completed in June 2011 with the disposal of HMV Canada for £2.0 million to Hilco UK Ltd.

The separation of HMV and Waterstone's, and the sale of HMV Canada, are the right decisions at this time. The sale of Waterstone's, in particular, has enabled the Group to agree with its banks a revised, two-year £220m credit facility (the details of which are on page 12), which strengthens the capital structure of the Group and enables us to continue evolving our strategy to deliver value from the HMV UK and Live businesses. In turn, new ownership for Waterstone's and HMV Canada has secured a future for these businesses in increasingly challenging markets. On behalf of the Board, I would like to convey my appreciation to the teams at Waterstone's and HMV Canada for their contributions to our Group.

For the year ended 30 April 2011, the Group's pro forma profit before tax and exceptional items declined by 61% to £28.9m, on revenues which decreased by 7% to £1,868.3m. Our adjusted earnings per share from continuing operations fell by 67% to 3.8p. Given this level of performance, combined with the indebtedness of the Group at the year end, the Board has decided not to recommend payment of a final dividend. The interim dividend of 0.9p per share is, therefore, also the total dividend for the year, down from 7.4p in the prior year. The Board has also agreed, within the terms of the Group's revised bank facility, not to pay future dividends until a £90m term loan has been repaid.

Our operating and financial performance this year has evidently been both disappointing and unsatisfactory. However, the Board has grounds to be optimistic about our ability to improve the performance of the continuing Group.

Since being appointed Chairman, much time has been spent on the disposal of Waterstone's and HMV Canada, and in renegotiating the bank facility. At the same time the company has been working hard on its plans for the future. Whilst we operate in rapidly changing markets, we believe that there is a clear place for HMV as a specialist retailer of entertainment products and that by rebalancing the space in many of our stores away from declining categories to a focused range of high-growth technology products we will both enhance our offering to our customers and strengthen our sales base. In addition, as we evolve as a broader-based entertainment business, we see strong opportunities to combine under one format a focused range of portable digital products and accessories, visual, games and music and, increasingly, access to live and digital content.

Now that we have put the Group on a sounder financial footing, the management team can refocus on running the business and developing and executing effective strategies for the future. We have a strong management team, who are highly motivated to succeed in this challenging environment. I would like to thank Robert Swannell for his contributions as Chairman and support to me as I took over the role, and welcome David Wolffe, who joined us as Group Finance Director at such a critical time for the business. The Board would also like to express our appreciation to Neil Bright for his many contributions as Group Finance Director over the preceding 12 years.

In summary, the Group had a difficult year against a backdrop of challenging markets and continuing macro-economic uncertainty. As we encountered increased financial uncertainty during the final quarter, our lending banks and suppliers remained supportive of the Group and, through the disposal of Waterstone's to a good home, we were able to secure a future for the continuing business. Throughout the year, we have retained a tight control over our cost base, including a 9% reduction in HMV UK & Ireland's total store footage, and we will increase our focus on cost reduction as part of an overall strengthening of our financial discipline. Our Group has been simplified and our strategic agenda is tightly focused. We must rebuild and do so quickly. At the heart of our business is a World-class entertainment brand, surrounded by high quality assets, dedicated people and the support of our business partners. With this strong underpinning, our urgent priority on behalf of all our stakeholders is to re-create value.

Philip Rowley

Chairman

Strategic Review

After a three-year period during which the Group made excellent progress, delivering 50 per cent growth in profit before tax and exceptional items and a 40 per cent increase in earnings per share, 2010/11 was a disappointing and challenging year for the Group.

In March 2010, we outlined our strategy for the next three years, through which we planned to deliver sustainable growth over the medium and longer term. The plans for the HMV business included continuing to evolve HMV's product mix and growing in live and digital, while in Waterstone's our short-term target was to restore the operating margin to 2-3% by executing a clear turnaround strategy for the business. A flexible cost base, including a property portfolio with a declining average lease life, underpinned these plans.

We have long acknowledged that the core HMV markets for music, visual and games are changing structurally and, therefore, our business must evolve into higher-growth areas of the broader entertainment market. Over the last 12 months, the packaged music and visual markets declined broadly as expected. However, during the year the market for games hardware and software, albeit at a low point in its growth cycle, significantly underperformed the industry's expectations, whilst in visual HMV's performance was weaker than the market, and in both categories we lost some share largely as a result of aggressive pricing strategies by supermarket and Internet mail order competitors. These continuing underlying trends, combined with very weak trading at Christmas, when our UK stores were significantly impacted by severe snow, produced a disappointing operating performance in HMV UK.

HMV Live, comprising our live music venues and portfolio of summer festivals, performed well, driven by increased venue utilisation, occupancy and sales as we continued to maximise the synergies with HMV UK's retailing activities.

In Waterstone's, under the new management team appointed at the beginning of 2010 very good progress was made on our strategic priorities to refocus on range and localise the in-store book offer, drive sales of related product and maximise efficiencies from the book hub. Therefore, profit at Waterstone's increased significantly compared to the prior year and we achieved our short-term target for operating margin.

Addressing our flexible cost base and capital structure became key priorities as we exited a difficult peak trading period. We identified 40 HMV stores for closure, primarily in locations where we operate more than one store, and we are making good progress on this programme. In addition, the disposals of Waterstone's and HMV Canada has simplified the Group and strengthened its capital structure, therefore allowing us to more closely focus on the business strategy of continuing to develop the customer offer across HMV Retail and Live. Both Waterstone's and HMV Canada have strong positions in their respective markets combined with high quality people, and the Group wishes their new owners and our former colleagues continued success.

As negotiations over a revised facility with our lending banks progressed during our final quarter, our suppliers remained highly supportive, reflecting our strong working relationships with them and the importance of our business to the markets in which we operate. Our priority is to optimise these relationships for the benefit of HMV's customers, providing them with high quality content and the very best offers for entertainment whether consumed at home, live or on the move.

We have much to do, and with the Group on a sounder financial footing we are accelerating our plans to transform HMV into a broad-based entertainment business.

Rebalancing HMV's store space and range with the expansion of technology

To offset the changes taking place in our core physical product categories, new products, which align with HMV's core entertainment offering and relevance to customers, have been introduced into our offer over the last three years. The most successful of these categories is a highly focused range of portable digital technology, including headphones, speaker docks, MP3 players and related accessories, which as entertainment products fit exceptionally well with HMV's customer base and specialist brand. Since their launch in HMV stores three years ago, these products have grown to become £85 million of HMV UK's turnover and 8% of sales, despite limited dedicated store space, and we have demonstrated that our focused ranges and differentiated store environment can compete effectively with other retailers of these products. We believe there is a significant revenue opportunity in expanding our in-store space to include a wider range of these products, incorporating new portable tablet devices that are expected to grow rapidly over the next few years.

During our final quarter, we commenced trials in six stores, significantly increasing store space for this category of product. As a result, growth of over 100% in technology like for like sales has been delivered in these stores and their overall like for like sales have improved by over 8% in comparison to the rest of our estate. In the new financial year, we will commence a roll out of the successful elements of this trial, so that by Christmas 2011, 150 HMV stores will have around a quarter of their space dedicated to technology.

We expect that this rebalancing of store space and range will over the next few years continue to offset the structural changes that are taking place in some of our core categories, albeit the combined value of the physical markets for music, visual and games in the UK is still expected to be around £4.5bn in 2014. Our strategies to compete effectively in these markets are based on realistic medium-term assessments, and include: leveraging our leading specialist brand and multi-channel presence to protect margin; focusing on our core strengths in range, campaign and promotions; maximising the synergies that have been built with HMV Live; and, through our strong links with suppliers, creating attractive and value-added offers for our customers.

Customer relationship management across all of HMV's touchpoints with consumers is a key part of our strategy to be the leading specialist retailer for entertainment. HMV has since May 2009 recruited 1.8 million 'Pure' loyalty card holders, who are able to exchange points accumulated against purchases made from HMV for a wide range of rewards, such as entertainment merchandise signed by artists and tickets to live events. Pure is also a strong asset for differentiating our retail offer, and provides key information about our customers' preferences, and these are shared across our activities in live and digital.

Evolve HMV as a broad-based entertainment brand

Over the last two years, we have made significant investments in the growth entertainment markets of live music, ticketing and digital to counteract declines in the core physical format retail markets and evolve HMV into a broad-based 'entertainment brand'. The three areas of focus are HMV Live, HMV Tickets and 7digital, which we intend to grow by maximising synergies with our retail platform and customer base.

We intend to add to our portfolio medium-sized live venues, including in the autumn of 2011 the reopening of a 1,500-capacity venue in Manchester. Our target is to attain sufficient UK coverage to route artists' national tours entirely through HMV Live venues and, in our existing venues, continue to drive utilisation, occupancy and spend per head. Our aspiration for HMV Live is to increase its operating profit to around £10m over the medium term.

There is a significant opportunity to leverage our existing HMV Tickets platform to grow our share in the UK ticketing market, which has an estimated annual value of around £1bn. HMV's access to a large and relevant entertainment customer base enables effective promotion of events to store and online customers, and this platform is also attractive to promoters of events at third-party venues. Our aspiration is to build a ticketing business that, over the medium term, will make a £3-4m operating profit contribution to HMV UK.

There are powerful synergies from the partnership of HMV stores, HMV.com and HMV Tickets. We have already developed a successful formula for combining these assets to create new revenue opportunities, including offering live tickets to customers when they pre-order product by the same artist from HMV.com, and tickets to our venues and festivals are included as rewards to Pure loyalty card holders. Through the support of the HMV store and online network, and using our strong links with suppliers, we expect to drive utilisation, occupancy and sales at our venues and summer festivals. Ticketing is also a valuable source of customer data for the cross-selling of other physical and digital products across our multiple channels.

In digital, through the Group's joint venture with 7digital, we have excellent visibility to and participation in this high growth market. 7digital is at the heart of developments in digital media, and its entertainment content is pre-installed on a growing number of tablet and other consumer electronics devices, including Samsung, BlackBerry, Acer, Toshiba and Pure. Our partnership with 7digital, combined with the increasing focus on technology products in our stores, creates opportunities to enhance the HMV customer experience with bundled offers of digital content and portable devices.

Outlook

We continue to operate in a challenging macro environment, and the core retail markets in which HMV trades also remain difficult. However, we have taken decisive action to restructure the Group, and have a clear strategy for transforming HMV into a broad-based entertainment business. We are encouraged by the support that continues to be shown by suppliers of our core categories, in which there are strong opportunities to improve our store productivity, and by the early signs from our technology trials in six stores, which are being rolled out to the majority of the estate by autumn 2011. In addition, the links between HMV's operations in retail and live are proving to be powerful, and enable us to create unique and compelling opportunities for our customers. With this strategy, we are targeting a significant improvement in our performance at Christmas, which as always will be key to the Group's full financial year.

Although we have much more to do, with clear plans to further benefit from the integration of retail, ticketing, live and digital, combined with a relentless focus on cash and driving cost reduction, our aspiration over the medium term is for the Group to restore operating margin to 3-4%.

Financial Review

The period under review is the 53 weeks ended 30 April 2011, whilst the prior period covers the 52 weeks to 24 April 2010.

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 reclassified as assets held for sale following the commencement of disposal processes. In order to aid performance analysis, results are also presented below on a pro forma basis, which treats Waterstone's and HMV Canada as if they were continuing operations for the whole period.

On a pro forma basis, total Group sales decreased by £148.3m or 7.4% to £1,868.3m, including an 11.0% decline in like for like sales. At constant exchange rates, total sales fell by 8.1%. A favourable movement in the Canadian dollar exchange rate, partially offset by an adverse movement in the Euro, impacted sales by £14.1m and operating profit by £0.1m.

Pro forma operating profit before exceptional charges decreased by £43.0m, or 53.4%, to £37.4m. This reflects the downturn in trading in the HMV retail businesses, particularly in the second half of the year, partially offset by the improvement in profitability of Waterstone's. Operating profit also includes a full year contribution from HMV Live for the first time, which contributed profit of £3.0m compared with the £0.2m seasonal loss recorded for the three months of the previous financial year.

Joint ventures and associates of 7digital and aNobii (an ebook business) contributed a loss after tax of £1.0m.

Net finance charges increased to £8.6m from £6.2m, reflecting the impact of higher average net debt as a result of the downturn in trading. In addition, exceptional finance charges of £1.9m were incurred in the period in connection with the refinancing of the Group's banking facilities.

The profit before tax and exceptional items on a pro forma basis was £28.9m, down 61% on the prior period. For continuing operations, profit before tax and exceptional items was £18.8m, down 72.7% on the prior period.

A net operating exceptional charge of £26.8m (2010: £5.3m) was incurred in the year. This included £23.9m of store closure costs, offset by a £13.8m lease premium received on the disposal of the HMV UK Oxford Street store, fixed asset impairment charges of £11.2m, restructuring costs of £7.8m, and a net defined benefit pension credit of £2.3m. In addition, a non-cash impairment charge of £111.5m arose on the reclassification of Waterstone's and HMV Canada as disposal groups. Full details of exceptional charges by business are given in Note 3.

Underlying net borrowings at £170.7m (2010: £67.6m) were £103.1m higher than last year, primarily reflecting the adverse impact of working capital movements due both to the downturn in trading and a tightening of credit during the period that the Group's refinancing remained uncertain.

The Board is not recommending the payment of a final dividend. Consequently, the 0.9p per share interim dividend already paid represents the total dividend for the year (2010 total dividend: 7.4p).

1. Total sales in 2011 are for 53 weeks compared with 52 weeks in 2010. The additional week's trading contributed 1.2% to total Group sales growth.

2. Year on year growth for the 53 week period compared with the corresponding 52 week period last year is based on results translated at the actual exchange rates being the weighted average exchange rates for the year ended 30 April 2011 and year ended 24 April 2010 respectively.

3. Constant exchange growth for the 53 week period compared with the corresponding 52 week period last year is based on the weighted average exchange rates for the year ended 24 April 2010.

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 2009) 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. On a pro forma basis, Waterstone's and HMV Canada are presented as if they had been continuing operations throughout the financial year.

HMV UK & Ireland

HMV UK & Ireland's total sales fell by 13.6% at statutory exchange rates, including a like for like sales decline of 14.8%. This sales performance resulted in an operating profit of £24.0m, 67.5% lower than last year.

Music and visual markets continued to decline in line with expectations. In music, the physical market was down almost 10% in volume, broadly in line with HMV's performance. Continued growth in the digital music market resulted in an overall music market decline of 5%. In visual, market volume also declined 10%, but more aggressive competitor pricing strategies led to a share loss.

The games market continued to be challenging with a 14% contraction in market value in the period. HMV market share also declined as supermarkets, in particular, expanded their offer. However, pre-played games continue to perform strongly with sales +46% in the year.

Other products now account for 12% of total sales, up from 9% in the prior year. This reflected strong growth in technology sales, despite dedicated store space remaining limited. During the final quarter, trials were conducted in six stores in which space for this product category was significantly increased, delivering encouraging sales uplifts.

Margin declined by 50 basis points in the period reflecting some dilution from new sales categories, combined with a competitive pricing environment. Given the sales performance, costs were tightly controlled, with underlying like for like operating costs down 4% year on year.

Net exceptional costs totalling £13.5m have been charged in the period driven by store closures and ongoing property costs (£15.1m), asset impairments (£9.6m) and head office restructuring (£2.6m). This is offset by a credit receivable on the exit of the Oxford Street store (£13.8m).

In total, 22 stores were closed during the year. These included 19 of the 40 stores identified for closure in January, with a further 13 expected to close in the first quarter of 2011/12.

HMV International

HMV International now comprises seven stores in Hong Kong and Singapore following the reclassification of HMV Canada as a discontinued operation.

HMV International total sales increased by 6.9% to £33.2m, including like for like sales up 4.3%. This reflects the successful introduction of technology and related products, combined with growth in games.

Operating profit of £1.4m is £0.3m up on last year with gross margin dilution of 30 basis points. Operating costs were flat on prior year.

HMV Live

HMV Live is the second largest multiple live music venue operator in the UK, with a portfolio of 12 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.

Sales at HMV Live for the year were £46.9m with operating profit at £3.0m. The venues traded well, with improved venue utilisation, occupancy and spend per head reflecting the benefit of the developing operational synergies between Live and HMV store and online businesses. The expansion of the venue operation continued to progress, with the 1,700-capacity HMV Institute in Birmingham opening after redevelopment in September 2010 and G-A-Y Manchester opened in April 2011. Contracts were also exchanged to reopen the 1,500-capacity Ritz in Manchester in autumn 2011.

The result of the festivals division was adversely impacted by the inaugural High Voltage classic rock festival in summer 2010, which underperformed against expectations. However, the performance of established festivals was solid, with the outlook for 2011 encouraging.

Joint ventures

The Group's investments in joint ventures and associates accounted for using the equity method include 7digital and various investments in the Live division. In addition, £2.1m was invested in a 45.4% interest in aNobii, an eBook venture. The Group's share of joint venture and associate post tax losses in the period amount to £1.0m (2010: £0.3m).

Discontinued operations

On 25 March 2011, the Company confirmed that it was exploring strategic options in respect of Waterstone's and HMV Canada. This reflected a Board decision on 26 February 2011 to pursue a disposal of these businesses, from which date each has been held as an asset for sale. This requires the reclassification of each business as a disposal group and an assessment of the carrying value of assets against their fair value, which resulted in an impairment charge of £111.5m (Waterstone's £110.5m, HMV Canada £1.0m). In addition, the results of each business in the Group's financial statements are reclassified to discontinued operations, with the comparative period restated accordingly.

On 20 May 2011 the Group announced that it had conditionally agreed to sell the Waterstone's business for cash consideration of £53m. The final condition of the sale, shareholder approval, was satisfied on 23 June 2011 and the transaction completed on 28 June 2011.

On 27 June 2011 the Company announced that it had reached agreement to sell HMV Canada to Hilco UK for total cash consideration of £2.0m.

HMV Canada - discontinued activity

Total sales in HMV Canada fell 8.8% at constant exchange rates, with like for like sales also down 8.8%. The performance reflected ongoing decline in music and visual markets, although HMV Canada gained market share in both formats. Performance on games was disappointing, but technology and other products now account for over 7% of the sales mix.

Operating profit of £0.5m reflects the sales performance, partially offset by a strong margin control and operating costs down 3%.

Operating exceptional costs totalling £2.3m include £0.5m for store closures, £0.7m for impairment of property, plant and equipment and £1.1m of Head Office restructuring costs.

Waterstone's - discontinued activity

Waterstone's total sales decreased by £14.4m at statutory exchange rates, including a like for like sales decline of 3.8%. A satisfactory first half and Christmas trading period were followed by a disappointing final quarter of the year, with weakness in the book market accompanying some loss of market share.

However, despite the disappointing end to the year, Waterstone's has focused throughout on transforming its offer, through an enhancement of range, successful utilisation of the book hub, investment in refitting the top 20 stores, and an enhanced eReader offer. This has resulted in pro forma operating profit of £9.5m, compared with £2.8m last year. Gross margin improved 70 basis points in the year benefiting from an enhanced local offer and more selective discounting, with strong cost management resulting in operating costs down 4% in the period.

Operating exceptional costs totalled £10.2m, including £8.3m of store closure costs (19 stores closed during the year with 15 closing in the final quarter), impairment of remaining property, plant and equipment (£0.9m) and head office restructuring costs (£0.5m).

Net finance charges

Net finance costs for continuing operations increased from £6.2m to £8.6m. This reflected higher average net debt as a result of the downturn in trading. In addition, exceptional finance charges of £1.9m were incurred in respect of progress on the refinancing of the Group's debt.

Taxation

The underlying effective tax rate on continuing operations before exceptional items is 7% (2010: 28%), which is lower than the statutory rate due to over provision in prior periods. The total tax expense in the current year of £13.5m includes a credit of £7.3m (2010: £1.0m) in relation to the exceptional items of £28.7m (excluding impairment of disposal groups) (2010: £5.3m) offset by an exceptional charge in respect of the derecognition of the Group's deferred tax asset.

Earnings per share

Adjusted earnings per share for continuing operations, excluding the effect of exceptional items, was 3.8p, a decrease of 67% on last year. Basic earnings per share for continuing operations was a loss of (1.1)p, a decrease of 110% on last year. Adjusted earnings per share for the total group was 7.0p and basic was a loss of (29.1)p.

Dividend

The Board is not recommending the payment of a final dividend. Consequently, the 0.9p per share interim dividend already paid represents the total dividend for the year (2010 total dividend: 7.4p).

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 are anticipated in the forthcoming financial year.

Bank financing

On 22 July the Company completed a refinancing of a £240m revolving credit facility with a final maturity date of 30 September 2013, with an option to extend for a further year. As a consequence of the difficult market conditions the Company had experienced, compounded by weak trading during the key Christmas period, the Company announced on 1 March 2011 that it did not expect to meet certain of the covenant tests in the borrowing facility and that discussions with the lenders had commenced. The Company further announced on 5 April 2011 that, in agreement with the lenders, the measurement period for all relevant financial covenant tests had moved from the 12 months ending 30 April 2011 to the 12 months ending 2 July 2011.

Following completion of negotiations, and conditional on the disposal of Waterstone's, a new £220m bank facility became effective on 28 June 2011, with an arrangement fee of £4.4m payable. The facility comprises 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, up from 2.5% for the Group's existing funding. 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 facility became fully effective with effect from 28 June 2011.

Cash flow and net debt

Closing net debt of £170.7m was £103.1m higher than last year. This primarily reflected a working capital outflow £96.7m, combined with adverse trading and higher interest payments, offset by lower capital expenditure and business acquisitions. Free cash outflow was £68.7m (2010: inflow of £22.4m). 

1. EBITDA - Earnings before interest, taxation, depreciation, amortisation and exceptional items. 2010/11 is pro forma, based on discontinued activities being fully consolidated through the period

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

The Group suffered a significant working capital outflow during the period, totaling £96.7m (2010: outflow of £32.2m). This primarily reflected a marked reduction in supplier funding year on year, due to the impact of the like for like sales decline, combined with a tighter credit environment in advance of the post year end confirmation of the Group's refinancing and a dilution of payments terms in line with the changing sales mix, as well some adverse timing effects around the year end. Stock was down £35m year on year, reflecting store closures and very tight purchasing controls in the final quarter.

Capital expenditure

Total capital expenditure in the period was £28.2m (2010: £39.9m), including £18.5m (£21.5m) for continuing activities and £9.7m (2010: £18.4m) for discontinued activities. Expenditure on continuing activities reflected £3.7m on new stores and resites, £6.2m on store refurbishment and expansion, £4.9m on IT and other projects and £3.7m at HMV Live.

Following the Group's refinancing, future capital expenditure is restricted to certain agreed levels, albeit these are believed to be adequate to fund the Group's strategic plans, including the roll-out of an enhanced technology offer across the HMV UK store estate, and continued investment in HMV Live.

Acquisition of MAMA Group Plc

As reported at the half year, the net asset fair value exercise on acquisition of MAMA Group was finalised, resulting in a decrease in the fair value of the net assets acquired and consequently an increase in the goodwill capitalised of £4.6m. This principally reflected an impairment charge against the carrying value of MAMA's minority investment in the Nettwerk group of artist management companies.

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 six years. Lease flexibility is even greater in the Group's International division, in which the majority of stores operate through turnover-related leases with an average length of less than four years.

The Group's net operating lease rentals in continuing operations were £84.7m in the financial year (2010: £85.9m). The total continuing future rental commitment at the balance sheet date amounted to £0.5 billion, or £0.4 billion 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 £26.7m (2010: £28.1m) at 30 April 2011. The most recently completed actuarial valuation was at 30 June 2007, where a funding deficit of £5.1m was subsequently funded by three special contributions of £2.2m, the last of which was paid on 1 May 2010. The next actuarial review is due as at 30 June 2010, with a more significant deficit anticipated, reflecting adverse investment returns and updated actuarial assumptions. Finalisation of the funding valuation and an appropriate deficit recovery plan became dependent on agreement regarding the impact of the Waterstone's disposal on the scheme, as a substantial proportion of scheme liabilities related to the Waterstone's business. Consequently, 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 agreeing for the deficit to be so apportioned, the trustees and the Company have agreed certain future payments to the scheme, primarily as follows:

Ø £1.0m following completion of the Waterstone's disposal and £1.5m following receipt of the deferred consideration under the disposal agreement;

Ø £5.0m per annum (payable monthly) from 1 July 2011 until the close of any agreed recovery plan;

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

Ø an additional share of annual cash generation capped at £1.0m.

Notes for editors

HMV Group is one of the world's leading retailers of music, video and electronic games and the leading retailer of books in the United Kingdom and Ireland in terms of total sales. As of 30 April 2011 it operated 257 HMV and 9 Fopp stores selling music, video and games in five countries and 296 Waterstone's bookstores, principally in the United Kingdom and Ireland. All of the Group's retail operations, both in the United Kingdom and internationally, are wholly owned.

After the period end the Group announced the conditional disposal of the Waterstone's bookstores.

HMV Group websites

hmvgroup.com

hmv.com

tickets.hmv.com

hmv.ca

hmv.com.hk

Supporting financial information

Consolidated Income Statement

For the 53 weeks ended 30 April 2011 and 52 weeks ended 24 April 2010

For details of exceptional items, see note 3.

Consolidated Statement of Comprehensive Income

For the 53 weeks ended 30 April 2011 and 52 weeks ended 24 April 2010

Consolidated Balance Sheet

Consolidated Statement of Changes in Equity

Consolidated Cashflow Statement

For the 53 weeks ended 30 April 2011 and 52 weeks ended 24 April 2010

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.

2. Segmental information

For both management and financial reporting purposes the continuing operations of the Group are organised into three operating businesses - HMV UK & Ireland, HMV International (comprising HMV Hong Kong and HMV Singapore) and HMV Live. At 30 April 2011 Waterstone's and HMV Canada (which was previously included within HMV International) have been classified as disposal groups available for sale and as discontinued operations as both businesses are expected to be sold within 12 months.

HMV UK & Ireland and HMV International are the pre-recorded music, video and electronic games retailing divisions that primarily trade under the HMV brand. 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. Waterstone's is a book retailer, primarily trading under the Waterstone's brand. Segment information about these businesses is presented below. 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 30 April 2011 and 24 April 2010.

2. Segmental information continued

The following tables present revenue and certain asset information regarding the Group's geographic locations for the periods ended 30 April 2011 and 24 April 2010.

Non-current assets for this purpose consist of property, plant and equipment (including those held for sale), intangible assets, investment in joint ventures and associates and trade and other receivables.

3. Exceptional items

Exceptional items (charged) credited comprise the following:

Restructuring costs of £7.8m relating to redundancy costs of non-store employees in HMV UK & Ireland (£2.6m), HMV Canada (£1.1m) and Waterstone's (£0.5m) and £3.6m of advisory and other restructuring fees incurred by the Company during the period;

Store closure costs totalling £23.9m (HMV UK & Ireland (£15.1m), HMV Canada (£0.5m) and Waterstone's (£8.3m)), including fixed asset write-offs, redundancy costs incurred, strip-out costs, stock obsolescence and an assessment of provisions required for future property costs on stores where the leases have not yet expired;

Partially offsetting store closure costs was a £13.8m premium received in cash by HMV UK & Ireland on the disposal of its leasehold interest in a store at 360 Oxford Street, London;

3. Exceptional items continued

Fixed asset impairment charges totalling £11.2m were incurred by HMV UK & Ireland (£9.6m), Waterstone's (£0.9m) and HMV Canada (£0.7m) following a review of the carrying value of retail assets based on prevailing market trading conditions;

At 26 February 2011 the HMV Canada and Waterstone's businesses were reclassified as disposal groups held for sale (see Note 7). At this point they were remeasured to the lower of carrying value and fair value less costs to sell, which resulted in an impairment charge of £111.5m;

A net exceptional credit of £2.3m was taken in respect of defined benefit pension schemes, including a £2.8m curtailment credit in connection with benefit changes on the closure of the UK scheme to future accrual at 31 March 2011, partially offset by a £0.5m settlement cost of purchasing annuities in the Irish scheme.

Exceptional costs of £1.9m have been incurred with respect to the refinancing negotiations that were underway in the period to 30 April 2011 (see Note 4).

Exceptional costs for continuing operations charged to operating profit are allocated as £10.9m to cost of sales and £3.4m to administrative expenses. A net tax credit of £7.3m arose in respect of exceptional charges (continuing operations £4.2m, discontinued operations £3.1m).

During the previous period, included within cost of sales were exceptional impairment charges of £2.0m (Waterstone's £1.0m, HMV Canada £1.0m) following a review of the carrying value of certain retail assets based on prevailing market trading conditions. Administration expenses included restructuring costs of £1.7m relating to Waterstone's and £1.6m of integration costs following the acquisition of MAMA Group Plc. A tax credit of £1.0m arose in respect of these charges.

4. Net finance costs

Included within the total net finance costs are net non-cash charges totalling £1.7m (2010: £1.4m). These comprise the amortisation of deferred financing fees and other finance costs relating to pensions.

In addition to the above net finance income of £0.1m (2010: nil) was included in the result of the discontinued operation (see Note 7).

5. Taxation

The underlying effective tax rate on continuing operations before exceptional items is 7% (2010: 28%) which is lower than the statutory rate due to over provision in prior periods. The total tax expense in the current year of £13.5m includes a credit of £7.3m (2010: £1.0m) in relation to the exceptional items of £28.7m (excluding impairment of disposal groups) (2010: £5.3m) offset by an exceptional charge in respect of the derecognition of the Group's deferred tax asset.

6. Equity dividends

The Board is not recommending the payment of a final dividend. Consequently, the 0.9p per share interim dividend already paid represents the total dividend for the year (2010 total dividend: 7.4p).

7. Discontinued operations

As at 30 April 2011 negotiations for the sale of Waterstone's and HMV Canada were in progress and the businesses were therefore classified as disposal groups held for sale and as discontinued operations.

Waterstone's is the book retailing division, primarily trading in the UK and HMV Canada is the pre-recorded music, video and electronic games retailing division, previously included in the HMV International business segment. Subsequent to the year end, the Company announced that it had reached agreement to sell both businesses, further details of which are given in Note 13.

The results of Waterstone's and HMV Canada are presented below: