HMV Group Plc HMV Group Plc Annual Report and Accounts 2011 Annual Report and Accounts 2011

Home , Comet Group, Fopp (retailer), Hammersmith Apollo

HMV Group plc HMV Group plc Annual report and accounts 2011 Annual report and accounts 2011

14531_HMV_AR11_cover.indd 1 18/07/2011 11:25 14531_HMV_AR11_cover.indd 2 Jessie J performs at the HMV Next Big ThingFront Festival cover: 2011. Contents 92 tore and venue directory92 91 Additional information 39 onsolidated income statement38 36 Financial statements 30 24 16 oard of Directors 12 11 Governance 5 3 hairman’s statement Business and financial review: 1 Overview 41 35 90 44 43

C S S S C C D C B F B C of HMV Group plc B I D N C S G ndependent auditor’s report to the members inancial review hareholder information tatements of comprehensive income tatements of changes in equity usiness review alance sheets irectors’ remuneration report irectors’ report otes to the financial statements ompany information orporate responsibility orporate governance ash flow statements roup financial record HMV Retail operations were comprisedFor the of the12 monthsfollowing: ended 30 Aprilprogress 2011, willour continuingbe reportedbetween throughour activities theseentertainment, twoin Livedivisions. and andRetail, ourHMV andfocusis ain world-class isfuture on maximising our brand, thewhichcomplementary links is synonymous HMV Retail withclear and strategyLive businesses. for delivering the Group, value and fromwe now theDecisive have highly a tightlyaction was focused taken and to restructurewas adverse and to refinance expectations. Consequently, our operatingprogressively and financial difficult aperformance macro-economicbackdrop of changing environment.The product Group marketshad a challenging and a financialIntroduction year against 12 months ended 30 April 2011. HMV Retail comprised of continuing businesses of HMV UK & Ireland and seven stores in Hong Kong and Singapore. customer data ticketing platform a valuable Oversource 1.8m of Pure loyalty members and digital technology products with Visual, games and music specialist, 273 stores, predominantly in the UK of with sales of £1.1bn andLeading operating specialist profit entertainment retailer,

25.4m

apidly evolving sales of personal © Carl Fysh Carl © and Global Gathering and High Voltage,Six summer festivals, including Lovebox, Relentless Garage and Jazz CaféHouse (Edinburgh) and London’sApollo, Forum, Institute (Birmingham), Picture14 venues, including HMV Hammersmith of £3.0m with venues and summer music festivals,Operator of medium-size entertainment HMV Live Godskitchen and Global Gathering brands

a s pprox 30 overseas festivals under ales of £46.9m and operating profit

Design and production: Radley Yeldar www.ry.com 18/07/2011 11:25 HMV Group plc Annual report and accounts 2011 1 Chairman’s statement

This has been, unquestionably, a difficult The separation of HMV and Waterstone’s, and turbulent year for the Group, as we and the sale of HMV Canada, are the experienced further changes in our core right decisions at this time. The sale of product markets, particularly in HMV, Waterstone’s, in particular, has enabled the overlaid with a progressive deterioration Group to agree with its banks a revised, of the macro-economic environment. two‑year £220m credit facility (the details of These challenging conditions were which are on page 88), which strengthens compounded by unprecedented weak the capital structure of the Group and trading in our UK businesses at Christmas, enables us to continue evolving our strategy a period which typically accounts for to deliver value from the HMV UK and Live 40% of the Group’s full year sales and a businesses. In turn, new ownership for significant proportion of annual profit. Waterstone’s and HMV Canada has secured The summary effect of these factors was a future for these businesses in increasingly that the Group’s operating and financial challenging markets. On behalf of the Board, performance was significantly adverse I would like to convey my appreciation to the to the Board’s expectations, and we teams at Waterstone’s and HMV Canada for confirmed that the Group did not expect their contributions to our Group. to meet certain of the covenant tests in its existing bank facility when they fell due. Financial performance For the year ended 30 April 2011, the Group refinancing Group’s pro forma profit before tax and We commenced discussions with exceptional items declined by 61% to our lending banks regarding potential £28.9m, on revenues which decreased changes to our existing bank facility by 7% to £1,868.3m. Our adjusted earnings to ensure appropriateness for future per share from continuing operations fell by trading conditions and to support delivery 67% to 3.8p. Given this level of performance, of the Group’s strategy. During the course combined with the indebtedness of the of these negotiations, the Board became Group at the year end, the Board has aware that the Group would need to reduce decided not to recommend payment of a leverage in the short term in order to final dividend. The interim dividend of 0.9p achieve a satisfactory refinancing, and per share is, therefore, also the total dividend concluded that the most decisive way for the year, down from 7.4p in the prior year. to achieve this was through the disposal The Board has also agreed, within the terms of Waterstone’s. of the Group’s revised bank facility, not to pay future dividends until part of the term loan After fully exploring all of the options has been repaid. available to us for Waterstone’s, the Group announced on 20 May 2011 Our operating and financial performance that a conditional agreement had been this year has evidently been both entered into to sell Waterstone’s to disappointing and unsatisfactory. However, A&NN Capital Fund Management for the Board has grounds to be optimistic a total cash consideration of £53.0m. about our ability to improve the performance This transaction was successfully delivered of the continuing Group. 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 £2.0m to Hilco UK Ltd. The sale of Waterstone’s has enabled the Group to agree with its banks a revised credit facility, which strengthens our capital structure

14531_HMV_AR11_p01-11.indd 1 20/07/2011 15:04 HMV Group plc Annual report and accounts 2011 2 Chairman’s statement

Looking ahead In summary Since being appointed Chairman, much The Group had a difficult year against a HMV’s core product time has been spent on the disposal of backdrop of challenging markets and markets for visual, Waterstone’s and HMV Canada, and in continuing macro-economic uncertainty. games and music renegotiating the bank facility. At the same As we encountered increased financial time the Company has been working hard uncertainty during the final quarter, our on its plans for the future. Whilst we operate lending banks and suppliers remained Visual in rapidly changing markets, we believe that supportive of the Group and, through the The market for packaged visual there is a clear place for HMV as a specialist disposal of Waterstone’s to a good home, software in the UK contracted in 2010 retailer of entertainment products, and that we were able to secure a future for the by around 3.5%, and is expected to do by rebalancing the space in many of our continuing business. Throughout the year, so at a rate of 6%–8% per annum over stores away from declining categories to a we have retained a tight control over our the next three years. By 2014, the total focused range of high-growth technology cost base, including a 9% reduction in HMV packaged software market is forecast products we will both enhance our offering UK & Ireland’s total store footage, and we will to be worth £1.5bn. to our customers and strengthen our sales increase our focus on cost reduction as part base. In addition, as we evolve as a broader- of an overall strengthening of our financial Games based entertainment business, we see discipline. Our Group has been simplified The market for games hardware and strong opportunities to combine under one and our strategic agenda is tightly focused. We software is driven by new console format a focused range of portable digital must rebuild and do so quickly. At the heart of releases, which over the last two years products and accessories, visual, games and our business is a world-class entertainment has contracted significantly due to music and, increasingly, access to live and brand, surrounded by high quality assets, the maturity of current consoles. digital content. dedicated people and the support of With the first next-generation console, our business partners. With this strong Nintendo’s Wii U, announced for launch Now that we have put the Group on a underpinning, our urgent priority on behalf in mid-2012, we expect the market to sounder financial footing, the management of all our stakeholders is to re-create value. decline by 5%, 1% and to grow by 9% team can refocus on running the business in 2011-14, with the total value of the and developing and executing effective Philip Rowley packaged hardware and software strategies for the future. We have a strong Chairman market forecast to be £2.5bn–3bn management team, who are highly 29 June 2011 at the end of this period. motivated to succeed in this challenging environment. I would like to thank Robert Music Swannell for his contributions as Chairman The high street physical audio market and support to me as I took over the role, continued to contract in 2010, and this and welcome David Wolffe, who joined us as is expected to continue by around Group Finance Director at such a critical 20% in each of the next three years. time for the business. The Board would also Nevertheless, by 2014 the CD market like to express our appreciation to Neil Bright in the UK is expected to still have a for his many contributions as Group Finance value of around £0.3bn. Director over the preceding 12 years. Sources: Futuresource/Nick Parker Consulting (games)

We believe that there is a clear place for HMV as a specialist retailer of entertainment products

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HMV Live, comprising our live music We have much to do, and with the Group venues and portfolio of summer festivals, on a sounder financial footing we are performed well, driven by increased venue accelerating our plans to transform HMV utilisation, occupancy and sales as we into a broad-based entertainment business. continued to maximise the synergies with To offset the changes taking place in our HMV UK’s retailing activities. core physical product categories, new In Waterstone’s, under the new products, which align with HMV’s core management team appointed at the entertainment offering and relevance to After a three-year period during which beginning of 2010 very good progress was customers, have been introduced into our the Group made excellent progress, made on our strategic priorities to refocus offer over the last three years. The most delivering 50% growth in profit before on range and localise the in-store book successful of these categories is a highly tax and exceptional items and a 40% offer, drive sales of related product and focused range of portable digital increase in earnings per share, 2010/11 maximise efficiencies from the book hub. technology, including headphones, was a disappointing and challenging year Therefore, profit at Waterstone’s increased speaker docks, MP3 players and related for the Group. significantly compared to the prior year and accessories, which as entertainment In March 2010, we outlined our strategy we achieved our short-term target for products fit exceptionally well with HMV’s for the next three years, through which we operating margin. customer base and specialist brand. Since their launch in HMV stores three years ago, planned to deliver sustainable growth over Addressing our flexible cost base and these products have grown to become the medium and longer term. The plans capital structure became key priorities as £85m of HMV UK’s turnover and 8% of for the HMV business included continuing we exited a difficult peak trading period. sales, despite limited dedicated store to evolve HMV’s product mix and growing We identified 40 HMV stores for closure, space, and we have demonstrated that our in live and digital, while in Waterstone’s primarily in locations where we operate focused ranges and differentiated store our short-term target was to restore the more than one store, and we are making environment can compete effectively operating margin to 2%–3% by executing a good progress on this programme. with other retailers of these products. clear turnaround strategy for the business. In addition, the disposals of Waterstone’s We believe there is a significant revenue A flexible cost base, including a property and HMV Canada has simplified the Group opportunity in expanding our in-store space portfolio with a declining average lease life, and strengthened its capital structure, and range of these products, incorporating underpinned these plans. therefore allowing us to more closely focus new portable tablet devices that are on the business strategy of continuing to expected to grow rapidly over the next Challenging year develop the customer offer across HMV few years. We have long acknowledged that the core Retail and Live. Both Waterstone’s and HMV markets for music, visual and games HMV Canada have strong positions in their During our final quarter, we commenced are changing structurally and, therefore, our respective markets combined with high trials in six stores, significantly increasing business must evolve into higher-growth quality people, and the Group wishes their store space for this category of product, areas of the broader entertainment market. new owners and our former colleagues and our technology like for like sales have Over the last 12 months, the packaged continued success. increased by over 100% and we have music and visual markets declined broadly seen a swing of more than 8% in the as expected. However, during the year the New focus total stores’ like for like compared to the market for games hardware and software, rest of our estate. In the new financial As negotiations over a revised facility with year, we will commence a roll-out of the albeit at a low point in its growth cycle, our lending banks progressed during our significantly underperformed the industry’s successful elements of this trial, so that final quarter, our suppliers remained highly by Christmas 2011, 150 HMV stores will expectations, whilst in visual HMV’s supportive, reflecting our strong working performance was weaker than the market, have around a quarter of their space relationships with them and the importance dedicated to technology. and in both categories we lost some share of our business to the markets in which we largely as a result of aggressive pricing operate. Our priority is to optimise these strategies by supermarket and Internet mail relationships for the benefit of HMV’s order competitors. These continuing customers, providing them with high underlying trends, combined with very weak quality content and the very best offers trading at Christmas, when our UK stores for entertainment whether consumed were significantly impacted by severe snow, at home, live or on the move. By Christmas 2011, 150 HMV produced a disappointing operating stores will have a quarter performance in HMV UK. of space dedicated to technology products

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We expect this rebalancing of store space We intend to add to our portfolio medium- 7digital is at the heart of developments in and range will over the next few years offset sized live venues, including in the autumn digital media, and its entertainment content the structural changes that we expect to of 2011 the reopening of a 1,500-capacity is pre-installed on a growing number of see in some of our core categories, albeit venue in Manchester. Our target is to attain tablet and other consumer electronics the combined value of the physical markets sufficient UK coverage to route artists’ devices, including Samsung, BlackBerry, for music, visual and games in the UK is still national tours entirely through HMV Live Acer, Toshiba and Pure. Our partnership expected to be around £4.5bn in 2014. venues and, in our existing venues, with 7digital, combined with the increasing Our strategies to compete effectively in continue to drive utilisation, occupancy and focus on technology products in our stores, these markets are based on realistic spend per head. Our aspiration for HMV creates opportunities to enhance the HMV medium-term assessments and include: Live is to increase its operating profit to customer experience with bundled offers leveraging our leading specialist brand and around £10m over the medium term. of digital content and portable devices. multi-channel presence to protect margin; There is a significant opportunity to focusing on our core strengths in range, leverage our existing HMV Tickets platform There are powerful synergies from campaign and promotions; maximising the to grow our share in the UK ticketing the partnership of HMV stores, synergies that have been built with HMV market, which has an estimated annual Live; and, through our strong links with HMV.com and HMV Tickets value of around £1bn. HMV’s access to a suppliers, creating attractive and value- large and relevant entertainment customer added offers for our customers. base enables effective promotion of events Customer relationship management across to store and online customers, and this Outlook all of HMV’s touchpoints with consumers platform is also attractive to promoters of We continue to operate in a challenging is a key part of our strategy to be the events at third-party venues. Our aspiration macro environment, and the core retail leading specialist retailer for entertainment. is to build a ticketing business that, over markets in which HMV trades also remain HMV has since May 2009 accumulated the medium term, will make a £3m–4m difficult. However, we have taken decisive 1.8 million ‘Pure’ loyalty cardholders, whom operating profit contribution to HMV UK. action to restructure the Group, and have are able to exchange points accumulated There are powerful synergies from the a clear strategy for transforming HMV into against purchases made from HMV for partnership of HMV stores, HMV.com and a broad-based entertainment business. a wide range of rewards, such as HMV Tickets. We have already developed We are encouraged by the support that entertainment merchandise signed by a successful formula for combining these continues to be shown by suppliers of artists and tickets to live events. Pure is assets to create new revenue opportunities, our core categories, in which there are also a strong asset for differentiating our including offering live tickets to customers strong opportunities to improve our store retail offer, and provides key information when they pre-order product by the same productivity, and by the early signs from about our customers’ preferences, and artist from HMV.com, and tickets to our our technology trials in six stores, which these are shared across our activities in venues and festivals are included as are being rolled-out to the majority of the live and digital. rewards to Pure loyalty cardholders. estate by autumn 2011. In addition, the Through the support of the HMV store and links between HMV’s operations in retail An entertainment brand online network, and using our strong links and live are proving to be powerful, and Over the last two years, we have made with suppliers, we expect to drive utilisation, enable us to create unique and compelling significant investments in the growth occupancy and sales at our venues and opportunities for our customers. We are entertainment markets of live music, summer festivals. Ticketing is also a maintaining a relentless focus on cash and ticketing and digital to counteract declines valuable source of customer data for the driving cost reduction. With this strategy, we in the core physical format retail markets cross-selling of other physical and digital are targeting a significant improvement in and evolve HMV into a broad-based products across our multiple channels. our business at Christmas, which as always will be key to the Group’s full financial year. ‘entertainment brand’. The three areas In digital, through the Group’s 50% of focus are HMV Live, HMV Tickets and ownership of 7digital, we have excellent Although we have much more to do, with 7digital, which we intend to grow by visibility to and participation in the high clear plans to further benefit from the maximising synergies with our retail growth market for digital delivery. integration of retail, ticketing, live and digital, platform and customer base. combined with a relentless focus on cash and driving cost reduction, our aspiration over the medium term is for the Group to The combined value of the restore operating margin to 3%–4%. physical markets for music, Simon Fox visual and games in the UK is still Chief Executive Officer expected to be c.£4.5bn in 2014 29 June 2011

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The period under review is the 53 weeks On a pro forma basis, total Group sales Operating profit also includes a full year ended 30 April 2011, whilst the prior period decreased by £148.3m or 7.4% to contribution from HMV Live for the first covers the 52 weeks to 24 April 2010. £1,868.3m, including an 11.0% decline in time, which contributed profit of £3.0m like for like sales. At constant exchange compared with the £0.2m seasonal loss The result of the Group is presented on rates, total sales fell by 8.1%. A favourable recorded for the final three months of the basis of continuing and discontinued movement in the Canadian dollar the previous financial year. operations. The discontinued operations exchange rate, partially offset by an adverse represent Waterstone’s and HMV Canada, Joint ventures and associates of 7digital movement in the Euro, impacted sales by both of which were reclassified as assets and aNobii (an ebook business) £14.1m and operating profit by £0.1m. held for sale following the commencement contributed a loss after tax of £1.0m. of disposal processes. In order to aid Pro forma operating profit before Net finance charges increased to £8.6m performance analysis, results are also exceptional charges decreased by £43.0m, from £6.2m, reflecting the impact of presented below on a pro forma basis, or 53.4%, to £37.4m. This reflects the higher average net debt as a result of the which treats Waterstone’s and HMV downturn in trading in the HMV retail downturn in trading. In addition, exceptional Canada as if they were continuing businesses, particularly in the second finance charges of £1.9m were incurred operations for the whole period. half of the year, partially offset by the in the period in connection with the improvement in profitability of Waterstone’s. refinancing of the Group’s banking facilities.

Key Performance Indicators 2011 2010 Growth £m £m % Pro forma basis: Sales 1,868.3 2,016.6 (7)% Like for like sales % (11.0)% (4.2)% Operating profit (before exceptional items) 37.4 80.4 (53)% Exceptional items (operating and financial) (28.7) (5.3) Profit before tax (before exceptional items) 28.9 74.2 (61)% Profit before tax 0.2 68.9 Statutory basis – continuing operations: Sales 1,150.2 1,281.1 (10)% Like for like sales % (14.5)% (2.4)% Operating profit (before exceptional items) 27.4 75.1 (63)% Exceptional items (operating and financial) (16.2) (1.6) Profit before tax (before exceptional items) 18.8 68.9 (73)% Profit before tax 2.6 67.3

Discontinued operations (loss) profit after tax and exceptional items (118.5) 1.2

Adjusted basic earnings per share (continuing operations) 3.8p 11.7p (67)% Basic earnings per share (continuing operations) (1.1)p 11.3p Total dividend per share 0.9p 7.4p

Underlying net debt 170.7 67.6 Free cash flow (68.7) 22.4

Store numbers (continuing operations) 273 292 Average trading square footage (continuing operations) 1.60m 1.62m (0.9)%

14531_HMV_AR11_p01-11.indd 5 15/07/2011 09:50 HMV Group plc Annual report and accounts 2011 6 Financial review

The profit before tax and exceptional items charges of £11.2m, restructuring costs of both to the downturn in trading and a on a pro forma basis was £28.9m, down £7.8m, and a net defined benefit pension tightening of credit during the period that 61% on the prior period. For continuing credit of £2.3m. In addition, a non-cash the Group’s refinancing remained uncertain. operations, profit before tax and impairment charge of £111.5m arose on The Board is not recommending the exceptional items was £18.8m, down the reclassification of Waterstone’s and payment of a final dividend. Consequently, 72.7% on the prior period. HMV Canada as disposal groups. Full the 0.9p per share interim dividend already details of exceptional charges by business A net operating exceptional charge of paid represents the total dividend for the are given in Note 7. £26.8m (2010: £5.3m) was incurred in the year (2010 total dividend: 7.4p). year. This included £23.9m of store closure Underlying net borrowings at £170.7m costs, offset by a £13.8m lease premium (2010: £67.6m) were £103.1m higher than received on the disposal of the HMV UK last year, primarily reflecting the adverse Oxford Street store, fixed asset impairment impact of working capital movements due

Constant Year-on-year exchange Like for like growth growth sales growth 2011 2010 (decline)2 (decline)2 (decline)4 Sales £m £m % % % HMV UK & Ireland 1,070.1 1,241.9 (13.8) (13.6) (14.8) HMV International 33.2 31.1 6.9 3.3 4.3 HMV Live 46.9 8.1 – – – Total continuing operations 1,150.2 1,281.1 (10.2) (10.1) (14.5) HMV Canada 218.9 221.9 (1.3) (8.8) (8.8) Waterstone’s 499.2 513.6 (2.8) (2.6) (3.8) Discontinued operations 718.1 735.5 (2.4) (4.5) (5.3) Total HMV Group 1,868.3 2,016.6 (7.4) (8.1) (11.0)

Constant Year-on-year exchange growth growth Pro forma operating profit 2011 2010 2011 2010 (decline)1 (decline)2 (before exceptional items) £m £m % of sales % of sales % % HMV UK & Ireland 24.0 73.8 2.2 5.9 (67.5) (67.5) HMV International 1.4 1.2 4.4 4.0 16.8 11.1 HMV Live 3.0 (0.2) 6.4 – – – Continuing operations 28.4 74.8 2.5 5.8 (62.0) (62.1) Share of post-tax (loss) profit of joint ventures and associates (1.0) 0.3 – – – – Total continuing operations 27.4 75.1 2.4 5.9 (63.5) (63.6) HMV Canada5 0.5 2.5 0.2 1.1 (78.9) (80.7) Waterstone’s5 9.5 2.8 1.9 0.5 237.7 238.8 Discontinued operations 10.0 5.3 1.4 0.7 91.1 90.9 Total HMV Group 37.4 80.4 2.0 4.0 (53.4) (53.5)

1. Total sales in 2011 are for 53 weeks compared with 52 weeks in 2010. The additional weeks 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 (ie open at the beginning of May 2009) and that have not been resized, closed or resited 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.

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HMV UK & Ireland Margin declined by 50 basis points in HMV Live the period reflecting some dilution from HMV UK & Ireland’s total sales fell by 13.6% new sales categories, combined with a HMV Live is the second largest multiple at statutory exchange rates, including a like competitive pricing environment. Given live music venue operator in the UK, with for like sales decline of 14.8%. This sales the sales performance, costs were tightly a portfolio of 12 venues. In addition, HMV performance resulted in an operating profit controlled, with underlying like for like Live also operates five UK festivals and of £24.0m, 67.5% lower than last year. operating costs down 4% year-on-year. has management fee arrangements in place with third parties for approximately Music and visual markets continued to Net exceptional costs totalling £3.5m 30 overseas festivals. decline in line with expectations. In music, have been charged in the period driven by the physical market was down almost store closures and ongoing property costs Sales at HMV Live for the year were 10% in volume, broadly in line with HMV’s (£15.1m), asset impairments (£9.6m) and £46.9m with operating profit at £3.0m. performance. Continued growth in the head office restructuring (£2.6m). This is The venues traded well, with improved digital music market resulted in an overall offset by a credit receivable on the exit of venue utilisation, occupancy and spend music market decline of 5%. In visual, the Oxford Street store (£13.8m). per head reflecting the benefit of the market volume also declined 10%, but developing operational synergies between more aggressive competitor pricing In total, 22 stores were closed during the Live and HMV store and online businesses. strategies led to a share loss. year. These included 19 of the 40 stores The expansion of the venue operation identified for closure in January, with a continued to progress, with the The games market continued to be further 13 expected to close in the first 1,700-capacity HMV Institute in Birmingham challenging with a 14% contraction in quarter of 2011/12. opening after redevelopment in September market value in the period. HMV market 2010 and G-A-Y Manchester opened in share also declined as supermarkets, in April 2011. Contracts were also exchanged particular, expanded their offer. However, HMV International to reopen the 1,500-capacity Ritz in pre-played games continue to perform HMV International now comprises seven Manchester in autumn 2011. strongly with sales +46% in the year. stores in Hong Kong and Singapore following the reclassification of HMV The result of the festivals division was Other products now account for 12% of Canada as a discontinued operation. adversely impacted by the inaugural total sales, up from 9% in the prior year. High Voltage classic rock festival in summer This reflected strong growth in technology HMV International total sales increased 2010, which underperformed against sales, despite dedicated store space by 6.9% to £33.2m, including like for like expectations. However, the performance remaining limited. During the final quarter, sales up 4.3%. This reflects the successful of established festivals was solid, with the trials were conducted in six stores in which introduction of technology and related outlook for 2011 encouraging. space for this product category was products, combined with strong growth significantly increased, delivering in games. encouraging sales uplifts. Joint ventures and associates Operating profit of £1.4m is £0.3m up on last year with gross margin dilution The Group’s investments in joint ventures of 30 basis points. Operating costs and associates accounted for using the were flat on prior year. equity method include 7digital and various investments in the Live division. In addition, £2.1m was invested in a 45.4% interest in 5 1 aNobii, an eBook venture. The Group’s 4 share of joint venture and associate post tax losses in the period amount to £1.0m (2010: £0.3m). HMV UK sales mix 2010–2011 1 Music: 27% 2 Visual: 44% 3 Games: 17% 2 3 4 Technology: 8% 5 Other: 4%

14531_HMV_AR11_p01-11.indd 7 15/07/2011 09:50 HMV Group plc Annual report and accounts 2011 8 Financial review

Discontinued operations Waterstone’s – discontinued activity Net finance charges On 25 March 2011, the Company Waterstone’s total sales decreased by Net finance costs for continuing confirmed that it was exploring strategic £14.4m at statutory exchange rates, operations increased from £6.2m to options in respect of Waterstone’s and including a like for like sales decline £8.6m. This reflected higher average net HMV Canada. This reflected a Board of 3.8%. A satisfactory first half and debt as a result of the downturn in trading. decision on 26 February 2011 to pursue Christmas trading period were followed In addition, exceptional finance charges of a disposal of these businesses, from which by a disappointing final quarter of the £1.9m were incurred in respect of progress date each has been held as an asset for year, with weakness in the book market on the refinancing of the Group’s debt. sale. This requires the reclassification of accompanying some loss of market share. each business as a disposal group and However, despite the disappointing end Taxation an assessment of the carrying value to the year, Waterstone’s has focused The underlying effective tax rate on of assets against fair value, which resulted throughout on transforming its offer, in an impairment charge of £111.5m continuing operations before exceptional through an enhancement of range, items is 7% (2010: 28%) which is lower (Waterstone’s £110.5m, HMV Canada successful utilisation of the book hub, £1.0m). In addition, the results of each than the statutory rate due to over provision investment in refitting the top 20 stores, in prior periods. The total tax expense in business in the Group’s financial and an enhanced eReader offer. This has statements are reclassified to discontinued the current year of £13.5m includes a credit resulted in pro forma operating profit of of £7.3m (2010: £1.0m) in relation to the operations, with the comparative period £9.5m, compared with £2.8m last year. restated accordingly. exceptional items of £28.7m (excluding Gross margin improved 70 basis points in impairment of disposal groups) (2010: On 20 May 2011 the Group announced the year benefiting from an enhanced local £5.3m) offset by an exceptional charge in that it had conditionally agreed to sell offer and more selective discounting, with respect of the derecognition of the Group’s the Waterstone’s business for cash strong cost management resulting in deferred tax asset. consideration of £53m. The final operating costs down 4% in the period. condition of the sale, shareholder approval, Operating exceptional costs totalled Earnings per share was satisfied on 23 June 2011 and the £10.2m, including £8.3m of store closure Adjusted earnings per share for transaction completed on 28 June 2011. costs (19 stores closed during the year with continuing operations, excluding the effect 15 closing in the final quarter), impairment On 27 June 2011 the Company announced of exceptional items, was 3.8p, a decrease of remaining property, plant and equipment that it had reached agreement to sell of 67% on last year. Basic earnings per (£0.9m) and Head Office restructuring HMV Canada to Hilco UK for total cash share for continuing operations was a loss costs (£0.5m). consideration of £2.0m. of (1.1)p, a decrease of 110% on last year. Adjusted earnings per share for the total HMV Canada – discontinued activity Group was 7.0p and basic was a loss Total sales in HMV Canada fell 8.8% at of (29.1)p. 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.

14531_HMV_AR11_p01-11.indd 8 15/07/2011 09:50 HMV Group plc Annual report and accounts 2011 9

Dividend Bank financing arrangement fee of £4.4m payable. The facility comprises a £70m term loan The Board is not recommending the On 22 July the Group completed a (Facility A), a £90m term loan (Facility B) payment of a final dividend. Consequently, refinancing of a £240m revolving and a £60m revolving credit facility (Facility the 0.9p per share interim dividend already credit facility with a final maturity date C), each with a final maturity date of paid represents the total dividend for the of 30 September 2013, with an option 30 September 2013. The margin payable year (2010 total dividend: 7.4p). to extend for a further year. As a on the facility is 4% per annum, up from consequence of the difficult market Under the terms of the refinancing 2.5% for the Group’s existing funding. In conditions the Company had experienced, effective on 28 June 2011, the Company addition an exit fee (initially at 5% per compounded by weak trading during is prohibited from making distributions to annum, increasing to 8% on 1 April 2012 the key Christmas period, the Company shareholders until such time as the £90m and 14% on 1 January 2013) accrues on announced on 1 March 2011 that it did Facility ‘B’ tranche of term debt has been the amount outstanding under Facility B not expect to meet certain of the repaid in full. Following such repayment of which is payable upon repayment of Facility covenant tests in the borrowing facility the facility, dividends are permitted subject B or final maturity. The Company also and that discussions with the lenders to certain restrictions, primarily relating to issued warrants representing 5% of the had commenced. The Company further the indebtedness of the Company and Company’s share capital to the lending announced on 5 April 2011 that, in existing and forecast compliance with all banks effective 28 June 2011. The warrants agreement with the lenders, the other facility terms. Consequently, no are convertible into ordinary shares by a measurement period for all relevant payment of dividends are anticipated in lending bank at any time from 30 June 2012 financial covenant tests had moved the forthcoming financial year. until the tenth anniversary of the issue of from the 12 months ending 30 April 2011 the warrants. The facility became fully to the 12 months ending 2 July 2011. effective with effect from 28 June 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

Summary cash flow 2011 2010 £m £m EBITDA1 80.5 123.9 Capital expenditure (28.2) (39.9) Working capital outflow (96.7) (32.2) Exceptional charges and provision utilisation (9.9) (5.1) Exceptional lease premium received 13.8 – Other (3.1) (4.0) Net interest paid (8.9) (4.7) Taxation (16.2) (15.6) Free cash flow2 (68.7) 22.4 Investments in joint ventures and associates (2.1) (8.1) Debt issue costs (2.9) – Dividends paid (27.5) (31.2) Purchase of MAMA Group Plc including related fees and net debt acquired – (48.0) Repayment of loan from joint venture – 4.5 Other (1.9) (0.7) Net cash outflow (103.1) (61.1) Underlying opening net debt3 (67.6) (6.5) Underlying closing net debt3 (170.7) (67.6)

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 cash flow – Cash flow from operating activities after capital expenditure and net interest. 3. Underlying net debt – Underlying net debt is stated before unamortised deferred financing fees.

14531_HMV_AR11_p01-11.indd 9 15/07/2011 09:50 HMV Group plc Annual report and accounts 2011 10 Financial review

Cash flow and net debt Acquisition of MAMA Group Plc updated actuarial assumptions. Finalisation of the funding valuation and an appropriate Closing net debt of £170.7m was As reported at the half year, the net asset deficit recovery plan became dependent £103.1m higher than last year. This primarily fair value exercise on acquisition of on agreement regarding the impact of the reflected a working capital outflow £96.7m, MAMA Group was finalised, resulting in a Waterstone’s disposal on the scheme, as a combined with adverse trading and higher decrease in the fair value of the net assets substantial proportion of scheme liabilities interest payments, offset by lower capital acquired and consequently an increase related to the Waterstone’s business. expenditure and business acquisitions. in the goodwill capitalised of £4.6m. Consequently, on 6 June 2011 a scheme Free cash outflow was £68.7m This principally reflected an impairment apportionment arrangement was entered (2010: inflow of £22.4m). charge against the carrying value of into between the Company, Waterstone’s MAMA’s minority investment in the Nettwerk and the scheme trustees, such that on Working capital group of artist management companies. Waterstone’s ceasing to participate in the The Group suffered a significant working scheme, their share of the scheme’s capital outflow during the period, totalling Operating leases deficit (instead of becoming immediately £96.7m (2010: outflow of £32.2m). All the Group’s retail stores are held under payable) transferred to the Company. In This primarily reflected a marked operating leases. In the UK, whilst the return for agreeing for the deficit to be so reduction in supplier funding year-on-year, majority of leases are on typical institutional apportioned, the trustees and the Company due to the impact of the like for like sales lease terms, lease flexibility has increased have agreed certain future payments to the decline, combined with a tighter credit over recent years through natural ageing scheme, primarily as follows: environment in advance of the post year and the agreement of shorter lease lengths – £1.0m following completion of end confirmation of the Group’s refinancing on both renewals and new store openings. the Waterstone’s disposal and and a dilution of payments terms in line Consequently, the average UK lease length £1.5m following receipt of the with the changing sales mix, as well some is now six years. Lease flexibility is even deferred consideration under the adverse timing effects around the year greater in the Group’s International division, disposal agreement; end. Stock was down £35m year-on-year, in which the majority of stores operate reflecting store closures and very tight through turnover-related leases with an – £5.0m per annum (payable monthly) purchasing controls in the final quarter. average length of less than four years. from 1 July 2011 until the close of any agreed recovery plan; The Group’s net operating lease rentals in Capital expenditure continuing operations were £84.7m in the – £0.5m per annum from 1 May 2013 to 30 April 2021 and £3.0m on Total capital expenditure in the period was financial year (2010: £85.9m). The total 1 January 2014; and £28.2m (2010: £39.9m), including £18.5m continuing future rental commitment at (£21.5m) for continuing activities and the balance sheet date amounted to – an additional share of annual cash £9.7m (2010: £18.4m) for discontinued £0.5bn, or £0.4bn at net present value. generation capped at £1.0m. activities. Expenditure on continuing activities reflected £3.7m on new stores Pensions and resites, £6.2m on store refurbishment The Group has a number of pension and expansion, £4.9m on IT and other schemes in operation. These primarily projects and £3.7m at HMV Live. include various defined contribution Following the Group’s refinancing, future arrangements and a defined benefit capital expenditure is restricted to certain scheme which, following a period of agreed levels, albeit these are believed to consultation, closed to future service be adequate to fund the Group’s strategic accrual on 31 March 2011. plans, including the roll-out of an enhanced Under IAS 19 ‘Employee Benefits’, the HMV technology offer across the HMV UK store defined benefit scheme had a deficit, net estate, and continued investment in of deferred tax, of £26.7m (2010: £28.1m) HMV Live. 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

14531_HMV_AR11_p01-11.indd 10 15/07/2011 09:50 HMV Group plc Annual report and accounts 2011 11 Board of Directors

Philip Rowley Simon Fox David Wolffe Chairman Chief Executive Officer and Group Finance Director Philip Rowley was appointed to the Board on 1 October Managing Director HMV UK & Ireland David Wolffe was appointed to the Board as Group 2007, was made Senior Independent Director in Simon Fox was appointed to the Board with effect from Finance Director in January 2011. From 2008 he was February 2010 and appointed as Chairman to the 4 September 2006, became Chief Executive Officer Finance Director of ITV Studios, and Interim Managing Board on 1 March 2011. He was Chairman and CEO on 28 September 2006 and additionally Managing Director of ITV Global Entertainment. He previously held of AOL Europe until February 2007. He was Group Director of HMV UK and Ireland on 1 February 2007. senior finance and executive positions at leading global Finance Director of Kingfisher plc from 1998 to 2000, He was previously Chief Operating Officer for Kesa media and entertainment brands. These include AOL and Deputy Chief Executive and Finance Director of Electricals plc with responsibility for Comet in the UK, Europe as Chief Financial Officer, AOL UK as Managing Kingfisher’s General Merchandise Division from 2000 Kesa’s subsidiaries in Continental Europe and Director, and BBC Worldwide, as Finance Director, to 2001. Prior to that his roles included Executive Vice e-commerce developments. Prior to his appointment Magazines and Consumer Publishing. His professional President and Chief Financial Officer of EMI Music as COO of Kesa, he was Managing Director of Comet, and educational background includes Fellowship Worldwide, and Chief Operating Officer and CFO of which he led through its demerger from Kingfisher. of CIMA, the Chartered Institute of Management Golden Books Family Entertainment, the largest Prior to this he founded Office World, the UK’s first Accounting, an MBA from INSEAD, and MEng children’s book publisher in the US. He is a former out‑of-town office supplies retailer. He began his Manufacturing Engineering, Cambridge University. non‑executive director of Tradus plc (previously QXL career as a graduate trainee at Security Pacific Bank ricardo plc) until its delisting in March 2008. He is and thereafter worked at Boston Consulting Group currently a non-executive director of each of ARM and Sandhurst Marketing plc. Mr Fox is also a Holdings Plc, Misys plc and Promethean World plc, non‑executive director of Guardian Media Group. and is on the Board of trustees of Scidev.net, the science and development network. He is Chairman of both Livestation Limited and Pouncer Media Limited. He is a fellow of the Institute of Chartered Accountants in England and Wales. Chairman of the Nomination Committee

Orna Ni-Chionna Christopher Rogers Andy Duncan Non-Executive Director Non-Executive Director Non-Executive Director Orna Ni-Chionna was appointed to the Board on Christopher Rogers was appointed to the Board on Andy Duncan was appointed to the Board on 13 March 30 September 2009 and appointed as Senior 1 October 2006. He is Group Finance Director of 2009. He has been Chief Executive of H R Owen plc Independent Director on 1 March 2011. She is Whitbread plc, having been appointed in May 2005. since October 2010. Prior to that he was Chief Chairman of Eden McCallum’s Advisory Board and Previously he was Group Finance Director of Executive of Channel 4, a position he held from Senior Independent Director of the Royal Mail Group. Woolworths Group plc and Chairman of the July 2004. He was a member of the BBC’s Executive Orna is a former Partner at McKinsey & Company, Woolworths Group Entertainment and Wholesale Board from 2001 to 2004 as Director of Marketing, where she specialised in serving retail and consumer Publishing businesses. He qualified as an accountant Communications and Audiences. He also led the clients. She was until recently the Senior Independent with Price Waterhouse and joined Kingfisher Group project to launch Freeview and was Chairman of the Director of Northern Foods plc and BUPA and was a as Corporate Finance Manager in 1988. Subsequent joint venture with BBC, Sky and Crown Castle for its non-executive director of the Bank of Ireland UK appointments included Group Financial Controller first two years. Prior to that, from 1984 to 2001, he Holdings plc and Bristol & West plc. She has also at Kingfisher plc and Finance Director and worked at Unilever where he held a series of Senior served as a member of the UK Retail and Consumer Commercial Director of Comet Group plc. Director positions. He has also been Chairman of Advisory Board of Apax Partners. She is Chair of the Media Trust since 2006, and is a Board member Chairman of the Audit Committee Trustees of the Soil Association. of Oasis Trust. Member of the Nomination and Senior Independent Director Member of the Audit, Nomination and Remuneration Committees Remuneration Committees Chairman of the Remuneration Committee Member of the Audit and Nomination Committees

14531_HMV_AR11_p01-11.indd 11 20/07/2011 15:57 HMV Group plc HMV Group plc Annual report and accounts 2011 Annual report and accounts 2011 12 13 Corporate governance

Compliance with the Code Officer has overall responsibility for running the Company’s The evaluation process for the Board as a whole and for and Robert Swannell. Mr Rogers was appointed to the The Company has complied throughout the year with the business. each of its Committees was conducted by means of detailed Committee on 1 October 2006, Mr Duncan was appointed to the provisions set out in Section 1 of the June 2008 FRC Combined questionnaires completed by all Directors. The results of the Committee on 13 March 2009, Mrs Ni-Chionna on 30 September The Board has a schedule of matters specifically reserved to it Code on Corporate Governance (the ‘Combined Code’). evaluation of each of the Board Committees were reviewed and 2009 and Mr Swannell on 1 March 2011. The Chairman, Chief for decision. These include the following major matters: The following paragraphs, together with the Directors’ discussed by each of the relevant Committees and then reported Executive Officer, Group Finance Director, the Head of Internal remuneration report on pages 16 to 23, provide a description – approval of any material investments, capital expenditure, to the Board as a whole, together with the results of the appraisal Audit and the external auditors were invited and attended of how the Combined Code has been applied. acquisitions and disposals by Group companies; of the Board itself. An action plan of matters which require further meetings of the Audit Committee. attention is agreed and reviewed by the Board six months after Christopher Rogers, chairman of the Committee, is a – substantial alteration in the general nature of the business; The Board the completion of the evaluation process to ensure these are qualified Chartered Accountant and Finance Director of There were a number of changes to the composition of the – approval of the operating plan and the three year dealt with accordingly. The evaluation which took place in the Whitbread plc and, thus, has recent relevant financial experience. Board during the year under review. Neil Bright retired from strategic plan; year under review confirmed that the Board was working well The Board believes that the other Committee members have the Board on 17 December 2010. David Wolffe was appointed and a number of minor recommendations were agreed. relevant experience to serve on this Committee. – setting of financial and dividend policies; to the Board as Group Finance Director on 10 January 2011. These included a review of the number of Non-Executive The Committee is required to meet a minimum of three Robert Swannell resigned as Chairman on 1 March 2011 but – consideration of interim and final dividends; Directors to Executive Directors so as to ensure the balance times a year and details of members’ attendance at the remained on the Board as a Non-Executive Director until the between the two remained appropriate; succession planning Committee can be found on page 14. Both the Head of Internal – change of auditors, accounting policies and practices; close of business on 23 June 2011. Philip Rowley became at a senior level was still an important focus of the Board despite Audit and the external auditors have direct access to the Non-Executive Chairman on 1 March 2011 and Orna Ni-Chionna – changes to the share capital of the Company; the development of a leadership development programme chairman of the Committee outside the formal Committee replaced Philip Rowley as Senior Independent Director on which had been implemented during the year under review, meetings. – appointment and removal of all Directors and senior 8 March 2011. the regular review of the investments made by the Group in its management; and The main duties of the Committee are as following: As at the end of the year under review the Board comprised strategic initiatives should be maintained; and the Board would four independent Non-Executive Directors, the Chairman, and – corporate governance and corporate social responsibility need to remain fully appraised of the changes taking place in – monitoring the integrity of and reviewing the financial two Executive Directors being the Chief Executive Officer and of the Company. the business landscape served by the Company. The Board will statements; the Group Finance Director. The biographical details of the monitor the implementation of these recommendations. In accordance with the Combined Code at least half the Board, – the appointment of and the review of the effectiveness and members of the Board are set out on page 11. The Board The Chairman appraises the performance of the individual excluding the Chairman, comprise independent Non-Executive independence of the external auditors; considers that during the year under review each of Andy Board members through discussion with all Directors individually. Directors. Non-Executive Directors are appointed for an initial Duncan, Orna Ni-Chionna, Christopher Rogers and Robert The Senior Independent Director is responsible for the – approval of the scope of the Company’s risk management term of three years and the Articles of Association include a Swannell were independent. In addition, the Board determined evaluation of the Chairman and the views of the other Directors programme and review of the risk management process; requirement that all Directors submit themselves for re-election that Philip Rowley was independent at the time of his are canvassed. The results of the performance evaluation for by the shareholders at the first Annual General Meeting following – reviewing the operation and effectiveness of the internal appointment as Chairman on 1 March 2011. In appointing each of the Directors and the Chairman were reported to appointment and thereafter every third calendar year. However, audit function; and Philip Rowley as Chairman, the Nomination Committee evaluated the Board. The development plans for the Board and the in accordance with current corporate governance practice the the skills and experience required for the role and, after performance evaluation process will continue to be reviewed – to oversee the establishment and maintenance of good Directors stand for re-election annually and (apart from Robert consulting with an external adviser and considering the annually. business practices throughout the Group. Swannell who retired from the Board on the close of business candidates available at that time, concluded that, in light of The Non-Executive Directors met on several occasions on 23 June 2011) will, therefore, stand for re-election at the During the period under review, the Committee met in order Philip’s understanding of the Company’s business and his skills without the Executive Directors being present during the year forthcoming Annual General Meeting. All have been subject to to review a wide range of financial matters, including annual and experience, he was the appropriate candidate for the role. under review. They also met without the presence of the evaluation as indicated below, and continue to demonstrate and half year profit figures, financial statements, trading Neither Mr Swannell nor Mr Rowley took part in this selection Chairman. commitment to the role and be effective members of the statements and other regulatory information disclosed to the process. The Company used external search consultants in Board. Accordingly, the Board believes these Directors should public, to conduct a review of the internal audit function and respect of the appointment of David Wolffe. be re-elected. Board Committees to receive regular reports from internal audit, before making There are three principal Board Committees, each of which Whilst the Board is collectively responsible for the success of the On appointment to the Board, Directors are given a formal appropriate recommendations to the Board. regularly reports to the Board and each of which has clear terms Company, the Chairman manages the Board to ensure that: induction and thereafter receive further guidance and training as of reference which can be found on the Company’s website and when required. There are also procedures for the Directors Nomination Committee – the Company has appropriate objectives and an effective www.hmvgroup.com. During the year under review each Board to take independent professional advice at the cost of the On 1 March 2011 Philip Rowley replaced Robert Swannell as strategy; Committee reviewed and updated its terms of reference. Company, if appropriate. All Directors have access to the advice chairman of the Nomination Committee. As at the end of the Each Committee will continue to keep under review its terms – there is a Chief Executive Officer with a team to implement and services of the Company Secretary who is responsible to the year under review the Nomination Committee comprised of reference and its effectiveness and make recommendations the strategy; Board for ensuring that Board procedures and applicable rules Philip Rowley (chairman), Christopher Rogers, Andy Duncan, to the Board of any appropriate changes as and when required. and regulations are followed. The appointment and removal of Robert Swannell, and Orna Ni-Chionna, who were appointed to – there are procedures in place to inform the Board of The chairman of each of the Board Committees will be available the Company Secretary is a matter for the Board as a whole. the Committee on 1 October 2007, 1 October 2006, 2 February performance against objectives; and to answer shareholders’ questions at the forthcoming Annual 2009, 13 March 2009 and 30 September 2009, respectively. General Meeting. – the Company is operating in accordance with the principles Performance evaluation The Company Secretary is the Secretary to the Committee. of corporate governance. The Board has an established process for evaluating the The Committee meets as and when required and during the Audit Committee individual Directors, the Board as a whole and each of the Board period under review the Committee met on six occasions. The Chairman’s other significant commitments are noted on On 1 March 2011 Philip Rowley resigned from the Audit Committees, which it reviews each year to ensure it is robust, These meetings were to evaluate the Committee’s own page 11. The Board considers that these are not a constraint Committee on his appointment as Chairman of the Board and comprehensive and appropriate to the Company. This evaluation performance, the appointment of Mr Wolffe as Group Finance on the Chairman’s agreed time commitment to the Company. Robert Swannell was appointed to the Audit Committee on the process involves an objective and comprehensive evaluation Director, the appointment of Mr Rowley as Chairman of the The Senior Independent Director acts as an alternative same date when he ceased to be Chairman of the Board. As at of the balance of skills, knowledge and experience of the Board Board, the appointment of Mrs Ni-Chionna as Senior channel of communication for shareholders. The chairman the end of the financial year the Audit Committee comprised and any development plans for the Board. Independent Director and to deal with other succession ofthe Remuneration Committee oversees senior executives’ Christopher Rogers (chairman), Andy Duncan, Orna Ni-Chionna planning issues. remuneration and remuneration policy. The Chief Executive

14531_HMV_AR11_p12-92.indd 12 15/07/2011 09:58 HMV Group plc HMVHMV Group Group plc plc Annual report and accounts 2011 AnnualAnnual report report and and accounts accounts 2011 2011 12 1313 Corporate governance

14531_HMV_AR11_p12-92.indd 13 15/07/2011 09:58 HMV Group plc HMV Group plc Annual report and accounts 2011 Annual report and accounts 2011 14 15 Corporate governance continued

The Committee is responsible for identifying and nominating As at the end of the year under review, the Committee – a comprehensive system of financial reporting, which Relations with shareholders executive and non-executive candidates for approval by the comprised Orna Ni-Chionna (chairman), Christopher Rogers, includes an annual budget process, monthly reporting The Board places high importance on maintaining good Board to fill vacancies as and when they arise and to put in Robert Swannell and Andy Duncan who were appointed to the with rolling forecasts, and half year and annual reporting relationships with both institutional and private investors place succession plans for Directors and other senior managers. Committee on 30 September 2009, 1 October 2006, 13 March to enable the Group to meet its public financial reporting and ensures, through its investor relations programme, The Committee has access to such information and advice both 2009 and 1 March 2011 respectively. No person other than requirements; that shareholders are kept informed of significant Group from within the Group and externally, at the cost of the Company, the members of the Committee is entitled to be present at developments. Shareholders can access further information – regular performance monitoring, with remedial action taken as it deems appropriate. External consultants are used to assist meetings but others may be invited by the Committee to attend. on the Group via the Company’s website at www.hmvgroup.com. where necessary; in identifying suitable external candidates based on a written No Director is present when the Committee considers matters The Chief Executive Officer and Group Finance Director specification for each appointment. Committee members relating to him or her or acts in matters relating to them. – regular Board meetings, with a formal schedule of matters meet regularly with institutional shareholders and analysts. prepare a shortlist of candidates for consideration by the Board. The Remuneration Committee is required to meet at least reserved to the Board for decision; Major institutional shareholders are given the opportunity to The final candidate is then subject to formal nomination twice a year and is responsible for approving the terms of service meet with the Chairman and the Senior Independent Director. – established procedures for planning, approving and by the Committee and approval by the Board. In addition, the and setting the remuneration for the Executive Directors and In addition, the Directors welcome the opportunity to meet with monitoring major projects; Committee will review the Board structure, size and composition other senior managers of the Group in accordance with a private investors at the Company’s general meetings, where and from time to time make any relevant recommendations to remuneration policy which is approved by the Board. It is also – a policies and procedures manual, which sets out, inter shareholders are invited to ask questions and express views the Board. responsible for determining the fees of the Chairman and the alia, authority limits and guidelines for capital expenditure, on the Company’s business. The views of shareholders are terms upon which the service of Executive Directors is which include annual budgets and appraisal and review reported to the Board as and when appropriate. Remuneration Committee terminated, having regard to a severance policy adopted by procedures. All operating businesses have to confirm During the year under review Philip Rowley ceased to be a the Board. It also prepares for approval by the Board the annual compliance with the manual on an annual basis; Accountability and audit member of the Remuneration Committee on 1 March 2011 Directors’ remuneration report (set out on pages 16 to 23). The Board is aware of its responsibility to present a clear and – certain centralised functions, that are staffed by appropriately and Robert Swannell was appointed in his place on that date. balanced assessment of the Group’s financial position and qualified individuals who draw on external professional advice. prospects. This assessment is provided in the statement of the A record of members’ attendance at the Board and Committee meetings is as follows: These functions include finance, tax, treasury, management Chairman on pages 1 and 2 and the Business and financial information systems, legal, company secretarial and internal Board Audit Remuneration Nomination review on pages 3 to 10. audit; and Neil Bright 12(13) 4* 1* 0 The Audit Committee reviews the independence and – clearly defined organisational structures and appropriate objectivity of the external auditors with a view to confirming that, Andy Duncan 26(27) 4(5) 8(8) 5(6) delegated authorities. in its view, the maintenance of objectivity on the one hand and Simon Fox 27(27) 5* 8* 6* value for money on the other has been kept appropriately in Management and specialists within the finance department balance. The external auditors have in place processes to ensure Orna Ni-Chionna 26(27) 4(5) 8(8) 6(6) are responsible for ensuring the appropriate maintenance their independence is maintained including safeguards to ensure of financial records and processes that ensure all financial Christopher Rogers 25(27) 5(5) 4 (8) 5(6) that where they provide non-audit services their independence is information is relevant, reliable, in accordance with the applicable not threatened. In this context, the Audit Committee considers Philip Rowley 26(27) 5(5)** 7(8)** 5(6) laws and regulations, and distributed internally and externally that it is appropriate for the external auditors to provide to the Robert Swannell 26(27) 5(5)** 8(8)** 6(6) in a timely manner. A review of the consolidation and financial Group, tax advice and other accounting services, including those statements is completed by management to ensure that the David Wolffe 12(12) 1* 0 0 in connection with supporting and reporting on financial financial position and results of the Group are appropriately representations in public documentation. Figures in brackets denote the maximum number of meetings that each Director could have attended. reflected. All financial information published by the Group is * Not a Committee member but invited to attend all or part of the number of meetings indicated. During the year under review the auditors were used for subject to the approval of the Audit Committee. ** Mr Swannell attended one Audit Committee and two Remuneration Committee meetings as a member of those Committees after he stepped down as Chairman of the Board work relating to the disposal of Waterstone’s as well as tax advice and Mr Rowley attended one Audit Committee meeting and two Remuneration Committee meetings by way of invitation once he was appointed Chairman of the Board. work. These services were considered and approved by the Audit The instances of non-attendance arose where the Director either had a conflict with another meeting or the meeting was held at short notice. Audit Committee Committee who determined that the provision of these services – approving the scope of the annual Group risk management Internal control during the year under review and up to the date of approval of by the auditors was appropriate in the circumstances. Details of programme; The Board attaches considerable importance to, and the Annual Report and Accounts and that there are satisfactory the fees paid to the auditors in the year, for audit and non-audit acknowledges its responsibility for, the Group’s system of internal ongoing processes for identifying, evaluating and managing the – reviewing the results of the risk identification process; services, are given on page 52. The Company foresees using the control and risk management and carries out regular reviews significant risks faced by the Group. The systems of internal auditors for tax advice work in the future. – providing input on risks and internal controls into the annual of their effectiveness. A system of internal control is designed to control and the processes used by the Board to review the Board strategy discussions; By order of the Board manage rather than eliminate risk of failure to achieve business effectiveness of those systems include: objectives and can only provide reasonable and not absolute – reviewing the effectiveness of the risk management process assurance against material misstatement or loss. The Audit Group and discussing significant risk issues with the Board; Elaine Marriner Company Secretary Committee reviews the effectiveness of the risk management – an internal audit function, which carries out a programme – considering reports from internal and external audit on the process and significant risk issues are referred to the Board for of audits covering the management of significant corporate 29 June 2011 system of internal control and any material control consideration. The Board confirms it has reviewed the Group’s risks and reports directly to the Audit Committee and the weaknesses; system of internal controls including financial, operational and Board on the effectiveness of key internal controls; compliance controls as well as risk management, and that – reviewing the internal audit and external audit work plans; – detailed risk registers, which describe the significant risks these accord with the guidance on internal controls set out and and control strategies in each area of the business and in the Internal Control: Revised Guidance for Directors on the which are reviewed annually; – at the year end, before producing the Statement of Combined Code, issued by the Financial Reporting Council Directors’ Responsibilities in the Annual report and accounts, in October 2005, and that such controls have been in place the Board, through the Audit Committee, considers reports generated from the internal and external auditors on any major problems that have occurred during the year.

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Directors’ remuneration report

The Board presents its Remuneration Report to the members Advisers to the Committee In particular: Annual bonus of the Company. In preparing this report and establishing its The Remuneration Committee has appointed Hewitt New Annual bonuses are dependent on the achievement of – base salaries for senior executives have been increased only policy the Board has given full consideration to, and follows the Bridge Street (‘HNBS’) a trading name of Aon Hewitt Limited demanding financial targets for the year. In 2010 Directors modestly or frozen in the last two financial years, in line with provisions of, the Combined Code, Schedule 8 to the Large and as its advisers. Aon Hewitt Limited do not provide other services were eligible to earn a bonus of 70% of base salary for on those for the Group’s other employees; Medium-sized Companies and Groups (Accounts and Reports) to the Company. In addition, during the period under review, target performance, rising to a maximum of 150% of salary Regulations 2008 (‘the Regulations’) and the relevant parts of the the Company used the following advisers in respect of – the Company operates annual bonus arrangements for all for exceptional financial performance. Listing Rules of the UK Listing Authority. remuneration matters: its employees and all of the Group’s UK employees are able The performance targets are determined each year by the to participate in equity incentive arrangements through the Committee. For the 2010/11 financial year the performance (a) Capita Share Plan Services and Simmons & Simmons, Company’s Saving Related Share Option Scheme; target was profit after notional interest (‘PANI’) which is Group Chairman’s Statement solicitors, on employee share schemes; The past financial year has been the most turbulent in HMV’s profit before interest and tax reduced by a 10% notional – the Committee ensures that there are appropriate policies history. Clearly the priority of the Board has been to ensure the (b) Towers Watson LLP, Lane Clark & Peacock LLP and interest rate applied to the Group’s average capital employed. and procedures in place to monitor the cost of incentive ongoing viability and stability of the business, but in my capacity PricewaterhouseCoopers LLP on pension matters; and At the date of this report the Remuneration Committee had awards to all employees and share usage under employee as Chairman of the Remuneration Committee I have needed to not made its assessment of whether the performance targets (c) Reynolds Porter Chamberlain LLP, solicitors, on employment share plans; and be cognisant of the impact of the present circumstances on the had been met, however, it is anticipated that no bonuses will contracts and associated legal issues. remuneration policy for senior executives. Recognising other – the Remuneration Committee is apprised by management be paid in respect of the 53 weeks to 30 April 2011. business priorities we have not made any significant changes of developments in remuneration policy throughout The Committee is reviewing the structure of the annual to the basic structure of the policy this year. However, the lack General policy the business. bonus arrangements for 2011/12 to ensure that it is appropriate The Company’s remuneration aim is to support the recruitment, of visibility in relation to long-term performance, together with given the Company’s current circumstances and will disclose full motivation and retention of high calibre employees, and to align In line with the Association of British Insurers’ Guidelines on the depressed share price, have necessitated a review of the details of the arrangements for 2011/12, including the measures incentives with shareholder interests. Responsible Investment Disclosure, the Committee will ensure annual bonus and long-term incentive policy. This review remains used, in next year’s report. While the performance targets for that the incentive structure for Executive Directors and senior ongoing at the time of writing this report and its conclusions will In setting the Company’s remuneration policy, therefore, the 2011/12 financial year have not yet been set, the Committee management will not raise environmental, social or governance be set out fully in next year’s report. At such time as the Company the Remuneration Committee believes that the Company intends that these should consist of a range of operational and risks by inadvertently motivating irresponsible behaviour. is on a more stable footing the Remuneration Committee is likely should provide: strategic measures linked to achieving a longer term recovery More generally, the Remuneration Committee will ensure that the to conduct a fuller review of the policy to ensure that it remains in Company performance. (a) competitive rewards, which will attract and retain high calibre overall remuneration policy does not encourage inappropriate appropriate for the future structure of the Group. management necessary to enable the Company to operate operational risk-taking. Performance share awards in the highly competitive retail sector and which reflect It is the Company’s policy that no Executive Director should Awards under The HMV Performance Share Plan (the ‘Plan’) The Remuneration Committee individual responsibilities and experience; and have a fixed term service contract or notice period exceeding The Remuneration Committee (‘Committee’) is a committee are usually made in August each year. Other than in exceptional one year and that no Non-Executive Director should have a letter of the Board and its role is to approve, implement and keep (b) incentive arrangements which are subject to challenging circumstances, the rules of the Plan limit awards to 200% of of appointment for a term of more than three years. All of the under review the remuneration policy and practice of the Group. performance targets, reflecting the Company’s objectives salary, but the Committee’s normal policy is to grant awards to current Directors’ service contracts or letters of appointment Specific remits include: agreeing with the Board the framework and which motivate executives to focus on both annual and Executive Directors with a value equivalent to 120% of salary comply with this policy. Further details are found on page 23. for the remuneration of the Chairman, Executive Directors longer term performance. (market value of shares as at the date of the award). and certain other senior executives; agreeing all terms of the The Remuneration Committee reviews award levels in July It is the Committee’s policy that variable performance-related pay Executive Directors’ and Company Secretary’s service contracts Components of the Executive Directors’ remuneration each year and has not yet determined the level of awards for and incentives should account for a significant proportion of the The Executive Directors’ remuneration comprises basic salary; and remuneration; determining the nature and scale of short- 2011/12. However, the Committee confirms that these awards overall remuneration package of Executive Directors so that their pension and other benefits; an annual bonus; and an award and long-term remuneration arrangements; and overseeing will not exceed its normal policy on grants to Executive Directors. remuneration is aligned with the Group’s performance. Generally, of shares under the HMV Performance Share Plan. the implementation and operation of share incentive schemes. The awards vest after three years provided that the for on target performance, the performance-related element Bonuses are subject to performance conditions set at the The Committee’s terms of reference are available on the performance measures are met over a three-year period. accounts for about half of the total package. For superior start of the financial year and the Committee carries out a quality Company’s website, www.hmvgroup.com. The Remuneration Committee sets the performance measures performance this would rise so that performance-related pay review at the end of the year before deciding on the amount each year. The Committee’s members during the year (all of whom the forms the majority of the total package. These figures exclude to be paid. The recent policy has been for awards to be granted subject Board considers to be independent) were as follows: pension values, which can vary significantly from person Details on each component are as follows: to two performance measures, with 50% of an award being to person. Orna Ni-Chionna (chairman) linked to relative TSR and the remaining 50% being linked The Committee intends that Executive Directors’ basic Andy Duncan Salary to growth in earnings per share (‘EPS’). The Remuneration salaries should be positioned at or around the median level Christopher Rogers The Committee determines the basic salary for each Executive Committee chose these performance measures because they in the marketplace with the incentive arrangements set in Philip Rowley (until 1 March 2011) Director. Salaries are usually reviewed with effect from 1 July provide a balance between rewarding relative performance and order to bring overall remuneration into the upper quartile Robert Swannell (from 1 March 2011) each year. In 2010 the Executive Directors’ salaries were longer term returns to shareholders through the use of TSR for the marketplace provided performance targets are met. unchanged. These salaries will be reviewed again in July 2011 and encouraging growth in profitability through the use of EPS. At the invitation of the chairman of the Committee, the Chairman When assessing the marketplace, the Committee refers and it is anticipated that no increases will be made. The performance conditions for the 2011/12 awards will be of the Board attends Committee meetings; and the Chief to survey data supplied by HNBS, focusing on companies set by the Committee in due course and will be fully disclosed Executive and the Human Resources Director of HMV UK of a broadly similar size and from the same market sector. Benefits in kind in next year’s report. Limited also attend Committee meetings by invitation, to provide In considering Executive Directors’ remuneration, Benefits in kind include provision of a car allowance, pension, background and context on company-wide remuneration as well the Committee considers pay and conditions in the medical and life insurance, permanent health insurance and Shareholding guidelines as recommendations on executive remuneration. No individual workforce generally. staff discount. The Company operates a shareholding policy which requires plays a part in any discussion about his or her remuneration. the Executive Directors and other senior executives to build and retain a shareholding in HMV Group plc equivalent in value to 100% of their salary.

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Directors’ remuneration report

14531_HMV_AR11_p12-92.indd 17 15/07/2011 09:58 HMV Group plc HMV Group plc Annual report and accounts 2011 Annual report and accounts 2011 18 19 Directors’ remuneration report continued

and determined that the targets in relation to growth in new provisions of each of the Executive Directors. Each service 140 product sales and profit from Live and Digital had not been agreement provides for a payment in lieu of notice on early met but that the target related to net margin improvement at termination to the Executive Director, which shall consist of base 120 Waterstone’s had been met. However, in light of the overall salary and the cash equivalent of all other benefits and is subject 100 performance of the business, the Remuneration Committee to mitigation. The Committee may exercise discretion over exercised its discretion to reduce the amount of the award deferred bonus entitlement and/or awards made under the 80 which would vest to zero. Achievement against the metrics performance share plan in accordance with the rules of the for 2011/12 (and the rationale for any adjustment) will be appropriate schemes. 60 disclosed in the Directors’ Remuneration Report for the 40 current year end financial year; and Outside directorships No Executive Director may accept a non-executive directorship (iii) one-third is based on total shareholder return assessed over 100 to based TSR Cumulative 20 without the prior approval of the Board to ensure that they do not the three-year period from the date of grant. 25% of this part 0 of the award will vest if the Company achieves median TSR, give rise to conflicts of interest. During the period under review Simon Fox was appointed as a non-executive director at with full vesting if the Company achieves upper quartile 2006 2007 2008 2009 2010 2011 performance or above. This TSR performance condition Guardian Media Group. He receives a non-executive director’s fee of £39,000 for this directorship, which he retains. is subject to a financial underpin requiring the Committee to be satisfied that there has been an improvement in HMV Group v FTSE General Retailers Index Chairman and Non-Executive Directors’ appointment, HMV Group FTSE General Retailers Index underlying financial performance over the performance period. The TSR group is that as noted on page 22. terms and fees The Chairman and Non-Executive Directors do not have 140 service agreements but have been engaged under letters Recruitment terms for Mr Wolffe 120 Mr Wolffe was appointed to the Board of the Company with of appointment. All are terminable by the Company without liability for compensation. All Non-Executive appointments are effect from 10 January 2011. In order to secure his appointment 100 for an initial period of three years and can be extended for a the Company undertook to make him an award under the HMV Performance Share Plan with a market value of 80% of salary as subsequent period of three years. The period of appointment 80

soon as was possible after he joined. Vesting of this award would is to 1 October 2012 for Christopher Rogers, to 30 September 60 have been subject to the same relative TSR condition as the 2013 for Philip Rowley, to 1 February 2012 for Robert Swannell, to 12 March 2012 for Andy Duncan and to 30 September 2012 awards made to other Executive Directors in 2010. As a result 40

of the Company being in closed periods from the time that he for Orna Ni-Chionna. As recently announced by the Company,

joined, the Company has been unable to make this award. It has, Mr Swannell ceased to be a director of the Company from the 100 to based TSR Cumulative 20

therefore, undertaken to replace this award with a cash award close of business on 23 June 2011. 0 of up to £100,000 payable in August 2011. Receipt of this award Each of the Non-Executive Directors will stand for re-election at the forthcoming Annual General Meeting. is conditional on the successful refinancing of the Group’s 2006 2007 2008 2009 2010 2011 banking debt, which has now been delivered.

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Matching award to Mr Fox All Employee Share Plan The Chairman and the Executive Directors determine the The Non-Executive Directors each receive a basic fee of £40,000 On 18 February 2010 a one-off award of matching shares was The Company operates a Save As You Earn Share Option remuneration of the Non-Executive Directors for their services per annum. Christopher Rogers receives an additional £5,000 made to Mr Fox, full details of which were disclosed in last year’s Scheme. as members of the Board and its Committees in accordance per annum for chairing the Audit Committee, Orna Ni-Chionna annual report. The following performance conditions apply with the Company’s Articles of Association. The Remuneration receives an additional £5,000 per annum for chairing the to this award: Dilution Committee determines the remuneration of the Chairman. Remuneration Committee plus £5,000 per annum for acting The Company reviews the awards of shares made under the as Senior Independent Director. (i) one-third of the matching award is subject to basic EPS, A review takes place in January every two to three years. various all-employee and executive share plans in terms of their adjusted by the Remuneration Committee as appropriate The policy is to pay fees at a market competitive level in The Chairman and Non-Executive Directors do not effect on dilution limits and complies with the dilution limits to take account of selected non-recurring items and other comparison with companies of broadly similar size in terms participate in any of the incentive or benefit schemes of recommended by the Association of British Insurers. Assuming factors, at the Committee’s discretion, for the 2011/12 of market capitalisation. The Company takes into account each the Group other than the provision of staff discount cards. none of the extant options lapse and will be exercised and, financial year being at least 14.0p; individual’s responsibilities and time commitments when setting Copies of the letters of appointment for the Chairman having included all exercised options, the Company has utilised fee levels. The Chairman, Philip Rowley, receives a basic fee and each of the Non-Executive Directors are available at (ii) one-third of the award is subject to strategic performance an amount equivalent to 1.61% of the current share capital under of £200,000 per annum. the registered office of the Company and will be available objectives split into two equal parts; (a) 50% of the award discretionary schemes and 1.95% under all-employee schemes. at the Annual General Meeting. is subject to the attainment of strategic KPIs to April 2011, these being growth in new product sales of 13%; net margin Executive Directors’ Service Agreements and Compensation Performance graphs improvement at Waterstone’s of 2%; and the achievement for early Termination The graphs below show the percentage change in the total shareholder return from 30 April 2005 to the end of the financial year of £7m (pre-minority interests) in profit from Live and Digital; Copies of the Executive Directors’ service agreements are against both the FTSE 250 and the FTSE General Retailers Index, both of which the Board considers to be appropriate peer groups and (b) 50% will again be linked to the attainment of strategic available at the registered office of the Company and will be for the Company as the Company has been a constituent member of both these indices over the period. KPIs to April 2012, which will be set by the Committee in due available at the Annual General Meeting. Simon Fox and David course. In either year the Committee may adjust the overall Wolffe, who are both standing for re-election at the forthcoming Total Shareholder Return Graphs level of vesting in circumstances where there is significant Annual General Meeting, each have a service agreement, which For the period 30 April 2005 to 30 April 2011 over or under-performance against any individual metric, so provide for a notice period of 12 months. as to ensure that there is an appropriate link between reward The arrangements for early termination of an Executive HMV Group v FTSE General Retailers Index and broad strategic performance. The Committee reviewed Director’s service agreement are decided by the Committee HMV Group FTSE General Retailers Index performance against the objectives for the year to April 2011 and will be made in accordance with the service agreement and determined that the targets in relation to growth in new provisions of each of the Executive Directors. Each service 140 product sales and profit from Live and Digital had not been agreement provides for a payment in lieu of notice on early met but that the target related to net margin improvement at termination to the Executive Director, which shall consist of base 120 Waterstone’s had been met. However, in light of the overall salary and the cash equivalent of all other benefits and is subject 100 performance of the business, the Remuneration Committee to mitigation. The Committee may exercise discretion over exercised its discretion to reduce the amount of the award deferred bonus entitlement and/or awards made under the 80 which would vest to zero. Achievement against the metrics performance share plan in accordance with the rules of the for 2011/12 (and the rationale for any adjustment) will be appropriate schemes. 60 disclosed in the Directors’ Remuneration Report for the 40 current year end financial year; and Outside directorships No Executive Director may accept a non-executive directorship (iii) one-third is based on total shareholder return assessed over 100 to based TSR Cumulative 20 without the prior approval of the Board to ensure that they do not the three-year period from the date of grant. 25% of this part 0 of the award will vest if the Company achieves median TSR, give rise to conflicts of interest. During the period under review Simon Fox was appointed as a non-executive director at with full vesting if the Company achieves upper quartile 2006 2007 2008 2009 2010 2011 performance or above. This TSR performance condition Guardian Media Group. He receives a non-executive director’s fee of £39,000 for this directorship, which he retains. is subject to a financial underpin requiring the Committee HMV Group v FTSE 250 Index to be satisfied that there has been an improvement in Chairman and Non-Executive Directors’ appointment, HMV Group FTSE 250 underlying financial performance over the performance period. The TSR group is that as noted on page 22. terms and fees The Chairman and Non-Executive Directors do not have 160

Recruitment terms for Mr Wolffe service agreements but have been engaged under letters 140 of appointment. All are terminable by the Company without Mr Wolffe was appointed to the Board of the Company with 120 effect from 10 January 2011. In order to secure his appointment liability for compensation. All Non-Executive appointments are 100 the Company undertook to make him an award under the HMV for an initial period of three years and can be extended for a subsequent period of three years. The period of appointment Performance Share Plan with a market value of 80% of salary as 80 soon as was possible after he joined. Vesting of this award would is to 1 October 2012 for Christopher Rogers, to 30 September 60 have been subject to the same relative TSR condition as the 2013 for Philip Rowley, to 1 February 2012 for Robert Swannell, awards made to other Executive Directors in 2010. As a result to 12 March 2012 for Andy Duncan and to 30 September 2012 40 of the Company being in closed periods from the time that he for Orna Ni-Chionna. As recently announced by the Company, 100 to based TSR Cumulative 20 joined, the Company has been unable to make this award. It has, Mr Swannell ceased to be a director of the Company from the therefore, undertaken to replace this award with a cash award close of business on 23 June 2011. 0 of up to £100,000 payable in August 2011. Receipt of this award Each of the Non-Executive Directors will stand for re-election is conditional on the successful refinancing of the Group’s at the forthcoming Annual General Meeting. 2006 2007 2008 2009 2010 2011 banking debt, which has now been delivered.

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Audited information They are subject to the Company’s salary ‘capping’ which Details of Directors’ remuneration The information below, with the exception of the Directors’ was introduced in April 2006, which is currently £123,600. interests in the Company’s Ordinary shares, has been audited. The HMV Group Pension Scheme, therefore, provides Mr Fox Cash allowance Salary in lieu of Benefits Total Total and Mr Bright with benefits of up to one-thirtieth of their and fees pension in kind Annual bonus remuneration remuneration Pension arrangements respective ‘capped’ salaries for each year of service. The defined 2011 2011 2011 2011 2011 2010 For each Executive Director, only basic salary is pensionable. benefit scheme closed to future service accrual with effect from £000 £000 £000 £000 £000 £000 Simon Fox and Neil Bright are members of the HMV Group 31 March 2011. Executive Directors Pension Scheme, which is a contracted-out defined benefit The Company made a contribution to a Self Invested Simon Fox 874 scheme, providing them with benefits of up to one-thirtieth Pension Plan (‘SIPP’) for each of Mr Bright and Mr Fox in lieu of 517 2 1 – 520 of final pensionable pay for each year of service. pension contribution above the cap. Neil Bright 222 – 1 – 223 559 In the event of death during employment, the dependants of David Wolffe 123 15 – – 138 – the Executive Directors would receive a pension and a lump sum. Mr Wolffe receives a monthly cash allowance of 15% of Non-Executive Directors salary in lieu of pension. Philip Rowley 71 – – – 71 41 Andy Duncan 40 – – – 40 40 Name Simon Fox Neil Bright Orna Ni-Chionna 46 – – – 46 26 Age as at 24 April 2010 50 48 Christopher Rogers 45 – – – 45 45 Accrued pension at 30 April 2011 – £000 pa 19 45 Robert Swannell 173 – – – 173 200 Increase in accrued pension during the period – £000 pa 4 2 Total 1,237 17 2 – 1,256 1,785 Increase in accrued pension during the period (net of inflation) – £000 pa 3 1 Notes: Transfer value of accrued pension at 30 April 2011 – £000 189 524 (i) Taxable benefits in kind consist of private healthcare during the financial year under review. (ii) At the end of the period under review the base salary for the Executive Directors was Simon Fox £499,035 and David Wolffe £330,000. Transfer value of accrued pension at 24 April 2010 – £000 139 464 (iii) David Wolffe did not serve as a Director for the full 2010/11 financial year and his remuneration above reflects this accordingly. Robert Swannell served as Chairman until Directors’ contributions during the period – £000 11 8 1 March 2011 when he ceased to act as Chairman and became a Non-Executive Director. Philip Rowley served as a Non-Executive Director until 1 March 2011 when he became Non-Executive Chairman. Their remuneration above reflects these changes accordingly. Increase (decrease) in transfer value over the year (iv) Target PANI for the year was not met therefore no annual bonuses were awarded. (net of Directors’ contributions)– £000 (v) All the fees earned by Andy Duncan in respect of his Non-Executive directorship are waived by Mr Duncan and have been paid direct to charity. 50 60 (vi) Neil Bright resigned from the Company on 17 December 2010. Transfer value of increase (decrease) in accrued pension during the period (net of inflation and Directors’ contributions) – £000 19 (3) Directors’ interests in shares The Directors who held office at the end of the financial period had the following interests (beneficial and non-beneficial) in the share * Mr David Wolffe joined the Company with effect from 10 January 2011. capital of the Company in addition to the interests in executive share options and other employee share schemes set out on pages 22 Notes: and 23: (i) Pension accruals shown are the amounts that would be paid annually on retirement based on service to the end of the year. (ii) Transfer values have been calculated in accordance with guidance note GN11 issued by the Institute of Actuaries. (iii) The value of the net increase or decrease represents the incremental value to the Director of his service during the year calculated on the assumption that service is terminated Ordinary Shares at the year end. It is based on the accrued pension increase or decrease after an adjustment for inflation. 24 April 2010 or (iv) The change in the transfer value includes the effect of fluctuations in the transfer value due to factors beyond the control of the Company and the Directors, such as stock as at the date market movements. It is calculated after deducting the Directors’ contributions. 30 April 2011 of appointment (v) Voluntary contributions paid by the Directors and resulting benefits are not shown. (vi) The figures above exclude contributions of £32,421 paid into Mr Bright’s SIPP and £90,203 paid into Mr Fox’s SIPP. Executive Directors (vii) The HMV Group Pension Scheme is now closed to future accrual. Simon Fox 442,819 432,819 David Wolffe – – Non-Executive Directors Philip Rowley 17,150 17,150 Andy Duncan 12,000 12,000 Orna Ni-Chionna – – Christopher Rogers 5,580 5,580 Robert Swannell 185,000 105,000 For those Directors who served at the end of the financial year there have been no changes to the shareholdings since 30 April 2011.

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Share Incentive Plan Matching award to Mr Fox The Directors who served as Directors at any time in the year under review and who held shares under the SIP as at 30 April 2011 On 18 February 2010, the Company granted an option with a nil exercise price to Simon Fox. The share price on the date of the are as follows: award was 73.75p. The matching award was granted in accordance with the requirements of Listing Rule 9.4.2 R(2).

Matching Shares Number of Partnership awarded in Total options at Shares May 2011 SIP shares 24 April 2010 Number of Total purchased by at 64p held at Exercise or date of Granted Lapsed Exercised options at Exercisable Exercisable SIP shares participants in which will vest 30 April 2011 Date of grant price appointment in year in year in year 24 April 2011 from to held at May 2010 one year after the or date of 24 April 2010 64p date of purchase termination 18 February 18 February 18 February Simon Fox 2010 0p 2,164,095 – – – 2,164,095 2013 2017 Simon Fox 8,752 195 195 9,142 Neil Bright 17,773 195 195 Note: 18,163 (i) The performance conditions that apply to this award are disclosed on page 18 of this Report. Note: (i) The SIP ceased to operate in May 2010 and, therefore, no further Partnership Shares were purchased or Matching Shares awarded. Deferred annual bonus The following deferred bonus awards held by each person who was a Director of the Company at the end of the financial year under Performance Share Plan review are as follows: The following Performance Share Plan awards for Executive Directors who served at any time during the period under review are as follows: Number of Number of Number of Number of shares held shares shares vested shares held Number Number of conditionally conditionally in the year and Number of conditionally of shares Market shares vested Number of as at awarded in Market price of Performance market price on shares lapsed as at Interests in conditionally price of in the year and shares Interests in Executive Directors 24 April 2010 the year Date of award shares at award period ending vesting date in the year 30 April 2011 shares as at awarded shares at Performance market price on lapsed shares as at Executive Directors 24 April 2010 in the year Date of award award period ending vesting date in the year 30 April 2011 Simon Fox 153,721 – 8 July 2008 106.25p 30 April 2011 – – 153,721 Simon Fox 2,060,737 – 7 August 2007 115.25p 24 April 2010 – 2,060,737 – 21,235 – 7 July 2009 115.20p 28 April 2012 – – 21,235 678,571 – 8 July 2008 108.15p 30 April 2011 – – 678,571 April 2011 and – 310,328 7 July 2010 57.65p 2012 – – 310,328 14 September 529,199 – 2009 113.16p 29 April 2012 – – 529,199 David Wolffe – – – – – – – – Neil Bright 520,607 – 7 August 2007 115.25p 24 April 2010 – 520,607 – Notes: (i) The deferred share awards granted in each of 2008 and 2009 will vest three years following their grant and are not subject to any further performance criteria. 428,571 – 8 July 2008 108.15p 30 April 2011 – 428,571 – (ii) 50% of the award made to Mr Fox on 7 July 2010 will be deferred over a two year period and paid in equal tranches. 14 September 334,231 – 2009 113.16p 29 April 2012 – 334,231 – Service agreements No Executive Director has a service agreement containing a notice period exceeding one year. David Wolffe – – – – – – – – The Committee has considered the notice periods and termination arrangements set out below in light of the Combined Code, Notes: and continues to believe they are appropriate for the Executive Directors given their seniority and value to the Company. (i) For the awards made in August 2007, vesting is subject to the satisfaction of a target based on adjusted earnings per share (‘EPS’) in the financial year 2009/10. The EPS targets were set based on the Group’s performance without the contribution of HMV Japan, which was sold during the 2007/08 financial year. This EPS target has not been met and The service contracts in respect of the Executive Directors who served at any time during the period under review are summarised consequently the awards will not vest. below: (ii) To support the three-year transformation plan launched in March 2007, the Remuneration Committee, on a one-off basis for 2007, made some changes to the way in which remuneration arrangements were applied. The changes required Mr Fox to purchase shares to the value of one times salary. After three years, he may receive up to five shares Date of Notice period Notice period for every one share purchased dependent on the achievement of the EPS performance target. Mr Fox’s co-investment arrangement was made under the rules of the Plan and service contract from Company from individual replaced the regular 2007 Plan award. As part of these arrangements, the share options granted to Mr Fox shortly after his appointment in September 2006 lapsed. (iii) No shares vested in the year under review. Simon Fox 18 July 2006 12 months 12 months (v) The 2009 awards are subject to a relative TSR performance condition with performance measured against a comparator group comprising: Arriva, Carpetright, Carphone Warehouse, Debenhams, Domino’s Pizza UK & IRL, DSG international, Dunelm, Enterprise Inns, Game Group, Greene King, Halfords, Home Retail Group, J D Wetherspoon, Neil Bright 23 April 2002 12 months 12 months Kesa Electricals, Kingfisher, Marks and Spencer, Marston’s, Millennium & Copthorne Hotels, Mothercare, N Brown Group, Next, Sports Direct International, The Go-Ahead David Wolffe 24 December 2010 12 months 12 months Group, The Restaurant Group, Whitbread and WH Smith. 25% of the award vests for median performance with the percentage vesting increasing so that 100% of the award vests for upper quartile performance. Vesting of awards is also subject to the satisfaction of an underpin based on the Group’s absolute performance over the period. Note: (vi) The 2010 awards are subject to two performance conditions, with 50% based on relative TSR performance against a comparator group comprising: Carpetright, Carphone (i) The service contract under which Mr Wolffe was appointed as Group Finance Director was as described on page 18. Warehouse, Debenhams, DSG International, Findel, Game Group, Halfords, Home Retail Group, Kesa Electricals, Kingfisher, Marks and Spencer, Mothercare, N Brown Group, Next, Topps Tiles and WH Smith; and, 50% being linked to growth in earnings per share (‘EPS’) to the end of 2012/13. 25% of the TSR element vests if the Company is ranked at median with the percentage vesting increasing so that 100% of this element of the award vests for upper quartile performance. 25% of the EPS element vests for EPS in Shareholder approval 2012/13 of 13.5p, increasing to 65% vesting for EPS of 15.0p and 100% vesting for EPS of 16.5p. No award will vest for TSR performance below the median or threshold. A resolution to approve the Remuneration Report is being proposed at the Annual General Meeting. The Committee will assess EPS performance by reference to the Company’s audited financial results. Performance against the TSR measure will be independently assessed at the time of vesting. For and on behalf of the Board (vii) Mr Bright’s PSP awards lapsed on his resignation from the Company on 17 December 2010.

Orna Ni-Chionna Chairman of the Remuneration Committee 29 June 2011

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Orna Ni-Chionna Chairman of the Remuneration Committee 29 June 2011

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Our Corporate Responsibility (CR) platform comprises the areas HMV UK & Ireland partners the music industry initiative Julie’s Energy management Table: UK stores recycling averages* of Environment, People and Community. Bicycle, which aims to reduce the sector’s greenhouse gas Efforts to reduce energy usage in our UK stores through the emissions. roll-out of an energy management system continued to make HMV UK Environment During its final year of ownership by the Group, Waterstone’s progress during this financial year. Systems which enable 2009/10 61% The following have been identified as the principal areas for worked with the Booksellers’ Association & Publishers’ heating, air conditioning and lighting to be pre-programmed 2010/11 75% potential environmental impact by our businesses: Association Environmental Action Group to ensure that various to ensure maximum efficiencies, are being installed gradually Waterstone’s industry-wide initiatives were implemented within its stores. across the estate, although at a slower pace than anticipated – Energy usage This group considers all aspects of the trade, including due to the prioritisation of a store closure programme in the 2009/10 52% – Waste/recycling packaging, book miles, paper sourcing and returns, and operates UK during the second half. 2010/11 48% the information website green4books. – Supply chain Waterstone’s also worked with the British Safety Council Automated Meter Readings (AMR) and * Figures do not include shopping centre locations, where waste and centre management carries out recycling. Consultation on waste management and – Packaging (BSC) to consider wider measures of environmental impact than electricity procurement recycling is underway with landlords of these locations. the company’s carbon footprint. During the last two financial years, over 400 ‘domestic’ energy – Green purchasing policies of goods not for resale meters have been switched to AMR ‘Smart Meters’ to improve Water usage – Green build initiatives Carbon reduction commitment: billing, monitoring and reporting capabilities. The new meters Measures are taken, where possible, to reduce the amount of CRC energy efficiency scheme remove the need for manual reading and estimated billing, – Health and safety water used in our store and distribution locations. The fit-out of all The Carbon Reduction Commitment (CRC) is a UK emissions and assist the Company and our energy suppliers to reduce new stores follows a ‘green blueprint’, incorporating energy and We are managing our impacts through the following initiatives: trading scheme (ETS) with the aim of cost-effectively reducing waste. Flexible electricity contracts are negotiated for our UK water-saving design and devices, while at the Waterstone’s book emissions in the service, public and other less energy-intensive businesses, enabling us to maximise price reductions in hub a recycled grey water system is used. Industry and environmental partners sectors by 1.2m tonnes by 2020. The CRC will be a mandatory the UK’s electricity market. The Group’s businesses in the UK work with a number of emissions trading scheme, targeting large organisations whose Supply chain specialist organisations to help to minimise our impacts on the emissions are currently not included in the ETS or Climate Waste and recycling Waterstone’s centralised book hub delivered a number of environment, including The Carbon Trust, British Safety Council, Change Agreements of the European Union. Overall, HMV UK recyclyed over 70% of the waste generated environmental benefits for the company and its suppliers, Adam Energy Management Systems, Inenco, IMServe and Biffa All of the qualifying sites within the Company’s UK store through its store estate. including: Waste Services. In addition, through our involvement in various estate were registered with the Environment Agency in the In Canada, the high proportion of mall-based stores means trade bodies, we are helping to manage the environmental required timescale and work is underway to produce our first that HMV’s landlords have lead responsibility for waste and – A significant reduction in suppliers’ transportation impacts made by the entertainment and book industries. Annual Report. recycling, and most of these participate in mandatory municipal requirements, driven by the replacement of deliveries to recycling schemes. individual branches with shipments to a single destination. Energy usage At Waterstone’s product was delivered in reusable totes, – Prior to the hub, an average of 20 medium-sized cardboard As the table below summarises, energy usage in our UK businesses reduced during the year, reflecting store closures and initiatives producing less packaging waste, which in HMV forms the bulk boxes per day were used to deliver books direct from to reduce consumption, offset by the extreme winter weather. of recycled material. suppliers to each store. Now books are primarily delivered to Waterstone’s Head Office became a ‘binless’ environment Electricity Gas Total the hub on pallets and, after processing, transferred to each at the end of the year, when all under-desk waste bins were store in plastic reusable totes, thereby reducing the amount Total HMV UK & Waterstone’s Total kWh Total CO2 (tonnes) Total kWh Total CO2 (tonnes) Total kWh Total CO2 (tonnes) removed and replaced with centralised bins for plastic cups, of cardboard and packaging involved in distribution of stock. 2007/08 89,599,549 48,117 1,305,943 242 90,905,492 48,358 glass, cans, and general waste, as part of the overall aim to reduce the amount of general waste sent to landfill every year. – 100% of all packaging used in deliveries to the hub is either 2008/09 86,856,010 46,643 1,114,062 202 87,970,072 46,850 re-used or recycled. 2009/10 100,975,059 54,427 1,968,694 361 102,943,753 54,788 – Returns of excess stock from each store are made to the 2010/11 96,880,120 52,412 2,731,897 501 99,612,017 52,913 hub, rather than direct to suppliers generally for pulping, allowing for sale in other branches of Waterstone’s. NB: 2009/10 figures use revised DECC conversion factors, issued 22 January 2010. Green benefits within the hub include: motion-sensor energy- efficient lighting, half-flush sanitary systems and half-hourly metering to ensure efficient monitoring of energy usage.

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Goods not for resale Year-on-year Green build Recruitment policy As part of the Group’s continuing commitment to tightly Business Bags used % change We strive to ensure that the new stores we open and those we Our businesses are committed to providing equality of managing its costs, efficiencies are being made by more HMV UK refit are as green as possible. As well as the roll-out of smart opportunity and to maximising the talents of our people. effectively procuring the Group’s goods and services not meters and energy management systems to new stores, any Our recruitment decisions are made only on the basis of for resale. This programme is also helping to enhance our 2008/09 44.5m –12% new timber used in store builds is FSC-certified and only qualifications, skills and ability to do the job. This commitment environmental commitment. 2009/10 47.2m +6% energy-efficient PCs, lighting and appliances are deployed. to equal opportunities includes: We also recycle fixtures and fittings, wherever possible, with 2010/11 32.7m –30% – The promotion of equality of opportunity in employment. Paper browser units and stands re-sprayed and metallic merchandising Most of the paper used by the Group worldwide is supplied from HMV Canada fixtures refurbished. HMV Canada uses Eco carpet for all new – The development, implementation, regular monitoring and FSC-certified sources, and includes a mixture of recycled and 2008/09 10.0m –8% builds and applicable refits. review of employment policies, with the aim of ensuring non-recycled stock. The green credentials of suppliers of our 2009/10 8.2m –18% that colleagues receive fair and consistent treatment. in-store point of sale materials (POS) are carefully monitored. Health and safety – A continuing programme of action to ensure our policy We continue to review our paper consumption, and this 2010/11 7.0m –15% The Group maintains a strong commitment to health and safety and its implementation is fully effective, including training declined in Waterstone’s by 24% year-on-year, and in HMV UK in order to protect the visitors, staff and customers at all our Waterstone’s and guidance. by 4% year-on-year, reflecting changes made to both the 2008/09 18.6m –32% locations across the estate. Company’s systems and the working practices at head offices The Health and Safety teams from HMV UK and – The elimination of discrimination of any kind. and stores. 2009/10 14.7m –21% Waterstone’s were merged to form a Group Health and Safety The law sets out that our policies must at least ensure that Team, enabling best practice to be shared and to provide a more 2010/11 12.3m –16% current and potential colleagues are offered the same Carrier bags consistent service. The main activity of the combined team was Group opportunities regardless of gender, colour, race, religion or The Group’s businesses are working hard to reduce the amount the implementation of a revised health and safety file to enhance belief, national or ethnic origin, age, disability, sexual orientation, of carrier bags distributed annually by our stores to customers. 2008/09 73.2m –17% compliance and simplify branch tasks marital status, part-time or fixed-term status. Our stance is that Our stores have a policy to ask customers, individually or through These new procedures also introduced a ‘Zero Tolerance’ 2009/10 70.1m –4% the promotion of equal opportunities is essential and, therefore, point of sale communication, if a bag is required with each policy to ensure enhanced compliance with fire safety checks, 2010/11 52.0m –25% all colleagues should be treated with respect, regardless of purchase. In Waterstone’s, loyalty cardholders are offered staff training and central supervision. whether they are specifically protected by legislation. ‘Eco Points’ when they decline a bag, thereby rewarding our Our businesses adopt a responsible approach to sourcing In order to improve the health and safety culture and climate, customers with money off future purchases. carrier bags. Stores in HMV UK and HMV Canada provide Regional Health and Safety Champions are being introduced to The table below shows a year-on-year decline of 25% all parts of the business. Colleague progression degradable, single-use carrier bags made from 30% recycled The Group is committed to nurturing talent and promoting from in the number of carrier bags used across the Group. plastic. The bags degrade in landfill sites within 12 to 24 months within, wherever possible. Various internal training programmes in the presence of light, oxygen, heat and stress. In addition, People are available, as well as assistance to gain professional Our businesses fully recognise the essential nature of attracting HMV UK offers customers a ‘bag for life’, manufactured from qualifications where this is relevant. The programmes we operate and retaining dedicated and motivated people. There are 100% recycled plastic, principally recycled water bottles. enable our businesses to have well-developed succession plans numerous initiatives to promote the engagement of our At Waterstone’s, plastic carrier bags are manufactured from and to fill any gaps in individuals’ knowledge before promotion. colleagues, to celebrate success, provide a range of attractive 100% post-consumer recycled plastic. In addition, Waterstone’s Examples of these programmes include: offers a ‘bag for life’ manufactured from 100% certified Fairtrade benefits, and to develop the careers of individuals. organic cotton. In Ireland, where local legislation prohibits the use This year, as a result of employee feedback, we launched the HMV UK & Ireland provides an induction-training programme, of plastic carrier bags, HMV and Waterstone’s provide customers Pledge Festival, giving colleagues the chance to take advantage Get Started, for all new colleagues. This includes: a company who request them with bags made from recycled craft paper. of great offers and discounts on a variety of products and DVD, online training, in-store training and regular reviews Online products ordered from hmv.com and waterstones.com activities, and also includes many of the great benefits we already for colleagues during their first six months with the Company. are shipped using recycled packaging materials. In HMV provide for our people. Offers and benefits range from maternity Since 2000, HMV UK & Ireland has had Investors in People Canada, a bag fee levied by the City of Toronto was leave, season ticket loans and healthcare to discounts on festival accreditation, which was successfully renewed in April 2009, implemented by neighbouring cities during the year, and HMV tickets, holidays and activities. reflecting our commitment to developing our people so they collected C$24,000, with proceeds continuing to go to its chosen are better able to deliver what is required of them. In 2009 we charity the Centre for Addiction and Mental Health (CAMH). trained all retail colleagues on our new customer service strategy ‘loose fit’ and launched NipperpediA – an eLearning tool with role specific courses and mandatory courses on new product ranges for all retail colleagues to complement the in-store training delivered by our store management population. HMV believes in promoting from within and offers Fast Track programmes to ensure that talented people with the desire to progress into management roles are supported. Over the past three years, more than 700 colleagues have completed one of the four levels of HMV Fast Track programmes available. Several of our Store Managers have been promoted to Regional Manager, reflecting the success of our internal development offer. In May 2009, HMV Canada introduced the HMV Academy, an independent e-learning platform that delivers and tracks compliance-related learning, as well as delivering knowledge and information about policies, procedures and product.

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The Academy has delivered significant cost reduction, flexibility As a result of this focus, HMV was named Music Retail Brand of Waterstone’s believes that it should not act as censor and that During the year, HMV UK, Fopp and HMV Canada hosted for end-users and administrators, as well as the elimination of the Year at the Music Week 2011 awards. HMV was also winner customers should have the right to choose whatever they want to several hundred personal appearances by some of the workbook printing. This year, in an effort to continue educating of Best Bricks and Mortar Retailer and Best Blu-ray retailer at the read. The only circumstances under which we would remove a biggest names in the music and filmed entertainment industries. HMV employees, HMV Canada introduced 10 new online training British Video Association 2011 awards ceremony. book from sale are on the advice of the police or the publisher. They provided volume sales for artists and stores, local, national modules as part of the HMV Academy Learning Programme. We understand that we share a responsibility with parents to and, in some instances, international publicity, and provided The most successful module was the new Pure HMV customer Rewarding loyalty ensure that inappropriate material is not sold to minors. While unique experiences for our customers. Demonstrating a loyalty and rewards programme. Successful completion of In the UK, both of our main brands have programmes to reward many books for children and teenagers include no printed direct commitment to help develop the careers of new and emerging this module ensured that all store colleagues had a good customers for their loyalty. Purehmv has been highly successful, age guidance, our booksellers can both offer advice or decline a artists, HMV and MAMA, the Group’s Live music venue and understanding of this key business initiative and enabled them with over 1.8 million members joining since the launch in May sale if they believe a particular title should not be sold to a minor. festival division, continued to develop the Next Big Thing music to confidently sell memberships to our customers. 2009. Members earn points every time they shop with HMV festival, a showcase for celebrating a broad and diverse range of For colleagues in Waterstone’s stores, an induction in-store and online, and these points can then be redeemed for Community 50 breakthrough artists drawn from across the music spectrum. programme exists for all new booksellers, following which there ‘cool stuff money can’t buy’ via a bespoke members’ website. We recognise that both the products we sell and, therefore, the In the Games market, HMV’s flagship London store hosted the is a focus on customer service through the ‘Spread The Word’ The prestigious Marketing Week 2010 Engage Awards awarded HMV and Waterstone’s brands, have an important part to play in official UK retail launch event for the groundbreaking Nintendo initiative. For those wishing to progress their careers with Purehmv Best Loyalty Scheme. Following its launch in autumn the lives of our customers. Our commitment to the hundreds of 3DS handheld console. 100 HMV stores opened specially at Waterstone’s, a Lead Bookseller development programme 2007, the Waterstone’s loyalty card now has approximately communities in which we operate is to extend our engagement midnight for the launch. was launched in 2010, with workshops attended by 340 Lead 3.4 million members, enjoying a wide range of benefits. with them in ways which, we hope, can help to make even more Waterstone’s supports, through activities in its stores, Booksellers in 2010 and 2011. Several Branch Managers have Points can be earned on virtually every item in every store, of a difference. World Book Day, by honouring the vouchers that permit every been promoted to the Regional Manager, reflecting the success and are also given as a reward if customers either bring their child in the UK to a free book. Stores held a range of events of our Fast Track programme for Regional Managers. Branch own carrier bag or opt not to use one. Charitable support to celebrate World Book Day itself, including activity days and Managers and Assistant Managers also benefit from a range of The data we collect from customers’ participation in our The focus of HMV’s community engagement activity during the readings across stores and schools. The World Book Day workshops, based around various management tasks, including schemes enables us to provide carefully targeted and relevant year was its nominated charity CLIC Sargent, which supports campaign is supported by Quick Reads, a selection of nine performance reviews, delivering training to others, Living communication. The right to privacy and security of customer children and young adults with cancer. Since 2008, HMV has books which appeal to reluctant adult readers across fiction Leadership and Spread The Word for Managers. data is taken very seriously. Customers can opt in or out of generated over £1m for CLIC Sargent through a range of and non-fiction, which this year included titles from a number communication at any time and the information we use is not fundraising events, donations and cause-related marketing, of well-known authors. The Big Book Bank is an award-winning Green benefits package sold, rented or passed on to others for marketing purposes and has helped to raise awareness for the invaluable work of Waterstone’s initiative that enables children to bring a favourite Our people are encouraged to choose from a menu of benefits without the express consent of customers. All of the information the organisation among HMV’s customers, employees, suppliers book to school to share with other children and, in return, receive that directly promote green issues, including: provided to us by customers is treated securely and strictly in and other stakeholders. On behalf of CLIC Sargent, HMV has a voucher from the school to redeem against a new book from accordance with the Data Protection Act 1998. created a number of sports-related annual events and, with its Waterstone’s. During the school year ended June 2010, a total – Loans of up to £1,000 to purchase a bicycle for travel to and suppliers, has created a range of products to sell in stores and of 1,272 schools took part in the scheme, with nearly 12,500 from work. Responsible selling online. This fruitful relationship came to an end on 30 April 2011 books being exchanged across the country. This scheme was – Season ticket loans to encourage travel to and from work As specialist retailers, our brands are committed to providing and in the new financial year HMV will be supporting the recognised by the Institute of Sales Promotion (ISP), winning using public transport. the widest ranges of products available either on the high street Teenage Cancer Trust in the UK and the Marie Keating three of its Gold Awards in June 2009: the ISP Gold for Retail, or online. Sometimes, for all sorts of reasons, certain of the Foundation in the Republic of Ireland. Home Shopping and E-Commerce; ISP Gold for Art Direction – Give As You Earn (GAYE) scheme to make regular, pre-tax products we sell in stores or online can be of a sensitive nature. HMV Canada’s charitable focus is on the promotion of & Copywriting; and ISP Gold for Social Responsibility. donations to chosen charities through payroll. We are proud Therefore, we adopt a responsible approach to selling. education and awareness-raising activities to help reduce the Waterstone’s continues to be lead sponsor of The Children’s that our colleagues donated over £7,000 during the year Where appropriate, we liaise with trading standards and other incidence of suicide amongst young Canadians. In an ongoing Laureate which recognises outstanding commitment to through this scheme. external bodies and listen to our customers and our colleagues. partnership with the CAMH, Canada has taken a unique Children’s books and aims to promote a love of reading. In addition, Waterstone’s offers colleagues the opportunity Within the boundaries of existing legislation and industry approach to offering its support. CAMH bi-annually conducts an The recently announced 2011/12 Laureate is Julia Donaldson, to participate in the Day for Good scheme, which enables regulation applied to our product categories, including the anonymous survey to over 9,000 students, which provides reliable author of The Gruffalo. our people to take paid time off to carry out voluntary work. Public Order Act and British Board of Film Classification (BBFC) information about the health risk behaviour, attitudes and beliefs Waterstone’s was an enthusiastic supporter of the inaugral Colleagues can request one day of paid time in any year ratings, we maintain a strictly non-censorial approach to selling. of adolescents. In a highly successful initiative, HMV digital World Book Night, which saw 20,000 ‘givers’ distribute 1million to volunteer for their chosen organisation. In support of this, the people in our stores are provided with downloads were offered to encourage survey participation as free books across the UK. As well as co-sponsoring the launch training and regular communication to ensure that, if appropriate, well as attract new customers to the HMV.ca website. event in Trafalgar Square, where over 5,000 people enjoyed Responsibility to customers sensitive product is clearly identified and/or is sold only to Waterstone’s and its customers raised over £105,000 for its readings from authors including Alan Bennett, David Mitchell and customers who are entitled to purchase it. charity partner, Rainbow Trust, through various activities in stores Margaret Atwood, hundreds of Waterstone’s stores held events The customer experience HMV UK and Canada believes that it is inappropriate to and initiatives carried out by colleagues, including running the on the night. Waterstone’s was also a key part of the World Book We believe that it is our responsibility to provide our customers restrict or censor the choice that it makes available to customers. London Marathon, a parachute jump, donations in lieu of giving Night supply chain, with many givers choosing to pick up their with the best possible experience. Our people are, therefore, However, we recognise the importance of merchandising and Christmas cards, collection pots and other sporting activities. free books from branches, which were distributed at no charge equipped with high quality and extensive training and our most displaying stock in a responsible manner, which is consistent Waterstone’s stores also sold charity Christmas cards during via Waterstone’s Distribution Hub. prestigious company awards recognise excellent customer with trading standards and retail practice and sensitive to the year, raising over £106,000 which was apportioned between Waterstone’s was also involved in nearly 20 literary festivals service as a key criteria. prevailing public concerns. Rainbow Trust, Wateraid, Save the Children and MacMillan during the year, offering varying levels of support and As the standards expected of us increase, we must strive to Cancer Support. sponsorship. These included: the Times Cheltenham Festival of deliver an ever more rewarding customer experience. In support Literature; UEA Spring Literary Festival; Stratford Literary Festival; of this, we carry out regular research and brand tracking surveys Events Daphne du Maurier Festival in Fowey; Glasgow’s Aye Write! with our customers, and employ ‘mystery shopper’ programmes. Among the important added-value experiences our local stores Durham Book Festival; and Discovery Season in Bloomsbury. Results from these initiatives are fed back to all parts of our are uniquely placed to provide, is the opportunity for our businesses and, where appropriate, adaptations to policy or customers to meet their favourite artists and authors from the training are made. entertainment and literary worlds at live performances, signings and other special events.

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The Directors submit their report and audited financial appointed as Non-Executive Chairman on 1 March 2011 and Risk Mitigating action statements for the 53 weeks ended 30 April 2011, which were Orna Ni-Chionna replaced Mr Rowley as Senior Independent Growth of digital entertainment – Strategic plans based on realistic independent market forecasts. approved on behalf of the Board on 29 June 2011. Director on 8 March 2011. All other Directors served throughout Physical entertainment media remains a key driver of footfall to the Group’s – Investment in, and development of a broader retail offer, embracing new technology the year under review and details for all present Directors are stores and of online customers to its transactional websites. Technological products, which have already been successfully incorporated into stores on limited Principal activities and business review listed, together with their biographical details, on page11. advances and changing customer preferences have given rise to new basis methods of digital delivery, both legal and illegal. The principal activities of the Group for the period under review The Directors will be retiring and seeking re-election at the – Delivering entertainment content to customers through multiple channels in retail were the retailing of pre-recorded music, video, electronic games forthcoming AGM. In response, the Group’s strategy is to focus on the development of growth and live, supported by customer loyalty programmes and related entertainment products under the HMV and Fopp With regards to the appointment and replacement of areas, including the retail of personal digital technology, and live and – Diversification of the Group’s business – investment in Live and digital media delivery brands, the retailing of books principally under the Waterstone’s Directors, the Company is governed by its Articles of Association, ticketing. This strategy requires investment in capital and will stretch financial brand and the operation of a number of live music venues and the Combined Code, the Companies Act 2006 and related and operational resources. However, failure to successfully implement, legislation. The Articles themselves may be amended by special could have a material adverse effect on the Group’s financial condition festivals. The Group had operations in seven countries, with the and prospects. principal markets being those of the UK and Canada. resolution of the shareholders. The powers of the Directors are Since the end of the period under review the Company has detailed in the Corporate governance report on page 12. Seasonality – Thorough planning in advance of Christmas and excellent operational practices agreed to sell the entire issued share capitals of Waterstone’s The Directors’ interests in the shares of the Company, The business of the Group is highly seasonal – the Christmas season is the to ensure peak trading opportunities are maximised and unexpected events most important trading period in terms of sales, profitability and cash flow. are managed Booksellers Limited, Waterstone’s Booksellers Ireland Limited. together with their remuneration (where applicable) and further Lower than expected performance in this period, including the impact Waterstone’s Booksellers’ Amsterdam BV and Waterstone’s details of their service agreements are detailed in the Directors’ – Diversification of the Group’s business away from pure retail – investment in Live on footfall of severe weather, may have an material impact on results for entertainment Booksellers Belgium SA to A&NN Capital Management Fund remuneration report on pages 16 to 23. a full financial year. Limited for a total consideration of £53.0m. The transaction was No Director, at any time during the period under review, had Economic environment subject to the approval of the Company’s shareholders which a material interest in any contracts with the Company or any of its – Strategic planning that allows for a range of economic scenarios Both the retail and live music markets are sensitive to economic conditions – Both our retail and live offers include product and events at affordable price points, was secured on 23 June 2011. The transaction completed on subsidiary undertakings, other than the Executive Directors who and would be impacted by a prolonged economic downturn. had such an interest through their service agreements with the that are generally more resilient to reductions in discretionary spend than higher 28 June 2011 when an initial consideration of £40.0m was paid. value products Deferred consideration of £13.0m is payable on 31 October Company, details of which are summarised on pages 18 and 23. 2011. On 27 June 2011 the Company sold the entire share None of the Directors or their families at any time during the Competition – Continued adaptation and development of the retail offer to remain competitive The Group operates in highly competitive markets, where the Group’s – Maximising our direct relationship with suppliers to ensure the widest ranges capital of HMV Canada Inc to Hilco UK for a total cash period under review, or subsequently, were interested in any products are often sold at or below cost. consideration of £2.0m. shares of the Company’s subsidiary undertakings. Each Director of our core products on the high street Commentary on the strategy of the Company, the has been given an unlimited indemnity from the Company in – Ensuring the reputation as a specialist retailer is maintained, through compelling performance of the Group during the year and likely future respect of certain losses which they may incur to third parties offers and active customer relationship management developments can be found in the Chairman’s statement in the course of acting as Directors of the Company and any Credit risk and liquidity – A central Treasury team, that operates within Board approved policies on pages 1 and 2, and the Business and financial review subsidiary undertaking in which they hold a directorship. The Group’s ability to operate depends on access to adequate short and financial limits on pages 3 to 10, which are deemed to be incorporated by and medium-term funding, predominantly from the bank lending market. – Regular review and stress testing of liquidity, interest rate and foreign reference in (and shall be deemed to form part of) this report. This requires regular refinancing, the success of which is dependent on exchange exposures and covenant headroom Principal shareholders both financial condition of the Group and the appetite of the lending market. As at 29 June 2011 the Company had been advised of the – A successful refinancing agreed on 28 June 2011, providing funding to Risks and uncertainties following holdings representing 3% or more in its issued In addition, the interest rate, credit and exchange rate risks must be 30 September 2013. The Directors have no reason to believe that funding will The Board has a policy of continuous identification and review Ordinary Shares: adequately managed. not be available beyond the maturity date. of key business risks and uncertainties. It oversees the Damage to reputation or brands – Thorough staff training to ensure that the business is always to seen Number of Percentage The HMV and live music and festival brands are material assets of the to act responsibly development of processes to ensure that these risks are Ordinary of issued managed appropriately and operational management implement Group and maintaining their reputation is key to continued success. – Regular review of policies and operating procedures to ensure compliance Shares share capital Risks include an event that causes reputational damage, including a failure these and report to the Board on their outcomes. The key risks with all relevant legislation and best practice UBS Global Asset Management 46,118,351 10.89 to comply with legislation or other regulatory requirements. identified by the Board, together with a summary of the mitigating actions considered, are set out on page 31. Schroders plc 34,619,783 8.17 People – Quality development and training programmes The performance of the Group depends on its ability to continue to attract, – An organisational structure with clear career development opportunities Various entities connected to motivate and retain staff. Results and dividends Channel Trustees Limited – Appropriate rewards for personal and business success The consolidated loss after deducting taxation amounted to The retail sector is very competitive and the Group’s people are frequently (as trustees of the Mamut Trust) targeted by other companies for recruitment. £(121.7)m (2010: profit of £49.2m). The Board of Directors of which the beneficiary is recommend that no final dividend be paid in respect of the year Alexander Mamut 25,823,600 6.71 Major business interruption – Thorough contingency and disaster recovery plans that are regularly updated under review. The total dividend paid for the year under review As with any business, exposure exists to a major external event such as an – Appropriate insurance cover Henderson Global Investors was 0.9p (2010: 7.4p). 23,174,227 5.47 act of terrorism or an outbreak of a pandemic disease, as well as fires, floods Fidelity International Limited 20,935,298 4.94 or systems failures. Retail store network Directors Blackrock, Inc 20,363,704 4.81 – For new stores or renewals, seeking to negotiate short, flexible lease lengths Neil Bright retired from the Board on 17 December 2010. Retaining a portfolio of good quality real estate, in prime retail areas with rents linked to turnover where possible David Wolffe was appointed as Group Finance Director on Artemis Fund Managers 19,450,931 4.59 and at commercially reasonable rates, remains critical to the performance – Occupying prime, highly marketable locations of the Group. 10 January 2011. Robert Swannell resigned as Chairman on Standard Life Investments 15,347,612 3.62 – Regular ongoing review of the store portfolio 1 March 2011 but remained on the Board as a Non-Executive Pacific Capital Sarl 14,062,050 3.32 Continuity of supply – Ongoing active engagement with suppliers and credit insurers Director. Since the end of the year under review, the Company The ability to trade is dependent on continuity of supply. Issues that could Universities Superannuation – Building strategic relationships with key suppliers, utilising the Group’s various retail has announced that Mr Swannell retired from the Board cause an interruption to supply include the withdrawal of credit insurance platforms and digital and Live businesses Scheme Limited 13,425,751 3.17 upon which some suppliers rely, the failure of a supplier or the physical at the close of business on 23 June 2011. Philip Rowley was – A flexible supply chain, with contingency and disaster recovery plans that are disruption to the supply chain. regularly tested

14531_HMV_AR11_p12-92.indd 30 15/07/2011 09:58 HMV Group plc HMVHMV Group Group plc plc Annual report and accounts 2011 AnnualAnnual report report and and accounts accounts 2011 2011 30 3131 Directors’ report

The Directors submit their report and audited financial appointed as Non-Executive Chairman on 1 March 2011 and Risk Mitigating action statements for the 53 weeks ended 30 April 2011, which were Orna Ni-Chionna replaced Mr Rowley as Senior Independent Growth of digital entertainment – Strategic plans based on realistic independent market forecasts. approved on behalf of the Board on 29 June 2011. Director on 8 March 2011. All other Directors served throughout Physical entertainment media remains a key driver of footfall to the Group’s – Investment in, and development of a broader retail offer, embracing new technology the year under review and details for all present Directors are stores and of online customers to its transactional websites. Technological products, which have already been successfully incorporated into stores on limited Principal activities and business review listed, together with their biographical details, on page11. advances and changing customer preferences have given rise to new basis methods of digital delivery, both legal and illegal. The principal activities of the Group for the period under review The Directors will be retiring and seeking re-election at the – Delivering entertainment content to customers through multiple channels in retail were the retailing of pre-recorded music, video, electronic games forthcoming AGM. In response, the Group’s strategy is to focus on the development of growth and live, supported by customer loyalty programmes and related entertainment products under the HMV and Fopp With regards to the appointment and replacement of areas, including the retail of personal digital technology, and live and – Diversification of the Group’s business – investment in Live and digital media delivery brands, the retailing of books principally under the Waterstone’s Directors, the Company is governed by its Articles of Association, ticketing. This strategy requires investment in capital and will stretch financial brand and the operation of a number of live music venues and the Combined Code, the Companies Act 2006 and related and operational resources. However, failure to successfully implement, legislation. The Articles themselves may be amended by special could have a material adverse effect on the Group’s financial condition festivals. The Group had operations in seven countries, with the and prospects. principal markets being those of the UK and Canada. resolution of the shareholders. The powers of the Directors are Since the end of the period under review the Company has detailed in the Corporate governance report on page 12. Seasonality – Thorough planning in advance of Christmas and excellent operational practices agreed to sell the entire issued share capitals of Waterstone’s The Directors’ interests in the shares of the Company, The business of the Group is highly seasonal – the Christmas season is the to ensure peak trading opportunities are maximised and unexpected events most important trading period in terms of sales, profitability and cash flow. are managed Booksellers Limited, Waterstone’s Booksellers Ireland Limited. together with their remuneration (where applicable) and further Lower than expected performance in this period, including the impact Waterstone’s Booksellers’ Amsterdam BV and Waterstone’s details of their service agreements are detailed in the Directors’ – Diversification of the Group’s business away from pure retail – investment in Live on footfall of severe weather, may have an material impact on results for entertainment Booksellers Belgium SA to A&NN Capital Management Fund remuneration report on pages 16 to 23. a full financial year. Limited for a total consideration of £53.0m. The transaction was No Director, at any time during the period under review, had Economic environment subject to the approval of the Company’s shareholders which a material interest in any contracts with the Company or any of its – Strategic planning that allows for a range of economic scenarios Both the retail and live music markets are sensitive to economic conditions – Both our retail and live offers include product and events at affordable price points, was secured on 23 June 2011. The transaction completed on subsidiary undertakings, other than the Executive Directors who and would be impacted by a prolonged economic downturn. had such an interest through their service agreements with the that are generally more resilient to reductions in discretionary spend than higher 28 June 2011 when an initial consideration of £40.0m was paid. value products Deferred consideration of £13.0m is payable on 31 October Company, details of which are summarised on pages 18 and 23. 2011. On 27 June 2011 the Company sold the entire share None of the Directors or their families at any time during the Competition – Continued adaptation and development of the retail offer to remain competitive The Group operates in highly competitive markets, where the Group’s – Maximising our direct relationship with suppliers to ensure the widest ranges capital of HMV Canada Inc to Hilco UK for a total cash period under review, or subsequently, were interested in any products are often sold at or below cost. consideration of £2.0m. shares of the Company’s subsidiary undertakings. Each Director of our core products on the high street Commentary on the strategy of the Company, the has been given an unlimited indemnity from the Company in – Ensuring the reputation as a specialist retailer is maintained, through compelling performance of the Group during the year and likely future respect of certain losses which they may incur to third parties offers and active customer relationship management developments can be found in the Chairman’s statement in the course of acting as Directors of the Company and any Credit risk and liquidity – A central Treasury team, that operates within Board approved policies on pages 1 and 2, and the Business and financial review subsidiary undertaking in which they hold a directorship. The Group’s ability to operate depends on access to adequate short and financial limits on pages 3 to 10, which are deemed to be incorporated by and medium-term funding, predominantly from the bank lending market. – Regular review and stress testing of liquidity, interest rate and foreign reference in (and shall be deemed to form part of) this report. This requires regular refinancing, the success of which is dependent on exchange exposures and covenant headroom Principal shareholders both financial condition of the Group and the appetite of the lending market. As at 29 June 2011 the Company had been advised of the – A successful refinancing agreed on 28 June 2011, providing funding to Risks and uncertainties following holdings representing 3% or more in its issued In addition, the interest rate, credit and exchange rate risks must be 30 September 2013. The Directors have no reason to believe that funding will The Board has a policy of continuous identification and review Ordinary Shares: adequately managed. not be available beyond the maturity date. of key business risks and uncertainties. It oversees the Damage to reputation or brands – Thorough sh37anhe533 0Td<0003>ruofGr(n)66(d)5ttncas9(n)59(7116)63( )66(d)5founo bub Number of Percentage The HMV and live music and festival brands are material assets of the development of processes to ensure that these risks are Ordinary of issued managed appropriately and operational management implement Group and maintaining their reputation is key to continued success. Shares share capital Risks include an event that causes reputational damage, including a failure these and report to the Board on their outcomes. The key risks UBS Global Asset Management 46,118,351 10.89 to comply with legislation or other regulatory requirements. identified by the Board, together with a summary of the mitigating actions considered, are set out on page 31. Schroders plc 34,619,783 8.17 Various entities connected to Results and dividends Channel Trustees Limited The consolidated loss after deducting taxation amounted to (as trustees of the Mamut Trust) £(121.7)m (2010: profit of £49.2m). The Board of Directors of which the beneficiary is recommend that no final dividend be paid in respect of the year Alexander Mamut 25,823,600 6.71 under review. The total dividend paid for the year under review Henderson Global Investors was 0.9p (2010: 7.4p). 23,174,227 5.47 Fidelity International Limited 20,935,298 4.94 Directors Blackrock, Inc 20,363,704 4.81 Neil Bright retired from the Board on 17 December 2010. David Wolffe was appointed as Group Finance Director on Artemis Fund Managers 19,450,931 4.59 10 January 2011. Robert Swannell resigned as Chairman on Standard Life Investments 15,347,612 3.62 1 March 2011 but remained on the Board as a Non-Executive Pacific Capital Sarl 14,062,050 3.32 Director. Since the end of the year under review, the Company has announced that Mr Swannell retired from the Board Universities Superannuation at the close of business on 23 June 2011. Philip Rowley was Scheme Limited 13,425,751 3.17

HMV Group plc HMV Group plc Annual report and accounts 2011 Annual report and accounts 2011 32 33 Directors’ report continued

Policy on payment of creditors Details of the Company’s share capital can be found in Note 28 Auditors Annual General Meeting The Group does not impose standard payment terms on its which is incorporated by reference and deemed to be part of this The Directors who were members of the Board at the time The Annual General Meeting of the Company will be held at suppliers but agrees specific terms with each and ensures that report. Since the end of the period under review the Company of approving the Directors’ report are listed on page 11. 9.00am on 9 September 2011 at The Holiday Inn, Manor Lane, each supplier is made aware of such terms. It is the Group’s has not increased its issued share capital. Having made enquiries of fellow Directors and of the Company’s Maidenhead, Berkshire, SL6 2RA. The special business to be policy to pay its suppliers in accordance with the terms that The Company has one class of Ordinary Shares which carry auditors, each of these Directors confirms that: proposed at that meeting will be the renewal of the Directors’ they have agreed. The Group had 39 days purchases outstanding no right to fixed income. Each share carries the right to one vote authority to allot new Ordinary Shares and to disapply – to the best of each Director’s knowledge and belief, there at 30 April 2011 (2010: 62 days), based on the trade creditors at general meetings of the Company. The percentage issued pre-emption rights in certain circumstances; to avoid an is no information relevant to the preparation of their report at that date and purchases made during the year. The Company nominal value of the Ordinary Shares is 100% of the total inadvertent breach of Companies Act 2006, the renewal of which the Company’s auditors are unaware; and is a holding company and therefore has no trade creditors. issued nominal value of all share capital. There are no specific of the Group’s authority to make political donations. restrictions on the size of a holding nor on the transfer of shares, – each Director has taken all steps a director might reasonably The Notice of Meeting and details of the special business which are both governed by the general provisions of the be expected to have taken to be aware of relevant audit Financial instruments to be proposed can be found in the accompanying letter The Group’s Treasury Department is principally responsible for Articles of Association of the Company and prevailing legislation. information and to establish that the Company’s auditors to shareholders. managing financial risks to which the Group is exposed, such as The Directors are not aware of any agreements between holders are aware of that information. funding risk, liquidity risk, interest rate risk, credit risk and foreign of the Company’s shares that may result in restrictions on the By order of the Board A statement of the Directors’ responsibility for the consolidated exchange risk. Treasury manages these risks using policies transfer of securities or on voting rights. No person has any and Company financial statements can be found on page 34, approved by the Board. special rights of control over the Company’s share capital and which is deemed to be incorporated by reference in (and shall Elaine Marriner Details of the Group’s financial risk management policies all issued shares are fully paid. Company Secretary be deemed to form part of) this report. can be found in Note 26 to the Accounts, a breakdown of the Details of the employee share schemes are set out in Ernst & Young LLP have indicated their willingness to 29 June 2011 Group’s net debt position is found in Note 27 and interest Note 29 and in the Directors’ remuneration report on pages 16 continue in office and ordinary resolutions reappointing them as Shelley House, 2–4 York Road, Maidenhead, Berkshire SL6 1SR charges can be found in Note 10 to the Accounts. to 23 both of which are incorporated by reference in (and shall auditors and authorising the Directors to fix their remuneration be deemed to form part of) this report. will be proposed at the forthcoming Annual General Meeting. Employee policies The Group aims to employ and develop the best people, putting Charitable donations them in the right positions with a significant level of delegated The Group made charitable donations of £12,000 in the period Going concern The Group’s business activities, together with the factors likely authority and supporting them with the infrastructure and under review (2010: £13,000). It is Group policy not to make to affect its future development, performance and position are technology required to perform at the highest levels and at the donations to political parties or independent election candidates set out in the Business and Financial Review on pages 3 to 10. lowest costs with the quickest response time. and therefore no political donations were made during the In addition, this report describes the management of risks Responsibility for employment rests primarily with each period. The Group is also involved in charitable fundraising, and uncertainties, including credit risk and liquidity, with further business operation under the general guidance of central policy details of which can be found in the Corporate Responsibility information on the Group’s borrowing facilities detailed in the and procedural guidelines. Group companies are committed to Statement on page 29. financial statements (see Note 26). the maintenance of a work environment free of discrimination The Directors report that having reviewed current on the grounds of age, gender, nationality, ethnic or racial origin, Significant agreements performance and forecast they have a reasonable expectation non-job related disability, sexual orientation or marital status. The Company’s Senior Bank Facility agreement, details of which that the Group has adequate resources to continue in The Group gives full consideration to applications from can be found in Note 26 to the financial statements, contains operational existence for the foreseeable future. For this reason disabled persons where a disabled person can adequately fulfil provisions entitling the counterparties to exercise termination or they continue to adopt the going concern basis in preparing the the requirements of the job. Where existing employees become other rights in the event of a change of control of the Company. financial statements. disabled, it is the Group’s policy, wherever practicable, to provide The rules of the Company’s Annual Bonus Plan and continuing employment under normal terms and conditions share plans set out consequences of a change of control and to provide training, career development and promotion of the Company on the employees rights under the plans. to disabled employees wherever appropriate. All outstanding awards on the change of control will vest In order to promote employee involvement in the Group, immediately to employees to the extent that any performance regular meetings are held between local management and conditions are satisfied and, unless the Remuneration employees to allow a free flow of information and ideas. Committee otherwise decides, will be pro-rated to the extent The Company encourages staff involvement in the Group’s that the vesting period for each outstanding award has been performance via a combination of employee bonus and share completed at that time. schemes. During the year under review the Group operated a Details of payments to the Executive Directors under their Save As You Earn Share Option Scheme for all UK employees. service contracts as a result of a change of control can be found in the Directors’ remuneration report on page 18 and are Share capital deemed to be incorporated by reference in (and shall be At the Annual General Meeting held in September 2010, deemed to form part of) this report. shareholders authorised the Company to purchase up to a maximum of 42,358,705 million of its own Ordinary Shares, representing 10% of the issued share capital of the Company. During the period under review the Company did not purchase any of its own shares for cancellation.

14531_HMV_AR11_p12-92.indd 32 15/07/2011 09:58 HMV Group plc HMVHMV Group Group plc plc Annual report and accounts 2011 AnnualAnnual report report and and accounts accounts 2011 2011 32 3333 Directors’ report continued

14531_HMV_AR11_p12-92.indd 33 15/07/2011 09:58 HMV Group plc HMV Group plc Annual report and accounts 2011 Annual report and accounts 2011 34 35 Statement of Directors’ reponsibility Independent auditor’s report to the members of HMV Group plc

specific requirements in IFRS is insufficient to enable users satisfied that they give a true and fair view. Our responsibility Matters on which we are required to report by exception to understand the impact of particular transactions, other is to audit and express an opinion on the financial statements We have nothing to report in respect of the following: in accordance with applicable law and International Standards events and conditions on the entity’s financial position and Under the Companies Act 2006 we are required to report to you financial performance; on Auditing (UK and Ireland). Those standards require us to comply with the Auditing Practices Board’s (APB’s) Ethical if, in our opinion: (iv) state that the Company and the Group have complied Standards for Auditors. – adequate accounting records have not been kept by the with IFRS, subject to any material departures disclosed Parent Company, or returns adequate for our audit have not and explained in the financial statements; and Scope of the audit of the financial statements been received from branches not visited by us; or An audit involves obtaining evidence about the amounts (v) make judgements and estimates that are reasonable and disclosures in the financial statements sufficient to give – the Parent Company financial statements and the part of the and prudent. reasonable assurance that the financial statements are free Directors’ Remuneration Report to be audited are not in from material misstatement, whether caused by fraud or error. agreement with the accounting records and returns; or This includes an assessment of: whether the accounting policies – certain disclosures of Directors’ remuneration specified are appropriate to the Group’s and the Parent Company’s by law are not made; or circumstances and have been consistently applied and adequately disclosed; the reasonableness of significant – we have not received all the information and explanations accounting estimates made by the Directors; and the we require for our audit; or overall presentation of the financial statements. In addition, – a Corporate Governance Statement has not been prepared we read all the financial and non-financial information in the by the Company. annual report and accounts to identify material inconsistencies with the audited financial statements. If we become aware of Under the Listing Rules we are required to review: any apparent material misstatements or inconsistencies we – the Directors’ statement, set out on page 33, in relation consider the implications for our report. to going concern; and Opinion on financial statements – the part of the Corporate Governance Statement relating In our opinion: to the Company’s compliance with the nine provisions of the June 2008 Combined Code specified for our review; and – the financial statements give a true and fair view of the state of the Group’s and of the Parent Company’s affairs as at – certain elements of the report to shareholders by the Board 30 April 2011 and of the Group’s loss for the 53 weeks on directors’ remuneration. then ended; John Flaherty (Senior statutory auditor) – the Group financial statements have been properly for and on behalf of Ernst & Young LLP, Statutory Auditor prepared in accordance with IFRSs as adopted by the Birmingham, 29 June 2011 European Union;

14531_HMV_AR11_p12-92.indd 34 15/07/2011 09:58 HMV Group plc HMV Group plc Annual report and accounts 2011 AnnualAnnual reportreport andand accountsaccounts 20112011 34 3355 Statement of Directors’ reponsibility Independent auditor’s report to the members of HMV Group plc

The following statement, which should be read in conjunction The Directors are responsible for keeping adequate accounting We have audited the financial statements of HMV Group plc for – the Parent Company financial statements have been with the Auditors’ statement of their responsibilities on page 35, records which disclose with reasonable accuracy at any time, the the 53 weeks ended 30 April 2011 which comprise the properly prepared in accordance with IFRSs as adopted is made with a view to distinguishing for shareholders the financial position of the Company and of the Group and enable consolidated income statement, the Group and Parent Company by the European Union and as applied in accordance respective responsibilities of the Directors and the Auditors them to ensure that the financial statements comply with the statements of comprehensive income, the Group and Parent with the provisions of the Companies Act 2006; and Company balance sheets, the Group and Parent Company cash in relation to the financial statements. Companies Act 2006 as well as Article 4 of the IAS Regulation. – the financial statements have been prepared in accordance flow statements, the Group and Parent Company statements of The Directors are responsible for preparing the Annual They are also responsible for safeguarding the assets of the with the requirements of the Companies Act 2006 and, changes in equity and the related notes 1 to 37. The financial Report and the financial statements in accordance with Group and hence for taking reasonable steps for the prevention as regards the Group financial statements, Article 4 of the reporting framework that has been applied in their preparation is applicable United Kingdom law, the Disclosure and Transparency and detection of fraud and other irregularities. IAS Regulation. Rules, the Listing Rules of the UK Listing Authority and those applicable law and International Financial Reporting Standards We confirm that, to the best of our knowledge: (IFRSs) as adopted by the European Union and, as regards the International Financial Reporting Standards as adopted by the Parent Company financial statements, as applied in accordance Opinion on other matters prescribed by the Companies European Union. (i) the financial statements, prepared in accordance with with the provisions of the Companies Act 2006. Act 2006 International Financial Reporting Standards, present fairly the In our opinion: The Directors are required to prepare financial statements for This report is made solely to the Company’s members, assets, liabilities, financial position and profit of the Group each financial year which present a true and fair view of the as a body, in accordance with Chapter 3 of Part 16 of the – the part of the Directors’ Remuneration Report to be audited taken as a whole; and financial position of the Company and of the Group and the Companies Act 2006. Our audit work has been undertaken so has been properly prepared in accordance with the financial performance and the cash flows of the Company (ii) the Directors’ Report includes a fair review of the that we might state to the Company’s members those matters Companies Act 2006; and of the Group for that period. In preparing those financial development and performance of the business and the we are required to state to them in an auditor’s report and for no other purpose. To the fullest extent permitted by law, we do – the information given in the Directors’ Report for the financial statements, the Directors are required to: position of the Group, together with a description of the year for which the financial statements are prepared is principal risks and uncertainties that the Group may face. not accept or assume responsibility to anyone other than the (i) select suitable accounting policies and then apply Company and the Company’s members as a body, for our audit consistent with the financial statements; and them consistently; By order of the Board work, for this report, or for the opinions we have formed. – the information given in the Corporate governance (ii) present information, including accounting policies, in a statement set out on pages 12 to 15 with respect to internal Respective responsibilities of Directors and auditors control and risk management systems in relation to financial manner that provides relevant, reliable, comparable and Simon Fox David Wolffe Chief Executive Officer Group Finance Director As explained more fully in the Directors’ Responsibilities reporting processes and about share capital structures is understandable information; Statement set out on page 34, the Directors are responsible consistent with the financial statements. 29 June 2011 (iii) provide additional disclosures when compliance with the for the preparation of the financial statements and for being specific requirements in IFRS is insufficient to enable users satisfied that they give a true and fair view. Our responsibility Matters on which we are required to report by exception to understand the impact of particular transactions, other is to audit and express an opinion on the financial statements We have nothing to report in respect of the following: in accordance with applicable law and International Standards events and conditions on the entity’s financial position and Under the Companies Act 2006 we are required to report to you financial performance; on Auditing (UK and Ireland). Those standards require us to comply with the Auditing Practices Board’s (APB’s) Ethical if, in our opinion: (iv) state that the Company and the Group have complied Standards for Auditors. – adequate accounting records have not been kept by the with IFRS, subject to any material departures disclosed Parent Company, or returns adequate for our audit have not and explained in the financial statements; and Scope of the audit of the financial statements been received from branches not visited by us; or An audit involves obtaining evidence about the amounts (v) make judgements and estimates that are reasonable and disclosures in the financial statements sufficient to give – the Parent Company financial statements and the part of the and prudent. reasonable assurance that the financial statements are free Directors’ Remuneration Report to be audited are not in from material misstatement, whether caused by fraud or error. agreement with the accounting records and returns; or This includes an assessment of: whether the accounting policies – certain disclosures of Directors’ remuneration specified are appropriate to the Group’s and the Parent Company’s by law are not made; or circumstances and have been consistently applied and adequately disclosed; the reasonableness of significant – we have not received all the information and explanations accounting estimates made by the Directors; and the we require for our audit; or overall presentation of the financial statements. In addition, – a Corporate Governance Statement has not been prepared we read all the financial and non-financial information in the by the Company. annual report and accounts to identify material inconsistencies with the audited financial statements. If we become aware of Under the Listing Rules we are required to review: any apparent material misstatements or inconsistencies we – the Directors’ statement, set out on page 33, in relation consider the implications for our report. to going concern; and Opinion on financial statements – the part of the Corporate Governance Statement relating In our opinion: to the Company’s compliance with the nine provisions of the June 2008 Combined Code specified for our review; and – the financial statements give a true and fair view of the state of the Group’s and of the Parent Company’s affairs as at – certain elements of the report to shareholders by the Board 30 April 2011 and of the Group’s loss for the 53 weeks on directors’ remuneration. then ended; John Flaherty (Senior statutory auditor) – the Group financial statements have been properly for and on behalf of Ernst & Young LLP, Statutory Auditor prepared in accordance with IFRSs as adopted by the Birmingham, 29 June 2011 European Union;

14531_HMV_AR11_p12-92.indd 35 15/07/2011 09:58 HMV Group plc HMV Group plc Annual report and accounts 2011 Annual report and accounts 2011 36 37 Consolidated income statement For the 53 weeks ended 30 April 2011 and 52 weeks ended 24 April 2010

Before Before exceptional Exceptional exceptional Exceptional items items Total items items Total 2011 2011 2011 2010 2010 2010 Notes £m £m £m (restated) (restated) (restated) Notes £m £m £m Continuing operations: Continuing operations: Revenue 3,4 1,150.2 – 1,150.2 Revenue 3,4 1,281.1 – 1,281.1 Cost of sales (1,066.2) (10.9) (1,077.1) Cost of sales (1,154.1) – (1,154.1) Gross profit 84.0 (10.9) 73.1 Gross profit 127.0 – 127.0 Administrative expenses (55.6) (3.4) (59.0) Administrative expenses (52.2) (1.6) (53.8) Trading profit 3 28.4 (14.3) 14.1 Trading profit 3 74.8 (1.6) 73.2 Share of post-tax losses of associates and joint ventures accounted for using the equity method 18 (1.0) – (1.0) Share of post-tax profits of associates and joint ventures accounted for using the equity method 18 0.3 – 0.3 Operating profit 5 27.4 (14.3) 13.1 Operating profit 5 75.1 (1.6) 73.5 Finance revenue 10 0.2 – 0.2 Finance revenue 10 0.4 – 0.4 Finance costs 10 (8.8) (1.9) (10.7) Finance costs 10 (6.6) – (6.6) Profit before taxation 18.8 (16.2) 2.6 Profit before taxation 68.9 (1.6) 67.3 Taxation 11 (1.3) (4.5) (5.8) Taxation 11 (19.4) 0.1 (19.3) Profit (loss) from continuing operations 17.5 (20.7) (3.2) Profit from continuing operations 49.5 (1.5) 48.0 Discontinued operations: Discontinued operations: Profit (loss) after tax from discontinued operations 12 13.6 (132.1) (118.5) Profit (loss) after tax from discontinued operations 12 4.0 (2.8) 1.2 Profit (loss) for the period 31.1 (152.8) (121.7) Profit for the period 53.5 (4.3) 49.2

Attributable to: Attributable to: Shareholders of the Parent Company 29.7 (152.8) (123.1) Shareholders of the Parent Company 53.5 (4.3) 49.2 Non-controlling interests 1.4 – 1.4 Non-controlling interests – – – 31.1 (152.8) (121.7) 53.5 (4.3) 49.2

Earnings per share for profit (loss) attributable to shareholders: 13 Earnings per share for profit attributable to shareholders: 13 Basic and diluted 7.0p (36.1)p (29.1)p Basic 12.7p (1.1)p 11.6p

Diluted 12.7p (1.1)p 11.6p Earnings per share for profit (loss) from continuing operations attributable to shareholders: 13 Basic and diluted 3.8p (4.9)p (1.1)p Earnings per share for profit from continuing operations attributable to shareholders: 13 See Accounting Policies on pages 44 to 48 for the description of the 2011 reporting period. Basic 11.7p (0.4)p 11.3p For details of the exceptional items included above, see Note 7. Diluted 11.7p (0.4)p 11.3p

See Accounting Policies on pages 44 to 48 for the description of the 2010 reporting period. For details of the exceptional items included above, see Note 7.

14531_HMV_AR11_p12-92.indd 36 15/07/2011 09:58 HMV Group plc HMV Group plc Annual report and accounts 2011 AnnualAnnual reportreport andand accountsaccounts 20112011 36 3737 Consolidated income statement For the 53 weeks ended 30 April 2011 and 52 weeks ended 24 April 2010

Earnings per share for profit (loss) attributable to shareholders: 13 Earnings per share for profit attributable to shareholders: 13 Basic and diluted 7.0p (36.1)p (29.1)p Basic 12.7p (1.1)p 11.6p

See Accounting Policies on pages 44 to 48 for the description of the 2010 reporting period. For details of the exceptional items included above, see Note 7.

14531_HMV_AR11_p12-92.indd 37 20/07/2011 15:02 HMV Group plc HMV Group plc Annual report and accounts 2011 Annual report and accounts 2011 38 39 Statements of comprehensive income Balance sheets For the 53 weeks ended 30 April 2011 and 52 weeks ended 24 April 2010 Group Group Company Company Group as at Group as at Company as at Company as at 2011 2010 2011 2010 30 April 2011 24 April 2010 30 April 2011 24 April 2010 £m £m £m £m (restated) Notes £m £m £m £m

(Loss) profit for the period (121.7) 49.2 (403.6) 82.0 Assets Non-current assets Foreign exchange differences on retranslation of Property, plant and equipment 15 67.8 167.0 0.1 0.1 foreign operations (0.2) (1.1) – – Intangible assets 17 55.5 126.8 – – Tax effect (0.1) (0.5) – – Investments in subsidiaries, joint ventures and associates 18 – – 275.3 695.6 (0.3) (1.6) – – Investments accounted for using the equity method 18 11.4 10.3 – – Cash flow hedges: Deferred income tax asset 11 6.3 30.1 5.7 12.6 Loss on forward foreign exchange contracts (0.5) – – – Trade and other receivables 19 11.9 12.7 – – Transfers to the income statement on cash flow hedges 152.9 346.9 281.1 708.3 (cost of sales) (0.1) – – – Current assets (0.6) – – – Inventories 20 106.2 247.8 – –

Trade and other receivables 19 44.1 80.7 74.4 28.3 Actuarial gain (loss) on defined benefit pension schemes 3.4 (19.3) 3.9 (19.3) Derivative financial instruments 25 – 0.1 – 0.1 Tax effect (6.0) 5.4 (6.0) 5.4 Current income tax recoverable 3.7 1.8 5.0 – (2.6) (13.9) (2.1) (13.9) Cash and short-term deposits 21 24.1 29.7 21.4 48.9

178.1 360.1 100.8 77.3 Other comprehensive loss for the period, net of tax (3.5) (15.5) (2.1) (13.9) Assets in disposal groups classified as held for sale 12 198.2 – – –

Total assets 529.2 707.0 381.9 785.6 Total comprehensive (loss) income for the period (125.2) 33.7 (405.7) 68.1 Liabilities

Non-current liabilities Attributable to: Deferred income tax liabilities 11 (5.6) (1.6) – – Shareholders of the Parent Company (126.6) 33.7 (405.7) 68.1 Retirement benefit liabilities 33 (32.2) (39.0) (32.2) (39.0) Non-controlling interests 1.4 – – – Interest-bearing loans and borrowings 23 (7.0) (11.8) – – (125.2) 33.7 (405.7) 68.1 Provisions 24 (2.8) (1.1) – – (47.6) (53.5) (32.2) (39.0) Current liabilities Trade and other payables 22 (191.9) (442.8) (4.6) (7.8) Current income tax payable – (20.8) – (0.9) Interest-bearing loans and borrowings 23 (185.0) (84.5) (265.8) (227.5) Derivative financial instruments 25 (1.3) (0.8) (0.5) – Provisions 24 (10.9) (4.0) (2.6) – (389.1) (552.9) (273.5) (236.2) Liabilities in disposal groups classified as held for sale 12 (148.2) – – – Total liabilities (584.9) (606.4) (305.7) (275.2) Net (liabilities) assets (55.7) 100.6 76.2 510.4

14531_HMV_AR11_p12-92.indd 38 15/07/2011 09:58 HMV Group plc HMV Group plc Annual report and accounts 2011 AnnualAnnual reportreport andand accountsaccounts 20112011 38 39 Statements of comprehensive income Balance sheets For the 53 weeks ended 30 April 2011 and 52 weeks ended 24 April 2010 Group Group Company Company Group as at Group as at Company as at Company as at 2011 2010 2011 2010 30 April 2011 24 April 2010 30 April 2011 24 April 2010 £m £m £m £m (restated) Notes £m £m £m £m

178.1 360.1 100.8 77.3 Other comprehensive loss for the period, net of tax (3.5) (15.5) (2.1) (13.9) Assets in disposal groups classified as held for sale 12 198.2 – – –

Total assets 529.2 707.0 381.9 785.6 Total comprehensive (loss) income for the period (125.2) 33.7 (405.7) 68.1 Liabilities

14531_HMV_AR11_p12-92.indd 39 15/07/2011 09:58 HMV Group plc HMV Group plc Annual report and accounts 2011 Annual report and accounts 2011 40 41 Balance sheets continued Statements of changes in equity

Group as at Group as at Company as at Company as at Foreign Non- 30 April 2011 24 April 2010 30 April 2011 24 April 2010 Equity currency controlling Total Notes £m £m £m £m share Own Hedging translation Capital Retained interests equity capital shares reserve reserve reserve earnings Total (restated) (restated)

Equity Group Notes £m £m £m £m £m £m £m £m £m Equity share capital 30 347.1 347.1 347.1 347.1 Other reserve – own shares 30,31 (0.6) (0.6) (0.6) (0.6) At 25 April 2009 347.1 (2.7) 0.1 14.0 0.3 (259.2) 99.6 – 99.6 Hedging reserve 30 (0.5) 0.1 – – Foreign currency translation reserve 30 12.7 12.9 – – Profit for the period – – – – – 49.2 49.2 – 49.2 Capital reserve 30 0.3 0.3 0.3 0.3 Other comprehensive loss – – – (1.1) – (14.4) (15.5) – (15.5) Retained earnings (415.5) (260.4) (270.6) 163.6 Total comprehensive (loss) income – – – (1.1) – 34.8 33.7 – 33.7 Equity attributable to shareholders of the Parent Company (56.5) 99.4 76.2 510.4 Non-controlling interests 0.8 1.2 – – Ordinary dividend 14 – – – – – (31.2) (31.2) – (31.2) Total equity (55.7) 100.6 76.2 510.4 Purchase of own shares 31 – (0.3) – – – – (0.3) – (0.3) The financial statements were approved by the Board of Directors on 29 June 2011 and were signed on its behalf by: Share-based payment awards – 2.4 – – – (2.4) – – – Credit for share-based payments – – – – – (1.5) (1.5) – (1.5) Simon Fox David Wolffe Deferred tax on share-based payments – – – – – (0.9) (0.9) – (0.9) Chief Executive Officer Group Finance Director Non-controlling interests acquired with

subsidiary – – – – – – – 1.2 1.2

At 24 April 2010 (restated) 347.1 (0.6) 0.1 12.9 0.3 (260.4) 99.4 1.2 100.6

(Loss) profit for the period – – – – – (123.1) (123.1) 1.4 (121.7) Other comprehensive loss – – (0.6) (0.2) – (2.7) (3.5) – (3.5) Total comprehensive (loss) income – – (0.6) (0.2) – (125.8) (126.6) 1.4 (125.2)

Ordinary dividend 14 – – – – – (27.5) (27.5) – (27.5) Charge for share-based payments – – – – – 0.5 0.5 – 0.5 Deferred tax on share-based payments – – – – – (1.4) (1.4) – (1.4) Payments to non-controlling interests – – – – – – – (1.2) (1.2) Other movements in non-controlling

interests – – – – – (0.9) (0.9) (0.6) (1.5)

At 30 April 2011 347.1 (0.6) (0.5) 12.7 0.3 (415.5) (56.5) 0.8 (55.7)

14531_HMV_AR11_p12-92.indd 40 15/07/2011 09:59 HMV Group plc HMV Group plc Annual report and accounts 2011 AnnualAnnual reportreport andand accountsaccounts 20112011 40 4141 Balance sheets continued Statements of changes in equity

subsidiary – – – – – – – 1.2 1.2

At 24 April 2010 (restated) 347.1 (0.6) 0.1 12.9 0.3 (260.4) 99.4 1.2 100.6

interests – – – – – (0.9) (0.9) (0.6) (1.5)

At 30 April 2011 347.1 (0.6) (0.5) 12.7 0.3 (415.5) (56.5) 0.8 (55.7)

14531_HMV_AR11_p12-92.indd 41 15/07/2011 09:59 HMV Group plc HMV Group plc Annual report and accounts 2011 Annual report and accounts 2011 42 43 Statements of changes in equity continued Cash flow statements For the 53 weeks ended 30 April 2011 and 52 weeks ended 24 April 2010

Equity share Own Capital Retained Group Group Company Company capital shares reserve earnings Total 2011 2010 2011 2010 Company Notes £m £m £m £m £m Notes £m £m £m £m Cash flows from operating activities At 25 April 2009 347.1 (2.7) 0.3 131.0 475.7 Profit (loss) before tax – continuing operations 2.6 67.3 (439.4) (32.9) (Loss) profit before tax – discontinued operations (110.8) 1.6 – – Profit for the period – – – 82.0 82.0 Net finance costs 10.4 6.2 11.9 6.7

Other comprehensive loss – – – (13.9) (13.9) Share of post-tax losses (profits) of associates and joint ventures 1.0 (0.3) – – 15 Total comprehensive income – – – 68.1 68.1 Depreciation 39.7 43.4 – – Amortisation 17 0.1 – 0.3 – Net impairment charges 5 122.7 2.0 422.4 25.0 Ordinary dividend 14 – – – (31.2) (31.2) Profit on disposal of property, plant and equipment (0.2) (0.9) – – Purchase of own shares 31 – (0.3) – – (0.3) Equity-settled share-based payment charge (credit) 29 0.5 (1.5) 0.1 (0.6) Share-based payment awards – 2.4 – (2.4) – Pension contributions less income statement charge (3.7) (2.4) (3.9) (2.0) Credit for share-based payments – – – (0.6) (0.6) 62.5 115.5 (8.9) (3.8) Deferred tax on share-based payments – – – (0.3) (0.3) Movement in inventories 34.6 (29.6) – – Capital contribution to subsidiaries Movement in trade and other receivables (14.9) (6.0) (8.7) (0.1) for share-based payments – – – (1.0) (1.0) Movement in trade and other payables (116.4) 3.4 (3.4) 1.4

Movement in provisions 18.5 (1.8) 2.6 – At 24 April 2010 347.1 (0.6) 0.3 163.6 510.4 Cash generated from operations (15.7) 81.5 (18.4) (2.5)

Income tax (paid) received (16.2) (15.6) 8.4 5.6 Loss for the period – – – (403.6) (403.6) Net cash flows from operating activities (31.9) 65.9 (10.0) 3.1 Other comprehensive loss – – – (2.1) (2.1) Cash flows from investing activities Total comprehensive loss – – – (405.7) (405.7) Purchase of property, plant and equipment (28.2) (39.9) – – Proceeds from sale of property, plant and equipment 0.2 1.1 – – Ordinary dividend 14 – – – (27.5) (27.5) Interest received 0.2 0.4 3.9 7.8 Charge for share-based payments – – – 0.1 0.1 Repayment of loan by joint venture – 4.5 – 4.5 Deferred tax on share-based payments – – – (1.1) (1.1) Payments to acquire investments in joint ventures 18 (2.1) (8.1) (2.1) – Payments to acquire subsidiary 16 – (47.0) – (47.0) At 30 April 2011 347.1 (0.6) 0.3 (270.6) 76.2 Cash acquired with subsidiary 16 – 7.8 – – Payments to non-controlling interests (0.9) – – – Other movements in non-controlling interests (0.6) – – – Dividends received from subsidiaries – – 20.0 112.2 Net cash flows from investing activities (31.4) (81.2) 21.8 77.5 Cash flows from financing activities Movements in funding 105.2 35.0 106.0 34.8 Movement in intercompany funding – – (94.2) (12.5) Costs of raising debt (2.9) (0.2) (2.9) – Purchase of own shares 31 – (0.3) – (0.3) Interest paid (9.1) (5.1) (13.8) (15.2) Equity dividends paid to shareholders 14 (27.5) (31.2) (27.5) (31.2) Repayment of capital element of finance leases (1.0) (0.9) – – Net cash flows from financing activities 64.7 (2.7) (32.4) (24.4) Net increase (decrease) in cash and cash equivalents 1.4 (18.0) (20.6) 56.2 Opening cash and cash equivalents 27 27.3 45.5 42.0 (14.2) Effect of exchange rate changes 27 (0.3) (0.2) – – Closing cash and cash equivalents 21,27 28.4 27.3 21.4 42.0

14531_HMV_AR11_p12-92.indd 42 15/07/2011 09:59 HMV Group plc HMV Group plc Annual report and accounts 2011 AnnualAnnual reportreport andand accountsaccounts 20112011 42 43 Statements of changes in equity continued Cash flow statements For the 53 weeks ended 30 April 2011 and 52 weeks ended 24 April 2010

Movement in provisions 18.5 (1.8) 2.6 – At 24 April 2010 347.1 (0.6) 0.3 163.6 510.4 Cash generated from operations (15.7) 81.5 (18.4) (2.5)

14531_HMV_AR11_p12-92.indd 43 15/07/2011 09:59 HMV Group plc HMV Group plc Annual report and accounts 2011 Annual report and accounts 2011 44 45 Notes to the financial statements

1. Authorisation of financial statements and statement As a result of the completion of this process, net assets acquired 2. Accounting policies continued Interest income is accrued on a time basis, by reference of compliance with IFRS have decreased by £4.6m and goodwill arising on acquisition has Basis of consolidation to the principal outstanding and the applicable effective interest The Group and Company financial statements of HMV Group plc increased by £4.6m. There was no impact on the Group’s profit. The consolidated financial statements comprise the accounts rate. Dividend income is recognised when the right to receive for the period ended 30 April 2011 were authorised for issue by See Note 16 for further details. of the Company and its subsidiaries. All intra-group transactions, payment is established. Rental income from sublet properties the Board of Directors on 29 June 2011, and the balance sheets The income statement for the 52 weeks ended 24 April 2010 balances, income and expenses are eliminated on consolidation. is recognised on a straight-line basis over the period of were signed on the Board’s behalf by Simon Fox and David has been restated to reclassify the results of Waterstone’s The results of subsidiaries acquired or disposed of during a the sublease. Wolffe. HMV Group plc is a public limited company incorporated and HMV Canada as discontinued operations. Both of these period are included from the date that effective control passed and domiciled in England and Wales. The Company’s Ordinary businesses have been classified as disposal groups held for or up to the effective date of disposal, as appropriate. Where the Foreign currencies Shares are traded on the London Stock Exchange. sale as at 30 April 2011 and are presented as discontinued end of the reporting period of a subsidiary, joint venture or Transactions denominated in foreign currencies are recorded The financial statements of the Group and the Company operations in the current period. See Note 12 for further details. associate is different to that of the Group, the entity prepares at the rates of exchange ruling at the date of the transactions. have been prepared in accordance with International Financial additional financial statements, for consolidation purposes, as Monetary assets and liabilities denominated in foreign currencies Reporting Standards (IFRS) as adopted by the European Union of the same date as the financial statements of HMV Group plc. are retranslated into Sterling at period end rates. The resulting and as applied in accordance with the provisions of the Judgements and key sources of estimation uncertainty foreign exchange differences are dealt with in the determination Companies Act 2006. The principal accounting policies The judgements and key sources of estimation uncertainty that Interests in joint ventures and associates of profit (loss) for the period. adopted by the Group and the Company are set out below. have a significant risk of causing material adjustment to the A joint venture is a contractual arrangement with other parties On consolidation, average exchange rates are used to The Company has taken advantage of the exemption carrying amounts of assets and liabilities within the next financial to undertake an economic activity that is subject to joint control. translate the results of overseas companies and businesses, and permitted by Section 408 of the Companies Act 2006 not year are as follows. An associate is an entity in which the Company holds a long-term the assets and liabilities of overseas companies and businesses to publish its individual income statement and related notes. Impairment of goodwill and other assets – The Group is non-controlling interest and has the power to exercise significant are translated into Sterling at period-end rates. Differences on required to test goodwill for impairment on at least an annual influence, being the power to participate in the financial and translation are recognised in other comprehensive income in 2. Accounting policies basis. As part of this testing, the value in use of the cash- operating policies of the entity. a separate equity reserve, which was set to zero on transition Basis of preparation generating units to which the goodwill is allocated is assessed, The Group recognises its interest in joint ventures and to IFRS. On disposal of an overseas company or business, the The consolidated financial statements of the Company and its which requires the estimation of future cash flows and choosing associates using the equity method of accounting. Under the cumulative exchange differences for that entity are recognised subsidiaries are made up to the Saturday on or immediately a suitable discount rate (see Note 17). Property, plant and equity method, the interest in the joint venture or associate is in the income statement as part of the profit or loss on disposal. preceding 30 April each year. Consequently, the financial equipment are reviewed for impairment if events or changes carried in the balance sheet at cost plus post-acquisition statements for the current period cover the 53 weeks ended in circumstances indicate that the carrying amount may not be changes in the Group’s share of its net assets, less distributions Exceptional items 30 April 2011, whilst the comparative period covered the recoverable. When a review for impairment is conducted, the received and less any impairment in value. The Group income The Group presents as exceptional items on the face of the 52 weeks ended 24 April 2010. The financial statements are recoverable amount of an asset or a cash generating unit is statement reflects the share of the jointly controlled or associated income statement those material items of income and expense prepared in accordance with applicable accounting standards determined based on value-in-use calculations prepared on entity’s results after tax. The Group statement of comprehensive which, because of the nature or expected infrequency of the and specifically in accordance with the accounting policies set the basis of management’s assumptions and estimates income reflects the Group’s share of any income and expense events giving rise to them, merit separate presentation to allow out below. (see Note 15). recognised by the jointly controlled entity or associate outside shareholders to better understand the elements of financial The financial statements are presented in Pounds Sterling Defined benefit pension obligations – The measurement of profit and loss. performance in the year, so as to facilitate comparison with prior and are rounded to the nearest tenth of a million except where the defined benefit pension obligation is subject to a number of Any goodwill arising on the acquisition of a jointly controlled periods and to better assess trends in financial performance. otherwise indicated. They are prepared on the historical cost assumptions which are based on actuarial advice. These include entity, representing the excess of the cost of the investment Exceptional items recognised in arriving at operating profit basis, except for certain financial instruments, share-based inflation rates, discount rates, the long-term expected return compared to the Group’s share of the net fair value of the include (but are not limited to) those costs associated with payments and pensions that have been measured at fair value. on the scheme’s assets and member longevity (see Note 33). entity’s identifiable assets, liabilities and contingent liabilities, integrating a newly acquired business, impairment losses, The preparation of financial statements requires Inventory valuation – inventories are valued at the lower of is included in the carrying value of the jointly controlled entity reversal of impairments and costs associated with restructuring management to make estimates and assumptions that affect cost and net realisable value, which includes, where necessary, and is not amortised. the business. the amounts reported for assets and liabilities as at the balance provisions for slow moving and obsolete inventory. Calculation Where necessary, adjustments are made to bring the sheet date and the amounts reported for revenues and expenses of provisions requires judgements to be made regarding future accounting policies used into line with those of the Group. Goodwill during the year. The nature of estimation means that actual customer demand, the competitive environment and inventory The Group ceases to use the equity method on the date from On transition to IFRS, the Group utilised the exemption available outcomes could differ from those estimates. loss trends. which it no longer has joint control over, or significant influence in IFRS 1 whereby IFRS 3 Business Combinations has not been The Group’s business activities, together with the factors Taxation – calculation of the Group’s total tax charge on, the joint venture or associate. applied retrospectively to past business combinations. Goodwill likely to affect its future development, performance and position requires a degree of estimation and judgement in respect of arising on acquisitions prior to 25 April 1998 was set off directly are set out in the Business and financial review on pages 4 to 10. certain transactions whose ultimate tax treatment is uncertain. Investments in subsidiaries against reserves. This goodwill has not been reinstated on the In addition, the Directors’ report describes the management Where the final outcome of these tax matters differs from the In its separate financial statements, the Company recognises balance sheet on the transition to IFRS. Furthermore, it will not be of risks and uncertainties, including credit risk and liquidity, amounts that were initially recorded, the tax charge and deferred its investments in subsidiaries at cost less impairments booked. transferred to the income statement if the subsidiary is disposed with further information on the Group’s borrowing facilities tax provisions will be impacted (see Note 11). Income is recognised from these investments when the right of or if the investment in the subsidiary becomes impaired. detailed in the financial statements (see Note 26). Provisions – Provisions for store closure, onerous leases to receive the distribution is established. Positive goodwill arising since 25 April 1998 is capitalised The Directors report that having reviewed current and restructuring costs are estimates and the actual costs and and classified as an asset on the balance sheet. On transition performance and forecast they have a reasonable expectation timing of future cash flows are dependant on future events. Revenue to IFRS, this goodwill was frozen at its carrying value on the date that the Group has adequate resources to continue in Expectations are revised in each period, with any difference Revenue represents the value of goods supplied, less discounts of transition, 25 April 2004, subject to impairment testing at that operational existence for the foreseeable future. For this reason accounted in the period in which the revision is made. given, and is recognised when goods are delivered and title has date. Positive goodwill arising on acquisitions since the Group’s they continue to adopt the going concern basis in preparing Details of provisions are given in Note 24. passed. It also includes commission earned on ticket sales and transition to IFRS is also capitalised, classified as an asset on the the financial statements. For the Company, key areas of estimation uncertainty similar activities. Revenue in the HMV Live division is recognised balance sheet and is not amortised. Goodwill is calculated as the The Group’s balance sheet as at 24 April 2010 has been are those listed above for the Group and the measurement at the point that an event occurs or, in the case of services excess of the cost of the business combination over the Group’s restated on finalisation of the fair values of the assets and and impairment of investments in subsidiaries, joint ventures provided, over a period of time in accordance with the relevant interest in the net fair value of the identifiable assets, liabilities liabilities acquired with MAMA Group Plc in January 2010. and associates (see Note 18). contract in place. Revenue excludes value added tax (‘VAT’) and contingent liabilities. All capitalised goodwill is reviewed for and similar sales-related taxes. impairment annually or more frequently if events or changes in circumstances indicate that the carrying value may be impaired.

14531_HMV_AR11_p12-92.indd 44 15/07/2011 09:59 HMV Group plc HMV Group plc Annual report and accounts 2011 AnnualAnnual reportreport andand accountsaccounts 20112011 44 4455 Notes to the financial statements

14531_HMV_AR11_p12-92.indd 45 15/07/2011 09:59 HMV Group plc HMV Group plc Annual report and accounts 2011 Annual report and accounts 2011 46 47 Notes to the financial statements continued

2. Accounting policies continued Impairment of assets 2. Accounting policies continued Actuarial gains and losses are recognised in other Property, plant and equipment The Group assesses at each reporting date whether there are Such assets and liabilities are not recognised if the temporary comprehensive income in full in the period in which they occur. The capitalised cost of property, plant and equipment includes indicators that an asset may be impaired. Assets are grouped difference arises from goodwill or from the initial recognition Other income and expenses associated with the defined benefit only those costs that are directly attributable to bringing an asset for impairment assessment purposes at the lowest level at which (other than in a business combination) of other assets and scheme are recognised in the income statement. to its working condition for its intended use. there are identifiable cash inflows that are largely independent liabilities in a transaction that affects neither the taxable profit The defined benefit scheme provides benefits to a number Depreciation of property, plant and equipment is calculated of the cash inflows of other groups of assets (cash-generating nor the accounting profit. of Group companies. There is no agreement or policy for on cost, at rates estimated to write off the cost, less the units). If any indicator of impairment exists, or when annual Deferred tax liabilities are not recognised for temporary allocating a share of the defined benefit obligation to each estimated residual value, of the relevant assets by equal annual impairment testing is required, the Group makes an estimate of differences associated with investments in subsidiaries, participating entity. Consequently, the Company, as sponsoring amounts over their estimated useful lives. the asset’s recoverable amount, being the higher of its fair value branches and joint ventures as the Group has determined employer of the defined benefit scheme, recognises the net less costs to sell and its value in use. Value in use is the present that undistributed profits will not be distributed in the pension obligation for the scheme. The other participating The annual rates used are: value of the future cash inflows expected to be derived from the foreseeable future. members of the scheme account for their relevant pension Freehold property Over 50 years asset. Where the asset does not generate cash inflows that are Deferred income tax assets and liabilities are measured costs on a defined contribution basis. independent from other assets, the recoverable amount of the at the tax rates that are expected to apply to the year when On 31 March 2011 the defined benefit scheme was Leasehold improvements Shorter of useful life and cash-generating unit to which the asset belongs is estimated. the asset is realised or the liability settled, based on tax rates closed to future accrual and members were instead offered period of the lease Where the carrying amount of an asset or cash-generating and laws that have been enacted or substantively enacted membership of the defined contribution scheme. Further details Plant, equipment and vehicles 10 to 33⅓% unit exceeds its recoverable amount, an impairment loss is at the balance sheet date, and are not discounted. are given in Note 33. recognised in the income statement. Taxation is charged or credited to other comprehensive Contributions to the defined contribution scheme are The carrying values of property, plant and equipment are If there is an indication at the reporting date that previously income if it relates to items that are themselves charged or charged in the income statement as they become payable reviewed for material impairment in periods if events or changes recognised impairment losses no longer exist or may have credited to other comprehensive income, otherwise it is in accordance with the rules of the scheme. in circumstances indicate the carrying value may not be decreased, the recoverable amount is again estimated. To the recognised in the income statement. Taxation relating to items recoverable. Useful lives and residual values are reviewed extent that the recoverable amount has increased, the previously taken directly to equity is also charged or credited directly Share-based payments annually and where adjustments are required these are made recognised impairment loss is reversed. An impairment loss in to equity. The cost of equity-settled transactions with employees granted prospectively. respect of goodwill is not reversed. Deferred tax assets and deferred tax liabilities are offset, on or after 7 November 2002, which had not vested by if a legally enforceable right exists to set off current tax assets 1 January 2005, is measured by reference to the fair value at Leased assets Assets held for sale against current tax liabilities and the deferred taxes relate to the the date at which they are granted and is recognised as an In respect of property operating leases, benefits received and Non-current assets and disposal groups are classified as held for same taxable entity and the same taxation authority. expense over the vesting period, which ends on the date on receivable as an incentive to sign a lease, such as rent-free sale only if available for immediate sale in their present condition which the relevant employees become fully entitled to the award. periods, premiums payable and capital contributions, are spread and a sale is highly probable and expected to be completed Cash and cash equivalents Fair value is determined by using an appropriate pricing model. on a straight-line basis over the lease term. All other operating within one year from the date of reclassification. Such assets and Cash and short-term deposits comprise cash at bank and in In valuing equity settled transactions, no account is taken lease payments are charged directly to the income statement liabilities are measured at the lower of carrying amount and fair hand and short-term deposits with an original maturity of three of any service and performance (vesting conditions), other than on a straight-line basis over the lease term. The Group has value less costs to sell and are not depreciated or amortised. months or less. For the purposes of the cash flow statement, performance conditions linked to the price of the shares of the a number of lease agreements in which the rent payable cash and cash equivalents consist of cash and short-term Company (market conditions). Any other conditions which are is contingent on revenue, which is expensed in the period Inventories deposits less bank overdrafts that are payable on demand. required to be met in order for an employee to become fully in which it is incurred. Inventories are stated at the lower of cost and net realisable entitled to an award are considered to be non-vesting Assets held under finance leases, which transfer to the value on a first-in, first-out basis. Net realisable value is based Interest-bearing loans and borrowings conditions. Like market performance conditions, non-vesting Group substantially all the risks and benefits of ownership of the on estimated selling prices less further costs to be incurred Interest-bearing loans and borrowings are initially recognised conditions are taken into account in determining the grant fair leased assets, are capitalised at the inception of the lease, with a to disposal. at fair value less directly attributable transaction costs and are value. No expense is recognised for awards that do not ultimately corresponding liability being recognised for the lower of the fair subsequently measured at amortised cost using the effective vest, except for awards where vesting is conditional upon a value of the leased asset and the present value of the minimum Taxation interest rate method. market vesting condition or a non-vesting condition, which are lease payments. Lease payments are apportioned between the Current tax Current tax assets and liabilities for the current treated as vesting irrespective of whether of not the market reduction of the lease liability and finance charges in the income and prior periods are measured at the amount expected to Provisions vesting condition or non-vesting condition is satisfied, provided statement so as to achieve a constant rate of interest on the be recovered from, or paid to, the taxation authorities, based A provision is recognised when the Group has a legal or that all other non-market vesting conditions are satisfied. remaining balance of the liability. Assets held under finance on tax rates and laws that are enacted or substantively enacted constructive obligation as a result of a past event and it is leases are depreciated over the shorter of the estimated useful by the balance sheet date. probable that an outflow of economic benefits will be required Treasury shares life of the asset and the lease term. to settle the obligation. If the effect is material, expected future HMV Group plc shares held by the Group’s Employee Benefit Deferred tax Deferred income tax is recognised on all temporary cash flows are discounted using a current pre-tax rate that Trust are classified in shareholders’ equity as ‘other reserve – Intangible assets differences at the balance sheet date between the tax bases reflects the risks specific to the liability. own shares’ and are recognised at cost. No gain or loss is Intangible assets are valued at cost less amortisation and of assets and liabilities and their carrying amounts for financial recognised in the financial statements on the purchase, sale, impairment losses. Intangible assets with finite lives are reporting purposes. Pension costs issue or cancellation of equity shares. amortised on a straight-line basis over their useful lives of Deferred tax liabilities are generally recognised for all The Group operates both defined benefit and defined between three and 20 years and are reviewed for impairment temporary differences and deferred income tax assets are contribution pension schemes, the funds of which are held if there is any indication that the carrying value may not be recognised to the extent that it is probable that taxable profit will in separate, trustee administered funds. recoverable. Intangible assets with an indefinite useful life be available against which the deductible temporary differences The cost of providing benefits under the defined benefit are not amortised but are tested for impairment annually can be utilised. The carrying amount of deferred income tax scheme is determined using the projected unit credit method, or more frequently if events indicate that the carrying value assets is reviewed at each balance sheet date and reduced to with actuarial valuations being carried out at each balance sheet may be impaired. the extent that it is no longer probable that sufficient taxable date. The net retirement benefit obligation recognised in the profit will be available to allow all or part of the deferred income balance sheet represents the present value of the liabilities of tax asset to be utilised. the defined benefit scheme as reduced by the market value of the defined benefit scheme assets.

14531_HMV_AR11_p12-92.indd 46 15/07/2011 09:59 HMV Group plc HMV Group plc Annual report and accounts 2011 AnnualAnnual reportreport andand accountsaccounts 20112011 46 4747 Notes to the financial statements continued

14531_HMV_AR11_p12-92.indd 47 15/07/2011 09:59 HMV Group plc HMV Group plc Annual report and accounts 2011 Annual report and accounts 2011 48 49 Notes to the financial statements continued

recognised in other comprehensive income and any ineffective – Annual improvements to IFRS (issued in April 2009) 53 weeks ended 30 April 2011 portion is recognised immediately in the income statement. Total The Group has not adopted early the requirements of the HMV HMV HMV continuing Discontinued Total Amounts taken to other comprehensive income are transferred following accounting standards and interpretations, which have UK & Ireland International Live operations operations operations to the income statement when hedged transactions affect profit an effective date after the start date of these financial statements: £m £m £m £m £m £m or loss, such as when a forecast sale or purchase occurs. Segment revenue 1,070.1 33.2 46.9 1,150.2 718.1 1,868.3 Hedge accounting is discontinued when the hedging – IAS 24 Related Party Disclosures (Amendment) instrument expires or is sold, terminated or exercised, or no (1 January 2011) Segment trading profit before exceptional items 24.0 1.4 3.0 28.4 13.1 41.5 longer qualifies for hedge accounting. At that time any cumulative – IFRS 9 Financial Instruments: Classification and Operating exceptional items: gain or loss on the hedging instrument previously recognised Measurement (1 January 2013) Restructuring costs (2.6) – – (2.6) (1.6) (4.2) in other comprehensive income is retained in equity until the hedged transaction occurs. If the hedged transaction is no – IFRS 10 Consolidated Financial Statements (1 January 2013) Store closure costs (15.1) – – (15.1) (8.8) (23.9) longer expected to occur, the net cumulative gain or loss – IFRS 11 Joint Arrangements (1 January 2013) Lease disposal premium received 13.8 – – 13.8 – 13.8 recognised in other comprehensive income is then transferred Store impairment costs (9.6) – – (9.6) (1.6) (11.2) to the income statement. – IFRS 12 Disclosure of Interests in Other Entities Changes in the fair value of derivative financial instruments (1 January 2013) Pension scheme settlement – – – – (0.5) (0.5) that do not qualify for hedge accounting are recognised in the – IFRIC 14 Prepayments of a minimum funding requirements Impairment loss on remeasurement to fair value less income statement as they arise. (Amendment) (1 January 2011) costs to sell – – – – (111.5) (111.5) Total exceptional items allocated to segments (13.5) – – (13.5) (124.0) (137.5) Customer loyalty schemes – IFRIC 19 Extinguishing Financial Liabilities with Equity The fair value of loyalty points awarded is deferred until the Instruments (1 July 2010) Segment operating profit (loss) 10.5 1.4 3.0 14.9 (110.9) (96.0) awards are redeemed, after adjustment for the number of points – Annual improvements to IFRS (issued in May 2010) Exceptional items not allocated to segments: expected never to be redeemed. Fair value is determined by reference to the value for which the points can be redeemed. The Directors do not anticipate that the adoption of these Restructuring costs (3.6) – (3.6) standards and interpretations will have a material impact on Pension scheme curtailment 2.8 – 2.8 the Group’s financial statements. New accounting standards Share of post-tax losses of associates and joint ventures not The Group and the Company have adopted the following new The effective dates stated are those given in the original allocated to segments (1.0) – (1.0) accounting standards, amendments to accounting standards and IASB/IFRIC standards and interpretations. As the Group prepares interpretations, which are either mandatory for the first time for its financial statements in accordance with IFRS as adopted by Total operating profit (loss) 13.1 (110.9) (97.8) the financial year ending 30 April 2011 or have been adopted the European Union, the application of new standards and Net finance costs (8.6) 0.1 (8.5) early as appropriate. interpretations will be subject to their having been endorsed Exceptional finance costs for use in the EU via the EU endorsement mechanism. (1.9) – (1.9) – IAS 27 Consolidated and Separate Financial Statements Profit (loss) before taxation 2.6 (110.8) (108.2) (revised 2008) (1 July 2009). This requires that a change in the ownership interest of a subsidiary is accounted for Taxation (5.8) (7.7) (13.5) within equity as a transaction with owners in their capacity Loss for the period (3.2) (118.5) (121.7) as owners, therefore no longer giving rise to either goodwill Average employees (number) 6,015 213 515 6,743 6,874 13,617 on acquisition nor a gain or loss on disposal. Changes to non-controlling interests in subsidiaries during the period under review totalling £0.6m have been accounted for within equity. There is no impact on prior periods from this change in policy.

14531_HMV_AR11_p12-92.indd 48 15/07/2011 09:59 HMV Group plc HMV Group plc Annual report and accounts 2011 AnnualAnnual reportreport andand accountsaccounts 20112011 48 49 Notes to the financial statements continued

2. Accounting policies continued The following have also been adopted but have no material 3. Segmental information Derivative financial instruments impact on the Group or Company: For both management and financial reporting purposes the continuing operations of the Group are organised into three operating The Group may from time to time use derivative financial businesses – HMV UK & Ireland, HMV International (comprising HMV Hong Kong and HMV Singapore) and HMV Live. At 30 April 2011 – IFRS 2 Share-based Payment: Group Cash-settled Share- instruments for hedging purposes, including forward foreign Waterstone’s and HMV Canada (which was previously included within HMV International) have been classified as disposal groups based Payment Transactions (1 January 2010) exchange contracts. The Group does not enter into derivative available for sale and as discontinued operations as both businesses are expected to be sold within 12 months. financial instruments for speculative purposes. – IFRS 3 Business Combinations (revised 2008) (1 July 2009) HMV UK & Ireland and HMV International are the pre-recorded music, video and electronic games retailing divisions that primarily Derivative financial instruments are stated at their fair value. trade under the HMV brand. HMV Live’s activities include the operation of live music venues and events, including festivals, together – IAS 32 Financial Instruments: Presentation – Classification The fair value of forward foreign exchange contracts is their with sponsorship income relating to brands held within the business. It also includes the management of recording artists and other of Rights Issues (Amendment) (1 February 2010) quoted market value at the balance sheet date, being the present related activities. Waterstone’s is the book retailing division of HMV Group, primarily trading under the Waterstone’s brand. Segment value of the quoted forward price. – IAS 39 Financial Instruments: Recognition and Measurement information about these businesses is presented below. Finance costs, finance income and income taxes are managed on a – Eligible Hedged Items (1 July 2009) Group basis. Hedge accounting The following tables present revenue (all from third parties), profit, employee numbers and certain asset information regarding – IFRIC 17 Distribution of Non-cash Assets to Owners Changes in the fair value of derivative financial instruments that the Group’s reportable segments, for the periods ended 30 April 2011 and 24 April 2010. (1 July 2009) are designated and effective as hedges of future cash flows are recognised in other comprehensive income and any ineffective – Annual improvements to IFRS (issued in April 2009) 53 weeks ended 30 April 2011 portion is recognised immediately in the income statement. Total The Group has not adopted early the requirements of the HMV HMV HMV continuing Discontinued Total Amounts taken to other comprehensive income are transferred following accounting standards and interpretations, which have UK & Ireland International Live operations operations operations to the income statement when hedged transactions affect profit an effective date after the start date of these financial statements: £m £m £m £m £m £m or loss, such as when a forecast sale or purchase occurs. Segment revenue 1,070.1 33.2 46.9 1,150.2 718.1 1,868.3 Hedge accounting is discontinued when the hedging – IAS 24 Related Party Disclosures (Amendment) instrument expires or is sold, terminated or exercised, or no (1 January 2011) Segment trading profit before exceptional items 24.0 1.4 3.0 28.4 13.1 41.5 longer qualifies for hedge accounting. At that time any cumulative – IFRS 9 Financial Instruments: Classification and Operating exceptional items: gain or loss on the hedging instrument previously recognised Measurement (1 January 2013) Restructuring costs (2.6) – – (2.6) (1.6) (4.2) in other comprehensive income is retained in equity until the hedged transaction occurs. If the hedged transaction is no – IFRS 10 Consolidated Financial Statements (1 January 2013) Store closure costs (15.1) – – (15.1) (8.8) (23.9) longer expected to occur, the net cumulative gain or loss – IFRS 11 Joint Arrangements (1 January 2013) Lease disposal premium received 13.8 – – 13.8 – 13.8 recognised in other comprehensive income is then transferred Store impairment costs (9.6) – – (9.6) (1.6) (11.2) to the income statement. – IFRS 12 Disclosure of Interests in Other Entities Changes in the fair value of derivative financial instruments (1 January 2013) Pension scheme settlement – – – – (0.5) (0.5) that do not qualify for hedge accounting are recognised in the – IFRIC 14 Prepayments of a minimum funding requirements Impairment loss on remeasurement to fair value less income statement as they arise. (Amendment) (1 January 2011) costs to sell – – – – (111.5) (111.5) Total exceptional items allocated to segments (13.5) – – (13.5) (124.0) (137.5) Customer loyalty schemes – IFRIC 19 Extinguishing Financial Liabilities with Equity The fair value of loyalty points awarded is deferred until the Instruments (1 July 2010) Segment operating profit (loss) 10.5 1.4 3.0 14.9 (110.9) (96.0) awards are redeemed, after adjustment for the number of points – Annual improvements to IFRS (issued in May 2010) Exceptional items not allocated to segments: expected never to be redeemed. Fair value is determined by reference to the value for which the points can be redeemed. The Directors do not anticipate that the adoption of these Restructuring costs (3.6) – (3.6) standards and interpretations will have a material impact on Pension scheme curtailment 2.8 – 2.8 New accounting standards the Group’s financial statements. Share of post-tax losses of associates and joint ventures not The Group and the Company have adopted the following new The effective dates stated are those given in the original allocated to segments (1.0) – (1.0) accounting standards, amendments to accounting standards and IASB/IFRIC standards and interpretations. As the Group prepares interpretations, which are either mandatory for the first time for its financial statements in accordance with IFRS as adopted by Total operating profit (loss) 13.1 (110.9) (97.8) the financial year ending 30 April 2011 or have been adopted the European Union, the application of new standards and Net finance costs (8.6) 0.1 (8.5) early as appropriate. interpretations will be subject to their having been endorsed Exceptional finance costs for use in the EU via the EU endorsement mechanism. (1.9) – (1.9) – IAS 27 Consolidated and Separate Financial Statements Profit (loss) before taxation 2.6 (110.8) (108.2) (revised 2008) (1 July 2009). This requires that a change in the ownership interest of a subsidiary is accounted for Taxation (5.8) (7.7) (13.5) within equity as a transaction with owners in their capacity Loss for the period (3.2) (118.5) (121.7) as owners, therefore no longer giving rise to either goodwill Average employees (number) 6,015 213 515 6,743 6,874 13,617 on acquisition nor a gain or loss on disposal. Changes to non-controlling interests in subsidiaries during the period under review totalling £0.6m have been accounted for within equity. There is no impact on prior periods from this change in policy.

14531_HMV_AR11_p12-92.indd 49 15/07/2011 09:59 HMV Group plc HMV Group plc Annual report and accounts 2011 Annual report and accounts 2011 50 51 Notes to the financial statements continued

3. Segmental information continued 3. Segmental information continued The following tables present revenue and certain asset information regarding the Group’s geographic locations for the periods ended 53 weeks ended 30 April 2011 30 April 2011 and 24 April 2010. Total HMV HMV HMV continuing Discontinued Total 53 weeks ended 30 April 2011 UK & Ireland International Live operations operations operations United Rest of £m £m £m £m £m £m Kingdom Europe Asia Canada Total Segment assets 201.4 10.9 91.8 304.1 198.2 502.3 £m £m £m £m £m Unallocated assets managed on a Group basis: Segment revenue from third party customers 1,529.4 86.8 33.2 218.9 1,868.3 Investments accounted for using the equity method 8.8 Non-current assets 157.6 2.1 1.9 7.9 169.5 Deferred income tax asset 6.3 Unallocated non-current assets 15.1 Current income tax recoverable 3.7 Total non-current assets 184.6 Centrally held cash and short-term deposits 8.1 Total assets 529.2 52 weeks ended 24 April 2010 (restated) Depreciation 22.5 0.5 1.5 24.5 15.2 39.7 United Rest of Kingdom Europe Asia Canada Total

£m £m £m £m £m 52 weeks ended 24 April 2010 (restated) Segment revenue from third party customers 1,662.7 100.9 31.1 221.9 2,016.6 Total Non-current assets 292.6 4.1 2.4 10.1 309.2 HMV HMV HMV continuing Discontinued Total UK & Ireland International Live operations operations operations Unallocated non-current assets 37.7 £m £m £m £m £m £m Total non-current assets 346.9 Segment revenue 1,241.9 31.1 8.1 1,281.1 735.5 2,016.6 Segment trading profit (loss) before exceptional items 73.8 1.2 (0.2) 74.8 5.3 80.1 Non-current assets for this purpose consist of property, plant and equipment (including those held for sale), intangible assets, investment in joint ventures and trade and other receivables. Operating exceptional items: Impairment charge – – – – (2.0) (2.0) 4. Revenue Revenue disclosed in the consolidated income statement is analysed as follows: Restructuring costs – – – – (1.7) (1.7) Integration costs – – (1.6) (1.6) – (1.6) 2011 2010 (Restated) Total exceptional items – – (1.6) (1.6) (3.7) (5.3) £m £m Share of post-tax profits of associates and joint ventures Sale of goods – continuing operations 1,136.9 1,279.8 allocated to segments – – 0.9 0.9 – 0.9 Sale of goods – discontinued operations 718.1 735.5 Segment operating profit (loss) 73.8 1.2 (0.9) 74.1 1.6 75.7 Rendering of services 13.3 1.3 Share of post-tax losses of other associates and joint ventures (0.6) – (0.6) Financial revenue (Note 10) 0.2 0.4 Total operating profit 73.5 1.6 75.1 Total revenue 1,868.5 2,017.0 Net finance costs (6.2) – (6.2) Profit before taxation 67.3 1.6 68.9 Taxation (19.3) (0.4) (19.7) Profit for the period 48.0 1.2 49.2 Average employees (number) 6,740 227 129 7,096 7,058 14,154 Segment assets 227.7 10.0 88.7 326.4 330.5 656.9 Unallocated assets managed on a Group basis: Investments accounted for using the equity method 7.6 Deferred income tax asset 30.1 Current income tax recoverable 1.8 Centrally held cash and short-term deposits 10.6 Total assets 707.0 Depreciation 23.1 0.5 0.4 24.0 19.4 43.4

14531_HMV_AR11_p12-92.indd 50 15/07/2011 09:59 HMV Group plc HMV Group plc Annual report and accounts 2011 AnnualAnnual reportreport andand accountsaccounts 20112011 50 5151 Notes to the financial statements continued

14531_HMV_AR11_p12-92.indd 51 15/07/2011 09:59 HMV Group plc HMV Group plc Annual report and accounts 2011 Annual report and accounts 2011 52 53 Notes to the financial statements continued

5. Total Group operating profit (including discontinued operations) 7. Exceptional items (before taxation) continued Exceptional items (charged) credited comprise the following: 2011 2010 £m £m – Restructuring costs of £7.8m relating to redundancy costs of non-store employees in HMV UK & Ireland (£2.6m), HMV Canada Total Group operating profit (including discontinued operations) is stated after charging (crediting): (£1.1m) and Waterstone’s (£0.5m), and £3.6m of advisory and other restructuring costs incurred by the Company during the period; Depreciation of property, plant and equipment 39.7 43.4 Impairment charges 122.7 2.0 – 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 Amortisation of intangible assets 0.3 0.1 for future property costs on stores where the leases have not yet expired; Cost of inventories recognised as expense 1,185.6 1,296.3 – Partially offsetting store closure costs was a £13.8m premium received in cash by HMV UK & Ireland on the disposal of its Write down of inventories 6.7 5.4 leasehold interest in a store at 360 Oxford Street, London; Operating lease rentals: – Fixed asset impairment charges totalling £11.2m were incurred by HMV UK & Ireland (£9.6m), Waterstone’s (£0.9m) and Minimum rentals 161.2 161.9 HMV Canada (£0.7m) following a review of the carrying value of retail assets based on prevailing market trading conditions; Contingent rentals 2.3 3.3 – At 26 February 2011 the HMV Canada and Waterstone’s businesses were reclassified as disposal groups held for sale Sublease rentals (3.9) (3.4) (see Note 12). 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); Net operating lease rentals 159.6 161.8 – The UK defined benefit pension scheme was closed to future accrual as at 31 March 2011 with related changes to other linked The Group leases stores under non-cancellable operating lease agreements that are generally subject to periodic rent review. benefits such as rights on early retirement. As a result of this curtailment £2.8m has been credited to the income statement. These agreements provide for either or both minimum rentals and percentage rentals based on sales performance. In addition, the Irish Pension Scheme incurred an exceptional settlement cost of £0.5m in purchasing annuities for former Waterstone’s employees and which has been classified within discontinued operations; 6. Fees to auditors – Exceptional costs of £1.9m have been incurred with respect to the refinancing negotiations that were underway in the period 2011 2010 to 30 April 2011 (see Note 10). £m £m Exceptional costs for continuing operations charged to operating profit are allocated as £10.9m to cost of sales and £3.4m to Audit of the Group financial statements 0.2 0.5 administrative expenses. A net tax credit of £7.3m arose in respect of exceptional charges (continuing operations £4.2m, discontinued Other fees to auditors: operations £3.1m). Local statutory audits for subsidiaries 0.2 0.2 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. Other services pursuant to legislation 0.1 0.1 Administration expenses included restructuring costs of £1.7m relating to Waterstone’s and £1.6m of integration costs following the Tax services 0.1 – acquisition of MAMA Group Plc. A tax credit of £1.0m arose in respect of these charges (continuing operations £0.1m, discontinued Services relating to corporate finance transactions 0.6 0.1 operations £0.9m). 0.6 1.5 8. Directors’ emoluments

7. Exceptional items (before taxation) 2011 2010 £m £m 2011 2011 2011 2010 2010 2010 Directors’ emoluments 1.2 2.3 (Restated) (Restated) (Restated) £m £m £m £m £m £m Number of Directors accruing benefits under defined benefit pension schemes 2 3 Continuing Discontinued Continuing Discontinued Recognised in arriving at operating profit: operations operations Total operations operations Total Full details of Directors’ remuneration and interests are set out in the Directors’ remuneration report on pages 16 to 23. Restructuring costs (6.2) (1.6) (7.8) – (1.7) (1.7) 9. Employee costs Store closure costs (15.1) (8.8) (23.9) – – – 2011 2010 Lease disposal premium received 13.8 – 13.8 – – – £m £m Impairment costs (9.6) (1.6) (11.2) – (2.0) (2.0) Employee costs, including Executive Directors’ emoluments: Pension scheme curtailment/(settlement) 2.8 (0.5) 2.3 – – – Wages and salaries 216.1 219.6 Integration of Live division – – – (1.6) – (1.6) Social security costs 17.0 17.0 Operating exceptional items (14.3) (12.5) (26.8) (1.6) (3.7) (5.3) Other pension costs (see Note 33) 4.4 3.7 Impairment loss on remeasurement to fair value less costs to sell – (111.5) (111.5) – – – 237.5 240.3 (1.6) (3.7) (5.3) (14.3) (124.0) (138.3) Included in wages and salaries is a total charge for equity-settled share-based payments of £0.4m (2010: credit of £1.5m). Exceptional finance costs – Refinancing (1.9) – (1.9) – – – In addition, wages and salaries includes a charge of nil (2010: £0.4m) for the Share Incentive Plan and £0.1m (2010: nil) for the Total exceptional items (16.2) (124.0) (140.2) (1.6) (3.7) (5.3) Sharesave Scheme (see Note 29). The average monthly number of employees during the period is disclosed in Note 3.

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14531_HMV_AR11_p12-92.indd 53 15/07/2011 09:59 HMV Group plc HMV Group plc Annual report and accounts 2011 Annual report and accounts 2011 54 55 Notes to the financial statements continued

10. Net finance costs 11. Taxation continued The tax expense in the income statements is disclosed as follows: 2011 2010 (Restated) 2011 2010 £m £m (Restated) Finance revenue: £m £m Bank interest receivable 0.2 0.4 Income tax expense on continuing operations 5.8 19.3 Finance costs: Income tax expense on discontinued operations 7.7 0.4 Bank loans and overdrafts 7.1 5.2 Total taxation expense in the income statement 13.5 19.7 Amortisation of deferred financing fees 0.8 0.4 The underlying effective tax rate on continuing operations before exceptional items is 7% (2010: 28%) which is lower than the Other finance expense – pensions (see Note 33) 0.9 1.0 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 Total finance costs 8.8 6.6 an exceptional charge in respect of the derecognition of the Group’s deferred tax asset. Exceptional finance costs (see Note 7) – 1.9 The tax charge is reconciled with the standard rate of UK corporation tax as follows: Net finance costs 10.5 6.2 2011 2010 Included within the total net finance costs are net non-cash charges totalling £1.7m (2010: £1.4m). These comprise the amortisation £m £m of deferred financing fees and other finance costs relating to pensions. Profit from continuing operations before tax 2.6 67.3 In addition to the above net finance income of £0.1m (2010: nil) was included in the result of the discontinued operation (Loss) profit from discontinued operations before tax (110.8) 1.6 (see Note 12). Add back(less): share of post-tax (losses) profits of associates and joint ventures 1.0 (0.3) 11. Taxation (Loss) profit before taxation 68.6 (107.2) 2011 2010 Corporation tax at UK average statutory rate of 27.84% (2010: 28%) (29.8) 19.2 (Restated) Group £m £m Effects of: Taxation recognised in the income statement: (Income not taxable)permanent disallowables (0.1) 0.9 United Kingdom, current year: Overseas income taxed at different rates 0.7 (0.2) Corporation tax – continuing operations (0.6) 19.1 Permanent disallowables on exceptional items 31.0 0.4 Corporation tax – discontinued operations 2.2 0.7 Current tax prior period over provision (8.7) (0.3) Over provision in prior periods (5.4) (0.4) Temporary differences relating to prior periods 0.4 (0.3) (3.8) 19.4 Deferred tax rate change 1.1 – Overseas tax, current year: Derecognition of deferred tax 18.9 – Corporation tax – continuing operations 1.8 0.4 Total tax charge 13.5 19.7 Corporation tax – discontinued operations (1.1) 0.5 Key factors affecting the tax charge are: Over provision in prior periods (3.3) – (i) The tax charge is reduced by the release of prior year provisions relating to UK tax returns. (2.6) 0.9 (ii) The tax charge is increased by non-deductible expenses including non-qualifying depreciation and impairment Total current tax (6.4) 20.3 on discontinued operations. Deferred tax: (iii) The tax charge is increased by the derecognition of deferred tax (see below). United Kingdom – continuing operations 9.3 0.3 Tax relating to items charged or credited directly to equity in the Group is as follows:

United Kingdom – discontinued operations 7.9 (1.0) 2011 2010 Overseas – continuing operations 0.1 (0.1) £m £m Overseas – discontinued operations 2.6 0.2 Deferred tax relating to defined benefit pension schemes 6.8 (5.1) Total deferred tax 19.9 (0.6) Current tax relating to defined benefit pension schemes (0.8) (0.3) Total taxation expense in the income statement 13.5 19.7 Current tax on foreign exchange gains and losses 0.1 (0.8) Deferred tax on foreign exchange gains and losses 1.3 – Tax charge (credit) in other comprehensive income 6.1 (4.9) Deferred tax relating to share-based payments charged directly to equity 1.4 0.9 (4.0) 7.5

14531_HMV_AR11_p12-92.indd 54 15/07/2011 09:59 HMV Group plc HMV Group plc Annual report and accounts 2011 AnnualAnnual reportreport andand accountsaccounts 20112011 54 5555 Notes to the financial statements continued

2011 2010 Corporation tax at UK average statutory rate of 27.84% (2010: 28%) (29.8) 19.2 (Restated) Group £m £m Effects of: Taxation recognised in the income statement: (Income not taxable)permanent disallowables (0.1) 0.9 United Kingdom, current year: Overseas income taxed at different rates 0.7 (0.2) Corporation tax – continuing operations (0.6) 19.1 Permanent disallowables on exceptional items 31.0 0.4 Corporation tax – discontinued operations 2.2 0.7 Current tax prior period over provision (8.7) (0.3) Over provision in prior periods (5.4) (0.4) Temporary differences relating to prior periods 0.4 (0.3) (3.8) 19.4 Deferred tax rate change 1.1 – Overseas tax, current year: Derecognition of deferred tax 18.9 – Corporation tax – continuing operations 1.8 0.4 Total tax charge 13.5 19.7 Corporation tax – discontinued operations (1.1) 0.5 Key factors affecting the tax charge are: Over provision in prior periods (3.3) – (i) The tax charge is reduced by the release of prior year provisions relating to UK tax returns. (2.6) 0.9 (ii) The tax charge is increased by non-deductible expenses including non-qualifying depreciation and impairment Total current tax (6.4) 20.3 on discontinued operations. Deferred tax: (iii) The tax charge is increased by the derecognition of deferred tax (see below). United Kingdom – continuing operations 9.3 0.3 Tax relating to items charged or credited directly to equity in the Group is as follows:

14531_HMV_AR11_p12-92.indd 55 15/07/2011 09:59 HMV Group plc HMV Group plc Annual report and accounts 2011 Annual report and accounts 2011 56 57 Notes to the financial statements continued

11. Taxation continued 11. Taxation continued The deferred tax included in the Group balance sheet is as follows: The deferred tax included in the balance sheet of the Company is as follows:

2011 2010 2011 2010 £m £m £m £m Deferred tax liability Deferred tax asset Other temporary differences (5.6) (1.6) Other temporary differences 0.1 0.5 Deferred tax asset Defined benefit pension scheme obligations 5.5 10.9 Accelerated depreciation for tax purposes 0.2 17.5 Share-based payments 0.1 1.2 Other temporary differences 0.4 (0.2) 5.7 12.6 Defined benefit pension scheme obligations 5.5 10.9 Share-based payments 0.2 1.9 12. Discontinued operations 0.2 As at 30 April 2011 negotiations for the sale of Waterstone’s and HMV Canada were in progress and the businesses were therefore 6.3 30.1 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 The distinction between temporary differences that arise from items of either a trading or capital nature and when these can The distinction between temporary differences that arise from items of either a trading or capital nature and when these can International business segment. Subsequent to the year end, the Company announced that it had reached agreement to sell both reasonably be expected to unwind may affect the recognition of deferred tax assets. Accordingly, for the year ended 30 April 2011, businesses, further details of which are given in Note 37. deferred tax on pensions has been recognised to the extent of scheduled contributions over a three year period of £21.0m, resulting in a deferred tax asset of £5.5m and an unrecognised deferred tax asset of £2.9m. The derecognition of the deferred tax asset in The results of Waterstone’s and HMV Canada for 2009/10 and 2010/11 are presented below: relation to decelerated capital allowances and the pension have been taken to the income statement (£18.9m) with the remainder to other comprehensive income (£4.2m). 2011 2011 2011 2010 2010 2010 to other comprehensive income (£4.2m). Waterstone’s HMV Canada Total Waterstone’s HMV Canada Total The UK Government announced in the 2010 Budget that the headline rate of UK corporation tax would be reduced from 28% £m £m £m £m £m £m to 23% over the course of several years. The first phase of this reduction, taking the UK tax rate from 28% down to 26% came into Revenue 499.2 218.9 718.1 513.6 221.9 735.5 effect from 1 April 2011. As a result, recognised deferred tax balances are stated at 26%, resulting in a £1.1m charge to the profit and loss account. Expenses (487.1) (217.9) (705.0) (510.8) (219.4) (730.2) Operating profit before exceptional items 12.1 1.0 13.1 2.8 2.5 5.3 Unrecognised tax losses Net finance income 0.1 – 0.1 – – – There are no capital losses available for offset against the Group’s future capital gains. Profit before taxation and exceptional items 12.2 1.0 13.2 2.8 2.5 5.3 Deferred tax in the income statement Exceptional items (10.2) (2.3) (12.5) (2.7) (1.0) (3.7) The deferred tax included in the Group income statement is as follows: Impairment recognised on remeasurement to fair value less 2011 2010 costs to sell (110.5) (1.0) (111.5) – – – £m £m (Loss) profit before tax from discontinued operations (108.5) (2.3) (110.8) 0.1 1.5 1.6 Accelerated depreciation for tax purposes 16.9 (2.5) Tax (expense) credit (9.2) 1.5 (7.7) – (0.4) (0.4) Other 0.9 0.8 (Loss) profit for the period from discontinued operations (117.7) (0.8) (118.5) 0.1 1.1 1.2 Holdover of capital gains 3.0 0.5

Share-based payments 0.5 0.5 The tax (expense) credit is analysed as follows: Defined benefit pension scheme obligations (1.4) – On profit on ordinary activities for the period (2.8) 3.2 0.4 (0.6) (0.7) (1.3) 19.9 (0.7) On exceptional items 2.3 0.8 3.1 0.6 0.3 0.9 Company On derecognition of deferred tax asset (8.7) (2.5) (11.2) – – – Tax relating to other items charged or credited in the Company is as follows: (9.2) 1.5 (7.7) – (0.4) (0.4) 2011 2010 The impairment recognised on fair value less costs to sell has been allocated to Waterstone’s goodwill (£71.0m) and property, plant £m £m and equipment (Waterstone’s £39.5m, HMV Canada £1.0m). There was no tax impact of the impairment charge. Deferred tax relating to defined benefit pension schemes 6.8 (5.1) Current tax relating to defined benefit pension schemes (0.8) (0.3) Current tax on foreign exchange gains and losses – 1.2 Deferred tax on foreign exchange gains and losses – (1.2) Tax charge (credit) in other comprehensive income 6.0 (5.4) Deferred tax relating to share-based payments charged directly to equity 1.1 0.3 7.1 (5.1)

14531_HMV_AR11_p12-92.indd 56 15/07/2011 09:59 HMV Group plc HMV Group plc Annual report and accounts 2011 AnnualAnnual reportreport andand accountsaccounts 20112011 56 5757 Notes to the financial statements continued

11. Taxation continued 11. Taxation continued The deferred tax included in the Group balance sheet is as follows: The deferred tax included in the balance sheet of the Company is as follows:

2011 2010 2011 2010 £m £m £m £m Deferred tax liability Deferred tax asset Other temporary differences (5.6) (1.6) Other temporary differences 0.1 0.5 Deferred tax asset Defined benefit pension scheme obligations 5.5 10.9 Accelerated depreciation for tax purposes 0.2 17.5 Share-based payments 0.1 1.2 Other temporary differences 0.4 (0.2) 5.7 12.6 Defined benefit pension scheme obligations 5.5 10.9 Share-based payments 0.2 1.9 12. Discontinued operations 0.2 As at 30 April 2011 negotiations for the sale of Waterstone’s and HMV Canada were in progress and the businesses were therefore 6.3 30.1 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 The distinction between temporary differences that arise from items of either a trading or capital nature and when these can The distinction between temporary differences that arise from items of either a trading or capital nature and when these can International business segment. Subsequent to the year end, the Company announced that it had reached agreement to sell both reasonably be expected to unwind may affect the recognition of deferred tax assets. Accordingly, for the year ended 30 April 2011, reasonably be expected to unwind may affect the recognition of deferred tax assets. Accordingly, for the year ended 30 April 2011, businesses, further details of which are given in Note 37. deferred tax on pensions has been recognised to the extent of scheduled contributions over a three year period of £21.0m, resulting in a deferred tax asset of £5.5m and an unrecognised deferred tax asset of £2.9m. The derecognition of the deferred tax asset in The results of Waterstone’s and HMV Canada for 2009/10 and 2010/11 are presented below: relation to decelerated capital allowances and the pension have been taken to the income statement (£18.9m) with the remainder to other comprehensive income (£4.2m). 2011 2011 2011 2010 2010 2010 to other comprehensive income (£4.2m). Waterstone’s HMV Canada Total Waterstone’s HMV Canada Total The UK Government announced in the 2010 Budget that the headline rate of UK corporation tax would be reduced from 28% £m £m £m £m £m £m to 23% over the course of several years. The first phase of this reduction, taking the UK tax rate from 28% down to 26% came into Revenue 499.2 218.9 718.1 513.6 221.9 735.5 effect from 1 April 2011. As a result, recognised deferred tax balances are stated at 26%, resulting in a £1.1m charge to the profit and loss account. Expenses (487.1) (217.9) (705.0) (510.8) (219.4) (730.2) Operating profit before exceptional items 12.1 1.0 13.1 2.8 2.5 5.3 Unrecognised tax losses Net finance income 0.1 – 0.1 – – – There are no capital losses available for offset against the Group’s future capital gains. Profit before taxation and exceptional items 12.2 1.0 13.2 2.8 2.5 5.3 Deferred tax in the income statement Exceptional items (10.2) (2.3) (12.5) (2.7) (1.0) (3.7) The deferred tax included in the Group income statement is as follows: Impairment recognised on remeasurement to fair value less 2011 2010 costs to sell (110.5) (1.0) (111.5) – – – £m £m (Loss) profit before tax from discontinued operations (108.5) (2.3) (110.8) 0.1 1.5 1.6 Accelerated depreciation for tax purposes 16.9 (2.5) Tax (expense) credit (9.2) 1.5 (7.7) – (0.4) (0.4) Other 0.9 0.8 (Loss) profit for the period from discontinued operations (117.7) (0.8) (118.5) 0.1 1.1 1.2 Holdover of capital gains 3.0 0.5

14531_HMV_AR11_p12-92.indd 57 15/07/2011 09:59 HMV Group plc HMV Group plc Annual report and accounts 2011 Annual report and accounts 2011 58 59 Notes to the financial statements continued

12. Discontinued operations 13. Earnings per share The major classes of assets and liabilities of the businesses were as follows: The following reflects the income and share numbers data used in the basic and diluted earnings per share calculations:

2011 2011 2011 2011 2010 Waterstone’s HMV Canada Total (Restated) £m £m £m £m £m Assets (Loss) profit from continuing operations (3.2) 48.0 Property, plant and equipment 23.8 7.9 31.7 Less non-controlling interests (1.4) – Current income tax asset – 1.7 1.7 (Loss) profit from continuing operations attributable to shareholders of the Parent Company (4.6) 48.0 Inventories 74.4 31.8 106.2 Exceptional items, less tax thereon – continuing operations 20.7 1.5 Trade and other receivables 51.2 1.0 52.2 Adjusted profit from continuing operations attributable to shareholders of the Parent Company 16.1 49.5 Cash 4.1 2.3 6.4 Assets classified as held for resale 153.5 44.7 198.2 Discontinued operations (loss) profit after tax and exceptional items (118.5) 1.2 Liabilities Exceptional items, less tax thereon – discontinued operations 132.1 2.8 Interest bearing loans and borrowings (4.1) (2.1) (6.2) Adjusted profit from discontinued operations attributable to shareholders of the Parent Company 13.6 4.0 Deferred income tax liability (0.3) – (0.3) Retirement benefit liabilities (0.6) – (0.6) Total (loss) profit attributable to shareholders of the Parent Company (123.1) 49.2 Provisions (5.9) – (5.9) Exceptional items less tax thereon 152.8 4.3 Trade and other payables (91.6) (42.6) (134.2) Total adjusted profit attributable to shareholders of the parent company 29.7 53.5 Current income tax payable (1.0) – (1.0) Liabilities classified as held for resale (103.5) (44.7) (148.2) 2011 2010 Number Number Net assets of disposal group 50.0 – 50.0 Million Million The net cash flows attributable to Waterstone’s and HMV Canada are as follows: Weighted average number of Ordinary Shares – Basic 423.2 422.5

2011 2011 2011 2010 2010 2010 Dilutive share options – – Waterstone’s HMV Canada Total Waterstone’s HMV Canada Total Weighted average number of Ordinary Shares – Diluted 423.2 422.5 £m £m £m £m £m £m Operating cash flows (2.7) (0.9) (3.6) Earnings per Ordinary Share is calculated as follows: (8.3) (5.6) (13.9) Investing cash flows (7.6) (2.1) (9.7) (14.3) (3.1) (17.4) 2011 2010 (Restated) Financing cash flows 34.1 7.4 41.5 4.5 2.9 7.4 Pence Pence Net cash in flow (outflow) 18.2 (0.3) 17.9 (12.5) (1.1) (13.6) Continuing operations: In respect of Waterstone’s share of the UK defined benefit pension liabilities, a scheme apportionment arrangement was entered into Basic and diluted (1.1) 11.3 on 6 June 2011 between Waterstone’s and the Company. This provided that on Waterstone’s ceasing to participate in the scheme, Adjusted and diluted 3.8 11.7 their share of the Scheme’s deficit (instead of becoming immediately payable) will be transferred to the Company. Conversely, the Group’s Irish defined benefit scheme transfers with Waterstone’s Ireland, where all active members are employed. Further details Discontinued operations: are provided in Note 33. Basic and diluted (28.0) 0.3 Adjusted and diluted 3.2 1.0 Total operations: Basic and diluted (29.1) 11.6 Adjusted and diluted 7.0 12.7 The adjusted earnings per Ordinary Share is shown in order to highlight the underlying performance of the Group. Earnings per share for the discontinued operation is derived from the loss attributable to shareholders of the parent from discontinued operations of £118.5m (2010: profit £1.2m), divided by the weighted average number of Ordinary Shares for both basic and diluted amounts as per the table above. The weighted average number of shares excludes shares held by an Employee Benefit Trust and has been adjusted for the issue of shares during the period. There are no dilutive share options in issue (2010: nil). At the year end 2.7m anti-dilutive share awards were in issue (2010: 1.5m).

14531_HMV_AR11_p12-92.indd 58 15/07/2011 09:59 HMV Group plc HMV Group plc Annual report and accounts 2011 AnnualAnnual reportreport andand accountsaccounts 20112011 58 59 Notes to the financial statements continued

14531_HMV_AR11_p12-92.indd 59 15/07/2011 09:59 HMV Group plc HMV Group plc Annual report and accounts 2011 Annual report and accounts 2011 60 61 Notes to the financial statements continued

14. Dividends paid and proposed 15. Property, plant and equipment continued Property, plant and equipment has been written down by £11.2m (2010: £2.0m), of which £9.6m relates to HMV UK & Ireland 2011 2010 £m £m (2010: nil), £0.9m relates to Waterstone’s (2010: £1.0m) and £0.7m to HMV Canada (2010: £1.0m), following an impairment review of the carrying value of certain retail assets based on prevailing market trading conditions. The recoverable amounts of assets were Ordinary final dividend of 5.6p per share for 2010 (2009: 5.6p) 23.7 23.6 determined from value in use calculations that incorporated three-year cash flow estimates discounted at an appropriate pre-tax Ordinary interim dividend of 0.9p per share for 2011 (2010: 1.8p) 3.8 7.6 discount rate of 11.8%. The cash flows reflected management’s best estimates of revenue, margin and operating costs over the 27.5 31.2 forecast period and no reasonably possible change in assumptions would result in further impairment. Property, plant and equipment with a net book value of £72.2m has been transferred to assets held for sale as at 30 April 2011 The Board is not recommending the payment of a final dividend. Consequently, the 0.9p per share interim dividend already paid (see Note 12). represents the total dividend for the year (2010 total dividend: 7.4p). The carrying value of plant, equipment and vehicles held under finance leases at 30 April 2011 was £6.0m (2010: £6.5m), of which £5.9m is included in amounts transferred to assets held for sale. £0.1m of fixed assets acquired with a subsidiary were held 15. Property, plant and equipment under finance lease at 24 April 2010. Leased assets are pledged as security for the related finance leases.

Leasehold Plant, Plant, Freehold property and equipment equipment property improvements and vehicles Total and vehicles Total Group £m £m £m £m Company £m £m Cost at 25 April 2009 – 15.6 482.3 497.9 Cost at 25 April 2009 2.0 2.0 Currency retranslation – (0.5) 7.0 6.5 Disposals (0.1) (0.1) Disposals – – (5.4) (5.4) Cost at 24 April 2010 and 30 April 2011 1.9 1.9 Additions – 1.2 38.7 39.9 Depreciation at 25 April 2009, 24 April 2010 and 30 April 2011 1.8 1.8 Acquisition of subsidiary (Restated, see Note 16) 2.6 3.7 3.6 9.9 Net book value at 30 April 2011 0.1 0.1 Cost at 24 April 2010 (Restated) 2.6 20.0 526.2 548.8 Net book value at 24 April 2010 0.1 0.1 Currency retranslation – (0.8) (2.0) (2.8) Net book value at 25 April 2009 0.2 0.2 Disposals – (0.2) (31.8) (32.0) 16. Business combinations Additions – 2.4 25.8 28.2 During the prior year, on 29 January 2010 the Group completed its acquisition of MAMA Group Plc, when its offer for the entire Transfer to assets held for sale – – (230.1) (230.1) issued share capital became unconditional. MAMA comprised a diverse range of music-related businesses, and was the Group’s Cost at 30 April 2011 2.6 21.4 288.1 312.1 joint venture partner in the Mean Fiddler Group, the UK’s second largest multiple live music venue operator. The consideration paid to acquire MAMA’s shares was £46.0m, which included £4.2m incurred in December 2009, when 10% of share capital was acquired Depreciation and impairment at 25 April 2009 – 10.1 325.9 336.0 at 5.25p per share, with the remaining share capital subsequently purchased at 5.4p per share. Associated fees totalled £1.0m. Currency retranslation – (0.5) 5.8 5.3 The total consideration also included £15.5m (including £1.7m fees) incurred in the Group’s earlier investment in Mean Fiddler Charge for period – 0.7 42.7 43.4 Group. This gave a total cost of acquisition of £62.5m, all of which was satisfied in cash. At 24 April 2010 goodwill of £44.1m was capitalised based on provisional fair values (see Note 17). These fair values have now Impairment loss – – 2.0 2.0 been finalised, resulting in a decrease in the fair value of the net assets acquired (detailed below) and consequently an increase in the Disposals – – (4.9) (4.9) goodwill capitalised of £4.6m, bringing the total goodwill to £48.7m. The Group has paid an amount in excess of the fair value of the Depreciation and impairment at 24 April 2010 – 10.3 371.5 381.8 net assets based on the expected future profitability and cash generation of the business, as well as a number of synergy benefits, including using the HMV brand and business relationships to improve operating metrics, and the opportunity with MAMA to build a Currency retranslation – (0.8) (1.8) (2.6) wider ticketing business of scale. As part of the fair value exercise, historic goodwill of £22.0m in the books of MAMA Group was Charge for period 0.1 1.1 38.5 39.7 written-off. In addition, intangible assets totalling £5.2m (£3.6m over the book value) have been recognised on acquisition, reflecting Impairment loss – – 11.2 11.2 the fair value of various brands predominantly relating to MAMA’s festivals business. Disposals – (0.2) (27.7) (27.9) Transfer to assets held for sale – – (157.9) (157.9) Depreciation and impairment at 30 April 2011 0.1 10.4 233.8 244.3 Net book value at 30 April 2011 2.5 11.0 54.3 67.8 Net book value at 24 April 2010 (restated) 2.6 9.7 154.7 167.0 Net book value at 25 April 2009 – 5.5 156.4 161.9

14531_HMV_AR11_p12-92.indd 60 15/07/2011 09:59 HMV Group plc HMV Group plc Annual report and accounts 2011 AnnualAnnual reportreport andand accountsaccounts 20112011 60 6161 Notes to the financial statements continued

14531_HMV_AR11_p12-92.indd 61 15/07/2011 09:59 HMV Group plc HMV Group plc Annual report and accounts 2011 Annual report and accounts 2011 62 63 Notes to the financial statements continued

16. Business combinations continued 17. Intangible assets From the date of acquisition to 24 April 2010, the operations of MAMA Group contributed £8.1m of revenue and made a loss before Trademarks tax and exceptional items of £0.2m. In addition, exceptional costs of £1.6m were charged in the period relating to integration costs and brands Goodwill Total (see Note 7). If the acquisition had taken place at the beginning of the period ended 24 April 2010, revenue for the total Group, Group £m £m £m including discontinued operations, would have been £2,053.9m, operating profit before exceptional items would have been £83.3m Cost at 25 April 2009 2.1 71.0 73.1 and profit before tax and exceptional items would have been £76.5m. Acquisition of subsidiary 5.2 48.7 53.9 The fair value of the identifiable assets and liabilities as at the date of acquisition, and the corresponding carrying amounts immediately before the acquisition were: Cost at 24 April 2010 (restated) 7.3 119.7 127.0 Transfer to disposal group – (71.0) (71.0) Restated fair Book value value to Group Cost at 30 April 2011 7.3 48.7 56.0 £m £m Amortisation at 25 April 2009 0.1 – 0.1 Property, plant and equipment 10.7 9.9 Charge for period 0.1 – 0.1 Intangible assets 1.6 5.2 Amortisation at 24 April 2010 0.2 – 0.2 Goodwill 22.0 – Charge for period 0.3 – 0.3 Investments 5.8 2.8 Amortisation at 30 April 2011 0.5 – 0.5 Inventories 0.4 0.4 Net book value at 30 April 2011 6.8 48.7 55.5 Receivables 21.3 20.1 Net book value at 24 April 2010 (restated) 7.1 119.7 126.8 Cash 7.8 7.8 Net book value at 25 April 2009 2.0 71.0 73.0 Payables (14.2) (15.2) Provisions (0.2) (2.2) Intangible assets include the various trademark registrations and applications for the acronym ‘HMV’ and the dog and trumpet trademark. They are considered to have an indefinite life as they can be renewed at minimal costs and therefore no amortisation Taxation (2.1) (3.1) has been charged. Non-amortisation is supported by an annual impairment review. Borrowings (8.8) (8.8) Also included are various trademarks and domain names pertaining to the Fopp brand. These are considered to have a useful Derivative financial instrument (0.8) (0.8) life of 10 years and amortisation is being charged over this period. Various brands predominantly relating to MAMA’s festivals business, totalling £5.2m, were capitalised on the acquisition 43.5 16.1 of MAMA Group Plc on 29 January 2010. They are considered to have a useful life of 20 years and amortisation is being charged over Non-controlling interest (1.2) this period. Goodwill of £48.7m was recognised relating to the same acquisition, which is allocated to the Live cash-generating unit. The carrying value of the goodwill is subject to an annual impairment review so as to ensure that the carrying amount is not greater Effect of the change in fair value of equity previously owned (1.1) than the recoverable amount, which is determined from a value in use calculation incorporating cash flow projections based on HMV Group share of net assets acquired 13.8 forecasts approved by senior management over a four year period. The forecasts used include management’s most recent view of Goodwill arising on acquisition 48.7 medium-term trading prospects. Cash flows beyond the four years have been extrapolated using a 2.5% growth rate. This rate does not exceed the average long-term growth rate for the relevant market. The pre-tax discount rate applied to cash flow projections is Consideration (satisfied by cash) 62.5 13% based on WACC calculated for the Live business. On the basis of the impairment review undertaken, no impairment of the Changes to the provisional fair values previously reported are as follows: capitalised goodwill was required. The calculation of value in use is sensitive to assumptions made with respect to sales forecasts, gross margins and discount rates. To illustrate, the recoverable amount would reduce to a value equal to the carrying amount if – Property, plant and equipment have been revalued downwards by £0.3m following as an assessment of their carrying value. budgeted sales reduce 0.5%, budgeted gross margin rate reduced by 0.2%, the discount rate increased by 0.2% or the terminal – Investments have been revalued downwards by £2.7m following an assessment of their future profitability and cash flows. growth rate reduced by 0.3%. – Payables have increased by £0.4m as a result of a review of obligations. Goodwill of £71.0m arising on the purchase of Ottakar’s plc on 3 July 2006 has been capitalised. The Ottakar’s business was – Provisions have been increased by £1.0m following a review of a number of onerous contracts. subsumed into the Waterstone’s business, which as at 30 April 2011 has been classified as a disposal group. Therefore the goodwill – Non-controlling interests have increased by £0.2m due to a review of the recoverability of advances made. has been transferred to assets held for sale and an impairment charge has been made against it to write it down to the estimate of fair value less costs to sell. See Note 12. The Company had no intangible assets.

14531_HMV_AR11_p12-92.indd 62 15/07/2011 09:59 HMV Group plc HMV Group plc Annual report and accounts 2011 AnnualAnnual reportreport andand accountsaccounts 20112011 62 63 Notes to the financial statements continued

14531_HMV_AR11_p12-92.indd 63 15/07/2011 09:59 HMV Group plc HMV Group plc Annual report and accounts 2011 Annual report and accounts 2011 64 65 Notes to the financial statements continued

18. Investments in subsidiaries, joint ventures and associates 18. Investments in subsidiaries, joint ventures and associates continued Associates Investment in joint The Group had the following interests in associates at the balance sheet date: ventures and associates Proportion of voting £m Group Name of undertaking Year end date rights and shares held Country of incorporation Nature of business At 25 April 2009 14.7 aNobii Limited 31 December 45.4% England and Wales ebooks Additions (including fees incurred) 9.1 Lovebox Entertainment Limited 31 December 38.49% England and Wales Festivals Additions via acquisition of subsidiary 2.8 Music production and Share of results for the period 0.3 Metal Box Recordings Limited1 31 July 33% England and Wales recording Transfer to subsidiary investment upon full acquisition (16.6) Nettwerk Records LLC 30 June 20% State of Delaware, USA Recording At 24 April 2010 (restated) 10.3 Nettwerk Management Company Ltd 30 June 20% Canada Artist management Additions (including fees incurred) 2.1 Nettwerk Management (USA) LLC 30 June 20% California, USA Artist management Share of results for the period (1.0) Nettwerk Management UK Limited 30 June 20% England and Wales Artist management At 30 April 2011 11.4 Nettwerk Productions Partnership 30 September 20% Canada Recording Nettwerk Productions UK Limited 30 September 20% England and Wales Recording Joint ventures You Are Here LLP 31 July 25% England and Wales Artist management The Group had the following interests in joint ventures at the balance sheet date, further details of which are given below:

Proportion of voting rights During the year the Group and the Company acquired, for £2.1m in cash (including fees incurred), a 45.4% equity interest in aNobii Name of undertaking Year end date and shares held Country of incorporation Nature of business Limited, an ebook business. The Group’s investment in aNobii Limited is as follows:

7digital Inc 31 December 50% England and Wales Digital media 2011 Angel Festivals Limited 31 December 47.4% England and Wales Festivals £m Eleven 78 Limited 31 July 50% England and Wales Recording Cost of investment, satisfied by cash 1.8 PAPA Projects Limited 31 July 50% England and Wales Event management Professional fees incurred 0.3 Share of results for the period (0.7) The Group’s share of the net assets and results of joint ventures is as follows: Investment accounted for using the equity method 1.4 2011 2010 £m £m The Group’s share of the net assets and results of associates is as follows:

Non-current assets 2.0 1.8 2011 2010 Current assets 2.3 2.3 £m £m Non-current liabilities (0.4) – Non-current assets 0.3 0.1 Current liabilities (1.9) (1.7) Current assets 1.0 2.2 Share of net assets 2.0 2.4 Non-current liabilities (0.1) Current liabilities (0.2) (2.5) Revenue 5.4 9.7 Share of net assets 1.0 (0.2) Cost of sales (4.0) (4.9) Administrative expenses (1.7) (4.1) Revenue – 0.6 Finance costs – (0.1) Loss for the period (0.8) –

(Loss) profit before taxation (0.3) 0.6 Taxation 0.1 (0.3) (Loss) profit for the period (0.2) 0.3

14531_HMV_AR11_p12-92.indd 64 15/07/2011 09:59 HMV Group plc HMV Group plc Annual report and accounts 2011 AnnualAnnual reportreport andand accountsaccounts 20112011 64 6655 Notes to the financial statements continued

(Loss) profit before taxation (0.3) 0.6 Taxation 0.1 (0.3) (Loss) profit for the period (0.2) 0.3

14531_HMV_AR11_p12-92.indd 65 15/07/2011 09:59 HMV Group plc HMV Group plc Annual report and accounts 2011 Annual report and accounts 2011 66 67 Notes to the financial statements continued

18. Investments in subsidiaries, joint ventures and associates continued 18. Investments in subsidiaries, joint ventures and associates continued

Investment in Proportion of voting Investment in joint ventures Name of undertaking Year end date rights and shares held Country of incorporation Nature of business subsidiaries and associates Total 1 Company £m £m £m HMV Ireland Limited 24 April 100% Ireland Retailing Cost at 25 April 2009 796.0 14.5 810.5 HMV Music Limited 24 April 100% England and Wales Retailing Acquisition including professional fees 47.0 1.0 48.0 HMV Singapore Pte Limited 24 April 100% Singapore Retailing 1 Transfer to subsidiary investment upon full acquisition 15.5 (15.5) – HMV UK Limited 24 April 100% England and Wales Retailing 1 Capital contribution to subsidiaries for share-based payments (see Note 29) (1.0) – (1.0) Lovebox Festivals Limited 31 July 60% England and Wales Festivals 1 Cost at 24 April 2010 857.5 – 857.5 MAMA Festivals Limited 31 July 100% England and Wales Festivals Additions (see page 65) – 2.1 2.1 MAMA Group Plc 31 July 100% England and Wales Holding company 1 Cost at 30 April 2011 857.5 2.1 859.6 Mean Fiddler Aberdeen Limited 31 July 100% England and Wales Live venue 1 Provision at 25 April 2009 136.9 – 136.9 Mean Fiddler Group Limited 31 July 100% England and Wales Holding company 1 Impairment charge 25.0 – 25.0 Mean Fiddler Holdings Limited 31 July 100% England and Wales Live music venues 1 Provision at 24 April 2010 161.9 – 161.9 MF Presents Limited 31 July 100% England and Wales Promoter 1 Impairment charge 422.4 – 422.4 Supervision CC LLP 28 February 83.3% England and Wales Artist management 1 Provision at 30 April 2011 584.3 – 584.3 Supervision Management Group Limited 31 July 100% England and Wales Artist management 1 Net book value at 30 April 2011 273.2 2.1 275.3 Supervision Sandom LLP 31 July 85% England and Wales Artist management Net book value at 24 April 2010 695.6 – 695.6 Waterstone’s Booksellers Amsterdam BV 24 April 100% Netherlands Retailing Net book value at 25 April 2009 659.1 14.5 673.6 Waterstone’s Booksellers Belgium SA 24 April 100% Belgium Retailing Waterstone’s Booksellers Ireland Limited1 24 April 100% Ireland Retailing An impairment charge of £422.4m has been made against the carrying value of the Company’s investments in various subsidiaries. Of this, £179.6m relates to the discontinued operations, Waterstone’s and HMV Canada, where the recoverable amount of the Waterstone’s Booksellers Limited 24 April 100% England and Wales Retailing investments was determined based on the estimated proceeds less costs to sell the businesses. In the case of the remaining 1. Not directly held by the Company. continuing businesses, primarily HMV UK & Ireland, a review was performed based on current market trading conditions. The recoverable amount of the investments was determined from a value in use calculation incorporating five-year cash flow 19. Trade and other receivables projections extrapolated at a 1% growth rate and discounted using a pre-tax rate of 11.8%, which resulted in an impairment charge Group Group Company Company of £242.8m. The cash flows reflect management’s best estimates of revenue, margin and operating costs over the forecast period. 2011 2010 2011 2010 An increase in the discount rate of 1% would increase the impairment charge by approximately £14.0m and a decrease in the growth £m £m £m £m rate to 0% would increase the impairment charge by approximately £8.0m. Non-current In the previous period an impairment charge of £25.0m was made against the carrying value of the Company's investment in Waterstone's, following a review based on current market trading conditions. Lease premiums paid 11.4 11.9 – – Details of the Group’s investments in joint ventures and associates are listed on pages 64 and 65. The following information Other receivables 0.5 0.8 – – relates to those further investments whose results, or financial position, in the opinion of the Directors, principally affect the figures 11.9 12.7 – – of the Group as at 30 April 2011. All undertakings listed below are included in the consolidation. Current Proportion of voting Name of undertaking Year end date rights and shares held Country of incorporation Nature of business Trade receivables 16.9 13.2 – – Subsidiaries Amounts owed by subsidiary undertakings – – 72.4 27.7 Angel Music Group Limited1 31 July 95% England and Wales Holding company Other receivables 7.5 16.9 – – Angel Entertainment Limited1 31 July 85% England and Wales Sponsorship Prepayments and accrued income 19.7 50.6 2.0 0.6 Fopp Entertainments Limited1 24 April 100% England and Wales Retailing 44.1 80.7 74.4 28.3 Forum Club (Kentish Town) Limited1 31 July 100% England and Wales Live venue G-A-Y Group Limited1 31 July 66.25% England and Wales Live venues Trade receivables continuing operations 16.9 13.2 – – Hammersmith Apollo Limited1 31 July 100% England and Wales Live venue Trade receivables included in disposal group 3.6 – – – Heaven (London) Limited1 31 July 66.26% England and Wales Live venue 20.5 13.2 – – HMV Canada Inc 24 April 100% Canada Retailing The carrying value of trade and other receivables approximates to fair value. The terms and conditions of amounts owed by subsidiary HMV Guernsey Limited 24 April 100% Guernsey Retailing undertakings are given in Note 36. HMV Hong Kong Limited 24 April 100% Hong Kong Retailing HMV (IP) Limited 24 April 100% England and Wales Trademarks

14531_HMV_AR11_p12-92.indd 66 15/07/2011 09:59 HMV Group plc HMV Group plc Annual report and accounts 2011 AnnualAnnual reportreport andand accountsaccounts 20112011 66 6767 Notes to the financial statements continued

18. Investments in subsidiaries, joint ventures and associates continued 18. Investments in subsidiaries, joint ventures and associates continued

14531_HMV_AR11_p12-92.indd 67 15/07/2011 09:59 HMV Group plc HMV Group plc Annual report and accounts 2011 Annual report and accounts 2011 68 69 Notes to the financial statements continued

19. Trade and other receivables continued 22. Trade and other payables Trade receivables are denominated in the following currencies: Group Group Company Company Group Group 2011 2010 2011 2010 2011 2010 (Restated) £m £m £m £m £m £m Sterling 20.2 12.7 Current Euro 0.1 0.2 Trade payables 92.9 255.5 – – Canadian dollar 0.2 0.3 Amounts owed to subsidiary undertakings – – 1.0 0.7 20.5 13.2 Other payables 73.9 103.3 2.0 4.0 Accruals and deferred income 25.1 83.4 1.6 3.1 The Group’s credit risk is limited due to the nature of its retailing business. As at 30 April 2011 £0.5m of Group trade receivables was overdue (2010: £0.8m), of which £0.3m (2010: £0.4m) was provided for. See Note 26 for further discussion of credit risk. Amounts owed to joint ventures and associates – 0.6 – – Trade and other receivables are non-interest bearing and are generally on 30 day terms. 191.9 442.8 4.6 7.8 The Company has no trade receivables and no provisions for impairment of any financial assets. The carrying value of trade and other payables approximates to fair value. Trade payables are not interest-bearing and are generally 20. Inventories settled on 30–60 day terms. Other payables and accruals are not interest-bearing. The terms and conditions of amounts owed to Inventories primarily comprise finished goods and goods for resale. The replacement cost of inventories is considered to be not subsidiary undertakings are given in Note 36. materially different from the balance sheet value. 23. Interest-bearing loans and borrowings

21. Cash and short-term deposits Group Group Company Company Group Group Company Company 2011 2010 2011 2010 2011 2010 2011 2010 £m £m £m £m £m £m £m £m Non-current Cash at bank and in hand 22.8 27.8 21.4 48.9 Finance leases – 4.1 – – Short-term deposits 1.3 1.9 – – Bank loans 7.0 7.7 – – 24.1 29.7 21.4 48.9 7.0 11.8 – – Cash at bank earns interest at floating rates based on daily bank deposit rates. Short-term deposits are made for varying periods of Current between one day and three months depending on the cash requirements of the Group, and earn interest at the respective short-term Finance leases – 1.0 – – deposit rates. Current borrowings 81.1 80.3 Cash balances are deposited through the year with counter parties that have a strong credit rating, with an agreed limit for each 185.0 184.2 counterparty, so as to limit the risk of loss arising from a failure. Counterparties are AAA-rated liquidity funds, as well as banks. Bank overdrafts – 2.4 – 6.9 For the purpose of the cash flow statement, cash and cash equivalents comprise the following: 185.0 84.5 184.2 87.2

Total external loans and borrowings 192.0 96.3 184.2 87.2 Group Group Company Company 2011 2010 2011 2010 Loans from subsidiary undertakings – – 81.6 140.3 £m £m £m £m Total loans and borrowings 192.0 96.3 265.8 227.5 Cash at bank and in hand 22.8 27.8 21.4 48.9 Short-term deposits 1.3 1.9 – – Current borrowings fall due within one year of the balance sheet date. They reflect amounts drawn down from the Group’s multicurrency revolving credit facility (see Note 26), repayments due on the Group’s five year term loan and in the prior year, the short-term Bank overdrafts – (2.4) – (6.9) element of finance leases. Bank overdrafts are repayable on demand. Non-current bank loans consists of repayments due on the 24.1 27.3 21.4 42.0 Group’s five year term loan in more than one year. The maturity of non-current finance leases is shown in Note 35. Finance leases Cash held in disposal group 6.4 – – – in 2011 are included in the disposal group. The terms and conditions of loans from subsidiary undertakings are shown in Note 36. Bank overdrafts held in disposal group (2.1) – – – 28.4 27.3 21.4 42.0

14531_HMV_AR11_p12-92.indd 68 15/07/2011 09:59 HMV Group plc HMV Group plc Annual report and accounts 2011 AnnualAnnual reportreport andand accountsaccounts 20112011 68 69 Notes to the financial statements continued

14531_HMV_AR11_p12-92.indd 69 15/07/2011 09:59 HMV Group plc HMV Group plc Annual report and accounts 2011 Annual report and accounts 2011 70 71 Notes to the financial statements continued

23. Interest-bearing loans and borrowings continued 25. Derivatives and financial instruments Interest-bearing loans and borrowings analysed by currency are as follows: Currency derivatives The Group uses derivative instruments in order to manage foreign currency exchange risk arising on expected future purchases of Group Group Company Company 2011 2010 2011 2010 internationally sourced products in the Group’s subsidiaries. In all cases the implementation of these derivative instruments has been £m £m £m £m negotiated to match expected purchases and they therefore qualify for hedge accounting. The fair value of cash flow hedges in place at 30 April 2011 is a £0.5m liability (2010: £0.1m asset), which has been recognised in the hedging reserve. Sterling – revolving credit facility 184.0 80.3 184.2 80.3 – term loan 8.0 8.5 – – Interest rate hedging – overdraft – – – 6.9 No interest rate hedging instruments were utilised during the current or prior period, except that detailed below. Interest rate exposures continue to be monitored in accordance with the Group’s treasury policies. – finance leases 5.1 – – – On acquisition of MAMA Group Plc, the Group acquired a callable interest rate swap, which had been entered into by MAMA as Canadian Dollars – overdraft – 2.4 – – a hedge against interest payments. The carrying value and the fair value of this financial instrument was a £0.8m liability at acquisition External loans and borrowings 192.0 96.3 184.2 87.2 and at 24 April 2010 and a £0.8m liability at 30 April 2011. The hedge is deemed to be ineffective and therefore future changes to the carrying value are charged or credited to the income statement. Sterling – loans from subsidiary undertakings – – 81.6 140.3 Euro – loans from subsidiary undertakings – – – – Fair values Total loans and borrowings 192.0 96.3 265.8 227.5 Derivative financial instruments recognised on the balance sheet are considered to be level two of the fair value hierarchy. Valuation of these instruments involves the use of a model with inputs that are directly or indirectly observable market data. The fair values of All loans and borrowings of the Group and Company as at 30 April 2011 and 24 April 2010 bear interest at variable rates. The rates each category of the Group’s financial instruments and their carrying values in the Group’s balance sheet, excluding trade and other are set in advance for periods ranging from overnight to six months by reference to a relevant benchmark rate. Terms and conditions receivables and trade and other payables, are as follows: of loans from subsidiary undertakings are given in Note 36. Details of security granted under the Facility Agreement are given in Note 26. 30 April 2011 24 April 2010 In addition to the above, the disposal group includes £4.1m of finance leases held in Waterstone’s and £2.1m of bank overdrafts Carrying Carrying amount Fair value amount Fair value held in Canadian dollars by HMV Canada. £m £m £m £m

24. Provisions Financial assets Cash and short-term deposits 24.1 24.1 29.7 29.7 Group Company Total Total Foreign exchange forward contracts – – 0.1 0.1 Group £m £m Financial liabilities At 24 April 2010 (restated): Long-term borrowings (7.0) (7.0) (7.7) (7.7) Current 4.0 – Short-term borrowings (185.0) (185.0) (81.1) (81.1) Non-current 1.1 – Foreign exchange forward contracts (0.5) (0.5) – – 5.1 – Interest rate swap (0.8) (0.8) (0.8) (0.8) Charged during the year 30.1 2.6 Bank overdrafts – – (2.4) (2.4) Provisions utilised (15.0) – Finance leases – – (5.1) (5.1) Released during the year (0.6) – The fair values of each category of the Company’s financial instruments and their carrying values in the Company’s balance sheet, Transfer to disposal group (5.9) – excluding trade and other receivables and trade and other payables, are as follows: At 30 April 2011 13.7 2.6 30 April 2011 24 April 2010 Analysed as: Carrying Carrying Current 10.9 2.6 amount Fair value amount Fair value £m £m £m £m Non-current 2.8 – Financial assets 13.7 2.6 Cash and short-term deposits 21.4 21.4 48.9 48.9 Provisions consist of amounts in respect of store closures, restructuring and onerous leases. The £30.1m provision created Foreign exchange forward contracts – – 0.1 0.1 in the year was in respect of store closures and restructuring charges, as further discussed in Note 7. The utilisation of provisions in the current year largely reflects store closures and the rental costs, net of sublet income, of previously closed stores. Financial liabilities The disposal group includes £5.9m of provisions in respect of store closures, restructuring and onerous leases. Short-term borrowings (184.2) (184.2) (80.3) (80.3) The Company’s provisions at 30 April 2011 (24 April 2010: nil) were in respect of exceptional restructuring and Foreign exchange forward contracts (0.5) (0.5) – – refinancing charges. Bank overdrafts – – (6.9) (6.9)

14531_HMV_AR11_p12-92.indd 70 15/07/2011 09:59 HMV Group plc HMV Group plc Annual report and accounts 2011 AnnualAnnual reportreport andand accountsaccounts 20112011 70 7171 Notes to the financial statements continued

14531_HMV_AR11_p12-92.indd 71 15/07/2011 09:59 HMV Group plc HMV Group plc Annual report and accounts 2011 Annual report and accounts 2011 72 73 Notes to the financial statements continued

25. Derivatives and financial instruments continued 26. Financial risk factors continued The fair value of cash and short-term deposits and overdrafts is based on the carrying amount as a result of their short maturity. Of the £240.0m (2010: £240.0m) revolving credit facility, £187.0m (2010: £81.0m) had been drawndown at 30 April 2011. Analysis of The fair value of borrowings is based on the carrying amount, adjusted for unamortised deferred financing fees, as a result of their the availability of undrawn committed facilities available to the Group is shown below: short maturity. The fair value of finance lease obligations represents the present value of minimum lease payments (Note 35). 2011 2010 For both the Group and the Company the carrying value of trade receivables, other receivables, trade payables and other £m £m payables equates to the fair value. The fair value of foreign exchange forward contracts is determined using foreign exchange spot rates prevailing at the balance sheet date. Expiring within one year 21.6 21.5 Expiring in more than one year but not more than two years 33.0 139.0 The total notional amount of outstanding foreign currency contracts to which the Group and Company were committed at the balance sheet date is as follows: Total 54.6 160.5

Group Group Company Company Analysis of the maturity profile of the Group’s financial liabilities at 30 April 2011 is shown below: 2011 2010 2011 2010 £m £m £m £m Less than More than On demand 3 months 3 to 12 months 1 to 5 years 5 years Total Commercial activities: £m £m £m £m £m £m Euro 10.2 4.3 10.2 4.3 Current borrowings – 184.3 – – – 184.3 US Dollar 3.0 1.8 3.0 1.8 Trade and other payables – 191.9 – – – 191.9 13.2 6.1 13.2 6.1 Long-term borrowings – 0.3 0.9 7.9 – 9.1 At 30 April 2011 – 376.5 0.9 7.9 – 385.3 26. Financial risk factors The Company’s and Group’s business exposes it to certain limited financial risks, such as liquidity risk, interest rate risk, credit risk Bank overdrafts 2.4 – – – – 2.4 and foreign exchange risk. The Group’s Treasury department is principally responsible for managing these risks using policies Current borrowings – 80.6 0.9 – – 81.5 approved by the Board. Finance lease – 0.2 0.9 2.7 1.7 5.5 Liquidity risk Trade and other payables – 442.8 – – – 442.8 The Company’s and Group’s strategy for managing liquidity risk is to ensure that the Company and Group have sufficient funds Long-term borrowings – – – 8.9 – 8.9 and facilities available to satisfy their current requirements. Liquidity forecasts are prepared on a regular basis to ensure the optimal At 24 April 2010 (restated) 2.4 523.6 1.8 11.6 1.7 541.1 use of facilities and forecast covenant compliance is reviewed on a monthly basis. Longer term projections are also made to assess strategic funding requirements. Analysis of the maturity profile of the Company’s financial liabilities at 30 April 2011 is shown below: At 30 April 2011 the Company had a £240m multi-currency revolving credit facility. The final maturity date of the facility was 30 September 2013. After the balance sheet date, the Company entered into a new banking facility, details of which are given Less than More than On demand 3 months 3 to 12 months 1 to 5 years 5 years Total in Note 37. The Group also has a five year term loan in Mean Fiddler Group Ltd, a wholly owned subsidiary acquired with MAMA £m £m £m £m £m £m Group Plc, repayable by £0.2m quarterly, with an outstanding balance at 30 April 2011 of £8.0m (2010: £8.8m) and a final maturity of 13 November 2014. The Group also has some locally arranged bank facilities, which do not have a fixed maturity date but are Current borrowings – 184.2 – – – 184.2 reviewed annually. Loans from subsidiary undertakings – – 81.6 – – 81.6

Total available at Trade and other payables – 4.6 – – – 4.6 30 April 24 April At 30 April 2011 – 188.8 81.6 – – 270.4 2011 2010 £m £m Bank overdrafts 6.9 – – – – 6.9 Multi-currency revolving credit facility 240.0 240.0 Current borrowings – 80.3 142.3 – – 222.6 Term loan 8.0 8.8 Loans from subsidiary undertakings – 4.5 135.8 – – 140.3 Other local facilities 4.9 5.6 Trade and other payables – 7.8 – – – 7.8 Total 252.9 254.4 At 24 April 2010 6.9 92.6 278.1 – – 377.6 Fees totalling £3.6m incurred in arranging and amending the revolving credit facility have been deferred and are being amortised over the three year term of the facility to September 2013. Fees totalling £0.3m incurred in arranging the Mean Fiddler Group term loan were deferred and are being amortised over the five year term of the facility to November 2014. In March 2011 the Group confirmed that it did not expect to meet certain covenant tests in its bank facility and on 5 April 2011 the Group announced that its lenders had agreed to move the measurement period for all relevant financial covenant tests from the 12 months ending 30 April 2011 to the 12 months ending 2 July 2011. The Group's banking facilities remained fully available at 30 April 2011. On 28 June 2011 the group entered into a new bank facility, full details of which are given in Note 37. Interest was payable on the revolving credit facility at a rate equal to LIBOR plus a margin of 2.25% – 2.50% and on the term loan at a rate equal to LIBOR plus a margin of 4.25%.

14531_HMV_AR11_p12-92.indd 72 15/07/2011 09:59 HMV Group plc HMV Group plc Annual report and accounts 2011 AnnualAnnual reportreport andand accountsaccounts 20112011 72 7373 Notes to the financial statements continued

14531_HMV_AR11_p12-92.indd 73 15/07/2011 09:59 HMV Group plc HMV Group plc Annual report and accounts 2011 Annual report and accounts 2011 74 75 Notes to the financial statements continued

26. Financial risk factors continued 26. Financial risk factors continued Security Capital management The borrowings under the Facility Agreement as at 30 April 2011 are secured by the Guarantors that comprise HMV Group plc and The Board reviews the Group’s capital structure on a regular basis, with the core objective being to ensure that the Group will be any wholly-owned subsidiaries of the Company who accede to the Facility Agreement as guarantors. As a condition of the Agreement, able to continue to operate as a going concern, as well as having sufficient funds available to grow the business for the benefit of the aggregate gross assets, revenue and earnings before interest and tax of the Guarantors must comprise not less than 70% of the shareholders and other stakeholders. The capital structure of the Group comprises loans and borrowings, (see Note 23), cash and total gross assets, revenue and earnings before tax and interest of the Company and its subsidiaries. The Guarantors at 30 April 2011 cash equivalents (see Note 21) and equity attributable to equity shareholders of the Company (see Notes 28 and 30). The Group is comprised HMV Group plc, HMV Music Limited, Waterstone’s Booksellers Limited, HMV (IP) Limited, HMV UK Limited, HMV Ireland subject to certain externally imposed capital requirements in the form of banking covenants that monitor fixed charge and borrowing Limited, Waterstone’s Booksellers Ireland Limited and HMV Guernsey Limited. The Company has granted security comprising first- ratios. In addition, under the terms of a new bank facility effective 28 June 2011, certain restrictions on distributions to shareholders ranking, fixed and floating charges over all the assets and undertakings of the Guarantors. Under the new facility (details of which are now apply (see Note 37). given in Note 37) the condition described above has changed such that the aggregate gross assets, revenue and earnings before interest and tax of the Guarantors must comprise not less than 90% of the total (excluding Live) and the Guarantors under the new 27. Additional cash flow information facility comprise HMV Group plc, HMV Music Limited, HMV (IP) Limited, HMV UK Limited, HMV Guernsey Limited, HMV Ireland Movements in the Group’s net debt position are as follows: Limited and Rustico Holdings Limited. At 24 April Other non-cash Exchange At 30 April The Mean Fiddler term loan is secured on the assets of the Mean Fiddler Group of companies, which include freehold and 2010 Cash flow changes1 movements 2011 long leasehold music and entertainment venues. £m £m £m £m £m Under their banking arrangements, overdraft and cash balances of the Company and of certain subsidiaries are pooled or offset Cash and short-term deposits 29.7 1.5 – (0.7) 30.5 and cross-guaranteed. Such pooling and offset arrangements are reflected in the Group balance sheet as appropriate. Bank overdrafts (2.4) (0.1) – 0.4 (2.1) Interest rate risk Cash and cash equivalents 27.3 1.4 – (0.3) 28.4 The Company and Group are exposed to interest rate risk from their borrowings and cash deposits, with the potential exposure Loans and borrowings – non-current (11.8) 1.5 – – monitored on a regular basis. In recent years, without core longer term borrowings, the strong seasonality to trading patterns has (10.3) provided that, with the onset of peak trading in December, the Group moved into a net cash position before reverting to a net debt Loans and borrowings – current (82.1) (102.9) (0.8) – (185.8) position until the following December. As both debt and cash deposits attract a floating rate of interest, this seasonality provided Total loans and borrowings (93.9) (101.4) (0.8) – (196.1) a natural hedge against interest rate risk. However, the Group’s new banking facility (see Note 37) includes £160m of term debt, which is anticipated to require the supplemental use of interest rate hedging instruments to manage exposure. Net debt (66.6) (100.0) (0.8) (0.3) (167.7)

Credit risk At 25 April Net debt Other non-cash Exchange At 24 April The Group’s credit risk arises from its cash and cash equivalents, deposits, and outstanding receivables. 2009 Cash flow acquired changes1 movements 2010 The Group deposits cash balances with counterparties that have a strong credit rating, with an agreed limit for each counterparty, £m £m £m £m £m £m so as to limit the risk of loss arising from a failure. Counterparties include banks forming the Group’s syndicated banking facility. Cash and short-term deposits 52.7 (30.8) 7.8 – – 29.7 Trade and other receivables are regularly monitored and are limited in size due to the nature of the Group’s business as a retailer Bank overdrafts (7.2) 5.0 – – (0.2) (2.4) dealing predominantly in cash and cash equivalents. Allowances are made for doubtful debts based on the age of the debt and the customer’s financial circumstances. Cash and cash equivalents 45.5 (25.8) 7.8 – (0.2) 27.3 The Company does not have any trade receivables. Loans and borrowings – non-current (5.0) 0.9 (8.0) 0.3 – (11.8) Foreign exchange risk Loans and borrowings – current (46.1) (34.8) (0.8) (0.4) – (82.1) The Company and Group are exposed to foreign exchange risk from their investing, financing and operating activities. Total loans and borrowings (51.1) (33.9) (8.8) (0.1) – (93.9) Forward foreign exchange contracts are used to hedge the foreign exchange risk of imports where volumes are significant. Net debt (5.6) (59.7) (1.0) (0.1) (0.2) (66.6) However, the Group’s operating businesses generally source the majority of their products from suppliers within their country of operation and so the foreign exchange exposure is limited. No speculative positions are entered into by the Group. Details of foreign 1. Represents amortisation of issue costs incurred in connection with the raising of debt. The issue costs have been offset against the relevant debt instrument. currency contracts outstanding at the balance sheet date are given in Note 25. The Group is also exposed to foreign currency translation risk through its investment in overseas subsidiaries, which is partially offset by foreign currency translation risk in local debt. Generally, the Group does not hedge any net translation exposure of overseas earnings, although it may in certain circumstances implement hedges to secure short-term financial objectives.

Sensitivity analysis The following sensitivity analysis illustrates the sensitivity to changes in market variables of the Group’s and Company’s financial instruments and show the impact on profit and shareholders’ funds.

Interest rate sensitivity Based on the Group’s net debt position at the year end, a 100 basis points movement in interest rates would affect the Group’s profit before tax and shareholders’ equity by approximately £1.8m (2010: £0.8m). The impact on the Company would have been £2.5m (2010: £2.4m).

Foreign exchange rate sensitivity The Group has a number of cash flow hedges in place, as shown in Note 25. A 10% change in the value of hedged currencies against Sterling would affect the Group’s profit before tax and shareholders’ equity by £0.7m (2010: £0.2m). There would not have been any impact on the Company.

14531_HMV_AR11_p12-92.indd 74 15/07/2011 09:59 HMV Group plc HMV Group plc Annual report and accounts 2011 AnnualAnnual reportreport andand accountsaccounts 20112011 74 7755 Notes to the financial statements continued

14531_HMV_AR11_p12-92.indd 75 15/07/2011 09:59 HMV Group plc HMV Group plc Annual report and accounts 2011 Annual report and accounts 2011 76 77 Notes to the financial statements continued

27. Additional cash flow information continued 29. Share-based payments Movements in the Company’s net debt position are as follows: Details of share schemes and related performance targets are given in the Remuneration Report on pages 17 and 18. The total charge (credit) for share-based payments is summarised as follows: At Other At 24 April non-cash Exchange 30 April 1 2011 2010 2010 Cash flow changes movements 2011 £m £m £m £m £m £m £m Share option plan – – Cash and short-term deposits 48.9 (27.5) – – 21.4 Deferred annual bonus 0.3 0.5 Bank overdrafts (6.9) 6.9 – – – Performance Share Plan 0.1 (2.0) Cash and cash equivalents 42.0 (20.6) – – 21.4 All-employee Share Plan 0.1 – Loans and borrowings – non-current – – – – – Share Incentive Plan – 0.4 Loans and borrowings – current (80.3) (103.1) (0.8) – (184.2) 0.5 (1.1) Total loans and borrowings (80.3) (103.1) (0.8) – (184.2)

Net debt (38.3) (123.7) (0.8) – (162.8) Equity-settled share option plan The Company has a number of share option schemes under which options to subscribe for the Company’s Ordinary Shares have been granted to certain Directors and management. Options were granted at the five-day average of the market value of the At Other At 25 April non-cash Exchange 24 April Company’s shares on the date of grant. The options can normally only be exercised after three years and were subject to the 2009 Cash flow changes1 movements 2010 achievement of earnings per share targets imposed at the date of grant. If the options remain unexercised after a period of 10 years £m £m £m £m £m from the date of grant, the options expire. Options are forfeited if the employee leaves the Group before the option vests or before Cash and short-term deposits 15.8 33.1 – – 48.9 vested options are exercised. The charge for share options in respect of employee services during the period ended 30 April 2011 was £nil (2010: £nil). Bank overdrafts (30.0) 23.1 – – (6.9) There were no grants of share options during the period under review or the prior period. Cash and cash equivalents (14.2) 56.2 – – 42.0 The movements in the number of share options during the year are detailed in the table below. The options outstanding Loans and borrowings – non-current – – – – – at 30 April 2011 had a weighted average exercise price of 167p (2010: 167p) and a weighted average remaining contractual life of 1.1 years (2010: 2.1 years). Loans and borrowings – current (45.1) (34.8) (0.4) – (80.3) Total loans and borrowings (45.1) (34.8) (0.4) – (80.3) 2011 2010 Weighted Weighted Net debt (59.3) 21.4 (0.4) – (38.3) 2011 average 2010 average Options exercise price Options exercise price 1. Represents issue costs incurred in connection with the raising of debt. The issue costs have been offset against the relevant debt instrument. Group Number Pence Number Pence Outstanding at beginning of period 1,529,358 167 1,639,581 167 28. Share capital Lapsed during the period (496,315) 167 (110,223) 167 Group and Company Number £m 1 Outstanding at end of the period 1,033,043 167 1,529,358 167 Allotted, called up and fully paid Ordinary Shares of 1p each Exercisable at end of the period 1,033,043 167 1,529,358 167 At 25 April 2009, 24 April 2010 and 30 April 2011 423,587,057 4.2 1. Included within this balance are options over 1,033,043 (2010: 1,529,358) shares that have not been recognised in accordance with IFRS 2 as the options were granted No new shares were issued in the Company during the period. on or before 7 November 2002. These options have not been subsequently modified and therefore do not need to be accounted for in accordance with IFRS 2. In the event of a winding-up of the Company or other return of capital, the assets available for distribution to shareholders would be applied in the following order after payment of all debts and liabilities: (i) Repaying pari passu the amounts subscribed (1p per share) for the Ordinary Shares. (ii) Distributing pari passu any balance among the holders of the Ordinary Shares.

14531_HMV_AR11_p12-92.indd 76 15/07/2011 09:59 HMV Group plc HMV Group plc Annual report and accounts 2011 AnnualAnnual reportreport andand accountsaccounts 20112011 76 77 Notes to the financial statements continued

14531_HMV_AR11_p12-92.indd 77 15/07/2011 09:59 HMV Group plc HMV Group plc Annual report and accounts 2011 Annual report and accounts 2011 78 79 Notes to the financial statements continued

29. Share-based payments continued 29. Share-based payments continued

2011 2010 2011 2010 Weighted Weighted 2011 Weighted 2010 Weighted 2011 average 2010 average Share average Share average Options remaining Options remaining awards fair value awards fair value outstanding contractual life outstanding contractual life Company Number Pence Number Pence Group Number Years Number Years Outstanding at beginning of period 513,014 110 426,795 120 2002 Executive Share Option Scheme Granted during the period 566,503 58 123,678 115 Exercise price 167p 1,033,043 1.1 1,529,358 2.1 Vested during the period – – (28,094) 165

2011 2010 Lapsed during the period – – (9,365) 165 Weighted Weighted Forfeited during the period (382,208) 80 – – 2011 average 2010 average Options exercise price Options exercise price Outstanding at end of the period 697,309 84 513,014 110 Company Number Pence Number Pence Of the outstanding balance, the assessment of performance conditions at 30 April 2011 will result in nil (2010: nil) share awards Outstanding at beginning of period 507,319 167 601,555 167 lapsing after the period end (Company: nil, 2010: nil), whilst 560,423 (2010: 21,986) share awards will vest (Company: 246,313, 2010: Lapsed during the period (485,030) 167 (94,236) 167 nil). The vesting awards will be settled by shares held in an Employee Benefit Trust (see Note 31) and will be transferred to employees Outstanding at end of the period1 22,289 167 507,319 167 in July 2011. Exercisable at end of the period 507,319 167 22,289 167 Equity-settled Performance Share Plan (PSP) 1. Included within this balance are options over 22,289 (2010: 507,319) shares that have not been recognised in accordance with IFRS 2 as the options were granted on or before Under the PSP the Executive Directors and certain employees are granted an award of shares, which vest after three years provided 7 November 2002. These options have not been subsequently modified and therefore do not need to be accounted for in accordance with IFRS 2. that preset performance criteria, set by the Remuneration Committee, are met. For awards up to and including grants made during 2011 2010 the year ended 25 April 2009, vesting conditions were non-market related, primarily being Group earnings per share targets. For the Weighted Weighted award granted during the year ended 30 April 2011 and 24 April 2010, the vesting conditions also include a market related element, 2011 average 2010 average being relative total shareholder return. The charge in respect of the PSP during the year ended 30 April 2011 was £0.1m (2010: credit Options remaining Options remaining outstanding contractual life outstanding contractual life of £2.0m). Company Number Years Number Years The number and weighted average fair values of, and movements in, PSP awards during the year are as follows: 2002 Executive Share Option Scheme 2011 2010 Exercise price 167p 22,289 1.1 507,319 2.1 2011 Weighted 2010 Weighted Share average Share average Equity-settled deferred annual bonus awards fair value awards fair value Group Number Pence Number Pence As part of the HMV Group plc Incentive Plan for Senior Executives, as discussed more fully in the Directors’ Remuneration Report on page 17, the Company makes deferred awards to certain Directors and senior management. These awards are made in shares and Outstanding at beginning of period 11,312,783 113 14,843,056 125 the number of shares awarded, together with the fair value of the award, is determined by reference to the market value of shares Granted during the period 959,610 58 1,348,599 113 at the time the award is made, not when it is paid. No adjustment to value is made for expected dividend income during the vesting Vested during the period – – (1,452,083) 162 period. The deferred award normally vests following the third anniversary of the end of the financial year in which the award is made, subject to the performance of the individual. Lapsed during the period – (3,426,789) 143 The charge in respect of deferred awards during the period ended 30 April 2011 was £0.3m (2010: £0.5m). Forfeited during the period (8,592,479) 112 – – The number and weighted average fair values of, and movements in, deferred share awards during the year are as follows: Outstanding at end of the period 3,679,914 105 11,312,783 113

2011 2010 2011 Weighted 2010 Weighted 2011 2010 Share average Share average 2011 Weighted 2010 Weighted awards fair value awards fair value Share average Share average Group Number Pence Number Pence awards fair value awards fair value Company Number Pence Number Pence Outstanding at beginning of period 1,046,168 110 1,137,480 120 Outstanding at beginning of period 6,001,495 113 6,282,022 122 Granted during the period 1,365,937 58 269,847 115 Granted during the period 656,055 58 863,430 113 Vested during the period (21,986) 115 (204,982) 129 Vested during the period – – (61,056) 162 Forfeited during the period (530,526) 81 – – Transfer from other Group companies – – 43,520 125 Lapsed during the period – – (156,177) 165 Lapsed during the period – – (1,126,421) 162 Outstanding at end of the period 1,859,593 80 1,046,168 110 Forfeited during the period (4,927,976) 107 – –

Outstanding at end of the period 1,729,574 110 6,001,495 113

14531_HMV_AR11_p12-92.indd 78 15/07/2011 09:59 HMV Group plc HMV Group plc Annual report and accounts 2011 AnnualAnnual reportreport andand accountsaccounts 20112011 78 7979 Notes to the financial statements continued

29. Share-based payments continued 29. Share-based payments continued

Outstanding at end of the period 1,729,574 110 6,001,495 113

14531_HMV_AR11_p12-92.indd 79 15/07/2011 09:59 HMV Group plc HMV Group plc Annual report and accounts 2011 Annual report and accounts 2011 80 81 Notes to the financial statements continued

29. Share-based payments continued 30. Reserves The fair value of the PSP grants during the current and prior financial years were based on the following assumptions: Equity share capital The balance classified as equity share capital includes the total net proceeds (both nominal value and share premium) on issue Number Price at Expected Expected Risk of shares Fair value grant date Expected term dividend yield volatility free rate of the Company’s equity share capital, comprising 1p Ordinary Shares. At 30 April 2011, equity share capital included share premium Award date granted Pence Pence Years % % % Vesting condition of £342.9m (2010: £342.9m). 14 Sep 2009 1,348,599 31 115 3 5.8 46.5 1.92 Market2 Other reserve – own shares 1 7 July 2010 479,805 44 58 3 n/a n/a n/a Non-market The own shares reserve represents the Company’s shares that are held by an Employee Benefit Trust. Further details on this reserve 7 July 2010 479,805 30 58 3 6.1 42.2 1.55 Market2 can be found in Note 31.

1. Earnings per share. Hedging reserve 2. Total shareholder return. The hedging reserve is used to record changes in the fair value of derivative financial instruments that are designated and effective as hedges of future cash flows. Matching award to Simon Fox In addition to the above, on 18 February 2010, the Company granted an option over 2,164,095 shares with a £nil exercise price to Foreign currency translation reserve Simon Fox. The share price on the date of the award was 74p. This award will vest in three years, subject to the achievement of The foreign currency translation reserve is used to record exchange differences arising from the translation of the financial statements a range of performance objectives over a three year period (as outlined on page 18), Mr Fox remaining employed by the Group over of foreign subsidiaries. that period and the retention of his current shareholding of 432,819 shares. The fair value of this grant is based on the following assumptions: Capital reserve Number Price at Expected Expected Risk The capital reserve is utilised on cancellation of shares. No shares have been cancelled by the Company in the current or previous of shares Fair value grant date Expected term dividend yield volatility free rate period. Award date granted Pence Pence Years % % % Vesting condition 18 Feb 2010 1,442,730 55 74 3 n/a n/a n/a Non-market1 Goodwill 2 The cumulative amount of goodwill eliminated against retained earnings at 30 April 2011 is £645.5m (2010: £645.5m). 18 Feb 2010 721,365 39 74 3 6.1 42.2 1.55 Market 1. Earnings per share and strategic performance objectives. Company 2. Total shareholder return. The Company has taken advantage of the exemption permitted by Section 408 of the Companies Act 2006 not to publish its individual income statement and related notes. The loss for the period after taxation, dealt with in the accounts of the Company is £403.6m All-Employee Share Plan (2010: profit of £82.0m). The HMV Group plc All Employee Share Plan (the ‘Sharesave Scheme’) was launched on 22 October 2010. Under the Sharesave Scheme eligible employees were offered the opportunity to buy discounted HMV Group plc shares at the end of a three year savings 31. Other reserve – own shares period. Employees may elect to save between £5 and £250 per month over three years. The option exercise price was set at a 20% Number Cost discount to the average mid-market price in the three working days prior to the Scheme launch. At the end of the three year period Group and Company of shares £m employees can choose whether to exercise the options in whole or in part or have their savings refunded. 1,714,820 options were issued at an exercise price of 44.6p and are outstanding at 30 April 2011. The fair value of options granted under the Sharesave Ordinary Shares: Scheme during the year was 8p, which was estimated using the Black Scholes option pricing model, based on the following Balance at 25 April 2009 1,772,765 2.7 assumptions: Shares vested (1,657,065) (2.4) Number Price at Expected Expected Risk Shares transferred from Overseas Trust 77,956 – of shares Fair value grant date Expected term dividend yield volatility free rate Award date granted Pence Pence Years % % % Vesting condition Shares purchased 250,000 0.3 22 Oct 2010 1,714,820 8 55.7 3 8.3 45 2.3 Non-market1 Balance at 24 April 2010 443,656 0.6 1. Completion of savings contract. Shares vested (21,986) – The charge in respect of the Sharesave Scheme during the year ended 30 April 2011 was £0.1m (2010: nil). Balance at 30 April 2011 421,670 0.6

Share Incentive Plan The own shares deducted from shareholders’ equity represent the Company’s shares held by an Employee Benefit Trust (‘the Trust’). The HMV Group plc Share Incentive Plan (the ‘SIP’) provided share-based incentives to eligible employees until closing to further At 30 April 2011, the Trust held 421,670 (2010: 443,656) shares with a nominal value of £4,217 (2010: £4,437) and a market value participation during May 2010. Under the SIP, employees could acquire Ordinary Shares in three ways. Firstly, the Company used the of £0.05m (2010: £0.4m). This shareholding represented 0.1% (2010: 0.1%) of the total shares of the Company. The Trust has waived SIP as part of its broad incentive arrangements by awarding free shares to employees; in this regard an award of 120 free shares was any entitlement to the receipt of dividends in respect of all of its holding of the Company’s Ordinary Shares. The Trust’s waiver of made to every eligible employee on the Initial Public Offering in May 2002. There have not been any further awards of free shares and dividends may be revoked or varied at any time. All shares held by the Trust have been financed by loans from the Company, which there are no plans to award further free shares to any employees. Secondly, the Company could invite UK employees to purchase at 30 April 2011 amounted to £0.3m (2010: £0.5m). Ordinary Shares, known as Partnership Shares, and thirdly, the Company could, if it wished, agree to match the shares purchased with additional shares, known as Matching Shares. As at 30 April 2011 the number of shares held in Trust in respect of the SIP was 3,214,853 (2010: 3,790,074). See Note 31 for further details. The charge in respect of the SIP during the year ended 30 April 2011 was nil (2010: £0.4m).

14531_HMV_AR11_p12-92.indd 80 15/07/2011 09:59 HMV Group plc HMV Group plc Annual report and accounts 2011 AnnualAnnual reportreport andand accountsaccounts 20112011 80 8181 Notes to the financial statements continued

14531_HMV_AR11_p12-92.indd 81 15/07/2011 09:59 HMV Group plc HMV Group plc Annual report and accounts 2011 Annual report and accounts 2011 82 83 Notes to the financial statements continued

31. Other reserve – own shares continued 33. Pension arrangements continued The Trust holds shares to satisfy vested awards of the deferred annual bonus element of the HMV Group Incentive Plan for Senior The Company will also grant security to the Trustee over the assets of the Company and certain other members of the Group, Executives (‘HIPS’) and the Performance Share Plan (see Note 29). During the period, 21,986 shares were released to employees consistent to that provided to the lenders and EMI Group under the new bank facility (see Note 37), albeit subordinated to the lenders to satisfy the vesting of awards. It is expected that a further 560,423 shares will vest and be transferred to employees in July 2011. and EMI Group. The Group also has a UK Trust which holds the Company’s shares in connection with the HMV Group plc Share Incentive Plan, The Irish Pension Scheme will be included in the net assets disposed of and therefore the liability as at 30 April 2011 of £0.6m details of which are provided in Note 29. At 30 April 2011, the UK Trust held 3,214,853 shares (2010: 3,790,074) with a nominal value (2010: nil) has been included in the disposal group and is excluded from the balance sheet disclosures as at 30 April 2011 given of £32,149 (2010: £37,900). The shares within the UK Trust are not held as own shares by the Group or the Company as neither has below. In connection with the disposal, the Company is required to pay a special contribution of euro1.35m into the Irish Scheme de facto control over the shares. on completion of the Waterstone’s disposal.

32. Contingent liabilities Pension Saver Section The management of HMV Group is not aware of any legal or arbitration proceedings pending or threatened against any member of The Pension Saver Section is of the defined contribution type and is open to all permanent and temporary staff of the Group HMV Group which may result in any liabilities significantly in excess of provisions in the financial statements. HMV Group plc has given aged between 18 and 64 years. Members can choose to pay from 2% to 5% of pensionable pay, increasing to a maximum of 6.5% a parent guarantee to support local borrowing facilities, details of which are given in Note 26. from 1 April 2011. The Group matches the amount paid by the member up to a maximum of 5% of pensionable pay, which also increased to a maximum of 6.5% from 1 April 2011. Members have a choice of ways to invest their and the Group’s contributions in 33. Pension arrangements an individual fund to buy pension benefits of their choice. Actual employer contributions to the Pension Saver Section for the year HMV Group employees are members of a number of pension schemes. The main scheme that covers employees in the United ended 30 April 2011 were £1.0m (2010: £0.8m). In addition, employer contributions to similar pension arrangements in HMV’s Kingdom is the HMV Group Pension Scheme (the ‘Scheme’ – established with effect from July 1998). The Scheme has two international businesses totalled £0.5m (2010: £0.5m). sections – the Pension Benefit Section and the Pension Saver Section. There is also a small defined benefit pension arrangement Following the closure of the Pension Benefit section, 308 members joined the Pension Saver section as at 1 April 2011. in Ireland (‘Irish Pension Scheme’), which comprises Waterstone’s employees and has been included in the disposal group at the The maximum employee and matching employer contribution for these transferring members was set at 6.5% of pensionable pay. balance sheet date. The Irish Pension Scheme is therefore excluded from the balance sheet disclosures given below (see Note 12). Defined benefit pensions Pension Benefit Section Amounts reflected in the financial statements in respect of the defined benefit pension scheme are determined with the advice The Pension Benefit Section is of the defined benefit type and is an Inland Revenue exempt approved scheme for the purpose of the of independent qualified actuaries, Towers Watson, on the basis of annual valuations using the projected unit funding method. Income and Corporation Taxes Act 1988. It is contracted out of SERPS. Scheme assets are stated at their market value at the respective balance sheet dates. The major assumptions used in the calculations are as follows: A qualified actuary undertakes a valuation on at least a triennial basis. The most recently completed actuarial valuation was as at 30 June 2007 and was based on an assumed investment return of 5.0% to 6.75% a year, salary increases of 3.0% a year, and annual As at As at pension increases of 2.5% to 3.0%, and used the projected unit method. The result of the valuation was a level of asset cover of 94%, 30 April 2011 24 April 2010 representing a funding deficit of £5.1m, which has been funded by three special contributions of £2.17m, the last of which was % per annum % per annum paid on 1 May 2010. The actuarial review as at 30 June 2010 is close to completion and discussions are in progress between the Rate of price inflation 3.6 3.7 Company and the Trustees to agree a deficit recovery plan. These discussions have subsequently incorporated the agreement Rate of salary increase n/a 3.7 of a scheme apportionment arrangement in connection with the post year end disposal of Waterstone’s – see further below. Following completion of the 30 June 2010 review, the next actuarial review will take place no later than 30 June 2013. Rate of increase for pensions in payment 3.5 3.5 During the financial year a consultation process with employees and the Trustees took place, following which the UK Scheme Rate used to discount scheme liabilities 5.3 5.5 closed to future benefit accrual with effect from 31 March 2011. As a result, the 399 active members of the Scheme stopped building Expected rate of return on equities & growth funds 7.7 8.2 up a final salary pension and of these, 308 transferred to the Pension Saver Section of the Scheme, details of which are given below. The curtailment of the Scheme due to the closure to future accrual and changes to linked benefits such as rights on early retirement Expected rate of return on bonds n/a 5.1 resulted in a £2.8m credit which has been recognised in the income statement for the year ended 30 April 2011 as an exceptional Expected rate of return on index-linked bonds 4.2 4.4 item. Offsetting this, a £0.5m exceptional charge for the early settlement of liabilities in the Irish Scheme is included within discontinued operations, giving a net exceptional credit for pension schemes of £2.3m. The expected rate of return on Scheme assets are based on external historical and forecast market information. Actual employer contributions to the Pension Benefit Section for the year ended 30 April 2011 were £1.7m (2010: £2.2m) The post-retirement mortality assumptions used at 30 April 2011 are in line with the actuarial funding valuation as at 30 June 2010. excluding the special contribution noted above of £2.17m. In addition, a special contribution of £0.3m (2010: £0.4m) was made to They reflect the SAPS S1 pensioner mortality series table with a long term trend of improvement of 1.5% per annum from 2002, the Group’s Pension Benefit Section in Ireland. As the UK scheme is now closed to future service accrual, future contributions will be based on members’ year of birth. This is a change from the previous valuation as at 24 April 2010 which reflected the pensioner restricted to any special contributions required under a deficit recovery plan, as further discussed below. mortality 00 series tables rated up one year and based on year of use with allowance for medium cohort improvements applying On disposal of the Waterstone’s business, all liabilities of the Pension Benefit Section in respect of UK employees will remain from 2000 subject to a minimum of 1% per annum. This change has been made to incorporate more reliable and relevant data which has become available since the last valuation. These bases imply the following life expectancies: with HMV Group plc in accordance with a scheme apportionment arrangement entered into on 6 June 2011. This provided that on Waterstone’s ceasing to participate in the Scheme, their share of the Scheme’s deficit (instead of becoming immediately payable) 2011 2011 2010 2010 will be transferred to the Company. In return for so agreeing, the Trustees and the Company have agreed certain payments to, and At age 65 for At age 65 for At age 65 for At age 65 for additional protection for, the Scheme. These payments are as follows: someone someone someone someone currently currently currently currently (i) In connection with the Waterstone’s disposal, £1.0m within three weeks of completion and £1.5m within three weeks of receipt Life expectancy (years) aged 65 aged 50 aged 65 aged 50 of the deferred consideration due on 30 October 2011. Male 22.5 24.2 21.5 23.0 (ii) £5.0m per annum from 1 July 2011 until the end of the recovery period to be agreed with the Trustees. Female 24.6 26.4 23.9 25.4 (iii) £0.5m per annum from 1 May 2013 to 30 April 2021, and £3.0m on 1 January 2014. Other non-financial assumptions are consistent with those used in the actuarial valuation of the Scheme as at 30 June 2007. (iv) An additional share of Group’s annual cash generation, subject to a cap of £1.0m.

14531_HMV_AR11_p12-92.indd 82 15/07/2011 09:59 HMV Group plc HMV Group plc Annual report and accounts 2011 AnnualAnnual reportreport andand accountsaccounts 20112011 82 83 Notes to the financial statements continued

14531_HMV_AR11_p12-92.indd 83 15/07/2011 09:59 HMV Group plc HMV Group plc Annual report and accounts 2011 Annual report and accounts 2011 84 85 Notes to the financial statements continued

33. Pension arrangements continued 33. Pension arrangements continued Group Changes in the fair value of the assets are analysed as follows: On the basis of the above assumptions, the amounts charged or credited to the consolidated income statement and other comprehensive income for the period ended 30 April 2011 are set out below: 2011 2010 £m £m 2011 2010 Total market value of assets at the beginning of the period 104.4 79.0 £m £m Employer contributions 4.4 4.8 Recognised in the income statement Employee contributions 0.8 1.0 Current service cost (2.9) (2.4) Benefits paid (2.5) (2.5) Exceptional curtailment credit – continuing operations 2.8 – Settlement cost (0.9) – Exceptional settlement charge – discontinued operations (0.5) – Expected return on plan assets 6.9 5.5 Total recognised in arriving at operating profit (0.6) (2.4) Actuarial gain 2.9 16.7 Finance charge Foreign exchange loss – (0.1) Interest on pension scheme liabilities (7.8) (6.5) Transfer to disposal group (3.1) – Expected rate of return on assets in the pension scheme 6.9 5.5 Total market value of assets at the end of the period 112.9 104.4 Net charge to other finance expense (0.9) (1.0) Changes in the present value of the Scheme liabilities are analysed as follows: Total income statement charge before deduction for taxation (1.5) (3.4) Taken to other comprehensive income 2011 2010 £m £m Actual return on scheme assets 9.8 22.2 Defined benefit pension obligations at the beginning of the period (143.4) (100.0) Less: expected return on scheme assets (6.9) (5.5) Current service cost (2.9) (2.4) 2.9 16.7 Curtailment credit 2.8 – Other actuarial gains and losses 0.5 (36.0) Settlement cost 0.4 – Actuarial gain (loss) recognised in other comprehensive income 3.4 (19.3) Interest on pension scheme liabilities (7.8) (6.5) The assets and liabilities of the Scheme at the end of the period were: Employee contributions (0.8) (1.0) As at As at Benefits paid 2.5 2.5 30 April 24 April 2011 2010 Actuarial gain (loss) 0.5 (36.0) £m £m Foreign exchange loss (0.1) – Equities 53.1 44.6 Transfer to disposal group 3.7 – Diversified growth & absolute return funds – 33.5 Defined benefit pension obligations at the end of the period (145.1) (143.4) Bonds – 25.4 Index-linked bonds 34.5 25.0 2011 2010 2009 2008 2007 History of experience gains and losses £m £m £m £m £m Other 0.3 0.9 Fair value of scheme assets 112.9 104.4 79.0 86.3 86.9 Total market value of assets 112.9 104.4 Present value of defined benefit obligation (145.1) (143.4) (100.0) (102.6) (109.1) Actuarial value of scheme liabilities (145.1) (143.4) Deficit in the Scheme (32.2) (39.0) (21.0) (16.3) (22.2) Deficit in the Scheme (32.2) (39.0) Experience adjustments arising on scheme liabilities 6.0 0.2 0.1 6.6 – Deferred tax 5.5 10.9 Other actuarial changes (5.5) (36.2) 6.9 6.5 1.3 Net pension liability (26.7) (28.1) Experience adjustments arising on scheme assets 2.9 16.7 (18.0) (5.8) (1.3) The pension plans have not invested in any of the Group’s own financial instruments nor in properties or other assets used by the Group. The cumulative amount of actuarial gains and losses recognised since 25 April 2004 in other comprehensive income is £(32.5)m (2010: £(35.9)m). The Directors are unable to determine how much of the Scheme deficit of £17.4m, recognised on transition to IFRS and taken to other comprehensive income in the Group, is attributable to actuarial gains and losses since inception of the Scheme. Consequently, the Directors are unable to determine the amount of actuarial gains and losses that would have been recognised in the Group’s other comprehensive income before 25 April 2004.

14531_HMV_AR11_p12-92.indd 84 15/07/2011 09:59 HMV Group plc HMV Group plc Annual report and accounts 2011 AnnualAnnual reportreport andand accountsaccounts 20112011 84 8855 Notes to the financial statements continued

14531_HMV_AR11_p12-92.indd 85 15/07/2011 09:59 HMV Group plc HMV Group plc Annual report and accounts 2011 Annual report and accounts 2011 86 87 Notes to the financial statements continued

33. Pension arrangements continued 35. Obligations under leases The sensitivities regarding the principal assumptions used to measure the Scheme liabilities are set out below: Obligations under operating leases The Group operates entirely from properties in respect of which commercial operating leases have been entered into. These leases Assumption Change in assumption Impact on defined benefit obligation have an average remaining duration of six years. At the end of the period, future minimum rentals payable under non-cancellable Discount rate Increase by 0.25% Decrease by 7% operating leases were as follows:

Price inflation Increase by 0.25% Increase by 7% Land and buildings Other Post-retirement mortality Life expectancy increase by one year Increase by 3% 2011 2010 2011 2010 Group £m £m £m £m Company Not later than one year 151.8 166.4 0.6 0.5 The Company, as sponsoring employer of the UK defined benefit scheme, recognises the net pension obligation for the Scheme. Between two and five years inclusive 474.7 522.9 1.5 0.7 The other participating members of the Scheme account for their relevant pension costs on a defined contribution basis. The movement during the period in the defined benefit pension Scheme deficit recognised on the Company balance sheet is After five years 360.8 469.2 – – as follows: 987.3 1,158.5 2.1 1.2

2011 2010 Group companies other than the parent have sublet space in certain properties. The future minimum sublease payments expected £m £m to be received under non-cancellable sublease agreements as at 30 April 2011 is £15.6m (2010: £19.6m). Deficit in scheme at the beginning of the period (39.0) (20.7) Land and buildings Other Contributions paid 4.3 3.9 2011 2010 2011 2010 Current service cost (2.8) (2.3) Company £m £m £m £m Curtailment credit 2.8 – Not later than one year 0.2 0.2 – – Net charge to other finance expense (1.0) (1.0) Between two and five years inclusive 0.3 0.5 0.1 – Actuarial gain (loss) 3.9 (19.3) 0.5 0.7 0.1 – Deficit in scheme at the end of the period (32.2) (39.0) Obligations under finance leases Deferred tax 5.5 10.9 The Group has acquired certain plant and equipment using finance lease facilities. These leases have no terms of renewal, purchase Net pension liability (26.7) (28.1) options or escalation clauses. At the end of the period, future minimum payments under finance leases were as follows:

2011 2010 2011 2010 2009 2008 2007 Group £m £m History of experience gains and losses £m £m £m £m £m Not later than one year 0.8 1.1 Fair value of scheme assets 112.9 100.6 76.4 83.2 84.1 Between two and five years inclusive 2.5 2.7 Present value of defined benefit obligation (145.1) (139.6) (97.1) (99.1) (106.1) After five years 1.1 1.7 Deficit in the Scheme (32.2) (39.0) (20.7) (15.9) (22.0) 4.4 5.5 Experience adjustments arising on scheme liabilities 6.0 0.2 – 6.9 – Less: finance charges allocated to future periods (0.3) (0.4) Other actuarial changes (5.3) (35.6) 5.6 5.8 1.3 Present value of minimum lease payments 4.1 5.1 Experience adjustments arising on scheme assets 3.2 16.1 (16.7) (5.2) (1.3) The present value of minimum lease payments is analysed as follows: The cumulative amount of actuarial gains and losses recognised since 25 April 2004 in the Company’s other comprehensive income is £(32.1)m (2010: £(36.0)m). The Directors are unable to determine how much of the Scheme deficit of £16.9m, recognised on 2011 2010 transition to IFRS and taken directly to other comprehensive income in the Company, is attributable to actuarial gains and losses since £m £m inception of the Scheme. Consequently, the Directors are unable to determine the amount of actuarial gains and losses that would Not later than one year 0.7 1.0 have been recognised in the Company ’s other comprehensive income before 25 April 2004. Between two and five years inclusive 2.5 2.7 After five years 1.4 34. Capital commitments 0.9 4.1 5.1 2011 2010 Group £m £m The finance lease liability as at 30 April 2011 is classified on the balance sheet within liabilities in disposal groups held for sale Capital expenditure: contracted but not provided – – (see Note 12). The Company had no obligations under finance leases. The Company had no capital commitments contracted but not provided at either 30 April 2011 or 24 April 2010.

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36. Related party transactions 37. Post balance sheet event continued During the period the Group and Company entered into transactions in the ordinary course of business with related parties. An arrangement fee of 2% of the maximum facility amount (£4.4m) was payable on draw-down, with ongoing interest payable at Transactions entered into and balances outstanding at the end of the period are as follows: a margin of 4.0% over LIBOR. In addition, an exit fee will accrue on the amount outstanding under Facility B which will be payable upon repayment of facility B or final maturity. The rate at which the exit fee accrues starts at 5% per annum and will ratchet upwards Services Amounts Amounts received from owed by related owed to related on 1 April 2012 to 8% again on 1 January 2013 to 14% to the extent that Facility B has not been repaid by each date. The notional related parties parties parties balance of the Facility B term loan to which the exit fee applies at any time, reduces following the application of the proceeds of any Group £m £m £m equity raising by the Company, which are required to be applied in part against that term loan balance. In addition, the Company has With joint ventures an obligation to prepay the facilities with the proceeds of any subordinated debt issues, certain disposals and from any excess cash flow generated. 2011 0.9 – 0.2 The Company has also issued warrants to the lenders at closing representing 5% of the Company’s total share capital (on the 2010 0.5 – 0.9 basis that all outstanding warrants or options have been exercised). The warrants are fully detachable and are convertible into Ordinary Shares at any time from 30 June 2012 until the tenth anniversary of the issue of the warrants. The Group did not enter into any transactions with associates during the course of the year. No provision has been made against The revised bank facility contains a prohibition on the payment of dividends by the Company at any time before Facility B is advances to non-controlling interests not expected to be recoverable (2010: £0.8m). repaid in full. Following such repayment, dividends are permitted to be paid, subject to certain restrictions, primarily relating to the Dividends Services Amounts Amounts indebtedness of the Company and existing and forecast compliance with all other facility terms. received from rendered to owed by owed to The facility contains standard financial covenants in respect of gearing and fixed charge cover, together with an obligation to related parties related parties related parties related parties ensure that the aggregate gross assets, revenue and operating profits of the guarantors are at least 90% of the Group (excluding Company £m £m £m £m HMV Live) at all times. In addition, the level of capital expenditure incurred by the Company during the life of the facility is restricted With subsidiaries to certain agreed levels. 2011 20.0 4.4 72.4 82.6 Sale of Waterstone’s 2010 112.2 6.5 27.7 141.0 On 20 May 2011 the Company announced that it had reached agreement to sell Waterstone’s to A&NN Capital Fund Management The Company had no transactions with joint ventures in 2011 or 2010. Included within the amounts owed by and to subsidiaries, Limited, a company controlled by a trust in which Alexander Mamut has an interest. The total cash consideration payable for £7.7m (2010: £0.3m) related to intercompany trading balances which are settled regularly with no interest charge and £5.7m Waterstone’s was £53.0m on a cash-free, debt-free basis, subject to certain closing adjustments. Of the total cash consideration, (2010: £4.2m) relates to group taxation relief, which is settled annually with no interest charge. The remaining net balance of £23.6m £40.0m is payable on completion and £13.0m is payable on 31 October 2011. This deferred consideration is not contingent on the (2010: £117.8m) related to intercompany loans, which usually have a term of up to six months and on which interest is charged at the satisfaction of any conditions. The business will be sold free of all pension liabilities, with the exception of the Irish pension scheme, Bank of England base rate prevailing at the date of inception. which will transfer to the purchaser subject to a special contribution of euro1.35m to be paid into the scheme on completion. The Company was guarantor for the obligations of a subsidiary company, HMV Canada Inc, to a supplier, subject to a maximum Following shareholder approval of the disposal at a general meeting on 23 June 2011, all conditions were satisfied and the amount of C$2.5m. The guarantee expires on 31 July 2011. transaction completed on 28 June 2011. Transaction costs incurred by the Company in connection with the transaction are anticipated to total £3.0m. Remuneration of key management personnel The remuneration of the Directors and key management personnel of the Group is set out below: Sale of HMV Canada On 27 June 2011 the Company announced that it had sold HMV Canada to Hilco UK for a total cash consideration of £2.0m. Group Group Company Company 2011 2010 2011 2010 £m £m £m £m Short-term employee benefits 1.8 2.9 0.9 2.0 Post-employment benefits 0.2 0.2 0.2 0.2 Share-based payments – 0.1 – – Termination benefits 0.2 0.2 – – 2.2 3.4 1.1 2.2

37. Post balance sheet event Refinancing A new £220m bank facility was entered into on 6 June 2011, becoming effective on the completion of the Waterstone’s disposal on 28 June 2011 and with a final maturity date of 30 September 2013. The facilities provided under this agreement comprise: (i) A £70m term loan facility (Facility A). (ii) A £90m term loan facility (Facility B). (iii) A £60m multicurrency revolving credit facility, of which £10m may be utilised by way of an overdraft facility (Facility C).

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53 weeks 52 weeks 52 weeks 52 weeks 52 weeks HMV UK & Ireland Darlington London: Reading Oracle Ireland ended ended ended ended ended Derby Bayswater Whiteleys Redditch Blanchardstown Derry Beckton Rochdale 30 April 24 April 25 April 26 April 28 April UK Cork 2011 2010 2009 2008 2007 Doncaster Bromley Romford Drogheda Aberdeen £m £m £m £m £m Dumfries Canary Wharf Rotherham Dublin Grafton Street Summarised Profit and Loss Account Ashford Dundee Fulham Salisbury Dublin Henry Street Ashton under Lyne Turnover Durham Hammersmith ** Scarborough Dublin Swords Aylesbury Eastbourne Harrods Scunthorpe Dundalk HMV UK & Ireland 1,070.1 1,241.9 1,154.6 1,079.0 932.2 Ayr East Kilbride Harrow Sheffield High St. Dundrum 1 Ballymena Edinburgh Gyle Hounslow Sheffield Meadowhall Galway HMV International 33.2 31.1 32.5 29.8 28.0 Banbury Edinburgh Fort Kinnaird Islington Shrewsbury Kilkenny Bangor, NI HMV Live 46.9 8.1 – – – Edinburgh Ocean Terminal Leadenhall Market Solihull Liffey Valley Bangor, Wales Edinburgh Princes St. Moorgate Southampton Limerick Total continuing operations 1,150.2 1,281.1 1,187.1 1,108.8 960.2 Barnsley Edinburgh St. James Oxford Circus Southend Victoria Limerick Crescent 2 Basildon Enfield Putney ** Southport Newbridge Discontinued operations 718.1 735.5 769.6 827.3 934.3 Basingstoke Exeter Richmond Southshields Sligo Bath Total HMV Group 1,868.3 2,016.6 1,956.7 1,936.1 1,894.5 Falkirk Selfridges Speke Park Tallaght Belfast Boucher Rd. Folkestone Stratford St. Albans Belfast Donegall Gateshead Trocadero St. Helens Belfast Forestside Fopp Trading profit (loss) before exceptional items Gatwick South Terminal Victoria Station Stafford Bexleyheath Glasgow Argyle St. Walthamstow Staines Bristol HMV UK & Ireland 24.0 73.8 53.7 41.4 24.3 Birkenhead Glasgow Braehead Wandsworth Stansted Cambridge Birmingham Bullring Covent Garden 1 Glasgow Buchanan St. Westfield White City Stevenage HMV International 1.4 1.2 1.3 1.9 2.1 Birmingham High St. Glasgow Fort Wimbledon Stirling Edinburgh Birmingham The Fort Glasgow Byres HMV Live 3.0 (0.2) – – – Glasgow Silverburn Wood Green Stockport Blackburn Gloucester Stockton-on-Tees Glasgow Union Share of post-tax (losses) profits of associates and Blackpool Greenwich ** Loughborough Stratford Gower Street * Bluewater Manchester joint ventures (1.0) 0.3 0.2 – – Grimsby Luton Sunderland Bolton Guernsey Maidstone Sutton Nottingham Total continuing operations 27.4 75.1 55.2 43.3 26.4 Bolton Middlebrook Guildford Manchester Airport * ** Swansea Boston 2 Hanley Manchester Arndale Swindon Discontinued operations 13.1 5.3 15.1 23.0 30.9 Bournemouth Harlow Manchester 90 Market St. Tamworth HMV International Bournemouth Castlepoint Total HMV Group 40.5 80.4 70.3 66.3 57.3 Harrogate Manchester Trafford Centre Taunton Bracknell Hastings Manchester West One Teeside Hong Kong Bradford Operating exceptional items (26.8) (5.3) (1.7) (4.6) (24.7) Hatfield Galleria Mansfield Telford Causeway Bay Bridgend Outlet Heathrow Terminal 1 Merry Hill Thanet Central Building Brighton Churchill Sq. Net finance charges before exceptional items (8.5) (6.2) (7.3) (9.8) (9.2) Heathrow Terminal 3 Middlesbrough Thurrock Elements, Union Square Bristol Broadmead Heathrow Terminal 4 Milton Keynes Torquay Telford Plaza Exceptional finance charges (1.9) – – – (1.8) Bristol Cribbs Causeway Heathrow Terminal 5 Monks Cross Truro Tsimshatsui Profit before tax 3.3 68.9 61.3 51.9 21.6 Burnley Hemel Hempstead Newbury Tunbridge Wells Burton Upon Trent Hereford Newcastle Uxbridge Tax (13.5) (19.7) (17.1) (14.7) (5.5) Bury High Wycombe Newcastle Silverlink Wakefield Singapore Bury St Edmunds Horsham Newport Walsall CityLink Impairment loss on disposal group (111.5) – – – – Camberley Huddersfield Newry Walton on Thames Somerset Centre Profit after tax on disposal of discontinued operation – – – 51.8 – Cambridge Hull Newtownabbey Warrington Canterbury Inverness Northampton Watford (Loss) profit for the financial period (121.7) 49.2 44.2 89.0 16.1 Cardiff Ipswich Norwich Wellingborough HMV Live Cardiff Satellite ** Isle of Man Norwich Chapelfield Wigan Air, Birmingham Carlisle Isle of Wight Nottingham Victoria Winchester Borderline (London) Chatham Basic earnings per share (29.1)p 11.6p 10.8p 22.1p 4.0p Jersey Nuneaton Windsor Camden Barfly (London) Chelmsford Kettering Oxford Woking G-A-Y (London) Adjusted earnings per share 7.0p 12.7p 11.1p 10.1p 8.7p Cheltenham King’s Lynn Perth Wolverhampton G-A-Y Late (London) Cheshire Oaks Kingston Peterborough Queensgate Worcester G-A-Y Manchester * Diluted basic earnings per share (29.1)p 11.6p 10.7p 21.8p 4.0p Chester Kirkcaldy Plymouth Drake Circus Workington Heaven (London) Chesterfield Dividend per share 0.9p 7.4p 7.4p 7.4p 7.4p Lancaster Poole Worthing HMV Forum, Kentish Town Chichester Leamington Spa Portsmouth Wrexham HMV Hammersmith Apollo Total equity (55.7) 100.4 99.6 58.8 (13.2) Clydebank Leeds Birstall ** Portsmouth Gunwharf Quay Yeovil HMV Institute, Birmingham * Colchester Leeds Headrow Preston York HMV Picture House, Edinburgh 1. HMV International comprises the results of HMV Hong Kong, HMV Singapore and HMV USA. Coleraine Leeds White Rose HMV Ritz, Manchester *** 2. Discontinued operations comprise the results of Waterstone’s and HMV Canada, which were both sold in June 2011. In 2007 and 2008, discontinued operations also include Coventry Leicester Jazz Café (London) HMV Japan, which was sold on 25 August 2007. Craigavon Lincoln Relentless Garage (London) Crawley Lisburn Crewe Liverpool One Croydon Centrale Livingstone * Opened in Cwmbran Llandudno 53 weeks ended Llanelli 30 April 2011 ** Closed since 30 April 2011 *** Due to open September 2011

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14531_HMV_AR11_p12-92.indd 91 15/07/2011 09:59 HMV Group plc Annual report and accounts 2011 92 Shareholder information

Financial calendar Annual General Meeting 9 September 2011 Interim results December 2011 Announcement of results for year ending 28 April 2012 June 2012

Ordinary Shares The total number of Ordinary Shares in issue as at 30 April 2011 was 423,587,057 shares, which were held by a total of 4,264 shareholders.

Share price information The latest information on the HMV Group plc Ordinary Share price is available on www.hmvgroup.com

Registrars All enquiries relating to Ordinary Shares, dividends and changes of address should be addressed to the Company’s registrar, Capita Registrars.