9160 HMV Interim 2002 - HMV.com

HMV Group plcwww.hmvgroup.com00.01Interim highlights(26 weeks ended 26 October 2002))Group sales increased 2.4% to £715.7 million (H1 2001: £699.0 million), with underlying growth of4.0% at constant exchange rates including like for like sales growth of 1.6%.HMV total sales grew by 4.3% (2.5% like for like sales growth), driven by HMV Europe(13.2% total and 6.0% like for like sales growth).In Waterstone’s a marginal like for like sales decline of 0.7% and the impact of earlier storeclosures contributed to a 3.1% sales decrease.Operating profit improved by £4.3 million or 32.8% to £17.3 million (H1 2001: £13.0 million).The pro forma* earnings per share were 1.0p, against a 0.3p pro forma loss in the prior period.The Board has declared an interim dividend of 1.1p per share.Underlying net borrowings at £214.6 million were more than £100m below the pro forma*prior year comparative.Ongoing successful store opening programme in HMV UK, with 18 new stores opened since thebeginning of the financial year.*For explanation of pro forma adjustments, see page 7.Trading update(Five weeks ended 4 January 2003)Strong trading over the key Christmas period with improved performances across all businesses.HMV Group total sales growth of 8.5% including 4.6% like for like sales growth.Total sales growth of 9.7% in HMV, including 4.2% like for like sales growth, with a strongcontribution from HMV Europe of 13.4% total sales growth and 5.6% like for like sales growth.Waterstone’s achieved a 5.6% increase in like for like sales (4.5% total sales growth).Gross margins are in line with our expectations and broadly consistent with the prior year.Commenting, Chief Executive Alan Giles said:“We are pleased to have delivered a strong improvement in profitability in the first half.Following a successful Christmas, when every one of the Group’s businessesperformed well, we remain on track to meet our financial targets.We have increased sales and profitability in some challenging markets, andaccelerated our successful store opening programme for HMV in the UK. Despite anuncertain consumer outlook, with our UK leadership in both the music and rapidlygrowing DVD software markets, the ongoing turnaround of Waterstone’s and theapplication throughout our businesses of the highly successful HMV blueprint, I amoptimistic about the Group’s future growth.”

Operating reviewHMV Group plc is pleased to announce a strong improvement inprofitability for the first six months of the financial year. We have alsoenjoyed an encouraging Christmas trading period, especially in HMVEurope and Waterstone’s, and we remain on track to meet ourfinancial targets.HMV Europe has continued to be the driver of the Group, witha strong growth in sales and profitability. The consistent delivery ofexcellent financial performance, combined with the successful openingof nine new stores and two resites in the period and a further nine newstores before Christmas, is an outstanding achievement. In other HMVbusinesses the management teams are committed to implementingthe successful strategies of HMV UK, the “HMV blueprint”. In AsiaPacific, much focus has been on developing new promotionalcampaigns to drive sales in what continue to be difficult economicconditions. For HMV North America, a fundamental element ofdelivering the “HMV blueprint” has been addressing the trading termswith key suppliers. This process undoubtedly affected short-termperformance in the first half, particularly as it coincided with a periodof severe decline in the Canadian music market. The business is nowin a better position to work together with our suppliers to counterthese tough trading conditions.In Waterstone’s, we are pleased with the increase in profitability ina period of significant change designed both to position the businessfor the important Christmas season and to achieve longer termrecovery. The work included refurbishment of nine of the largest storesin the chain (representing some 10% of total sales), as well as a stockrenewal programme, replacing some 15% of the Company’s slowestmoving stock with newer, more saleable, product.In May 2002, the Company successfully completed its flotationon the London Stock Exchange, establishing a more appropriatecapital structure for the future development of the Group. Therefore,the financial results for the 26 weeks ended 26 October 2002 in partreflect the Company’s previous capital structure and includeexceptional costs arising from the flotation. Consequently, to providea more meaningful comparison to prior periods, key financial measuresare discussed on a pro forma basis adjusting for the impact of the newcapital structure and the exceptional flotation costs (see page 7).

02.03HMV Group plcwww.hmvgroup.comInterim reviewFinancial reviewGroup profit and loss accountStatement of total recognisedgains and lossesReconciliation of movements inshareholders’ fundsGroup balance sheetsGroup cash flow statementInterim reviewOperating resultGroup sales increased 2.4% to £715.7m compared with the 26 weeks ended 27 October 2001.At constant exchange rates total sales increased 4.0% with like for like sales growth for theperiod of 1.6%.Operating profit increased by £4.3m or 32.8% to £17.3m with the operating marginimproving to 2.4% from 1.9%.Year on Constant Like forH1 H1 year exchange like salesSales2002 2001 growth 1 growth 2 growth 3£m £m % % %HMVEurope 343.2 303.2 13.2 13.0 6.0Asia Pacific 129.4 131.5 (1.6) 3.9 (0.1)North America 67.0 82.7 (19.0) (13.3) (8.8)Total HMV 539.6 517.4 4.3 6.5 2.5Waterstone’s 176.1 181.6 (3.1) (3.2) (0.7)HMV Group 715.7 699.0 2.4 4.0 1.6Year onH1 H1 H1 H1 yearOperating profit2002 2001 2002 2001 growth 1£m £m % sales % sales %HMVEurope 15.7 12.3 4.6 4.1 28.1Asia Pacific 1.6 0.3 1.2 0.2 473.2North America (2.9) (2.3) (4.4) (2.7) (30.0)Total HMV 14.4 10.3 2.7 2.0 39.7Waterstone’s 2.9 2.7 1.6 1.5 6.6HMV Group 17.3 13.0 2.4 1.9 32.81 Year on year growth over the corresponding period last year is based on results translated at the actualexchange rates, being the weighted average exchange rates for the 26 weeks ended 26 October 2002and the 26 weeks ended 27 October 2001 respectively.2 Constant exchange growth over the corresponding period last year is based on the weighted averageexchange rates for the 26 weeks ended 27 October 2001.3 HMV Group’s like for like sales performance measures stores that were open at the beginning of theprevious financial year (i.e. open at the beginning of May 2001) and that have not been expanded, closed orresited during that time. Like for like sales growth is calculated at constant exchange rates. Stores resized(up or down) are excluded from like for like sales performance. Sales are only ever the net amount received.No adjustments are made for campaign or sale stock, and any supplier contribution to marketing promotionis accounted for within marketing expenditure.

HMV EuropeHMV Europe had an excellent half year, with total sales growth of 13.2% (6.0% like for like salesgrowth) contributing to a 28.1% uplift in operating profit to £15.7 million, with operating margin upto 4.6% from 4.1%.DVD continued as an important contributor to growth, as HMV Europe delivered increasedmarket share in a rapidly developing market, which increased in volume terms by over 120%.The market was driven by continuing hardware growth as well as by blockbuster releases suchas Harry Potter and Monsters Inc. Overall HMV’s video sales grew by 41%, with DVD sales nowover double those of VHS by value. For the six months to October 2002 the UK music marketincreased by 1% in volume terms, reflecting the improved release schedule in the latter part of theperiod, including Coldplay, The Rolling Stones and Elvis, which helped offset a disappointing firstquarter for HMV impacted particularly by the World Cup in June. HMV Europe’s total music salesand market share were marginally up year on year, with music now accounting for 54% of sales,down from 61% in the prior period. The business recorded share declines in VHS, reflectingreduced space allocation and the mainstream nature of some significant releases, and gamessoftware, the latter due to increased bundling of software titles with hardware by competitors.The strong growth in operating profit reflected the benefit of sales growth at consistentproduct margins, combined with effective management of operating costs, which improved as apercentage of sales by 0.5% points.HMV Europe, which now trades from 165 stores, including 155 in the UK, continued itstrack record of outstanding performance from new store openings. In the period nine new storesand two resites were opened, with a further nine new stores opened by Christmas. The storesare already trading well ahead of expectations. Further store openings are scheduled for the finalquarter, and we therefore remain on target for over 20 store openings this financial year.HMV Asia PacificIn Asia Pacific, HMV has 37 stores in Japan, 30 in Australia and a total of six stores in Hong Kongand Singapore. Total sales of £129.4 million increased by 3.9% at constant exchange rates, withthe growth of online sales and new store expansion more than offsetting a marginal 0.1% declinein like for like sales.The sales performance reflected strong DVD growth offsetting a small decline in musicsales. The increased proportion of DVD sales which, unlike the UK and Ireland, are at a lowermargin, diluted gross margins. However, this was more than offset by the control of storeand central costs, which reduced as a percentage of sales by 1.5% points. This resulted ina £1.3 million increase in operating profit for the region to £1.6 million.HMV North AmericaHMV’s North American operations are predominantly based in Canada, where it is market leaderwith 98 stores. In the United States, the Group has only nine stores, with two further storeclosures during the period and a third completed on 15 January 2003. Total sales for the region of£67.0 million decreased by 13.3% at constant exchange rates, with an 8.8% decrease in like forlike sales combined with the impact of recent store closures in the United States. Trading wasvery difficult in the period, with the Canadian music market showing year on year volume declinesof some 20%. Against this backdrop HMV improved market share, despite the disruption causedby a dispute over terms of trade with a supplier, which has since been resolved.Operating losses increased by £0.6 million to £2.9 million, with the impact of lower salesmitigated by improvements in operational efficiency, including reduced head office costs followingthe restructuring completed in the fourth quarter of the last financial year.

04.05HMV Group plcwww.hmvgroup.comInterim reviewFinancial reviewGroup profit and loss accountStatement of total recognisedgains and lossesReconciliation of movements inshareholders’ fundsGroup balance sheetsGroup cash flow statementWaterstone’sTotal sales from the business for the period were £176.1 million, a 3.1% decrease over the prioryear including a 0.7% decrease in like for like sales. The sales performance was impacted asexpected by a number of short-term internal factors associated with the longer term recovery ofthe business. This included refurbishment of nine of the largest stores in the chain, as well as thereplacement of some 15% of the Company’s slowest moving stock with newer, more saleable,product and changes in the regional management resource. The benefits of this investmentwere clearly demonstrated in the improved performance over Christmas.Waterstone’s product margin grew by 0.6% points in the period, reflecting improvementsin terms and promotional support. Operating costs increased as a percentage of sales by 0.5%points reflecting increased property costs and central costs, which were offset by reducedcontrollable store costs and the elimination of e-commerce losses following the formation of astrategic alliance with amazon.co.uk in September 2001. The net result was a 6.6% increase inoperating profit to £2.9 million.Trading updateFive weeks ended Ten weeks ended 36 weeks ended4 January 2003 4 January 2003 4 January 2003Like Like Likefor like Total for like Total for like Totalsales sales sales sales sales salesgrowth growth growth growth growth growth% % % % % %HMV Europe 5.6 13.4 5.3 12.4 5.7 12.7HMV Asia Pacific 2.5 6.6 (0.9) 3.2 (0.4) 3.6HMV North America (1.0) (4.5) (1.3) (5.1) (5.6) (10.0)Total HMV 4.2 9.7 3.5 8.4 2.9 7.3Waterstone’s 5.6 4.5 4.8 3.6 1.6 (0.5)HMV Group 4.6 8.5 3.8 7.3 2.6 5.4The five week period ended 4 January reflects trading over the key Christmas period, while the ten weeks ended4 January covers trading since the end of the half-year.Like for like sales growth and total sales growth are stated at constant exchange rates.Since the end of the half-year, the Group has seen an overall strengthening in sales performance,especially over the important Christmas period. In particular, HMV Europe delivered strong like forlike sales growth, a significant achievement when measured against the 16% and 14% like for likegrowth in the previous two Christmas periods. HMV Europe also delivered excellent double-digittotal sales growth, reflecting the benefit of the successful new store opening programme.In Waterstone’s, the benefit of the change programmes undertaken in the first half wasseen in an excellent Christmas performance, especially in the context of a disappointing bookmarket and challenging comparatives (9% like for like sales growth in Christmas 2001). HMV AsiaPacific and North America both showed improved performance, despite extremely difficultmarket conditions.At the Group level, gross margins are in line with our expectations and broadly consistentwith the prior year. In HMV Europe, the very competitive environment reduced margins by0.1% points over the prior year, while Waterstone’s well-managed promotional activity boostedmargins by approximately 0.5% points.

Financial reviewThe financial results for the 26 weeks ended 26 October 2002 in part reflect the Company’sprevious capital structure and include exceptional costs arising from the flotation. Consequently,to aid understanding, key financial measures such as net finance charges and earnings anddividends per share are shown on a pro forma basis adjusting for the impact of the new capitalstructure and excluding the exceptional flotation costs.Operating resultA full explanation of the trading performance of the Group is given in the Operating review onpages 1 to 4.Group sales increased 2.4% to £715.7 million, with underlying growth of 4.0% at constantexchange rates and like for like sales growth of 1.6%.Gross margin, which includes store operating costs, improved to 8.8% from 8.2% of salesreflecting improved product margins, particularly in Waterstone’s, combined with tight operatingcost control throughout the business. Administration expenses increased by £1.6 million but werebroadly consistent at 6.4% of sales compared with 6.3% in the comparable period.Operating profit increased by £4.3 million or 32.8% to £17.3 million with the operatingmargin improving to 2.4% from 1.9%.Finance chargesActual finance charges before exceptional items reduced by £17.6 million, reflecting the reductionin average borrowings following the change in the Group’s capital structure, together with strongoperating cash generation and lower interest rates. The exceptional charges in the period wereassociated with the Company’s flotation in May 2002 and are described below.Pro forma net finance charges for the period were £11.0 million, the £3.2 million reductionon the pro forma comparative primarily reflecting lower average net borrowings.Profit before taxationActual profit before taxation excluding exceptional items was £6.0 million compared with anactual loss of £15.9 million in the comparable prior year period.Restated on a pro forma basis, profit before taxation for the period was £6.3 million,compared with a pro forma loss of £1.2 million in the prior period.TaxationThe tax credit for the period of £8.9 million reflects the forecast full year effective tax rate of 33%applied to profit before taxation and exceptional charges, more than offset by a 30% tax credit inrespect of the exceptional charges which arose in the UK.Capital structure and refinancingOn 15 May 2002 the Company’s shares were listed on the London Stock Exchange, allowinggreater flexibility in funding future capital expenditure and incentivising employees. Associated withthe flotation was a fundamental restructuring of the funding structure of the Group, whichincluded a bonus issue for Ordinary Shareholders and the conversion or redemption of theCompany’s existing non-equity share capital. In addition, the proceeds of the global offer were inpart used to tender for the purchase of the £135 million and $125 million Senior SubordinatedNotes, while the Group arranged a new £275 million term facility and a new £150 million revolvingcredit facility, which were used to repay existing senior bank facilities.

06.07Financial reviewHMV Group plcwww.hmvgroup.comInterim reviewFinancial reviewGroup profit and loss accountStatement of total recognisedgains and lossesReconciliation of movements inshareholders’ fundsGroup balance sheetsGroup cash flow statementExceptional itemsThe flotation and refinancing of the Group, as described above, gave rise to some significantone-off costs. These included £6.0 million of flotation costs that were charged to the profit andloss account in the 52 weeks ended 27 April 2002 (£3.1 million cash flow impact in currentperiod). Exceptional finance costs for the current period comprise £25.6 million arising on thetender for the Senior Subordinated Notes, £1.0 million of related professional fees and £9.7 millionof costs relating to the issue of the original senior bank facility, which had previously been deferredand were being amortised over the term of the related debt. Costs of £8.4 million associated withthe arrangement of a new bank facility have been deferred and are being amortised over thenew five-year term, in accordance with applicable United Kingdom accounting standards.In addition, a redemption premium of £11.6 million was charged to the profit and lossaccount on the redemption of the Senior Preference Shares on 28 June 2002 and further shareissue costs of £18.0 million have been charged directly to the share premium account.Earnings per sharePro forma earnings per share for the period were 1.0p compared to a pro forma loss of 0.3p inthe prior period.The listing of the Company’s shares on the London Stock Exchange on 15 May 2002was associated with significant post year end changes to the number of Ordinary Shares inissue. Consequently, actual earnings per share disclosures in respect of the 26 weeks ended27 October 2001 and 52 weeks ended 27 April 2002 are unrepresentative of comparable figurespost flotation.DividendThe Board has declared an interim dividend of 1.1p per share reflecting its confidence inthe prospects for the Group. This will be paid on 7 February 2003 to shareholders on theregister at the close of business on 24 January 2003. Shares will be quoted ex-dividendfrom 22 January 2003.The Group’s profit and loss account also includes distributions in respect of non-equitysenior and junior preference shares. These amounts are related to the previous capital structureof the Group, with all non-equity shares having been redeemed or converted as a result ofthe flotation.Cash flowThe Group generated an operating cash inflow of £56.9 million in the period, compared to£57.0 million in the comparable period. This consistent level of cash generation reflectedimproved profitability and further working capital gains offsetting an increased level of capitalexpenditure.Capital expenditureCapital expenditure in the period increased from £9.4 million to £24.4 million reflecting acceleratednew store expansion and the upgrading of existing stores in HMV Europe, which in total cost£12.2 million. In North America we have refitted the Toronto superstore, while in Japan weexpanded the flagship HMV Shibuya store. In Waterstone’s we spent approximately £5.0 millionon refurbishment, including refitting nine of our largest stores.Underlying net debtOn the basis of the Group’s consistently strong cash generation, underlying net debt at26 October 2002 was £214.6 million, compared with a pro forma prior year comparativeof £328.5 million.

Pro forma financial informationThe key financial results are restated below on a pro forma basis to reflect the fundamentalchange in capital structure, which took place at the beginning of the period under review.The results are for illustrative purposes only and do not reflect the actual results for the period.26 weeks 26 weeks 52 weeksended ended ended26 October 27 October 27 April2002 2001 2002Notes £m £m £mTurnover 715.7 699.0 1,654.5Operating profit 1 17.3 13.0 105.6Net finance charges 2 (11.0) (14.2) (25.6)Profit (loss) before taxation 6.3 (1.2) 80.0Taxation 3 (2.1) – (26.4)Earnings 4.2 (1.2) 53.6Basic pro forma earnings per share 4 1.0p (0.3)p 13.3pDiluted pro forma earnings per share 1.0p (0.3)p 13.2pDividend per share 5 1.1p – 3.7pCash flow from operations before flotation cost spend 6 81.2 66.4 182.2Capital expenditure (24.4) (9.5) (23.5)Other 0.1 0.1 0.3Operating cash flow before finance charges 56.9 57.0 159.0Underlying net debt 7 (214.6) (328.5) (253.6)Notes1 Operating profit for the 52 weeks ended 27 April 2002 is stated before £6.0 million of exceptionalflotation costs.2 Pro forma net finance charges for each period are calculated on the basis that the Group’s new capitalstructure had been in place from 29 April 2001, and exclude the effect of the exceptional costs relating to theflotation and refinancing.3 The tax charge for each period where a profit before tax was earned is adjusted on the basis of anunderlying effective rate.4 Pro forma earnings per share for each period is calculated by reference to the number of Ordinary Shares inissue on 26 October 2002 (basic 402.7 million shares, diluted 404.4 million shares).5 The full year dividend for the 52 weeks ended 27 April 2002 is an indication of the distribution the Companywould have made had the Group’s new capital structure been in place from 29 April 2001. Dividends foreach period exclude any distributions in respect of the junior or senior preference share capital of theCompany converted or redeemed on flotation.6 Cash flow from operations is stated before the cash outflow of £3.1 million (27 April 2002: £2.1 million) arisingfrom operating exceptional flotation costs incurred.7 Pro forma underlying net debt is calculated on the basis that the Group’s new capital structure had been inplace from 29 April 2001. Pro forma underlying net debt at 27 April 2002 and 26 October 2002 thereforereflect the following adjustments; proceeds of the sale of the Company’s Ordinary Shares on flotation(£375.0 million) less costs incurred on flotation charged to the share premium account (£18.0 million),settlement of £6.0 million flotation costs charged at April 2002 (£2.1 million by April 2002, £3.1 million byOctober 2002, £0.8 million non-cash), costs associated with arranging the new bank facility (£8.4 million),deferred consideration paid to EMI Group plc (£50.0 million), additional consideration on the tender offer ofthe Senior Subordinated Notes (£25.6 million) and associated fees (£1.0 million), the settlement of accruedinterest on the Notes and original bank facilities (£16.2 million) and the redemption of the Senior PreferenceShares (£105.9 million).

08.09Group profit and loss accountfor the period ended:HMV Group plcwww.hmvgroup.comInterim reviewFinancial reviewGroup profit and loss accountStatement of total recognisedgains and lossesReconciliation of movements inshareholders’ fundsGroup balance sheetsGroup cash flow statement52 weeksended26 weeks ended 26 October 200227 April26 weeks 2002Before After ended Afterexceptional Exceptional exceptional 27 October exceptionalitems items items 2001 items 1Notes £m £m £m £m £mTurnover 2 715.7 – 715.7 699.0 1,654.5Cost of sales (652.7) – (652.7) (641.9) (1,454.4)Gross profit 63.0 – 63.0 57.1 200.1Administrative expenses (45.7) – (45.7) (44.1) (94.4)Other operating expenses – – – – (6.1)Group operating profit 2 17.3 – 17.3 13.0 99.6Profit on disposal of investment – – – – 1.0Profit on ordinary activitiesbefore interest 17.3 – 17.3 13.0 100.6Finance charges 4 (11.3) (36.3) (47.6) (28.9) (52.0)Profit (loss) on ordinary activitiesbefore taxation 6.0 (36.3) (30.3) (15.9) 48.6Taxation on profit (loss) onordinary activities 5 (2.0) 10.9 8.9 – (17.9)Profit (loss) attributable to shareholders 4.0 (25.4) (21.4) (15.9) 30.7Proposed ordinary dividend 6 (4.4) – (4.4) – –Redemption premium on non-equityshares 6 (1.8) – (1.8) (15.9) (31.8)Preference dividends on non-equityshares 6 (1.9) (11.6) (13.5) (5.4) (11.2)Preference dividend arrears 6 – (36.6) (36.6) – –Appropriated in previous years 6 – 36.6 36.6 – –Transfer from profit and loss reserve (4.1) (37.0) (41.1) (37.2) (12.3)Earnings per share – basic and diluted 3 0.1p (9.2)p (9.1)p (62.7)p (20.7)pDividend per Ordinary Share 1.1p – 1.1p N/A N/A1 The operating profit for the 52 weeks ended 27 April 2002 included an operating exceptional item of£6.0 million representing flotation fees and expenses incurred in respect of the initial public offer of HMVGroup plc on 15 May 2002. The tax charge for the same period included a related tax credit of £0.3 million.2 All results relate to continuing activities.3 There is no difference between the results stated above and their historical cost equivalents.

Statement of total recognised gains and lossesfor the period ended:26 weeks to 26 weeks to 52 weeks to26 October 27 October 27 April2002 2001 2002£m £m £m(Loss) profit for the period (21.4) (15.9) 30.7Currency retranslation 2.2 (0.3) 1.0Net exchange (losses) gains onforeign currency borrowings (net of tax) (7.1) – 0.5Other recognised gains and losses (4.9) (0.3) 1.5Total recognised gains and losses since last annual report (26.3) (16.2) 32.2Reconciliation of movements in shareholders’ fundsfor the period ended:26 weeks to 26 weeks to 52 weeks to26 October 27 October 27 April2002 2001 2002Notes £m £m £m(Loss) profit for the period (21.4) (15.9) 30.7Ordinary dividend 6 (4.4) – –Preference dividend on non-equity shares 6 (50.1) – –Other recognised gains and losses (4.9) (0.3) 1.5Proceeds of issue of equity shares 375.0 – –Costs of share issue written-off to share premium account (18.0) – –Redemption of Senior Preference Shares (50.0) – –Increase in goodwill on acquisition – – (25.0)Net increase (decrease) in shareholders’ funds for the period 226.2 (16.2) 7.2Opening shareholders’ funds (416.0) (423.2) (423.2)Closing shareholders’ funds (189.8) (439.4) (416.0)

10. 11Group balance sheetsat period end:HMV Group plcwww.hmvgroup.comInterim reviewFinancial reviewGroup profit and loss accountStatement of total recognisedgains and lossesReconciliation of movements inshareholders’ fundsGroup balance sheetsGroup cash flow statementFixed assets26 October 27 October 27 April2002 2001 2002Notes £m £m £mIntangible assets 2.0 – –Tangible assets 145.2 149.3 142.3Investment: own shares 0.3 0.9 0.9Current assets147.5 150.2 143.2Stocks 192.8 198.2 168.3Debtors 60.7 55.6 66.1Investments and short-term deposits 1.2 3.6 1.1Cash at bank and in hand 60.4 49.1 77.3Creditors: amounts falling due within one year315.1 306.5 312.8Borrowings (36.2) (75.1) (49.8)Other creditors (372.4) (361.6) (387.8)(408.6) (436.7) (437.6)Net current liabilities (93.5) (130.2) (124.8)Total assets less current liabilities 54.0 20.0 18.4Creditors: amounts falling due after more than one yearBorrowings (232.6) (439.5) (419.3)Other creditors (1.1) (2.3) (0.1)Provisions for liabilities and charges(233.7) (441.8) (419.4)Other provisions (10.1) (17.6) (15.0)Capital and reserves(189.8) (439.4) (416.0)Called up share capital 7 4.0 1.8 1.8Share premium account 7 308.3 223.4 3.4Profit and loss account (including goodwill previously written off) (502.3) (664.6) (421.2)Capital reserve 0.2 – –Equity shareholders’ funds (189.8) (780.3) (777.6)Non-equity shareholders’ funds 7 – 340.9 361.6Total shareholders’ funds (189.8) (439.4) (416.0)The interim financial statements were approved by the Board of Directors on 15 January 2003.

Group cash flow statementfor the period ended:26 weeks to 26 weeks to 52 weeks to26 October 27 October 27 April2002 2001 2002Notes £m £m £mNet cash inflow from operating activities 78.1 66.4 180.1Returns on investments and servicing of finance:Net interest paid (24.5) (24.2) (46.0)Exceptional finance charges paid (26.6) – –Costs incurred in connection with the raising of debt (8.4) – (3.5)Non equity dividends andredemption premiums paid to shareholders (55.9) – –Net cash outflow from returns oninvestments and servicing of finance (115.4) (24.2) (49.5)Tax paid (8.6) (1.2) (5.2)Net cash outflow from capital expenditure (24.4) (9.4) (23.2)Net cash (outflow) inflow from acquisitions and disposals (50.0) – 1.0Net cash (outflow) inflow beforemanagement of liquid resources and financing (120.3) 31.6 103.2Management of liquid resources 8 – 0.4 2.9Financing:New loans/Movements in short-term facilities 275.3 16.4 (16.2)Loan repayments (252.0) (12.1) (30.4)Proceeds of issue of equity shares (net of expenses) 357.0 – –Redemption of senior preference shares (50.0) – –Tender of senior subordinated notes (220.6) – –Net cash inflow (outflow) from financingand management of liquid resources (109.7) 4.7 (43.7)(Decrease) increase in cash in the period 8 (10.6) 36.3 59.5Reconciliation of operating profit to net cash flow from operating activities£m £m £mGroup operating profit 17.3 13.0 99.6Depreciation charge 19.7 19.8 39.5Amounts provided in respect of operating exceptional items – – 6.0Cash flow in respect of flotation costs (3.1) – (2.1)Profit on disposal of fixed assets – – (0.1)Amounts utilised in respect of provisions (4.7) (4.2) (7.5)Decrease in working capital 48.9 37.8 44.7Net cash inflow from operating activities 78.1 66.4 180.1

HMV Group plcwww.hmvgroup.com12.13Notes to the interim financial statements1. Basis of preparationThe interim financial statements have been prepared under the historical cost convention and onthe basis of the accounting policies set out in the Group’s Report and Accounts for the 52 weeksended 27 April 2002. The financial information set out in this report does not constitute statutoryaccounts within the meaning of the Companies Act 1985. Comparative figures for the 52 weeksended 27 April 2002 have been taken from the Group’s audited statutory accounts, which havebeen delivered to the Registrar of Companies and on which the Group’s auditors expressed anunqualified opinion. The results for the 26 weeks to 26 October 2002 are unaudited.2. Segmental analysisBy class of business:HMVTurnoverOperating Profit26 weeks to 26 weeks to 52 weeks to 26 weeks to 26 weeks to 52 weeks to26 October 27 October 27 April 26 October 27 October 27 April2002 2001 2002 2002 2001 2002£m £m £m £m £m £mEurope 343.2 303.2 784.4 15.7 12.3 74.0Asia Pacific 129.4 131.5 275.7 1.6 0.3 8.4North America 67.0 82.7 187.1 (2.9) (2.3) 1.0Total HMV 539.6 517.4 1,247.2 14.4 10.3 83.4Waterstone’s 176.1 181.6 407.3 2.9 2.7 22.2Total 715.7 699.0 1,654.5 17.3 13.0 105.6Operating exceptional items – – (6.0)Operating profit 17.3 13.0 99.6By origin:United Kingdom 490.0 456.1 1,124.5 16.4 12.5 87.9Rest of Europe 29.3 28.7 67.2 2.2 2.5 8.3Asia Pacific 129.4 131.5 275.7 1.6 0.3 8.4North America 67.0 82.7 187.1 (2.9) (2.3) 1.0Total 715.7 699.0 1,654.5 17.3 13.0 105.6Operating exceptional items – – (6.0)Operating profit 17.3 13.0 99.6Operating exceptional items arose in the UK and reflect professional fees and related costsincurred in respect of the Group’s Listing on the London Stock Exchange on 15 May 2002(£6.0 million).

3. Earnings per share26 weeks 26 weeks 52 weeksended ended ended26 October 27 October 27 April2002 2001 2002£m £m £m(Loss) profit attributable to members of the holding company (21.4) (15.9) 30.7Less: redemption premium and preferencedividends charged to profit and loss account (15.3) (21.3) (43.0)Basic and diluted loss (36.7) (37.2) (12.3)Exceptional items, less tax thereon 37.0 – 4.7Adjusted basic and diluted profit (loss) 0.3 (37.2) (7.6)26 October 27 October 27 April2002 2001 2002Number ’m Number ’m Number ’mWeighted average number of Ordinary Shares – basic 402.7 59.3 59.4Dilutive share options 1.7 – –Weighted average number of Ordinary Shares – diluted 404.4 59.3 59.4Earnings per Ordinary Share is calculated as follows:26 weeks 26 weeks 52 weeksended ended ended26 October 27 October 27 April2002 2001 2002Pence Pence PenceBasic and diluted loss per Ordinary Share (9.1) (62.7) (20.7)Exceptional items, less tax thereon 9.2 – 8.0Adjusted basic and diluted profit (loss) per Ordinary Share 0.1 (62.7) (12.7)The adjusted earnings per Ordinary Share is shown in order to highlight the underlyingperformance of the Group.The weighted average number of shares excludes shares held by the EBT and has beenadjusted for the issue of shares during the period. The diluted earnings per share calculationsreflect the weighted average dilutive effect of options outstanding during the year of 1,725,299.The weighted average number of Ordinary Shares in the prior year periods has beenadjusted to reflect the bonus issue, which took place on 8 May 2002.

HMV Group plcwww.hmvgroup.com14.15Notes to the interim financial statements4. Exceptional itemsExceptional finance costs for the current period comprise £25.6 million arising on the successfultender for the Senior Subordinated Notes, £1.0 million of related professional fees and £9.7 millionof costs relating to the issue of the original senior bank facility, which had previously been deferredand were being amortised over the term of the related debt. A tax credit of £10.9 million arose inrespect of these costs.In addition, a redemption premium of £11.6 million was charged to the profit and lossaccount on the redemption of the Senior Preference Shares on 28 June 2002 and further shareissue costs of £18.0 million have been charged directly to the share premium account.The operating exceptional item for the 52 weeks ended 27 April 2002 representsprofessional fees and related costs of £6.0 million incurred in respect of the flotation of newOrdinary Shares of HMV Group plc on the London Stock Exchange on 15 May 2002. A tax creditof £0.3 million arose in respect of these costs.The non-operating exceptional credit relates to a gain on the disposal of the Group’sremaining investment in Daisy & Tom Limited (now known as Chelsea Stores Limited). No taxwas payable in respect of this disposal.5. TaxationThe tax credit for the period of £8.9 million reflects the forecast full year effective tax rate of 33%applied to profit before taxation and exceptional charges, more than offset by a 30% tax credit inrespect of the exceptional charges which arose in the UK. There was no taxation charge or creditfor the 26 weeks ended 27 October 2001 since the Group generated a loss on ordinary activitiesfor that period and there were no exceptional items.6. Dividends and redemption premiumThe ordinary interim dividend of 1.1p per Ordinary Share, amounting to £4.4 million, will be paid on7 February 2003 to shareholders on the Register at close of business on 24 January 2003.In accordance with the provisions of FRS 4 “Capital Instruments”, the Company has charged tothe profit and loss account non-equity dividends and redemption premiums in respect of theSenior and Junior Preference Shares on the following basis.The Company’s Junior Preference Shares were converted on 15 May 2002 to a total of145,815,137 new Ordinary Shares. The rate of conversion reflected the benefit to the JuniorPreference Shareholders of a 13.0% per annum redemption premium from issue. Prior toconversion a further redemption premium of £1.8 million was charged and, as permitted byFRS 4, credited back to the profit and loss account reserve.The Company’s Senior Preference Shares were redeemed in full on 28 June 2002.A non-equity dividend of £1.9 million was charged for the period to 28 June 2002, adding to thecumulative dividend arrears of £36.6 million as at 27 April 2002. These amounts were settled infull, together with a further redemption premium of £11.6 million.

7. Capital Structure and RefinancingOn 15 May 2002 the Company’s shares were listed on the London Stock Exchange. Associatedwith the flotation was a fundamental restructuring of the funding structure of the Group, whichincluded the following significant transactions:On 8 May 2002 the Company undertook a bonus issue, whereby 5.3376 new OrdinaryShares were issued for every existing Ordinary Share held. In addition, the non-equity JuniorPreference Shares were converted into 145,815,137 new Ordinary Shares.The Initial Public Offering comprised the issue of 195,312,500 new Ordinary Shares,the sale of 84,255,525 existing Ordinary Shares by existing shareholders, and the issue of17,652 new Ordinary Shares to satisfy options exercised, raising gross proceeds for the Companyof £375.0 million. This resulted in a £354.8 million credit to the share premium account afterdeduction of £18.0 million of issue costs and after accounting for the bonus issue.The proceeds were primarily used to tender for the £135 million and $125 millionSenior Subordinated Notes, including exceptional interest of £25.6 million, to redeem allnon-equity Senior Preference Shares at 112.875% of the sum of the issue price and accumulatedunpaid dividends (£105.9 million) and to settle deferred consideration due to EMI Group plc(£50.0 million).Effective from 15 May 2002 the Company entered into a new syndicated Senior FacilityAgreement consisting of £275 million term debt and £150 million working capital facility. This facilitywas utilised on 15 May 2002 to repay the existing senior bank facilities. Interest on advancesunder the new Senior Facility Agreement is payable at the rate per annum equal to LIBOR plusa margin of 1.5%.8. Reconciliation of net cash flow to movement in net debt£m £m £m(Decrease) increase in cash (10.6) 36.3 59.5Cash outflow (inflow) from financing (excludingmovements in equity and senior preference share capital) 197.3 (4.3) 46.6Cash outflow (inflow) from short-term deposits – (0.4) (2.9)Change in net debt resulting from cash flows 186.7 32.6 103.2Exchange differences (0.9) (1.0) 0.1Amortisation of deferred financing fees (2.3) (1.5) (3.0)Decrease in net debt 183.5 29.1 100.3Opening net debt (390.7) (491.0) (491.0)Closing net debt (207.2) (461.9) (390.7)

HMV Group plcwww.hmvgroup.com16. 17Independent review reportto HMV Group plcIntroductionWe have been instructed by the Company to review the financial information for the 26 weekperiod ended 26 October 2002 which comprises the Consolidated profit and loss account,Consolidated statement of total recognised gains and losses, Reconciliation of movements inshareholders’ funds, Consolidated balance sheet, Consolidated cash flow statement, and therelated notes 1 to 8. We have read the other information contained in the interim report andconsidered whether it contains any apparent misstatements or material inconsistencies with thefinancial information.Directors’ responsibilitiesThe interim report, including the financial information contained therein, is the responsibility of,and has been approved by the Directors. The Directors are responsible for preparing the interimreport in accordance with the Listing Rules of the Financial Services Authority which require thatthe accounting policies and presentation applied to the interim figures should be consistent withthose applied in preparing the preceding annual accounts except where any changes, and thereasons for them, are disclosed.Review work performedWe conducted our review in accordance with the guidance contained in Bulletin 1999/4 issued bythe Auditing Practices Board. A review consists principally of making enquiries of HMV Group plcmanagement and applying analytical procedures to the financial information and underlyingfinancial data and based thereon, assessing whether the accounting policies and presentationhave been consistently applied unless otherwise disclosed. A review excludes audit proceduressuch as tests of controls and verification of assets, liabilities and transactions. It is substantially lessin scope than an audit performed in accordance with Auditing Standards and therefore providesa lower level of assurance than an audit. Accordingly we do not express an audit opinion on thefinancial information.Review conclusionOn the basis of our review we are not aware of any material modifications that should be made tothe financial information as presented for the 26 weeks ended 26 October 2002.Ernst & Young LLP Registered AuditorLondon15 January 2003

HMV Group plcwww.hmvgroup.com17. Company informationRegistered officeShelley House2-4 York RoadMaidenheadBerkshire SL6 1SRRegistered number3412290Corporate websitewww.hmvgroup.comOther websiteswww.hmv.co.ukwww.hmv.co.jpwww.hmv.comwww.hmv.com.auwww.waterstones.co.ukAuditorsErnst & Young LLPBecket House1 Lambeth PalaceRoadLondon SE1 7EUFinancial advisorsand brokersUBS Warburg2 Finsbury AvenueLondon EC2M 2PGSchroder SalomonSmith BarneyCitigroup Centre33 Canada SquareCanary WharfLondon E14 5LFPrincipal bankersThe Royal Bankof Scotland135 BishopsgateLondon EC2M 3URDresdner KleinwortWassersteinRiverbank House2 Swan LaneLondon EC4R 3UXLawyersMayer Brown Roweand Maw11 Pilgrim StreetLondon EC4V 6RWShearman & SterlingBroadgate West9 Appold StreetLondon EC2A 2APRegistrarsComputershareInvestor Services plcPO Box 82The PavilionsBridgwater RoadBristol BS99 7NH

18. HMV Group plcwww.hmvgroup.com