NOTES TO FINANCIAL STATEMENTS

20. Financial liabilities - borrowings

	Group		Company
	2006 £000	2005 £000	2006 £000	2005 £000
Current
Bank overdrafts	1,672	-	808	-
Obligations under finance leases	33	143	-	-
	1,705	143	808	-
Non-current
Bank loans	6,955	5,000	2,600	5,000
Obligations under finance leases	5	38	-	-
	6,960	5,038	2,600	5,000
Total borrowings	8,665	5,181	3,408	5,000

Bank overdrafts of the Group are denominated in euros and offset euro cash deposits outside of the UK under a pan European notional pooling agreement. The balances are offset for interest calculation purposes with the net balance accruing interest at a floating rate by reference to EuroBid.

Bank loans represent a medium-term revolving credit facility that is unsecured as at both 29 May 2005 and 28 May 2006 and can be drawn down in both sterling and euros. Covenants are based upon interest cover and gearing. Interest accrues at a floating rate by reference to LIBOR.

Lease liabilities are effectively secured as the rights to the leased asset revert to the lessor in the event of default and accrue interest at a fixed rate (sterling liability at 2%/US dollar liability at 4%).

The minimum lease payments under finance leases fall due as follows:

	2006 £000	2005 £000
Within 1 year	36	153
Between 1 and 5 years	5	42
	41	195
Future finance costs on finance leases	(3)	(14)
Present value of finance lease liabilities	38	181

 

Maturity profile of borrowings:

	2006				2005
Group	Bank loans £000	Bank overdrafts £000	Finance leases £000	Total £000	Bank loans £000	Bank overdrafts £000	Finance leases £000	Total £000
Within 1 year	-	1,672	33	1,705	-	-	143	143
Between 1 and 2 years	-	-	5	5	-	-	34	34
Between 2 and 5 years	6,955	-	-	6,955	5,000	-	4	5,004
	6,955	1,672	38	8,665	5,000	-	181	5,181

	2006			2005
Company	Bank loans £000	Bank overdrafts £000	Total £000	Bank loans £000	Bank overdrafts £000	Total £000
Within 1 year	-	808	808	-	-	-
Between 2 and 5 years	2,600	-	2,600	5,000	-	5,000
	2,600	808	3,408	5,000	-	5,000

The Company held no finance leases at either year end.

The carrying amounts of the Group and Company’s borrowings are denominated in the following currencies:

	Group		Company
	2006 £000	2005 £000	2006 £000	2005 £000
Sterling	2,629	5,143	3,408	5,000
Euro	6,027	-	-	-
US Dollar	9	38	-	-
	8,665	5,181	3,408	5,000

Undrawn borrowings
The bank borrowing facilities of the Group, drawn and undrawn, are as follows:

		2006				2005
	Currency	Effective interest rate at May 2006	Drawn £000	Undrawn £000	Total £000	Effective interest rate at May 2005	Drawn £000	Undrawn £000	Total £000
Committed :
- Medium-term revolving credit facility	sterling	5.25%	2,600	2,400	5,000	5.50%	5,000	5,000	10,000
- Medium-term revolving credit facility	euro	3.25%	4,355	645	5,000	-	-	-	-
			6,955	3,045	10,000				10,000
Uncommitted:
- Bank overdraft - working capital facility	sterling	5.25%	-	5,000	5,000	5.50%	-	5,000	5,000
- Bank overdraft	euro	3.25%	1,672	3,328	5,000	-	-	-	-
Total facilities for the Group			8,627	11,373	20,000		5,000	10,000	15,000

Bank borrowings attract floating rate interest by reference to sterling and euro base rates. The medium-term revolving credit facility is unsecured and is available until 1 September 2008. During the year, the terms of the facility were amended to allow draw down in both sterling and euros.

Bank overdrafts are unsecured. The working capital facility includes an additional £10 million (2005: £5 million) seasonal overdraft which ran from 1 August to 31 December in both years.

Following the year end, the Group increased the working capital facility to £10 million (£15 million between 1 September and 31 January).

The fair value of borrowings does not differ from the book value.

21. Derivative financial instruments
The Group's treasury function deals primarily with cash management and managing currency exposures as detailed below:

Financial risk management objectives and policies
The Group's financial risk management objective is to reduce the financial risks and exposures facing the business with respect to changes in foreign exchange rates and interest, and to ensure constant access to sufficient liquidity. To achieve this the Group undertakes an active hedging policy, including the use of derivatives (forward currency contracts), which are entered into under policies approved and monitored by the group finance director. These transactions are only undertaken to reduce exposures arising from underlying commercial transactions and at no time are transactions undertaken for speculative reasons.

Foreign currency risk
The majority of the Group's business is transacted in sterling, euros and US dollars. The principal commercial currency of the Group is sterling. The Group seeks to manage currency exposure wherever possible.

In each country where the Group has an operation, revenue generated and costs incurred are primarily denominated in the relevant local currency, so providing a natural currency hedge. In addition, intra-group trading transactions are netted and settled centrally. Any remaining material foreign currency transaction exposures are hedged using forward foreign currency contracts.

With regard to translation exposures, the policy is to match the average assets of the Group to the equivalent average liabilities in each major currency and thus minimise any impact to the Group. To the extent that this does not occur, foreign currency borrowings are used.

Interest rate risk
The Group's interest rate risk primarily arises from the Group's borrowings and finance leases. Borrowings issued at variable rates expose the Group to cash flow interest rate risk. Borrowings issued at fixed rates expose the Group to fair value interest rate risk.

The Group has an exposure to movements in interest rates, primarily in sterling and euros.

To manage these risks wherever possible, the Group offsets financial liabilities against financial assets in the same currency. This process is facilitated through a pan European cash pooling arrangement and external borrowings in more than one currency. The board periodically reviews the Group's exposure to interest rate fluctuations, and this exposure has not been significant in recent years.

Liquidity risk
The seasonal nature of the business necessitates higher levels of working capital in the months between September and January as inventories and trade receivables build up in advance of and during the Christmas period. Consequently, the Group ensures that it has a core level of medium-term funding in place and supplements this with an increased working capital facility in the winter period.

Credit risk
The Group controls credit risk from a treasury perspective by only entering into transactions involving financial instruments with authorised counter-parties of strong credit quality, and such positions are monitored regularly. Credit risk on cash, short-term deposits and derivative financial instruments is limited because the counter-parties are banks with high credit ratings assigned by international credit rating agencies.

There is no concentration of credit risk with respect to trade receivables, as the Group has a large number of customers that are internationally dispersed. Policies are also in place to ensure the wholesale sales of products are made to customers with an appropriate credit history.

Sales made through our own Hobby stores or via direct are made in cash or via major credit cards.

Hedge of net investment in foreign entity
The Group has euro denominated borrowings, which it has designated as a hedge of the net investment in the Group's euro denominated subsidiaries. The fair value of the borrowing at 28 May 2006 was £4,355,000 (2005: £nil). The foreign exchange loss of £2,000 (2005: £nil) on translation of the borrowing to sterling at the balance sheet date was recognised in the translation reserve in shareholders' equity (note 26).

The numerical financial instruments disclosures are set out below:

Recognised fair values of derivative financial instruments
Forward foreign exchange contracts and embedded derivatives are measured at fair value by reference to year end market values. The full fair values of hedging derivatives are classified as current assets or liabilities as the remaining maturity of all hedged items is less than 12 months.

	2006		2005
Group	Current assets £000	Current liabilities £000	Current assets £000	Current liabilities £000
Forward foreign exchange contracts - cash flow hedges	181	(14)	476	(109)
Total	181	(14)	476	(109)

In accordance with IAS 39 ‘Financial Instruments: Recognition and Measurement’, the Group has reviewed all contracts to identify embedded derivatives that are required to be separately accounted for if they do not meet certain requirements set out in the standard. The fair value of such embedded derivatives at 28 May 2006 was £nil (2005: £nil).

Net fair values of derivative financial instruments
The net fair values of derivative financial instruments and designated for cash flow hedges at the balance sheet date are:

Group	2006 £000	2005 £000
Contracts with positive fair values:
- Forward foreign currency contracts - cash flow hedges	181	476
Contracts with negative fair values:
- Forward foreign exchange contracts - cash flow hedges	(14)	(109)
Net fair value of cash flow hedges	167	367

The Company held no financial derivatives at either year end.

The principal amounts of the outstanding forward foreign currency contracts at 28 May 2006 are £17.1 million (2005: £19.6 million).

The net fair value gains at 28 May 2006 on open forward foreign exchange contracts that hedge the foreign currency risk of anticipated future sales (cash flow hedge) are £86,000 (2005: £331,000) and are recognised in the hedging reserve. These will be transferred to the income statement when the forecast sales occur over the next 12 months.

There were no derivatives outstanding at either balance sheet date that were designated as fair value hedges.

22. Trade and other payables - current

	Group		Company
	2006 £000	2005 £000	2006 £000	2005 £000
Trade payables	4,035	4,158	15	72
Payables due to related parties	-	-	71	35
Loans from related parties	-	-	2,479	2,118
Other taxes and social security	2,479	2,244	11	202
Other payables	1,088	1,804	60	126
Accruals and deferred income	8,112	9,520	343	463
	15,714	17,726	2,979	3,016

The fair value of trade and other payables does not differ from the book values.

23. Other non-current liabilities

	Group		Company
	2006 £000	2005 £000	2006 £000	2005 £000
Accruals and deferred income	1,317	640	-	-
Loans from related parties	-	-	1,503	1,503
	1,317	640	1,503	1,503

The fair value of other non-current liabilities does not differ from book values.

24. Provisions

Analysis of total provisions:

	Group		Company
	2006 £000	2005 £000	2006 £000	2005 £000
Current	584	322	3	3
Non-current	927	881	17	13
	1,511	1,203	20	16
Group		Employee benefits £000	Property £000	Total £000
At 30 May 2005		570	633	1,203
Charged/(credited) to the income statement:
- Additional provisions		45	419	464
- Unused amounts reversed		-	(7)	(7)
Exchange differences		-	(9)	(9)
Increase in provision - discount unwinding (note 7)		-	9	9
Utilised		-	(149)	(149)
At 28 May 2006		615	896	1,511
Company				Employee benefits £000
At 30 May 2005				16
Charged to the income statement:
- Additional provisions				4
At 28 May 2006				20

Employee benefits
The Group operates a long service incentive scheme under which employees receive a one off additional holiday entitlement of two weeks when they reach ten years of employment (10 Year Veterans). The provision therefore is expected to be utilised over this period. The costs of these benefits are accrued over the period of employment based on expected staff retention rates and the anticipated future employment costs discounted to present values.

Property provisions
Property provisions relate to committed costs outstanding under onerous or vacant lease commitments and will diminish over the lives of the underlying leases £431,000 (2005 : £422,000) of the above provision is expected to be utilised between 2008 and 2016. The estimated liability is discounted at the Group's weighted average cost of capital of 9% (2005: 8%).

25. Share capital

Group and Company	Number of shares (thousands)	Ordinary shares £000	Share premium £000	Total £000
At 31 May 2004	30,847	1,542	6,301	7,843
- Proceeds from shares issued	220	11	1,291	1,302
At 29 May 2005	31,067	1,553	7,592	9,145
- Proceeds from shares issued	62	3	230	233
At 28 May 2006	31,129	1,556	7,822	9,378

The total authorised number of shares is 42 million shares (2005: 42 million shares) with a par value of 5p per share (2005: 5p per share). All issued shares are fully paid.

The share premium account for the Group has been restated in both years to seperately recognise an other reserve following a payment to the previous holders of the Company's ordinary shares on flotation.

The share premium account for the Company has been restated in both years in order to realise the cancellation of the share premium account on flotation within brought forward retained earnings.

Share options
Share options outstanding at the end of the year have the following expiry dates and exercise prices:

Date granted	No. of shares			Exercise price in pence per share	Exercise dates
	2006	2005
17 September 1996	5,000	5,000		463p	Sep 1999 to Sep 2006
24 August 1999	4,348	4,348		460p	Aug 2002 to Aug 2006
24 August 1999	10,870	10,870		460p	Aug 2002 to Aug 2009
31 July 2001	2,508	2,508		392.5p	July 2004 to July 2008
3 October 2001	-	57		338p	Jan 2005 to June 2005
26 July 2002	-	5,506		-	June 2004 to July 2007
3 October 2002	-	96,867		335p	Nov 2005 to Apr 2006
25 July 2003	12,746	284,690		-	June 2005 to July 2008
30 September 2003	34,243	77,136		580p	Nov 2006 to Apr 2007
28 September 2004	54,942	112,489		581.2p	Nov 2007 to Apr 2008
18 October 2005	291,215	-		340p	Nov 2008 to Apr 2010
1 November 2005	19,139	-		329.5p	Nov 2007
	435,011	599,471

Movements in the number of share options outstanding are as follows:

	2006		2005
	Approved and unapproved share schemes	Long-term incentive plan	Approved and unapproved share schemes	Long-term incentive plan
At start of year	309,275	290,196	511,262	297,559
Granted	347,578	-	140,421	-
Forfeited	(173,092)	-	(122,595)	-
Exercised	(61,496)	(277,450)	(219,813)	(7,363)
At end of year	422,265	12,746	309,275	290,196

Movements in the weighted average exercise price of the approved and unapproved share schemes are as follows:

	2006	2005
At start of year	494p	426p
Granted	339p	581p
Forfeited	478p	602p
Exercised	335p	331p
At end of year	396p	494p

During the year 54,979 ordinary shares of 5p were issued for £211,002 under the Games Workshop Group PLC 1995 Sharesave Scheme, 6,517 ordinary shares were issued for £21,862 under the Games Workshop Group PLC International Sharesave Scheme. Out of the 422,265 outstanding options (2005: 309,275 options) no options (2005: 22,783 options) were exercisable at 28 May 2006.

IFRS 2 ‘Share-based Payment’, requires the fair value of all share options granted after 7 November 2002 to be charged to the income statement. For options granted after 7 November 2002, the fair value of the option must be assessed on the date of the grant.

The fair value of share options granted is determined using the Black-Scholes valuation model. The significant inputs into the model were as follows:

Group and Company	Share price at grant date (pence)	Option exercise price (pence)	Vesting period	Option life	Expected volatility	Risk free rate of return (%)	Dividend yield (%)	Fair value per option (pence)
Employee sharesave schemes:
Games Workshop Group PLC 1995 Sharesave Scheme 2003 granted options	652.5p	580p	36 mths	42 mths	38%	4.5%	2.5%	219.7p
Games Workshop Group PLC 1995 Sharesave Scheme 2004 granted options	740p	581.2p	36 mths	42 mths	26%	4.8%	2.5%	220.8p
Games Workshop Group PLC 2005 Savings-Related Share Option Scheme - non-US employees	377p	340p	36 mths	42 mths	36%	4.5%	5.0%	90.9p
Games Workshop Group PLC 2005 Savings-Related Share Option Scheme - US employees	385p	329.5p	24 mths	24 mths	41%	4.5%	4.9%	100.9p

The expected volatility was determined by reference to the volatility in the share price using rolling one year periods for the three years immediately preceeding the grant date. The risk free rate of return is based upon UK gilt rates with an equivalent term to the options granted. Dividend yield is based on historic performance. 75% of options are assumed to vest in the above calculation.

26. Other reserves

	2006					2005
Group	Capital redemption reserve £000	Translation reserve £000	Hedging reserve £000	Other reserve £000	Total £000	Capital redemption reserve £000	Translation reserve £000	Hedging reserve £000	Other reserve £000	Total £000
Beginning of year	101	486	232	(1,050)	(231)	101	-	431	(1,050	(518)
Cash flow hedges:
- Fair value gains in the year	-	-	86	-	86	-	-	331	-	331
- Transfers to net profit	-	-	(331)	-	(331)	-	-	(615)	-	(615)
Deferred tax	-	-	-	-	-	-	-	85	-	85
Current tax	-	-	73	-	73	-	-	-	-	-
Net investment hedge	-	(2)	-	-	(2)	-	-	-	-	-
Exchange differences on translation of foreign operations	-	(131)	-	-	(131)	-	486	-	-	486
End of year	101	353	60	(1,050)	(536)	101	486	232	(1,050)	(231)

The other reserve was created on flotation following a payment to the previous holders of the Company's ordinary shares.

As at 28 May 2006, the Company’s capital redemption reserve was £101,000 (2005: £101,000). The Company had no other reserves in addition to the capital redemption reserve at either year end.

27. Retained earnings

	Group			Company
	Treasury shares £000	Profit and loss £000	Total £000	Treasury shares £000	Profit and loss £000	Total £000
At 31 May 2004	(1,011)	33,067	32,056	(1,011)	27,826	26,815
Profit attributable to equity shareholders	-	9,020	9,020	-	458	458
Purchase of treasury shares	(150)	-	(150)	(150)	-	(150)
Shares vested	29	121	150	29	121	150
Dividends paid	-	(5,818)	(5,818)	-	(5,818)	(5,818)
Share-based payments	-	145	145	-	145	145
Issue of ordinary share capital	-	(575)	(575)	-	-	-
At 29 May 2005 and 30 May 2005	(1,132)	35,960	34,828	(1,132)	22,732	21,600
Profit attributable to equity shareholders	-	1,998	1,998	-	3,769	3,769
Shares vested	1,083	(1,083)	-	1,083	(1,083)	-
Dividends paid	-	(5,874)	(5,874)	-	(5,874)	(5,874)
Share-based payments	-	168	168	-	168	168
Issue of ordinary share capital	-	(26)	(26)	-	-	-
At 28 May 2006	(49)	31,143	31,094	(49)	19,712	19,663

Cumulative goodwill relating to acquisitions made prior to 1998, which has been eliminated against reserves, amounts to £1,159,000 (2005: £1,159,000).

Own shares are held in treasury by the Games Workshop Employee Share Trust, a discretionary trust, to satisfy options and awards granted under a former long-term incentive plan. The number and market value of the ordinary shares held in treasury by the ESOP at 28 May 2006 was 12,746 (2005: 290,196) and £35,000 (2005: £1,190,000) respectively. Dividends have been waived on these shares. Interests in own shares represent the cost of 12,746 of the Company's ordinary shares (nominal value of £250) purchased in earlier years. These shares were acquired in the open market using funds provided by Games Workshop Group PLC to meet obligations under the long-term incentive plan.

28. Reconciliation of profit to net cash from operations

	Group		Company
	2006 £000	2005 £000	2006 £000	2005 £000
Profit attributable to equity shareholders	1,998	9,020	3,769	458
Income tax expense (note 9)	1,660	4,889	(1,033)	(975)
Depreciation of property, plant and equipment (note 14)	7,145	6,239	-	-
Loss on disposal of property, plant and equipment (see below)	113	57	-	-
Amortisation of capitalised development costs (note 13)	2,289	1,809	-	-
Amortisation of other intangibles (note 13)	736	667	-	-
Impairment of related party loans	-	-	1,225	373
Interest income (note 6)	(238)	(348)	(142)	(207)
Interest expense (note 7)	908	734	477	372
Net fair value (gains)/losses on derivative financial instruments (note 21)	(43)	294	-	-
Share-based payments	168	145	168	145
Exchange gains/(losses) on borrowings	(111)	6	(116)	6
Changes in working capital:
- Decrease/(increase) in inventories	465	(644)	-	-
- Decrease in trade and other receivables	948	1,498	1,197	2,901
- Decrease in trade and other payables	(562)	(3,033)	(325)	(1,873)
- Increase/(decrease) in provisions	313	(181)	5	(213)
Net cash from operating activities	15,789	21,152	5,225	987

In the cash flow statement, proceeds from the sale of property, plant and equipment comprise:

	2006 £000	2005 £000
Net book amount (note 14)	145	106
Loss on sale of property, plant and equipment	(113)	(57)
Proceeds from sale of property, plant and equipment	32	49

The Company sold no property, plant and equipment at either year end.

29. Analysis of net funds/(debt)

Group	As at 29 May 2005 £000	Cash flow £000	Exchange movement £000	As at 28 May 2006 £000
Cash at bank and in hand	8,622	(2,178)	-	6,444
Current borrowings - bank overdraft	-	(1,667)	(5)	(1,672)
Cash and cash equivalents	8,622	(3,845)	(5)	4,772
Non-current borrowings	(5,000)	(1,955)	-	(6,995)
Finance leases	(181)	143	-	(38)
Net funds/(debt)	3,441	(5,657)	(5)	(2,221)
Company		As at 29 May 2005 £000	Cash flow £000	As at 28 May 2006 £000
Cash at bank and in hand		2,115	(2,115)	-
Current borrowings - bank overdraft		-	(808)	(808)
Cash and cash equivalents		2,115	(2,923)	(808)
Non-current borrowings		(5,000)	2,400	(2,600)
Net debt		(2,885)	(523)	(3,408)

30. Reconciliation of net cash flow to movement in net (debt)/funds

	Group		Company
	2006 £000	2005 £000	2006 £000	2005 £000
(Decrease)/increase in cash and cash equivalents in the year	(3,845)	234	(2,923)	1,563
Cash (inflow)/outflow from (increase)/decrease in debt and lease financing	(1,812)	(4,835)	2,400	(5,000)
Change in net funds/(debt)resulting from cash flows	(5,657)	(4,601)	(523)	(3,437)
New finance leases	-	19	-	-
Exchange movement	(5)	223	-	-
Net funds/(debt) at start of year	3,441	7,800	(2,885)	552
Net (debt)/funds at end of year	(2,221)	3,441	(3,408)	(2,885)

31. Commitments
Capital commitments
Capital expenditure contracted for at the balance sheet date but not yet incurred is as follows:

Group	2006 £000	2005 £000
Property, plant and equipment	-	750

The Company had no capital commitments at either year end.

Operating lease commitments
The future aggregate minimum lease payments under non-cancellable operating leases are payable as follows:

Group	Hobby stores £000	2006 Other property £000	Other £000	Hobby stores £000	2005 Other property £000	Other £000
Expiring within 1 year	7,639	1,250	440	7,179	1,296	511