Final Results

28 September 2012

Prime Focus London plc

("Prime Focus" or the "Company")

Preliminary results for the year ended 31 March 2012

CHAIRMAN'S STATEMENT

Prime Focus operates in a global industry where creativity and technology converge. The creativity of our artists and operators is underpinned by the technology that connects our studios - the technology that enables our artists to create and collaborate across facilities, continents and time zones.

Our creativity and technology is rounded-out and bound together by our highly differentiated business model - WorldSourcing. This model brings together our expertise across projects, locations, disciplines and sectors, allowing us to operate in every major market and at every stage of a project's development. It allows us to operate a network that combines global cost advantages, resources and talent pool with a deep understanding of the local markets in which we operate.

It is this understanding of our markets, and specifically our knowledge of the commercials and advertising sector in the UK, that has precipitated some difficult decisions for our UK business this year. We identified early developing negative industry trends that are forcing declines in activity levels in the UK commercials post production market, and we are moving quickly to attempt to insulate your company from the worst effects of these conditions.

Sir Martin Sorrell's Group M estimated in July 2012 that TV and press advertising revenues would fall by more than £350m in the UK during 2012, and we have seen marked reductions in the activity levels of our TV advertising client base. This reduction in activity has been exacerbated by the effect of the London Olympics, which was broadcast only on the advertising-free BBC channels this summer, leading to further declines in TV media spend in 2012.

However, the diverse nature of our operations in the UK ensures that not all areas of our business are affected by these trends to the same extent. Alongside our commercials business, we also have a strong presence in the TV broadcast post production and visual effects market in the UK.

Our broadcast division has reinforced its reputation this year for operational and technical excellence, on complex projects for all the UK broadcasters, as well as US broadcasters such as History Channel, Discovery Networks and National Geographic. We were also selected by Red Bee Media to devise, install and run a 'post production village' at their offices in White City, which is already operational and busy delivering over 5,000 on-air continuity items per year for clients such as the BBC and UKTV.

Furthermore, our broadcast visual effects (VFX) division, though still a nascent business, has expanded rapidly due to client demand, delivering over 160 minutes of high-end VFX across five major broadcast projects in the last six months alone, with a busy order book for the year ahead.

Your company is not alone in facing the challenging conditions of the market, but has responded swiftly, with decisive operational change designed to ensure we emerge from this downturn in a strong position. We expect to see consolidation in our industry over the coming months, due to the continuing downward pressure on margins and an over-capacity of service providers. Our response is one of retrenchment, to attain stability for the company against these rapidly emerging market conditions whilst investing in and supporting the more profitable areas of our business.

I would like to thank our clients, investors, vendors and most of all our people for their trust, faith and belief in our company, and I assure you all of our commitment to ensuring that Prime Focus London plc is strongly positioned for the future.

Ramakrishnan Sankaranarayanan

Chairman

For further information, contact:

CHIEF EXECUTIVE OFFICER'S REVIEW

This is my first statement as Chief Executive Officer of Prime Focus London plc. My appointment was made in April 2012, just after the conclusion of the financial year covered in this report, and one of my first priorities was to perform a review of the company - both financial and operational. That review forms the basis of this statement.

My appointment was one of several changes to the Board this year. Alongside my appointment, Ramakrishnan Sankaranarayanan was named Non-Executive Chairman, and Christopher Honeyborne and Shivkumar Venkatachalam both joined the Board as Non-Executive Directors. The company also appointed a new Nominated Advisor and Broker - Northland Capital Partners.

This financial year was a challenging period for the company. Whilst activity levels rose during the year, the continued downward pressure on rates for services worsened. The increased activity did not generate the incremental profit that would be expected, and the company had to be selective with the projects it took on.

As predicted in the previous year's accounts, trading remained challenging in this financial year, and the company fought hard to maintain market share.

Revenue

Sales increased slightly from £30.6m to £31.2m

Operating Loss

An Operating loss of £1.54m is reported compared to an Operating Profit of £4.035m in the previous year.

Margin improved in the period thanks to the removal of License fees for the final half of the financial year, charged for View-D™ software associated with the disposed of View-D business, of £2.62m; together with charges not repeated in this financial year from Prime Focus North America in respect of work that they carried out on behalf of London on the 'Chronicles of Narnia: Voyage of the Dawn Treader' film project of £2.029m.

However, set against the margin improvement were various adjustments as follows:

 Other Income and Exceptional Charges are referred to in the notes to the accounts.

Business review

The Commercials division of the company continues to be particularly hard hit by the negative industry trends it is facing. Reports predicting a sharp fall in TV advertising revenues in 2012 have been corroborated, and the intense interest in the London Olympics has predictably given the BBC, which had exclusive rights to broadcast the Olympics in the UK, the lion's share of the summer viewing figures, perhaps leading brands to reconsider their TV media spend this year and consider digital advertising in its place.

The Broadcast division was also affected by the challenging market conditions prevalent in the industry. The continuing effect of the recession and the on-going downward pressure on production company budgets both had a part to play in making this a difficult year for this area of the business, though there were also a number of positive initiatives for the Broadcast division, including the installation of a 'facility within a facility' for Red Bee Media. As a creative and technical partner to Red Bee, Prime Focus is creating around 5,000 on-air promotional items each year, operating a bespoke tapeless post production workflow which further increases Red Bee's own operational efficiencies. The benefits to Prime Focus are increased operational capacity and revenues without expensive infrastructure installations and building rent.

The Red Bee Media 'post production village', and continued high-profile work for all the major UK broadcasters, helped to insulate Broadcast from the worst effects of the negative market trends.

The Broadcast VFX department, though still a young business, is also showing promise, with high-profile visual effects work for major broadcast shows already completed, and the promise of further business growth due to increases in client demand for its services.

The Independent Film department delivers creative and technical post production services to independent filmmakers, including telecine, digital intermediate, offline and online editing and audio. The division performed in line with management expectations this year.

Finally, the Content Services department offers high quality, cost efficient and SLA compliant content preparation services including mastering, quality control, encoding, transcoding, repurposing, packaging and up/down conversion of media. This department has enjoyed a good year, partly driven by the fulfillment of a Prime Focus Technologies contract win to digitize the vast Associated Press Film and Video archive, creating 3,800,000 new assets from 32,000 hours of AP archive material over an 18 month period.

Operational Review

I will report more fully at the half year, but my initial review of the company made it immediately clear that the business had begun to suffer in the face of market headwinds and a loss of direction. The decision was taken to quickly make operational changes to help insulate the business from the negative industry trends that had been identified. These changes have been designed to drive greater efficiency while also ensuring that service levels are maintained.

An operational restructuring of the company was announced to protect profitability and to position the business to take full advantage of the perceived impending consolidation of excess capacity in the market. The objectives of the restructure are as follows:

a. Reduce costs. The company operates a fixed cost recovery model. The intention is to bring down break even points and convert as much fixed cost to variable cost as possible, to allow flex in the face of variable patterns of demand.

b. Reduce cash usage, and the consequent dependence on the parent company, Prime Focus Limited, for funding.

c. Increase focus on profitable activity and improved efficiency, and reduce heavy senior management overhead, simplifying the reporting structure.

d. Reposition the business, with a focus on core competencies and the elimination of non-core peripheral activities. To involve the consolidation of operations, the standardization of operational protocols, and the sharing of knowledge, resources and access to market across the key business channels of Broadcast and Commercials post production and Broadcast VFX.

e. Fully exploit the opportunity to drive improved margin through access to the Prime Focus WorldSourcing business model. The low-cost yet highly-skilled operations of the parent company in India allow the company to offer many unique benefits such as shortened turnaround times, increased flexibility and cost benefits, which also enables more time and budget to be allocated to the crafting of the work produced - a compelling advantage for many clients.

f. Create a platform from which to deliver recovery, and to restore shareholder value, recognising the instability in the external environment.

Current Trading

The operational restructuring of the company will be completed by the end of September 2012, resulting in an annualized run rate reduction in salary and associated costs of £3 million, and the elimination of losses through the termination of non-core activities of approximately £800,000.

The restructuring will be followed by a period of retrenchment whilst the company stabilizes and new, more efficient operational procedures are put in place. With the changes made, the company will continue to invest in the best people and equipment, and to respond swiftly and appropriately to the needs of its clients.

There are encouraging signs of increased activity across all of the company's business streams, including Commercials, both from existing and new clients.

In conclusion, this has been a difficult time for the business, and the outlook remains challenging, but the company is taking decisive action to counter the negative industry trends it is facing, and to position Prime Focus London plc strongly for recovery and future success. I am excited by the possibilities for the company, and I am confident that we are now on a path that will deliver stability and growth, and add value for all our stakeholders.

FINANCIAL POSITION

Net debt

Net debt increased to £14.411m from £6.977m.

CASHFLOW

Our cash balance has decreased to £1.2m from £1.3m in the prior year. 

KEY PERFORMANCE INDICATORS

Key performance indicators (KPIs) used by the Board to monitor progress are listed in the table

below.

PRINCIPAL RISKS AND UNCERTAINTIES

The management of the business and the execution of the Company's strategy are subject to a number of risks. Risks are formally reviewed by the Board and appropriate processes put in place to monitor and mitigate them.

The following section comprises a summary of the main risks the Board believes could potentially impact the Company's operating and financial performance.

Operational

The Company's performance depends largely on the retention of key creative staff and the ability of the management team to attract new talent to enhance this existing team. The Group continues to successfully retain its key staff by ensuring that it gives them the necessary tools and working atmosphere such that they can maximize their creative energies and output.

Financial

The company operates in an industry that demands continual investment in hardware and software to ensure competitive edge through technical delivery and creative output. This places a large emphasis on capital expenditure and the Company continues to invest in front-end creative systems and infrastructure through finance leasing. The current economic climate presents a greater challenge to securing this type of financing but the management continues to explore all opportunities to maintain this investment strategy.

Market and Environment

Business environment risks considered by the Group include a downturn in film production activity in the UK, potential delay in revenue generation from the Group's media asset management business, the timing of television production and the cut in advertising spend by blue chip clients.

Technology

The Group is reliant on a number of technology systems to provide services to clients. Due to the rapid advancement of technology, there is a risk that systems could become outdated with the potential to affect efficiency and have an impact on revenue and client service. This risk is mitigated by regular reviews of the Group's technology strategy and ongoing development of in-house technology and software.

Financial Instruments

The Company's policy in relation to the use of financial instruments and its exposure to price risk, liquidity risk and cash flow risk is given in Note 4 to the financial statements.

Bernard Kumeta

Chief Executive Officer

Consolidated Statement of Comprehensive Income for the year ended 31 March 2012

Consolidated Balance Sheet as at 31 March 2012

Consolidated Statement of cash flows for the year ended 31 March 2012

Consolidated statement of changes in equity

(i) Share premium - amount subscribed for share capital in excess of nominal value, net of directly attributable issue costs.

(ii) Capital redemption reserve - created as a result of a previous share buy-back.

(iii) Fair value reserve - represents cumulative gains or losses on the fair value of available for sale investments recognized in other comprehensive income.

(iv) Retained earnings - cumulative net gains and losses recognized in the consolidated statement of comprehensive income net of associated share based payment credits.

Notes to the Accounts for the Year Ended 31 March 2012

1. General information

Prime Focus London plc and its subsidiaries are technology based creative service providers to the media and entertainment industry.

The Company is a public limited company which is listed on the AIM Market of the London Stock Exchange and is incorporated and domiciled in England (Registration number 1694613). The address of its registered office and principal place of business is 64 Dean Street, London W1D 4QQ.

These financial statements were authorised for issue on 28 September 2012.

2. Significant accounting policies

Statement of compliance

The financial statements have been prepared in accordance with International Financial Reporting Standards (IFRSs) and International Financial Reporting Interpretation Committee (IFRIC) interpretations as endorsed by the European Union, and those parts of the Companies Act 2006 as applicable to companies reporting under IFRS.

Basis of consolidation

The consolidated financial statements incorporate the financial statements of the Company and entities controlled by the Company (its subsidiaries) made up to 31 March 2012. Control is achieved where the Company has the power to govern the financial and operating policies of an investee entity so as to obtain benefits from its activities.

The results of subsidiaries acquired during the year are included in the Consolidated Statement of Comprehensive Income from the date at which power of control is transferred to the group.

Where necessary, adjustments are made to the financial statements of subsidiaries to bring the accounting policies used into line with those used by the Group.

All intra-group transactions, balances, income and expenses are eliminated on consolidation.

Associates

Where the Group has the power to participate in (but not control) the financial and operating policy decisions of another entity, it is classified as an associate. Associates are initially recognised in the consolidated statement of financial position at cost. The Group's share of post-acquisition profits and losses is recognised in the consolidated statement of comprehensive income, except that losses in excess of the Group's investment in the associate are not recognised unless there is an obligation to make good those losses.

Business combinations and goodwill

The acquisition of subsidiaries is accounted for using the purchase method.

On acquisition, the acquiree's identifiable assets (including intangible assets), liabilities and contingent liabilities of an acquired entity are measured at their fair value and recognised at the acquisition date. The determination of these fair values is based upon management's judgment and includes assumptions on the timing and amount of future incremental cash flows generated by the assets acquired and the selection of an appropriate cost of capital.

Goodwill arising on consolidation represents the excess of the cost of an acquisition over the fair value of the Group's share of the net assets / net liabilities of the acquired entity at the date of acquisition. At the date of acquisition, goodwill acquired is recognised as an asset and allocated to each of the cash-generating units expected to benefit from the business combination's synergies and to the lowest level at which management monitors the goodwill.

Goodwill is reviewed for impairment at least annually by assessing the recoverable amount of each cash-generating unit to which the goodwill relates. The recoverable amount is the higher of fair value less costs to sell, and value in use. When the recoverable amount of the cash-generating unit is less than the carrying amount, an impairment loss is recognised. Any impairment loss is recognised immediately in profit or loss and is not subsequently reversed.

On disposal of a subsidiary, the attributable amount of goodwill is included in the determination of the profit or loss on disposal.

Revenue recognition

Revenue comprises the fair value of the consideration received for the sale of services and products in the ordinary course of the Group's activities. Revenue is shown net of value added tax, rebates and discounts and after eliminating sales within the Group.

The Group recognises revenue when the amount of revenue can be reliably measured, it is probable that future economic benefits will flow to the Group and when specific criteria have been met for each of the Group's activities as described below. The Group bases its estimates on historic results, taking into consideration the type of transaction, the type of customer and the specifics of each arrangement.

(a) Content services, post production & animation

Software sales

Where software is sold to a third party, there may be separable elements of the transaction, such as software products, upgrades or maintenance contracts. The Group allocates revenue to each element based upon fair value. Revenue for software products is recognised on delivery whereas revenue for upgrades or maintenance contracts is recognised on a straight line basis over the life of the relevant contract.

Post production & animation services

The group sells a variety of post production services to clients in the film, broadcast and commercials sectors. These services are provided as fixed price contracts, with contract terms generally ranging over a period of many months.

Where the outcome of a contract can be estimated reliably, revenue under these fixed price contracts is recognised under the percentage completion method based on the services performed to the reporting date as a percentage of total services expected to be performed to deliver the contract. The Group generally measures services performed by reference to hours spent.

Unbilled revenue is included as accrued income within receivables. Revenue in respect of subsequent sales of completed productions is recognised at the date the sale is agreed and the product is shipped.

Where the terms of a contract take the form of an agency arrangement, for example when the group does not have exposure to significant risk associated with the completion of the contract, commission revenue are recognised according to contractual element.

(b) VFX

The group sells VFX services to clients in the film, broadcast and commercials sectors. These services are provided as fixed price contracts, with contract terms generally ranging over a period of many months.

Where the outcome of a contract can be estimated reliably, revenue under these fixed price contracts is recognised under the percentage completion method based on the services performed to the reporting date as a percentage of total services expected to be performed to deliver the contract. The Group generally measures services performed by reference to hours spent.

Unbilled revenue is included as accrued income within receivables. Revenue in respect of subsequent sales of completed productions is recognised at the date the sale is agreed and the product is shipped.

Operating profit

Operating profit is shown after the deduction of expenses incurred in the ordinary course of business. Exceptional items represent income or expenses which based on their materiality and non-recurring nature have been separately disclosed to allow an assessment of the group's underlying operating profit.

Share-based compensation

The Group operates an equity-settled, share-based compensation plan. The fair value of share option awards are estimated at the date of award, using a Black-Scholes model, taking into account the terms and conditions of the award.

No expense is recognised for grants that do not vest and charges previously made are reversed except where vesting is conditional upon a market condition which are treated as vesting irrespective of whether or not the market condition is satisfied, provided all other performance conditions are satisfied.

At each reporting date before vesting, the cumulative expense is calculated, representing the extent to which the vesting period has expired and management's best estimate of the achievement or otherwise of non-market conditions, the number of equity instruments that will ultimately vest or, in the case of an instrument subject to a market condition, be treated as vesting as described above. The movement in cumulative expense since the previous balance sheet date is recognised in profit or loss, with a corresponding entry in equity.

Where the terms for an equity-settled award are modified, and the modification increases the total fair value of the share-based payment, or is otherwise beneficial to the employee at the date of modification, the incremental fair value is amortised over the vesting period.

Leasehold improvements, equipment, motor vehicles, fixtures and fitting

Leasehold property, equipment, motor vehicles, fixtures and fittings are stated at cost less accumulated depreciation and any provision for impairment. Cost comprises all costs that are directly attributable to bringing the asset into working condition for its intended use. Depreciation is calculated to write down the cost of fixed assets to their residual values on a reducing balance basis over the following estimated useful economic lives:

Leasehold improvements are depreciated on a straight line basis over the unexpired period of the lease.

Hire purchase and leased assets

Assets held under finance leases and hire purchase contracts are capitalised in the balance sheet and depreciated over their expected useful lives at the rates set out above. The interest element of leasing payments represents a constant proportion of the capital balance outstanding and is charged to the profit and loss account over the period of the lease.

All other leases are operating leases which have annual rentals charged to the profit and loss on a straight line over the lease term.

Acquired intangible assets

Film rights represent amounts paid by the Group in respect of content distribution agreements for certain film distribution rights where the Group intends to enhance and release such films. Film rights are measured initially at cost and are amortised on a straight-line basis over their estimated useful lives. The period of amortisation only starts at the point at which the films to which the Group has purchased rights have been enhanced and become available to produce economic returns.

Customer contracts acquired in a business combination are recognised at fair value at the acquisition date. The contractual customer relations have a finite useful life and are amortised on a straight-line basis over this life, which is usually less than one year.

Impairment of tangible and intangible assets excluding goodwill

At each reporting date, the Group reviews the carrying amounts of its tangible and intangible assets to determine whether there is any indication that those assets are impaired. If such indication exists, the recoverable amount of the asset is established in order to determine the extent of the impairment loss (if any). Where the asset does not generate cash flows that are independent from other assets, an estimate is made of the recoverable amount of the cash-generating unit to which the asset belongs.

The recoverable amount is the higher of fair value less costs to sell, and value in use. If the recoverable amount of an asset (or cash-generating unit) is estimated to be less than its carrying amount, the carrying amount of the asset (or cash-generating unit) is reduced to its recoverable amount. An impairment loss is recognised as an expense immediately.

Where an impairment loss subsequently reverses, the carrying amount of the asset (or cash-generating unit) is increased to the revised estimate of the recoverable amount, but so that the increased carrying amount does not exceed the carrying amount that would have been determined if no impairment loss had been recognised for the asset (or cash-generating unit) in prior years. A reversal of an impairment loss is recognised as a credit to profit or loss immediately.

Borrowings

Borrowings are recognised initially at fair value, net of transaction costs incurred. Borrowings are subsequently stated at amortised cost; any difference between the proceeds (net of transaction costs) and the redemption value is recognised in profit or loss over the period of the borrowings using the effective interest method.

Borrowings are classified as current liabilities unless the group has an unconditional right to defer settlement of the liability for at least 12 months after the balance sheet date.

Leased assets

Where substantially all of the risks and rewards incidental to ownership of a leased asset have been transferred to the Group (a "finance lease"), the asset is treated as if it had been purchased outright. The amount initially recognised as an asset is the lower of the fair value of the leased property and the present value of the minimum lease payments payable over the term of the lease. The corresponding lease commitment is shown as a liability. Lease payments are analysed between capital and interest. The interest element is charged to profit or loss over the period of the lease and is calculated so that it represents a constant proportion of the lease liability. The capital element reduces the balance owed to the lessor.

Where substantially all of the risks and rewards incidental to ownership are not transferred to the Group (an "operating lease"), the total rentals payable under the lease are charged to profit or loss on a straight-line basis over the lease term. The aggregate benefit of lease incentives is recognised as a reduction of the rental expense over the lease term on a straight-line basis.

Foreign currency translation

Transactions in currencies other than the functional currency (foreign currencies) are recorded at the rates of exchange prevailing on the dates of the transactions. At each reporting date, monetary assets and liabilities that are denominated in foreign currencies are retranslated at the rates prevailing on the reporting date. Non-monetary items that are measured in terms of historical cost in a foreign currency are not retranslated.

Exchange differences arising on the settlement of monetary items, and on the retranslation of monetary items, are included in profit or loss for the year.

Taxation

Corporation tax expense represents the sum of corporation tax currently payable and deferred tax. The tax currently payable is based on the taxable profit for the year. Taxable profit differs from profit as reported in the Statement of Comprehensive Income because it excludes items of income or expense that are taxable or deductible in other years and it further excludes items that are never taxable or deductible. The Group's liability for current tax is calculated using tax rates that have been enacted or substantively enacted by the balance sheet date.

Deferred tax is the tax expected to be payable or recoverable on differences between the carrying amounts of assets and liabilities in the financial statements and the corresponding tax bases used in the computation of taxable profit, and is accounted for using the balance sheet liability method. Deferred tax liabilities are generally recognised for all taxable temporary differences and deferred tax assets are recognised to the extent that it is probable that taxable profits will be available against which deductible temporary differences can be utilised. Such assets and liabilities are not recognised if the temporary difference arises from the initial recognition of goodwill or from the initial recognition (other than in a business combination) of other assets and liabilities in a transaction that affects neither the tax profit nor the accounting profit.

The carrying amount of deferred tax assets is reviewed at each balance sheet date and reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow all or part of the asset to be recovered.

Deferred tax is calculated at the tax rates that are expected to apply in the period when the liability is settled or the asset is realised. Deferred tax is charged or credited in the statement of comprehensive income.

Deferred tax assets and liabilities are offset when there is a legally enforceable right to set off current tax assets against current tax liabilities and when they relate to income taxes levied by the same taxation authority and the Group intends to settle its current tax assets and liabilities on a net basis.

Retirement benefits

The Group operates a defined contribution pension scheme. The assets of the scheme are held separately from those of the Group in an independently administered fund. The amount charged against profits represents the contributions payable to the scheme in respect of the accounting period.

Financial instruments

Financial assets and financial liabilities are recognised in the Statement of Financial Position when the Group becomes a party to the contractual provisions of the instrument.

Trade receivables

Trade receivables are non-interest bearing and are recognised initially at fair value and subsequently measured less provision for impairment. A provision for impairment of trade receivables is established where there is objective evidence that the Group will not be able to collect all amounts due according to the original terms of the receivables. Significant financial difficulties of the debtor, probability that the debtor will enter bankruptcy or financial reorganisation and default or delinquency in payments are considered indicators that the trade receivable is impaired.

When a trade receivable is uncollectible, it is written off against the provision for trade receivables. Subsequent recoveries of amounts previously written off are credited to profit or loss.

Investments

For available-for-sale investments, gains and losses arising from changes in fair value are recognised directly in equity, until the security is disposed of or is determined to be impaired, at which time the cumulative gain or loss previously recognised in equity is included in the net result for the period. Dividends on an available-for-sale equity instrument are recognised in profit or loss when the entity's right to receive payment is established.

Cash and cash equivalents

Cash and cash equivalents comprise cash on hand and demand deposits and other short-term, highly liquid investments that are readily convertible to a known amount of cash and are subject to an insignificant risk of changes in value.

Financial liabilities and equity instruments

Financial liabilities and equity instruments are classified according to the substance of the contractual arrangements entered into. An equity instrument is any contract that evidences a residual interest in the assets of the company after deducting all of its liabilities.

Trade payables

Trade payables are initially measured at fair value, and are subsequently measured at amortised cost, using the effective interest rate method.

Equity instruments

Equity instruments issued by the Company are recorded at the proceeds received, net of direct issue costs.

Going concern

The Group's activities, together with the factors likely to affect its future development are set out in the Managing Director's Review. The Group meets its day to day working capital requirements and funds its investment on content through a variety of banking arrangements, cash generated from operations or, where necessary, by loan from the Ultimate Parent Company, Prime Focus Limited. The Ultimate Parent Company has confirmed it will continue to support the Group for the foreseeable future as necessary.

The banking arrangements are shown in note 25 to the accounts. The bank arrangements are subject to covenants and the Group is in full compliance with its existing bank facility covenant arrangements.

The Group is exposed to uncertainties arising from the economic climate and also in the markets which it operates. Market conditions could lead to lower than anticipated demand for the Group's products and services and exchange rate volatility could also impact reported performance. The directors have considered the impact of these and other uncertainties and factored them into their financial forecasts and assessment of covenant headroom. The Group's forecasts and projections, taking into account of the reasonable possible changes in trading performance (and available mitigating actions), show that the Group will be able to operate within the expected limits of the banking arrangements and provide headroom against the covenants for the foreseeable future.

In the directors' view, the Group have adequate resources to continue in operational existence for the foreseeable future. For this reason the directors continue to adopt the going concern basis in preparing the financial statements.

Inventories

Inventories are included at the lower of cost and net realisable value less any provision for impairment.

Changes in accounting policy

i) Standards and amendments to existing standards effective 1 April 2011

The following new standards, amendments and interpretations are effective for the first time in these financial statements but none have had a material effect on the Group:

ii) Standards, amendments and interpretations to existing standards that are not yet effective and have not been early adopted by the Group in the 31 March 2012 financial statements:

At the date of authorisation of these financial statements certain new standards, amendments and interpretations to existing standards have been published but are not yet effective.

The Group has not early adopted any of these pronouncements. The new Standards, amendments and Interpretations that are expected to be relevant to the Group's financial statements are as follows:

* Not expected to be relevant to the Group

IFRS 9, 'Financial instruments: Classification and measurement'

IFRS 9 will ultimately replace IAS 39. The standard requires an entity to classify its financial assets on the basis of the entity's business model for managing the financial assets and the contractual cash flow characteristics of the financial asset, and subsequently measures the financial assets as either at amortised cost or fair value. The new standard is mandatory for annual periods beginning on or after 1 January 2013.

IFRS 10 consolidated Financial Statements

IFRS 10 replaces the portion of IUAS 27 'Consolidated and Separate Financial Statements' that addresses the accounting for consolidated financial statements. It also includes the issues raised in SIC-12' Consolidation - Special purpose Entities'. IFRS10 establishes a single control model that applies to all entities including special purpose entities. The Changes introduced by IFRS 10 will require management to exercise significant judgement to determine which entities are controlled and therefore, are required to be consolidated by a parent, compared with the requirements that were in IAS 27. This standard becomes effective for annual periods beginning on or after 1 January 2013.

Amendments to IAS 1 Presentation of Financial Statements (IAS 1 Amendments)

The IAS 1 Amendments require an entity to Group items presented in other comprehensive income into those that, in accordance with other IFRSs: (a) will not be reclassified subsequently to profit or loss and (b) will be reclassified subsequently to profit or loss when specific conditions are met. It is applicable for annual period beginning on or after 1 July 2012. It will not affect the measurement or recognition of such items.

3. Critical accounting estimates and judgments

The preparation of the financial statements requires management to make judgments, estimates and assumptions that affect the application of policies and reported amounts of assets and liabilities, income and expenses. The estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis of making judgments about carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.

The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision affects only that period or in the period of the revision and future periods if the revision affects both current and future periods.

Critical estimates and assumptions are primarily made in respect of revenue recognition. As set out in the accounting policy note, turnover is recognised as contract activity progresses and the right to consideration is earned, reflecting time and cost incurred as a percentage of total anticipated costs.

4. Capital management and financial instruments

a) Categorisation of financial instruments

b) Capital risk management

Capital comprises all components of equity - share capital, other reserves and retained earnings. The Group's objectives when managing capital are to provide returns for shareholders and benefits for other stakeholders and to maintain an optimal capital structure to reduce the cost of capital. At present the Group is unable to pay dividends or return equity to shareholders.

The Group sets the amounts of capital it requires in proportion to risk. The Group manages its capital structure and makes adjustments to it in light of changes in economic conditions and risk characteristics of the underlying assets. In order to maintain or adjust the capital structure, the Group may issue new shares or sell assets to reduce debt.

During the year ended 31 March 2012 the Group's strategy, which was unchanged from the previous year, was to monitor and manage the use of funds whilst developing business strategies and marketing.

c) Financial risk management

i) Credit risk

Credit risk is the risk of financial loss to the Group if a client or counterparty to a financial instrument fails to meet its contractual obligations, and arises principally from the Group's receivables from clients and cash. Management has a credit policy in place and the exposure to credit risk is monitored on an ongoing basis. 

The Group has a low credit risk in respect of its trade receivables, its principal customers being national broadcasters and major organisations which the Group has worked with for a number of years. The Group is also exposed to credit risk in respect of its cash and seeks to minimize this risk by holding funds on deposit with major United Kingdom financial institutions.

The maximum exposure to credit risk is represented by the carrying amount of each financial asset in the balance sheet. The highest credit risk exposure to a single customer at 31 March 2012 was £2,874k (2011: £265k). 

An analysis of ageing of debt and the movement in the allowance for doubtful accounts is presented in note 18.

ii) Liquidity risk

Ultimate responsibility for liquidity risk management rests with the Board, which has developed a liquidity management forecasting process which aims to ensure that the Group has sufficient cash at all times to meet liabilities as they fall due.

Working capital requirements are generally provided from cash generated from operations, bank overdraft or, where necessary, by loan from the Parent Company, Prime Focus Limited.

The following analysis sets out the maturities of financial assets and liabilities.

iii) Market risk

The Group does not trade in financial instruments.  As described in note 16, the Group does have an equity investment which is exposed to price risk, but the directors do not consider this to be material to the Group.

It is, and has been throughout the year under review, the Group's policy that financial derivatives shall not be used. As a result, the Group has not used interest rate hedges and currency swaps during the year.

Accordingly, the primary market risks to which the Group is exposed are foreign currency and interest rate risk.

Foreign currency risk

Some equipment is purchased in US Dollars. Management has continued to monitor the foreign exchange risk so that appropriate action can be taken if required.

The table below shows the extent to which the Group has financial assets and liabilities in currencies other than Sterling. Foreign exchange differences on re-translation of these assets and liabilities are recognised profit or loss.

A 10 percent strengthening of Sterling against the US Dollar at 31 March would have increased / (decreased) equity and profit or loss by £1,077K (2011: £974k). A 10 percent weakening of sterling against the US Dollar at 31 March would have had the equal but opposite effect. This analysis assumes that all other variables, in particular interest rates, remain constant.

Interest rate risk

Bank loans are arranged at floating rates, thus exposing the Group to cash flow interest rate risk. The Group does not consider this risk as significant. The benchmark rates for determining floating rate liabilities are based on LIBOR.

The interest rate profile of the Group's financial assets and liabilities were:

A 1 percent increase in floating interest rates at 31 March would have decreased equity and profit by £70k (2011: £39k). A 1 percent decrease in floating interest rates at 31 March would have had the equal but opposite effect. This analysis assumes that all other variables remain constant.

5. Segmental Reporting

The Group is organised into operating segments based on the nature of services provided. The information reviewed by the executive directors, who are perceived to fulfill the function of chief operating decision maker for the Group, contains various operating segments however, certain of these operating segments are aggregated into one reportable segment on the basis of the operating segments having similar economic characteristics and one management team is responsible for these combined segments.

The reportable segments of the group are comprised of the following:

·; Content services, post production & animation - providing data, content management and full post production & animation services and facilities to the broadcasting, advertising and film production sectors;

·; VFX - offers a full range of services to film and broadcast including pre-production, pre-visualisation and design, VFX supervision, 3D animation, matte paintings, digital grading and title design.

The accounting policies of the operating segments are the same as those described in the summary of significant accounting policies. The executive directors evaluate performance on the basis of profit or loss before tax. 

 Entity wide disclosures

Auditors' remuneration

Other fees paid to auditors relate to advice in connection with taxation and compliance matters. The directors do not consider that the level of fees paid to the auditors for non-audit services threatens their independence. The auditors have confirmed they agree with the conclusion.

7. Staff numbers and costs

The average number of persons employed by the Group (including directors) during the year was:

The total staff cost incurred by the Group was:

Directors' emoluments were £24,650 (2011: £30,000), of which the highest paid director's received £8,750 (2011: £15,000).

Contributions were paid on behalf of the directors to money purchase pension schemes amounting to £nil (2011: £nil).

Number of directors to whom retirement benefits are accruing under the defined contribution pension scheme is nil (2011: nil)

Key management remuneration (including directors):

Key management is defined as being the directors of the Group and other senior management with the authority and responsibility for planning, directing and controlling the Group's activities.

8. Other income

9. Finance income and cost

10. Exceptional Items

Exceptional income relates to net profit from sale of View D and VFX business £0.550m, £0.023m for supplier balances write off.

Exceptional charge relate to cost for Legal fees on abortive transaction £0.100m, exceptional cost of £0.049m for write off of Goodwill

This gives a total exceptional item credit for the current year ending March 31, 2012 of £0.425m.

11. Tax expense

Deferred tax asset amounting to £1.048M for capital losses has not been recognised because in the opinion of the Directors, there will be no suitable taxable gains available in the foreseeable future.

The difference between the tax charge and the amount calculated by applying the standard rate of UK corporation tax to the profit before tax is shown below.

12. Earnings per share

Basic earnings per share amounts are calculated by dividing the profit or loss attributable to owners of the parent by the weighted average number of shares in issue during the year.

Diluted earnings per share amounts are calculated by dividing the profit attributable to owners of the parent by the weighted average number of shares in issue during the year, adjusted for the effects of potentially dilutive options.

The dilution effect is calculated on the full exercise of all potentially dilutive ordinary share options granted by the Group.

All operations are continuing for the years presented.

13. Intangible assets

14. Property, plant and equipment

The net book value of equipment, fixtures & fittings includes an amount of £1,674,630 (2011:£1,823,031) in respect of assets held under hire purchase agreements. The charge for depreciation for the year on these assets was £262,259 (2011: £288,757). The net book value of assets held for hire includes an amount of £3,577,935 in respect of assets being leased out to other companies of the parent group.

15. Other receivables

16. Investments

The Group through its wholly owned subsidiary, VTR Media Investments Limited, owns 1,750,000 ordinary shares of £1 each in Conexion Media Group Plc (formerly known as Music Copyrights Solutions plc), a company incorporated in England and Wales. This company is listed on AIM. The market value of these shares at 31 March 2012 was £4,900 (2011: £12,250).

The principal undertakings in which the Group's interest at the year end is more than 20% are as follows:

* Held by Prime Focus London plc

** Held by VTR Media Investments Limited

The Company accounts for its investments in subsidiaries using the cost model.

17. Inventories

18. Trade and other receivables

The average credit period for trade receivables at the end of the year is 54 days. (2011: 162 days). The carrying amounts of the Group's trade and other receivables are denominated in sterling.

Trade receivables that are less than 3 months past due are not considered impaired. As of 31 March 2012, trade receivables of £2,520k (2011: £4,403k) were past due but not impaired. These relate to a number of independent customers for whom there is no recent history of default. The ageing analysis of all trade receivables is as follows:

An analysis of the movement in the provision for impairment of trade receivables is provided below:

19. Deferred tax

The movement for the year in the Group's net deferred tax asset provided at the UK company rate of corporation tax of 26% (2011: 28%) was as follows:

20. Called Up Equity Share Capital

The Company has issued the following shares during the year:

During the year a total of 107,353 ordinary shares of 5p each were issued.

Full details of all shares issued during the year can be found in the stock exchange announcements.

Omitted from the prior year financial statements was an issue of 125,000 shares of 5p each.

21. Share-based payments

The company implemented a share option scheme for all employees of the Group who participated in a salary reduction scheme. The charge for the year recognised in profit or loss in respect of equity-settled, share-based payments is £nil (2011: £nil).

The following tables reconcile the number of share options outstanding and the weighted average exercise price:

The average share price during the year ended 31 March 2012 was 22.55p (2011: 12.42p).

22. Borrowings

23. Trade and other payables

The average credit period taken for trade payable at the end of the year is 131 days (2011: 161days).

24. Income tax liabilities

Bank loans are secured by a fixed and floating charge over the assets of the Group.

The maximum facility available as per the Bibby Factors Manchester Limited Invoice discounting loan is £1.5 million (2011: £1.5 million from Bibby). Interest is charged at 2% (2011: 2%) above the Bank of England base rate (with a minimum base / libor rate of 3%).

26. Operating Lease and Capital commitments

(a) Total commitments under non-cancellable operating leases, together with the obligations by maturity, are as follows:

27. Pensions

The Group's principle pension plans comprise a defined contribution pension scheme. The pension charge for the year represents contributions payable by the Group which amounted to £nil (2011: £nil).

There were no outstanding or prepaid contributions at either the beginning or end of each financial year.

28. Related party transactions

The following transactions with companies within the Group headed by Prime Focus World ("PFW group"), a fellow subsidiary company, occurred during the year:

- Prime Focus North America Inc, as associate company in the USA, being a subsidiary of the Parent Company paid a sum equivalent to £58,144 (2011: £31,439) on behalf of PFLPLC to third parties in respect of operational and capital expenditure.

- Prime Focus North America Inc charged the Parent company the equivalent of £45,892 (2011: £40,949) for travel expenses and £0 (2011: £2,619,796) for license fees.

- PFLPLC charged Prime Focus North America Inc £220,762 (2011: £371,444) for loan interest incurred by the company. Costs of £172,194 (2011 £155,650) were incurred by PFLPLC in relation to fixed assets. Additionally, costs in relation to travel and other business expenses totalling £202,053 (2011: £160,836) were incurred by PFLPLC.

- PFLPLC carried out post production work on behalf of Prime Focus North America Inc. The total fee paid by Prime Focus North America Inc to PFLPLC was £978,736 (2011: £nil).

- At 31 March 2012 the balance due from Prime Focus North America Inc. was a sum of £1,991,990 (2011: £3,626,387), including an underlying loan of £1,985,348.

- PFLPLC paid a sum of £68,553 (2011: £nil) to third parties in respect of capital expenditure by Frantic Film VFX Inc., an associate company in Canada, being a subsidiary of the Parent Company. Additionally, costs in relation to travel and other business expenses totalling £171,237 (2011: £6,334) were incurred by PFLPLC. Frantic Film VFX incurred costs of £58,617 (2011: £nil) on behalf of PFLPLC.

- At 31 March 2012 the balance due to Frantic Films VFX Inc was a sum of £410,817 (2011: -£684,735), including an underlying loan payable of £967,054.

- Prime Focus International Services UK Ltd, as associate company in UK, being a subsidiary of the Parent Company paid a sum equivalent of £50,000 (2011: £nil) on behalf of PFLPLC to third parties in respect of operational and capital expenditure.

- PFLPLC charged Prime Focus International Services UK Ltd for Costs of £5,658,013 (2011 £nil) that were incurred by PFLPLC in relation to fixed assets. Additionally, costs in relation to travel and other business expenses totalling £4,803,576 (2011 £nil) were incurred by PFLPLC. During the year Prime Focus International Services UK Ltd paid £11,083,922 to PFLPLC against the fixed assets and business expense incurred by PFLPLC.

- Prime Focus International Services UK Ltd carried out post production work on behalf of PFLPLC clients. The total fee paid by PFLPLC to the Parent Company in respect of this work was £1,200,206 (2011: £nil). During the year PFLPLC paid £278,822 to Prime Focus International Services UK Ltd in respect of the post production work done for PFLPLC clients.

- PFLPLC carried out post production work on behalf of Prime Focus International Services UK Ltd clients. The total fee paid by PFLPLC to Parent Company was £1,551,200 (2011: £nil).

- At 31 March 2012 the balance due to Prime Focus International Services UK Ltd was a sum of £42,517 (2011: £nil).

- The balance outstanding at the end of the year payable to Prime Focus International Limited was £4,767,822 (2011: Receivable £145,549).

- The balance outstanding at the end of the year receivable from Prime Focus World NV was £3,462 (2011: £nil).

The following transactions with the Parent Company (Prime Focus India Limited) occurred during the year:

- The Parent Company charged PFLPLC for operational related expenditure relating to PFLPLC's activities the sum of £246,113 (2011 : £12,152);

- PFLPLC paid a sum of £48,357 (2011: £nil) to a third party on behalf of the Parent Company;

- The Parent Company carried out post production work on behalf of PFLPLC clients. The total fee paid by PFLPLC to the Parent Company was £2,658,206 (2011: £3,157,026). During the year PFLPLC paid £3,014,808 to the Parent Company in respect of against the post production work done on behalf of PFLPLC clients.

- PFLPLC carried out post production work on the Parent Company clients. The total fee paid by PFLPLC to Parent Company was £154,886 (2011: £nil).

- The balance outstanding at the end of the year payable to Parent Company was £3,200,400 (2011: £3,514,132).

- During the year PFLPLC paid expenses totalling £440,294 (2011: £22,482) on behalf of Prime Focus International Limited.

- The balance outstanding at the end of the year receivable from Prime Focus Technologies Ltd, India was £69,409 (2011: £nil).

- The balance outstanding at the end of the year receivable from Prime Focus Technologies UK Ltd was £407,975 (2011: £nil).

- At 31 March 2012 the balance due from Prime Focus Motion Pictures Limited was a sum of £9,055,000 in respect of sale of film rights.

The Parent Company has indemnified PFL PLC against all potential foreign exchange gains and losses.

As reported in previous year's accounts under related party balances, certain equipment owned by the Company is retained in India for the use by the Group in its trading activities. No charge has been made to the Parent Company for rent, maintenance and operation of the equipment.

29. Contingent assets & liabilities

The bank loans of the Group undertakings are secured by cross guarantee between Group companies. At 31 March 2012, the liability of the bank was borne by the Company at a value of £nil (2011: Nil)

The Company is a member of a Group VAT registration and is jointly and severally liable for any debts by member of the registration as at the year ended 31 March 2012. The total Group liability amounted to £177,287.

30. Ultimate controlling party

Prime Focus Limited, a company incorporated in India is the ultimate controlling party.

31. Availability of Report and Accounts

A copy of the final report and accounts for the year ended 31 March 2012 will shortly be posted to shareholders and be available from the Company's website, www.pflplc.com.