Zoo Digital Regulatory News (ZOO)

22 Jun 2009 07:00



ZOO DIGITAL GROUP PLC

('ZOO' or 'the Group')

PRELIMINARY RESULTS FOR THE YEAR ENDED 31 MARCH 2009

ZOO Digital Group plc (AIM: ZOO) is a provider of creative media services and software for the film industry. It works with film studios to deliver creative media for printed materials and audio-visual content. Its market-leading proprietary software offers media companies considerable cost savings and reduces time to market for home entertainment products, such as DVD, Blu-ray, Video on Demand, interactive games and broadcast.

Financial Highlights

Revenue up 100% to £6.6m (2008: £3.3m)

Operating profit £0.5m (2008: loss of £1.9m)

Maiden full year EBITDA profit of £1.3m (2008: loss of £1.4m), including £1.4m from favourable exchange translation

Profit before tax of £0.2m (2008: loss of £1.9m)

Basic earnings per share were 0.95p compared to a loss of 15.7p in 2008

Cash at year end of £1.0m (2008: £0.7m) and a new £0.5m overdraft secured

Cash from operations of £1.0m (2008: cash outflow of £1.9m)

Encouraging start to current year with a strong pipeline of work

Operational Highlights

Strong organic growth with major Hollywood film studios

Greater depth in relationships has allowed ZOO to offer a broader spread of revenue enhancing services

Key Hollywood studio now processes 80% of new DVD products using ZOO's software

Benefited from a change in consumer habits caused by the global recession, leading to a need for studios to reduce production costs and the time taken to release a film on DVD 

Stuart Green, CEO of ZOO Digital, commented, "These are good results and demonstrate that our focus on providing quality products and service to our major customers, the Hollywood studios, is bearing fruit. There is an increasing focus among our customers on efficiencies and cost savings and I am confident that we will continue to grow profitability in 2009."

For further enquiries please contact:

ZOO Digital Group plc	Tel: 0114 241 3700
Stuart Green - Chief Executive Officer
Helen Gilder - Group Finance Director
FinnCap	Tel: 020 7600 1658
Marc Young / Charles Cunningham
Weber Shandwick Financial	Tel: 020 7067 0700
Terry Garrett / Nick Dibden / John Moriarty / Katie Matthews

Chairman and Chief Executive Statement 

The year to 31 March 2009 showed a strong performance by ZOO and represents a fulfilment of our stated business development strategy which will continue to drive our growth in the future. The execution of this strategy has enabled the Company to report a doubling in revenues year-on-year and its first ever full year EBITDA profit: £1.3m compared to a loss of £1.4m for 2008. With profitability comes a much more stable footing in the development of ZOO, enabling the continued investment in our product set and a broadening of the scope of our operations, giving us confidence in our continued growth.

This improvement was driven largely by significant organic growth from our existing major customers, the Hollywood film studios, where our primary focus on penetrating deeper and broader into their operations has continued to prove successful. We have made good progress within the film studios by increasing both the number of business units utilising our products and services and the revenues from each business unit. As these customers are increasingly focused on reducing production costs and maximising efficiencies, our products and service offerings, which reduce time to market for our customers' products while delivering significant cost savings, are increasingly attractive. This is a trend that we expect to continue for the foreseeable future.

Financial Review

Sales for the year showed a significant improvement, increasing 100% to £6.6m (2008: £3.3m). Particularly strong growth resulted from the increased usage of our products by our existing customers together with adoption by additional studio business units. 

EBITDA profit of £1.3m reflected a £2.7m improvement over the prior year (2008: loss of £1.4m). This progress was partially flattered by gains on exchange translation of £1.4m but, nonetheless, the underlying result demonstrated a significant accomplishment. 

Operating profit was significantly higher than last year at £0.5m (2008: loss of £1.9m). After finance costs and an exceptional write-off of intangibles, this resulted in a profit before tax for the year of £0.2m (2008: loss of £1.9m). The Group has significant tax losses brought forward and therefore is not required to make any payment for corporation tax for the year ended 31 March 2009. This is expected to remain the case for the foreseeable future.

Basic earnings per share were 0.95p compared to a loss of 15.7p in 2008. 

Our continued focus on cash management has been an important factor in our significant improvement in performance. Net cash generated from operating activities was £1.0m compared to a net cash outflow of £1.9m for the corresponding period last year, leading to cash at the year end of £1.0m compared with £0.7m in 2008. In addition, we have recently put in place a new banking relationship with the Royal Bank of Scotland which gives us access to an overdraft facility of £0.5m.

Market Overview

As stated at the time of our Trading Update on 8 April 2009, current trends within the industry remain undoubtedly positive for our business model. The challenges within the home entertainment market continue and these largely relate to the wider pressures on consumer spending. As a result the film studios are looking at more efficient methods of production, reducing the associated spend and shortening the time to market of their products. Through the Group's ability to develop and deploy automation solutions and workflow optimisations, ZOO is able to save its customers a considerable amount of time and money.

The number of new products being developed by film studios for Blu-ray is still rising and we believe, despite the current economic conditions, that this will continue and give rise to greater opportunities to provide services for this platform. In addition, as our customers continue to search for higher efficiency and lower costs so our service offering becomes increasingly compelling.

Operational Review

The Group has delivered a particularly strong performance this year and it is pleasing to see the efforts and investment beginning to achieve positive results. Our relationships with the major Hollywood and other film studios are continuing to strengthen.

Production and Creative Services

Our production and creative services division, formerly referred to as Scope Seven which we acquired in August 2007, has seen significant growth in revenue. Our work with one major studio has now expanded across four key business units of Technical Services, Home Entertainment, Television and Theatrical whilst positive discussions are being undertaken with a number of other business units and studios. The services provided by this division are differentiated in the market by the application of our unique software which is not available through other service vendors. Many of the services we offer are more attractive in terms of pricing and turn-around times compared with our competitors.

Media Adaptation

The Group's Media Adaptation Tool, which automates the process of producing printed materials including product packaging, posters and marketing materials, saw revenues increase by 224%. The tool has been enhanced for our key customers who are driving this product into wider areas of their operations. This capability is particularly relevant to the film studios and home entertainment markets where original programmes are created and then adapted for many languages and territories. We are witnessing an increasing need by our customers to expand this capability into other areas such as programme titles and credits which are often regionalised for international markets. Our sophisticated product continues to offer significant competitive advantages over the conventional approaches employed within the market and we have identified a number of further applications for it in video production and website development.

Video Title Authoring

The Group's Templated Authoring System, which provides automated authoring of video-based content for industry standard formats, saw revenues increase 212% as our customers commissioned additional templates and significantly increased the volume of DVD titles processed by our system. Revenues from licensing of this system scale in proportion to the number of titles that it is used to process. The product's resilience and continued refinement is now proving hugely successful in the provision of production services for major Hollywood studios and has resulted in a key customer processing 80% of its new products using the system. The patent-protected methods on which this system is based are available exclusively through ZOO, a fact that has enabled us to continue to win business from a number of incumbent vendors.

Menu Regionalisation

Our Menu Regionalisation Tool which automates the process of creating multi language variants of home entertainment titles had another strong year and produced record revenues. The benefits of this tool are becoming more apparent to customers as they look to distribute content to new international markets in an effort to increase sales. We expect significant growth in our menu production services in the current year as well as in our licensing fees for this tool which scale in proportion to the number of menus that it is used to process.

Interactive DVD

The decline in the interactive DVD market has continued and we do not envisage any significant new products to be developed by British or European publishers in the current year. As a consequence, for the year ahead we expect almost all related revenues to be denominated in US dollars. Our technology continues to be used to create interactive DVD titles for US-based publishers but we anticipate revenues in this category to be lower than the equivalent period last year. However, we expect that the growth in our core business will more than offset the diminishing interactive DVD revenues.

New Product Development

Much progress has been made in the development of new technologies to support our services for Blu-ray title production, video localization and web based content. These are growing areas of our customers' operations so it is important that ZOO is able to participate in this market.

We continue to innovate and are working on a number of new products that provide automation and workflow optimisation solutions which we expect to announce in the period ahead.

Sales and Marketing

Our sales pipeline with our major customers strengthened though the year, with growth achieved across a number of different areas and penetration into an increasing number of business units including television networks and home entertainment. Through the broadening of the scope and service levels, the Group secured significantly greater production work and this has resulted in larger billings. The Group's technology is being used more widely across the industry and ZOO is adapting its products for different end markets from video titles through to printed materials, from standard definition DVD through to Blu-ray Disc and from TV production through to internet download.

Our commercial efforts continue to be focused on securing new business in other divisions of our existing studio customers, which can often be accomplished more quickly than acquiring new clients, as well as growing the customer base.

Board Changes

On 15 June 2009, we were pleased to announce the appointment to the Board of James Livingston as non-executive director in place of Matt Taylor. We would like to thank Matt for the contribution he has made during the past three years during which significant progress has been made. James is a portfolio manager at Foresight Group, working with a number of other SMEs at Board level.  He has a first class degree from Cambridge University and has represented Great Britain in the World Rowing Championships. We look forward to working with James through the next exciting episode of ZOO's growth.

Staff

We would like to take this opportunity to thank all our staff. Our product development team continues to innovate and work on a number of new technologies and product enhancements that will further enhance ZOO's competitiveness and profitability. Our production services teams continue to embrace the challenges presented by the significant growth in our pipeline of work and provide excellent services to our customers. The major developments achieved throughout the year would not have been possible without everyone's commitment and drive.

Outlook 

Current trends within the industry are undoubtedly positive for our business model. Film studios are looking at more efficient methods of production, reducing the associated spend and increasing the speed to market of their products. ZOO's technology helps them to achieve these goals and therefore our products and services are in strong demand. 

Based on continued strong demand for ZOO's products and services, the Board remains very positive about the opportunities for the Group and believes that 2009 will be another year of growth for our core business. Revenues are now almost all denominated in US dollars and trading in the current year has started well, with turnover improved over the same period in the previous year and profits significantly higher when compared on a fixed currency basis. We look forward to a successful outcome for the year as a whole and providing a further update to the market at the time of our AGM on 16 September 2009.

Dr C H B Honeyborne	Dr S A Green
Chairman	Chief Executive Officer

ZOO Digital Group plc
Annual Report and Accounts 2009
CONSOLIDATED INCOME STATEMENT
for the year ended 31 March 2009
		2009	2008
	Note	£000	£000
Revenue	5	6,567	3,264
Cost of Sales		(1,276)	(27)
Gross Profit		5,291	3,237
Other operating income	6	79	100
Other operating expenses		(4,046)	(4,711)
Profit/(Loss)  before interest, tax, depreciation and amortisation		1,324	(1,374)
Depreciation		(248)	(152)
Amortisation and impairment		(563)	(227)
Exceptional items	17	35	(175)
Total operating expenses	9	(4,822)	(5,265)
Operating Profit/(Loss)		548	(1,928)
Finance income	7	8	72
Finance cost	8	(345)	(327)
Profit/(Loss) before taxation		211	(2,183)
Tax on profit/(loss)	13	(26)	135
Profit/(Loss) for the year		185	(2,048)
Continuing operations		185	(1,837)
Discontinued operations	16	-	(211)
Profit/(Loss) for the year		185	(2,048)
Attributable to equity holders of the parent		185	(2,048)
Profit/(Loss) per share	15
- basic		0.95p	(15.72p)
- diluted		0.62p	(15.72p)

ZOO Digital Group plc
Annual Report and Accounts 2009
CONSOLIDATED BALANCE SHEET
as at 31 March 2009
		2009	2008
	Note	£000	£000
ASSETS
Non-Current Assets
Property, plant and equipment	18	528	567
Intangible assets	19	4,806	4,042
		5,334	4,609
Current Assets
Inventories	20	-	188
Trade and other receivables	21	1,452	1,238
Current tax assets	13	-	90
Cash and cash equivalents	22	989	675
		2,441	2,191
Total Assets		7,775	6,800
LIABILITIES
Current Liabilities
Trade and other payables	27	(2,461)	(1,621)
Borrowings	26	(366)	(270)
		(2,827)	(1,891)
Non-current Liabilities
Borrowings	26	(3,306)	(3,275)
Total Liabilities		(6,133)	(5,166)
Net Assets		1,642	1,634
EQUITY
Equity attributable to equity holders of the parent
Called up share capital	23	3,199	2,687
Share premium account	23	23,012	23,030
Other reserves	25	8,598	8,598
Share option reserve	25	77	54
Warrant reserve	25	27	-
Convertible loan note reserve	25	266	266
Foreign exchange translation reserve	25	(694)	56
Accumulated losses	24	(32,841)	(33,055)
		1,644	1,636
Interest in own shares	23	(2)	(2)
Attributable to equity holders		1,642	1,634

ZOO Digital Group plc
Annual Report and Accounts 2009
CONSOLIDATED CASH FLOW STATEMENT
for the year ended 31 March 2009
		2009	2008
	Note	£000	£000
Cash flows from operating activities
Operating profit/(loss) for the year		548	(1,928)
Finance income	7	8	72
Depreciation	18	248	152
Amortisation & Impairment	19	563	227
Share based payments	31	79	(87)
Disposal of own shares	23	-	74
Disposal of intangible assets	19	-	7
Disposal of property, plant and equipment	18	4	53
Exchange gain on foreign operations		(1,408)	-
Changes in working capital:
Inventories	20	188	(188)
Trade and other receivables	21	19	566
Trade and other payables	27	682	(975)
Cash flow from operations		931	(2,027)
Tax received		64	98
Net cash flow from operating activities		995	(1,929)
Investing Activities
Acquisition of subsidiary		-	(1,536)
Purchase of intangible assets	19	(643)	(310)
Purchase of property, plant and equipment	18	(89)	(2)
Net cash flow from investing activities		(732)	(1,848)
Cash flows from financing activities
Repayment of borrowings	26	(318)	(10)
Proceeds from borrowings	26	75	-
Finance cost		(250)	(232)
Share and convertible loan issues	23	(18)	(272)
Issue of Share capital	23	512	3,000
Net cashflow from financing		1	2,486
Net increase/(decrease) in cash and cash equivalents		264	(1,291)
Cash and cash equivalents at the beginning of the year		675	2,026
Exchange (loss)/gain on cash and cash equivalents		50	(60)
Cash and cash equivalents at the end of the year	22	989	675

ZOO Digital Group plc
Annual Report and Accounts 2009
CONSOLIDATED STATEMENT OF RECOGNISED INCOME AND EXPENSE
for the year ended 31 March 2009
		2009	2008
		£000	£000
Exchange difference on the translation of foreign operations		(750)	(26)
Net (expense)/ income recognised directly in equity		(750)	(26)
Profit/(loss) for the financial year		185	(2,048)
Total recognised expense for the year		(565)	(2,074)
Attributable to equity holders of the company		(565)	(2,074)

ZOO Digital Group plc

Annual Report and Accounts 2009

NOTES TO THE FINANCIAL STATEMENTS

for the year ended 31 March 2009

1. General Information

ZOO Digital Group plc ('the company') and its subsidiaries (together 'the group') provide productivity tools and services for the video post-production, pre-media and interactive markets and continue with ongoing research and development in those areas. The group has operations in both the UK and US.

The company is a public limited company which is listed on the Alternative Investment Market and is incorporated and domiciled in the UK. The address of the registered office is The Tower, 2 Furnival Square, Sheffield.

The registered number of the company is 3858881

2. Summary of significant accounting policies

The principal accounting policies applied in the preparation of these financial statements are set out below. These policies have been applied consistently to all the years presented, unless otherwise stated.

2.1 Basis of preparation

These financial statements have been prepared in accordance with IFRS as adopted by the European Union, and with those parts of the Companies Act 1985 applicable to companies reporting under IFRS. 

The preparation of financial statements in conformity with IFRS requires management to make judgements, estimates and assumptions that effect the application of policies and reported amounts in the financial statements. The areas involving a higher degree of judgements or complexity, or areas where assumptions or estimates are significant to the financial statements are disclosed in note 3.

A separate income statement for the parent company has not been presented as permitted by section 230 (4) of the Companies Act 1985.

The directors have prepared trading and cash flow forecasts for the group for the period to 31 March 2012. Recent months sales figures have shown increases in the group's sales to its existing customers, and an encouraging roll out of products to new customers. The forecasts assume, inter alia, that sales of existing products to existing and new customers will continue to increase, and the directors have had informal indications from customers to substantiate a significant proportion of the forecast increased sales.

The directors have considered the consequences if the increase in sales volume is less than the level forecast. The directors are confident that in this eventuality alternative steps could be taken to ensure that the group can continue to operate without the need for additional funding.

The directors believe these assumptions to be realistic, and consequently that the group will continue in operational existence for the foreseeable future. The financial statements have therefore been prepared on a going concern basis.

2.1.1 EU adopted IFRS not yet applied

The following IFRS was available for early adoption but has not yet been applied by the group in these financial statements:

IFRS 8 Operating Segments for years commencing on or after 1 January 2009.

The application of IFRS 8 in the year ended 31 March 2009 would not have affected the balance sheet or income statement as the standard is concerned only with disclosure.

2.2 Consolidation

Subsidiaries are all entities over which the group has the power to govern the financial and operating policies so as to obtain benefit from their activities. Subsidiaries are fully consolidated from the date on which control is transferred until the date that control ceases.

The consolidated financial statements of ZOO Digital Group plc include the results of the Company and its subsidiaries. Subsidiary accounting policies are amended where necessary to ensure consistency within the Group and intra group transactions are eliminated on consolidation.

2.3 Segment reporting

A business segment is a group of assets and operations engaged in providing products or services that are subject to risks and returns that are different from those of other business segments. A geographical segment is engaged in providing products or services within a particular economic environment that are subject to risks and returns that are different from those of segments operating in other economic environments.

2.4 Foreign currency translation

2.4.1 Functional and presentation currency

Items included in the financial statements of each of the group's entities are measured using the currency of the primary economic environment in which the entity operates ('the functional currency'). The consolidated financial statements are presented in sterling which is the company's functional and presentation currency.

2.4.2 Transactions and balances

Transactions in foreign currencies are recorded at the prevailing rate of exchange in the month of the transaction. Foreign exchange gains or losses resulting from the settlement of such transactions and from the translation of monetary assets and liabilities denominated in foreign currencies at the year end exchange rates are recognised in the income statement.

2.4.3 Group companies

The results and financial position of all group entities that have a functional currency different from the presentation currency are translated into the presentation currency as follows:

assets and liabilities for each entity are translated at the closing rate at the balance sheet date;

income and expenses for each income statement are translated at the prevailing monthly exchange rate for the month in which the income or expense arose and all resulting exchange rate differences are recognised with the foreign exchange translation reserve.

2.5 Intangible assets

2.5.1 Goodwill

Goodwill arising on the acquisition of subsidiary undertakings and businesses, representing any excess of the fair value of the consideration given over the fair value of the identifiable assets and liabilities acquired, is capitalised and reviewed annually for impairment. Goodwill is carried at cost less accumulated impairment losses. Impairment losses on goodwill are not reversed.

Goodwill is allocated to cash-generating units for the purpose of impairment testing. The allocation is made to those cash-generating units that are expected to benefit from the business combination in which the goodwill arose.

2.5.2 Patent and Trademark costs

Patent and trademark costs are stated at cost, net of amortisation and any provision for impairment. Patents and trademarks have a finite useful life and amortisation is charged on a straight line basis over the estimated useful economic life (10 years).

2.5.3 Research and Development costs

Research expenditure is charged to the income statement in the period in which it is incurred. Development costs are recognised as an intangible asset if they fulfil the following criteria:

it is technically feasible to complete the intangible asset so that it will be available for use;

management intends to complete the intangible asset and use or sell it;

there is an ability to use or sell the intangible asset;

it can be demonstrated how the intangible asset will generate probable future economic benefits;

there are adequate technical, financial and other resources to complete the development and to use or sell the intangible asset;

the expenditure attributable to the intangible asset during its development can be reliably measured.

Other development expenditures that do not meet these criteria are recognised as an expense as incurred. Development costs previously recognised as an expense are not recognised as an asset in a subsequent period.

Development costs recognised as an intangible asset are amortised on a straight line basis over 3 years or the length of any current sales contracts, from the point at which the asset is ready for sale or use.

2.5.4 Computer Software

Acquired computer software is shown at historical cost less accumulated amortisation and impairment losses. Amortisation is charged to the income statement on a straight-line basis over 3 years from the date the asset is available for use.

Costs that are directly associated with the development of identifiable and unique software products controlled by the group, and are expected to generate economic benefits exceeding costs beyond one year, are recognised as development costs within intangible assets. See note 2.5.3 Research and Development costs.

2.6 Investments in subsidiary undertakings

In the company, Investments in subsidiary undertakings are carried at cost less any impairment. The investments are reviewed on an annual basis to test for any indication of impairment. The investments are eliminated on consolidation.

2.7 Property, plant and equipment

All property, plant and equipment assets are stated at cost less accumulated depreciation and impairment. Depreciation is provided on all such assets at rates calculated to write off the cost of each asset less estimated residual value, on a straight-line basis, over its expected useful life, as follows:

Leasehold improvements	5 years or over the term of the lease, if shorter
Computer hardware	between 2 and 3 years
Office equipment, fixtures and fittings	between 2 and 5 years

2.8 Impairment of assets

The group assesses at each balance sheet date whether there is any indication that any of its assets have been impaired. If such indication exists, the asset's recoverable amount is estimated and compared to its carrying value.

For goodwill, intangible assets that have an indefinite life and intangible assets not yet available for use, the recoverable amount is estimated at each balance sheet date and whenever there is an indication of impairment an impairment loss is recognised for the amount by which the asset's carrying value amount exceeds its recoverable amount. Impairment losses are recognised in the income statement.

2.9 Financial Instruments

The group classifies financial instruments, or their component parts, on initial recognition as a financial asset, a financial liability or an equity instrument in accordance with the substance of the contractual agreement.

Financial instruments are recognised on the balance sheet at fair value when the group becomes a party to the contractual provisions of the instrument.

2.9.1 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 the income statement over the period of the borrowings using the effective interest rate method.

The convertible loan notes are accounted for in accordance with IAS 32 'Financial Instruments:presentation' and split between debt and equity based upon the market rate of similar loans not carrying conversion options.

2.9.2 Trade receivables

Trade receivables are stated at their amortised cost as reduced by appropriate allowances for estimated irrecoverable amounts. They are recognised on the trade date of the related transactions. Subsequent recoveries of amounts previously written off are credited to the income statement.

2.9.3 Cash and cash equivalents

Cash and cash equivalents include cash in hand and deposits held at call with banks.

2.9.4 Trade payables

Trade payables are stated at their amortised cost. They are recognised on the trade date of the related transactions.

2.10 Share based payments

Options are measured at fair value at grant date using the binomial model. The fair value is expensed on a straight line basis over the vesting period, based on an estimate of the number of options that will eventually vest

Under the group's share option scheme, share options are granted to directors and selected employees. The options are expensed in the period over which the share based payment vests. A corresponding increase to the share option reserve under shareholder's funds is recognised. When share options are exercised, or when share options are forfeited, cancelled or expire, the corresponding fair value is transferred to the accumulated losses reserve. The group has no legal or constructive obligation to repurchase or settle the options in cash.

2.11 Pension costs and other post retirement benefits

The Group operates only defined contribution schemes and pays contributions to publicly or privately administered pension insurance plans on a mandatory, contractual or voluntary basis. The group has no further obligations once the contributions have been paid. The amount charged to the income statement in respect of pension costs and other post-retirement benefits is the contributions payable in the period. Differences between contributions payable in the period and contributions actually paid are shown as either accruals or prepayments in the balance sheet.

2.12 Revenue

Revenue comprises the consideration receivable for services provided, software usage fees and royalty income. Revenue is shown net of value added tax, returns, rebates and discounts and after eliminating sales within the group.

2.12.1 Sales of services

The group sells design, development and other services relating to the DVD production industry. These services are provided either on a time and material basis or as a fixed price contract.

Revenue from time and material contracts is recognised as labour hours and direct expenses are incurred, at the contracted rates.

Revenue from fixed price contracts is recognised in accordance with the substance of the contract as services are performed by the group and accepted by the customer.

If circumstances arise that may change the original estimates of revenue and costs or extent of progress toward completion, estimates are revised. These revisions resulting in increases or decreases in the estimated revenues and costs are reflected in the income statement in the period in which the circumstances that give rise to the revision become known to management.

2.12.2 Software usage fees

Revenue attributable to the use of software products is credited to the profit and loss account in line with the usage of these products.

2.12.3 Royalty income

Under IAS 18 royalties are recognised on an accruals basis in accordance with the substance of the relevant agreement. Based on the substance of the contract agreements, revenue is recognised to match with estimated sales. Estimates of expected sales are reviewed at each balance sheet date.

2.13 Inventories

Inventories are stated at the lower of cost and net realisable value. Cost includes all direct costs incurred and attributable production overheads. Net realisable value is based on estimated selling price allowing for all further costs of completion and disposal.

Product development expenditure is carried forward to the extent that it is considered to be recoverable. The amount carried forward is written off on release over the expected sales life of each product.

2.14 Leases

Leases in which a significant portion of the risks and rewards of ownership are retained by the lessor are classified as operating leases. Payments made under operating leases are recognised in the income statement on a straight line basis over the term of the lease

Leases of equipment where the group has substantially all the risks and rewards of ownership are classified as finance leases. Finance leases are capitalised at the lease's commencement at the lower of the fair value of the leased property and the present value of the minimum lease payments.

Each lease payment is allocated between the liability and finance charges so as to achieve a constant rate on the finance balance outstanding. The corresponding rental obligations, net of finance charges, are included in other long-term payables. The interest element of the finance cost is charged to the income statement over the lease period so as to produce a constant periodic rate of interest on the remaining balance of the liability for each period. The equipment acquired under finance leases is depreciated over the shorter of the useful life of the asset or the lease term.

2.15 Deferred taxation

Deferred tax, including UK corporation tax and foreign tax, is provided in full using the balance sheet liability method. Deferred tax is the future tax consequences of temporary differences between the carrying amounts and tax bases of assets and liabilities shown on the balance sheet. Deferred tax assets and liabilities are not recognised if they arise in the following situations; the initial recognition of goodwill; or the initial recognition of assets and liabilities that affect neither accounting nor taxable profit. The amount of deferred tax provided is based on the expected manner of recovery or settlement of the carrying amount of assets and liabilities, using tax rates enacted or substantially enacted at the balance sheet date.

The group does not recognise deferred tax liabilities, or deferred tax assets, on temporary differences associated with investments in subsidiaries, joint ventures and associates as it is not considered probable that the temporary differences will reverse in the foreseeable future. 

A deferred tax asset is recognised only to the extent that it is probable that future taxable profits will be available against which the asset can be utilised. The carrying amount of deferred tax assets are reviewed at each balance sheet date and reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the asset to be recovered.

2.16 Government grants

Grants from the government are recognised at their fair value where there is a reasonable assurance that the grant will be received and the group will comply with all attached conditions.

Government grants relating to operating costs are deferred and recognised in the income statement over the period necessary to match them with the costs they are intended to compensate.

Government grants relating to property, plant and equipment are credited to the cost of the asset and released to the income statement on a straight line basis over the expected lives of the related assets.

2.17 Exceptional items

Exceptional items are those significant items which are separately disclosed by virtue of their size or incidence to enable a full understanding of the group's financial performance. Transactions which may give rise to exceptional items are principally gains and losses on disposal of operations or restructuring provisions.

3. Accounting estimates and judgements

Estimates and judgments are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances.

3.1 Critical accounting estimates and assumptions

The group makes estimates and assumptions concerning the future. The resulting accounting estimates will, by definition, seldom equal the related actual results. The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below.

Goodwill

Goodwill is tested annually for impairment at the balance sheet date. The recoverable amounts of cash generating units have been estimated based on value in use calculations. Value in use calculations have been based on a subjective pre-tax discount rate of 8%. No impairment loss incurred at this discount rate. Had the discount rate used been 1% greater or lower than estimated, there still would be no impact on impairment.

Financial Instruments

Discounted cash flow analysis is used to determine the fair value of financial instruments that are not traded on the open market. Calculations have been based on a subjective pre-tax discount rate of 8%. Had the discount rate used been 1% greater or lower than estimated, the in fair value would have been decreased by £109,000, or increased by £115,000 respectively.

3.2 Critical judgements in applying the group's accounting policies

Operating lease commitments

The group has entered into property leases for its Sheffield and Los Angeles offices. As management have determined that the group has not obtained substantially all the risks and rewards of ownership of the property, the lease has been classified as an operating lease and accounted for accordingly.

4. Segmental reporting

Primary reporting format - Business segments

At 31 March 2009, the group is organised on a worldwide basis into two main business segments:

Software solutions, through development and consultancy

Media production and design

These divisions are the basis on which the group reports its primary segment information. Other group operations comprise of head office operations.

The segment results are as follows:

	Software Solutions		Media Production		Group
	2009	2008	2009	2008	2009	2008
	£000	£000	£000	£000	£000	£000
Total Revenue	3,675	2,038	4,384	1,710	8,059	3,748
Inter-segment revenue	(82)	(129)	(1,410)	(355)	(1,492)	(484)
Revenue	3,593	1,909	2,974	1,355	6,567	3,264
Segment result	1,889	(191)	(552)	(661)	1,337	(852)
Unallocated corporate expenses					(789)	(1,076)
Operating profit/(loss)					548	(1,928)
Finance income					8	72
Finance cost					(345)	(327)
Profit/(loss) before taxation					211	(2,183)
Tax on profit/(loss)					(26)	135
Profit/(loss) for the year					185	(2,048)

Other segmental information included in the income statement is as follows:

	Software Solutions		Media Production		Group Operations
	2009	2008	2009	2008	2009	2008
	£000	£000	£000	£000	£000	£000
Depreciation	36	44	196	76	16	32
Amortisation	97	57	53	20	3	8
Impairment losses	36	45	374	97	-	-

Segment assets consist primarily of property, plant and equipment, intangible assets, trade and other receivables and cash and cash equivalents.

Segment liabilities comprise operating liabilities. Unallocated liabilities comprise items such as borrowings.

Capital expenditure includes additions to property, plant and equipment and intangible assets, including additions resulting from acquisitions through business combinations.

	Software Solutions		Media Production		Group
	2009	2008	2009	2008	2009	2008
	£000	£000	£000	£000	£000	£000
Assets	4,347	2,801	1,901	1,896	6,248	4,697
Unallocated corporate assets					1,527	2,103
Consolidated total assets					7,775	6,800
Liabilities	1,223	546	1,192	1,020	2,415	1,566
Unallocated corporate liabilities					3,718	3,600
Consolidated total liabilities					6,133	5,166
Capital Expenditure	688	358	190	1301	879	1,688

Secondary reporting format - geographical segments

The Group's operating divisions operate in two principal geographical areas of the world, the UK and the US. All European operations are run from the UK office.

	Revenue		Assets		Additions to property, plant and equipment, and intangible assets
	2009	2008	2009	2008	2009	2008
	£000	£000	£000	£000	£000	£000
United Kingdom	298	471	5,033	4,620	676	381
US	6,269	2,793	2,742	2,180	203	1,307
	6,567	3,264	7,775	6,800	879	1,688

Discontinuing operations

Following the acquisition of Scope Seven LLC in August 2007 the group re-categorised the previously exited video production services as a continued operation. There have been no trading activities for discontinued operations during the year.

5. Revenue

The group's revenue comprises:

	2009	2008
	£000	£000
Software Solutions	3,593	1,909
Media Production	2,974	1,355
	6,567	3,264
Continuing operations	6,567	3,264
Discontinued operations	-	-
	6,567	3,264
Revenue from services	5,948	2,456
Royalty income	619	808
	6,567	3,264

6. Other operating income

	2009	2008
	£000	£000
Government grants	79	100

7. Finance income

	2009	2008
	£000	£000
Interest on short term deposits	8	72

8. Finance costs

	2009	2008
	£000	£000
Interest on borrowings	(345)	(327)

9. Operating profit/(loss)

Group operating profit/(loss) for the year is stated after charging/(crediting) the following:

	2009	2008
	£000	£000
Exchange gains or losses	(1,575)	(43)
Staff Costs	3,878	3,035
Depreciation	248	152
Amortisation of other intangible assets	152	90
Impairment losses on other intangible assets	411	137
Research and non-capitalised development costs	729	797
Operating lease expense	379	290
Auditor's remuneration	50	78
Exceptional items (note 17)	(35)	175
Other expenses	585	554
Other operating expenses	4,822	5,265

10. Auditor's remuneration

	2009	2008
	£000	£000
Fees payable to group's auditor for the audit of the group's annual financial statements	19	21
The audit of the group's subsidiaries, pursuant to legislation	23	24
Tax services	3	24
All other services	5	9
	50	78

11. Staff costs

The average number of employees (including executive directors) was:

	2009	2008
	No.	No.
Product design	74	67
Sales and marketing	9	9
Administration	13	13
	96	89

Their aggregate remuneration comprised:

	2009	2008
	£000	£000
Wages and salaries	3,148	2,606
Social security costs	650	458
Other pension costs	45	58
Share based payments	35	(87)
	3,878	3,035

The group pension arrangements are operated through a defined contribution scheme.

12. Directors' remuneration, interests and transactions

Aggregate remuneration

Directors' remuneration comprised:

				2009	2008
	Salary	Benefits	Pension	Total	Total
	£000	£000	£000	£000	£000
Dr Stuart A Green	115	1	6	122	122
Helen P Gilder	85	1	4	90	90
Ian C Stewart	15	-	-	15	15
	215	2	10	227	227

In addition to the above, £20,000 (2008: £20,000) was paid to Brockhill Limited under agreements to provide the group with the services of Dr Christopher H B Honeyborne. £21,000 (2008: £20,000) was paid to Foresight Group for the services of Matthew P Taylor.

The balance owing to Brockhill Limited at 31 March 2009 was £nil (2008: £3,000). The balance owing to Foresight Group at 31 March 2009 was £8,000 (2007: £6,000).

Two directors (2008: two) serving during the year have been members of money purchase pension schemes into which the company contributes.

The highest paid director received emoluments and benefits as follows:

	2009	2008
	£000	£000
Emoluments	116	116
Money purchase pension contributions	6	6
	122	122

The highest paid director did not exercise any share options or received or was due any shares in the year. As at 31 March 2009 no amounts, in respect of services performed as a director, were due.

Compensation of key management personnel (including directors)

	2009	2008
	£000	£000
Short-term employee benefits	734	475
Post-employment benefits	10	10
Share based payments	58	(43)
	802	442

Directors' share options

Aggregate emoluments disclosed above do not include any amounts for the value of options to acquire ordinary shares in the company granted to or held by the directors. Details of the options are as follows:

Name of director	1 April 2008	Granted during the year	Surrendered during the year	31 March 2009	Exercise price	Date from which exercisable	Expiry date
Dr Christopher H B Honeyborne	30,000	-	(30,000)	-	£0.27	Aug-08	Oct-18
Dr Christopher H B Honeyborne	-	30,000	-	30,000	£0.15	Sep-09	Oct-18
Dr Stuart A Green	175,000	-	(175,000)	-	£0.27	Aug-08	Oct-18
Dr Stuart A Green	-	175,000	-	175,000	£0.15	Sep-09	Oct-18
Helen P Gilder	450,000	-	(450,000)	-	£0.27	Aug-08	Oct-18
Helen P Gilder	-	450,000	-	450,000	£0.15	Sep-09	Oct-18
Helen P Gilder	-	100,000	-	100,000	£0.15	Oct-09	Oct-18
Ian C Stewart	30,000	-	(30,000)	-	£0.27	Aug-08	Oct-18
Ian C Stewart	-	30,000	-	30,000	£0.15	Sep-09	Oct-18
	685,000	785,000	(685,000)	785,000

The exercise of share options is staggered over the exercise period with typically 40% exercisable after the first year and a further 30% in each of the following two years.

The charge to the profit and loss account in respect of directors' share options amounted to £18,000 (2008: credit £53,000). The credit in 2008 was due to the surrendering of unexercised share options.

The market price of the ordinary shares at 31 March 2009 was 7.1p and the range during the year was 19.75p (high) to 4.0p (low).

Directors' interests

The directors who held office at 31 March 2009 had the following interests, including family interests, in the 15p ordinary shares of ZOO Digital Group plc:

	2009	2008
Name of director	Beneficial	Beneficial
Dr Christopher H B Honeyborne	1,333	1,333
Dr Stuart A Green	4,179,835	2,746,502
Helen P Gilder	226	226
Ian C Stewart	1,675,365	1,675,365
Matthew P Taylor (Resigned 12 June 2009)	-	-
James A Livingston (Appointed 12 June 2009)	-	-

The directors also had the following interest in 6% unsecured convertible loan stock at 31 March 2009:

	2009	2008
	£000	£000
Dr Christopher H B Honeyborne	4	4
Dr Stuart A Green	342	342
Helen P Gilder	-	-
Ian C Stewart	270	270
Matthew P Taylor (Resigned 12 June 2009)	-	-
James A Livingston (Appointed 12 June 2009)	-	-

No other changes took place in the interests of directors between 31 March 2009 and 19 June 2009.

James Livingston has a non beneficial interest in both shares and loan notes as a representative Foresight Group, manager of the Foresight VCTs, several of which have a direct beneficial interest in ZOO Digital Group plc.

No other transactions have taken place with directors aside from those disclosed in this note 12.

13. Income tax expense

13.1 Current tax:

	2009	2008
	£000	£000
UK corporation tax
- Current tax on income for the year	-	-
- Adjustments in respect of prior years	-	-
Foreign tax	-	-
	-	-

Corporation tax is calculated at 28% (2008:30%) of the estimated assessable profit for the year.

13.2 Tax charge for the year

The tax charge for the year can be reconciled to the profit for the year as follows:

	2009	2008
	£000	£000
Profit before tax	211	(2,183)
Tax calculated at standard rate of corporation tax of 30%	59	(655)
Depreciation in excess of capital allowances	234	179
Disallowable items	(3)	262
Profits/(Losses) carried forward	(290)	214
Foreign tax charged at lower rates the UK standard rate	-	-
Release of withholding tax	(26)	-
Research and development tax credit	-	135
Tax (charge)/credit	(26)	135

13.3 Tax losses carried forward

The group has tax losses carried forward of approximately £18,000,000 (2008: £16,000,000).

13.4 Current tax assets

	2009	2008
	£000	£000
Research and development tax credit	-	90

14. Dividends

There were no dividends paid or proposed.

15. Profit/(Loss) per share

Earnings per share is calculated by dividing the profit attributable to equity holders of the company by the weighted average number of ordinary shares in issue during the year.

No adjustment was made in 2008 for 'in money' share options as this would have decreased the loss per share, which is not dilutive. No adjustment was made in 2008 for 'out of the money' share options based on the assumption that option holders would not exercise these options.

	Basic and Diluted
	2009	2008
	£000	£000
Continued operations	185	(1,837)
Discontinued operations	-	(211)
Profit/(loss) for the financial year	185	(2,048)

Weighted average number of shares for basic & diluted profit/(loss) per share	2009	2008
	Number of shares	Number of shares
Basic	19,558,970	13,030,659
Diluted	29,955,174	13,030,659

The profit/(loss) per share on discontinued activities is as follows:

	2009	2008
Basic	0.00p	(1.62p)
Diluted	0.00p	(1.62p)

16. Discontinued operations

Following the acquisition of Scope Seven LLC in August 2007 the group re-categorised the previously exited video production services as a continued operation. There have been no trading activities for discontinued operations during the year.

16.1 Income statement

	2009	2008
	£000	£000
Revenue	-	-
Expenses	-	(211)
Loss before tax of discontinued operations	-	(211)
Income tax expense	-	-
Loss after tax of discontinued operations	-	(211)

16.2 Cash flow movements

	2009	2008
	£000	£000
Operating	-	5
Investing	-	-
Financing	-	-
	-	5

16.3 Analysis of assets and liabilities

	2009	2008
	£000	£000
Property, plant and equipment	-	-
Goodwill	-	-
Other Intangible assets	-	-
Inventory	-	-
Other current assets	-	12
	-	12
Other current liabilities	-	(214)
Current - provisions	-	-
	-	(214)

17. Exceptional items

In March 2008 the group provided for the write off of £175,000 of the consideration outstanding from the sale of its UK interactive DVD production business in October 2006, following the administration of the purchaser. The group remains in discussions with the liquidators and to date has recovered £35,000 of the £175,000.

18. Property, plant and equipment

	Production Equipment	Leasehold improvements	Computer hardware	Office equipment, fixtures & fittings	Total
	£000	£000	£000	£000	£000
Cost
Opening cost at 1 April 2007	-	12	611	351	974
Additions	55	2	63	33	153
Disposals	-	(12)	-	(125)	(137)
Acquired through business combination	11	222	149	95	477
Opening cost at 1 April 2008	66	224	823	354	1,467
Additions	75	-	83	-	158
Disposals	(4)	-	(3)	-	(7)
Acquired through business combination	39	-	16	-	55
Closing cost at 31 March 2009	176	224	919	354	1,673
Accumulated depreciation/ impairment
Opening balance at 1 April 2007	-	12	558	262	832
Depreciation	11	30	77	34	152
Disposals	-	(12)	-	(72)	(84)
Opening balance at 1 April 2008	11	30	635	224	900
Depreciation	52	52	107	37	248
Disposals	-	-	(3)	-	(3)
Closing balance at 31 March 2009	63	82	739	261	1,145
Opening carrying value at 1 April 2007	-	-	53	89	142
Opening carrying value at 1 April 2008	55	194	188	130	567
Closing carrying value at 31 March 2009	113	142	180	93	528

Depreciation expense of £248,000 (2008: £152,000) is included in 'Other operating expenses'.

Property, plant and equipment for the group includes the following amounts where the group is a lessee under a finance lease:

At 31 March 2009	Production Equipment	Computer hardware	Office equipment, fixtures & fittings	Total
	£000	£000	£000	£000
Cost - capitalised finance leases	141	158	70	369
Exchange differences	20	2	-	22
Accumulated depreciation	(48)	(70)	(26)	(144)
Net book value	113	90	44	247

At 31 March 2008	Production Equipment	Computer hardware	Office equipment, fixtures & fittings	Total
	£000	£000	£000	£000
Cost - capitalised finance leases	39	104	70	213
Accumulated depreciation	(1)	(20)	(9)	(30)
Net book value	38	84	61	183

19. Intangible assets

	Goodwill	Development Costs	Patents and trademarks	Computer Software	Total
	£000	£000	£000	£000	£000
Cost
Opening cost at 1 April 2007	10,423	546	285	105	11,359
Additions	-	214	54	42	310
Disposals	-	(11)	-	-	(11)
Exchange differences	19	15	-	-	34
Acquired through business combination	842	688	-	45	1,575
Opening cost at 1 April 2008	11,284	1,452	339	192	13,267
Additions	-	580	80	61	721
Disposals	-	-	-	-	-
Exchange differences	334	266	-	6	606
Closing cost at 31 March 2009	11,618	2,298	419	259	14,594
Accumulated amortisation/ impairment
Opening balance at 1 April 2007	8,828	71	26	77	9,002
Amortisation	-	50	6	34	90
Disposals	-	(4)	-	-	(4)
Impairment loss	-	92	45	-	137
Opening balance at 1 April 2008	8,828	209	77	111	9,225
Amortisation	-	105	11	36	152
Disposals	-	-	-	-	-
Impairment loss	-	375	36	-	411
Closing balance at 31 March 2009	8,828	689	124	147	9,788
Opening carrying value at 1 April 2007	1,595	475	259	28	2,357
Opening carrying value at 1 April 2008	2,456	1,243	262	81	4,042
Closing carrying value at 31 March 2009	2,790	1,609	295	112	4,806

Development costs are internally generated software development costs. All other intangible assets are acquired externally.

The remaining life of the majority of development costs is 13 years.

Following the decision by management not to renew or pursue some of the group's patent applications, £36,000 (2008: £45,000) of previously capitalised patent costs was found to be impaired.

Changes in market expectations led to a management decision not to continue certain development projects. Capitalised costs relating to these projects were considered to be impaired. The amount of impairment was £375,000 (2008:£92,000).

Amortisation and impairment costs are included within 'Amortisation and impairment' in the income statement.

Computer software includes the following amounts where the group is a lessee under a finance lease:

	2009	2008
	£000	£000
Cost - capitalised finance leases	93	38
Accumulated amortisation	(24)	(7)
Net book value	69	31

Impairment tests for goodwill

Goodwill is subject to annual impairment testing, or more frequently if there are indications that goodwill might be impaired.The recoverable amount of a cash-generating unit is determined based on value-in-use calculations. The calculations use pre-tax cashflow projections which are based on financial budgets approved by management covering a five-year period. Management determined the budgets based on past performance and its expectations of market development.

Goodwill is allocated to the group's cash-generating units (CGUs) identified according to the business segment. Goodwill is allocated as follows:

Software Solutions		Media Production		Group
2009	2008	2009	2008	2009	2008
£000	£000	£000	£000	£000	£000
1,595	1,595	1,195	861	2,790	2,456

Following the impairment tests, goodwill was considered not to be impaired.

Key assumptions

Discount rate

The discount rate used was 8%.

Cash flow growth rates

The cash flow growth rates are derived from forecast sales growth taking into consideration past experience of operating margins achieved in each cash generating unit.

Sensitivities

The group's impairment review is sensitive to changes in the key assumptions. Based on a sensitivity analysis a change of 5% in any one of the assumptions will not not cause any impairment of the group's CGUs.

20. Inventories

	2009	2008
	£000	£000
Products in the course of development	-	188

£133,000 was recognised as an expense within 'cost of sales' during the year (2008:Nil). £55,000 was capitalised as an intangbile asset under development costs. The company held no inventory at 31 March 2009.

21. Trade and other receivables

	2009	2008
	£000	£000
Trade receivables	1,209	826
Less: provision for impairment of trade receivables	(82)	(71)
Trade receivables - net	1,127	755
VAT	18	6
Other debtors	159	76
Prepayments and accrued income	148	401
	1,452	1,238

The fair values of trade and other receivables equals their carrying amount.

As of the 31 March 2009, trade receivables of £353,000 (2008: £321,000) were overdue. The ageing analysis of these trade receivables is as follows:

	2009	2008
	£000	£000
Less than 3 months	342	207
3 to 6 months	-	73
7 to 12 months	6	35
Over 12 months	5	6
	353	321

The carrying amounts of trade and other receivables are denominated in the following currencies:

	2009	2008
	£000	£000
Pounds sterling	204	271
US Dollars	1,234	943
Euros	14	24
	1,452	1,238

Provision for impairment of trade receivables:

	2009	2009
	£000	£000
At 1 April 2008	71	323
Provision for receivables impairment	82	27
Receivables written off in the year as uncollectible	(71)	(246)
Unused amounts reversed	-	(33)
At 31 March 2009	82	71

The other classes within trade and other receivables do not contain impaired assets.

The maximum exposure to credit risk at the reporting date is the carrying value of Trade receivables, Royalty advances, Other debtors and cash and cash equivalents. The group does not hold any collateral as security.

The directors believe that a reasonable provision has been made for outstanding amounts or values impaired and the remaining unprovided amounts are considered to be recoverable.

The amounts owed by the subsidiary undertakings to the parent company, have no payment terms and bear no interest, but they are considered to be recoverable in the future.

22. Notes to the cash flow statement

22.1 Significant non-cash transactions

During the year the group acquired property, plant and equipment and computer software with a cost of £219,000 (2008:£153,000) of which £211,000 (2008:£46,000) was acquired by the means of finance leases. (The 2008 value does not include assets acquired as part of the acquisition of Scope Seven LLC).

22.2 Cash and cash equivalents

Cash and cash equivalents consist of cash on hand and balances with banks. Cash and cash equivalents included in the cash flow statement comprise the following balance sheet amounts.

	2009	2008
	£000	£000
Cash on hand and balances with banks	989	675

The fair value of the cash and cash equivalents are considered to be at their book value.

23. Share capital and premium

		2009	2008
		£000	£000
Authorised
26,666,667 ordinary shares of 15p each		4,000	4,000
Allotted, called-up and fully paid
21,326,421 ordinary shares of 15p each		3,199
(2008: 17,913,089 ordinary shares of 15p each)			2,687
Reconciliation of the number of shares outstanding:
Opening balance		17,913,089	5,913,089
Shares issued		3,413,332	12,000,000
Closing balance		21,326,421	17,913,089

On 6 October 2008 3,413,332 ordinary shares were issued at a price of 15p per share for a total consideration of £512,000.

	Ordinary shares	Share Premium
	£000	£000
Balance at 1 April 2007	887	22,102
Issue of shares	1,800	1,200
Issue costs	-	(272)
Balance at 31 March 2008	2,687	23,030
Issue of shares	512	-
Issue costs	-	(18)
Balance at 31 March 2009	3,199	23,012

Interest in own shares	£000
Balance at 1 April 2007	(76)
Disposal of own shares	74
Balance at 31 March 2008	(2)
Disposal of own shares	-
Balance at 31 March 2009	(2)

The Share premium reserve represents the amount subscribed for share capital in excess of the nominal value.

On 9 April 2009 the Group purchased 473,500 of its own shares through ZOO Employee Share Trust Limited at an average price of 10.3p per share. The total cost of the purchase was £48,939.

24. Accumulated losses

	Accumulated losses
	£000
Balance at 1 April 2007	(31,192)
Forfeited Share options	185
Loss for the year	(2,048)
Balance at 31 March 2008	(33,055)
Forfeited Share options	29
Profit for the year	185
Balance at 31 March 2009	(32,841)

The accumulative losses are the cumulative net losses recognized in the consolidated income statement for the group.

25. Other reserves

	Foreign Exchange Translation reserve	Convertible loan reserve	Share option reserve	Warrant reserve	Other reserves	Total
	£000	£000	£000	£000	£000	£000
Balance at 1 April 2007	82	266	326	-	8,598	9,272
Forfeited Share options	-	-	(326)	-	-	(326)
Share based payments	-	-	54	-	-	54
Foreign exchange translation adjustment	(26)	-	-	-	-	(26)
Balance at 31 March 2008	56	266	54	-	8,598	8,974
Forfeited Share options	-	-	(54)	-	-	(54)
Share based payments	-	-	77	27	-	104
Foreign exchange translation adjustment	(750)	-	-	-	-	(750)
Balance at 31 March 2009	(694)	266	77	27	8,598	8,274

The following describes the nature and purpose of each reserve within owner's equity.

Reserve	Description and purpose
Foreign Exchange Translation reserve	Cumulative exchange differences resulting from translation of foreign operations into the reporting currency.
Convertible Loan reserve	Represents the equity element of the Convertible loan note.
Share option reserve	Cumulative cost of share options issued to employees.
Share warrant reserve	Cumulative cost of share warrants issued to customers
Other reserves	Created as part of the reverse takeover between Kazoo3D plc and ZOO Media Corporation in 2001.

26. Borrowings

	2009	2008
	£000	£000
Non-current
6% Unsecured convertible loan stock	3,214	3,108
Promissory note - Scenewise Inc.	-	121
Finance lease liabilities	92	46
	3,306	3,275
Current
Promissory note - Scenewise Inc.	172	165
South Yorkshire Investment fund loan	75	-
Finance lease liabilities	119	105
	366	270
Total borrowings	3,672	3,545

On 27 September 2006 the Group issued £3,541,000 6% Unsecured convertible loan stock which is redeemable on 31 October 2011. The loan stock holder is entitled, at any time after the first anniversary, to convert all or part of the loan stock into fully paid ordinary shares on the basis of 1 Ordinary share for every 48.75p of principal amount of loan stock. The company can force conversion if the mean average closing bid price of an ordinary share, as shown in the daily official list of the London Stock Exchange for at least 30 consecutive days is equal to or exceeds £9.00 on or before the third anniversary or £11.25 after the third anniversary.

The convertible loan stock has been accounted for in accordance with IAS 32 (Financial instruments: Presentation) and split between debt and equity based upon the market rate of similar loan stock not carrying conversion options, estimated to be 8%. The fair value of the convertible loan note is considered to be the carrying value.

The Scenewise Inc. promissory note is repayable in equal quarterly instalments of $60,000 (2008: $60,000) until completion of the loan repayments at 31 December 2009. The loan bears a fixed interest rate of 10%. The promissory note arose on the acquisition of Scope seven LLC. The South Yorkshire Investment fund loan was fully repaid on 15th May 2009. The loan carried a fixed interest rate of 12%. The fair values of the promissory note and the short term loan are considered to be their book values.

Finance lease liabilities

Finance lease liabilities are payable as follows:

At 31 March 2009	Future minimum lease payments	Interest	Present value of minimum lease payments
	£000	£000	£000
Less than one year	119	-	119
Between one and five years	92	-	92
More than five years	-	-	-
	211	-	211

At 31 March 2008	Future minimum lease payments	Interest	Present value of minimum lease payments
	£000	£000	£000
Less than one year	105	-	105
Between one and five years	46	-	46
More than five years	-	-	-
	151	-	151

The lease periods of the finanace leases range from between 3 and 4 years, with options to purchase the assets at the end of the terms.

27. Trade and other payables

	2009	2008
	£000	£000
Trade Creditors	532	411
Accrued expenses	1,929	1,210
	2,461	1,621

The fair values of trade and other payables equals their carrying amount.

28. Commitments

Capital commitments

The group had no capital commitments at the balance sheet date.

Operating lease commitments

The group has a number of operating leases as a lessee, for equipment and premises under non-cancellable agreements. The lease terms are between 3 and 6 years, and the majority of lease agreements are renewable at the end of the lease period at market rate. The lease expenditure charged to the income statement during the year is disclosed in note 9.The lease expenditure on premises is charged to the income statement on an average annual charge over the life of the lease.

The future minimum lease payments under non-cancellable operating leases are as follows:

	2009	2008
	£000	£000
Within one year	340	327
From one to five years	710	799
After five years	-	-
	1,050	1,126

The group does not sub-lease any of its leased premises.

29. Events after the balance sheet date

On 9 April 2009 the Group purchased 473,500 of its own shares through ZOO Employee Share Trust Limited at an average price of 10.3p per share. The total cost of the purchase was £48,939.

30. Related parties

Key Management personnel

The details of key management remuneration is disclosed in the Directors' remuneration, interests and transactions (note 12).

No other related party transactions took place during the year.

31. Share based payments

Share options have been granted under the following schemes to subscribe for ordinary shares of the company. Movements in the number of options, under each of the schemes, and their related weighted average exercise price are as follows:

	2009		2008
	Options	Weighted average exercise price	Options	Weighted average exercise price
	No.	£	No.	£
Kazoo3D plc employee share option scheme*
Outstanding at the beginning of the year	-	-	2,008	37.50
Surrendered during the year	-	-	(2,008)	37.50
Outstanding at the end of the year	-	-	-	-
Exercisable at the end of the year	-	-	-	-
Kazoo3D plc unapproved employee share option scheme*
Outstanding at the beginning of the year	-	-	4,425	16.77
Surrendered during the year	-	-	(4,425)	16.77
Outstanding at the end of the year	-	-	-	-
Exercisable at the end of the year	-	-	-	-
Kazoo3D plc cross-over share option scheme*
Outstanding at the beginning of the year	-	-	13,880	37.50
Surrendered during the year	-	-	(13,880)	37.50
Outstanding at the end of the year	-	-	-	-
Exercisable at the end of the year	-	-	-	-
ZOO Digital Group plc rollover share option scheme
Outstanding at the beginning of the year	-	-	40,701	0.01
Surrendered during the year	-	-	(40,701)	0.01
Outstanding at the end of the year	-	-	-	-
Exercisable at the end of the year	-	-	-	-
ZOO Digital Group plc Enterprise Management Incentive scheme*
Outstanding at the beginning of the year	-	-	104,868	5.95
Forfeited during the year	-	-	-	-
Surrendered during the year	-	-	(104,868)	5.95
Outstanding at the end of the year	-	-	-	-
Exercisable at the end of the year	-	-	-	-
ZOO Digital Group plc Unapproved share option scheme*
Outstanding at the beginning of the year	-	-	36,635	6.96
Forfeited during the year	-	-	-	-
Surrendered during the year	-	-	(36,635)	6.96
Outstanding at the end of the year	-	-	-	-
Exercisable at the end of the year	-	-	-	-
ZOO Digital Group plc EMI scheme (2007)*
Outstanding at the beginning of the year	422,979	0.27	-	-
Granted during the year	-	-	422,979	0.27
Surrendered during the year	(422,979)	0.27	-	-
Outstanding at the end of the year	-	-	422,979	0.27
Exercisable at the end of the year	-	-	-	-
ZOO Digital Group plc Unapproved (2007)*
Outstanding at the beginning of the year	1,842,437	0.27	-	-
Granted during the year	-	-	1,842,437	0.27
Surrendered during the year	(1,842,437)	0.27	-	-
Outstanding at the end of the year	-	-	1,842,437	0.27
Exercisable at the end of the year	-	-	-	-
ZOO Digital Group plc EMI scheme (2008)*
Outstanding at the beginning of the year	-	-	-	-
Granted during the year	995,647	0.15	-	-
Outstanding at the end of the year	995,647	0.15	-	-
Exercisable at the end of the year	-	-	-	-
ZOO Digital Group plc Unapproved (2008)*
Outstanding at the beginning of the year	-	-	-	-
Granted during the year	2,138,918	0.15	-	-
Outstanding at the end of the year	2,138,918	0.15	-	-
Exercisable at the end of the year	-	-	-	-

*Under these schemes the percentage of shares that can be exercised is staggered over the exercise period with typically 40% exercisable after the first year and a further 30% in each of the following two years.

Out of the 3,134,565 outstanding options (2008: 2,265,416 options), no options (2008: nil) were exercisable. No options were exercised in 2009 or 2008.

During the year 2,265,416 were surrendered as they were deemed to be underwater and not providing an incentive to employees. New options were issued to replace the surrendered options.

All share options outstanding at the end of the year have an expiry date of 13 October 2018 and an exercise price of £0.15.

In arriving at the fair value, each option grant has been valued separately using the binomial model and the resulting fair value is expensed over the vesting period. The following table lists the range of assumptions used in the model:

Expected Volatility (%)	74.4 - 100
Risk-free Interest rate(%)	4.49
Expected life of option (years)	5
Expected dividends	none

Volatility has been estimated by taking the historical volatility in the company's share price over a three year period. The expected life used in the model has been adjusted, based on management's best estimate, for the effects of non-transferability, exercise restrictions and behavioural considerations.

Share warrants have been granted under the following scheme to subscribe for ordinary shares of the company. Movements in the number of warrants and their related weighted average exercise price is as follows:

	2009		2008
	Options	Weighted average exercise price	Options	Weighted average exercise price
	No.	£	No.	£
Share Warrants
Outstanding at the beginning of the year	-	-	-	-
Granted during the year	525,000	0.15	-	-
Outstanding at the end of the year	525,000	0.15	-	-
Exercisable at the end of the year	-	-	-	-

Under this scheme the percentage of shares that can be exercised is staggered over the exercise period based on cumulative cash received from the Warrant holder.

Out of the 525,000 outstanding warrants (2008: nil), 125,000 (2008: nil) were exercisable. No warrants were exercised in 2009 or 2008.

All share warrants outstanding at the end of the year have an expiry date of 15 August 2013 and an exercise price of £0.15.

In arriving at the fair value, the share warrants have been valued using the binomial model and the resulting fair value is expensed over the vesting period. The following table lists the range of assumptions used in the model:

Expected Volatility (%)	100
Risk-free Interest rate(%)	4
Expected life of option (years)	2
Expected dividends	none

Volatility has been estimated by taking the historical volatility in the company's share price over a three year period. The expected life used in the model has been adjusted, based on management's best estimate, for the effects of non-transferability, exercise restrictions and behavioural considerations.

Share based payments have had the following impact on the group's profit/(loss) for the year:

	2009	2008
	£000	£000
Total expense/(credit) recognised from share based payment transactions	52	(87)
Total expense/(credit) recognised from share warrant transactions	27	-
Share based payment liability	104	54

The credit for the year ended 31 March 2008 is due to the employees surrendering options during the year.

32. Financial instruments

The Group's financial instruments comprise cash and liquid resources, a long term convertible loan, a promissory note, a short term loan and various items, such as trade receivables and trade payables that arise directly from its operations. The main purpose of these financial instruments is to provide working capital for the Group's operations.

It is, and has been throughout the year under review, the Group's policy that no trading in financial instruments shall be undertaken.

Categories of financial instruments

	2009	2008
	£000	£000
Current financial assets
Trade receivables (note 21)	1,127	755
Cash at bank and in hand (note 22)	989	675
	2,116	1,430

	2009	2008
	£000	£000
Current financial liabilities
Finance lease liabilities (note 26)	119	105
Promissory note - Scenewise Inc. (note 26)	172	165
South Yorkshire Investment fund loan (note 26)	75	-
Trade and other payables (note 27)	2,461	1,621
Total current financial liabilities	2,827	1,891
Non-current financial liabilities
Finance lease liabilities (note 26)	92	46
Promissory note - Scenewise Inc. (note 26)	-	121
6% Unsecured convertible loan stock	3,214	3,108
Total non-current financial liabilities	3,306	3,275
Total financial liabilities	6,133	5,166

Market Risk

Foreign currency risk

The main risks arising from the Group's financial instruments are from foreign currency risk.

The Group includes two overseas subsidiaries operating in the USA during the year. The majority of the group's overseas transactions are with the USA and denominated in US dollars, hence exposing it to a currency risk of fluctuations in the US dollar. During the year ended 31 March 2009 there was much volatility in the US dollar with the rate peaking at 2.0038 and falling to a low of 1.3631. If Sterling had remained at its highest level throughout the full year the group would have shown a post tax loss of £2.1million (2008: Loss £2.1m) and if Sterling had been at its lowest level throughout the full year the group would have shown a post tax profit of £1.3million (2008: Loss £396,000). The main impact is on the translation of the intercompany balances between subsidiary undertakings. The company has less transactions denominated in US dollars. The transactions for the company which are in US dollars are with it's overseas subsidiaries.

During the year ending 31 March 2009 due to volatility in the US dollar rate exposure of the group and company was more significant than in previous years.

Interest rate risk

In September 2006 the company issued £3,541,000 Unsecured convertible redeemable loan stock, redeemable on 31 October 2011. The loan carries a fixed interest rate of 6%. The group also holds a promissory note repayable in quarterly instalments of $60,000 to Scenewise Inc. The promissory note, with a current balance of £172,000 (2008:£286,000), will be fully repaid on 31 December 2009 and carries an interest rate of 10%. During the year the company also obtained a loan from South Yorkshire investment fund, this loan was fully repaid on 15th May 2009. The group and company consider the interest rate risk on the loans to be minimal as rates are fixed.

Liquidity risk

Liquidity risk is the risk that the group and company will not be able to meet their financial obligations as they fall due. Management monitors rolling forecasts of the group's cash and cash equivalents on the basis of expected cash flows, reducing its liquidity risk through management of bank accounts, trade debtors and trade creditors, by utilising the availability of finance leases and through controls on expenditure.

The tables below analyse the financial liabilities which will be settled on a net basis into relevant maturity groupings based on the remaining period at the balance sheet to the contractual maturity date. The amounts disclosed in the table are the contractual undiscounted cashflows.

At 31 March 2009	Less than 1 year	Between 1 and 2 years	Between 2 and 5 years	Over 5 years
	£000	£000	£000	£000
Borrowings	247	-	3,214	-
Finance lease liabilities	119	88	4	-
Trade and other payables	2,461	-	-	-
At 31 March 2008	Less than 1 year	Between 1 and 2 years	Between 2 and 5 years	Over 5 years
	£000	£000	£000	£000
Borrowings	165	109	3,120	-
Finance lease liabilities	105	46	-	-
Trade and other payables	1,621	-	-	-

Credit risk

Credit risk arises from cash and cash equivalents and credit exposures on outstanding receivables. The group's main credit risk is on the outstanding trade receivables, this risk is reduced through credit control procedures. An analysis of outstanding receivables is included in note 21.

33. Capital management

The group's objectives when managing capital are to safeguard the group's ability to continue as a going concern, so that it can provide returns for shareholders and benefits for other stakeholders and to provide an adequate return to shareholders by pricing products and services commensurately with the level of risk.

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

Consistent with others in the industry, the group monitors capital on the basis of the gearing ratio. This ratio is calculated as net debt divided by total capital. Net debt is calculated as total borrowings (including 'current and non-current borrowings' as shown in the consolidated balance sheet) less cash and cash equivalents. Total capital is calculated as 'equity' as shown in the consolidated balance sheet plus net debt.

	2009	2008
	£000	£000
Total borrowings	3,672	3,545
Less cash and cash equivalents	(989)	(675)
Net Debt	2,683	2,870
Total equity	1,642	1,634
Total capital	4,325	4,504
Gearing ratio	62%	64%

Annual report and Accounts

 

The Report & Accounts for the year ended 31 March 2009 are expected to be posted to shareholders on or around 25 June 2009. Further copies will be available from the Company's Registered Office: 

The Tower

2 Furnival Square

Sheffield

S1 4QL

 

Copies will also available on the Group's website www.zoodigital.com. 

Annual General Meeting

The annual general meeting of the Group will be held at the Group's offices, The Tower, 2 Furnival Square, Sheffield, S1 4QL on 16 September 2009 at 11.30 a.m.

ENDFR FLMRTMMABBLL