Zoo Digital Regulatory News (ZOO)

ZOO DIGITAL GROUP PLC

('ZOO' or 'the group')

UNAUDITED PRELIMINARY RESULTS FOR THE YEAR ENDED 31 MARCH 2011

ZOO, the provider of workflow management software and services for creative media production, is pleased to announce its unaudited preliminary results for the year ended 31 March 2011.

HIGHLIGHTS

Operational highlights

·; Major Hollywood studio adopted automated toolset for Apple's iTunes® Extras

·; Secured Warner Home Video International for new automated style guide production system

·; Ebook and music industries identified as further areas for growth

Financial highlights

·; Revenues of $14m (2010: $15m) reflect change in sales mix to higher margin services

·; Adjusted EBITDA of $2.3m (2010: $1.6m)*

·; Adjusted operating profit of $1.3m (2010: $0.8m)*

·; Year-end cash balance $0.6m (2010: $1.2m)

*Adjusted EBITDA and operating profit are stated before exchange gain on intercompany transactions and exceptional impairment

Post period end highlights

·; First significant contract through MPS relationship with leading videogame publisher

·; Global Digital Media Xchange licenses automated Blu-Ray and Electronic Sell Through ("EST") production solutions

·; Successfully completed a share placing of $2.8m to provide working capital to fund growth, particularly in the area of eBooks

·; $5.6m convertible loan note instrument resolved with 50% converting into equity and 50% rolling into a loan note extension for two years

Stuart Green, CEO of ZOO Digital, commented, " I am pleased to be able to report further progress for the group, against the backdrop of great upheaval in the filmed entertainment industry. It is a great credit to ZOO that it came through this period with increased profits, which underlines the strength of our business. New opportunities continue to present themselves and it has become ever more apparent that our solutions are relevant to a wide range of industries outside of our traditional stronghold of Hollywood.

One particularly exciting prospect is within the eBook market, where ZOO's suite of tools have been developed to format books for the EST market in a superior and more cost effective way than existing methods. To this end, we are delighted to have secured an additional $2.8 million of funding from shareholders, primarily to accelerate our presence in this rapidly growing market. Continued support from our major shareholders has also allowed us to reach agreement with the holders of our existing loan notes, which were due for redemption in October of this year.

For further enquiries please contact:

About ZOO Digital Group plc

ZOO Digital Group plc provides software and related services that support the authoring, re-purposing and distribution of creative media. ZOO's products form an integrated suite of web-based and desktop applications for audio/visual content and printed materials, adapting these media for different languages, formats and delivery mechanisms.

By centralising editorial and approval processes via secure web-based platforms, ZOO's proprietary patented software helps customers to increase their speed of production, reduce costs and protect their brand integrity. ZOO's services enable quicker and more cost effective processes across a wide range of applications and formats, including packaging, printed materials, DVD, Blu-ray Disc, video on demand, electronic sell-through, broadcast, music and electronic books.

The group's largest customers include major Hollywood studios, for which the production, marketing and distribution of titles in numerous formats across many geographies and languages has previously been a lengthy, costly and largely manual process. Increasingly the group's software is benefiting a variety of companies across sectors where the development of media products, printing, packaging and marketing involves complex processes in multiple countries and languages, particularly where brand integrity is of core importance.

CHAIRMAN'S STATEMENT

The Board is pleased to report another year of progress in which ZOO has performed in line with market expectations. The group increased its operating profit to $1.3m (compared with $821k in 2010), and EBITDA rose to $2.3m (from $1.6m in 2010), despite a decline in revenue to $14m (from $15m in 2010). The decline in revenue arose from two primary causes: a short-term slowdown in projects from our largest customer during a major organisation change there and a reduction in the amount of low margin subtitling work which has traditionally been subcontracted to a third party vendor. Cash generation was also affected by this temporary slowdown in orders, and our year end cash balance was $0.6m.

During the year ZOO has made significant progress in reducing its dependence on the filmed entertainment industry. Although extending and deepening our customer relationships in this large industry remains vital to our business, the alliance with MPS, announced last year, has now yielded its first significant customer contracts outside the sector. In addition, our software and service platforms have shown themselves to be ideally suited to the management and electronic delivery of a wide range of creative media content, such as music, video game materials and, most significantly, e-Books. The Chief Executive's operational review provides more details of these exciting developments for the group.

Shareholders will be aware that in September 2006 the company issued a five-year convertible loan note of $5.6m (£3.54m) to be either redeemed or converted into shares prior to October 2011. I am pleased to report that we have reached agreement with the loan note holders for 50% of this loan to be converted into shares and for the balance of 50% to remain in the loan note instrument with the maturity date extending to 31 October 2013 and the coupon changing to 7.5%. I am also pleased to report a successful placing which will raise $2.8m to be used as working capital for the group to support expansion of the business in new markets, particularly e-Books.

Ian Stewart, Non-Executive Director of the company, announced his decision to step down from the Board of Directors with effect from 31 December 2010 to concentrate on his other business interests. The Board would like to thank Ian, who had been with ZOO since inception, for his dedication and commitment to the group, and he takes with him our very best wishes for the future.

ZOO's products and services are highly relevant to companies in all industries where there is a need to maintain the quality and brand integrity of creative digital content. ZOO's customers are therefore typically large, multi-national organisations whose brands are recognised internationally and whose names signify a level of quality that the companies need to protect. The progress we have made this year in winning new customers for our software tools outside the filmed entertainment sector, and in extending our relationships with existing customers, stems directly from the quality and commitment of our staff in the US and the UK; the Board is therefore confident in the future success of the group.

Roger Jeynes

Chairman

[1] Operating Profit and EBITDA are stated before exceptional exchange gain on intercompany transactions and any exceptional impairment

CHIEF EXECUTIVE'S STATEMENT

Operational review

I am pleased with the performance of the group in what has been a difficult environment for the filmed entertainment industry.

Filmed entertainment

The home entertainment market in particular has been through a turbulent period over the last 12 months, with upheaval and cost cutting measures taking place at many of the major Hollywood studios which, in turn, led to some order distortion for ZOO, specifically from our major customer. However, we were very pleased to note that the shortfall in orders has substantially recovered. Furthermore, we believe that the pressure that the studios are under to maximise sales and eliminate costs provides an ever greater advantage for the group. One of the most important ways for a studio to maximise sales of a new release, especially blockbuster titles, is to distribute the product into as many territories as possible simultaneously. By doing so, the loss of revenue through counterfeit products and illegal copying are dramatically reduced and the integrity and quality of the production is maintained. This very need to accelerate distribution globally in the shortest time frame possible makes our toolsets even more compelling.

We are continually looking to broaden our client base whilst also striving to deepen the relationships with existing customers and increase the scope of work that we are doing for them. We were, therefore, pleased to be able to announce that Global Digital Media Xchange, a wholly-owned subsidiary of Warner Bros. Entertainment, has licensed our automation production solutions for Blu-Ray and Electronic Sell Through platforms.

Electronic Sell Through ("EST") Market

The electronic delivery of digital products represents possibly the most significant shift in consumers' media purchasing in recent times and we believe that this creates an excellent opportunity for ZOO. In September we announced that we had launched a new toolset that allowed existing content for the filmed entertainment industry to be made available through Apple's iTunes® Extras platform. Our tools enable content owners to adapt additional features such as movie and chapter selection along with special features such as movie stills, deleted scenes, exclusive interviews, and behind-the-scenes footage. These additional features have long been associated with DVD and more recently with Blu-ray Disc productions but the costs associated with traditional production methods have proved prohibitive for sales on iTunes and other Electronic Sell Through platforms. ZOO's toolset enables this production at significantly lower costs and the initial response from clients has been extremely positive.

A similar opportunity exists within the music industry. Traditional album formats often include extra features such as the ability to view lyrics, liner notes, band photos and performance videos. ZOO has created an Interactive Content Editor to enable the efficient preparation of iTunes LPs, enabling publishers to sell such content through Apple's iTunes LP platform and incorporate many of the extra features associated with traditional formats. Initial customers include a number of music publishers in the US, UK and France. According to Strategy Analytics, digital music revenues in 2012 will reach US$2.8 billion and surpass physical sales for the first time.

An even greater opportunity in the field of EST, and one of the most exciting developments in the past year, has presented itself with the electronic book, or eBook, market. The success of the overall eBook market has been spectacular and well publicised. According to a recent report from Futuresource Consulting, in 2010 the eBook market grew by more than 200% to a value of more than US$900m.

As a result of ZOO's success with the iTunes platform we have augmented our Media Collaboration solutions to include an eBook Builder which provides an efficient and cost-effective way for publishers to repurpose traditional books for sale online. This new tool works in conjunction with ZOO's software for managing collaborative workflows, adapting materials into multiple languages, and providing storage and distribution of content for multiple eBook vendors. Another great advantage in using ZOO's toolset for eBook production is that it maintains the formatting qualities and standards of a physical production thereby enhancing the enjoyment of reading it electronically. For example, where pictures or illustrations are used to accompany text to illustrate a point in a physical book, current practices for converting this into an electronic version have proved complicated and many of the resulting eBooks created by third parties have been produced with layout errors. Whilst this may not be of particular relevance to pure text books, it makes a huge difference where such features are integral to the genre of the book, which makes our tools particularly applicable to picture books, comics, travel guides, cookery books and reference publications.

MPS

At this stage last year we announced that we had agreed a strategic relationship with John Henry Holdings Inc., a subsidiary of Multi Packaging Solutions, Inc. ("MPS"), a US headquartered value-added print-based packaging solutions company. I am pleased to report that we have made significant progress through this in the past 12 months and the potential new business opportunities available to us are extremely exciting.

Indeed, in June this year we were able to announce the first significant contract win through this relationship with a leading international videogame publisher. We have already begun work with the publisher in the regionalisation of the interactive game group's packaging materials for multiple territories and languages.

We believe that this will be just the first in many relationships to come through MPS and are currently in discussions with a number of impressive organisations to help them with the production of packaging, marketing and other printed materials in a wide range of geographies, and I look forward to providing further updates in the coming year.

Placing of Shares

We have raised approximately $2.8m of capital through a placing of shares to provide working capital that we intend to use to support the acceleration of the business in new markets. I have personally subscribed $160,000 to the placing demonstrating my confidence in the future.

We plan to use these funds for the following purposes:

·; Put in place the infrastructure needed to establish ZOO as an eBook aggregator

·; Support the recruitment of additional R&D staff to accelerate eBook and EST software development

·; Enlargement of the production team to provide a range of eBook services

·; Recruit new sales and marketing staff to support eBook business development

Convertible loan note

We have reached agreement with the holders of the $5.6m convertible loan note, which was issued in 2006 and was due to mature in October 2011. The loan note holders have agreed to convert 50% of the outstanding amount into equity at 40p with the balance remaining in the convertible loan note instrument which has been extended for a further period of two years with a coupon of 7.5% and a conversion price of 48p.

Staff

It continues to be an honour to work with such a talented team of professionals in both our UK-based R&D centre and our US-based production services facility. In all areas of the business our success hinges on the talents, creativity and dedication of our staff who continue to excel in delivering innovative technology and first class customer services. We strive to provide a great place to work to attract and retain our key talent. On behalf of the Board I would like to extend my thanks to all staff for their contributions over the past year and I look forward to working together in the year ahead.

Outlook

Our team has built an excellent product platform, reputation and customer relationships that I believe place us in a strong position to grow the business significantly. We have many exciting opportunities ahead of us and I look forward to the future with confidence.

Stuart A Green

CEO

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (UNAUDITED)

for the year ended 31 March 2011

Other comprehensive income:

CONSOLIDATED STATEMENT OF FINANCIAL POSITION (UNAUDITED)

as at 31 March 2011

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY (UNAUDITED)

for the year ended 31 March 2011

CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)

for the year ended 31 March 2011

NOTES TO THE FINANCIAL STATEMENTS (UNAUDITED)

for the year ended 31 March 2011

1. General Information

ZOO Digital Group plc ('the company') and its subsidiaries (together 'the group') provide productivity tools and services for digital content authoring, video post-production and localisation for entertainment and packaging markets and continue with on-going 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.

The consolidated financial statements are presented in US dollars, the currency of the primary economic environment in which the company operates (note 2.2).

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 2006 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.

A separate Statement of Comprehensive Income for the parent company has not been presented as permitted by section 408 (2) of the Companies Act 2006.

In September 2006 the company issued a five year convertible loan note of $5.6m to be either redeemed or converted into shares prior to October 2011. Since the balance sheet date the Board have reached agreement with the loan note holders for 50% of this loan to be converted into shares and for the remaining 50% to stay in the loan note instrument which has been extended for a further a two years with a coupon of 7.5%. A placing of equity shares has raised an additional $2.8m which will be used as working capital for the group to support expansion of the business in new markets, particularly e-Books.

The results for the year demonstrate growth in profitability and the directors have prepared trading and cash flow forecasts for the group for the period to 31 March 2014 which show further cautious growth in profitability. In line with industry practice in this sector the directors have had informal indications from major and other customers to substantiate a significant proportion of the forecast sales. The directors have considered the consequences if the sales volume is less than the level forecast and they 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 bank funding facilities are due for renewal in October 2011 and the directors have no reason to believe that this will not be renewed.

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.

2.2 Foreign currency translation

2.2.1 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 US dollars which is the group's functional and presentation currency.

The pound sterling/US dollar exchange rate at 31 March 2011 was 0.6228 (2010: 0.6589).

3. Profit/(loss) per share

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

4. Notes to the cash flow statement

4.1 Significant non-cash transactions

During the year the group acquired property, plant and equipment and computer software with a cost of $510,000 (2010:$334,000) of which $288,000 (2010: $120,000) was acquired by the means of finance leases.

4.2 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 consolidated and parent company statement of financial position amounts.

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

5. Share capital and reserves

Called up share capital

During the year the group purchased 298,232 (2010: 473,500) of its own shares through ZOO Employee Share Trust Limited at an average price of $0.42 (24.1p) per share. The total cost of the purchase was $124,374 (2010: $71,823).

On 25 June 2010 the company allotted and issued 2,148,642 new ordinary shares of $0.23 (15p) each in the company, at a subscription price of $0.60 (40p) per share.

Transactions after the reporting period are shown in note 7.

Reserves

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

6. Borrowings

On 27 September 2006 the company issued $5,062,000 6% Unsecured convertible loan note stock which matures on 31 October 2011. The underlying value of the loan stock is £3,541,000. 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 $0.6969 (£0.4875) of principal amount of loan stock.

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.

7. Events after the reporting period

On 10 June 2011 36,155 shares were issued following the exercise of employee share options.

On 14 June 2011 the group entered into an agreement to extend the lease on its US offices. The lease has been extended to December 2016. The total commitment of the five year period is $2.6m.

On 10 August 2011 the company announced that agreement had been reached with the holders of the $5.6m convertible loan note to convert 50% of their holding into shares at a price of 40p and for the balance of 50% to remain within the loan note instrument for a further two years at a coupon of 7.5% and a conversion price of 48p. It was further announced that there has been a successful placing of shares raising $2.8m at a price of 40p in order to fund working capital in areas of growth. Stuart A Green, CEO, agreed to subscribe $160,000 to the placing. The loan note conversion into equity results in the issue of 4,426,250 shares and the placing results in a further 4,252,500 shares. After these transactions the total number of shares in issue will be 32,561,160.