Zoo Digital Regulatory News (ZOO)

10 August 2011

ZOO Digital Group plc

("ZOO" or "The Company")

Placing to raise £1.70m and Restructuring of Loan Notes

The Company is pleased to announce a fundraising of £1.70 million by way of a placing of 4,252,500 new Ordinary Shares at a price of 40 pence per share, and a restructuring of all of the Company's outstanding convertible Loan Notes, amounting to £3.54 million which were due to mature on 31 October 2011.

Highlights

·; £1.70 million raised by way of a Placing of 4,252,500 new ordinary shares at 40 pence per share

·; Net proceeds of the Placing will accelerate the roll-out of the Company's software in new markets, particularly eBooks

·; Conversion of half of its outstanding convertible loan notes at the Placing Price and the extension of the other half to October 2013

·; Placing, Conversion and Extension are subject to approval of Shareholders and Loan Noteholders at respective general meetings on 6 September 2011

·; Admission expected to be effective from 7 September 2011

Terms and expressions defined in the Circular have the same meaning in this announcement.

The net proceeds of the Placing will be deployed toward accelerating the adoption of the Company's software in new markets, particularly eBooks. The Directors believe that the Company's software is well suited to the production of media rich eBooks including picture books, comics, graphic novels, cookery books, travel guides and encyclopaedias.

The Company will further strengthen its balance sheet, subject to the approval of the Loan Noteholders, by the conversion of £1.77 million of the Loan Notes (representing half of the outstanding Loan Notes) into 4,426,250 new Ordinary Shares and the extension of the term in respect of the remaining £1.77 million of the Loan Notes to 31 October 2013.

The Placing, Conversion and Extension are subject, inter alia, to the passing of the Resolutions at a General Meeting and the approval of the Loan Noteholders. A circular to Shareholders and Loan Noteholders setting out full details of the Resolutions and convening the General Meeting and Loan Noteholders GM will today be posted to Shareholders (the "Circular"). The Circular is available on the Company's website at www.zoodigital.com.

Stuart Green, Chief Executive Officer of ZOO, commented "We are pleased to have secured this additional funding which will enable us to take advantage of the growth taking place in the electronic books market. Our solutions maintain the formatting qualities and standards of a physical production, thereby enhancing the enjoyment of reading it electronically and we are confident that the proceeds of this Placing will help us to achieve great success in this field.

"We are also very pleased to have reached agreement with the holders of our existing Loan Notes to restructure these commitments in order to strengthen our balance sheet. We believe this solution will benefit all of our stakeholders in the long term. The Board would like to thank all shareholders and loan noteholders for their continued support and looks forward to the future with confidence."

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The following text has been extracted from the circular which has been sent to shareholders and loan noteholders:

Introduction

The Company has today announced that it has conditionally raised approximately £1.70 million subject, inter alia, to the passing of the Resolutions at the General Meeting, by way of a placing of 4,252,500 new Ordinary Shares at a price of 40 pence per share to provide working capital to enable the development of the Company's business in new markets, including developing its Electronic Books ("eBooks") product offering as detailed below.

The Company is seeking the approval of the Loan Noteholders to convert and/or restructure and extend all of the £3,541,000 of the outstanding Loan Notes, which were due to mature and be repaid by the Company on 31 October 2011. The Directors are of the belief that the conversion of £1,770,500 of the Loan Notes into 4,426,250 new Ordinary Shares and the extension of the term in respect of the balance of £1,770,500 of the Loan Notes to 31 October 2013 will strengthen the Company's balance sheet.

Further details of the Placing, the Conversion and the Extension of the Loan Notes are set out below.

The Company is seeking the authority of Shareholders at the General Meeting to provide the Directors with authority to allot and issue the Placing Shares and the Conversion Shares and to allot further shares and/or to grant rights to subscribe for or convert any security into Ordinary Shares up to a nominal amount of £553,281.30 and to disapply the statutory rights of pre-emption in relation to the allotment of the Placing Shares and the Conversion Shares and otherwise up to a nominal amount of £1,855,093.80. In addition, the Company is also seeking similar authorities in respect of any Ordinary Shares that come to be allotted pursuant to future conversions of Loan Notes. The Resolutions to be proposed at the General Meeting are contained in the Notice of General Meeting set out at the end of the circular.

The Company is also seeking the authority of Loan Noteholders at the Loan Noteholders GM to vary certain of the Loan Noteholders' rights and to make amendments to the Loan Note Instrument in order to effect the Conversion and the Extension together with certain other consequential amendments to the terms and conditions of the Loan Note Instrument.

The purpose of this letter is to outline the reasons for, and to explain the terms of the Placing, the Conversion and the Extension and to explain why the Board considers the Resolutions and the Loan Noteholders Resolutions to be in the best interests of the Company, the Shareholders and the Loan Noteholders as a whole and why the Independent Directors recommend that you vote in favour of the Resolutions at the General Meeting and the Loan Noteholders Resolutions at the Loan Noteholders GM as they intend to do in respect of the Ordinary Shares and Loan Notes which are legally and beneficially held by them.

Reasons for the Placing and the use of the proceeds

The Company has successfully marketed its automated workflow management software to the filmed entertainment market. As described in the Company's announcement of its unaudited preliminary financial results today, the Company has sought to expand on this success by attracting new customers to its existing product set, while developing new software solutions to market to both existing clients and new clients across a range of sectors including the regionalisation of packaging materials, publishing (notably eBooks), music, and interactive entertainment.

The net proceeds of the Placing will be deployed toward accelerating the adoption of the Company's software in new markets, particularly eBooks. The Directors believe that the Company's software is likely to be well suited to the production of media rich eBooks including picture books, comics, graphic novels, cookery books, travel guides and encyclopaedias.

Specifically, in view of the rapid growth of the market for the Company's technology, the employment of additional technical staff will be required to accelerate the development of software, production staff to provide the eBook services, and sales and marketing staff to support the client base.

The eBooks Market

The global eBooks market is particularly attractive to ZOO. With almost $1bn suggested to be likely to have been spent on eBooks in the US during 2010 and with this market expected to reach $3 billion by 2015, according to Forrester Research, publishing companies are increasingly seeking efficient ways to convert their products into eReader-friendly formats. To illustrate this, the Directors note that the Hachette Book Group, the 3rd largest book publisher worldwide, recently announced that eBooks accounted for 22 per cent. of its revenues in the first quarter of 2011, whilst amazon.co.uk state that almost 800,000 of its 35 million books for sale are in eBook format. The Association of American Publishers echoed the notion by announcing that digital books became the largest single format of books in the US in February 2011.

As announced previously, the Company's expertise in providing workflow and automation software for the film production market can be applied to, amongst others, this rapidly growing eBooks market. ZOO's products enable publishers to repurpose traditional books for sale online across a range of eReader devices, including both the Amazon Kindle and Apple iPad (the two largest eReaders by market share). The Directors believe that their strategic proposition is clearly different to its competitors, whereby ZOO's proprietary, automation software technology provides efficiencies and economies superior to competitors' reliance on human labour.

Summary of Financial Results for the Year ended 31 March 2011

The Company is pleased today to have reported its unaudited preliminary financial results for the year ended 31 March 2011. Shareholders are advised to review that announcement for a detailed report of the Company's financial results for the year ended 31 March 2011.

In summary, for the year to 31 March 2011, ZOO is pleased to have performed in line with market expectations. The Group increased its operating profit to $1.3 million (compared with $821k for the year ended 31 March 2010), and EBITDA rose to $2.2 million (from $1.6 million in the previous year), despite a decline in revenue to $14 million (from $15 million in the previous year).

The decline in revenue arose from two primary causes: a short-term slowdown in projects from the Company's largest customer during a major organisational change within a division of the customer 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 the cash balance at 31 March 2011 was $0.6 million ($1.2 million at 31 March 2010).

The Loan Notes

The Loan Notes, amounting to £3,541,000, all of which are currently outstanding, were issued by the Company in September 2006 to a number of institutional and private investors, carry a coupon of 6 per cent. per annum (payable half-yearly), with maturity on 31 October 2011. The conversion price of the Loan Notes under the terms of the Loan Note Instrument is 48.75 pence per Ordinary Share converted.

Subject to the passing of the Resolutions and the Loan Noteholder Resolutions and completion of the Placing, the Company intends to convert £1,770,500 of the Loan Notes into the 4,426,250 Conversion Shares and the balance of the Loan Notes, being £1,770,500, will be subject to an amended Loan Note Instrument, maturing on 31 October 2013.

In order to effect this, it is proposed that two fundamental amendments are to be made to the rights of the Loan Noteholders and the terms and conditions of the Loan Note Instrument in order to effect the proposed restructuring of the Loan Notes and in order to effect the Conversion and the Extension:

·; Conversion - the Loan Noteholders are being asked to agree to the conversion of 50 per cent. of the Loan Notes (representing £1,770,500 of Loan Notes) at a price of 40 pence per Ordinary Share and accordingly 4,426,250 Conversion Shares would be issued following Admission. As a result of the Conversion, the total amount of Loan Notes in issue would be reduced to £1,770,500; and

·; Extension - following completion of the Conversion and the allotment of the Conversion Shares, the Loan Note Instrument will be amended so that the balance of approximately £1,770,500 of Loan Notes will mature and become redeemable by the Company on 31 October 2013 and will, following Admission, carry a coupon of 7.5 per cent. This amendment to the Loan Note Instrument will also provide for the Loan Noteholders to be able to convert the Loan Notes at any time at the price of 48 pence of Loan Notes per Ordinary Share.

In addition, further amendments are proposed to be made to the Loan Note Instrument: (i) to enable the Company to redeem Loan Notes at any time, pro rata to the holding of Loan Noteholders; and (ii) to vary the share price hurdle to £2.50 per share which must be satisfied to enable the Company to convert the Loan Notes pursuant to the Loan Note Instrument.

Subject to the passing of the Loan Noteholder Resolutions, following completion of the Conversion and immediately following Admission, £1,770,500 of Loan Notes will remain outstanding and issued and will be subject to the new terms and conditions pursuant to the amendments made to the Loan Note Instrument as a result of the Extension.

Details of the Placing, the Conversion and the Extension

The Company has today announced that it intends to raise approximately £1.70 million, before expenses, through the conditional Placing by finnCap of 4,252,500 Placing Shares at a price of 40 pence per share (representing 13.1 per cent. of the Enlarged Share Capital), and the Conversion in respect of which the 4,426,250 Conversion Shares (representing 13.6 per cent. of the Enlarged Share Capital) will be issued and allotted to certain of the Loan Noteholders, as detailed below.

The Placing Agreement

Under the terms of the Placing Agreement, finnCap has conditionally agreed to use its reasonable endeavours, as agent for the Company, to place the Placing Shares with certain institutional and other investors at the Placing Price per share. The Placing Agreement is conditional upon, inter alia, the Resolutions being duly passed at the General Meeting, the Loan Noteholders Resolutions being passed at the Loan Noteholders GM and Admission becoming effective on or before 8.00 a.m. on 7 September 2011 (or such later time and/or date as the Company and finnCap may agree, but in any event by no later than 8.00 a.m. on 30 September 2011).

The Placing Agreement contains warranties from the Company in favour of finnCap in relation to, inter alia, the accuracy of the information in the Circular, the fact that the Group has and will have sufficient working capital for its present requirements, that is for at least 12 months following Admission, and certain other matters relating to the Company and its business. In addition, ZOO has agreed to indemnify finnCap in relation to certain liabilities it may incur in respect of the Placing. finnCap has the right to terminate the Placing Agreement in certain circumstances prior to Admission, in particular, in the event of a material breach of the warranties.

Under the Placing Agreement and subject to it becoming unconditional in all respects and not being terminated in accordance with its terms, the Company has agreed to pay finnCap, together with any applicable value added tax, a commission and a corporate finance advisory fee.

The Loan Notes

Subject to the passing of the Loan Noteholders Resolutions and the completion of the Placing, the Loan Noteholders have agreed as follows:

·; that £1,770,500 of the Loan Notes be converted into 4,426,250 Conversion Shares at 40 pence per share (representing 50 per cent. of the Loan Notes currently in issue); and

·; that £1,770,500 of the Loan Notes (representing 50 per cent. of the Loan Notes currently in issue) be extended to mature on 31 October 2013 and to carry a coupon of 7.5 per cent.

The New Ordinary Shares will, following allotment, rank pari passu with the Existing Ordinary Shares.

The Placing, the Conversion and the Extension are conditional on the approval by Shareholders of the Resolutions to be proposed at the General Meeting and the approval by Loan Noteholders of the Loan Noteholders Resolutions to be proposed at the Loan Noteholders GM.

Application will be made for the New Ordinary Shares to be admitted to trading on AIM. It is expected that Admission will become effective and dealings in the New Ordinary Shares on AIM will commence on 7 September 2011.

Participation of Directors

Stuart Green and his wife have agreed to subscribe for 250,000 Placing Shares and for the conversion of Sara Green's £171,000 interest in the Loan Notes (representing half of their beneficial interest in the Loan Notes) which will result in the issue of 427,500 Conversion Shares. Together with his wife, Stuart Green will on Admission be interested in 4,857,335 Ordinary Shares, representing 14.9 per cent. of the Enlarged Share Capital and Sara Green will be interested in £171,000 of the Loan Notes which will follow the Extension.

Capital structure following the Placing and the Conversion

Following Admission, the Company will have 32,561,160 Ordinary Shares in issue. The passing of the Resolutions at the General Meeting will give the Directors the authority to allot the Placing Shares and the Conversion Shares and thereafter to allot up to a further 3,688,542 new Ordinary Shares, further details of which can be found below.

The current interests of the Directors and those persons holding in excess of 3 per cent. or more and such persons' interests in the Enlarged Share Capital are set out below:

* Comprising funds managed by the Foresight Group

** Combined interest of Stuart Green and his wife

*** Combined interest of Ian Stewart and his wife

General Meeting

The notice convening the General Meeting to be held at the offices of finnCap, 60 New Broad Street, London, EC2M 1JJ at 10.00 a.m. on 6 September 2011 is set out in the Circular at which the following resolutions will be proposed:

Resolution 1

An ordinary resolution to give the Directors authority to allot the Placing Shares and the Conversion Shares up to a further 8,678,750 new Ordinary Shares upon the conversion of any of the Loan Notes after Admission and thereafter general authority to allot shares or grant rights to subscribe shares up to an aggregate nominal amount of £553,281.30 (being 3,688,542 Ordinary Shares), such authority to expire on 31 October 2013.

Resolution 2

Subject to the passing of Resolution 1, a special resolution to dis-apply the statutory pre-emption rights in respect of the allotment of the Placing Shares, the Conversion Shares up to a further 8,678,750.00 new Ordinary Shares upon the conversion of any of the Loan Notes after Admission and thereafter a general disapplication authority to allot shares up to an aggregate nominal amount of £553,281.30 (being 3,688,542 Ordinary Shares), such authority to expire on 31 October 2013.

Resolution 3

Subject to the passing of Resolutions 1 and 2 above, an ordinary resolution to give the Directors authority to allot new Ordinary Shares in the Company in respect of the balance of Loan Notes in issue following Admission at any time prior to the maturity of Loan Note Instrument on 31 October 2013, such authority to expire on 31 October 2013.

Resolution 4

Subject to the passing of Resolution 3, a special resolution to dis-apply the statutory pre-emption rights in respect of the allotment of the new Ordinary Shares pursuant to Resolution 3, such authority to expire on 31 October 2013.

Loan Noteholders GM

Notice convening the Loan Noteholders GM, to be held at the offices of finnCap, 60 New Broad Street, London EC2M 1JJ at 10.10 a.m. on 6 September 2011 (or as soon thereafter as the General Meeting convened for 10.00 a.m. on the same day and at the same place shall have been concluded), will be posted to Loan Noteholders, at which the following extraordinary resolutions of Loan Noteholders will be proposed:

Resolution 1

An extraordinary resolution to modify the rights of the Loan Noteholders to approve the conversion of £1,770,500 of the Loan Notes into 4,426,250 Conversion Shares (representing 50 per cent. of the Loan Notes).

Resolution 2

An extraordinary resolution to modify the terms and conditions of the Loan Note Instrument such that, inter alia, the remaining £1,770,500 of Loan Notes in issue (currently representing the 50 per cent. of the Loan Notes) be extended to mature on 31 October 2013 carrying a coupon of 7.5 per cent. and additionally that the Company have the right of redemption at any time prior to such maturity date and further that the share price hurdle in respect of the Company's right to convert the Loan Notes be varied.

Resolution 3

An extraordinary resolution to approve the special resolutions passed by the shareholders at the General Meeting.

Irrevocable Undertakings

Each of the Directors has given irrevocable undertakings to vote in favour of the Resolutions at the General Meeting in respect of their own beneficial holdings of Ordinary Shares, totalling 4,255,854 Ordinary Shares, representing, in aggregate, 17.82 per cent. of the Existing Ordinary Shares.

The Company has received irrevocable undertakings representing £3,478,000 of the Loan Notes (being 98.2 per cent. of the Loan Notes) to vote in favour of the Loan Noteholders Resolutions at the Loan Noteholders GM.

Venture Capital Trusts

HM Revenue & Customs has given provisional approval that the Placing Shares to be issued qualify for relief under VCT legislation.

Related Party Transaction

The participation in the Placing of Stuart Green as a director of the Company and of his wife Sara Green in respect of the Conversion and the Extension, and in respect of the participation of Herald Investment Management and Foresight Group in the Placing, the Conversion and the Extension, as substantial shareholders, represents related party transactions under the AIM Rules (the "Related Party Transactions").

The Independent Directors, having consulted with the Company's nominated adviser, finnCap, believe that the terms of the Related Party Transactions are fair and reasonable insofar as the Shareholders are concerned.

Recommendation

The Independent Directors believe that the Placing, the Conversion and the Extension are in the best interests of the Company and its Shareholders and the Loan Noteholders as a whole. Accordingly, the Independent Directors recommend that you vote in favour of the Resolutions and the Loan Noteholders Resolutions as they intend to do in respect of their own beneficial holdings of Ordinary Shares and Loan Notes.

Share capital and Placing statistics