Final Results

Z GROUP plc Preliminary results for the twelve months ended 28 February 2007 Z GROUP plc (Z GROUP or the Group), the AIM listed developer and provider of leading consumer internet technologies, today announces its preliminary results for the twelve months ended 28 February 2007. Financial Highlights: - Results in line with market expectations: - Turnover £2.6 million (2006: 5.0 million) - Loss before tax of £1.1 million, including a share option charge of £0.3m (2006 profit of £0.4 million, including a share option charge of £0.7m) - Gross Profit Margin 75% (2006: 78%) - Administrative expenses down by 13% to £3.2 million (2006 adjusted: £3.6 million) - Cash of £2.2 million (2006: 4.1 million), with cost cutting programme initiated - Minority Interest of OnShare acquired in exchange for £3.8 million Z GROUP shares Jamie True and Jack Bekhor, Joint Chief Executive Officers, commented: "The sentiment within the Group is one of excitement for the current financial year, with a focus on maintaining our core businesses, exploiting the Group's IP and developing a new pipeline of products, with a more efficient cost-base." 11 June 2007 Enquiries: Z GROUP Plc +44 (0) 8700 111 173 Jack Bekhor/Jamie True Joint Chief Executive Officers Duncan Neale Finance Director Nexus Financial +44 (0) 20 7451 7050 Nicholas Nelson/Kathy Nicholas.nelson@nexusgroup.co.uk Boate Teather & Greenwood +44 (0) 20 7426 9000 Tom Hulme Corporate Finance CHAIRMAN'S STATEMENT The key elements of our results for the year to 28th February 2007 are that turnover was down to £2.6 million (2006: £5.0 million); and losses before tax and the option based charge was £0.8m (2006: profit of £1.0 million). Cash balances reduced to £2.2 million (2006: £4.1 million). These results demonstrate the resilience of ONSPEED as we continued with the development of OnShare. There is no doubt that the challenges associated with the development of OnShare have been greater than originally anticipated but this product is now out and we are confident it will be considerably better for the delays encountered. As a result of this emphasis on development expenditure last year, the cash burn rate was considerable but it has been reduced substantially since the beginning of this year. CORPORATE STRATEGY Our strategy for growing the business remains as stated in our AIM admission document - to identify, acquire or licence and develop technology opportunities and to commercialise them through proven brand development and analytical and cost efficient marketing. We continue to monetise the current products within the Group as well as seeking new innovative web-enabled technologies to add to our portfolio that are pre-paid, high margin and offer high visibility. We have acquired the technology rights to market some new products which will grow our product portfolio, thereby enabling us to utilise our customer base to maximum effect. In December 2006, we completed the acquisition of the outstanding minority interest in OnShare Limited which holds the OnShare technology and this will allow us to gain the full advantage of this new product when commercialisation commences. BOARD OF DIRECTORS We strengthened our Board by appointing three new members in the year. In July 2006, Polly Williams was appointed as a non-executive director and as Chair of our Audit Committee and Jonty Slater, the Group's Chief Technology Officer, was appointed as an executive director. Duncan Neale was appointed as Finance Director and Company Secretary in September 2006. Ian Smith, who joined as a non-executive director at the time of our AIM listing in June 2005, has decided to stand down from the board at our forthcoming AGM due to his other increasing business commitments. We have benefited greatly from Ian's wisdom and experience and wish him well with his other endeavours. OUR PEOPLE Success in the technology sector is fundamentally reliant upon making the best use of the people it employs to create intellectual capital. We are committed to motivating, developing and rewarding our employees and are pleased that each employee has been with Z GROUP for an average of nearly two and a half years. We promote knowledge sharing across the Group, ensuring that management are responsive to issues and trends within the business and the wider marketplace. Our employees are encouraged to keep abreast of new technology in the marketplace in order to remain competitive. We also encourage a collegiate atmosphere based on teamwork so as to encourage creativity while focusing on business development. We are grateful for the support and continued hard work put in by these 22 highly skilled employees. They are truly the key to the future of our business. CORPORATE RESPONSIBILITY Part of Z GROUP's philosophy is to work to the highest ethical standards, wherever possible - this includes its relationships with employees and customers and all those who may have dealings with the Group. We actively support a small start-up charity and provide encouragement to those employees involved. Also, we adhere to all environmental regulations and have, where possible, utilised environment-sustaining policies such as recycling and waste reduction. We also encourage our employees to use environmentally-friendly supplies wherever possible, and to conserve electricity and water. PROSPECTS OnShare is now at the stage where we can see its potential and believe it can deliver significant shareholder value. Our priority this year is to commercialise the OnShare product and to become cash positive. Our existing and other new products, and a much reduced cash burn rate, will assist us in that endeavour. The current year's trading is currently ahead of budget and we are cautiously optimistic that the coming months will continue that trend. JOHN STANDEN Non-Executive Chairman 8 June 2007 CHIEF EXECUTIVES' STATEMENT Introduction The past financial year has seen focus on the following areas: - The core consumer product ONSPEED, which despite a reduction in sales in the period as a result of the increasing use of broadband, improving the cost of acquisition and focussing on customer retention; - ONSPEED Mobile which provides a fast, full internet experience on a mobile phone, was launched last March 2006 and the business continues to focus on sales both to consumers and also to operators; - The development of the innovative file sharing service Onshare, and its underlying technology. Beta testing of OnShare was concluded in February 2007 and is demonstrating encouraging signs of success; - Laying the groundwork for the release of new products; and - Towards the end of the year, the commencement of a cost-cutting exercise Financial Overview The Group's results for the 12 months ending 28 February 2007 show a loss before tax of £1.1 million on turnover of £2.6 million, compared to a restated profit in 2006 of £0.4 million on turnover of £5.0 million. Turnover from ONSPEED represents 88% of total turnover for the year. The fall in ONSPEED turnover from £4.4 million for 2006 to £2.3 million in 2007 was principally as a result of the growth of competitive, fast broadband in the UK, Europe and the US. Net2Roam contributed £0.1 million to turnover (2006: £0.4 million) and ONSPEED Mobile which was launched in 2006 added £0.1 million to turnover. The loss in the year adjusted for all non-cash items was £0.6m. Together with the investment in OnShare of £1.3m, this has resulted in a net cash outflow of £1.9 million, leaving cash resources of £2.2 million at 28 February 2007. A cost saving plan was implemented in January 2007 and we are already seeing the benefits in the current financial year. Share Issues 333,172 shares were issued in the year on the exercise of share options by three option holders. A further 3,942,134 shares were issued to the minority shareholders of Onshare Limited to acquire the 49% minority interest in the business, ensuring that the benefits of the future success of this service will flow 100% to Z GROUP shareholders. Review of Operations The primary aims in the past year were to maintain good customer retention in ONSPEED, while gaining market traction for two new products, ONSPEED Mobile and OnShare. ONSPEED In spite of the predicted decline in dial-up internet access, ONSPEED has performed well throughout the year in retaining its retail customer base whilst gaining additional Rest of the World revenue through partnerships in new territories. Online sales continue to account for the majority of sales both in the UK and abroad. We recognise the need for local support within international markets and have established relationships with key local partners, which we have found to be highly beneficial in supporting sales growth. Following the success of ONSPEED sales via the web and the release of the retail version in Europe, we have signed a number of additional distribution deals for ONSPEED in Poland and Russia. In Russia, we deployed a retail promotion in March 2006 through monthly scratch cards, thereby addressing low credit card penetration and successfully attracting direct consumer revenue. In August 2006, we closed an agreement with Voxnet, one of Poland's leading ISPs, to promote ONSPEED and ONSPEED Mobile. Our retail presence in Europe and the US has also been strengthened. In April 2006, we signed a retail agreement with Avanquest, a leading global publisher of best-selling personal and professional software marketed in over 100 countries, for France and Spain gaining a retail presence in key multiples including FNAC, Boulanger and through select online portals such as Bluesquad and Blitzbox. In February 2007, we appointed Navarre (NASDAQ: NAVR), a leading distributor of home entertainment PC software in the US. In June 2006, we announced an extension to the agreement with BT to distribute ONSPEED to BT's 512kb Broadband base, giving these customers up to 5 times faster connectivity with ONSPEED Version 5. The Group continues to use these high profile relationships to further improve its awareness and credibility to a wider international audience. Marketing spend on ONSPEED represented 29% of total Group indirect costs, representing a continuation of the historically efficient use of marketing. With targeted media buying and innovative in-house analysis, cost per sale equated to an efficient £6.76 compared to £8.04 in 2006. To further increase ARPU across the ONSPEED base, we launched an ONSPEED toolbar in February 2007; providing more value to the ONSPEED product as well as a search box powered by YAHOO! to capitalise on search revenue from the ONSPEED base. The benefit of this added capability will be reflected in next year's results. ONSPEED Mobile The ONSPEED Mobile product became commercially available in March 2006 via internet subscription and through existing UK distribution channels, including Amazon, PC World, Play and Staples. ONSPEED Mobile has received wide acclaim in the trade press, many of whom believe that demand will be triggered by the current expense of accessing the internet via mobile devices - the same driver behind the original success of ONSPEED. Fifteen publications have presented upbeat reviews, some granting 5 star awards, notably Computer Active, Stuff and WebUser. Although direct consumer sales have been slow to materialise, the directors believe in the size and strength of the mobile internet market and feel ONSPEED Mobile is well-positioned to benefit from longer term consumer take-up. In addition, deeper market penetration will take place via partnership with mobile network operators as demonstrated by a diverse pipeline of potential partners and jurisdictions. OnShare The Group has continued to invest significantly in OnShare, the proprietary file sharing software. The development of OnShare over the last 12 months has seen a series of continuous improvements to the design and functionality of the OnShare product, with focus on building stability and ease of use. In addition, significant R&D has been invested in OnShare's underlying protocol, "ActiveStream". This proprietary IP will be re-used and is set to become the basis for future consumer and corporate product development. OnShare was launched to a test group of users in March 2006, with subsequent upgrades through the year. This test identified a number of required improvements prior to launch and in February 2007 a soft launch was implemented providing users with free access to the product which included a mechanism to encourage viral marketing. The growth in users has exceeded the directors' original projections to date and based on this trend, we plan to commercialise the product with marketing support around the middle of the current financial year. Shareholders will be informed at the commencement of this initiative and will be regularly updated as to progress. Net2Roam Net2Roam product continues to provide a consistent revenue stream, with very little requirement for additional resources or marketing budget. Re-launched in February 2007 using iPass (NASDAQ: IPAS) infrastructure, Net2Roam added 76,000 Wi-Fi hotspots in 68 countries to its offering. Cost Savings and performance in the current financial year A cost saving plan was implemented starting in January 2007, based on a staff redundancy programme, continuing focus on efficient marketing spend, streamlining server use across our portfolio of products and negotiating better terms with our suppliers. As a result of these costs savings, our unaudited management accounts for the first two months of the current financial year show a 30% reduction in administrative costs year-on-year. In addition, sales for quarter one of the current year are ahead of budget. Outlook The extended test launch of OnShare, although putting us behind our original plan at the time of admission to AIM, has resulted in a stronger offering to consumers. OnShare offers several unique features to consumers and to SMEs which the Group intends to take full advantage of in the coming months. Additionally, the R&D invested in OnShare's underlying proprietary protocol, "ActiveStream" is well-placed to be used in other products developed by the Group to drive future revenue streams. Mobile internet usage is the key driver to ONSPEED Mobile, our other recent product, which uses proprietary compression technology to enable more efficient access to the internet, and we are confident of the conclusion of operator agreements and healthy consumer demand in the coming year. The Group has continued to identify commercial opportunities for new technologies and to develop products that satisfy consumer needs. We have a confirmed launch plan for two new and exciting software products that adhere to our high margin, pre-paid criteria. The Group remains focused on maintaining our core businesses, exploiting the Group's IP and developing a new pipeline of products, with a more efficient cost-base. Jack Bekhor James True Joint Chief Executive Officers 8 June 2007 CONSOLIDATED PROFIT AND LOSS ACCOUNT For the year ended 28 February 2007 28 February 28 February 2007 2006 (as restated) £ £ TURNOVER 2,629,788 4,971,722 Cost of sales (651,199) (1,077,224) Gross profit 1,978,589 3,894,498 Administrative expenses (3,157,823) (3,609,555) Operating (loss) / profit before share (835,163) 1,024,921 based payments charge Share based payments charge (344,071) (739,978) OPERATING (LOSS) / PROFIT (1,179,234) 284,943 Net interest receivable 104,087 113,591 (LOSS) / PROFIT ON ORDINARY ACTIVITIES (1,075,147) 398,534 BEFORE TAXATION Taxation 64,194 (341,016) (LOSS) / PROFIT ON ORDINARY ACTIVITIES (1,010,953) 57,518 AFTER TAXATION Minority interest - 30,850 RETAINED (LOSS) / PROFIT FOR THE YEAR (1,010,953) 88,368 EARNINGS PER SHARE Basic (5.0) 0.3 Diluted (5.0) 0.3 STATEMENT OF TOTAL RECOGNISED GAINS AND LOSSES Retained (loss) / profit for the period (1,010,953) 88,368 Total gains and losses related to the (1,010,953) 88,368 period Prior year adjustment (739,978) Total recognised gains and losses since (1,750,931) 88,368 the last annual report All group activities relate to continuing operations CONSOLIDATED BALANCE SHEET 28 February 28 February 2007 2006 (as restated) £ £ FIXED ASSETS Intangible assets 6,119,727 1,151,167 Tangible assets 515,338 318,690 6,635,065 1,469,857 CURRENT ASSETS Stocks 56,383 64,222 Debtors due within one year 682,490 1,369,295 Cash at bank and in hand 2,256,211 4,134,589 2,995,084 5,568,106 CREDITORS: Amounts falling due within one year (983,754) (1,553,141) NET CURRENT (LIABILITIES) ASSETS 2,011,330 4,014,965 TOTAL ASSETS LESS CURRENT LIABILITIES 8,646,395 5,484,822 CREDITORS: Amounts falling due after more than one year (16,889) (25,651) PROVISIONS FOR LIABILITIES AND CHARGES (39,527) (61,371) NET ASSETS 8,589,979 5,397,800 CAPITAL AND RESERVES Called up share capital 1,187,294 973,529 Share premium account 5,967,757 2,322,461 Merger reserve 1,065,741 1,065,741 Share option reserve 1,084,049 739,978 Profit and loss account (714,862) 296,091 SHAREHOLDERS' FUNDS 8,589,979 5,397,800 CONSOLIDATED CASH FLOW STATEMENT Year ended Year ended 28 February 28 February 2007 2006 £ £ Cash (outflow) / inflow from operating activities (220,760) 235,508 Returns on investments and servicing of finance 104,087 113,591 Taxation (289,958) (126,855) Capital expenditure and financial investment (1,527,319) (1,090,389) CASH OUTFLOW BEFORE FINANCING (1,933,950) (868,145) Financing 46,141 2,452,588 (DECREASE) / INCREASE IN CASH IN THE PERIOD (1,887,809) 1,584,443 RECONCILIATION OF NET CASH FLOW TO MOVEMENT IN NET FUNDS Year ended Year ended 28 February 28 February 2007 2006 £ £ (Decrease) / increase in cash in the period (1,878,378) 1,585,587 (Increase) in overdraft in the period (9,431) (1,144) (1,887,809) 1,584,443 Cash outflow from lease financing 8,762 8,762 MOVEMENT IN NET FUNDS IN THE PERIOD (1,879,047) 1,593,205 NET FUNDS AT THE BEGINNING OF THE PERIOD 4,099,034 2,505,829 NET FUNDS AT THE END OF THE PERIOD 2,219,987 4,099,034 NOTES TO THE PRELIMINARY ANNOUNCEMENT 1. a) Basis of preparation The consolidated financial information for the year ended 28 February 2007 has been prepared using accounting policies and practices consistent with those applied in the 2006 Annual Reports and Accounts with the exception of the application of FRS20 (see below). The financial information is unaudited. The financial information contained in this Report does not constitute statutory accounts as defined by Section 240 of the Companies Act 1985. This preliminary report was approved by the Board of Directors on 8 June 2007. The statutory accounts for the year ended 28 February 2007 have not been filed with the Registrar of Companies nor reported on by the Company's auditors. They will be circulated to shareholders in June 2007. The figures for the year ended 28 February 2006 have been extracted from the statutory accounts which have been filed with the Registrar of Companies but have been restated for the impact of FRS20. The auditors' report for the 2006 accounts was unqualified and did not contain a statement under s237 (2) or (3) of the Companies Act 1985. 1. b) Adoption of new accounting policies Share Based Payments (FRS 20), and resulting prior year adjustment The cost of providing share based payments to employees is charged to the consolidated profit and loss account over the vesting period of the related share options or share allocations. The cost is based on the fair value of the options and shares allocated determined using the Black-Scholes option-pricing model, which is appropriate given the vesting and other conditions attached to the options. The value of the charge is adjusted at each balance sheet date to reflect expected and actual levels of vesting. In accordance with FRS20 "Share-based payment" the Group has elected to apply FRS20 to all grants, options and other equity instruments as they have all been granted since November 2002, the effective date of the standard. The adoption of FRS20 this year has necessitated a prior year adjustment to be made, creating a share based reserve at 28 February 2006 of £739,978. 1. c) Significant Accounting Policies Research and Development Z GROUP invests a significant proportion of its resources in the development of its own intellectual property to bring new products and services to the market. Development expenditure (principally in the form of the salary costs of its developers) is carried forward when its future recoverability can be foreseen with reasonable assurance. It is amortised in line with sales from the related product over a period, typically between four and five year, which represents the directors' estimate of its useful economic life. ONSPEED Mobile development costs are being amortised over 4 years on a straight-line basis. All research and other development costs are written off as incurred. Goodwill Goodwill arising on the acquisition of a business acquired is included in the balance sheet at cost, less accumulated amortisation and any provisions for impairment. Goodwill, which represents the difference between the purchase consideration and the fair values of those net assets (or book value of those net assets if the difference between book value and fair value is immaterial), is capitalised and amortised on a straight-line basis from the year following acquisition and over a period which represents the directors' estimate of its useful economic life. Goodwill in the case of the acquisition of Onshare Limited will be amortised over 10 years. 2. Dividends The directors do not recommend the payment of a dividend. 3. Earnings per share 28 February 28 February 2007 2006 No. No. Weighted average number of share: - Basic 20,284,347 18,618,215 - Share options 824,510 Diluted shares 20,284,347 19,442,725 Retained (loss) / profit (1,010,953) 57,518 Earnings per share: pence pence - Basic (5.0) 0.3 -Diluted (5.0) 0.3 Due to the loss incurred in the twelve months ended 28 February 2007, there is no dilutive effect from the issue of share options 4. Intangible Fixed Assets Goodwill Development Intellectual Domain Total expenditure property names rights £ £ £ £ £ Group Cost 1 March 2006 - 1,092,711 58,722 8,912 1,160,345 Additions 3,804,160 1,197,213 5,737 5,062 5,012,172 28 February 3,804,160 2,289,924 64,459 13,974 6,172,517 2007 Amortisation 1 March 2006 - - (8,202) (976) (9,178) Charged in the - (36,404) (6,271) (937) (43,612) period 28 February - (36,404) (14,473) (1,913) (52,790) 2007 Net book value 28 February 3,804,160 2,253,520 49,986 12,061 6,119,727 2007 28 February - 1,092,711 50,520 7,936 1,151,167 2006 Additions to development expenditure relates to the development of OnShare. Intellectual property rights represent the costs associated with patent creation. Goodwill has not been amortised in the year to 28 February 2007 as the amount of the charge would not be material. 5. Acquisitions The group purchased the 49% minority interest in Onshare Limited for a total consideration of £3.8m on 15 December 2006. An average of the book value of the assets and liabilities at 30 November 2006 and 31 December 2006 has been extracted from the management accounts of Onshare Limited. The transaction gives rise to goodwill of £3.8m since at the date of acquisition Onshare Limited had net liabilities. 6. Debtors Group 28 February 2007 28 February 2006 £ £ Due within one year: Trade debtors 72,233 532,569 Credit card debtors 80,668 584,853 Amounts owed by subsidiary undertakings - - Other debtors 263,957 105,665 Prepayments and accrued income 107,179 96,529 524,037 1,319,616 Due in more than one year: Other debtors 158,453 46,679 Total debtors 682,490 1,369,295 7. Movements in equity and in the share premium account Share Premium Shares in issue Exercise price Equity Account £ £ £ At 1 March 2006 19,470,573 973,529 2,322,461 Issue of equity on exercise of options 333,172 0.157 16,659 35,744 Issue of equity to purchase the 49% minority interest in Onshare limited 3,942,134 0.965 197,107 3,607,053 Credit on share issue expenses 2,500 At 28 February 2007 23,745,879 1,187,294 5,967,758 8. Reconciliation of movement in shareholders funds 28 February 28 February 2007 2006 Group Profit for the period (1,010,953) 88,368 Issue of shares 4,200,631 3,000,002 Share issue expenses (538,652) Credit on share issue expenses 2,500 Share option reserve 739,978 Net addition to shareholders' funds 3,192,178 3,289,966 Opening shareholders' funds 5,397,800 2,108,104 Closing shareholders funds 8,589,978 5,397,800 Year ended Year ended 28 February 28 February 2007 2006 £ £ 9. Reconciliation of operating (loss) / profit to net cash inflow from operating activities Operating (loss) / profit (1,179,234) 284,943 Depreciation 122,655 79,271 Amortisation 43,611 5,998 Share option expense 344,071 739,978 Foreign exchange movements 2360 Decrease / (increase) in stocks 7,839 (64,222) Decrease / (increase) in debtors 685,990 (1,236,538) (Decrease) / increase in creditors & provisions (248,052) 426,078 Net cash flow from operating activities (220,760) 235,508 Analysis of cash flows for headings netted in the cash flow £ £ Returns on investments and servicing of finance Interest received 104,354 113,591 Interest paid (267) 0 Net cash inflow for returns on investment and servicing of finance 104,087 113,591 Capital expenditure and financial investment Purchase of tangible fixed assets 319,307 224,146 Purchase of intangible fixed assets 1,208,012 866,243 Net cash outflow for capital expenditure and financial investment 1,527,319 1,090,389 Financing Issue of share capital 52,403 2,461,350 Credit on issue of share expenses 2,500 Capital element of finance lease payments (8,762) (8,762) Net cash outflow for capital expenditure and financial investment 46,141 2,452,588 Analysis of net funds At At 28.02.06 Cash Flow 28.02.07 Cash at Bank 4,134,589 -1,878,378 2,256,211 Overdraft -1,144 -9,431 -10,575 4,133,445 -1,887,809 2,245,636 Finance Leases -34,411 8,762 -25,649 4,099,034 -1,879,047 2,219,987

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