15th May 2007 07:02
Turbo Power Systems Inc15 May 2007 15th May 2007 TURBO POWER SYSTEMS INC. ANNOUNCES ITS RESULTS FOR THE FIRST QUARTER ENDED 31 MARCH 2007 Highlights •Production and development income increased by 122 percent to £2.4 million (2006: £1.1 million) •Loss before tax, depreciation, amortisation, and stock compensation charges reduced by 23 percent to £0.9 million (2006: £1.1 million) •Loss before tax reduced by 25 percent to £1.4 million (2006: £1.9 million) •Orders announced in the quarter totalling US$22 million including: •Bombardier Chicago Transit Authority •Bombardier Toronto Transit Commission •Further rail orders announced today with NREC worth £1.2m in 2007 Commenting on the results, Michael Hunt, Chief Executive said, "The first quarter has seen an encouraging start to the year for TPS withproduction revenues exceeding £2.0 million for the first time in a quarter anddevelopment income increasing significantly. At the same time the company hasannounced further strong growth in its order book with the success of theChicago Transit Authority and Toronto Transit Commission bids as well as thefurther £1.2 million order from NREC announced today to be delivered during2007." For further information, please contact: Turbo Power Systems Tel: +44 (0)20 8564 4460Michael Hunt, Chief Executive OfficerStephen Sadler, Chief Financial Officer Company Website: www.turbopowersystems.com Gavin Anderson (PR) Tel: +44 (0)20 7554 1400Ken CroninMichael Turner KBC Peel Hunt Tel: +44 (0)20 7418 8900Oliver Scott NOTES TO EDITORS About Turbo Power Systems Turbo Power Systems Inc. designs and manufactures innovative power solutionswhich provide local, high quality, controllable electrical power. The Group'sproducts are sold into a number of markets but are all based on its coretechnologies of power electronics and high speed electrical machines. The Group operates across the following market sectors: •Direct Drive High-Speed Electrical Machines and Electronics •Specialist Drives and Motor applications (Aerospace, Oil and Gas) •High Voltage Power Supplies, Auxiliary Power Systems, Grid-Connected Inverters for Energy Recovery Systems and Renewable Technologies Forward looking statements This news release contains forward-looking statements. Forward-lookingstatements include statements concerning plans, objectives, goals, strategies,future events, or performance, and underlying assumptions and other statementsthat are other than statement of historical fact. These statements are subjectto uncertainties and risks including, but not limited to, the ability to meetongoing capital needs, product and service demand and acceptance, changes intechnology, economic conditions, the impact of competition, the need to protectproprietary rights to technology, government regulation, and other risks definedin this document and in statements filed from time to time with the applicablesecurities regulatory authorities. Notice of no auditor review of interim financial statements Under Canadian National Instrument 51-102, Part 4, subsection 4.3(3)(a), if anauditor has not performed a review of the interim financial statements, theymust be accompanied by a notice indicating that the financial statements havenot been reviewed by an auditor. The accompanying un-audited interim financial statements of the Company havebeen prepared by and are the responsibility of the Company's management. The Company's independent auditor has not performed a review of these financialstatements in accordance with standards established by the Canadian Institute ofChartered Accountants for a review of interim financial statements by anentity's auditor. OPERATIONAL REVIEW Business of the Company Turbo Power Systems designs and manufactures innovative power solutions whichprovide local, high quality, controllable electrical and motive power. TheGroup's products can be tailored for use in a wide range of industries andapplications, but are all based on its core technologies of high speedelectrical machines and power electronics. The Group's site at Heathrow is the Head Office for UK operations and the designand manufacturing centre for Electrical Machines. The Group's site at Gatesheadis the design and manufacturing centre for power electronics. Strategy The Company's strategy is to build a high performance electric machines andpower electronics business which can demonstrate strong and sustainable growthin all of its technology areas and is not dependent on any single market sector,product or operating unit. Our sales strategy is to focus on developing long term relationships with strongpartners in each of our target market sectors where our technology typicallyforms part of a larger product supplied to the end customer. We will combine the skills of our two sites to match the requirements of ourcustomers. Review of operations Overview During the first quarter of 2007 income grew strongly as the rate of demand forexisting products from customers such as National Rail Equipment and PRC Lasersincreased, and development income from new projects made a significant impact.Progressively during 2007 a number of the new long term programmes in the rail,aerospace and industrial sectors will move from the development phase intoinitial manufacturing production and this will continue the process of buildinga strong and balanced production revenue base for the future. Following the notable recent achievement of entering the commercial aerospacemarket with the two contracts for the Boeing 787 from Eaton Aerospace andHamilton Sundstrand, the Company has had the opportunity to discuss a number ofother potential projects with major companies in this sector, and we areconfident that we can build on our initial success to establish a continuingmarket position in specialist motor drives and electronics in aerospace. The rail business continues to grow strongly with the addition of two newcontracts in Q1 2007 from Bombardier Transport in Canada with a combined valueof some US$22M. The contents cover electronics to be deployed in metro subwaycars which will be supplied from 2008 onwards to Chicago Transit Authority andToronto Transit Commission. In addition the traction electronics system beingsupplied to the National Rail Equipment Company in the USA for theirlow-emissions, fuel efficient rail-yard locomotive is becoming an increasinglyimportant product for us, as NREC continue to be successful in promoting thelocomotive both in the North American and International markets. The new larger electronics design and manufacturing facility at Gateshead is nowready for occupancy, and the move will take place during May. The site includesdedicated facilities for aerospace product manufacture and has been designed tomaximize manufacturing efficiency and productivity. Customers and Contracts Update 1) Direct Drive Industrial High Speed Motors and Drives The TPS direct drive technology is designed to provide significant performanceimprovements and operating cost reductions for a wide range of industrialcompression and turbo-machinery applications. By eliminating the need formechanical gearboxes and conventional low speed motors and by operating moreefficiently across a wider range of load points, the customer's energyrequirements and costs can be reduced significantly. SKF The extended end customer field trials, which were being carried out in Germanyhave now been completed and the complete compressor product including the TPSmotor and variable frequency drive and the SKF magnetic bearing system have beenreleased for volume manufacture. TPS will begin deliveries of the motor anddrive to SKF by the end of Q2 and the current order releases cover deliveriesthrough 2007 and into 2008. Industrial Motor and Drive Agreement The development programme for the new industrial high-speed direct drive motorand controller product range has now reached the stage of UK prototype testing.Hardware will be shipped to the USA for system testing before the end of May andBeta testing is scheduled at pilot sites during the summer. The OEM customer isplanning to publicly unveil the new products at a leading industry exhibitionduring January 2008, and initial TPS production to support the product launch isscheduled for Q4 2007. The development programme is underwritten by an agreementwith the OEM customer to procure a minimum of 500 systems during 2008 and 2009,subject to successful prototype testing. 2) Specialist Motors and Drives In addition to the long-term design investment that the Company has made in thehigh speed electrical machine technology, the Company has accumulatedconsiderable expertise in motor and controller designs for challenging, highperformance environments. This expertise is now providing the basis for a new range of products targetedat both the aerospace and oil markets. Eaton Aerospace The contract from Eaton for high performance drives for the fuel transfer andjettison pumps on the Boeing 787 airliner has reached the stage where TPS hassupplied initial evaluation hardware to the customer and is now completing theformal qualification programme for the production units. The programme isproceeding well and hardware manufacture in support of the initial 787 aircraftwill begin later this year. Hamilton Sundstrand The HS 787 programme, which commenced several months after the Eaton project, iscurrently at an earlier stage of development, with the initial customerevaluation units due to be dispatched before the end of June. In collaborationwith the customer, the Company will commence an accelerated hardware andsoftware integration and qualification testing programme early in Q3, and willalso be manufacturing the initial production units later this year. Artificial Lift Company (Oil and Gas) The development contract placed for a small diameter modular down-hole pumpmotor for the oil sector has now significant progress with the successfulelectrical testing of the motor now completed in the test facilities at TPS. Thefield prototypes which have now been integrated with the submersible pump arecurrently deployed at a test well in the UK for initial system trials. Once theUK trials are concluded the equipment will be transferred to an operational oilwell in North America for extensive field testing prior to commercial launch.The response from the major oil companies to progress to-date has been verypositive, confirming high levels of demand for the system subject to successful"live" testing. On satisfactory completion of the North American trials, theCompany would expect to commence manufacture of the initial production units in2008. Lotus Engineering UK trials of the hybrid vehicle motor drive are now close to completion, and themodified prototype passenger cars are scheduled to be shipped to South East Asiain the near future. The vehicles were recently exhibited at the Geneva MotorShow where they generated considerable interest. On arrival in South East Asiafurther trials and demonstrations are scheduled prior to any final decision bythe sponsoring car company regarding whether this pilot programme will move onto the pre-production stage. 3) Rail and Industrial Power Electronics TPS designs and manufactures rugged power electronics products for both rail andindustrial applications, all of which require high reliability and availabilityin operation. Customers and Contracts Bombardier Transportation - Germany Following the selection of TPS by Bombardier Germany in 2006 to develop a rangeof three standard battery chargers, which are intended to be incorporated acrossa wide range of train types, the Company has been involved in providingtechnical and commercial proposals in support of a number of internationalprojects including some in China. At present Bombardier are still awaiting the final contract decisions from theirend customers, however it is expected that initial orders and formal productdesign launch will commence in 2007. Bombardier Transportation-Canada Beijing TPS has begun delivery of auxiliary power systems to Bombardier's assemblypartner in China, and equipment will continue to be dispatched through 2007 andinto early 2008. The power electronics units are a key part of the unmannedtrains being supplied in support of the 2008 Olympics infrastructure expansion.The Company is supplying 40 car sets with a contract value of $1.5M. Chicago Transit Authority In January 2007 TPS announced that it had received its largest rail order todate for the supply of auxiliary power units to be installed on 406 subway carsbeing built by Bombardier for the Chicago Transit Authority. The base contractis valued at some US$14M including production, spares and engineering services,with possible options for additional cars which could increase the value to morethan US$20M. The development project is currently underway with the units forinitial customer prototype vehicles planned for delivery in January 2008. Toronto In March 2007 the Company followed the Bombardier Chicago contract success withanother major North American project, this time for a distributed powerelectronics system to be installed in subway cars being built for the TorontoTransit Commission. TPS will supply three different product types, which will beinstalled in various configurations in the 234 subway cars. Design has alreadycommenced and initial customer prototypes are required for January 2008, withproduction to commence by the end of that year. The contract for the initialquantity of 234 cars is expected to exceed US$8M, with the potential for furtheroption quantities to extend that to some US$14M. Bombardier Transportation - UK Production of the air-conditioning power supply for London Underground DistrictLine continues to proceed to plan. National Rail Equipment Co. With the additional orders for a further 30 systems announced today, NRE has nowcommitted to more than 100 loco sets since volume production of the new tractionsystem commenced in mid 2006. NRE continues to generate a significant andincreasing number of international prospects for its innovative locomotive andTPS is confident that the growth in demand and orders will continue. The NREproject is now a significant element of the Gateshead manufacturing programmeand additional build capacity has been planned into the new factory layout tocater for increased demand. Toronto Transit Commission H6 Subway Programme Monthly production of the auxiliary power converters for installation by TorontoTransit as part of a subway car upgrade programme is proceeding to schedule andwill continue through 2007 until completion in early 2008. PRC Monthly demand for the high voltage pulsed power supplies supplied to PRCCorporation in the USA increased steadily during 2006 and has now stabilized atthe higher demand levels in early 2007. The TPS equipment is now a standard itemfor all the PRC laser systems. 4) Direct Drive Generators and Inverters TPS produces a range of high speed direct drive generators in the size range of400kW to 1.2MW, designed to operate with a broad range of prime movers includinggas and steam turbines, and heat and energy recovery systems. The associatedpower electronic inverters connect the generators to the central utility gridand can also be used in conjunction with solar panels, fuel cells and windturbines, meeting all the required interconnection standards. Customers and Contracts A number of potential programmes are currently being discussed with a number ofcustomers who have requirements for high speed generators and electronicsincluding: • 100 kW Generator and Inverter for a closed cycle energy recovery system • 600 kW Generator and Inverter for an air expander application • 5000 kW Generator and Inverter for a biomass fuelled gas turbine programme Compact Power, with whom TPS has a product development agreement for the supplyof a generator and inverter for use with the 600kW gas turbine designed intotheir Biomass Generation project, have now received funding to support a numberof planned installations both in the UK and internationally and are in theprocess of setting up the pilot project. Renewable and Energy Saving Projects TPS is continuing its strategy of participating in early "technologydemonstrators" across a range of energy efficient and renewable projects where3rd party funding is available and existing TPS hardware can be adapted for useat the feasibility stage. This is particularly directed towards expanding thepotential for our grid connected inverter technology. FINANCIAL PERFORMANCEREVIEW OF FIRST QUARTER TO 31 MARCH 2007 Overview In the first quarter of 2007 the company continued to demonstrate strong growthin production and recorded quarterly production revenue in excess of £2.0million for the first time. As in previous quarters the great majority of thisrevenue was from power electronics at the Gateshead site but productionquantities of SKF motors at Heathrow were shipped in March and are expected toincrease in Q2 2007. Development income of £0.3 million showed a significant increase over Q1 2006 asthe company reached development milestones on the Eaton Boeing 787 programme andsigned new contracts with Bombardier for the Chicago Transit Authority andToronto Transit Commission programmes. Expenses were in line with expectations and the loss before interest, tax,depreciation, amortisation and stock compensation was £0.9 million, a reductionof 23 percent over Q1 2006. Cash outflows before movements in working capital of £1.1 million for thequarter included interest payments of £331,000 to convertible note holdersrelating to the period 1 July 2006 to 31 December 2006. The next convertiblenote interest payment, due at the beginning of Q3 2007, will be significantlyless following the redemption of £9.36 million of the convertible notes in lateDecember 2006 and early January 2007. Continuing production growth and the purchase of long lead time items led tosignificant stock increases in the quarter and associated cash outflows of£462,000. Cash received from tax credits of £312,000 comprises research and developmenttax credit claims for the year to 31 December 2006. Long term assets purchased of £175,000 represent the initial investment in thecompany's new production facilities in Gateshead. Movements in restricted funds of £335,000 represent net movements in performancebond cash during the quarter as certain performance bonds reached maturityincluding the release of performance bond cash on the cancelled CLRV programme. The overall decrease in cash in the quarter was £0.9 million leaving the Companywith an unrestricted cash balance of £5.7 million and further restricted cash of£1.1 million at 31 March 2007. Revenue Production revenue in the quarter ended 31 March 2007 was £2.03 million comparedwith £0.97 million in 2006 and comprised 2007 2006 £'000 £'000 Power electronics 2,017 949Electrical machines 16 20 ------ ------- 2,033 969 ======= ======= The Power Electronics division has seen strong turnover growth, both as a resultof increased volumes on established programmes and the start of production runson new contracts. Output volumes have grown significantly on the existingproduction contracts for PRC laser power supplies, Bombardier London Undergroundand Trans Elektro. In addition the contract with National Railway Equipment Comade a significant contribution to revenue for the quarter. Spares and service revenues were £0.1m for the quarter (2006: £0.3m). In the Electrical Machines division revenue for the quarter related to the SKFcontract. Development income Development income in the quarter was £0.34 million compared with £0.10 millionin 2006 and included receipts from Hamilton Sundstrand on the Boeing 787Dreamliner programme, and initial incomes from Bombardier on both the ChicagoTransit and Toronto Transit programmes. 2007 2006 £'000 £'000 Development income 341 99 ======= ======= Production costs The cost of product revenues in the quarter amounted to £1.62 million (2006:£0.73 million) and reflects the growth in production revenue. 2007 2006 £'000 £'000 Power electronics 1,412 583Electrical machines 204 151 ------ ------- 1,616 734 ====== ======= Production costs include certain fixed facilities costs attributable to themanufacturing operation. Included in production costs for the quarter are stock compensation charges onoptions awarded of £26,000 (2006: £nil). Research and product development Research and product development expenditure in the quarter was £1.02 millioncompared with £0.83 million in 2006, and comprised 2007 2006 £'000 £'000 Research and product development expenditure 1,015 841Accrued R&D tax credits - (15) ------- --------Total expenditure 1,015 826 ======= ======== Product development costs increased in the quarter as development work commencedon both the Eaton contract and the Hamilton Sundstrand contract for the Boeing787 Dreamliner. Included in research and product development expenditure for the quarter arestock compensation charges on options awarded of £104,000 (2005: £56,000). No R&D tax credits were accrued in the quarter as the majority of the Group'sdevelopment resource moved on to commercial programmes. General and administrative General and administrative costs of £0.84 million (2006: £0.75 million) consistmainly of staff costs and facilities costs. Also included are stock compensationcharges on options awarded of £83,000 (2006: £41,000). Amortisation Amortisation was £0.22 million compared with £0.39 million in 2006. Thereduction reflects a number of assets becoming fully written down. Interest income Interest income for the three months was £0.09 million compared with£0.08 million in 2006. Interest expense and finance charges Interest expense and finance charges arise from the issue of convertible bondsin July 2003 and March 2005, and the redemption of bonds and issue of shares inJanuary 2007, and comprised 2007 2006 £'000 £'000 Finance charges 103 -Interest payable 29 134Amortisation of deferred finance charges - 40Debt accretion 22 97 ------- ------ 154 271 ======= ====== Convertible bonds are considered to be compound financial instruments, and theliability component and the equity component must be presented separately, asdetermined at initial recognition. The Company has valued the equity componentof these bonds using the residual value of equity component method, whereby theliability component is valued first using current market rate for comparableinstruments, at the time of issuance. The difference between the proceeds of thebonds issued and the fair value of the liability is assigned to the equitycomponent. The equity element of the March 2005 bond issue was estimated at£1.11 million. The equity element of the 2003 bond issue was estimated at£0.91 million. The carrying value of the debt element is increased over the termof the debt and this accretion expense is charged to the profit and lossaccount. During the three months this charge amounted to £0.02 million (2006:£0.10 million). Finance charges for the quarter were £103,000 (2006: £nil) and were made up asbelow: During 2006 the company purchased U.S. dollar denominated currency contractscovering expected dollar income from programmes scheduled for 2006 and 2007. Thevalue of the option as at 31 March 2007 was £23,000, resulting in a net decreaseand cost during the quarter of £21,000 (2006: £nil). During the quarter the company redeemed 4,500,000 loan notes, resulting in a netcharge of £65,000. Charges related to the restricted cash movements and performance bonds totaled£17,000 (2006: £nil). CASH FLOWS FOR THE THREE MONTHS Cash outflow from operating activities Operating cash outflow before movements in working capital was £1.07 million forthe period (2006: £1.23 million). Included in this amount are interest paymentsto convertible note holders of £0.33 million for the period 1 July 2006 to 31December 2006. Movements in stocks, work in progress and debtors and creditors produced a netcash outflow of £0.27 million during the period (2006: inflow of £0.10 million)reflecting the increased turnover and manufacturing volume. Tax credits During the quarter the company received research and development tax creditreceipts of £0.31 million (2006: £nil). Investing activities Purchases of long term tangible assets amounted to £0.18 million (2006: £0.02million) and relate to the new Power Electronics facility in Gateshead. Cash inflows related to movements in restricted funds of £0.36 million (2006:£nil) are the net result of the cancellation of the bonds previously provided of£250,000 and £515,000, and the creation of new bonds totalling £410,000. Cash flow from financing activities Cash outflow from financing in Q1 2007 of £0.07 million relates to payment offinal service charges in relation to the fundraising in December 2006, when theCompany completed a £6,000,000 (gross) financing agreement with institutionalinvestors. Overall cash outflow for the three months Overall the cash outflow for the period was £0.92 million. This compares with acash outflow of £1.15 million in 2006. BALANCE SHEET AS AT 31 MARCH 2007 The Company ended the period with an unrestricted cash balance of £5.74 millioncompared with £6.67 million at 31 December 2006. Substantially all of theCompany's cash balances are denominated in Sterling. In addition the Company had restricted cash amounts of £1.14 million relating toperformance bonds entered into as part of contracts with the Toronto TransitCommission and Bombardier Transportation (2006: £1.50 million). Long term assets excluding restricted cash have decreased from £3.69 million at31 December 2006 to £3.41 million at 31 March 2007, after depreciation chargesof £0.22 million. Long term liabilities have decreased to £1.85 million at 31 March 2007 comparedto £6.13 million at 31 December 2006, reflecting the reduction in Loan Notesfollowing the redemption of £4,500,000 notes in January 2007. Net working capital at 31 March 2007, excluding cash balances, was £1.15million, compared with £0.85 million as at 31 December 2006. As at 31 March 2007, the Company had 273,944,592 common shares issued andoutstanding and 115,000,000 A shares. As at that date there were 29,877,681outstanding share options and 10,500,000 outstanding warrants. TURBO POWER SYSTEMS INC.CONSOLIDATED STATEMENTS OF NET LOSS, COMPREHENSIVE LOSS AND LOSS DEFICITUNAUDITED Notes Three months ended 31 March 2007 2006 £'000 £'000Statement of Net Loss Revenue 2,3 2,033 969Development income 2 341 99 --------- ---------- 2,374 1,068Expenses Production costs 1,616 734 Research and product development 4 1,015 826 General and administrative 841 752 Amortisation 223 391 -------- --------- 3,695 2,703 Loss before interest and finance (1,321) (1,635)charges Interest income 88 79Interest expense and finance 5 (154) (271)chargesForeign exchange gains - (32) -------- ---------- (66) (224) -------- ----------Net loss for the period (1,387) (1,859) ======== ========== Statement of Comprehensive Loss Net loss (1,387) (1,859)Exchange adjustment on consolidation (16) 89 -------- ---------Comprehensive loss for the period (1,403) (1,770) ========= ========= Statement of Loss Deficit Loss deficit, beginning of period (53,636) (44,718)Net loss for the period (1,387) (1,859)Equity adjustment on issue of shares 11 (2,403) - ---------- --------- Loss deficit, end of period (57,426) (46,577) ========== ========= Loss per share - basic 7 (0.5)p (1.0)pLoss per share - diluted 7 (0.5)p ( 1.0)p TURBO POWER SYSTEMS INC.CONSOLIDATED BALANCE SHEETSUNAUDITED Notes As at 31 March As at 31 December 2007 2006 £'000 £'000Current assets Cash and cash equivalents 5,744 6,669 Restricted cash 8 - 765 Trade and other receivables 1,766 1,544 Stock and work in progress 1,693 1,230 Prepayments 421 419 Tax recoverable 449 718 ----------- ---------- 10,073 11,345 ----------- ----------Long-term assets Restricted cash 8 1,141 731 Prepayments 254 254 Investments 9 31 31 Intangible assets 9 66 77 Goodwill 9 820 820 Deferred finance charges 9 - 145 Tangible assets 9 2,240 2,361 ----------- ----------- 4,552 4,419 ----------- ----------- 14,625 15,764 =========== ===========Liabilities and shareholders' equityCreditors: amounts falling due withinone year Trade and other payables 3,063 3,109 Deferred income 366 206 -------- -------- 3,429 3,315 -------- -------- Creditors: amounts falling due aftermore than one year Warranty provision 303 303 Convertible notes 1,551 5,827 -------- -------- 1,854 6,130 -------- --------Capital and reserves Share capital and other equity 10 66,852 60,023 instruments Accumulated other comprehensive (84) (68) income Loss deficit (57,426) (53,636) ---------- ----------Shareholders' funds 9,342 6,319 --------- --------- 14,625 15,764 ========== =========TURBO POWER SYSTEMS INC.CONSOLIDATED STATEMENT OF CHANGES IN EQUITYUNAUDITED Common Share A Ordinary Other Accumulated Loss Total capital capital equity other income deficit Equity £'000 £'000 £'000 £'000 £'000 £'000 Balance at 1 January 2006 44,753 - 2,144 (128) (44,718) 2,051 Loss for the period (6,318) (6,318) Exchange gain 60 60 Stock compensation 511 511 Conversion to shares 3,383 4,320 (674) (2,600) 4,429 Issue of shares 4,059 2,000 6,059 Expiry of warrants 117 117 Fundraising costs (393) (197) (590) ------- ------- ------ ------ ------ ------ Balance at 31 December 2006 51,919 6,123 1,981 (68) (53,636) 6,319 Loss for the period (1,387) (1,387) Exchange loss (16) (16) Stock compensation 213 213 Conversion to shares 7,291 (675) (2,403) 4,213 ------- ------ ------- ------- ------- ------- Balance at 31 March 2007 51,919 13,414 1,519 (84) (57,245) 9,342 ======= ======= ======== ======= ======= ====== TURBO POWER SYSTEMS INC.CONSOLIDATED STATEMENTS OF CASH FLOWSUNAUDITED Three months ended 31 March Notes 2007 2006 £'000 £'000 Net loss from operations (1,387) (1,859)Amortisation 247 391Accretion of debt 15 97Stock compensation charges 213 97Foreign currency instrument loss 21 -Movement in net interest accrual (181) 40 --------- ---------Cash outflow before movements in (1,072) (1,234)working capitalDecrease/(increase) in debtors 45 (183)Decrease/(increase) in stock (462) (163)Increase/(decrease) in creditors 143 446 --------- ---------Net cash outflow from operating activities before tax (1,346) (1,134) --------- ---------Tax credits 312 - --------- ---------Net cash outflow from operating activities after tax (1,034) (1,134) --------- ---------Investing activitiesPurchase of long-term assets (175) (19)Movement in restricted funds 355 - --------- ---------Cash inflow/(outflow) from investing 180 (19)activities --------- ---------Financing activitiesNet expense from equity placing 11 (71) - --------- ---------Cash outflow from financing (71) -activities --------- ---------Decrease in cash in the period (925) (1,153) ========= ========= Cash and cash equivalents:Beginning of period 6,669 6,525 ---------- ----------End of period 5,744 5,372 ========== ========== TURBO POWER SYSTEMS INC.THREE MONTHS ENDED 31 MARCH 2007NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSUNAUDITED 1 Basis of preparation The consolidated financial statements of the Company have been prepared by management in accordancewith Canadian Generally Accepted Accounting Principles (Canadian GAAP). The Company provides are conciliation from Canadian GAAP to International Financial Reporting Standards in Note 21 of the Consolidated Financial Statements for the year ended 31 December 2006. The preparation of theconsolidated financial statements requires management to make estimates andassumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates. The consolidated financial statements have, in management'sopinion, been properly prepared using careful judgement with reasonable limits ofmateriality and within the framework of the Company's accounting policies. Theconsolidated financial statements include the accounts of Turbo Power Systems Inc. ("the Company"), and the accounts of its wholly owned subsidiary company Turbo Power Systems Limited (collectively "the Group"). The significant accounting policies are consistent with prior years. Certain comparative figureshave been reclassified to conform to the financial statement presentation adopted for 2006. The Company's interim financial statements do not conform in all respects to the requirements of Canadian GAAP for annual financial statements. The Company's interim statements should be read in conjunction with the consolidated financialstatements of the Company for the year ended 31 December 2006. These interim financial statements are prepared in accordance with the requirements of Canadian GAAP for interim financial statements as recommended by CICA Handbook section 1751 "Interim Financial Statements". These consolidated financial statements follow the same accounting policies and methods of application as forthe Company's 31 December 2006 financial statements, except as described below: On January 1 the Company adopted new CICA accounting standards comprising CICAHandbook Section 3855 "Financial Instruments - Recognition and Measurement", Section 1530 "Comprehensive Income", and Section 3251, "Equity". As a result ofadopting these requirements, a new statement has been added to report movementsin Comprehensive Loss, after Net Loss, and consists of the gains and losses from the translation of the Company's self-sustaining foreign operations.Accumulated other income is presented as a separate section within the Statementof Changes in Equity. In determining the fair value of financial instruments, as required by Section 3855, the carrying value of the Convertible debt wasdecreased by £140,000, and the net value of the Deferred Finance Charges was offset against the Convertible debt balance, resulting in a reduction in the Fixed asset balance and the Convertible debt balance of £145,000. Derivative financial instruments are used by the Company to manage a portion ofits exposure to foreign exchange rate fluctuations. The Company does not utilisederivative financial instruments for trading or speculative purposes. The Company enters into foreign currency options denominated in U.S. Dollars, to manage foreign exchange rate fluctuation exposure on receipts from customers billed in U.S. Dollars. These derivative contracts, not accounted for as hedges,are marked to market, and any changes in the market value are recorded in incomeor expense when the changes occur. The fair value of these instruments is recorded as accounts receivable or payable. Most of the Company's operations are conducted by its United Kingdom subsidiaries in Sterling. All numbers reported in these financial statements are stated in Sterling unless otherwise noted. 2 Segmental analysis The Group's two reportable segments are the power electronics segment, which isinvolved in the development and manufacture of electrical power supply and control systems and the electrical machines segment, which is involved in the development and commercialisation of high speed electrical machines. Corporate charges relating to the financing of the group and other related management activities are allocated between the two reportable segments. The power electronics and electrical machines segments both operate in the United Kingdom. All amounts in £'000 Power Electrical Total electronics machines 2007 2006 2007 2006 2007 2006Three months ended 31 MarchRevenue 2,017 949 16 20 2,033 969Development income 341 99 - - 341 99Interest income 44 39 44 40 88 79Interest expense (75) (135) (76) (136) (151) (271)Amortisation (35) (74) (188) (317) (223) (391)Net loss (98) (418) (1,289) (1,441) (1,387) (1,859)Capital expenditure 84 18 9 1 93 19 As at Mar Dec Mar Dec Mar Dec 2007 2006 2007 2006 2007 2006 Total assets 4,430 3,868 10,195 11,896 14,625 15,764Total liabilities 2,818 2,159 2,465 7,286 5,283 9,445 3 Significant Customers During the three month period ended 31 March 2007, 64% of the Company's revenuewas from three customers (2006: 44% from three customers). 4 Research and product development Research and product development expenditure incurred during the period comprised: Three months ended 31 March 2007 2006 £'000 £'000 Research and product development cost 1,015 841Accrued tax credits - (15) -------- --------Total expenditure 1,015 826 ======== ======== Total accrued tax credits receivable at 31 March 2007 amounted to £178,000 (31 December 2006: £490,000). 5 Interest expense and finance charges Three months ended 31 March 2007 2006 £'000 £'000 Finance charges 103 -Interest payable 29 134Amortisation of deferred finance charges - 40Debt accretion 22 97 --------- --------- 154 271 ========= ========= 6 Financial Instruments Certain of the Company's business transactions occur in currencies other than Sterling. The Company has a foreign exchange average rate option contract in place during the three months ended 31 March 2007 (2006: nil) to reduce exposure to fluctuations in foreign exchange rates on remittances from customers denominated in U.S. Dollars. The Company holds an average rate option over $5.898million U.S. Dollars at a strike rate of 2.00 U.S. Dollars which expires on 27 December 2007. During the period a loss of £21,000 was realised on this option (2006: £nil). As at 31 March 2007 the unrealised gain from the contract was £23,000 (2006: £nil). 7 Loss per share Loss per common share has been calculated using the weighted average number of shares in issue during the relevant financial periods. The treasury stock method was used in determining the weighted average number of shares outstandingfor each period. The weighted average number of shares outstanding in the period was 273,944,592(2006: 190,532,944). No fully diluted earnings per share have been reported as the Company has made losses in both years and the effect would be anti-dilutive. The loss for the three months ended 31 March 2007 was £1,387,000 (2006: £1,859,000). Anti-dilutive potential securities outstanding not included in the loss per common share calculation at 31 March 2007 total 170,286,014 (2006: 120,881,160) 8 Restricted cash In 2004 the Company committed cash bonds in support of contracts placed by theToronto Transit Commission for the CLRV and H6 programmes. The associated contracts required the bonds to remain in place until two years after allequipment is delivered. According to the current contract schedule that would result in the cash related to the H6 programme being under the performance bond restriction until 2010. In March 2007 the CLRV contract was cancelled and the cash bond of £515,000 in respect of this programme was cancelled and the cashbecame unrestricted. In September 2005 the Company committed cash bonds of £250,000 in support of a development contract. The contract required the bondsto remain in place until completion of certain contract milestones. These milestones were completed in January 2007 when the bond was cancelled and the cash became unrestricted. During March 2007 the Company committed cash bondstotalling £410,000 in support of contracts placed by Bombardier Transportationfor the CTA and TTC programmes. The associated contracts require the bonds to remain in place until after development and the prototype equipment is delivered. At 31 March 2007 cash subject to restrictions totalled £1,141,000 (December 2006:£1,496,000) and is secured over an equivalent cash balance. 9 Long - term assets Cost Impairment Amortisation Net book value £'000 £'000 £'000 £'000At 31 March 2007:Investments 104 73 - 31Intangible assets 4,074 1,663 2,345 66Goodwill 863 43 - 820Tangible assets 8,443 - 6,203 2,240 -------- -------- -------- --------Total long term assets 13,484 1,779 8,548 3,157 ======== ======== ======== =========At 31 December 2006:Investments 104 73 - 31Intangible assets 4,074 1,663 2,334 77Goodwill 863 43 - 820Deferred finance 474 - 329 145Tangible assets 8,350 - 5,989 2,361 -------- -------- -------- --------Total long term assets 13,865 1,779 8,652 3,434 ======== ======== ========= ======== 10 Share capital - issued shares Common A Ordinary Number £'000 Number £'000 At 1 January 2006 190,510,259 44,753 - -Conversion of convertible notes 541,665 65 - -Redemption of convertible notes 32,500,000 3,43 31,250,000 4,320Issue of common shares, net of share 50,442,668 3,666 25,000,000 1,803issue costs ----------- --------- ------------ -----------At 31 December 2006 273,944,592 51,919 56,250,000 6,123 ============ ========= ============= =========== Redemption of convertible notes - - 58,750,000 7,291 ------------ --------- ------------- ----------- At 31 March 2007 273,944,592 51,91 115,000,000 13,414 ============ ========= ============= =========== No options or warrants were exercised during the three months ended 31 March 2007. 11 Financing On 11 July 2003 the Company completed an £5,000,000 financing agreement with institutional investors. The financing comprised unsecured Convertible Notesand Warrants. The Convertible Notes have a term of five years and bear interestat a rate of 3.5% per annum. They are convertible into an aggregate of 25,000,000 Common Shares in Turbo Power Systems Inc. at a conversion price of £0.20 per share. The Warrants had a term of three years and were convertibleinto an aggregate of 3,500,000 Common Shares in Turbo Power Systems Inc. at an exercise price of £0.15 per share. On 11 March 2005 the Company completed an £8,000,000 (gross) financing agreementwith institutional investors. The financing comprised unsecured Convertible Notes and Warrants. The Convertible Notes have a term of five years plus one day and bear interest at a rate of 6.5% per annum. They are convertible into anaggregate of 66,666,667 Common Shares in Turbo Power Systems Inc. at a conversion price of £0.12 per share. The Warrants have a term of five years andare convertible into an aggregate of 7,000,000 Common Shares in Turbo Power Systems Inc. at an exercise price of £0.15 per share. On 28 December 2006 the Company completed a £6,000,000 (gross) financing agreement with institutional investors. The financing comprised 50,000,000 Common Shares in the company and 25,000,000 A-Ordinary shares in Turbo Power Systems Limited. The financing included the issue of 3,500,000 Warrants, having a term of three years and being convertible into an aggregate of 3,500,000 Common Shares in Turbo Power Systems Inc. at an exercise price of £0.15 per share. These warrants were issued on 6 January 2007 (see Note 13). On 28 December 2006, per an agreement reached with the holders of the convertible notes, the Company redeemed £2,500,000 of the 2003 Convertible Loan Notes and £2,360,000 of the 2005 Convertible Loan Notes at a redemption price of £0.08. The redemption was dependant upon the Company's shares being approved for trading on the AIM exchange which occurred on 28 December 2006. A further £2,500,000 of the 2003 Convertible Loan Notes and £2,000,000 of the2005 Convertible Loan Notes were redeemed in January 2007 at a redemption price of £0.08. The Company has incorporated the guidance provided by the CICA's Emerging IssueCommittee Abstract 96 "Accounting for the Early Extinguishment of ConvertibleSecurities Through (1) Early Redemption or Repurchase and (2) Induced Early Conversion" (EIC96) in accounting for the early redemption of the convertible notes. EIC96 provides guidance on the treatment of the fair value of the conversion feature on the extinguishment of the convertible debenture. Redemption of the convertible debentures in January 2007 resulted in an increase in deficit of £65,000 and an increase in retained deficit of £2,403,000. 12 Stock options, warrants and compensation expense The number of options and warrants outstanding as at 31 March 2007, and the movement during the three months then ended, are as follows: Options Warrants Number Number Outstanding at 1 January 2007 21,567,281 7,000,000Cancelled (89,600) -Issued 8,400,000 3,500,000 ------------- ------------Outstanding at 31 March 2007 29,877,681 10,500,000 ============= ============= The stock based compensation expense for the three month period ended 31 March 2007, included in Production costs was £26,000 (2006: £nil), in Research and product development was £104,000 (2006: £56,000), and in General and administrative costs was £83,000 (2006: £41,000). On 6 January 2007 the Company issued 3,500,000 warrants as part of its financingagreement with institutional investors (see Note 12). The fair value of the stock options is the estimated fair value at grant date. The fair value is calculated using the Black-Scholes option-pricing model. In calculating the fair values of the options granted during the quarter ended 31 March 2007 a dividend yield of Nil, expected volatility of 65%, a risk fee interest rate of 5.0% and an expected option life of 5 years havebeen assumed. The fair value of the stock options granted during the quarter ended 31 March 2007 was £0.06 per share. The Black-Scholes option-pricing model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. In addition, option-pricing models require the input of highly subjective assumptions including the expected price volatility. The Company usesexpected volatility rates, which are based on historical volatility rates trended into future years. Changes in the subjective input assumptions can materially affect the fair value estimate, and therefore the existing models donot necessarily provide a reliable single measure of the fair value of the Company's stock options. 13 Selected quarterly information The following table sets forth selected consolidated financial information of the Company for theeight most recent quarters. Revenue Net loss (Loss) per share UK £'000 £'000 pence June 2005 593 (1,681) (0.9)September 2005 809 (1,584) (0.9)December 2005 874 (1,249) (0.6)March 2006 969 (1,859) (1.0)June 2006 1,192 (1,712) (0.9)September 2006 1,470 (1,624) (0.8)December 2006 1,851 (1,124) (0.6)March 2007 2,033 (1,387) (0.5) This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
TPS.L